Valens Semiconductor Ltd. annual report, Q4 FY2021

Business context and reporting period

Valens Semiconductor Ltd. filed its audited annual report on Form 20-F for the fiscal year ended December 31, 2021; it is not a quarterly Q4 report, and the filing does not provide separate Q4 results. The Israel-based fabless semiconductor company sells connectivity chips for audio-video and automotive applications. Its products are manufactured by third parties, with wafers designed for production at TSMC.

Valens completed its business combination with PTK Acquisition Corp. and began trading on the NYSE in September 2021. The audited financial statements use U.S. GAAP and U.S. dollars. The auditor issued an unqualified opinion on the financial statements.

Financial results and liquidity

Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Audio-video revenue was $62.8m, up 14.5%; automotive revenue was $7.9m, up 281.4%, and represented approximately 11% of sales versus 4% in 2020. Audio-video gross margin was 77.9%, compared with 79.5%; automotive gross margin improved to 21.2% from a gross loss of $0.1m.

Operating cash use was $21.6m, compared with $19.6m in 2020. Investing cash use was $84.2m, principally reflecting net investment of $82.8m in short-term deposits; financing provided $135.4m, mainly from the business combination and PIPE financing. Cash increased by $30.5m during the year. Capital expenditures were $1.4m. The balance sheet reported total liabilities of $20.4m and no conventional borrowings; the filing does not identify outstanding debt borrowings.

Material changes versus the prior comparable period

• Revenue growth reflected recovery in audio-video demand, uptake of the VS3000 product family and a full year of automotive customer mass production, including expansion into additional vehicle models.
• Gross margin fell as automotive sales, which carry lower margins, grew; new audio-video product costs were not yet optimized; and supplier cost increases preceded customer price increases.
• Operating expenses rose 17.2% to $77.6m. General and administrative costs more than doubled to $16.6m, including business-combination and listing expenses, accelerated executive option vesting, bonuses and D&O insurance.
• The 2021 net loss included $9.9m of stock-based compensation, including $3.4m from accelerated vesting, and $2.6m of business-combination issuance costs expensed in the income statement.
• The business combination and PIPE raised substantial capital; preferred shares converted into ordinary shares. Ordinary shares outstanding at year-end were 98.1m, and 18.16m warrants were outstanding.

Outlook, management commentary, risks and unusual items

Management said cash and short-term deposits were sufficient to fund working capital for at least 12 months from the report date. It expects average gross margin to remain above 60% in the foreseeable future, while noting that a rising automotive mix could pressure margins. The filing gives no formal revenue or earnings guidance. Management expected sales of VS3000-based products to ramp gradually in 2022, with more than 100 new products expected to embed the chipset; it also expected initial Stoneridge-related revenue in 2022, increasing in 2023 and later.

Management reported that it met customer demand during the 2021 semiconductor shortage, but disclosed extended supplier lead times, higher input costs and longer-term purchase orders to secure capacity. Inventory rose to $9.3m from $3.2m, and non-cancelable purchase obligations totaled approximately $50.6m for supply-chain vendors plus $6.6m for intellectual-property and development-tool vendors. Most of these commitments were due in 2022 or 2023. The company depends on third-party manufacturing and has no long-term agreements for many materials and supplies.

Key risks include semiconductor cyclicality and supply constraints; customer order cancellations and demand-forecasting uncertainty; concentration in automotive and audio-video markets; the top three customers accounting for approximately 30% of 2021 revenue; competition, product pricing and design-win execution; and reliance on TSMC for wafer fabrication. COVID-19 effects, foreign-exchange exposure to the Israeli shekel, intellectual-property and cybersecurity risks, and Israeli regulatory and geopolitical risks are also disclosed. The company reported no material pending legal proceedings. It has never paid cash dividends and does not expect to do so in the foreseeable future.

Disclosure controls and procedures were assessed as effective at December 31, 2021. The filing did not include management’s assessment or auditor attestation of internal control over financial reporting because of the transition period for newly public companies.

Important facts for investors to verify

• Review the audited statements and notes for the composition and accessibility of the $174.4m in cash and short-term deposits, and reconcile cash-flow disclosures with the business-combination proceeds.
• Track gross-margin performance as automotive revenue grows, supplier cost increases flow through inventory, and customer price changes take effect.
• Verify whether design wins and evaluations convert into volume shipments and revenue, especially for VA7000, VS3000 and the Stoneridge program.
• Assess inventory quality, supplier capacity, TSMC dependence and the timing and flexibility of the roughly $57.2m in disclosed non-cancelable purchase obligations.
• Monitor customer concentration, operating cash burn, stock-based compensation and dilution from outstanding warrants and equity awards.