Annual Report for Fiscal Year Ending December 31, 2024 (Form 20-F)

Item 5 .

Operating and Financial Review and Prospects

You should read the following discussion and analysis of our financial condition and results of operations together with the audited annual consolidated financial statements and the related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled Item 3.D. "Key Information-Risk Factors" of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Company Overview

We are a leading Tier-1 direct supplier of high-performance, automotive grade LiDAR sensors and perception software that feature technological breakthroughs across core components and bring enhanced vision and superior performance to enable safe autonomous driving at a mass scale. We believe that we provide a comprehensive solution for OEMs and Tier-1 partners that are developing and marketing autonomous driving vehicles to the passenger car and other relevant markets, such as robotaxis, shuttles, delivery vehicles and trucks.

We were founded in 2016. From our founding, our culture drew from our core values of solving sophisticated technological problems through creativity and agile thinking. We have relied on these values to address the needs of autonomous vehicles in a manner that strikes the desired balance between performance and cost. We created a new type of LiDAR sensor from the chip-level up, including a suite of powerful and sophisticated software applications for high-performance computer vision to allow superior perception. In 2018, we achieved a design win to power BMW's Level 3 autonomous platform, a program which reached maturity during 2024 and with vehicles already being sold with our LiDARs and perception software.

Since 2021, we have funded the development of two production path programs: the InnovizOne and InnovizTwo LiDAR sensor and perception software suites. With the InnovizOne program transitioned from the development phase into full series production in 2024, we eliminated duplicative cost structures and reduced spending on InnovizOne development, while reinvesting a portion of the savings into the InnovizTwo sensor and perception software platform. All quoting and bidding activity in our request for information and request for quotation pipeline is now focused on the InnovizTwo platform.

During 2022, we made the strategic decision to become a Tier-1 supplier of LiDAR and perception software to the automotive industry. This decision allows us to have direct technical discussions with end customers and to improve pricing to automotive OEMs with the goal of continuing to strengthen our position in the automotive market. This strategic decision has played a significant role in our subsequent major OEM program wins, as discussed below.

In 2022, following more than two years of extensive diligence and qualification, we were selected by Volkswagen as its direct LiDAR supplier for automated vehicles within the Volkswagen brands with our InnovizTwo next generation high-performance automotive-grade LiDAR sensor,and in 2023, we announced that Volkswagen aims to expand its use of our InnovizTwo LiDAR to its existing light commercial vehicle program, the I.D Buzz.

In 2024, we announced that Mobileye will use the InnovizTwo Long-Range and the new InnovizTwo Short- to Mid-Range LiDARs for the Mobileye Drive™ platform. The new InnovizTwo Short- to Mid-Range leverages InnovizTwo Long-Range's maturity and is designed to meet the requirements for light commercial vehicles, shuttles, robotaxis, and can be customized to suit a wide array of vehicular design and functionality requirements. We believe that the combination of our LiDARs and Mobileye's platform is critical to enabling comprehensive sensing capabilities for navigating complex urban environments and enhancing the overall safety and reliability of autonomous driving systems, and that this partnership showcases the flexibility of our LiDARs to work across a variety of vehicle platforms to further testing and deployment of autonomous vehicles. Our partners are leaders in deploying new technologies into the automotive industry. We believe that our close cooperation with these partners and OEMs positions us well to make Level 3 and Level 4 autonomous driving a commercial reality.

The sustained cooperation with our customers provides our engineers and other research and development personnel with a valuable competitive edge. These engineers and other research and development personnel have been meticulously trained to design, operate, and verify our many ground-breaking innovations in accordance and in compliance with the ISO26262 standard for Functional Safety in the automotive industry, and the IATF 16949:2016 certification for Quality Management in the automotive industry. Compliance with these and other standards have been enforced by regular ongoing audits of Innoviz and rigorous testing by our key suppliers, existing customers and prospective customers that thoroughly review the performance of various elements of our operations. As a result, our products have been constructed from the bottom up with hardware and software technology that meets the most stringent automotive safety, quality, environmental, manufacturing, and other standards.

Our innovation has produced LiDAR solutions that deliver market leading performance and that meet the current demanding safety requirements for Level 2+ through Level 5 autonomous vehicles at price points suitable for mass produced passenger vehicles.

Our robust software suite enables our ~905nm wavelength laser-based LiDAR architecture to be easily leveraged to provide compelling solutions for Level 2+ through Level 4 (and Level 5 when applicable), using both our long- and medium-range LiDARs. Our integrated custom design of advanced hardware and software components, which leverages the multidisciplinary expertise and experience of our team, enables us to provide autonomous solutions that we believe will accelerate widespread adoption across automakers at serial production scale. This means that we are positioned to penetrate the current market, which is focused primarily on Level 2+, Level 3 and Level 4 production, and to continue to capture and extend our market share to 5 as the market continues to mature.

We are currently expanding our third-party manufacturing capacity through contract manufacturers to meet an anticipated increase in customer demand for our products.

Entered into Multi-Year NRE Payment Plan with Key Customers

On December 23, 2024, we announced a multi-year NRE payment plan of approximately $80 million with key existing customers. NREs are expected to be paid between 2025 and 2027, of which over $40 million are expected to be paid in 2025 with further amounts expected in 2026 and 2027. These payments would be incremental to revenues generated from ongoing sales of LiDAR products based on existing and expected new orders coming from new programs. There can be no assurances, however, that we will enter into definitive agreements, orders or receive payments with respect to the NRE payment plan.

Regained Compliance with Nasdaq's Minimum Bid Price Requirement

On January 2, 2025, we announced that we received formal written confirmation from Nasdaq confirming that the Company has regained compliance with Nasdaq's minimum bid price requirement. The closing bid price of the ordinary shares was at $1.00 per share or greater for 10 consecutive business days from December 16 to December 30, 2024. Accordingly, Nasdaq Listing Qualifications Staff notified the Company that it determined that the Company regained compliance with Nasdaq Listing Rule 5550(a)(2), and that the matter was closed.

Integration of Perception Software with NVIDIA DRIVE AGX Orin

On January 7, 2025, we announced our collaboration with NVIDIA to allow our perception software to run seamlessly with the NVIDIA DRIVE AGX Orin platform, offering a range of software-driven features designed to accelerate autonomous driving applications by allowing for real-time processing and advanced understanding of the vehicle's environment, enabling exceptional object detection, classification, and tracking capabilities.

Optimization of Operations

On February 4, 2025, we announced an optimization of our operations to extend our cash runway and accelerate progress towards profitability and free cash flow generation, which includes a reduction in our employee headcount by approximately 9% during the first quarter of 2025.

Registered Direct Offering

On February 10, 2025, we entered into the Securities Purchase Agreement with the Purchasers. Pursuant to the Securities Purchase Agreement, we agreed to sell in the Offering 28,776,978 units to the Purchasers at a purchase price of $1.39 per unit, with each unit consisting of one ordinary share and eight tenths of a warrant to purchase one ordinary share. The Offering was consummated on February 12, 2025. We received net proceeds of approximately $37.3 million, after deducting the placement agent fees and offering expenses. The ordinary shares and warrants were issued separately. The warrants are exercisable at $1.69 per share and will expire on February 12, 2030. A holder of the warrants will not have the right to exercise any portion of its warrants if the holder (together with such holder's affiliates, and any persons acting as a group together with such holder or any of such holder's affiliates or any other persons whose beneficial ownership of ordinary shares would be aggregated with the holder's or any of the holder's affiliates), would beneficially own ordinary shares in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of the ordinary shares outstanding immediately after giving effect to such exercise.

Appointment of Ido Luski

Udy Gal-On, the Company's Chief Operating Officer, will transition into the role of Co-Chief Operating Officer during the second quarter of 2025. Ido Luski, currently the Company's VP Delivery, will assume the role of Co-Chief Operating Officer alongside Mr. Gal-On during the second quarter of 2025.

We believe that our future performance and success depends to a substantial extent on the following factors, each of which is in turn subject to significant risks and challenges, including those discussed below and in the section of this Annual Report entitled Item 3.D."Key Information-Risk Factors."

Market Adoption

We believe that widespread adoption of LiDAR across applications for autonomy is approaching and that we are well-positioned in both automotive and nonautomotive markets to take advantage of this opportunity. Nevertheless, automotive OEMs and their suppliers have commenced the commercialization of autonomous systems that rely on LiDAR technology. Accordingly, we expect the rate of actual adoption and commercialization of LiDAR-based solutions by automotive OEMs and their suppliers to impact our results of operations, including revenue and gross margins, for the foreseeable future. Given the focus of the consumer automotive market on Level 4, 3 and 2+ segments, we expect these verticals to continue to grow over the short to medium term, we are aligning our focus and efforts on these segments, specifically via our InnovizTwo product.

We believe that InnovizTwo will drive significant revenue growth in the near to medium term. We also believe that market penetration of InnovizTwo will drive revenues in the Level 4 and 3 segments of the market. This is because the architecture of our products, which feature agile configuration of multiple components, allow us to offer different product configurations based on the same hardware with only software modification. Accordingly, we can address multiple market needs and niches without the need to develop several hardware configurations. Therefore, our LiDAR solution enables upgrade from Level 2+ to Level 3 through a vehicle software update without changes to the hardware components or the need of new hardware.

We also target markets such as robotaxis, shuttles, delivery vehicles, trucks and, potentially, others. We believe that LiDAR-based solutions in these emerging markets are still in the pre-commercial development stage and, as a result, our future success also depends on customers in these industries adopting and bringing these solutions to commercial scale.

Design Wins

Our solutions are designed to be key enabling technologies for OEMs in automotive and other applications. Because our solutions must be integrated into a broader platform by the OEM, it is critical that we achieve design wins with these customers. The time necessary to achieve design wins varies based on the market and application. The design cycle in the automotive market tends to be substantially longer and more onerous than in other markets. Even within the automotive market, achieving a design win with an automotive OEM takes considerably longer than a design cycle for an aftermarket application. We consider design wins to be critical to our future success, although the revenue generated by each design win and the time necessary to achieve such a win can vary significantly making it difficult to predict our financial performance.

Product Cost and Margins

Our results of operations will depend on our ability to leverage the fixed costs involved in production of our current products and our ability to improve gross margins on the basis of volume and manufacturing efficiencies.

InnovizTwo platform is based on an improved design, which allows: (i) lower bill of materials, and (ii) more efficient manufacturing process, which together may allow for a significant cost reduction and improved gross margins.

Continued Investment and Innovation

Our unique LiDAR and perception solutions feature technological breakthroughs across core components and allow us to act as one of the leading suppliers in a competitive market. We believe that our financial performance is significantly dependent on our ability to maintain this position. This in turn will depend on our future research and development investments and our ability to attract and retain highly qualified and experienced research and development personnel. These are necessary to both continue the work required on our current products and future products to full commercialization, and to identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products and enhance and service existing products. Failure to do this could adversely affect our market position and our revenue, and our research and development investments may not be recovered.

Components of Results of Operations

Revenues

Our revenues derive primarily from sales of LiDAR sensors, critical components and NRE to customers.

Revenue from LiDAR sensors and critical components is recognized at a point in time when the control of the goods is transferred to the customer, generally upon delivery.

NRE to certain customers may require substantive customer acceptance due to performance acceptance criteria that is considered more than a formality. For these services, revenue is recognized at a point in time upon customer acceptance.

Cost of Revenues

Cost of revenues include the manufacturing cost of LiDAR sensors, which primarily consists of components costs, sub-assembly costs and personnel-related costs, and amounts paid to third-party contract manufacturers and vendors. Cost of revenues also includes depreciation, costs of providing NRE, an allocated portion of overhead, warranty costs, excess and obsolete inventory and shipping costs. We expect cost of revenue to increase in absolute dollars in future periods to the extent revenue increases, however we expect our products' unit cost to decrease as sales increase thereby leveraging economies of scale achievable due to our business model and higher production efficiencies.

Operating Expenses

Research and Development

Our research and development efforts are focused on enhancing and developing cost efficient LiDAR solutions and the accompanying software suite.

Research and development expenses include:

We expense research and development costs as incurred until the point that technological feasibility is reached, which for our software products is generally shortly before the products are released to production. We expect that our research and development expenses will continue to be significant for the foreseeable future as we invest in research and development activities to improve and enhance our product portfolio.

Sales and Marketing

Sales and marketing expenses include:

We expect our sales and marketing expenses to be similar as we focus our marketing activities in the automotive market.

General and Administrative

General and administrative expenses include:

We expect our general and administrative expenses to be similar.

Financial Income, Net

Financial income, net consists primarily of interest on cash and cash equivalents deposited in our bank account, exchange rate differences arising from our ILS denominated lease liabilities under ASC 842, marketable securities remeasurement and private placement warrants remeasurement. The deposits will vary based on cash and cash equivalents, and with market rates. Our marketable securities have an average credit rating of "A" and a maturity of up to three years. We do not intend to invest more than 5% of our investment portfolio in a single security at time of purchase. In addition, financial income, net includes the fluctuation in value due to foreign exchange differences between cash and cash equivalent and monetary assets and liabilities denominated in foreign currency, mainly in ILS and EUR.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report.

A. Results of Operations

For a discussion of our results of operations for the year ended December 31, 2022, including a year-to-year comparison between the years ended December 31, 2023 and December 31, 2022, as well as a discussion of our liquidity and capital resources for the year ended December 31, 2022, refer to Item 5. "Operating and Financial Review and Prospects" in our Annual Report on Form 20-F for the year ended December 31, 2023, filed with the SEC on March 12, 2024.

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report. The following table sets forth our consolidated results of operations data for the periods presented:

Comparison of the Years Ended December 31, 2024 and 2023

Revenues

Revenues increased by approximately $3.4 million, or 16%, to approximately $24.3 million for the year ended December 31, 2024, from approximately $20.9 million for the year ended December 31, 2023.

The increase in revenues was primarily due to increased sales of NRE, which contributed $18.0 million in revenues during the year ended December 31, 2024 compared to $15.2 million in revenues during the year ended December 31, 2023, as well as increased sales of LiDAR sensors and critical components.

Cost of Revenues and Gross Margin

Cost of revenues decreased by approximately $7.1 million, or 22%, to approximately $25.4 million for the year ended December 31, 2024, from approximately $32.5 million for the year ended December 31, 2023.

The decrease in cost of revenues was primarily due to decreased production inefficiencies of InnovizOne, decreased excess and obsolete inventory and decreased machinery depreciation. The decrease in cost of revenues was partially offset by an increase in cost related to sales of NRE. Gross margin increased to approximately (5)% for the year ended December 31, 2024, from approximately (56)% for the year ended December 31, 2023, primarily due to increased sales of NRE, as well as the same factors that resulted in the decrease in cost of revenues.

Operating Expenses

Research and Development

Research and development expenses decreased by approximately $18.9 million, or 20%, to approximately $73.8 million for the year ended December 31, 2024, from approximately $92.7 million for the year ended December 31, 2023.

The decrease was primarily attributable to decreased payroll of $8.7 million (primarily related to allocation of direct costs related to sales of NRE and decreased personnel expenses), decreased materials purchases and prototype expenses of $3.7 million, decreased third-party consulting services and software expenses of $3.6 million and decreased stock-based compensation of $2.5 million.

Sales and Marketing

Sales and marketing expenses decreased by approximately $1.3 million, or 15%, to approximately $7.5 million for the year ended December 31, 2024, from approximately $8.8 million for the year ended December 31, 2023.

The decrease was primarily attributable to decreased payroll of $0.8 million (primarily attributed to a decrease in headcount), decreased consulting services expenses of $0.2 million and decreased stock-based compensation of $0.2 million.

General and Administrative

General and administrative expenses were approximately $19.5 million for the year ended December 31, 2024, compared to General and administrative expenses of approximately $19.5 million for the year ended December 31, 2023.

The difference was primarily related to decreased stock-based compensation of $1.1 million, offset by increased consulting services (primarily legal) of $0.9 million and increased payroll of $0.2 million.

Financial Income, net

Financial income, net was approximately $7.3 million for the year ended December 31, 2024, compared to financial income, net of approximately $9.8 million for the year ended December 31, 2023.

The decrease was primarily related to decreased bank deposit interest income of $1.1 million, decreased net gain related to marketable securities of $0.8 million, warrants liability revaluation of $0.3 million as well as foreign currency exchange differences (also including differences arising from our ILS denominated lease liabilities under ASC 842) of $0.2 million.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly assess currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors.

Foreign Currency Risk

Our financial results are reported in USD, and changes in the exchange rate between USD and local currencies in the countries in which we operate (primarily ILS) may affect the results of our operations. In the year ended December 31, 2024, approximately 92% of our revenues were denominated in USD. The USD cost of our operations in countries other than the United States may be negatively influenced by devaluation of the USD against other currencies.

During the year ended December 31, 2024, the value of the USD appreciated against the value of the ILS by approximately 0.6%. Our most significant foreign currency exposures are related to our operations in Israel. We hedge our anticipated exposure by exchanging USD into ILS in amounts sufficient to fund up to three months of operations and monitoring foreign currency exchange rates over time.

Interest Rate Risk

Our investment strategy is to achieve a return that will allow us to preserve capital and meet our liquidity requirements. We invest in bank deposits and marketable securities, primarily in USD.

Our cash and cash equivalents are exposed to market risk related to changes in interest rates, which is affected by changes in the general level of the Bank of Israel interest rates and United States Federal Reserve interest rates. Due to the short-term nature and the low-risk profile of our interest-bearing accounts, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents, bank deposits and restricted deposits or on our financial position or results of operations.

Our investments in marketable securities are primarily in securities with an average credit rating of "A" and a maturity of up to three years. We do not intend to invest more than 5% of our investment portfolio in a single security at time of purchase.

Other Market Risks

We do not believe that inflation had a material effect on our business, financial conditions or results of operations during the years ended December 31, 2024 and 2023.

B. Liquidity and Capital Resources

Sources of Liquidity

During the years ended December 31, 2024 and 2023, we funded our operations primarily from the approximately $370 million in proceeds we received in connection with the Business Combination (completed in April 2021) and, to a lesser extent, from the approximately $61.4 million in net proceeds we received from our August 2023 underwritten equity offering and the revenues generated from the sale of goods and services.

As of December 31, 2024, we had approximately $68.0 million in cash and cash equivalents, short term bank deposits, short term restricted cash and marketable securities. Cash equivalents and marketable securities are invested in accordance with our investment policy.

Cash Flow Summary

The following table summarizes our cash flows for the periods presented:

Operating Activities

During the year ended December 31, 2024, operating activities used approximately $77.0 million. The primary factors affecting operating cash flows during the year ended December 31, 2024 were the net loss of approximately $94.8 million, impacted by non-cash charges of approximately $17.8 million consisting of stock-based compensation of approximately $19.7 million, depreciation and amortization of approximately $7.8 million, remeasurement of private warrants of approximately $(0.2) million and an increase in working capital of approximately $(9.5) million.

During the year ended December 31, 2023, operating activities used approximately $93.1 million. The primary factors affecting operating cash flows during the year ended December 31, 2023, were the net loss of approximately $123.5 million, impacted by non-cash charges of approximately $30.4 million consisting of stock-based compensation of approximately $22.3 million, depreciation and amortization of approximately $9.2 million, remeasurement of private warrants of approximately $(0.5) million and an increase in working capital of approximately $(0.6) million.

Investing Activities

During the year ended December 31, 2024, cash provided by investing activities was approximately $75.5 million, which primarily resulted from withdrawal of bank deposits of approximately $127.3 million and proceeds from sales and maturities of marketable securities of approximately $62.2 million, partially offset by investment in marketable securities of approximately $55.5 million, investment in bank deposits of approximately $54.1 million and purchase of property and equipment of approximately $4.4 million.

During the year ended December 31, 2023, cash provided by investing activities was approximately $1.1 million, which primarily resulted from the withdrawal of bank deposits of approximately $141.5 million, proceeds from sales and maturities of marketable securities of approximately $83.5 million, partially offset by investments in bank deposits of approximately $165.6 million, investment in marketable securities of approximately $51.7 million and purchases of property, plant, and equipment of approximately $6.6 million.

Financing Activities

During the year ended December 31, 2024, cash provided by financing activities was approximately $0.2 million resulting from the exercise of employee stock options.

During the year ended December 31, 2023, cash provided by financing activities was approximately $61.9 million resulting from $61.4 million in net proceeds from underwritten public offering and $0.5 million from the exercise of employee stock options.

Funding Requirements

We expect to continue to invest substantially in our research and development activities and incur commercialization expenses related to product sales, marketing, manufacturing and distribution. As we achieve further commercial success, we may need to obtain additional funding to support our continuing operations. In addition, our financial stability is reviewed by existing and potential customers from time to time and we believe that a stronger cash position provides us additional time to execute our growth strategy and is perceived positively by such customers and may also provide us with higher grading in such customers' diligence processes. If we are unable to obtain capital when and if needed or on attractive terms, we could be forced to delay, reduce or eliminate some of our research and development programs or future commercialization efforts.

As of December 31, 2024, we had cash and cash equivalents, short term bank deposits, short term restricted cash and marketable securities of approximately $68.0 million. We expect those funds to be sufficient to continue to execute our business plan for at least the next 12 months.

Additionally, we intend to fund our operations from revenues generated from the sale of goods and services, together with funds received under the registered direct offering and savings pursuant to optimization of our operations (both of which took place early in 2025).

We also expect our losses to be similaror lower in future periods as we:

•

continue to invest in research and development;

•

increase our test and validation activities as part of our Tier-1 responsibilities;

Because we will incur costs and expenses from these efforts and the incremental revenue will not be sufficient to cover these costs and expenses, losses in future periods will be significant. In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in revenues, which would further increase our losses.

Off-Balance Sheet Arrangements

Our remaining performance obligations are comprised of application engineering services not yet rendered. As of December 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $15.3 million, which we expect to recognize as revenues within the next 12 months.

Other than as set forth above, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

C. Research and Development, Patents and Licenses, etc.

Research and Development

We have invested a significant amount of time and expense into research and development of LiDAR-based technologies. Our research and development team is the largest department in the company and, as of December 31, 2024, was comprised of 340 employees. Our ability to maintain a leadership position in the industry depends to a great degree on our ongoing research and development activities. Our research and development team includes engineers and researchers with a diverse range of expertise and diverse levels of experience and academic backgrounds, including holders of B.Sc., M.Sc. and PhD degrees from leading academic institutions. Our research and development activities are largely conducted at our headquarters in Rosh HaAin, Israel.

Creating an automotive-grade, eye-safe and cost efficient ~905nm wavelength LiDAR solution and the accompanying software suite required the efforts of a multi-disciplinary team with expertise spanning optics, lasers, mechanical engineering, micro-electronics, chip design, MEMS design, complex IC packaging, algorithms, neural networks, systems engineering and software architecture and engineering.

Intellectual Property

Our success and competitive advantage depend in part upon our ability to develop and protect our core technology and intellectual property. We own a portfolio of intellectual property, including registered patents, registered trademarks, registered designs, confidential technical information, and expertise in the development of LiDAR technology and software for, among others, autonomous vehicles.

We have filed patent and trademark applications in order to further secure these rights and strengthen our ability to defend against third parties who may infringe on our rights. We also rely on design and manufacturing know-how, continuing technological innovations, and licensing and exclusivity opportunities to maintain and improve our competitive position. Additionally, we protect our proprietary rights through agreements with our commercial partners, supply-chain vendors, employees, and consultants, as well as close monitoring of developments and products in our industry.

D. Trend Information

Supply Chain

We currently have sufficient component inventory in order to meet the demands of our customers in the near-term. In addition, we are in the process of procuring additional component stock to keep in inventory on a go-forward basis to minimize the effect of supply chain strain on our business in the future.

E. Critical Accounting Policies and Use of Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates. Please see Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report for additional information.

Revenue Recognition

We follow the provisions of ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), which applies to all contracts with customers. Under ASC 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products and services.

When we enter into a contract, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract and determine those that are performance obligations and assess whether each promised good or service is distinct.

We evaluate each performance obligation to determine if it is satisfied at a point in time or over time.

Inventory Reserves

Our inventory are stated at the lower of cost or estimated net realizable value. Cost of inventory is determined as follows:

We charge cost of revenue for write-downs of inventory which are obsolete or in excess of anticipated demand based on a consideration of marketability and product life cycle stage, product development plans, component cost trends, demand forecasts, historical revenue, and assumptions about future demand and market conditions.

Losses expected to arise from firm non-cancellable commitments for future purchases of inventory are charged to cost of revenues unless the losses are recoverable through firm sales contracts or other means.

Useful Lives of Property, Plant, and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and impairment. The estimated useful lives of property and equipment are determined when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. When useful life is reassessed for an asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated over the revised estimated useful life.