A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in our securities involves a
high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects,
financial condition, or operating results could be harmed by any of these risks, as well as other risks not known to us or that we consider
immaterial as of the date of this Annual Report. The trading price of our securities could decline due to any of these risks, and, as
a result, you may lose all or part of your investment. Set forth below is a summary of some of the principal risks we face:
● The cyclicality of the semiconductor industry;
● Geopolitical tensions as a result of our location in Israel;
● Global political and economic uncertainty, including with respect to China-Taiwan relations;
● Competition in the semiconductor industry, and the failure to introduce new technologies and products in a timely manner to compete successfully with competitors;
● If Valens fails to adjust its supply chain volume due to changing market conditions or fails to estimate its customers’ demand;
● Disruptions in relationships with any one of Valens’ key customers and/or suppliers;
● Any difficulty selling Valens’ products if customers do not design our products into their product offerings;
● Valens’ dependence on winning selection processes;
● Even if Valens succeeds in winning selection processes for its products, Valens may not generate timely or sufficient net sales or margins from those wins;
● Sustained yield problems or other delays in the manufacturing process of products;
● Any difficulty adequately obtaining, maintaining, protecting, defending or enforcing Valens’ intellectual property rights or commercializing our products without infringing, misappropriating or otherwise violating the intellectual property rights of others; and
● Cyber-attacks or other disruptions to or breaches of Valens’ information technology, systems or networks.
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Risks Related to Our Business and Industry
The semiconductor industry is highly cyclical.
The semiconductor industry is highly cyclical
and is characterized by significant and often rapid fluctuations in product supply and demand. The industry has, from time to time, experienced
significant downturns, frequently associated excess manufacturing capacity, maturing product cycles of semiconductor companies and their
customers, inventory corrections, and deteriorating macroeconomic conditions, as well as constant and rapid technological change and evolving
standards. Those in turn may result in rapid product obsolescence, price erosion, short product life cycles and extensive fluctuations
in product supply and demand as a result of volatility across end markets. If we expand our operations and workforce too rapidly, procure
excessive resources or increase inventory levels in anticipation of increased demand for our products, and that demand does not materialize
at the pace at which we expect, or declines, or if we are unable to adjust our cost structure quickly during periods of reduced demand,
our operating results may be adversely affected due to increased operating expenses, reduced margins, underutilization of capacity or
asset impairment charges.
The semiconductor industry has experienced downturns
in the past and may experience such downturns in the future.
We experienced this in 2024 when our customers
entered into the year with high inventory levels. This, together with rising inflation and interest rates caused our customers to take
a more cautious approach in building their inventory, while inventory digestion pace was relatively small. While 2025 reflects a recovery
from that period, there can be no assurance regarding the timing, duration, or magnitude of future recoveries from downturn periods.
Conversely, significant upturns can cause us to
be unable to satisfy demand in a timely and cost-efficient manner and could result in increased competition for access to third-party
foundry and assembly capacity. In the event of such an upturn, as we started witnessing at the end of 2025, with the rise in artificial
intelligence-driven demand for semiconductor products, may result in extended supplier lead times, increased manufacturing and raw material
costs, inventory risks, and constraints on our ability to meet customer demand or secure future design wins.
Due to the inherently cyclical nature of the semiconductor
industry and the rapid pace of technological change, we may not be able to scale our operations, workforce, or product offerings efficiently
or respond effectively to shifts in customer demand or end-market preferences, which could materially adversely affect our business, financial
condition, and results of operations.
Global political and economic uncertainty, downturns
or volatility in general economic conditions could have a material adverse effect on our international operations and adversely affect
our business, financial condition, results of operations and liquidity.
Our net sales, gross margin, and profitability
depend significantly on general economic conditions and the demand for products in the markets in which our customers compete. A significant
portion of our revenue is derived from customers in international markets, and we expect that international sales will continue to account
for a significant portion of our revenue in the future. As a result of our international operations, our business, financial condition
and results of operations could be negatively impacted by the following:
● political, legal and economic changes, crises or instability and civil unrest in markets in which we do business, such as potential macroeconomic weakness related to trade and political disputes between the United States and China, changes in China-Taiwan relations that may adversely affect our operations in Taiwan, since, as of today, all our silicon wafers, which are the basic element of any semiconductor product, are designed to be manufactured at Taiwan Semiconductor Manufacturing Company (“TSMC”). TSMC is a critical supplier, and any disruption in its operations could significantly impact our operations and adversely affect our ability to meet production demands. In addition, we use other vendors that are located in Taiwan and who have an important role in our supply chain. Any disruption in their operations can also have an adverse impact on our operations and cause a significant delay in our ability to timely fulfill our customers’ demands. Automotive customers have become increasingly risk-averse following the recent global semiconductor shortages, placing heightened scrutiny on supply chain resilience and geographic concentration. In particular, geopolitical tensions in Taiwan, where a significant portion of advanced semiconductor manufacturing capacity is located, have amplified concerns around potential supply disruption, trade restrictions, or logistical bottlenecks. These sensitivities are compounded by the automotive industry’s reliance on just-in-time manufacturing models, which operate with limited inventory buffers and can magnify the operational impact of even short-term component shortages. As a result, even the perception of elevated supply chain or geopolitical risk associated with critical vendors may adversely affect our ability to win new designs, could lead to design-outs or dual-sourcing decisions, and, in the event of actual disruption, could interrupt supply, any of which may negatively impact our growth prospects, customer relationships, and business results.
● geopolitical events, such as the status of war in Israel, the ongoing conflict between Russia and Ukraine, or any other threat of war or terrorist actions;
● increased global instability resulting from recent unilateral U.S. military and diplomatic actions;
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● compliance requirements of U.S. customs and export regulations, including the Export Administration Regulations;
● currency conversion risks and exchange rate and interest rate fluctuations, including the current increasing interest rate environment;
● instability of global credit and financial markets due to adverse macroeconomic conditions such as rising inflation, increasing interest rates and slower economic growth or recession that could, among other impacts, affect our ability to access external financing sources on acceptable terms or lead to financial difficulties or uncertainty of our customers, suppliers and distributors exposing us to late payments, cancelled orders and inventory challenges, among others;
● trade policy, commercial, travel, export or taxation disputes or restrictions, import or export tariffs, changes to export classifications or other restrictions imposed by the U.S. government or by the governments of the countries in which we do business, particularly in China;
● complex, varying and changing government regulations and legal standards and requirements, particularly with respect to tax regulations, price protection, competition practices, export control regulations and restrictions, customs and tax requirements, immigration, anti-boycott regulations, privacy, data protection and information security, sustainability and climate-related regulations, intellectual property, anti-corruption and environmental compliance, including the Foreign Corrupt Practices Act;
● economic disruption from terrorism and threats of terrorism and the response to them by the U.S. and its allies;
● natural disasters or public health emergencies;
● fluctuations in raw material costs and energy costs due to general market factors and conditions such as inflation and supply chain constraints;
● cyber-attacks or other disruptions to or breaches of our information technology, systems or networks; and
● greater difficulty in accounts receivable collections and longer collection periods.
Weaknesses in the global economy and financial
markets and any adverse changes in general domestic and global economic conditions that may occur in the future, including any recession,
economic slowdown or disruption of credit markets, may also lead to lower demand for products that incorporate our solutions, particularly
in the automotive and cross-industry business markets. A decline in end-user demand can affect our customers’ demand for our products,
as well as their ability to build new products, obtain credit and otherwise meet their payment obligations. Our net sales, financial condition
and results of operations could be negatively affected by such actions. Volatile and/or uncertain economic conditions can adversely impact
sales, gross margin and profitability and make it difficult for us to accurately forecast and plan our future business activities. To
the extent we incorrectly plan for favorable economic conditions that do not materialize or take longer to materialize than expected,
we may face oversupply of our products relative to customer demand.
Conversely, if we overestimate customer demand,
we may manufacture products that we may not be able to sell. As a result, we would have excess inventory, which could result in losses.
To the extent that our sales, profitability and strategies are negatively affected by downturns or volatility in general economic conditions,
our business, financial condition and results of operations may be materially and adversely affected. In addition, any disruption in the
credit markets could impede our access to capital, which could be further adversely affected if we are unable to obtain or maintain favorable
credit ratings. If we have limited access to additional financing sources, we may be required to defer capital expenditure or seek other
sources of liquidity, which may not be available to us on acceptable terms or at all.
Similarly, if our suppliers face challenges in
obtaining credit or other financial difficulties, they may be unable to provide the materials we need to manufacture our products. All
of these factors relate to global economic conditions, which are beyond our control, and could adversely impact our business, financial
condition, results of operations and liquidity.
The U.S. Department of Commerce’s Bureau
of Industry and Security (BIS) has restricted the export of advanced computing integrated circuits and related items to China and other
countries and entities
The U.S. Department of Commerce, Bureau of Industry
and Security (“BIS”) announces from time-to-time new restrictions on the export of advanced computing integrated circuits
and related items to certain countries, including China, and various entities. Based on our existing customer base, characteristics of
our existing products and their export control classifications, as well as the licenses issued to us by the BIS, these regulations did
not have a material impact on our business. Export control regulations adopted by the United States and other jurisdictions are subject
to change and interpretation, and it is possible that future regulatory changes or actions by the BIS impacting U.S. exports of integrated
circuits and related items, which will restrict the re-export of integrated circuits to China or to certain Chinese entities will have
a material impact on our business operations in China which accounted to approximately 15% of our total revenues in 2025, and on our
ability to further expand and grow our business and revenue in China. This may also be affected by our ability to renew or otherwise
obtain relevant BIS licenses.
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A recent example of these restrictions includes
an Interim Final Rule (IFR) from January 2025 that expands controls on advanced computing integrated circuits (ICs or chips) and model
weights for artificial-intelligence models. Although we do not believe that these recent controls and policies will impede our ability
to conduct our business, given the kinds of semiconductors we typically deploy in our business, there can be no assurance that broadening
these restrictions or adopting similar ones would not limit our ability to use certain supply chain vendors, sell our products to existing
and potential customers in certain geographic areas and ultimately adversely affect our financial performance.
Events beyond our control could have an adverse
effect on our business, financial condition, results of operations and cash flow.
Our ability to make, transport and sell products
in coordination with our suppliers, customers, distributors and third-party manufacturers or other subcontractors is critical to our success.
Damage or disruption to our supply, manufacturing, supply chain or distribution capabilities resulting from weather, freight carrier availability,
any potential effects of climate change, natural disaster, disease, fire, explosion, cyber-attacks or other disruptions to or breaches
of our information technology, systems or networks, terrorism, pandemics, epidemics or other outbreaks of infectious disease, strikes,
civil unrest, repairs or enhancements at facilities manufacturing or distribution of our products or other reasons could impair our ability
to manufacture, sell our products, and to deliver products to our customers on a timely basis or at all. Global climate change may result
in certain natural disasters occurring more frequently or with greater intensity, such as drought, wildfires, storms, sea-level rise,
and flooding, and could disrupt the availability of water necessary for the operation of our fabrication facilities located in semi-arid
regions. The long-term effects of climate change on the global economy and the semiconductor industry in particular are unclear but could
be severe.
Similarly, over demand on existing supply chain
manufacturing lines as well as disruptions in the operations of our key suppliers or in the services provided by contract manufacturers,
including disruptions due to natural disasters, materials shortages or other disruptions, or by the transition by us to other suppliers
or third-party manufacturers could lead also to supply chain problems and otherwise impair or delay our ability to deliver products to
our customers on a timely basis or at all. Additionally, we do not have long-term agreements for the materials and supplies used in our
business, which could make it more difficult to obtain such materials and supplies.
Other companies in our industry may be affected
differently by natural disasters or other disruptions depending on the location of their suppliers, operations, and customers. In addition,
many of our competitors are larger companies with more substantial financial and other resources and, as a result, may be better able
to plan for, withstand or otherwise mitigate the effects of any such disruption. While we may take steps to plan for or address the occurrence
of any such event, we cannot guarantee that we will be successful. If we fail to take adequate steps to reduce the likelihood or mitigate
the potential impact of such events, or to effectively manage such events if they occur, it could adversely affect our business, financial
condition, results of operations and cash flows and/or require additional resources to restore our supply chain.
Any downturn in the cross-industry served markets
or automotive market could significantly harm our financial results and slow the pace of adoption of new technologies, including those
that we offer.
Approximately 73% and 27% of our total net sales
in fiscal year 2025 and 63% and 37% of our total net sales in fiscal year 2024 were generated by our cross-industry and automotive products,
respectively. The global economic uncertainty in recent years has impacted demand in many global markets, exposing us to the risks associated
with such markets as follows:
● Cross-Industry Business market: following the negative impact from the COVID-19 pandemic on some of our professional audio-video customers’ demand, the following two years, 2023-2024, were characterized by high-inventory levels of our customers, a slow inventory digestion and a cautious approach to inventory building, due to the inflation environment, high-interest rates and shorter product lead times. These, in turn, contributed to a decrease in demand for our products, although 2025 marked a recovery from the slow pace of inventory digestion. Slow growth trends may have a negative effect on the demand for our cross-industry products, as well as high inventory levels, and could delay plans of our customers to introduce new products into which our products are designed. The demand for our cross-industry products, including those used in professional audio-video and video-conferencing applications, is influenced by global macroeconomic conditions, enterprise and institutional capital spending, and customers’ willingness to invest in new technology deployments. Periods of economic uncertainty, inflationary pressures, elevated interest rates, tariffs and trade restrictions, and budget constraints may cause enterprises, educational institutions, and public-sector customers to delay, scale back, or reprioritize technology investments. In addition, adoption cycles in the video-conferencing and Professional Audio Video markets may be slower than anticipated if customers choose to extend the useful life of existing systems, defer upgrades to next-generation platforms, or limit deployments to essential or incremental improvements rather than comprehensive system refreshes. Moreover, increasing adoption of artificial intelligence, machine learning, automated decision-making, and similar models, algorithms and technologies (collectively, “AI”) technologies in enterprise environments may introduce additional uncertainty regarding future workplace configurations, collaboration workflows, and technology requirements. As organizations assess how AI tools may alter meeting formats, communication practices, and the role of physical collaboration spaces, customers may delay or reconsider investments in video-conferencing and Professional Audio Video infrastructure. Such uncertainty could further extend decision-making timelines, slow deployment rates, or reduce the scale of technology rollouts incorporating our solutions. This may impede our ability to grow our business, meet our short- and long-term goals and consummate plans that we communicate to the market from time to time.
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● Automotive market: automotive sales generally correlate with global economic conditions, such as increased inflation rate, high interest rates, and imposed tariffs which may affect consumer spending and automakers’ capital allocation decisions. In periods of economic uncertainty, automotive manufacturers may delay or scale back investments in new vehicle platforms, advanced features and next-generation technologies, and may prioritize cost containment over innovation. This was demonstrated recently with automakers increasing caution in adopting new technologies, including advanced driver assistance systems (“ADAS”), and in transitioning vehicles across higher levels of automation. This caution has been reflected in longer development cycles, delayed vehicle launches, reduced production volumes, the postponement or cancellation of certain electric vehicle and advanced technology programs, and a greater focus on extending the life of existing vehicle platforms rather than introducing new architectures. Such developments may slow the pace at which our technology is adopted and deployed by automotive players, extend qualification and design-in timelines, or reduce the number of vehicles and programs incorporating our solutions. If automakers defer the introduction of new vehicle models or features, reduce production of existing models, or exit or delay certain technology initiatives, demand for our automotive products, including our ADAS solutions, could be materially lower than we expect. Any of the foregoing could adversely affect our revenues, margins, growth prospects, and our ability to execute our long-term automotive strategy, and could have a material adverse effect on our business, financial condition and results of operations. In addition, this may impede our ability to meet our short- and long-term goals and consummate plans that we communicate to the market from time to time.
The semiconductor industry is highly competitive.
If we fail to introduce new technologies and products in a timely manner, or fail in causing the market to adopt our solutions or to continue
to prefer our solutions over new ones, this could adversely affect our business.
The semiconductor industry is highly competitive
and characterized by constant and rapid technological change, short product life cycles (mainly in the cross-industry business, versus
longer cycles in the automotive industry), significant price erosion and evolving standards. Our ability to compete in this industry depends
on many factors, including general economic and industry market conditions, our ability to identify emerging markets and technology trends
in an accurate and timely manner, introduce new and innovative technologies and products, implement advanced manufacturing technologies
at a sustainable pace, maintain the performance and quality of our products, manufacture our products in a cost-effective manner, market
our solutions and develop an ecosystem around them, as well as on our competitors’ performance.
The success of our business depends to a significant
extent on our ability to develop new technologies and products that are ultimately successful in the market. The costs related to the
research and development necessary to develop new technologies and products are significant and any reduction in our research and development
budget could harm our competitiveness. Meeting evolving industry requirements and introducing new products to the market in a timely manner
and at prices that are acceptable to our customers are significant factors in determining our competitiveness and success. Given the long
development cycle of semiconductor products, commitments to develop new products must be made well in advance of any resulting sales,
and technologies and standards may change during development, potentially rendering our products outdated or uncompetitive before their
introduction. If we are unable to successfully develop new products, win designs for our existing products and preserve our position as
the providers of the solutions of choice, our revenues may decline substantially.
Moreover, some of our competitors are well-established
entities, are larger than us and have greater resources than we do. Some of our competitors may have more advantageous supply or development
relationships with our current and potential customers or suppliers and may be more successful than us in causing the market to adopt
other solutions over those that we offer. If these competitors increase the resources they devote to developing and marketing their products,
we may not be able to compete effectively. Any consolidation among our competitors could lead to a changing competitive landscape, which
could negatively impact our competitive position and market share, could enhance their product offerings and financial resources, further
strengthening their competitive position. In addition, some of our competitors operate in narrow business areas relative to us, allowing
them to concentrate their research and development efforts directly on products and services for those areas, which may give them a competitive
advantage. As a result of these competitive pressures, we may not be successful in winning designs for our products or in building a large
enough ecosystem and ultimately face declining sales volumes or lower prevailing prices for our products, and we may not be able to reduce
our total product costs in line with these declining revenues. If any of these risks materialize, they could have a material adverse effect
on our business, financial condition, and results of operations.
The semiconductor industry is characterized
by significant price erosion, especially after a product has been on the market for a significant period of time.
The products we develop and sell are subject to
rapid declines in average selling prices over the life of the products. Product life cycles can be relatively short, and as a result,
products tend to be replaced by more technologically advanced substitutes on a regular basis. In turn, demand for older technology falls,
causing the price at which such products can be sold to drop, in some cases precipitously. Additionally, competitors may be able to quickly
introduce new products to compete with our products, and sometimes competitors will anticipate our entry into a market and start to lower
the prices on their products before our entry. To the extent we are unable to reduce the prices of our products and remain competitive,
our net sales will likely decline, resulting in further pressure on our gross margins, which could have a material adverse effect on our
business, financial condition and results of operations and our ability to grow our business.
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Additionally, because we do not operate our own
manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities
and consequently our costs may increase, which could also impact our gross margins. Our gross margin could also be impacted by increased
cost (including those caused by tariffs), loss of cost savings or dilution of savings due to changes in charges incurred due to inventory
holding periods if parts ordering does not correctly anticipate product demand or if the financial health of either contract manufacturers
or suppliers deteriorates as well as excess inventory and inventory storage and obsolescence charges. In addition, we are subject to risks
from fluctuating market prices of certain components, which are incorporated into our products or used by our suppliers to manufacture
our products. Supplies of these components may, from time to time, become restricted, or general market factors and conditions may affect
pricing of such commodities. For example, supply shortages in the semiconductor industry of multi-layer complex substrates, IC packaging
capacity and fab constraints as we have experienced in past years, have resulted in increased lead times, and overall increased costs.
For other industry players they have resulted in an inability to meet demand, which can also happen to us. Any increase in the price of
components used in our products or difficulties in meeting the demand may adversely affect our gross margins.
In order to continue profitably supplying our
products, we must reduce our production costs in line with the lower revenues we can expect to receive per unit. Usually, this must be
accomplished through improvements in process technology and production efficiencies. If we cannot advance our process technologies or
improve our efficiency to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of
these products. Additionally, we may not be able to cease production of such products, either due to contractual obligations or for customer
relationship reasons, and as a result may be required to bear a loss on such products. We cannot guarantee that competition in our core
product markets will not lead to price erosion, lower revenue growth rates and lower margins in the future. Should reductions in our manufacturing
costs fail to keep pace with reductions in market prices for the products we sell, this could have a material adverse effect on our business,
financial condition and results of operations. Similarly, if our suppliers increase their production prices, and we are not able to roll
over such increases to our customers in a timely manner, it could adversely impact our business, decrease our gross margins and operating
results.
To attract new customers or retain existing customers,
from time to time we offer certain price concessions to our customers, which could cause our average selling prices and gross margins
to decline. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures,
new product introductions by us or by our competitors and other factors. We expect that we will continue to have to reduce prices of existing
products in the future. Moreover, because of the wide price differences across the markets we serve, the mix and types of performance
capabilities of our products sold may affect the average selling prices of our products and have a substantial impact on our revenue and
gross margin. We may enter new markets in which a significant amount of competition exists, and this may require us to sell our products
with lower gross margins than we earn in our established businesses. If we are successful in growing revenue in these markets, our overall
gross margin may decline. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover
the fixed costs and investments associated with a particular product, and as a result may harm our financial results.
Failure to adjust our supply chain volume due
to changing market conditions or failure to estimate our customers’ demand could adversely affect our net sales and could result
in additional charges for obsolete or excess inventories or non-cancelable purchase commitments. Conversely, we may have insufficient
inventory or be unable to obtain the supplies or contract manufacturing capacity to meet that demand which would result in lost revenue
opportunities and potential loss of market share as well as damaged customer relationships.
We typically sell products pursuant to purchase
orders rather than long-term purchase commitments. Some of our customers may cancel or defer purchase orders on short notice without incurring
a significant penalty. Due to their inability to predict demand or other reasons, some of our customers may accumulate excess inventories
and, as a consequence, defer purchases of our products.
We make significant decisions, including determining
the levels of business that we will seek and accept, production schedules, levels of reliance on outsourced contract manufacturing, personnel
needs, and other resource requirements, based on our estimates of customer requirements. The short-term nature of the commitments by many
of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate the future
requirements of our customers. Anticipating future demand is difficult because our customers face unpredictable demand for their own products
and are increasingly focused more on cash preservation and tighter inventory management. In addition, as an increasing number of our chips
are being incorporated into consumer products, we anticipate greater fluctuations in demand for our products, which makes it more difficult
to forecast customer demand. Occasionally, our customers may require rapid increases in production, which can challenge our resources.
We may not have sufficient capacity at any given time to meet our customers’ demands. Conversely, downturns in the semiconductor
industry have in the past caused, and may in the future, cause our customers to significantly reduce the solutions or the number of products
ordered from us. Because many of our sales, research and development, and manufacturing expenses are relatively fixed, a reduction in
customer demand may decrease our gross margins and operating results.
In addition, we base many of our operating decisions,
and enter long-term purchase commitments, on the basis of anticipated net sales trends which are highly unpredictable. Some of our purchase
commitments are not cancelable, and in some cases, we are required to recognize a charge representing the amount of material purchased
or ordered which exceeds our actual requirements. These non-cancelable purchase commitments could reduce our ability to adjust our inventory
to address declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete
inventories and be forced to incur additional charges, which would reduce our gross margin and adversely affect our financial results.
If net sales in future periods fall substantially below our expectations, or if we fail to accurately forecast changes in demand mix,
we could again be required to record substantial charges for obsolete or excess inventories or non-cancelable purchase commitments. Conversely,
if we underestimate customer demand or otherwise lack the required manufacturing capacity, we may miss revenue opportunities and potentially
lose market share. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products
could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations.
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Moreover, during a market upturn, we may not be
able to purchase sufficient supplies or components to meet increasing product demand, which could prevent us from taking advantage of
opportunities and reduce our net sales. In addition, a supplier could discontinue a component necessary for our design, extend lead times,
limit supply, or increase prices due to capacity constraints or other factors. Our failure to adjust our supply chain volume or estimate
our customers’ demands could have a material adverse effect on our net sales, business, financial condition and results of operations.
Disruptions in our relationships with any one
of our key customers could adversely affect our business.
Approximately 31% of our 2025 revenues and 38%
of our 2024 revenues were generated by our top three customers, in each of those periods, that purchase products from us based on short
term purchase orders that reflect the demand they have from their end customers. We cannot guarantee that we will be able to generate
similar levels of revenues from our largest customers in the future. Should one or more of these customers substantially reduce their
purchases from us, this could have a material adverse effect on our business, financial condition and results of operations.
Our customers’ continued success will depend
in large part on growth within the markets for our automotive and audio-video solutions and products and their success within such markets.
Demand in these markets fluctuates significantly, by consumer spending, consumer preferences, the development of new technologies and
prevailing economic conditions. Factors affecting these markets could seriously harm our customers and, as a result, harm us, including:
● the effects of catastrophic and other disruptive events at our customers’ offices or facilities including, but not limited to, natural disasters, telecommunications failures, cyber-attacks or other disruptions to or breaches of our customers’ information technology, systems or networks, terrorist attacks, pandemics, epidemics or other outbreaks of infectious disease, breaches of security or loss of critical data;
● increased costs associated with potential disruptions to our customers’ supply chain and other manufacturing and production operations, including due to shortages in raw materials, increases in raw materials, transport and other commodities’ prices, among others, due to geopolitical tensions and fluctuations in oil prices;
● the deterioration of our customers’ financial condition;
● changes in geographic, product or customer mix;
● delays and project cancellations as a result of design flaws in the products developed by our customers; the inability of customers to dedicate the resources necessary to promote and commercialize their products;
● the inability of our customers to adapt to changing technological demands resulting in their products becoming obsolete; and
● the failure of our customers to anticipate their customers’ needs and the failure of our customers’ products to achieve market success and gain broad market acceptance.
Any slowdown in the growth of these end markets
could adversely affect our financial results.
We will have difficulty selling our products
if customers do not design our products into their product offerings.
Our products are not sold directly to the end-users
but are components of other products. Our products are generally incorporated into our customers’ products at the design stage.
As a result, we rely on our customers to select our products from among alternative offerings to be designed into the products they sell.
If they do not include our products in their designs, we will have difficulty selling our products. Even after a customer designs our
products into the products they sell, the customer is not obligated to purchase our products, nor can we guarantee that the customer is
not using competitive products. In addition, the customer can choose at any time to reduce or discontinue their use of our products, for
example, if their own products are not commercially successful, or for any other reason. In addition, we often incur significant expenditures
on the development of a new product without any assurance that our product will be designed into our customers’ products. Once a
customer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products
to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Our customers and potential
customers may not choose to design our products into theirs, or, if chosen, continue to design them into future versions or models, or
we might not be able to convert any such design into actual sales, either of which could materially and adversely affect our results of
operations.
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If we are unable to manage our growth effectively,
our business and financial results may be adversely affected.
To continue to grow, we must continue to expand
our operational, engineering, accounting and financial systems, procedures, controls and other internal management systems. This may require
substantial managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures
and controls may not be adequate to support our future operations. Unless our growth results in an increase in our revenues that is proportionate
to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected. If we fail
to adequately manage our growth effectively, improve our operational, financial and management information systems, or effectively train,
motivate and manage our new and future employees, it could adversely affect our business, financial condition and results of operations.
The estimates of market opportunity and growth
forecasts included in this disclosure or which we communicated to the market elsewhere may prove to be inaccurate.
Market opportunity estimates and growth forecasts
are inherently uncertain. Our estimates regarding the expected growth in our served available markets are based on our experience, as
well as internal research and industry forecasts, which are subject to a number of estimates and assumptions. While we believe our assumptions
and the data underlying our estimates to be reasonable, these assumptions and estimates may not be correct and the conditions supporting
our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. As a result,
our estimates regarding the size and expected growth rates of our served available markets may prove to be incorrect. If our served available
markets are smaller than we have estimated, or if we are unable to gain the market share we assumed we could gain, our sales growth and/or
market share may fail to reach the levels implied by these estimates and we may not meet the forecasted financial targets.
Our quarterly net sales and operating results
are difficult to predict accurately and may fluctuate significantly from period to period. As a result, we may fail to meet the expectations
of securities analysts and investors, which could cause our share price to decline.
We operate in a highly dynamic industry and our
future operating results could be subject to significant fluctuations, particularly on a quarterly basis. Our quarterly net sales and
operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors,
many of which are not within our control. Although some of our customers provide us with rolling forecasts of their future requirements
for our products, a significant percentage of our net sales in each fiscal quarter is dependent on sales that are booked and shipped during
that fiscal quarter and are typically attributable to a large number of orders from diverse customers and markets. As a result, accurately
forecasting our operating results in any fiscal quarter is difficult. If our operating results do not meet the expectations of securities
analysts and investors, they may change their recommendations, or the target price of our share and our share price may decline.
Additional factors that can contribute to fluctuations
in our operating results include:
● the rescheduling, increase, reduction or cancellation of significant customer orders;
● the timing of customer qualification of our products and commencement of volume sales by our customers of systems that include our products;
● the timing and amount of research and development and sales and marketing expenditures;
● the rate at which our present and future customers and end users adopt our technologies in our target end markets;
● the timing and success of the introduction of new products and technologies by us and our competitors, and the acceptance of our new products by our customers;
● our ability to anticipate changing customer product requirements;
● our gain or loss of one or more key customers;
● the availability, cost and quality of materials and components that we purchase from third-party vendors and any problems or delays in the manufacturing, testing or delivery of our products;
● the availability of production capacity at our third-party facilities or other third-party subcontractors and other interruptions in the supply chain, including as a result of materials shortages, bankruptcies or other causes;
● supply constraints for and changes in the cost of the other components incorporated into our customers’ products;
● our ability to reduce the manufacturing costs of our products;
● fluctuations in manufacturing yields;
● the changes in our product mix or customer mix;
8
● the timing of expenses related to the acquisition of technologies or businesses;
● product rates of return or price concessions in excess of those expected or forecasted;
● the emergence of new industry standards;
● product obsolescence;
● unexpected inventory write-downs or write-offs;
● costs associated with litigation over intellectual property rights and other litigation;
● the length and unpredictability of the purchasing and budgeting cycles of our customers;
● loss of key personnel or the inability to attract qualified engineers;
● the quality of our products and any remediation costs;
● adverse changes in economic conditions in various geographic areas where we or our customers do business;
● the general industry conditions and seasonal patterns in our target end markets, particularly the automotive market and the audio- video market;
● other conditions affecting the timing of customer orders or our ability to fill orders of customers subject to export control or economic sanctions;
● cyber-attacks or other disruptions to or breaches of our information technology, systems or networks; and
● geopolitical events, such as war, threat of war or terrorist actions, or the occurrence of pandemics, epidemics or other outbreaks of disease, or natural disasters, and the impact of these events on the factors set forth above.
We may experience a delay in generating or recognizing
revenues for a number of reasons. For example, open backlogs at the beginning of each quarter are typically lower than expected net sales
for that quarter and are generally cancelable or reschedulable with minimal notice.
Accordingly, we depend on obtaining orders during
each quarter for shipment in that quarter to achieve our net sales objectives and failure to fulfill such orders by the end of a quarter
may adversely affect our operating results. Furthermore, our customer agreements may include provisions that allow them to delay scheduled
delivery dates and/or cancel orders within specified timeframes without a significant penalty. In addition, we maintain an infrastructure
of facilities and human resources in several locations around the world and have a limited ability to reduce the expenses required to
maintain such infrastructure. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term, any delay in generating or recognizing forecasted net sales or changes in levels of our customers’
forecasted demand could materially and adversely impact our business, financial condition, and results of operations. Due to our limited
ability to reduce expenses, in the event our revenues decline, or our forecasted net sales do not meet our expectations, it is likely
that in some future quarters our operating results will decrease from the previous quarter or fall below the expectations of securities
analysts and investors. As a result of these factors, our operating results may vary significantly from quarter to quarter.
Accordingly, we believe that period-to-period
comparisons of our results of operations should not solely be relied upon as indications of future performance. Any shortfall in net sales
or net income from any previous quarter or from levels expected by the investment community could cause a decline in the trading price
of our share.
We depend on winning selection processes, and
failure to be selected could adversely affect our business in those market segments.
One of our business strategies is to participate
in and win competitive technology selection processes to develop products for use in our customers’ equipment and products. These
selection processes are typically lengthy and require us to incur significant design and development expenditures, with no guarantee of
winning a contract or generating revenues. The incurrence of such significant expenditures, failure to win new design projects and delays
in developing new products with anticipated technological advances or in commencing volume shipments of these products may have an adverse
effect on our business. This risk is particularly pronounced in markets where there are only a few potential customers and in the automotive
market, where, due to the longer design cycles involved, failure in a particular selection process could prevent access to such an automotive
customer for several years. Our failure to win a sufficient number of design wins and to gain market adoption of out solutions, could
result in reduced revenues and hurt our competitive position in future selection processes because we may not be perceived as being a
technology or industry leader, or as the providers of the industry’s solutions of choice, each of which could have a material adverse
effect on our business, financial condition and results of operations. Furthermore, even if our solution is selected, it can take a long
period of months, and even years, before the selecting customer will commence the volume production of components or systems that incorporate
our products, which means that the sales and meaningful revenues therefrom may be delayed. See Item 5A. “Operating and Financial Review
and Prospects -Operating Results - Design Wins with New and Existing Customers”.
9
Even if we succeed in winning selection processes
for our products, we may not generate timely or sufficient net sales or margins from those wins and our financial results could suffer.
After incurring significant design and development
expenditures, a substantial period of time generally elapses before we generate meaningful net sales relating to such a product, if at
all, particularly with respect to the automotive industry. The reasons for this delay include, among other things, the following:
● changing customer requirements, including product and quality related requirements, resulting in an extended development cycle for the product;
● delay in the ramp-up of volume production of the customer’s products into which our solutions are designed;
● delay or cancellation of the customer’s product development plans;
● competitive pressures to reduce our selling price for the product;
● the discovery of design flaws, defects, errors or bugs in the products or at the customers’ system level;
● lower than expected customer acceptance of the solutions designed for the customer’s products;
● lower than expected acceptance of our customers’ products; and
● higher manufacturing costs than anticipated.
If we do not continue to win selection processes
for our products in the short term, then we may not be able to achieve the expected net sales levels associated with these winnings. If
we experience delays in achieving such sales levels, our operating results could be adversely affected. Moreover, even if a customer selects
our product, we cannot guarantee that this will result in any sales of our products, as the customer may ultimately change or cancel its
product plans, or our customer’s efforts to market and sell its product may not be successful.
If we fail in a timely and cost-effective manner
to develop new product features or new products that address customer preferences and achieve market acceptance, our operating results
could be adversely affected.
Our customers are constantly seeking new products
with more features and functionality at a lower cost, and our success relies heavily on our ability to continue to develop and market
to our customers new and innovative products and improvements of existing products, at competitive prices. In order to respond to new
and evolving customer demands, achieve a strong market share and keep pace with new technological, processing and other developments,
we must constantly introduce new and innovative products into the market. Although we strive to respond to customer preferences and industry
expectations regarding the development of our products, we may not be successful in developing, introducing or commercializing any new
or enhanced products on a timely basis or at all. Further, if initial sales volumes for new or enhanced products do not reach anticipated
levels within the time periods we expect, we may be required to engage in additional marketing efforts to promote such products and the
costs of developing and commercializing such products may be higher than we predict. Moreover, new and enhanced products may not perform
as expected. We may also encounter lower manufacturing yields and longer delivery schedules in commencing volume production of new products
that we introduce, which could increase our costs and disrupt our supply of such products.
A fundamental shift in technologies, the regulatory
climate or demand patterns and preferences in our existing product markets or the product markets of our customers or end-users could
make our current products obsolete, prevent or delay the introduction of new products or enhancements to our existing products or render
our products irrelevant to our customers’ needs. If our new product development efforts fail to align with the needs of our customers,
including due to circumstances outside of our control like a fundamental shift in the product markets of our customers and end users or
regulatory changes, our business, financial condition and results of operations could be materially and adversely affected.
The development of our products is highly complex.
New and enhanced products require substantial financial and other resources to research and development. Occasionally, we have experienced
delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the
future. Unanticipated problems in developing products could also divert substantial research and development and engineering resources,
which may impair our ability to develop new products and enhancements and could substantially increase our costs. Even if we introduce
new and enhanced products to the market, we may not be able to achieve market acceptance of these products in a timely manner or at all.
10
Our competitive position, demand for products
and results of operations could be adversely affected if we are unable to meet customers’ quality requirements.
Suppliers in the semiconductor industry must meet
increasingly stringent quality standards of certain original equipment manufacturers and customers, particularly for automotive and audio-video
applications. While our quality performance to date has generally met these requirements, we may experience problems in achieving acceptable
quality results in the manufacture of our products, particularly in connection with the production of new products or adoption of a new
manufacturing process or applying any change to an existing product. Any of these changes may require a new qualification process. If
we are unsuccessful or delayed in qualifying these products or changes by our existing or potential customers or if we fail to achieve
acceptable quality levels, the sales of our products may be precluded from a certain process or potential customer, or delayed, which
may result in holding excess or obsolete inventory, or could otherwise adversely affect our business results. In addition, our customers
generally impose very high quality and reliability standards on our products, which often change and may be difficult or costly to satisfy.
Any inability to satisfy customer quality and reliability standards or comply with industry standards and technical requirements may cause
our customers not to design-in our products or to return products that do not meet their quality requirements. This may adversely affect
demand for our products and the results of our operations.
In March 2024, we received a complaint from a customer
indicating an alleged batch production incident. We subsequently identified and remedied the production issue and delivered replaced products.
The customer made a claim for related expenses reimbursement and for this reason we have recorded expenses in 2024 of $2.2 million dollars.
During 2025, following the ongoing discussions with the customer and updated indications, the Company recorded reversals of the provision
in the overall amount of $0.7 million. As of December 31, 2025, the Company, the insurer and the customer are involved in advanced discussions
of a final settlement, which includes a payment of $1.5 million dollars by the insurance company to the customer, a payment that the Company
assumes to be probable (in addition to a retention amount of $250 thousand to be paid by the Company). Accordingly, the Company recognized
in 2025 an insurance recovery asset of $1.5 million. Although we provided immediate service to our customer to minimize the effects of
this incident to the satisfaction of the customer and are in advance discussions of a final settlement, this incident, and other quality
control incidents in the future, may adversely affect our reputation and our ability to win business, as well as our relationship with
our existing customers, and affect demand for our products and business results.
Our results of operations and reputation could
be adversely affected by warranty claims, product liability claims and product returns, including recalls.
Our products are highly complex and though we
invest significant resources in their testing and quality, they may contain defects, bugs or errors that may affect their quality or performance
and could result in claims against us by our customers or others, including liability for costs and expenses associated with such defects,
including recalls, which, in turn, may adversely impact our operating results, our relationship with our customers and our reputation.
We generally provide our customers with a limited warranty assurance that the sold products are in compliance with the applicable specifications
at the time of delivery. Under our standard terms and conditions of sale, liability for certain failures of product during the stated
warranty periods is usually limited to repair or replacement of defective items, although with some customers we may have other arrangements.
Any claims that are based on warranty, product liability, epidemic or delivery failures, or other grounds relating to any defects, errors
or bugs in our products, may require us to make significant expenditures to defend these claims or pay damage awards or settlements. In
addition, we may write-off inventory or, our customers may decide as a result to discontinue the purchasing or the design-in of our products
into their products, which may also result in holding excess or obsolete inventory or could otherwise adversely affect our business results.
If our customers product is recalled due to a failure in our product which is embedded into such product, the process of identifying a
recalled product, whether in automotive or in other devices that have been widely distributed, may be lengthy and require significant
resources, and we may incur significant costs and expenses as a result as well as reputational harm, which may adversely affect our business
results. To minimize these potential damages, we maintain relevant insurances, but there is no guarantee that such insurances will be
available or adequate to protect against all such potential claims and damages.
Changes in industry standards could limit our
ability to sell our products and force us to write down our inventory.
The markets for semiconductors are characterized
by rapidly evolving industry standards. We must continuously develop new products or upgrade our existing products to keep pace with these
evolving standards. Changes in industry standards, or the development of new industry standards, may make our products less competitive
or obsolete. Our products comprise only a component of an automotive vehicle or a part of an electronic device. All components of these
end products must uniformly comply with industry standards (if any) in order to operate efficiently together. We depend on companies that
provide other components of the end products to support prevailing industry standards. Many of these companies are significantly larger
and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly,
and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry
standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm
our business. The acquisition by larger companies of smaller companies that are developing products that support competing industry standards
may be interpreted as an endorsement for the competing standards by these larger companies, which may adversely affect the market acceptance
of our products.
Because it is not practicable to develop products
that comply with all current standards and new standards that may be adopted in the future, our ability to compete effectively will depend
on our ability to select industry standards that will be widely adopted by the market and to design our products to support those relevant
industry standards. We may be required to invest significant effort and to incur significant expense to redesign our products to address
relevant standards, and we may lose market share if we do not redesign our products quickly enough. If our products do not meet relevant
industry standards that have been widely adopted for a significant period of time, our results of operations, business, and prospects
would be adversely affected.
11
If we encounter sustained yield problems or
other delays in the manufacturing process of our products, we may lose sales and damage our customer relationships.
The manufacture of our products, including the
fabrication of semiconductor microchips, and the assembly and testing of our products, involve highly complex processes. From time to
time, we have experienced problems achieving acceptable yields at our third-party facilities, resulting in delays in the availability
of components. Moreover, an increase in the rejection rate of products during the quality control process before, during or after manufacture
and/or shipping of such products, results in lower yields and margins. In addition, changes in manufacturing processes required as a result
of changes in product specifications, changing customer needs and the introduction of new product lines have historically significantly
reduced our manufacturing yields, resulting in low or negative margins on those products. Poor manufacturing yields over a prolonged period
of time could adversely affect our ability to deliver our products on a timely basis and harm our relationships with customers, which
could materially and adversely affect our business, financial condition and results of operations. We may be unable to maintain appropriate
manufacturing capacity or product yields at our CM manufacturing facilities.
We have acquired and may continue to acquire
other businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future adversely
affect our financial results
Seeking and negotiating potential acquisitions
to a certain extent diverts our management’s attention from other business concerns and is expensive and time-consuming. Acquisitions
expose us and our business to unforeseen liabilities or risks associated with the business or assets acquired or with entering new markets.
In addition, we may lose key employees and vendors while integrating new organizations and may not effectively integrate the acquired
products, technologies or businesses or achieve the anticipated revenue or cost benefits, and we might harm our relationships with our
future or current technology suppliers. Future acquisitions could result in customer dissatisfaction or vendor dissatisfaction or performance
problems with an acquired product, technology or company. Paying the purchase price for acquisitions in the form of cash, debt or equity
securities may weaken our cash position, increase our leverage or dilute our existing shareholders, as applicable. Furthermore, a substantial
portion of the price paid for these acquisitions is typically for intangible assets. We may be required to pay additional funds for earn-outs
based on achievement of milestones, or may incur contingent liabilities, amortization expenses related to intangible assets or possible
impairment charges related to goodwill or other intangible assets (which has occurred in the past) or become subject to litigation or
other unanticipated events or circumstances relating to the acquisitions, and we may not have, or may not be able to enforce, adequate
remedies in order to protect our Company. Moreover, acquisitions may result in losses, in unwanted results and wasting valuable resources,
time and money.
For example, in May 2024, we acquired Acroname
Inc. (“Acroname”) (the acquisition of Acroname by Valens Inc., a fully owned subsidiary of Valens is referred to below as
a business combination) and we may continue to acquire complementary products, technologies or businesses. These acquisitions, and the
subsequent integration of the Acroname business and technologies, has diverted and may in the future divert a substantial part of our
resources and management attention which could in the future adversely affect our financial results.
Our ability to raise capital in the future may
be limited and could prevent us from executing our growth strategy.
Our ability to operate and expand our business
depends on the availability of adequate capital, which in turn depends on cash flow generated by our business and the availability of
debt, equity, or other applicable financing arrangements. We cannot assure you that our existing resources will be sufficient to meet
our future liquidity needs. We may require additional capital to respond to business opportunities, challenges, acquisitions or other
strategic transactions and/or unforeseen circumstances. The timing and amount of our working capital and capital expenditure requirements
may vary significantly depending on numerous factors, including: market acceptance of our products; the need to adapt to changing technologies
and technical requirements; the existence of opportunities for expansion; and access to and availability of sufficient management, technical,
marketing and financial personnel.
If our capital resources are insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of
additional equity securities or convertible debt securities would result in additional dilution to our shareholders. Additional debt would
result in increased expenses and could result in covenants that would restrict our operations and our ability to incur additional debt
or engage in other capital-raising activities. We have not made arrangements to obtain additional financing and there is no assurance
that financing, if required, will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow and support our business and respond
to business opportunities and challenges could be significantly limited.
12
We are exposed to a variety of financial risks,
including currency risk, interest rate risk, liquidity risk, commodity price risk, credit risk and other non-insured risks, which may
have an adverse effect on our financial results.
We are a global company and, as a direct consequence,
movements in the financial markets may impact on our financial results. We are exposed to a variety of financial risks, including currency
fluctuations, primarily due to the fact that while our functional currency is the U.S. dollar, our Israeli employees’ payroll, which
is a significant expense in our income statement, is paid in NIS. As a result, fluctuations in the exchange rate between the U.S. dollar
and the NIS may influence our results of operations as well as period-to-period comparisons. During 2024-2025, the U.S. dollar–NIS
exchange rate has experienced heightened volatility. A strengthening of the NIS relative to the U.S. dollar increases our operating expenses
when translated into U.S. dollars and may influence our gross margins and operating results. We engage in foreign currency hedging transactions
from time to time in an effort to reduce the potential impact of exchange rate fluctuations on our results of operations. However, our
hedging activities may not be effective, may not cover all of our exposure, and may be costly to implement. In addition, we cannot guarantee
that our hedging strategies will successfully offset foreign currency risks, that any hedging instruments we enter into will be sufficient
to mitigate the potential impact of adverse exchange rate movements, or that such hedging will be meaningful enough to neutralize the
potential effects of currency fluctuations on our financial results.
In addition, we are exposed to interest rate risk,
liquidity risk, commodity price risk and credit risk and other non-insured risks. If we create debt, the rating thereof by major rating
agencies may further improve or deteriorate. As a result, our additional borrowing capacity and financing costs may be impacted. Credit
risk represents the loss that would be recognized at the reporting date if counterparties failed to perform upon their agreed payment
obligations. Credit risk is present within our trade receivables. Such exposure is reduced through ongoing credit evaluations of the financial
conditions of our customers and by adjusting payment terms and credit limits when appropriate. We invest available cash and cash equivalents
with various financial institutions and are in that respect exposed to credit risk with these counterparties. Cash is invested and financial
transactions are concluded where possible with financial institutions with a strong credit rating. If we are unable to successfully manage
these risks, they could have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty attracting, motivating
and retaining executives and other key employees.
Our success depends to a large extent upon the
continued services of our executive officers, managers and skilled personnel, including our development engineers. Generally, our employees
are not bound by obligations that require them to continue to work for us for any specified period and, therefore, they could terminate
their employment with us at any time. Given these limitations, we may not be able to continue to attract, retain and motivate the qualified
personnel necessary for our business.
The loss of services of any key personnel or the inability to hire
new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely matter,
to sell products to customers or to manage our business effectively. In November 2025, we had a CEO transition, as our former CEO, Mr.
Gideon Ben-Zvi, stepped down, and we announced the appointment of Mr. Yoram Salinger, a highly experienced professional with a rich history
of leading successful organizations, as our new CEO.
We depend on highly skilled personnel to support
our business operations. If we are unable to retain and motivate our current personnel or attract additional qualified personnel, our
ability to develop and successfully market our products could be harmed.
We believe our future success will depend in large
part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. Our ability to enhance
our products may be harmed if we are unable to attract and retain sufficient engineers and research and development personnel. The competition
for qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of semiconductor
solutions is intense, specifically in Israel where our principal research and development activities are conducted, we face significant
competition for suitably skilled engineers and research and development personnel, where the availability of such personnel is limited
as well as in global markets in which we operate. Our inability to attract and retain qualified personnel, including hardware and software
engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell our products.
Our ability to attract and retain qualified personnel also depends on how well we maintain a strong workplace culture that is attractive
to employees.
13
Larger companies with whom we compete may allocate
more resources than we do for employee recruitment and may be able to offer more favorable compensation and incentive packages than us.
In addition, as a result of the intense competition for qualified human resources, the Israeli high-tech market has also experienced and
may continue to experience significant wage inflation. Accordingly, our efforts to attract, retain and develop personnel may also
result in significant additional expenses, which could adversely affect our profitability.
Furthermore, in making employment decisions, particularly
in the high-technology industry, job candidates often consider the value of the equity they are to receive in connection with their employment.
Employees may be more likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly
appreciated or significantly decreased in value. Many of our employees may receive significant proceeds from sales of our equity in the
public markets, which may reduce their motivation to continue to work for us and could heighten the risk of employee attrition.
If we cannot attract or retain a sufficient number
of skilled research and development employees, our business, prospects and results of operations could be adversely affected. In order
to remain competitive, we expect to continue to dedicate significant financial and other resources to expand our research and development
teams in order to assist in developing new solutions, applications and enhancements to our existing products and platforms. The loss of
our key personnel could harm our business, as their knowledge of our business and industry would be extremely difficult to replace.
In February 2026 we announced an efficiency plan
that included a reduction of approximately 10% in our workforce. Following such events, we may experience increased difficulty in retaining
and motivating our remaining employees, and we may lose institutional knowledge and technical expertise as a result of employee departures.
If we are not successful in effectively transferring knowledge and responsibilities, our ability to support our existing customers at
the expected quality and responsiveness levels, as well as our ability to develop new business, secure additional design wins, or execute
on our growth initiatives, could be adversely affected.
We may not be able to adequately obtain, maintain,
protect, defend or enforce our intellectual property rights, which could harm our competitive position.
Our success and future revenue growth depend,
in part, on our ability to obtain, maintain, protect, defend and enforce our intellectual property rights. We primarily rely on patent,
copyright, trademark, and trade secret laws, as well as non-disclosure agreements and other methods, to protect our proprietary technologies
and processes. It is difficult and costly to monitor the use of our intellectual property and there can be no assurances that the steps
we have taken to protect our proprietary technologies or processes will be effective or sufficient. It is possible that competitors or
other unauthorized third parties may obtain, copy, use or disclose, illegally or otherwise, our proprietary technologies and processes,
despite our efforts to protect such proprietary technologies and processes. It is also possible that customers, employees and other third
parties may breach or violate our agreements with them and make unauthorized use of our proprietary technology and processes, and we may
not have adequate remedies for such breach or violation. We cannot guarantee that we have entered into such agreements with each party
that may have or has had access to our proprietary technology or processes. In addition, while it is our policy to require our employees
and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual
property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual
property that we regard as our own. Moreover, even when we obtain agreements assigning intellectual property to us, the assignment of
intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims
against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual
property.
Moreover, the semiconductor industry is generally
subject to a high turnover of employees, so the risk of trade secret misappropriation may be amplified. Enforcing a claim that a party
illegally disclosed or misappropriated our trade secrets or proprietary technologies and processes is difficult, expensive, and time-consuming,
and the outcome is unpredictable, and therefore, we may not be able to obtain adequate remedies. If any of our trade secrets are subject
to unauthorized disclosure or are otherwise misappropriated by third parties or are independently developed by competitors or other third
parties, our competitive position may be materially and adversely affected.
14
The failure to identify any violations of our
intellectual property rights could materially and adversely affect our business, financial condition and result of operations and hurt
our competitive advantage.
While we currently own a significant number of
patents, the patent prosecution process is expensive, time-consuming and complex, and there can be no assurances that we be able to file,
prosecute, maintain, enforce or license all necessary or desirable patents and patent applications at a reasonable cost or in a timely
manner. Further, there can be no assurances that any additional patents will be issued. Even if new patents are issued, the claims allowed
may not be sufficiently broad to protect our technology. In addition, any of our existing patents, and any future patents, may be challenged,
narrowed, declared generic or lapsed, invalidated or circumvented. As such, any rights granted under these patents may not provide us
with meaningful protection or commercial advantage. Our intellectual property rights may be infringed, misappropriated or challenged,
which could result in them being narrowed in scope or declared invalid or unenforceable.
In addition, the protection afforded under the
patent and other intellectual property laws of one country may not be the same as that in other countries. The legal systems of certain
countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property
protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation
of our proprietary rights generally. Therefore, our intellectual property rights may not be as strong or as easily enforced outside of
the U.S. This means, for example, that our right to exclusively commercialize a product in those countries where we have patent rights
for that product can vary on a country-by-country basis. We also may not have the same scope of patent protection in every country where
we do business. If our patents do not adequately protect our technology, competitors may be able to offer products similar to ours. Our
competitors may also be able to develop similar technology independently or design around our patents. In addition, changes in either
the patent laws or interpretation of the patent laws in the U.S. and other jurisdictions could increase the uncertainties and costs surrounding
the prosecution of patent applications and the enforcement or defense of issued patents. Court rulings may narrow the scope of patent
protection available in certain circumstances and weaken the rights of patent owners in certain situations, which could also have a material
adverse effect on our business, financial condition, results of operations and prospects.
Our ability to compete successfully depends
in part on our ability to commercialize our products without infringing, misappropriating or otherwise violating the intellectual property
rights of others.
To the same extent that we seek to protect our
proprietary technology, processes and other inventions with patents, copyrights, trademarks and trade secrets, our competitors and other
third parties do the same for their proprietary technology, processes and other inventions. We have no means of knowing the content of
patent applications filed by third parties until they are published. It is also difficult and costly to continuously monitor the intellectual
property portfolios of our competitors to ensure our technologies do not infringe, misappropriate or otherwise violate the intellectual
property rights of any third parties.
The semiconductor industry is ripe with patent
assertion entities and is characterized by frequent litigation regarding patent and other intellectual property rights. As a public company
with an increased profile and visibility, we may receive communications in the future that allege that our products or technologies infringe,
misappropriate or otherwise violate third-party patents, copyrights, trademarks or other intellectual property rights. Lawsuits or other
proceedings resulting from such allegations could subject us to significant liability for damages, narrow or invalidate our intellectual
property or proprietary rights and adversely affect our business. Defending these proceedings may be costly and time-consuming and may
divert the attention of management and key personnel from other business issues, regardless of whether there is merit to such claims.
The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Under our customer
agreements and other agreements, we agree in many cases to indemnify our customers if our products are alleged to infringe, misappropriate
or otherwise violate a third party’s intellectual property rights.
15
In the event that any third party succeeds in
asserting a valid claim against us or any of our customers, we could be forced to do one or more of the following:
● discontinue selling, importing or using certain technologies that contain the allegedly infringing intellectual property which could cause us to stop manufacturing certain products;
● seek to develop non-infringing technologies, which may not be feasible;
● incur significant legal expenses;
● pay substantial monetary damages to the party whose intellectual property rights we may be found to be infringing; and/or
● seek licenses to the infringed technology that may not be available on commercially reasonable terms, if at all.
If a third party causes us to discontinue the
use of any of our technologies, we may be required to design around those technologies. This could be costly and time-consuming and could
have an adverse effect on our financial results. Claims that we have misappropriated confidential information or trade secrets of third
parties could have a similar negative impact on us. Although we try to ensure that our employees, consultants and advisors do not use
the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have
wrongfully used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s
current or former employer. Any significant impairments of our intellectual property rights from any litigation we face could materially
and adversely impact our business, financial condition, results of operations and our ability to compete in our industry.
If we fail to comply with our obligations under
license or technology agreements with third parties, or if we cannot license rights to use technologies on reasonable terms, we could
be required to pay damages, lose license rights that are critical to our business or be unable to commercialize new products in the future.
We license certain intellectual property and technologies
that are important to our business from third parties, and in the future, we may enter into additional agreements. If we fail to comply
with any of the obligations under our license or technology agreements, we may be required to pay damages and the licensor may have the
right to terminate the license. Termination by the licensor (or other applicable counterparty) may cause us to lose valuable rights and
could disrupt or otherwise inhibit our ability to sell our products or commercialize future products. Our business may suffer if any current
or future licenses or other grants of rights to us terminate, if the licensors (or other applicable counterparties) fail to abide by the
terms of the license or other applicable agreement, if the licensors fail to enforce the licensed intellectual property rights against
infringing third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable. Third parties from
whom we currently license intellectual property and technology could refuse to renew our agreements upon their expiration or could impose
additional terms and fees that we otherwise would not deem acceptable, requiring us to obtain the intellectual property or technology
from another third party, if any is available, or to pay increased licensing fees or be subject to additional restrictions on our use
of such third-party intellectual property or technology. In addition, the agreements under which we license intellectual property or technology
from third parties may be complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution
of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant
intellectual property or technology or increase what we believe to be our financial or other obligations under the relevant agreement.
In the future, we may also identify additional
third-party intellectual property and technologies that we may need to license or otherwise obtain rights to in order to conduct our business,
including to develop or commercialize new products. However, such licenses or other grants of rights may not be available on acceptable
terms or at all. The licensing or acquisition of third-party intellectual property rights is a competitive area, and several more established
companies may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary.
These established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization
capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign, license or otherwise grant rights
to us. Even if such licenses or other grants of rights are available, we may be required to pay the licensor (or other applicable counterparty)
substantial royalties based on sales of our products. Such royalties are a component of the cost of our products and may affect the margins
on our products. In addition, such licenses or other grants of rights may be non-exclusive, which could give our competitors access to
the same intellectual property licensed to us. Failure to obtain the necessary licenses or otherwise obtain adequate grants of rights
on favorable terms, or at all, could prevent us from commercializing products, which could have a material adverse effect on our competitive
position, business, financial condition and results of operations.
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We may be subject to cyber-attacks or other
disruptions or breaches of our information technology, systems or networks that could irreparably damage our reputation and our business,
expose us to liability and materially and adversely affect our results of operations.
In conducting our business, we routinely collect,
store and otherwise process proprietary, confidential or sensitive data, including personal information and proprietary technology and
information about our business and our customers, suppliers and business partners, including proprietary technology and information owned
by our customers. The secure maintenance, transmission and other processing of this data and information is critical to our operations
and business strategy. Our employees occasionally work remotely, based on a hybrid work model, which creates a heightened risk of cyber-attacks
or other disruptions to or breaches of our information technology, systems or networks.
We may be subject to cyber-attacks or other disruptions
or breaches of our information technology, systems or networks caused by computer viruses, software bugs, server malfunctions, software
or hardware failure, illegal hacking, criminal fraud or impersonation, ransomware attacks, denial-of-service attacks, malware, social
engineering or phishing attacks, acts of vandalism or terrorism, unauthorized access, theft or employee malfeasance or error.
Cyber-attacks are increasing in number and sophistication,
are well-financed, in some cases supported by state actors, and are designed to not only attack, but also to evade detection. Since the
techniques used to obtain unauthorized access to information technology, systems, and networks, or to otherwise sabotage them, change
frequently, have become increasingly complex and sophisticated, including through the use of AI, and are often not recognized until launched
against a target, we and third parties associated with us may be unable to anticipate these techniques or to implement adequate preventative
measures. Cyber-attacks can originate from a wide variety of sources, including organized crime, hackers, activists, terrorists, nation-states,
nation-state supported actors and others, any of which may see their effectiveness enhanced by the use of AI.
In addition, certain global geopolitical events
can increase our cybersecurity risk. For example, the geopolitical tension between Israel and the surrounding region, including Iran,
can result in heightened malicious activities from state-sponsored or politically motivated cybercriminal groups. These threats include
threats to harm Western countries’ infrastructure and assets and specifically those of Israel.
The costs for us to reduce the risk of or remediate
cybersecurity breaches and vulnerabilities could be significant. We have invested in cybersecurity technologies and protocols to mitigate
potential threats, but the complexities of regional geopolitical tensions make it difficult to fully predict or protect against every
potential risk. Furthermore, the evolving nature of the cybersecurity landscape, for example, by the emergence of new technologies such
as AI technologies that are used to identify and target new vulnerabilities in our information technology, systems or networks or of those
of our customers, vendors and other business partners, increases the challenge to predict and protect against all potential risks and
there is no assurance that we will be able to promptly and effectively respond to such increasingly sophisticated threats.
Any type of security breach, attack or misuse
of data, whether actual or perceived, and whether experienced by us or an associated third party, could harm our reputation or deter existing
or prospective customers from using our products and applications, increase our operating expenses in order to contain and remediate the
incident, expose us to unbudgeted or uninsured liability, disrupt our operations, divert management focus away from other priorities,
increase our risk of regulatory scrutiny, result in litigation from customers, employees or other third parties, lead to the imposition
of penalties, reporting obligations and fines under state, federal and foreign laws or by payment networks or adversely affect our continued
payment network registration and financial institution sponsorship. Moreover, any such compromise of our information security could result
in the loss, misappropriation, corruption or unauthorized publication of our confidential business or proprietary information or personal
or sensitive information, or that of other parties with which we do business, an interruption or other failure of our information technology,
systems, networks or operations, the unauthorized transfer of cash or other of our assets, the unauthorized release of customer or employee
data or a violation of laws, regulations, industry standards or other legal or contractual obligations related to privacy, data protection
and information security. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software
programs that attack our products, or that otherwise exploit any security vulnerabilities, and any such attack, if successful, could expose
us to liability to customer claims. In addition, our ability to monitor the data security of our third-party service providers or other
third parties with whom we do business is limited. Certain of such third parties may store or have access to our data and may not have
effective controls, processes, or practices to protect our information from loss, unauthorized disclosure, unauthorized use or misappropriation
or other cyber-attacks or other disruptions to or breaches of information security. A vulnerability in such third parties’ software
or information technology, systems or networks, a failure of such third parties’ safeguards, policies or procedures, or a cyber-attack
or other disruption to or breach of information security affecting any of these third parties could irreparably damage our reputation
and business. The costs related to significant cyber-attacks or other disruptions to or breaches of our information technology, systems
or networks could be material and cause us to incur significant expenses. If the information technology, systems or networks of third
parties associated with us become subject to cyber-attacks or other disruptions or security breaches, we may have insufficient recourse
against such third parties and we may have to expend significant resources to mitigate the impact of such an event, and to develop and
implement protections to prevent future events of this nature from occurring. Any of the foregoing could irreparably damage our reputation
and business, which could have a material adverse effect on our results of operations.
We cannot ensure that any limitation of liability
provisions in our agreements with customers, service providers, business partners and other third parties with which we do business would
be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim in connection
with a cyber-attack or other disruption to or breach of information security. Additionally, we cannot be certain that our insurance coverage
will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable
terms, or at all, or that our insurer will not deny coverage as to any future claim.
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Our use of Artificial Intelligence technologies may not achieve intended
results and could expose us to operational, competitive, regulatory and reputational risks that may adversely affect our business, financial
condition and results of operations.
Artificial Intelligence (“AI”) is an emerging area of technology
that may increasingly influence aspects of our business and operations. While AI has the potential to improve efficiency, it also presents
various uncertainties and potential risks. We have made limited use of AI to date to support internal business functions, primarily as
a work-supporting tool in software development and content research, and may expand its use in the future. These tools are used solely
to enhance employee productivity and workflow efficiency. Our products and services do not incorporate AI-based features or functionality,
and AI does not currently form a component of our revenue-generating offerings.
Although our use of AI tools is limited, there can be no assurance
that such use will be successful or that it will not lead to unintended consequences. For example, certain AI technologies have been known
to produce false or “hallucinatory” inferences or output, and certain AI technologies can create inaccurate, incomplete or
misleading content, unintended biases and other discriminatory or unexpected results, errors or inadequacies, any of which may not be
easily detectable. Any actual or perceived errors, biases, deficiencies or other flaws in AI algorithms or output—whether developed
internally by us or provided by third parties—could result in operational inefficiencies, legal and regulatory liability, inaccurate
responses to customers, poor customer experiences, or inappropriate or misleading content. These issues could negatively impact on our
brand reputation, customer trust, competitive position and overall business performance. Additionally, AI is an area of rapid technological
advancement and evolving competition. Our competitors may adopt or develop more effective AI-based tools and solutions, or can implement
those into their products and services, thus creating a technological advantage over our offerings, which could place us at a competitive
disadvantage.
Moreover, the legal and regulatory landscape surrounding AI continues
to develop. The technologies underlying AI and its uses are already subject to a variety of laws and regulations, including intellectual
property, privacy, data protection and information security, consumer protection, competition and equal opportunity laws and regulations,
and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations. It is possible
that we will not be able to anticipate how to respond to these rapidly evolving frameworks, and we could be required to expand resources
to adjust our work practices in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions. Furthermore, because
AI technology itself is highly complex and rapidly developing, it is not possible to predict all of the legal, operational or technological
risks that may arise relating to the use of AI as part of our work flows.
Additionally, any output created by us using AI may not be subject
to copyright protection, which may adversely affect our intellectual property rights in, or ability to commercialize or use, any such
content. In the United States, a number of civil lawsuits have been initiated related to the foregoing and other concerns, any one of
which may, among other things, require us to limit the ways in which we use AI as part of the work flows. For example, the output produced
by AI technologies may include information subject to certain privacy or right of publicity laws or constitute an unauthorized derivative
work of the copyrighted material used in training the underlying AI model, any of which could also create a risk of liability for us.
If we do not have sufficient rights to use the models, algorithms, data or other material or content on which our AI solutions rely, or
the output thereof, we could also incur liability through the violation of applicable laws and regulations, third-party intellectual property,
privacy or other rights, or contracts to which we are a party.
We also rely in part on third-party vendors that
integrate AI into the tools and services they provide to us. Because we may have limited visibility or control over these systems, any
technical errors, privacy, data protection or information security issues, or regulatory noncompliance by such vendors could negatively
affect our operations.
Further, if any of our employees, contractors,
consultants or third-party vendors use any third-party AI-powered software in connection with our business or the services they provide
to us, it may lead to the inadvertent disclosure or incorporation of our confidential information into publicly available training sets,
which may impact our ability to realize the benefit of, or adequately obtain, maintain, protect, defend and enforce our intellectual property
rights or confidential information, harming our competitive position and business. In addition, the use of AI has resulted in, and may
in the future result in, cyber-attacks or other breaches or disruptions that implicate the personal information or confidential information
of clients of AI solutions. Our ability to mitigate risks associated with disclosure of our confidential information, including in connection
with AI, will depend on our implementation, maintenance, monitoring and enforcement of appropriate technical and administrative safeguards,
policies and procedures governing the use of AI in our business.
To date, our internal use of AI-enabled tools has not had a material
impact on our financial condition or results of operations. However, if our reliance on such tools increases or related regulatory, operational
or security risks materialize, our business, financial condition and results of operations could be adversely affected.
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There may exist deficiencies in internal financial
reporting controls and disclosure procedures that could adversely affect the accuracy and reliability of our periodic reporting.
Prior to September 30, 2021, Valens was
a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our
independent registered public accounting firm has not conducted an audit of the effectiveness of our internal control over financial reporting.
As a public company, we are required pursuant
to Section 404(a) of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal
control over financial reporting. This assessment includes the disclosure of any material weaknesses identified by our management in our
internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to
the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following
the date we are no longer an “emerging growth company” pursuant to Section 404(b) of the Sarbanes-Oxley Act. Our status as
an “emerging growth company” will end in 2026.
The company has designed disclosure controls and procedures to provide
reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated
to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. However,
despite the disclosure and compliance procedures, there may from time to time exist deficiencies in our control systems that could adversely
affect the accuracy and reliability of our periodic reporting. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent
limitations in our control system, misstatements due to error or fraud may occur and not be detected. Imperfections in our periodic reporting
could create uncertainty regarding the reliability of our results of operations and financial results, which in turn could have a material
adverse impact on our reputation or share price.
Risks Related to Laws and Regulation
Our global business requires us to comply with
laws and regulations in countries across the world and exposes us to international business risks that could adversely affect our business.
We are subject to environmental, labor, health,
safety, anti-corruption, tax, corporate governance, imports and exports, and other laws and regulations in Israel, the United States and
other jurisdictions in which we operate. We are also required to obtain environmental permits and other authorizations or licenses from
governmental authorities for certain of our operations and have to protect our intellectual property worldwide. In the jurisdictions where
we operate, we need to comply with differing standards and varying practices of regulatory, tax, judicial and administrative bodies.
The business environment is also subject to many
uncertainties, including the following international business risks:
● negative economic developments in economies around the world and the instability of governments, currently for example the sovereign debt situation in certain European countries;
● social and political instability in a number of countries around the world, uncertain economic, legal and political conditions in the Middle East, China, Europe and other regions where we do business, including, for example, changes in China-Taiwan relations, the military conflict between Russia and Ukraine and the related sanctions and other penalties imposed on Russia by the United States, the European Union, the United Kingdom and other countries, and the threat of war, terrorist attacks in the United States, in Europe, Middle East and Africa (EMEA), or Asia Pacific (APAC);
● pandemics or national and international environmental or other disasters, which may adversely affect our workforce, as well as our local suppliers and customers;
● adverse changes in governmental policies, especially those affecting trade and investment;
● foreign currency exchange, in particular with respect to the U.S. dollar, and transfer restrictions, in particular in Greater China; and
● threats that our operations or property could be subject to nationalization and expropriation.
No assurance can be given that we have been or
will be at all times in complete compliance with the laws and regulations to which we are subject or that we have obtained or will obtain
the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits and other
authorizations or licenses, we could be fined or otherwise sanctioned by regulators. In addition, if any of the international business
risks were to materialize or become worse, they could also have a material adverse effect on our business, financial condition and results
of operations.
19
We are subject to governmental regulations and
other legal obligations, particularly related to privacy, data protection and information security, across different markets where we
conduct our business. Our actual or perceived failure to comply with such regulations and obligations could harm our business.
In Israel, the United States, Europe and other
jurisdictions in which we operate, we are subject to various laws, industry standards, regulations and other legal and contractual obligations
related to privacy, data protection and information security. Such laws and regulations are constantly evolving, subject to uncertain
and inconsistent interpretation and enforcement, and also may be expanded. If we are found to have breached any such laws, standards,
regulations or obligations, in any such jurisdiction, we may be subject to enforcement actions that require us to change our business
practices in a manner which may negatively impact our revenue, as well as expose us to litigation, fines, civil and/or criminal penalties
and adverse publicity that could cause our customers to lose trust in us, negatively impacting our reputation and business in a manner
that harms our financial position.
As part of our business development, we collect,
maintain, transmit, store and otherwise process information about individuals, also referred to as personal information, from our customers
and suppliers. Laws, regulations and standards in Israel, the United States (both state and federal), Europe and other jurisdictions around
the world restrict how personal information is collected, stored, used, disclosed and otherwise processed, as well as, among other things,
set standards for its security, implement notice requirements regarding privacy practices, and provide individuals with certain rights
regarding the use, disclosure and sale of their protected personal information.
For example, in the United States, various federal
and state regulators, including governmental agencies like the Federal Trade Commission, have adopted, or are considering adopting, laws
and regulations concerning privacy, data protection and information security. Certain state laws may be more stringent or broader in scope,
or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws
may differ from each other, all of which may complicate compliance efforts. Additionally, many statutory requirements, both in the United
States and other jurisdictions, include obligations for companies to notify individuals of data breaches involving certain personal information.
Internationally, laws, regulations and standards
in many jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal
information. For example, the EU General Data Protection Regulation (“GDPR”), together with national legislation, regulations
and guidelines of the EU member states governing the processing of personal data, impose strict obligations and restrictions on the ability
to collect, use, retain, protect, disclose, transfer and otherwise process personal data. In particular, the GDPR includes obligations
and restrictions concerning the consent and rights of individuals to whom the personal data relates, the transfer of personal data out
of the European Economic Area (“EEA”), security breach notifications and the security and confidentiality of personal data.
The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater. Legal
developments in the EEA, including rulings from the Court of Justice of the European Union and from various EU member state data protection
authorities, have also created complexity and uncertainty regarding transfers of personal data from the EEA to the United States and other
so-called third countries outside the EEA. While we have taken steps to mitigate the impact on us, the efficacy and longevity of these
mechanisms remains uncertain.
In addition, in Israel, we are subject to the
Privacy Protection Law, 5741-1981 (the “PPL”) and its regulations, as well as the guidelines of the Israeli Privacy Protection
Authority (“PPA”), which govern the collection, use, retention, security, disclosure, transfer, and other processing of personal
information. These include provisions governing the transfer of personal information outside the borders of Israel, as well as the handling
of personal information transferred from the European Economic Area (“EEA”) and stored in databases located in Israel, or
other personal information stored together with such data. Material amendments to the PPL were approved by the Israeli Parliament in August
2024 and came into effect in August 2025 (“Amendment 13”). Following Amendment 13, the PPL expands the PPA’s authority to
investigate and impose monetary sanctions, which are significantly higher than those previously available, and introduces additional obligations
regarding the processing of personal data, which we are in the process of implementing. Failure to comply with the PPL, its regulations,
and guidelines issued by the PPA may expose us to administrative fines (which in some cases may reach millions of NIS), civil claims (including
class actions), and, in certain cases, criminal liability.
Any changes in these regulations and sanctions
may also require us to modify the manner in which personal data is collected, processed, and maintained by us.
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We make public statements about our use and disclosure
of personal information through our privacy policies, information on our website and press statements. Although we endeavor to comply
with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of
our privacy policies and other statements that provide promises and assurances about privacy and data security can subject us to potential
government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Any concerns about
our privacy, data protection and information security practices, even if unfounded, could damage our reputation and adversely affect our
business.
Restrictions on the collection, use, sharing,
disclosure or other processing of personal information or additional requirements and liability for security and data integrity could
require us to modify our data processing practices and policies and our solutions and features, possibly in a material manner, and could
subject us to increased compliance costs and obligations and regulatory scrutiny. Our failure to comply with applicable laws, regulations
and other legal obligations, or to protect personal data, could result in enforcement or litigation action against us, including fines,
sanctions, penalties, judgments and public censure, claims for damages by residents and other affected individuals, damage to our reputation
and loss of goodwill, any of which could have a material adverse impact on our business, financial condition and results of operations.
Failure to comply with the Foreign Corrupt Practices
Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other
adverse consequences.
We have extensive international operations and
a substantial portion of our business, particularly with respect to our manufacturing processes, is conducted outside of the United States.
Our operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), as well as the anti-corruption and anti-bribery
laws in the countries where we do business. The FCPA prohibits covered parties from offering, promising, authorizing or giving anything
of value, directly or indirectly, to a “foreign government official” with the intent of improperly influencing the official’s
act or decision, inducing the official to act or refrain from acting in violation of lawful duty, or obtaining or retaining an improper
business advantage. The FCPA also requires publicly traded companies to maintain records that accurately and fairly represent their transactions,
and to have an adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of
domestic government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or receiving
improper payments to or from non-government parties, as well as so-called “facilitation” payments. In addition, we are subject
to U.S. and other applicable trade control regulations that restrict with whom we may transact business, including the trade sanctions
enforced by the U.S. Treasury, Office of Foreign Assets Control.
Though we maintain policies, internal controls
and other measures reasonably designed to promote compliance with applicable anticorruption and anti-bribery laws and regulations, and
certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents may nevertheless engage in improper
conduct for which we might be held responsible. Any violations of these anti-corruption or trade controls laws, or even allegations of
such violations, can lead to an investigation and/or enforcement action, which could disrupt our operations, involve significant management
distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees or agents acting on our behalf,
are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement,
injunctions on future conduct, securities litigation, bans on transacting government business, delisting from securities exchanges and
other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition,
our reputation, our net sales or our share price could be adversely affected if we become the subject of any negative publicity related
to actual or potential violations of anti-corruption, anti- bribery or trade control laws and regulations.
Environmental, health and safety (EHS) laws
and regulations may expose us to liability, and such liability and compliance with these laws and regulations may adversely affect our
business.
The semiconductor industry is subject to a variety
of international, federal, state, local and non-U.S. laws and regulations governing pollution, environmental protection and occupational
health and safety, including those relating to the release, storage, use, discharge, handling, generation, transportation, disposal, and
labeling of, and human exposure to, hazardous and toxic materials, product composition, and the investigation and cleanup of contaminated
sites, including sites we currently or formerly owned or operated, due to the release of hazardous materials, regardless of whether we
caused such release. We are also required to obtain environmental permits from governmental authorities for some of our operations. We
cannot be assured that we have been or will be at all times in complete compliance with such EHS laws, regulations and permits. Failure
to comply with such EHS laws and regulations could subject us to civil or criminal costs, obligations, sanctions or property damage or
personal injury claims, or suspension of our facilities’ operating permits.
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Changes in EHS laws or regulations may require
us to invest in costly equipment or make manufacturing process changes and may adversely affect the sourcing, supply and pricing of materials
used in our products. Any such changes may require us to conduct careful audits of our vendors or even to replace vendors, which may involve
costs in qualifying or making adjustments for the work with another vendor.
In the event of an incident involving hazardous
materials, we could be liable for damages and such liability could exceed the amount of any liability insurance coverage and the resources
of our business. In addition, in the event of the discovery of contaminants or the imposition of clean up obligations for which we are
responsible, we may be required to take remedial or other measures which could have a material adverse effect on our business, financial
condition and results of operations. In response to environmental concerns, some customers and government agencies impose requirements
for the elimination and/or labeling of hazardous substances, such as lead (which is widely used in soldering connections in the process
of semiconductor packaging and assembly), in electronic equipment, as well as requirements related to the take-back of products discarded
by customers.
EHS laws and regulations have tended to become
more stringent over time, causing a need to redesign technologies, imposing greater compliance costs and increasing risks and penalties
associated with violations, which could seriously harm our business.
In addition, increasingly regulators, customers,
investors, employees and other stakeholders are focusing on environmental, social and governance (ESG) matters and related disclosures.
These changing rules, regulations and stakeholder expectations have resulted in, and are likely to continue to result in, increased general
and administrative expenses and increased management time and attention spent complying with or meeting such regulations and expectations.
The Internal Revenue Service (IRS) may not agree
that Valens should be treated as a non-U.S. corporation for U.S. federal income tax purposes.
Under current U.S. federal income tax law, a corporation
generally will be considered to be a U.S. corporation for U.S. federal income tax purposes if it is created or organized in the United
States or under the law of the United States or of any state. Accordingly, under generally applicable U.S. federal income tax rules, Valens,
which is incorporated and tax resident in Israel, would generally be classified as a non-U.S. corporation for U.S. federal income tax
purposes. Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code”) and the Treasury regulations promulgated
thereunder, however, contain specific rules that may cause a non-U.S. corporation to be treated as a U.S. corporation for U.S. federal
income tax purposes. If it were determined that Valens is treated as a U.S. corporation for U.S. federal income tax purposes under Section
7874 of the Code and the Treasury regulations promulgated thereunder, Valens would be liable for U.S. federal income tax on its income
in the same manner as any other U.S. corporation and certain distributions made by Valens to non-U.S. investors generally would be subject
to U.S. withholding tax.
As more fully described in the section titled
“Material U.S. Federal Income Tax Considerations-U.S. Federal Income Tax Treatment of Valens-Tax Residence of Valens for U.S.
Federal Income Tax Purposes,” based on the terms of the Business Combination (as defined in Item 4A to this Annual Report) and
certain facts and factual assumptions, Valens does not believe that it should be treated as a U.S. corporation for U.S. federal income
tax purposes under Section 7874 of the Code after the Business Combination. However, the application of Section 7874 of the
Code is complex, subject to detailed Treasury regulations (the application of which is uncertain in various respects and would be impacted
by changes in such regulations with possible retroactive effect) and subject to certain factual uncertainties.
Accordingly, there can be no assurance that the
IRS will not challenge the status of Valens as a non-U.S. corporation for U.S. federal income tax purposes under Section 7874 of
the Code or that such challenge would not be sustained by a court.
If the IRS were to successfully challenge Valens’
status as a non-U.S. corporation for U.S. federal income tax purposes, Valens and certain Valens shareholders may be subject to significant
adverse tax consequences, including a higher effective corporate income tax rate on Valens and the application of U.S. withholding taxes
on dividends paid on Valens Ordinary Shares to non-U.S. shareholders, subject to reduction under an applicable income tax treaty.
See “Material U.S. Federal Income Tax
Considerations-U.S. Federal Income Tax Treatment of Valens” for a more detailed discussion of the application of Section 7874
of the Code to Valens. Investors should consult their own tax advisors regarding the application of Section 7874 of the Code to
the Business Combination and the tax consequences to Valens and its shareholders if the classification of Valens as a non-U.S. corporation
is not respected.
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Changes to tax laws or regulations in Israel,
the United States and other jurisdictions expose us to tax uncertainties and could adversely affect our results of operations or financial
condition.
As a multinational business, operating in multiple
jurisdictions such as Israel, the United States, the EU, Japan and China, we may be subject to taxation in several jurisdictions around
the world with increasingly complex tax laws, the application of which can be uncertain. Changes to tax laws or regulations in the jurisdictions
in which we operate, or in the interpretation of such laws or regulations, could significantly increase our effective tax rate and reduce
our cash flow from operating activities and otherwise have a material adverse effect on our financial condition. Since a significant portion
of our operations are located in Israel, changes in tax laws or regulations in Israel could significantly affect our operating results.
Further changes in the tax laws of foreign jurisdictions could arise, in particular, as a result of different initiatives undertaken by
the Organization for Economic Co-operation and Development (the “OECD”). Any changes in the OECD policy or recommendations,
if adopted, could increase tax uncertainty and may adversely affect our provision for income taxes and increase our tax liabilities.
In addition, other factors or events, including
business combinations and investment transactions, changes in the valuation of our deferred tax assets and liabilities, adjustments to
taxes upon finalization of various tax returns or as a result of deficiencies asserted by taxing authorities, increases in expenses not
deductible for tax purposes, changes in available tax credits, changes in transfer pricing methodologies, other changes in the apportionment
of our income and other activities among tax jurisdictions, and changes in tax rates, could also increase our effective tax rate.
We are subject to regular review and audit by
Israeli and other foreign tax authorities. Although we believe our tax estimates are reasonable, the authorities in these jurisdictions
could review our tax returns and impose additional taxes, interest, linkage and penalties, and the authorities could claim that various
withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries,
any of which could materially affect our income tax provision, net income, or cash flows in the period or periods for which such determination
and settlement is made. We may also be liable for taxes in connection with the businesses we acquire. Our determinations are not binding
on any taxing authorities, and accordingly the final determination in an audit or other proceeding may be materially different than the
treatment reflected in our tax provisions, accruals and returns. An assessment of additional taxes because of an audit could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
Transfer pricing rules may adversely affect
our corporate income tax expenses.
Many of the jurisdictions in which we conduct
business have detailed transfer pricing rules, which require contemporaneous documentation establishing that all transactions with non-resident
related parties be priced using arm’s length pricing principles. The tax authorities in these jurisdictions could challenge our
related party transfer pricing policies and as a consequence the tax treatment of corresponding expenses and income. International transfer
pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree
of judgment. If any of these tax authorities were to be successful in challenging our transfer pricing policies, we may be liable for
additional corporate income tax, and penalties and interest related thereto, which may have a significant impact on our results of operations
and financial condition.
Changes in government trade policies, including
the imposition of tariffs and export restrictions, could limit our ability to sell our products to certain customers or demand from certain
customers, which may materially and adversely affect our sales and results of operations.
Our business is subject to risks associated
with changes in global trade policies, including the imposition of tariffs, duties, trade restrictions and other barriers to
international commerce. During 2025, trade policy uncertainty increased, including renewed discussion and implementation of tariffs
by the United States on certain imported goods. We expect trade policy uncertainty to continue during 2026. We rely on a global
ecosystem of suppliers, manufacturing partners and customers, and our products are sold into international markets. The imposition
of tariffs or other trade restrictions on semiconductors, semiconductor components, finished goods, or materials used in the
production of our products, whether directly or indirectly, could increase our costs of manufacturing or procurement, reduce gross
margins, disrupt supply chains, or require us to modify our sourcing, manufacturing or logistics arrangements. In addition, tariffs
or retaliatory measures could increase prices for our customers, reduce demand for end products incorporating our solutions, or
cause customers to delay, reduce or cancel orders.
Furthermore, changes in trade policy or tariff
regimes may negatively affect our customers’ business plans, capital expenditures and production volumes. Such impacts could slow
adoption of our products, lengthen sales cycles, or reduce volumes, which could adversely affect our revenues and operating results.
We may not be able to fully mitigate the impact
of tariffs or trade restrictions through pricing adjustments, contractual protections, supply chain modifications or other measures. Any
inability to pass through increased costs to customers, delays in implementing mitigation strategies, or additional trade actions adopted
in the future could materially and adversely affect our business, financial condition and results of operations.
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Specifically with respect to the U.S. market, since our current products
are manufactured outside the United States, the application of tariffs can have a disproportionate impact on our business and make our
products more expensive and less competitive in the U.S. market. Furthermore, changes in U.S. trade policy could trigger retaliatory actions
by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce
or discourage purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased
costs of manufacturing our products, and higher prices for our products in foreign markets. In addition, the U.S. government has recently
adopted an aggressive trade and industrial policy focused on semiconductor self-sufficiency. Under a Presidential Proclamation issued
in January 2026, the U.S. announced the imposition of a 25% Section 232 tariff on certain advanced semiconductors and products containing
those semiconductors that are not intended for use in the U. S. While our legacy products are currently not subject to such tariff, the
administration has indicated it may consider broader, significant tariffs on all semiconductor imports if foreign partners do not comply
with U.S. onshoring targets. In February 2026, the U.S. Supreme Court ruled that certain tariffs imposed under the International Emergency
Economic Powers Act (IEEPA) are unconstitutional, and the future of tariffs and trade restrictions from the U.S. market will continue
to remain uncertain.
In China, the Chinese government may also impose
trade policies and restrictions and may, among other things, as part of its “Made in China 2025” policy, require the use of
local suppliers in place of non - Chinese suppliers like us, compel companies that do business in China to partner with local companies
to conduct business and provide incentives to government-backed local customers to buy from local suppliers. Changes in, and responses
to, U.S. trade policy could reduce the competitiveness of our products and cause our sales to decline, which could materially and adversely
impact our business, financial condition and results of operations, as well as our ability to grow and expand our share of the Chinese
market. In addition, the U.S. or foreign governments may take administrative, legislative or regulatory action that could materially interfere
with our ability to sell products in certain countries and/or to certain customers, particularly in China. We cannot predict what actions
may ultimately be taken with respect to tariffs or trade relations between the United States and China or other countries, what products
may be subject to such actions, or what actions may be taken by the other countries in retaliation.
We will be subject to legal and regulatory consequences
if we do not comply with applicable export control laws and regulations.
Products developed in Israel and other locations
are subject to export controls of the applicable nation. Obtaining export licenses can be difficult, costly and time-consuming and we
may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for
our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic
revenues. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational
harm. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. Failure
to obtain export licenses for our products or having one or more of our customers be restricted from receiving exports from us could significantly
reduce our net sales and materially and adversely affect our business, financial condition and results of operations.
Risks Related to Being a Public Company
Valens incurs increased costs as a result of
operating as a public company, and its management is required to devote substantial time to new compliance initiatives.
As of September 30, 2021, Valens became
a public company subject to reporting requirements in the United States, and it will incur significant legal, accounting, insurance and
other expenses that it did not incur as a private company, and these expenses may increase even more after Valens is no longer an emerging
growth company, as defined in Section 2(a) of the Securities Act. As a public company, Valens is subject to the reporting requirements
of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules adopted,
and to be adopted, by the SEC and the NYSE. Valens’ management and other personnel devote, and will continue to need to devote,
a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased its legal and financial
compliance costs and to make some activities more time-consuming and costly. For example, Valens expects these rules and regulations to
make it more difficult and more expensive for it to maintain director and officer liability insurance and it may be forced to accept reduced
policy limits or incur substantially higher costs to maintain the same or similar coverage. Valens cannot accurately predict or estimate
the full amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also
make it more difficult for Valens to attract and retain qualified people to serve on its board of directors, its board committees or as
executive officers.
A market for Valens’ securities may not
be sustained.
The price of Valens’ securities may fluctuate
significantly due to general market and economic conditions. Between January 1, 2025, and December 31, 2025, the closing price of our
share price fluctuated from a low of $1.38 to a high of $3.46, and the daily average trading volume in that period was 594,152 shares.
An active trading market for Valens’ securities may not be sustained. In addition, the price of Valens’ securities can vary
due to general economic conditions and forecasts, Valens’ general business condition and the release of Valens’ financial
reports. The following factors may also cause significant fluctuations in the market price of our Ordinary Shares:
● negative fluctuations in our quarterly revenues and earnings or those of our competitors;
● pending sales into the market due to the sale of large blocks of shares, due to, among other reasons, the expiration of contractual lock- up with respect to significant amounts of our Ordinary Shares;
24
● shortfalls in our operating results compared to levels forecast by us or securities analysts;
● changes in our senior management;
● mergers and acquisitions by us or our competitors;
● technological innovations;
● the introduction of new products;
● changes in trade policy or tariffs;
● cyber-attacks or other disruptions to or breaches of our information technology, systems or networks;
● the conditions of the securities markets, particularly in the semiconductors sector; and
● political, economic and other developments in Israel and worldwide.
In addition, share prices of many technology companies
in general and semiconductors companies in particular fluctuate significantly for reasons that may be unrelated or disproportionate to
operating results. The factors discussed above may depress or cause volatility to our share price, regardless of our actual operating
results.
Additionally, if Valens’ securities become
delisted from the NYSE and are quoted on the OTC Bulletin Board (an inter-dealer automated quotation system for equity securities that
is not a national securities exchange), the liquidity and price of Valens’ securities may be more limited than if Valens was quoted
or listed on the NYSE or another national securities exchange.
The lack of an active market may impair our shareholders’
ability to sell their securities at the time they wish to sell them or at a price that they consider reasonable. The lack of an active
market may also reduce the fair value of our securities. An inactive market may also impair our ability to raise capital to continue to
fund operations by selling Ordinary Shares and may impair our ability to acquire other companies or technologies by using our shares as
consideration.
Value Base Ltd. beneficially owns a significant
amount of our shares, and its interests may conflict with ours or yours in the future.
Value Base Ltd. beneficially owns approximately
20.79% of the voting power of our Ordinary Shares. For so long as ValueBase continues to beneficially own a significant percentage of
our Ordinary Shares, it may have interests that differ from ours or yours and it may vote in a way with which you disagree, and which
may be adverse to your interests. See Item 7B “Related Party Transactions - Board Nomination Agreement”.
Valens’ internal controls over financial
reporting may not be effective and its independent registered public accounting firm may not be able to attest as to their effectiveness,
which could have a significant and adverse effect on Valens’ business and reputation.
Under the Sarbanes-Oxley Act, among other things,
Valens is required to maintain effective disclosure controls and procedures and internal control over financial reporting. Valens is continuing
to develop and refine its disclosure controls, internal control over financial reporting and other procedures that are designed to ensure
that information required to be disclosed by it in the reports that it will file with the SEC is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under
the Exchange Act is accumulated and communicated to Valens’ principal executive and financial officers. Pursuant to Section 404(a)
of the Sarbanes-Oxley Act, we are required to furnish a report by management on, among other things, the effectiveness of our internal
control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management
in internal control over financial reporting.
Valens’ current controls and any new controls that it develops
may become inadequate because of changes in conditions in its business. Further, weaknesses in Valens’ internal controls may be
discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation
or improvement, could adversely affect Valens’ operating results or cause it to fail to meet its reporting obligations and may result
in a restatement of Valens’ financial statements for prior periods. Any failure to implement and maintain effective internal controls
also could adversely affect the results of periodic management evaluations. Since the Company is currently an “emerging growth company,”
as defined in the Securities Act, as modified by the Jumpstart Business Startups Act of 2012 (the “JOBS Act”), it may take
advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging
growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b)
of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause
investors to lose confidence in Valens’ reported financial and other information. In any event, we will lose our status as an emerging
growth company on December 31, 2026.
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In order to maintain and improve the effectiveness
of its disclosure controls and procedures and internal control over financial reporting, Valens has expended and anticipates that it will
continue to expend significant resources, including accounting-related costs, and provide significant management oversight. Any failure
to maintain the adequacy of its internal controls, or consequent inability to produce accurate financial statements on a timely basis,
could increase Valens’ operating costs and could materially and adversely affect its ability to operate its business. In the event
that Valens’ internal controls are perceived as inadequate or that it is unable to produce timely or accurate financial statements,
investors may lose confidence in Valens’ operating results and the stock price of Valens may decline. In addition, if we are unable
to continue to meet these requirements, we may not be able to maintain listing on the NYSE.
Our independent registered public accounting firm is not required to
attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company.
At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with
the level at which Valens’ controls are documented, designed or operating. Any failure to maintain effective disclosure controls
and internal control over financial reporting could have a material and adverse effect on our business and operating results.
We may be named as a party to several legal
proceedings in the future, including litigation related to our patents and other intellectual property, which could subject us to liability,
require us to indemnify our customers, require us to obtain or renew licenses, require us to stop selling our products or force us to
redesign our products.
We may become a party to lawsuits, government
inquiries or investigations and other legal proceedings (referred to as “litigation”).
The ultimate outcome of litigation could have
a material adverse effect on our business and the trading price for our securities. Litigation may be time consuming, expensive, and disruptive
to normal business operations, and the outcome of litigation is difficult to predict. Litigation, regardless of the outcome, may result
in significant expenditures, diversion of our management’s time and attention from the operation of our business and damage to our
reputation or relationship with third parties, which could materially and adversely affect our business, financial condition, results
of operations, cash flows and stock price.
Risks Related to Our Incorporation and Location in Israel
Conditions in Israel, including the 2023 attack
by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may adversely affect our business
and limit our ability to market our products, which may lead to a decrease in revenues.
We are incorporated under the laws of the State
of Israel, and our principal offices are located in Israel. Accordingly, political, economic and geopolitical instability in Israel may
affect our business. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies,
and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or geopolitical
instability in the region continues or increases. Any hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect
our business.
Because most of our research and development is
conducted in Israel and our management (and certain members of our board of directors) as well as a majority of our employees, are located
in Israel, our business may be directly affected by economic, political, geopolitical and military conditions in Israel. Throughout the
years, Israel has experienced a number of armed conflicts with its neighboring countries and terrorist organizations active in the region.
These conflicts have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various parts of Israel,
which have negatively affected business conditions in Israel. In June 2025, a short-duration armed conflict erupted between Israel, the
United States and Iran, involving strikes on Iranian military and nuclear infrastructure and retaliatory missile and drone attacks before
a ceasefire was reached. The conflict drew in multiple actors and underscored the fragility of regional stability in the Middle East.
Even following the ceasefire, regional tensions have remained elevated, with continuing diplomatic efforts underway to prevent further
escalation and the risk of renewed hostilities persisting. This event followed the October 7th, 2023 events in Israel, in which, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military
targets which has further evolved into an ongoing war involving Israel, Hamas and other terrorist organizations in the Gaza strip, as
well as Iran-aligned groups such as Hezbollah in Lebanon and the Houthis in Yemen. As of the date of this annual report, the situation
continues to be volatile and could lead to additional hostilities in Israel and the Middle East. These events may result in disruption
to our operations and facilities, such as our Headquarters and R&D facilities that are located in Israel, and impact our employees,
some of which are military reservists being called to active military duty, as well as impact the economic, social and political stability
of Israel. The absence of our employees due to their military service may cause delays in our introduction of new technologies to the
market in a timely manner, which, in turn, could adversely affect our business and ability to compete with newer generations of products
introduced to the market by our competitors.
While our facilities have not been damaged during
these events, the hostilities with Hamas, Hezbollah, Iran and its proxies and others have caused and may continue to cause damage to private
and public facilities, infrastructure, utilities, and telecommunication networks, and potentially disrupting our operations. Our commercial
insurance will not necessarily cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli
government currently covers the reinstatement value of certain direct damages that are caused by terrorist attacks or acts of war, we
cannot assure you that such government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses
or damages incurred by us could have a material adverse effect on our business.
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During the years ended December 31, 2025, and
2024, the impact of this war on the Company’s results of operations and financial condition was immaterial, but such impact may
increase, as a result of the continuation, escalation or expansion of armed conflicts.
In addition, there have been increased efforts
by activists to cause companies and consumers to boycott Israeli goods and services. Such efforts, particularly if they become more widespread,
may materially and adversely impact our ability to sell and provide our products and services outside of Israel.
Investors’ rights and responsibilities as
our shareholders will be governed by Israeli law, which differs in some respects from the rights and responsibilities of shareholders
of non-Israeli companies.
We were incorporated under Israeli law and the
rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders of U.S. and other non- Israeli corporations. In particular,
a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing
its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other
things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association,
an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require
shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a
controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote
or to appoint or prevent the appointment of an office holder in the company has a duty to act in fairness towards the company. These provisions
may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders
of U.S. corporations.
Provisions of Israeli law and our amended and
restated articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or
assets.
Provisions of Israeli law and our amended and
restated articles of association could have the effect of delaying or preventing a change in control and may make it more difficult for
a third-party to acquire us or our shareholders to elect different individuals to our board of directors, even if doing so would be considered
to be beneficial by some of our shareholders, and may limit the price that investors may be willing to pay in the future for our Ordinary
Shares. Among other things:
● Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased;
● Israeli corporate law requires special approvals for certain transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions;
● Israeli corporate law does not provide for shareholder action by written consent for public companies, thereby requiring all shareholder actions to be taken at a general meeting of shareholders;
● our amended and restated articles of association divide our directors into three classes, each of which is elected once every three years;
● our amended and restated articles of association generally require a vote of the holders of a majority of our outstanding Ordinary Shares entitled to vote present and voting on the matter at a general meeting of shareholders (referred to as simple majority), and the amendment of a limited number of provisions, such as the provision dividing our directors into three classes, requires a vote of the holders of 65% of the total voting power of our shareholders;
● our amended and restated articles of association do not permit a director to be removed except by a vote of the holders of at least 65% of the total voting power of our shareholders; and
● our amended and restated articles of association provide that director vacancies may be filled by our board of directors.
Further, Israeli tax considerations may make potential
transactions undesirable to us or some of our shareholders whose country of residence does not have a tax treaty with Israel granting
tax relief to such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same
extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral
contingent on the fulfillment of numerous conditions, including, a holding period of two years from the date of the transaction during
which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share
swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of
the shares has occurred.
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Our amended and restated articles of association
provide that unless the Company consents otherwise, the competent courts of Tel Aviv, Israel shall be the sole and exclusive forum for
substantially all disputes between the Company and its shareholders under the Companies Law and the Israeli Securities Law, which could
limit our shareholders’ ability to brings claims and proceedings against, as well as obtain favorable judicial forum for disputes
with the Company, its directors, officers and other employees.
Unless we agree otherwise, the competent courts
of Tel Aviv, Israel shall be the exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any
action asserting a claim of breach of fiduciary duty owed by any director, officer, or other employee of the Company to the Company or
the Company’s shareholders, or (iii) any action asserting a claim arising pursuant to any provision of the Companies Law or
the Israeli Securities Law. Such exclusive forum provision in our amended and restated articles of association will not relieve the Company
of its duties to comply with federal securities laws and the rules and regulations thereunder, and shareholders of the Company will not
be deemed to have waived the Company’s compliance with these laws, rules and regulations. This exclusive forum provision may limit
a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with the Company or its directors or other
employees which may discourage lawsuits against the Company, its directors, officers and employees. The foregoing exclusive forum provision
is intended to apply to claims arising under Israeli law and would not apply to claims for which the federal courts would have exclusive
jurisdiction, whether by law (as is the case under the Exchange Act) or pursuant to our amended and restated articles of association,
including claims under the Securities Act for which there is a separate exclusive forum provision in our amended and restated articles
of association. However, the enforceability of similar forum provisions (including exclusive federal forum provisions for actions, suits
or proceedings asserting a cause of action arising under the Securities Act) in other companies’ organizational documents has been
challenged in legal proceedings and there is uncertainty as to whether courts would enforce the exclusive forum provisions in our amended
and restated articles of association. If a court were to find the choice of forum provision contained in our amended and restated articles
of association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in
other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.
Our amended and restated articles of association
provide that unless we consent to an alternate forum, the federal district courts of the United States shall be the exclusive forum of
resolution of any claims arising under the Securities Act which may impose additional litigation costs on our shareholders.
Our amended and restated articles of association
provide that the federal district courts of the United States shall be the exclusive forum for the resolution of any claims arising under
the Securities Act or the federal forum provision in our amended and restated articles of association (the “Federal Forum Provision”).
While the Federal Forum Provision does not restrict the ability of our shareholders to bring claims under the Securities Act, nor does
it affect the remedies available thereunder if such claims are successful, we recognize that it may limit shareholders’ ability
to bring a claim in the judicial forum that they find favorable and may increase certain litigation costs which may discourage the filing
of claims under the Securities Act against the Company, its directors and officers. However, the enforceability of similar forum provisions
(including exclusive federal forum provisions for actions, suits or proceedings asserting a cause of action arising under the Securities
Act) in other companies’ organizational documents has been challenged in legal proceedings and there is uncertainty as to whether
courts would enforce the exclusive forum provisions in our amended and restated articles of association. If a court were to find the choice
of forum provision contained in our amended and restated articles of association to be inapplicable or unenforceable in an action, we
may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business,
financial condition and results of operations.
We have received Israeli government grants for
certain research and development activities. The terms of those grants require us to satisfy specified conditions as defined in Israel’s
Encouragement of Research, Development and Technological Innovation in Industry Law, 5744- 1984 (the “Innovation Law”).
We received Israeli government grants for certain
of our research and development activities. When a company develops know-how, technology or products using grants from the Israel Innovation
Authority of the Israeli Ministry of Innovation, Science and Technology (formerly known as Office of Chief Scientist) (“IIA”),
the terms of these grants and the Innovation Law restrict the transfer or license of such know-how, and the transfer of manufacturing
or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the IIA. Therefore,
the discretionary approval of an IIA committee would be required for any transfer or license to third parties inside or outside of Israel
of know how or for the transfer outside of Israel of manufacturing or manufacturing rights related to those aspects of such technologies.
We may not receive those approvals, in the future, while in the past the Company did receive approvals of requests submitted by it according
to the Innovation Law, including for the manufacturing of Company products outside of Israel.
Furthermore, the IIA may impose certain conditions
on any arrangement under which it permits us to transfer technology or development outside of Israel.
The transfer or license of IIA-supported technology
or know-how outside of Israel and the transfer of manufacturing of IIA-supported products, technology or know-how outside of Israel, may
require payment to the IIA of amounts which are determined taking into consideration the following elements: (i) the value of the
transferred or licensed technology or know-how;(ii) our research and development expenses; (iii) the amount of IIA accumulated
grants. Over the years, Valens has received various grants from the IIA in the total amount of $6 million, out of which the latest
grants in the amount of $2.05 million were received from the IIA in 2016; (iv) accumulated revenue-based royalties already paid
by the Company; and (v) the time that has passed since the completion of IIA supported period and other factors. These restrictions
and requirements for payment may impair our ability to sell, license or otherwise transfer our technology assets outside of Israel or
to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore,
despite the fact that as of December 31, 2019 the Company paid in full all the grants received from the IIA, Valens remains subject to
the restrictions and obligations under the Innovation Law described above, and the net consideration available to our shareholders in
certain transactions (such as a merger or similar change of control transaction) involving the transfer outside of Israel of technology
or know-how developed with IIA funding may be reduced by any amounts that we may be required to pay to the IIA.
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Certain tax benefits that may be available to
Valens, if obtained by Valens, would require it to meet various conditions and may be terminated or reduced in the future, which could
increase Valens’ costs and taxes.
Valens may be eligible for certain tax benefits
provided to “Preferred Technological Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 5719-1959,
referred to as the Investment Law. If Valens obtains tax benefits under the “Preferred Technological Enterprises” regime then,
in order to remain eligible for such tax benefits, it will need to continue to meet certain conditions stipulated in the Investment Law
and its regulations, as amended. If these tax benefits are reduced, cancelled or discontinued, Valens’ Israeli taxable income may
be subject to the Israeli corporate tax rate of 23% (the rate known as of the date of this annual report). Additionally, if Valens increases
its activities outside of Israel through acquisitions, for example, its activities might not be eligible for inclusion in future Israeli
tax benefit programs. See “Certain Material Israeli Tax Considerations.”
It may be difficult to enforce a U.S. judgment
against Valens, its officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve
process on Valens’ officers and directors.
Most of Valens’ directors or officers are
not residents of the United States and most of their and Valens’ assets are located outside the United States. Service of process
upon Valens or its non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against Valens
or its non-U.S. directors and executive officers may be difficult to obtain within the United States, although our amended and restated
articles of association provide that unless we consent to an alternate forum, the federal district courts of the United States shall be
the exclusive forum of resolution of any claims arising under the Securities Act. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws against Valens or its non-U.S. officers and directors because Israel may not be the most appropriate
forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S.
law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which
can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding
case law in Israel addressing the matters described above. Israeli courts might not enforce judgments rendered outside Israel, which may
make it difficult to collect on judgments rendered against Valens or its non- U.S. officers and directors.
Moreover, among other reasons, including but not
limited to, fraud or absence of due process, or the existence of a judgment which is at variance with another judgment that was given
in the same matter if a suit in the same matter between the same parties was pending before a court or tribunal in Israel, an Israeli
court will not enforce anon-Israeli judgment if it was given in a state whose laws do not provide for the enforcement of judgments of
Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of
Israel. For more information, see “Enforceability of Civil Liabilities.”
Risks Related to Ownership of Our Shares and Warrants
Valens’ Articles and Israeli law could
prevent a takeover that shareholders consider favorable and could also reduce the market price of Valens Ordinary Shares.
Certain provisions of Israeli law and Valens’
Articles could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire
Valens or for Valens’ shareholders to elect different individuals to its board of directors, even if doing so would be beneficial
to its shareholders and may limit the price that investors may be willing to pay in the future for Valens’ Ordinary Shares. For
example, Israeli corporate law regulates mergers and requires that a tender offer be affected when certain thresholds of percentage ownership
of voting power in a company are exceeded (subject to certain conditions). Further, Israeli tax considerations may make potential transactions
undesirable to Valens or to some of its shareholders whose country of residence does not have a tax treaty with Israel granting tax relief
to such shareholders from Israeli tax. Payment of dividends may be subject to Israeli withholding taxes. See Item 10.E. “Taxation-Taxation
and government programs-Israeli tax considerations and government programs” for additional information.
We have never declared or paid any cash dividends.
Further, we do not intend to pay dividends for the foreseeable future. We currently intend to retain all available funds and any future
earnings for use in the operation of our business and do not anticipate paying any dividends on our Ordinary Shares in the foreseeable
future.
Our board of directors has sole discretion whether
to pay dividends. If Valens’ board of directors decides to pay dividends, the form, frequency, and amount will depend upon its future,
operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that
its directors may deem relevant. The Israeli Companies Law, 5759-1999 (the “Companies Law”) imposes restrictions on Valens’
ability to declare and pay dividends. See “Description of share capital and articles of association-Dividend and liquidation
rights” for additional information.
The market price and trading volume of Valens’
Ordinary Shares may be volatile and could decline significantly.
The stock markets, including the NYSE on which
our Ordinary Shares and warrants are listed under the symbol “VLN” and “VLNW” respectively, have from time-to-time
experienced significant price and volume fluctuations. The market price of our Ordinary Shares and warrants may be volatile and could
decline significantly. In addition, the trading volume in our Ordinary Shares and warrants may fluctuate and cause significant price variations
to occur. If the market price of our Ordinary Shares and warrants declines significantly, shareholders may be unable to resell their shares
or warrants at or above the market price of the Ordinary Shares and warrants. The market price of our Ordinary Shares and warrants might
fluctuate widely or decline significantly in the future in response to a number of factors, including, among others, the following:
● the realization of any of the risk factors presented in this Annual Report;
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● actual or anticipated differences in Valens’ estimates, or in the estimates of analysts, for Valens’ revenues, earnings, results of operations, level of indebtedness, liquidity or financial condition;
● additions and departures of key personnel;
● failure to comply with the requirements of the NYSE;
● failure to comply with the Sarbanes-Oxley Act or other laws or regulations;
● publication of research reports about Valens;
● the performance and market valuations of other similar companies;
● failure of securities analysts to initiate or maintain coverage of Valens, changes in financial estimates by any securities analysts who follow Valens or Valens’ failure to meet these estimates or the expectations of investors;
● new laws, regulations, subsidies, or credits or new interpretations of existing laws applicable to Valens;
● commencement of, or involvement in, litigation involving Valens;
● broad disruptions in the financial markets, including sudden disruptions in the credit markets;
● speculation in the press or investment community;
● actual, potential or perceived control, accounting or reporting problems;
● the failure to achieve our current or future business plans;
● changes in accounting principles, policies and guidelines; and
● other events or factors, including those resulting from infectious diseases, health epidemics and pandemics, natural disasters, war, cyber-attacks or other disruptions to or breaches of our information technology, systems or networks, trade wars, acts of terrorism or responses to these events.
In the past, securities class-action litigation
has often been instituted against companies following periods of volatility in the market price of their shares. This type of litigation
could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect
on us.
If securities or industry analysts do not publish
or cease publishing research or reports about Valens, its business, or its market, or if they change their recommendations regarding Valens’
Ordinary Shares adversely, then the price and trading volume of Valens’ Ordinary Shares could decline.
The trading market for Valens’ Ordinary
Shares will be influenced by the research and reports that industry or financial analysts publish about its business. Valens does not
control these analysts, or the content and opinions included in their reports. In addition, Valens cannot guarantee a wide research coverage
and the analysts who publish information about Valens Ordinary Shares will have relatively little experience with Valens, which could
affect their ability to accurately forecast Valens’ results and make it more likely that Valens fails to meet their estimates. In
the event Valens obtains industry or financial analyst coverage, if any of the analysts who cover Valens issues an inaccurate or unfavorable
opinion regarding it, Valens’ share price would likely decline. In addition, the share prices of many companies in the technology
industry have declined significantly after those companies have failed to meet, or significantly exceed, the financial guidance publicly
announced by the companies or the expectations of analysts. If Valens’ financial results fail to meet, or significantly exceed,
its announced guidance or the expectations of analysts or public investors, analysts could downgrade their ratings of Valens Ordinary
Shares or publish unfavorable research about it. If one or more of these analysts cease coverage of Valens or fail to publish reports
on it regularly, Valens’ visibility in the financial markets could decrease, which in turn could cause its share price or trading
volume to decline.
Valens’ failure to meet the continued
listing requirements of the NYSE could result in a delisting of its Securities.
If Valens fails to satisfy the continued listing
requirements of the NYSE such as the corporate governance requirements or the minimum closing bid price requirement, the NYSE may take
steps to delist its securities. Such a delisting would likely have a negative effect on the price of the securities and would impair your
ability to sell or purchase the securities when you wish to do so. In the event of a delisting, Valens can provide no assurance that any
action taken by it to restore compliance with listing requirements would allow its securities to become listed again, stabilize the market
price or improve the liquidity of its securities, prevent its securities from dropping below the NYSE minimum bid price requirement or
prevent future non-compliance with the NYSE’s listing requirements. Additionally, if Valens’ securities become delisted from
the NYSE for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that
is not a national securities exchange, the liquidity and price of Valens’ securities may be more limited than if it were quoted
or listed on the NYSE or another national securities exchange. You may be unable to sell your securities unless a market can be established
or sustained.
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Valens is an emerging growth company within the meaning of the Securities
Act and takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make Valens’
securities less attractive to investors and may make it more difficult to compare Valens’ performance with other public companies.
We will lose our status as an emerging growth company on December 31, 2026.
Valens is treated as an emerging growth company,
as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. Under the JOBS Act, emerging growth companies can
delay adopting new or revised financial accounting standards until such time as those standards apply to private companies. Valens intends
to take advantage of this extended transition period under the JOBS Act for adopting new or revised financial accounting standards.
For as long as Valens continues to be an emerging growth company, it
may also take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are
not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act. As a result, its shareholders may not have access to certain information that they may deem important. Valens could
be an emerging growth company for up to five years following its initial public offering, which period will end on December 31, 2026.
Valens cannot predict if investors will find Valens
Ordinary Shares less attractive because it may rely on these exemptions. If some investors find Valens Ordinary Shares less attractive
as a result, there may be a less active trading market for Valens Ordinary Shares and Valens’ share price may be more volatile.
Further, there is no guarantee that the exemptions available to Valens under the JOBS Act will result in significant savings. To the extent
that Valens chooses not to use exemptions from various reporting requirements under the JOBS Act, it will incur additional compliance
costs, which may impact Valens’ financial condition.
We are a foreign private issuer and, as a result,
are not subject to U.S. proxy rules but are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less
frequent than those of a U.S. issuer.
Because we qualify as a foreign private issuer
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and although we follow Israeli laws and regulations
with regard to such matters, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including:
(i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security
registered under the Exchange Act (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock
ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (iii) the
rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other
specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, foreign private
issuers will be required to file their annual report on Form 20-F by 120 days after the end of each fiscal year, while U.S. domestic issuers
that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign
private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of
material information. As a result of the above, even though we are contractually obligated and intend to make interim reports available
to our shareholders, copies of which we are required to furnish to the SEC on a Form 6-K, and even though we are required to file reports
on Form 6-K disclosing whatever information we have made or are required to make public pursuant to Israeli law or distribute to our shareholders
and that is material to our company, you may not have the same protections afforded to shareholders of companies that are United Sates
domestic issuers.
We may lose our foreign private issuer status
in the future, which could result in significant additional costs and expenses.
As discussed above, we are a foreign private issuer,
and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act.
The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed
second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2026. In the future, we would
lose our foreign private issuer status if (1) more than 50% of our outstanding voting securities are owned by U.S. residents and
(2) a majority of our directors or executive officers are U.S. citizens or residents, or we fail to meet additional requirements
necessary to avoid loss of foreign private issuer status. If we lose our foreign private issuer status, we will be required to file with
the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms
available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers,
directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16
of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under
the listing rules of the New York Stock Exchange. As a U.S. listed public company that is not a foreign private issuer, we will incur
significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer.
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As we are a “foreign private issuer”
and follow certain home country corporate governance practices, our shareholders may not have the same protections afforded to shareholders
of companies that are subject to all New York Stock Exchange corporate governance requirements.
As a foreign private issuer, we have the option
to follow certain home country corporate governance practices rather than those of the NYSE, provided that we disclose the requirements
we are not following and describe the home country practices we are following. We rely on this “foreign private issuer exemption”
with respect to the NYSE rules requiring shareholder approval. We may in the future elect to follow home country practices with regard
to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject
to all NYSE corporate governance requirements.
Due to fluctuations in the market price of Valens’
Ordinary Shares, there is a significant risk that Valens may be a passive foreign investment company (“PFIC”) for U.S. federal
income tax purposes for 2026 or one or more future taxable years, which could result in adverse U.S. federal income tax consequences to
U.S. investors in Valens Ordinary Shares or Valens warrants.
A non-U.S. corporation generally will be treated
as a PFIC for U.S. federal income tax purposes for any taxable year if either (1) at least 75% of its gross income for such year
is passive income or (2) at least 50% of the value of its assets (generally based on an average of the quarterly values of the assets)
during such year is attributable to assets that produce, or are held for the production of, passive income (including cash). For purposes
of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation
is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share
of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and capital gains. Goodwill
and other intangibles are generally treated as active assets to the extent associated with business activities that produce active income.
Although Valens has not obtained independent valuations
of its assets (including goodwill and other intangibles) for its taxable year ending 2025, and thus is not in a position to make a definitive
determination as to whether it was a PFIC in 2025, based on the composition of its income and assets during 2025 and the estimated value
of its assets (which is based on its average market capitalization during 2025), Valens believes that it was not a PFIC for 2025. However,
there can be no assurances in this regard. The application of the PFIC rules is subject to uncertainty in several respects, and Valens
cannot assure you that the IRS will not take a contrary position or that a court will not sustain such a challenge by the IRS. Furthermore,
because of the volatility of Valens’ market capitalization in recent years, whether Valens will be a PFIC for 2026 and future taxable
years is uncertain. The determination of whether Valens is a PFIC is an annual factual determination that depends on, among other things,
the composition of Valens’ income and assets, and the value of its and its subsidiaries’ shares and assets from time to time
(including the value of Valens’ goodwill and other intangibles, which may be determined, in large part, by reference to the market
price of Valens’ Ordinary Shares from time to time, which has been, and may continue to be, volatile). As a result, the average
value of Valens’ goodwill and other intangibles as well as other active assets may not be sufficiently large in relation to the
average value of its passive assets for any taxable year. In particular, because the value of Valens’ goodwill and other intangibles
may be determined by reference to the market price of Valens Ordinary Shares from time to time, and because Valens holds and may continue
to hold significant amounts of cash and other passive assets, if Valens’ market capitalization continues to fluctuate or declines,
then there is a significant risk that Valens may be a PFIC for 2026.
If Valens is a PFIC for any taxable year, a U.S.
investor who owns Valens Ordinary Shares or Valens warrants may be subject to adverse tax consequences and additional information reporting
obligations. For a further discussion, see “Material U.S. Federal Income Tax Considerations- U.S. Federal Income Tax Considerations
of Ownership and Disposition of Valens Ordinary Shares and Valens Warrants to U.S. Holders-Passive Foreign Investment Company Rules.”
U.S. investors who own Valens Ordinary Shares and/or Valens warrants should consult their tax advisors regarding the potential application
of these rules to Valens and the ownership of Valens Ordinary Shares and/or Valens warrants.
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