Item 3. Key Information
A. Selected Financial Data
The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial data in conjunction with “Item 5 — Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this annual report. Our historical results are not necessarily indicative of results to be expected for future periods. The consolidated statements of operations data for the years ended
December 31, 2014
,
2015
and
2016
, the consolidated statements of financial position data at
December 31, 2014
,
2015
and
2016
, and the consolidated statements of cash flow data for the years ended
December 31, 2014
,
2015
and
2016
have been derived from our audited Consolidated Financial Statements included elsewhere in this annual report. The consolidated statement of operations data for the years ended
December 31, 2012
and
2013
, consolidated statement of financial position data at
December 31, 2012
and
2013
, and the consolidated statement of cash flow data for the year ended
December 31, 2012
and
2013
, have been derived from our audited Consolidated Financial Statements not included in this annual report.
Our financial statements included in this annual report were prepared in U.S. dollars in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
(in thousands, except per share data)
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Product revenue
|
$
|
19,600
|
|
$
|
10,708
|
|
$
|
19,836
|
|
$
|
24,669
|
|
$
|
34,581
|
|
Other revenue
|
2,654
|
|
3,004
|
|
2,766
|
|
7,863
|
|
10,998
|
|
Total revenue
|
22,254
|
|
13,712
|
|
22,602
|
|
32,532
|
|
45,579
|
|
Cost of revenue
(1)
:
|
|
|
|
|
|
Cost of product revenue
|
11,781
|
|
8,616
|
|
15,435
|
|
17,970
|
|
22,574
|
|
Cost of other revenue
|
176
|
|
205
|
|
346
|
|
1,481
|
|
3,022
|
|
Total cost of revenue
|
11,957
|
|
8,821
|
|
15,781
|
|
19,451
|
|
25,596
|
|
Gross profit
|
10,297
|
|
4,891
|
|
6,821
|
|
13,081
|
|
19,983
|
|
% of revenue
|
46
|
%
|
36
|
%
|
30
|
%
|
40
|
%
|
44
|
%
|
Operating expenses
(1)
:
|
|
|
|
|
|
Research and development
|
28,365
|
|
28,357
|
|
28,634
|
|
25,305
|
|
26,334
|
|
Sales and marketing
|
6,562
|
|
4,449
|
|
5,278
|
|
5,985
|
|
7,126
|
|
General and administrative
|
8,093
|
|
7,528
|
|
6,969
|
|
5,428
|
|
6,267
|
|
Total operating expenses
|
43,020
|
|
40,334
|
|
40,881
|
|
36,718
|
|
39,727
|
|
Operating income (loss)
|
(32,723
|
)
|
(35,443
|
)
|
(34,060
|
)
|
(23,637
|
)
|
(19,744
|
)
|
Financial income (expense)
|
(21
|
)
|
(1
|
)
|
98
|
|
(3,448
|
)
|
(4,759
|
)
|
Profit (Loss) before income taxes
|
(32,744
|
)
|
(35,444
|
)
|
(33,962
|
)
|
(27,085
|
)
|
(24,503
|
)
|
Income tax expense (benefit)
|
234
|
|
142
|
|
162
|
|
317
|
|
284
|
|
Profit (Loss)
|
$
|
(32,978
|
)
|
$
|
(35,586
|
)
|
$
|
(34,124
|
)
|
$
|
(27,402
|
)
|
$
|
(24,787
|
)
|
Basic earnings (loss) per share
|
$
|
(0.95
|
)
|
$
|
(0.78
|
)
|
$
|
(0.58
|
)
|
$
|
(0.46
|
)
|
$
|
(0.39
|
)
|
Diluted earnings (loss) per share
|
$
|
(0.95
|
)
|
$
|
(0.78
|
)
|
$
|
(0.58
|
)
|
$
|
(0.46
|
)
|
$
|
(0.39
|
)
|
Number of shares used for computing:
|
|
|
|
|
|
Basic
|
34,680
|
|
45,456
|
|
59,142
|
|
59,145
|
|
63,805
|
|
Diluted
|
34,680
|
|
45,456
|
|
59,142
|
|
59,145
|
|
63,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
(in thousands)
|
Consolidated Statements of Financial Position Data:
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
$
|
28,751
|
|
$
|
37,244
|
|
$
|
12,489
|
|
$
|
8,681
|
|
$
|
20,547
|
|
Total current assets
|
49,539
|
|
60,658
|
|
36,315
|
|
35,819
|
|
50,069
|
|
Total assets
|
68,402
|
|
73,528
|
|
49,415
|
|
48,856
|
|
65,077
|
|
Current and non-current loans and borrowings
|
—
|
|
—
|
|
5,846
|
|
26,482
|
|
29,310
|
|
Total current liabilities
|
11,954
|
|
13,258
|
|
19,048
|
|
31,072
|
|
33,196
|
|
Total equity
|
55,471
|
|
58,929
|
|
25,115
|
|
(1,248
|
)
|
8,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
(in thousands)
|
Consolidated Statements of Cash Flow Data:
|
|
|
|
|
Net cash flow from (used in) operating activities
|
$
|
(22,848
|
)
|
$
|
(24,345
|
)
|
$
|
(24,406
|
)
|
$
|
(16,401
|
)
|
$
|
(15,589
|
)
|
Net cash flow used in investments activities
|
(5,511
|
)
|
(3,956
|
)
|
(5,625
|
)
|
(5,345
|
)
|
(5,270
|
)
|
Net cash flow from financing activities
|
(119
|
)
|
36,791
|
|
5,121
|
|
17,710
|
|
32,778
|
|
Net foreign exchange difference
|
9
|
|
3
|
|
(5
|
)
|
(5
|
)
|
(5
|
)
|
Cash and cash equivalents at January 1
|
57,220
|
|
28,751
|
|
37,244
|
|
12,329
|
|
8,288
|
|
Cash and cash equivalents at December 31
|
28,751
|
|
37,244
|
|
12,329
|
|
8,288
|
|
20,202
|
|
(1) Includes share-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
(in thousands)
|
Cost of revenue
|
$
|
156
|
|
$
|
112
|
|
$
|
47
|
|
$
|
17
|
|
$
|
11
|
|
Operating expenses
|
3,033
|
|
2,052
|
|
1,230
|
|
850
|
|
1,111
|
|
Share-based compensation
|
$
|
3,189
|
|
$
|
2,164
|
|
$
|
1,277
|
|
$
|
867
|
|
$
|
1,122
|
|
Exchange Rate Information
In this annual report, for convenience only, we have translated the euro amounts reflected in our financial statements as of and for the year ended
December 31, 2016
into U.S. dollars at the rate of €1.00 = $1.0552, the noon buying rate for euros in New York City, as certified for customs purposes by the Federal Reserve Bank of New York, on
December 31, 2016
. You should not assume that, on that or on any other date, one could have converted these amounts of euros into U.S. dollars at that or any other exchange rate.
The following table sets forth, for each period indicated, the low and high exchange rates for euros expressed in U.S. dollars, the exchange rate at the end of such period and the average of such exchange rates on the last day of each month during such period, based on the noon buying rate in the City of New York for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York. The source of the exchange rate is the H.10 statistical release of the Federal Reserve Board. The exchange rates set forth below demonstrate trends in exchange rates, but the actual exchange rates used throughout this annual report may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
High
|
|
1.3463
|
|
|
1.3816
|
|
|
1.3927
|
|
|
1.2015
|
|
|
1.1516
|
|
Low
|
|
1.2062
|
|
|
1.2774
|
|
|
1.2101
|
|
|
1.0524
|
|
|
1.0375
|
|
Period End
|
|
1.3186
|
|
|
1.3779
|
|
|
1.2101
|
|
|
1.0859
|
|
|
1.0552
|
|
Average Rate
|
|
1.2859
|
|
|
1.3281
|
|
|
1.3297
|
|
|
1.1096
|
|
|
1.1072
|
|
The following table sets forth, for each of the last six months, the low and high exchange rates for euros expressed in U.S. Dollars and the exchange rate at the end of the month based on the noon buying rate as described above. The source of the exchange rate is the H.10 statistical release of the Federal Reserve Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last Six Months
|
|
|
September
|
October
|
|
November
|
|
December
|
|
January
|
|
February
|
|
High
|
|
1.1271
|
|
1.1212
|
|
|
1.1121
|
|
|
1.0758
|
|
|
1.0794
|
|
|
1.0802
|
|
|
Low
|
|
1.1158
|
|
1.0866
|
|
|
1.0560
|
|
|
1.0375
|
|
|
1.0416
|
|
|
1.0551
|
|
|
End of Month
|
|
1.1238
|
|
1.0962
|
|
|
1.0578
|
|
|
1.0552
|
|
|
1.0794
|
|
|
1.0618
|
|
|
On March 24, 2017, the noon buying rate for euros in New York City, as certified for customs purposes by the Federal Reserve Bank of New York, was €1.00 = $1.0806.
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission (“SEC”), including the following risk factors which we face and which are faced by our industry. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See “Special Note Regarding Forward-Looking Statements” on page 1.
Risks Related to Our Business and Industry
We have a history of losses and have experienced a significant decline in revenue from 2011, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.
We were established in 2003 and began operations in 2004, and have incurred losses on an annual basis since inception. We experienced net losses of $34.1 million, $27.4 million and $24.8 million in
2014
,
2015
and
2016
, respectively. At
December 31, 2016
, our accumulated deficit was $209.6 million. We expect to continue to incur significant expense related to the development of our LTE products and expansion of our business, including research and development and sales and administrative expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expense. As a result of these expenditures, we will have to generate and sustain substantially increased revenue to achieve profitability. If we do not, we may not be able to achieve or maintain profitability, and we may continue to incur significant losses in the future.
Our industry is subject to rapid technological change that could result in decreased demand for our products and those of our customers or result in new specifications or requirements on our products, each of which could negatively affect our revenues, margins and operating results.
The markets in which we and our customers compete or plan to compete are characterized by rapidly changing technologies and industry standards and technological obsolescence. Our ability to compete successfully depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our target markets could harm our competitive position within these markets. In addition, such shifts can cause a significant decrease in our revenues and adversely affect our operating results. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenue and a loss of design wins. The development of new technologies and products generally requires substantial investment before they are commercially viable. We intend to continue to make substantial investments in developing new technologies and products, including our LTE products, and it is possible that our development efforts will not be successful and that our new technologies and products will not be accepted by customers or result in meaningful revenue. If the semiconductor solutions we develop fail to meet market or customer requirements or do not achieve market acceptance, our operating results and competitive position would suffer.
Our success and the success of our new products will depend on accurate forecasts of future technological developments, customer and consumer requirements and long-term market demand, as well as on a variety of specific implementation factors, including:
|
|
•
|
accurate prediction of the size and growth of the LTE markets, and in particular the market for LTE-only, also referred to as single-mode LTE, products where no fall back to 2G or 3G technology is required;
|
|
|
•
|
accurate prediction of changes in device manufacturer requirements, technology, industry standards or consumer expectations, demands and preferences;
|
|
|
•
|
accurate prediction of the growth of the Internet of Things market and the adoption of industry standards allowing devices to connect and communicate with each other;
|
|
|
•
|
timely and efficient completion of process design and transfer to manufacturing, assembly and test, and securing sufficient manufacturing capacity to allow us to continue to timely and cost-effectively deliver products to our customers;
|
|
|
•
|
market acceptance, adequate consumer demand and commercial production of the products in which our semiconductor solutions are incorporated;
|
|
|
•
|
the quality, performance, functionality and reliability of our products as compared to competing products and technologies; and
|
|
|
•
|
effective marketing, sales and customer service.
|
The markets for our semiconductor solutions are characterized by frequent introduction of next generation and new products with new features and functionalities, short product life cycles and significant price competition. If we or our customers are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations would suffer. In addition, frequent technology changes and introduction of next generation products may result in inventory obsolescence, which could reduce our gross margins and harm our operating performance. If we fail to timely introduce new products that meet the demands of our customers or our target markets, or if we fail to penetrate new markets, our revenue will decrease and our financial condition would suffer.
If we fail to successfully develop, commercialize, produce and sell our module product line, our business, revenue and operating results may be harmed.
In 2013, we introduced a new product module line. Our modules incorporate many components in addition to our chipsets. We may lack the purchasing power to acquire at competitive prices certain components required to produce modules, and we do not expect to be able to command selling prices for those modules that allow us to maintain traditional semiconductor-only margins for the full module. In the near future, modules could represent a large portion of our revenue mix, which could negatively impact our overall gross margin. Certain large customers may decide to buy the modules directly from the manufacturers who purchase our chipsets, rather than us, in order to reduce their costs. This may result in a reduction of our revenue and gross profit, but an improvement of overall gross margin percentage, compared to the case where we sell the modules ourselves.
Module components may be sourced from numerous different suppliers. Some of these components may periodically be in short supply or be subject to long lead times, which could affect our ability to meet customer demand for our modules, therefore delaying our revenue. In addition, we rely on various contract manufacturers to produce our modules. If these manufacturers encounter any issues with production capacity, quality or reliability of their products, it could adversely affect our revenue and our reputation in the market. If our ability to expand our product platform is significantly delayed or if we are unable to leverage our module as expected, our business and financial condition could be materially and adversely affected.
If customers request from us, and we agree to provide, a wide variety of module variants or stock-keeping units, or SKUs, to support different operators or different end-applications, our expenses associated with developing, sourcing and certifying our module products would increase. In addition, managing supply and demand across multiple SKUs may increase the possibility that we will under or over-forecast a given SKU, resulting in either delayed revenue or excess inventory.
Participating in the module business could create a perception among our customers that we are competing with them if they are also in the module business, which could impair our chipset business prospects with such customers. The module can be considered an end product with full LTE functionality; therefore, there is market pressure from manufacturers of products not normally incorporating a communication function for us to sell the module with essential IP indemnification. We intend to negotiate license agreements for the module in order to offer standard indemnification to our manufacturing partners, but there can be no assurance that we will be successful in obtaining licenses on acceptable terms.
Our LTE semiconductor solutions do not incorporate support for 2G or 3G protocols, and we currently focus on selling our solutions into the market for LTE-only devices. If the market for LTE-only devices materializes more slowly or at a lower volume level than we anticipate, our results of operations may be harmed.
Our semiconductor solutions currently support only 4G protocols. As a result, our LTE strategy focuses primarily on selling into the LTE-only device market. The growth rate and size of the market for LTE-only devices is dependent on a number of factors, including the degree of geographic and population coverage by LTE networks. If this coverage does not materialize as quickly as we expect, if fewer LTE carriers than we expect offer comprehensive LTE coverage in their geographic operating areas, or if these LTE carriers require support for 2G or 3G protocols in a larger proportion of their overall device portfolio than we expect, then demand for LTE-only semiconductor solutions like ours would be lower and our results of operations would be harmed.
If we are unsuccessful in developing and selling new products on a timely and cost-effective basis or in penetrating new markets, in particular the single-mode LTE market, our business and operating results would suffer.
We or our customers may be required to obtain licenses for certain so-called “essential patents” in order to comply with applicable standards, which could require us to pay additional royalties on certain of our products. If we or our customers are unable to obtain such licenses, our business, results of operations, financial condition and prospects would be harmed.
We or our customers may be required to obtain licenses for third-party intellectual property. In particular, we may be required to obtain licenses to certain third-party patents, so-called “essential patents”, that claim features or functions that are incorporated into applicable industry standards and that we are required to provide in order to comply with the standard. If we need to license any third-party intellectual property, essential patents or other technology, we could be required to pay royalties on certain of our products. In addition, while the industry standards bodies and the antitrust laws in certain countries may require participating companies to license their essential patents on fair, reasonable, and nondiscriminatory terms, there can be no assurances that we will be able to obtain such licenses on commercially reasonable terms or at all. Although we have implemented a dedicated standard essential patents licensing-in reference policy, our inability to obtain required third-party intellectual property licenses on commercially reasonable terms or at all could harm our business, results of operations, financial condition or prospects. If our customers are required to obtain such licenses, there can be no assurances that their businesses will not be adversely affected. In addition, if our competitors have significant numbers of essential patents and/or patent license rights, they could be at an advantage in negotiating with our customers or potential customers, which could influence our ability to win new business or could result in downward pressure on our average selling prices.
We depend on the commercial deployment of 4G wireless communications equipment, products and services to grow our business, and our business may be harmed if wireless carriers delay or are unsuccessful in the commercial deployment of 4G technology or if they deploy technologies that are not supported by our solutions.
We depend upon the continued commercial deployment of 4G wireless communications equipment, products and services based on our technology. Deployment of new networks by wireless carriers requires significant capital expenditures, well in advance of any revenue from such networks. In the past, wireless carriers have cancelled or delayed planned deployments of new networks, including, for example, commercial retail service in the Indian market. If existing deployments are not commercially successful or do not continue to grow their subscriber base, or if new commercial deployments of 4G networks are delayed or unsuccessful, our business and financial results would be harmed.
During network deployment, wireless carriers often anticipate a certain rate of subscriber additions and, in response, operators typically procure devices to satisfy this forecasted demand. If the rate of deployment of new networks by wireless carriers is slower than we expect or if 4G technology is not as widely adopted by consumers as we expect, the rate of subscriber additions may be slower than expected, which will reduce the sales of our products and cause OEMs and ODMs to hold excess inventory. This would harm our sales and our financial results.
As we expand into the broader Internet of Things market, we will similarly depend on the commercial deployment of narrow band LTE variants, beginning with Cat M and, later, Cat NB-1. The adoption of the Cat M and Cat NB-1 standards is expected to expand the market for Internet of Things devices. If the Cat M or Cat NB-1 standards are not successfully adopted and deployed, or if competing standards for Internet of Things devices become favored by wireless carriers, we may not be able to successfully commercialize our Cat M (and, later, Cat NB-1) chipsets, which would harm our sales and our financial results.
In addition, wireless carriers may choose to deploy technologies not supported by our solutions. If a technology that is not supported by our semiconductor solutions gains significant market share or is favored by a significant wireless carrier, we could be required to expend a significant amount of time and capital to develop a solution that is compatible with that alternative
technology. If we are not successful, we could lose design wins with respect to that technology and our business and financial results would be harmed. Moreover, once a competitor’s solution is chosen by a wireless carrier, OEM or ODM we will have difficulty supplanting those solutions with ours.
We have significant ongoing capital requirements that could have a material effect on our business and financial condition if we are unable to generate sufficient cash from operations.
Our business requires significant capital investment to carry out extensive research and development in order to remain competitive. At the same time, demand for our products is highly variable and there have been downturns. If our cash on hand, net proceeds from financing activities and cash generated from operations are not sufficient to fund our operations and capital requirements, we may be required to limit our growth, or enter into financing arrangements at unfavorable terms, any of which could harm our business and financial condition.
Additionally, we anticipate that that strategic alliances and partnerships will be an important source of revenue and possible financing for us going forward. If we are unable to develop alliances with or otherwise attract investment from strategic partners, or if strategic partners are not willing to enter into transactions with us on favorable terms, our business and financial condition could be harmed.
A portion of our software development and testing activity is outsourced to a third-party provider based in Kiev, Ukraine. If political developments in Ukraine and Russia escalate to open hostilities, some of our product development activities and some customer software support activities could be adversely affected.
While we have our key engineering competencies in-house, primarily in France, the United Kingdom and the United States, we outsource some software development and testing activities to an independent third-party provider of engineering services. We work with a dedicated team of 24 software engineers based in Kiev, Ukraine. As a result of the decision of the Russian government to annex the Crimea region of Ukraine, the United States and the European Community have imposed economic sanctions on Russia. If Ukraine experiences further political instability, these engineers may be unable to work for a sustained period of time, which could adversely impact our research and development operations. We also have our own electronic equipment physically in place in Kiev which could be at risk in the event of violence in the region. We have developed a contingency plan to trigger if the engineers in Kiev are unable to continue working on their projects for us, but if our contingency plan is not effective, we could suffer delays in product introduction or delays in resolution of customer software bugs, which could have a negative impact on our revenues.
We depend on a small number of customers for a significant portion of our revenue. If we fail to retain or expand customer relationships, our business could be harmed.
A significant amount of our total revenue is attributable to a small number of customers, and we anticipate that this will continue to be the case for the foreseeable future. These customers may decide not to purchase our semiconductor solutions at all, to purchase fewer semiconductor solutions than they did in the past or to alter the terms on which they purchase our products. In addition, to the extent that any customer represents a disproportionately high percentage of our accounts receivable, our exposure to that customer is further increased should they be unable or choose not to pay such accounts receivable on a timely basis or at all.
Our top ten customers accounted 96%, 92% and 86% of our total revenue in
2014
,
2015
and
2016
, respectively. The following table summarizes customers representing a significant portion of total revenue:
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Customer
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% of total revenues for the year ended December 31,
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% of our accounts receivable at
December 31,
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2014
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2015
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2016
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2016
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Comtech
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—
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—
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29
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%
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35
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%
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Gemtek
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39
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%
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14
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%
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15
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%
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Less than 10%
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Customer A (Taiwan-based)
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Less than 10%
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27
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%
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Less than 10%
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Less than 10%
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AIT
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12
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%
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16
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%
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—
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—
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|
Huawei
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25
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%
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Less than 10%
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—
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—
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Comtech is a distributor who serves multiple customers in China and Taiwan. We expect that some of these customers, particularly those above 10% during 2016, could each continue to represent at least 10% of our revenue in 2017 as the market for single-mode LTE devices is in its early stages and still concentrated in a relatively small number of device makers. The loss of any significant customer, a significant reduction in sales we make to them in general or during any period, or any issues with collection of receivables from customers would harm our financial condition and results of operations. Furthermore, we must obtain orders from new customers on an ongoing basis to increase our revenue and grow our business. If we fail to expand our customer relationships, our business could be harmed.
We depend on one independent foundry to manufacture our products and do not have a long-term agreement with such foundry, and loss of this foundry or our failure to obtain sufficient foundry capacity would significantly delay our ability to ship our products, cause us to lose revenue and market share and damage our customer relationships.
Access to foundry capacity is critical to our business because we are a fabless semiconductor company. We depend on a sole independent foundry, Taiwan Semiconductor Manufacturing Company Limited, or TSMC, in Taiwan to manufacture our semiconductor wafers. Because we outsource our manufacturing to a single foundry, we face several significant risks, including:
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constraints in or unavailability of manufacturing capacity;
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limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and
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•
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the unavailability of, or potential delays in obtaining access to, key process technologies.
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If we do not accurately forecast our capacity needs, TSMC may not have available capacity to meet our immediate needs or we may be required to pay higher costs to fulfill those needs, either of which could harm our business, results of operations or financial condition.
The ability of TSMC to provide us with semiconductor wafers is limited at any given time by their available capacity and we do not have a guaranteed level of manufacturing capacity. We do not have any agreement with TSMC and place our orders on a purchase order basis. As a result, if TSMC raises its prices or is not able to satisfy our required capacity for any reason, including natural or other disasters, allocates capacity to larger customers or to different sectors of the semiconductor industry, experiences labor issues or shortages or delays in shipment of semiconductor equipment or materials used in the manufacture of our semiconductors, or if our business relationship with TSMC deteriorates, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, in a timely manner, or at all.
Locating and qualifying a new foundry would require a significant amount of time, which would result in a delay in production of our products. In addition, using foundries with which we have no established relationship could expose us to unfavorable pricing and terms, delays in developing and qualifying new products, unsatisfactory quality or insufficient capacity allocation. We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. Many of the customers of TSMC, or foundries that we may use in the future, are larger than we are, or have long-term agreements with such foundries, and as a result those customers may receive preferential treatment from the foundries in terms of price, capacity allocation and payment terms. Any delay in qualifying a new foundry or production issues with any new foundry would result in lost sales and could damage our relationship with existing and future customers as well as our reputation in the market.
If our foundry vendor does not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.
The fabrication of semiconductor solutions such as ours is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. TSMC, or foundries that we may use in the future, could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendor could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendor, or defects, integration issues or other performance problems in our semiconductor solutions could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. In addition, because we have a sole source of wafer supply, these risks are magnified because we do not have an alternative source to purchase from should these risks materialize. If TSMC fails to provide satisfactory product to us, we would be required to identify and qualify other sources, which could take a significant amount of time and would result in lost sales. In addition, we indemnify our customers for losses resulting from defects in our products, which costs could be substantial. A product liability or other indemnification claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend.
Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory, which could harm our business.
We do not have firm, long-term purchase commitments from our customers. Substantially all of our sales are made on a purchase order basis, and in most cases our customers are not contractually committed to buy any quantity of products from us beyond firm purchase orders. Additionally, customers may cancel, change or delay purchase orders already in place with little or no notice to us. Because production lead times often exceed the amount of time required to fulfill orders, we often must manufacture in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our ability to accurately forecast demand can be harmed by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory, which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not manufacture enough semiconductor solutions, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers significantly increase their requested production quantities with little or no advance notice. If we do not fulfill customer demands in a timely manner, our customers may cancel their orders and we may be subject to customer claims for cost of replacement. Underestimating or overestimating demand would lead to insufficient, excess or obsolete inventory and could harm our operating results, cash flow and financial condition, as well as our relationships with our customers and our reputation in the marketplace.
If customers do not design our semiconductor solutions into their product offerings or if our customers’ product offerings are not commercially successful, our revenue and our business would be harmed.
We sell our semiconductor solutions directly to OEMs who include them in their products, and to ODMs who include them in their products they supply to OEMs. As a result, we rely on OEMs to design our semiconductor solutions into the products they sell. Because our semiconductor solutions are generally a critical component of our customers’ products, they are typically incorporated into our customers’ products at the design stage and the sales cycle typically takes 12 months or more to complete. Without these design wins, our revenue and our business would be significantly harmed. We often incur significant expenditures on the development of a new semiconductor solution without any assurance that an OEM will select our semiconductor solution for design into its own product. Because the types of semiconductor solutions we sell are a critical aspect of an OEM’s product, once an OEM designs a competitor’s semiconductor into its product offering, it becomes significantly more difficult for us to sell our semiconductor solutions to that customer for a particular product offering because changing suppliers involves significant cost, time, effort and risk for the customer. Further, if we are unable to develop new products in a timely manner for inclusion in such products, or if major defects or errors that might significantly impair performance or standards compliance are found in our products after inclusion by an OEM, OEMs will be unlikely to include our semiconductor solutions into their products and our reputation in the market and future prospects would be harmed.
Furthermore, even if an OEM designs one of our semiconductor solutions into its product offering, we cannot be assured that its product will be commercially successful and that we will receive any revenue from that OEM. This risk is heightened because 4G technology is rapidly emerging and many of our customers, particularly in the Internet of Things market, do not have significant experience designing products utilizing 4G technology. If our customers’ products incorporating our semiconductor solutions fail to meet the demands of their customers or otherwise fail to achieve market acceptance, our revenue and business would be harmed.
If we are unable to compete effectively, we may not increase or maintain our revenue or market share, which would harm our business.
We may not be able to compete successfully against current or potential competitors. If we do not compete successfully, our revenue and market share may decline. In the LTE market, we face or expect to face competition from established semiconductor companies such as HiSilicon Technologies, Intel Corporation, Mediatek, Qualcomm Incorporated, Samsung Electronics Co. Ltd., Sony Corporation (after its acquisition of Altair Semiconductor in 2016) and Spreadtrum, as well as smaller actors in the market such as GCT Semiconductor. Many of our competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of existing customers than us. In addition, recently there has been consolidation within the industry, notably the acquisition of smaller competitors by larger competitors. The significant resources of these larger competitors may allow them to respond more quickly than us to new or emerging technologies or changes in customer requirements or to bring new products to market in a more timely manner than us. For example, some competitors may have greater access or rights to complementary technologies, including GNSS (GPS), blue tooth, sensors, graphic processing, etc., and we may need to develop or acquire complementary technologies or partner with others to bring to market solutions that integrate enhanced functionalities. We expect to pursue such transactions or partnerships if appropriate opportunities arise. However, we may not be able to identify suitable transactions or partners in the future, or if we do identify such transactions or partners, we may not be able to complete them on commercially acceptable terms, or at all. In addition, these competitors may have greater credibility with our existing and potential customers. Further, many of these competitors are located in Asia or have a significant presence and operating history in Asia and, as a result, may be in a better position than we are to work with manufacturers and customers located in Asia. Moreover, many of our competitors have been doing business with customers for a longer period of time and have well-established relationships, which may provide them with advantages, including access to information regarding future trends and requirements that may not be available to us. In addition, some of our competitors may provide incentives to customers or offer bundled solutions with complementary products, which could be attractive to some customers, or adopt more aggressive pricing policies, which may make it difficult for us to gain or maintain market share.
Our ability to compete effectively will depend on a number of factors, including:
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our ability to anticipate market and technology trends and successfully develop products that meet market needs;
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our ability to deliver products in large volume on a timely basis at competitive prices;
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our success in identifying and penetrating new markets, applications and customers;
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our ability to accurately understand the price points and performance metrics of competing products in the market;
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our products’ performance and cost-effectiveness relative to those of our competitors;
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our ability to develop and maintain relationships with key customers, wireless carriers, OEMs and ODMs;
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•
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our ability to secure sufficient high quality supply for our products;
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our ability to conform to industry standards while developing new and proprietary technologies to offer products and features previously not available in the 4G market;
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our ability to develop or acquire complementary technologies or to partner with others to bring to market products with enhanced functionalities; and
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our ability to recruit design and application engineers with expertise in wireless broadband communications technologies and sales and marketing personnel.
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If we experience material changes to the competitive structure of our industry due to cooperation or consolidation among our competitors, we may not increase or sustain our revenue or market share, which would harm our business.
Our current or future competitors may establish cooperative relationships among themselves or with third parties. In addition, there has recently been consolidation within our industry, notably the acquisition of smaller competitors by larger competitors with significantly greater resources than ours. These events may result in the emergence of new competitors with greater resources and scale than ours that could acquire significant market share, which could result in a decline of our revenue and market share. Our ability to maintain our revenue and market share will depend on our ability to compete effectively despite material changes in industry structure. If we are unable to do so, we may not increase or sustain our revenue or market share, which would harm our business.
If we are unable to effectively manage our business through periods of economic or market slow-down and any subsequent future growth, we may not be able to execute our business plan and our operating results could suffer.
Our future operating results depend to a large extent on our ability to successfully manage our business through periods of economic or market slow-down and periods of subsequent expansion and growth. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must, among other things, effectively:
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recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering, and applications engineering;
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add additional sales personnel and expand sales offices;
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add additional finance and accounting personnel;
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implement and improve our administrative, financial and operational systems, procedures and controls; and
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enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.
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Furthermore, to remain competitive and manage future expansion and growth, we must carry out extensive research and development, which requires significant capital investment. During periods of economic or market slow-down, we must also effectively manage our expenses to preserve our ability to carry out such research and development. We kept our operating expenses fairly flat in 2014 and decreased them in 2015, but with our initial success in introducing new LTE products and gaining design wins during 2015, we increased our investment in research and development in 2016, as well as sales and marketing, general and administrative and other functions to support the growth of our business. As our customer base broadens and as our customers launch products on more operators worldwide, we expect that operating expenses will increase somewhat in 2017. We are likely to incur these costs earlier than some of the anticipated benefits and the return on these investments, if any, may be lower, may develop more slowly than we expect, or may not materialize at all, which could harm our operating results.
If we are unable to manage our business during both periods of economic or market slow-down and growth effectively, we may not be able to take advantage of market opportunities or develop new products and we may fail to satisfy customer requirements, maintain product quality, execute our business plan or respond to competitive pressures, any of which could harm our operating results.
The average selling prices of our semiconductor solutions have historically decreased over time and will likely do so in the future, which could harm our gross profits and financial results.
Average selling prices of our semiconductor solutions have historically decreased over time, and we expect such declines to continue to occur. Our gross profits and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced semiconductor solutions on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Even if we are successful in reducing our costs or improving sales volumes, such improvements may not be sufficient to offset declines in average selling prices in the future. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs and our costs may even increase, either of which would reduce our margins. We have reduced the prices of our semiconductor solutions in line with and at times in advance of competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to do so again in the future.
Any increase in the manufacturing cost of our products would reduce our gross margins and operating profit.
The semiconductor business is characterized by ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price or manufacturing cost variances or due to other factors, will reduce our gross margins and operating profit. We do not have long-term supply agreements with our manufacturing, test or assembly suppliers and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers. Because we have a sole source of wafer supply and limited sources of test and assembly, we may not be able to negotiate favorable pricing terms from our suppliers. These and other related factors could impair our ability to control our costs and could harm our operating results.
The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows.
The semiconductor industry has historically been cyclical, experiencing significant downturns in customer demand. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not
be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation occurs, it could harm our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. If this occurs, we may not be able to obtain sufficient quantities of our semiconductor solutions to meet the increased demand, resulting in lost sales, loss of market share and harm to our customer relationships. We may also have difficulty in obtaining sufficient assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that we target, may harm our ability to generate revenue and could negatively impact our operating results.
The communications industry has experienced pronounced downturns, and these cycles may continue in the future. A future decline in global economic conditions could have adverse, wide-ranging effects on demand for our semiconductor solutions and for the products of our customers, particularly wireless communications equipment manufacturers or other participants in the wireless industry, such as wireless carriers. Inflation, deflation and economic recessions that harm the global economy and capital markets also harm our customers and our end consumers. Specifically, the continued deployment of new 4G networks requires significant capital expenditures and wireless carriers may choose not to undertake network expansion efforts during an economic downturn or time of other economic uncertainty. Our customers’ ability to purchase or pay for our semiconductor solutions and services, obtain financing and upgrade wireless networks could be harmed, and networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their inventories and take a cautious approach to acquiring our products, which would have a significant negative impact on our business. If such economic situations were to occur, our operating results, cash flow and financial condition could be harmed. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of the ADSs.
Though we rely to a significant extent on proprietary intellectual property, we may not be able to obtain, or may choose not to obtain, sufficient intellectual property rights to provide us with meaningful protection or commercial advantage.
We depend significantly on intellectual property rights to protect our products and proprietary technologies against misappropriation by others. We generally rely on the patent, trademark, copyright and trade secret laws in Europe, the United States and certain other countries in which we operate or in which our products are produced or sold, as well as licenses and nondisclosure and confidentiality agreements, to protect our intellectual property rights.
We may have difficulty obtaining patents and other intellectual property rights, and the patents and other intellectual property rights we have and obtain may be insufficient to provide us with meaningful protection or commercial advantage. We currently do not apply for patent protection in all countries in which we operate. Instead we select and focus on key countries for each patent family. In addition, the protection offered by patents and other intellectual property rights may be inadequate or weakened for reasons or circumstances that are out of our control. For instance, we may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which we have filed patent applications or in which we operate, and under the laws of such countries, patents and other intellectual property rights may be or become unavailable or limited in scope.
We may not be able to adequately protect or enforce our intellectual property against improper use by our competitors or others and our efforts to do so may be costly to us, which may harm our business, financial condition and results of operations.
Our patents and patent applications, or those of our licensors, could face challenges, such as interference proceedings, opposition proceedings, nullification proceedings and re-examination proceedings. Any such challenge, if successful, could result in the invalidation or narrowing of the scope of any such patents and patent applications. Any such challenges, regardless of their success, would also likely be time-consuming and expensive to defend and resolve, and would divert management time and attention. Further, our unpatented proprietary processes, software, designs and trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. While we generally enter into confidentiality agreements with such persons to protect our intellectual property, we cannot assure you that our confidentiality agreements will not be breached, that they will provide meaningful protection for our proprietary technology and trade secrets or that adequate remedies will be available in the event they are used or disclosed without our authorization. Also, intellectual property rights are difficult to enforce in the People’s Republic of China, or PRC, and certain other countries, particularly in Asia, where the application and enforcement of the laws governing such rights may not have reached the same level as compared to other jurisdictions where we operate, such as Europe and the United States. Consequently, because we operate in these countries and all of our manufacturing, test and assembly takes place in Taiwan and Singapore, we may be subject to an increased risk that unauthorized parties may attempt to copy or otherwise use our intellectual property or the intellectual property of our suppliers or other parties with whom we engage or have licenses.
There can be no assurance that we will be able to protect our intellectual property rights, that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable, or that we will have adequate legal recourse in the event that we seek legal or judicial enforcement of our intellectual property rights. Any inability on our part to adequately protect or enforce our intellectual property may harm our business, financial condition and results of operations. We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights to protect these rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel, and we may not prevail in making these claims.
Assertions by third parties of infringement by us or our customers of their intellectual property rights could result in significant costs and cause our operating results to suffer.
The markets in which we compete are characterized by rapidly changing products and technologies and there is intense competition to establish intellectual property protection and proprietary rights to these new products and the related technologies. The semiconductor and wireless communications industries, in particular, are characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies.
We may be unaware of the intellectual property rights of others that may cover some of our technology, products and services. In addition, third parties may claim that we or our customers are infringing or contributing to the infringement of their intellectual property rights.
We have in the past received and, particularly as a public company operating in a highly competitive marketplace, we expect that in the future we will receive communications and offers from various industry participants and others alleging that we infringe or have misappropriated their patents, trade secrets or other intellectual property rights and/or inviting us to license their technology and intellectual property. Any lawsuits resulting from such allegations of infringement or invitations to license, including suits challenging LTE standards, could subject us to significant liability for damages and/or challenge our activities. Any potential intellectual property litigation also could force us to do one or more of the following:
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stop selling products or using technology that contain the allegedly infringing intellectual property;
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lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;
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incur significant legal expenses;
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing intellectual property; or
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
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Our customers could also become the target of litigation relating to the patents and other intellectual property rights of others. This could, in turn, trigger an obligation for us to provide technical support and/or indemnify such customers. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with our customers and cause the sale of our products to decrease. We cannot assure you that claims for indemnification will not be made or that if made, such claims would not materially harm our business, operating results or financial conditions.
Any potential dispute involving our patents or other intellectual property could also include our industry partners and customers, which could trigger our indemnification obligations to them and result in substantial expense to us.
In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation, and certain customers have received notices of written offers from our competitors and others claiming to have patent rights in certain technology and inviting our customers to license this technology. Because we indemnify our licensees and customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations in some of our license agreements, which could result in substantial payments and expenses by us. In addition to the time and expense required for us to supply support or indemnification to our licensees and customers, any such litigation could severely disrupt or shut down the business of our customers, which in turn could hurt our relations with our customers and cause the sale of our proprietary technologies and products to decrease.
Our failure to comply with obligations under open source licenses could require us to release our source code to the public or cease distribution of our products, which could harm our business, financial condition and results of operations.
Some of the software used with our products, as well as that of some of our customers, may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to make available derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the licenses we customarily use to protect our intellectual property. In addition, there is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the determination of which works are subject to the terms of such licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.
The complexity of our semiconductor solutions could result in unforeseen delays or expenses from undetected defects or design errors in hardware or software, which could reduce the market acceptance for our semiconductor solutions, damage our reputation with current or prospective customers and increase our costs.
Highly complex semiconductor solutions such as ours can contain defects and design errors, which, if significant, could impair performance or prevent compliance with industry standards. We have not in the past, but may in the future, experience such significant defects or design errors. In addition, our semiconductor solutions must be certified by individual wireless carriers that such solutions function properly on the carrier’s network before our solutions can be designed into a particular product. If any of our semiconductor solutions have reliability, quality or compatibility problems from defects or design errors we may not be able to successfully correct these problems in a timely manner, or at all. Furthermore, we may experience production delays and increased costs correcting such problems. Issues in the carrier certification process, which varies among carriers, may also create delays. Consequently, and because our semiconductor solutions are a critical component of our customers’ products, our reputation may be irreparably damaged and customers may be reluctant to buy our semiconductor solutions, which could harm our ability to retain existing customers and attract new customers and harm our financial results. In addition, these defects or design errors or delays in the carrier certification process could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new semiconductor solution, we may be required to incur additional development costs and product recalls, repairs or replacement costs. Furthermore, we provide warranties on our products ranging from one to two years, and thus may be obligated to refund sales with respect to products containing defects, errors or bugs. These problems may also result in claims against us by our customers or others, all of which could damage our reputation and increase our costs.
The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing employees could impair our ability to grow our business.
We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled management, engineering and sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel could delay the development and
introduction of and harm our ability to sell our semiconductor solutions. We believe that our future success is dependent on the contributions of Georges Karam, our co-founder and chief executive officer, and Bertrand Debray, our co-founder and chief operating officer. The loss of the services of Dr. Karam, Mr. Debray, other executive officers or certain other key personnel could materially harm our business, financial condition and results of operations. For example, if any of these individuals were to leave unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for any such successor and while any successor is integrated into our business and operations.
Our key technical and engineering personnel represent a significant asset and serve as the source of our technological and product innovations. We plan to recruit additional design and application engineers with expertise in wireless broadband communications technologies. We may not be successful in attracting, retaining and motivating sufficient technical and engineering personnel to support our anticipated growth. In addition, to expand our customer base and increase sales to existing customers, we will need to hire additional qualified sales personnel. The competition for qualified marketing, sales, technical and engineering personnel in our industry is very intense. If we are unable to hire, train and retain qualified marketing, sales, technical and engineering personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenue will be harmed.
Rapidly changing standards could make our semiconductor solutions obsolete, which would cause our operating results to suffer.
We design our semiconductor solutions to conform to standards set by industry standards bodies such as the Institute of Electrical and Electronics Engineers, Inc. (IEEE), the 3rd Generation Partnership Project (3GPP) and Open Mobile Alliance (OMA). We also depend on industry groups such as the Global Certification Forum (GCF) and the PTS Type Certification Review Board (PTCRB) to help certify and maintain certification of our semiconductor solutions. If our customers adopt new or competing industry standards that are not compatible with our semiconductor solutions, if industry groups fail to adopt standards compatible with our semiconductor solutions or if our customers are requiring chip certifications that we did not design our products for, our existing semiconductor solutions would become less desirable to our customers and our sales would suffer. The emergence of markets for our products is affected by a variety of factors beyond our control. In particular, our semiconductor solutions are designed to conform to current specific industry standards. Competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures to develop new semiconductor solutions. For example, as we expand into the Internet of Things market, we expect to face additional competition from companies such as SIGFOX or others using LoRa Wireless RF technology, a long range, low power consumption and data transmission protocol for Internet of Things devices. Wireless carriers have recently started testing 5G technology, the next phase of mobile telecommunications standards, which is expected to be introduced to the market by 2020. If we are unable to successfully develop or commercialize products for the 5G standard, our semiconductor solutions could become obsolete, which would cause our sales and financial results to suffer. Governments and foreign regulators may adopt standards that are incompatible with our semiconductor solutions, favor alternative technologies or adopt stringent regulations that would impair or make commercially unviable the deployment of our semiconductor solutions. In addition, existing standards may be challenged as infringing upon the intellectual property rights of other companies or may become obsolete.
We outsource our assembly, testing, warehousing and shipping operations to third parties, and if these parties fail to produce and deliver our products in a timely manner and in accordance with our specifications, our reputation, customer relationships and operating results could suffer.
We rely on third parties for the assembly, testing, warehousing and shipping of our products. We rely on United Test and Assembly Center Ltd., or UTAC; Siliconware Precision Industries Limited, or SPIL; StatschipPac Limited, or SPC; and other third-party assembly and test subcontractors for assembly and testing. We further rely on a single company for logistics and storage. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We are unable to maintain the same level of oversight and control of these outsourced operations as we would if we were to conduct them internally.
The services provided by these vendors could be subject to disruption for a variety of reasons, including natural disasters, such as earthquakes, labor disputes, power outages, or if our relationship with a vendor is damaged. If we experience problems at a particular location, we would be required to transfer the impacted services to a backup vendor, which could be costly and require a significant amount of time. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications, which may not be possible or cost effective. Further, we do not have any long-term agreements with any of these vendors. If one or more of these vendors terminates its relationship with us, allocates capacity to other customers or if we encounter any problems with our supply chain, it could harm our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.
Certain natural disasters, such as coastal flooding, large earthquakes or volcanic eruptions, may negatively impact our business. Any disruption to the operations of our foundry and assembly and test subcontractors could cause significant delays in the production or shipment of our products.
If coastal flooding, a large earthquake, volcanic eruption or other natural disaster were to directly damage, destroy or disrupt TSMC’s manufacturing facilities or the facilities of our test and assembly contractors, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. For example, substantially all of our semiconductor solutions are manufactured and assembled by third-party contractors located in Taiwan and Singapore. The risk of an earthquake or tsunami in Taiwan or Singapore, such as the major earthquakes that occurred in Taiwan in June 2003, December 2006 and February 2016, and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines to the facilities of our foundry vendor and assembly and test subcontractors. Even if these facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains. Although our third-party contractors did not suffer any significant damage as a result of the most recent earthquakes, the February 2016 earthquake caused shipment delays in the first
and second quarter of 2016, and the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry vendor or assembly and test capacity. For instance, the recent earthquake and tsunami in Japan, though it did not directly cause damage to any of our third-party contractors, may impair the ability of such contractors to procure components from vendors in Japan, and alternative suppliers may not be available in a timely manner or at all, and may impair the ability of our customers to procure components other than ours that are necessary to their production process, which in turn could result in a slowing of their production and consequently of purchases of our products. Any disruption resulting from such events could cause significant delays in the production or shipment of our semiconductor solutions as well as significant increases in our transportation costs until we are able to shift our manufacturing, assembling or testing from an affected contractor to an alternative vendor.
We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs.
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries and to achieve higher levels of design integration. These ongoing efforts require us from time to time to modify the manufacturing processes for our semiconductor solutions and to redesign some solutions, which in turn may result in delays in product deliveries. We periodically evaluate the benefits of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and increased expenses as we transition our products to new processes. We depend on our relationship with TSMC and our test and assembly subcontractors to transition to new processes successfully. We cannot assure you that TSMC or our test and assembly subcontractors will be able to effectively manage the transition or that we will be able to maintain our relationship with TSMC or our test and assembly vendors or develop relationships with new foundries and vendors if necessary. If TSMC, any of our subcontractors or we experience significant delays in transitioning to smaller geometries or fail to efficiently implement transitions, we could experience reduced manufacturing yields, or delays in product deliveries and increased costs, all of which could harm our relationships with our customers, our margins and our operating results. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as end-customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely or cost-effective basis.
Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products or otherwise harm our business.
Wireless networks can only operate in the spectrum allowed by regulators and in accordance with rules governing how that spectrum can be used. Regulators in various countries have broad jurisdiction over the allocation of spectrum for wireless networks, and we therefore rely on these regulators to provide sufficient spectrum and usage rules. For example, countries such as China, India, Japan or Korea heavily regulate all aspects of their wireless communication industries, and may restrict spectrum allocation or usage. If further restrictions were to be imposed over the frequency bands where our semiconductor solutions are designed to operate, we may have difficulty selling our products in those regions. In addition, our semiconductor solutions operate in the 2.5 and 3.5 gigahertz, or GHz, bands, which in some countries is also used by government and commercial services such as military and commercial aviation. European and United States regulators have traditionally protected government uses of the 2.5 and 3.5 GHz bands by setting power limits and indoor and outdoor designation and requiring that wireless local area networking devices not interfere with other users of the band such as government and civilian satellite services. Changes in current laws or regulations or the imposition of new laws and regulations in the markets in which we operate regarding the allocation and usage of the 2.5 and 3.5 GHz band may harm the sale of our products and our business, financial condition and results of operations.
Adverse outcomes in tax disputes could subject us to tax assessments and potential penalties.
From time to time, we are subject to tax audits that could result in tax assessments and potential penalties, particularly with respect to claimed research tax credits due to the judgment involved in determining which projects meet the tax code’s criteria for innovation and fundamental research. For example, in May 2015, we received notification from the United Kingdom tax authorities that they made inquiries regarding the calculation method used in 2014 UK research tax credit and discussions with the authorities are ongoing. We disagreed with the tax authorities’ position and defended our position, but ultimately the tax authorities' position prevailed and we settled the matter in 2016 for approximately the amount of the provision recorded in 2015: £170,000 ($252,000). Our actual costs for any disputes in the future may be materially different from the provisions recorded if we are not successful in our appeal of any assessment, which could have a material adverse effect on our business.
Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. Some of these metals are commonly used in electronic equipment and devices, including our products. Depending on various circumstances, these new requirements will require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. We have an extremely complex supply chain, with numerous suppliers (many of whom are not obligated by the new law to investigate their own supply chains) for the components and parts used in each of our products. As a result, we may incur significant costs to comply with the diligence and disclosure requirements, including costs related to determining the source of any of the relevant metals used in our products. In addition, because our supply chain is so complex, we may not be able to sufficiently verify the origin of all the relevant metals used in our products through the due diligence procedures that we implement, which may harm our business reputation. We may also face difficulties in satisfying customers if they require that we prove or certify that our products are “conflict free.” Key components and parts that can be shown to be “conflict free” may not be available to us in sufficient quantity, or at all, or may only be available at significantly higher cost to us. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier. Any of these outcomes could adversely impact our business, financial condition or results of operations.
Fluctuations in foreign exchange rates may harm our financial results.
Our functional currency is the U.S. dollar. Substantially all of our sales are denominated in U.S. dollars and the payment terms of all of our significant supply chain vendors are also denominated in U.S. dollars. We incur operating expenses and hold assets and liabilities denominated in currencies other than the U.S. dollar, principally the euro, and to a lesser extent the British pound sterling, the Chinese yuan and the New Israeli shekel. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, primarily the U.S. dollar to euro exchange rate. As we grow our operations, our exposure to foreign currency risk could become more significant. If there had been a 10% increase or decrease in the exchange rate of the U.S. dollar to the euro, we estimate the impact, in absolute terms, on operating expenses for the year ended
December 31, 2016
would have been $2.2 million. Our exposure to foreign currency risk may change over time as business practices evolve and economic conditions change, including, for example, sudden global economic conditions resulting from measures like the referendum in the United Kingdom in June 2016, which resulted in a vote in favor of exiting the European Union, commonly referred to as “Brexit.”
We enter into foreign currency hedging contracts primarily to reduce the impact of variations in the U.S. dollar to euro exchange rate on our operating expenses denominated in euros. However, hedging at best reduces volatility and helps to lock in a target rate for the following six to twelve months but cannot eliminate the fundamental exposure and may not be effective.
Our business and operations could suffer in the event of security breaches.
Attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated. These attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. Hackers may also develop and deploy viruses, worms and other malicious software programs that attack or otherwise exploit security vulnerabilities in our systems or products. Attacks may create system disruptions, cause shutdowns or result in the corruption of our engineering data, which could result in delays in product development or software updates and harm our business. Additionally, the theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any security breach results in inappropriate disclosure of our customers’ or business partners’ confidential information, we may incur liability as a result. We seek to detect and investigate all security incidents and to prevent their recurrence, but in some cases, we might be unaware of an incident or its magnitude and effects. While we have identified some incidents involving attempts at unauthorized access, we are not aware of any that have succeeded. We expect to continue to devote resources to the security of our information technology systems.
Our global operations are subject to risks for which we may not be adequately insured.
Our global operations are subject to many risks including errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters. No assurance can be given that we will not incur losses beyond the limits or outside the scope of coverage of our insurance policies. From time-to-time, various types of insurance may not be available on commercially acceptable terms or, in some cases, at all. We cannot assure you that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially. We maintain limited insurance coverage and in some cases no coverage for natural disasters and sudden and accidental environmental damages as these types of insurance are
sometimes not available or available only at a prohibitive cost. Accordingly, we may be subject to an uninsured or under-insured loss in such situations.
Risks Related to Ownership of Our Shares and ADSs
Fluctuations in our operating results on a quarterly or annual basis and difficulty predicting our quarterly operating results could cause the market price of the ADSs to decline.
Our revenue and operating results have fluctuated significantly from period to period in the past and will do so in the future. As a result, you should not rely on period-to-period comparisons of our operating results as an indication of our future performance. In future periods, our revenue and results of operations may be below the expectations of analysts and investors, which could cause the market price of the ADSs to decline.
Factors that may cause our operating results to fluctuate include:
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reductions in orders or cancellations by our customers;
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changes in the size, growth or growth prospects of the LTE and Internet of Things markets;
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changes in the competitive dynamics of our market, including new entrants or pricing pressures, and our ability to compete in the LTE market;
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timing and success of commercial deployments of and upgrades to 4G wireless networks;
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timely availability, at a reasonable cost, of adequate manufacturing capacity with the sole foundry that manufactures our products;
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our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;
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timing and growth rate of revenues from the LTE market;
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changes in manufacturing costs, including wafer, test and assembly costs, mask costs and manufacturing yields;
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the timing of product announcements by competitors or us; and
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costs associated with litigation, especially related to intellectual property.
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Moreover, sales of our semiconductor solutions fluctuate from period to period due to cyclicality in the semiconductor industry and the short product life cycles and wide fluctuations in product supply and demand characteristic of this industry. We expect these cyclical conditions to continue. Due to our limited operating history, we have yet to experience an established pattern of seasonality. However, business activities in Asia generally slow down in the first quarter of each year during the lunar new year period, which could harm our sales and results of operations during the period. Our expense levels are relatively fixed in the short-term and are based, in part, on our future revenue projections. If revenue levels are below our expectations, we may experience declines in margins and profitability or incur a loss from our operations. As a result, our quarterly operating results are difficult to predict, even in the near term, which may result in our revenue and results of operations being below the expectations of analysts and investors and which could cause the market price of the ADSs to decline.
If securities or industry analysts cease to publish research reports about us or our industry, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
The trading market for the ADSs is influenced by research reports that industry or securities analysts publish about us or our industry. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of the ADSs appreciates.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any recommendation by our board of directors to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of the ADSs falls in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends. In addition, even if we were to pay a dividend on our ordinary shares, French law may prohibit paying such dividends to holders of the ADSs or the tax implications of such payments may significantly diminish what you receive.
French law may limit the amount of dividends we are able to distribute and exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.
Although our consolidated financial statements are denominated in U.S. dollars, under French law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements under the French commercial code in accordance with generally accepted accounting principles in France, which we refer to as French GAAP. Therefore, we may be more restricted in our ability to declare dividends than companies not based in France. In addition, exchange rate fluctuations may affect the amount of euros that we are able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. These factors could harm the value of the ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of the ADSs.
You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us and (ii) a statement as to the manner in which instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary share so that you can vote them yourself. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
You may be subject to limitations on the transfer of your ADSs.
Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company; our ordinary shares are not listed, and we do not intend to list our shares, on any market in France, our home country. This may limit the information available to holders of the ADSs.
We are a “foreign private issuer”, as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act, including the U.S. proxy rules under Section 14 of the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we have and expect to continue to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies and are not required to file quarterly reports on Form 10-Q or current reports on Form 8-K under the Exchange Act. Furthermore, our ordinary shares are not listed and we do not currently intend to list our ordinary shares on any market in France, our home country. As a result, we are not subject to the reporting and other requirements of listed companies in France. For instance, we are not required to publish quarterly or semi-annual financial statements. Accordingly, there is less publicly available information concerning our company than there would be if we were a U.S. public company.
As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from NYSE corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with NYSE corporate governance listing standards.
As a foreign private issuer listed on the NYSE, we are subject to NYSE corporate governance listing standards. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in France, which is our home country, may differ significantly from NYSE corporate governance listing standards. For example, neither the corporate laws of France nor our by-laws require a majority of our directors to be independent and we could include non-independent directors as members of our compensation committee and nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Currently, we intend to comply with the NYSE corporate governance listing standards to the extent possible under French law. However, if we choose to change such practice to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under NYSE corporate governance listing standards applicable to U.S. domestic issuers.
U.S. holders of the ADSs may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. To determine if at least 50% of our assets are held for the production of, or produce, passive income, we may use the market capitalization method for certain periods. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of the ADSs has fluctuated substantially and is likely to fluctuate in the future, and the market price may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any taxable year. While we do not believe we were a PFIC for 2016, there is no assurance that we will not be a PFIC in 2017 or later years. If we are characterized as a PFIC, U.S. holders of the ADSs may suffer adverse tax consequences, including having gains realized on the sale of the ADSs treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on the ADSs by individuals who are U.S. holders, having interest charges apply to distributions by us and the proceeds of ADS sales and additional reporting requirements. We do not expect to provide to U.S. holders the information needed to report income and gain pursuant to a “qualified electing fund” election, which election would alleviate some of the adverse tax consequences of PFIC status, and we make no undertaking to provide such information in the event that we are a PFIC. See “Item 10.E—Taxation—Material United States Federal Income Tax Consequences.”
You may be unable to recover in civil proceedings for U.S. securities laws violations.
We are a corporation organized under the laws of France. The majority of our directors are citizens and residents of countries other than the United States, and the majority of our assets are located outside of the United States. Accordingly, it may be difficult for investors to obtain jurisdiction over us or our directors in courts in the United States and enforce against us or them judgments obtained against us or them. In addition, we cannot assure you that civil liabilities predicated upon the federal securities laws of the United States will be enforceable in France.
The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.
We are a French company with limited liability. Our corporate affairs are governed by our by-laws and by the laws governing companies incorporated in France. The rights of shareholders and the responsibilities of members of our board of directors are in many ways different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a stockholder.
Our by-laws and French corporate law contain provisions that may delay or discourage a takeover attempt.
Provisions contained in our by-laws and the corporate laws of France, the country in which we are incorporated, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. In addition,
provisions of our by-laws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. These provisions include the following:
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our shares are in registered form only and we must be notified of any transfer of our shares in order for such transfer to be validly registered;
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our by-laws provide for directors to be elected for three year terms, and we intend to elect one third of the directors every year;
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our shareholders may grant our board of directors broad authorizations to increase our share capital;
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our board of directors has the right to appoint directors to fill a vacancy created by the resignation, death or removal of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;
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our board of directors can only be convened by its chairman except when no board meeting has been held for more than two consecutive months;
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our board of directors meetings can only be regularly held if at least half of the directors attend either physically or by way of secured telecommunications;
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approval of at least a majority of the shares entitled to vote at an ordinary shareholders’ general meeting is required to remove directors with or without cause;
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advance notice is required for nominations for election to the board of directors or for proposing matters that can be acted upon at a shareholders’ meeting; and
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the sections of the by-laws relating to the number of directors and election and removal of a director from office may only be modified by a resolution adopted by 66 2/3% of our shareholders present or represented at the meeting.
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The exercise or conversion of outstanding stock options, founders warrants, restricted shares, warrants and convertible notes into ordinary shares will dilute the percentage ownership of our other shareholders and the sale of such shares may adversely affect the market price of the ADSs.
As of
December 31, 2016
, there were outstanding stock options, founders warrants, restricted shares and warrants to purchase an aggregate of approximately 7.8 million of our ordinary shares, and more restricted shares, options and warrants will likely be granted in the future to our officers, directors, employees and consultants. We also have outstanding two issuances of convertible notes, the first of which may be converted into 7.3 million ADSs at a conversion price of $1.85 per ADS and the second of which may be converted into 2.8 million ADSs at a conversion price of $2.7126 per ADS. We may issue additional warrants or convertible notes in connection with acquisitions, borrowing arrangement or other strategic or financial transactions. The exercise of outstanding stock options, warrants, or convertible notes, and the vesting of restricted shares, will dilute the percentage ownership of our other shareholders. The exercise of these options, warrants and convertible notes and the vesting of restricted shares, with the subsequent sale of the underlying ordinary shares could cause a decline in the market price of the ADSs.
If we raise additional capital in the future, your ownership in us could be diluted.
Any issuance of equity we may undertake in the future to raise additional capital could cause the price of the ADSs to decline, or require us to issue shares or ADSs at a price that is lower than that paid by holders of our shares or ADSs in the past, which would result in those newly issued shares or ADSs being dilutive. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these securities would likely have rights senior to your rights as an ADS holder, which could impair the value of the ADSs.
Item 4. Information on the Company
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History and Development of the Company
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Our History
Sequans Communications S.A. was incorporated as a
société anonyme
under the laws of the French Republic on October 7, 2003, for a period of 99 years. We are registered at the Nanterre Commerce and Companies Register under the number 450 249 677. Our principal executive offices are located at 15-55 boulevard Charles de Gaulle, 92700 Colombes, France, and our telephone number is +33 1 70 72 16 00. Our agent for service of process in the U.S. is GKL Corporate/Search, Inc., One Capitol Mall, Suite 660, Sacramento, California 95814.
Our website is
www.sequans.com
. The information on, or that can be accessed through, our website is not part of this annual report.
As of the date of this annual report, there has been no indication of any public takeover offers by third parties in respect of our ADSs or ordinary shares or by the Company in respect of other companies’ shares.
Principal Capital Expenditures
Our capital expenditures for the years ended December 31,
2014
,
2015
and
2016
amounted to $6.2 million, $5.5 million and $5.4 million, respectively. These investments in property and equipment and intangible assets primarily consisted of purchases related to LTE product development and, to a lesser extent in 2014, leasehold improvements and furnishing for our new corporate office. We anticipate our capital expenditures in the year ended December 31, 2017 to be for ongoing LTE product development. We anticipate our capital expenditure in 2017 to be financed from our cash on hand plus financing from strategic alliances, R&D project financing and/or debt. Should we decide to broaden our product range by acquiring or developing complementary technologies, we would need additional capital expenditures in order to support development of multi-mode products.
Overview
We are a fabless designer, developer and supplier of 4G LTE semiconductor solutions for wireless mobile broadband applications, with a specific focus on the single-mode device market. Our solutions incorporate baseband processor and radio frequency, or RF, transceiver integrated circuits, or ICs, along with our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low power consumption and high reliability in a small form factor and at a competitive price.
We believe the single-mode LTE, or LTE-only, device market is a potentially large and under served segment of the overall LTE device market, and that these devices are characterized by attractive attributes not typically found in the traditional multi-mode device market, which include legacy 2G and 3G wireless technologies. Specifically, we believe there are significant advantages in size, power consumption, product cost, development costs and certification costs for our customers producing LTE-only devices compared to their more expensive, larger, more power hungry and more complex multi-mode counterparts. Furthermore, we believe a growing proportion of cellular-connected “Internet of Things” (IoT) devices, such as industrial machine-to-machine (M2M) devices, will integrate 4G LTE connectivity solutions as result of the announced or expected shutdowns of many 2G networks and the longevity and technical advantages of 4G LTE in this market. In addition, the completion of 3GPP Release 13 in 2016 ratified two new LTE categories targeting low complexity, low data-use machine-type communications. LTE-M (also known as LTE Cat M) and NB-IoT (also known as Cat NB1) enable dramatically better power efficiency, reduced module costs and better coverage for M2M and IoT devices compared to traditional LTE or even 2G or 3G solutions. As a result, we believe that the LTE-only market will continue to increase, especially as operators fully deploy their LTE networks, as the volume of data traffic continues to grow, and as the IoT market adopts the new connectivity technologies. We believe our LTE solutions are among the most highly optimized, efficient and mature solutions in the industry, and that they are differentiated from those of both the multi-mode solutions providers and from rivals providing single-mode 4G LTE solutions.
We have successfully brought to market seven generations of 4G wireless chipsets, including four generations of LTE chipsets. The cost, size and power efficiency of our LTE chip designs, coupled with our deep understanding of system-level architecture, our advanced wireless signal processing intellectual property and our RF expertise, enable us to provide high-performance, low-power and cost-efficient 4G semiconductor solutions, allowing us to target a wide range of wireless broadband and IoT devices. In the broadband data device market, our solutions serve as the core wireless communications platform in these devices, including USB dongles; portable routers; embedded wireless modems for computing and multimedia devices; and customer-premises equipment, such as fixed wireless broadband access modems, routers and residential gateways. In the Internet of Things device markets, our solutions provide connectivity for machine-to-machine devices and sensors in transportation, security, asset tracking, retail, smart energy, smart city, agriculture, healthcare and other applications. We also expect to see strong growth in the IoT market in consumer applications such as wearables and personal and property trackers.
From 2005 through
December 31, 2016
, we shipped approximately 22.9 million 4G baseband-based semiconductor
solutions, which have been deployed by leading wireless carriers around the world. Until the end of 2012, our shipments were primarily 4G WiMAX products. Since 2012, shipments of our LTE products exceeded our WiMAX shipments, and we ceased shipments of WiMAX in 2015.
Given that LTE and WiMAX share a common technology platform, we leveraged our leadership in WiMAX to successfully develop highly competitive LTE semiconductor solutions that are being deployed globally. Our LTE solutions are
currently in commercial deployments in the United States, Canada, Italy, United Kingdom, Indonesia, Malaysia, Philippines, China, South Korea, India, Australia, Brazil and elsewhere.
Our LTE product line comprises two families: our StreamrichLTE
TM
family addresses the high-performance, feature-rich broadband device segment, while the StreamliteLTE
TM
family is designed specifically to address the unique price/performance requirements of the “Internet of Things” market, including connected consumer electronics and machine-to-machine devices. The figure below highlights our portfolio strategy, which allows us to target a variety of applications with purpose-built, price/performance-optimized chipset solutions.
In 2013, we introduced the EZLinkLTE
TM
family of LTE modules, which provide all-in-one connectivity solutions designed to simplify the task, and reduce the cost, of embedding LTE into mobile computers, tablets, and machine-to-machine devices. Several different EZLinkLTE modules have been certified by Verizon Wireless for use on their LTE network, and are shipping in various commercial devices for the Verizon Wireless LTE network. In addition, EZLinkLTE modules have been approved for use by AT&T and T-Mobile US. The module strategy was put in place primarily to seed the market with our technology and accelerate time-to-market for us and our customers during a period when traditional cellular module vendors were not providing LTE-only solutions. We have seen this shift significantly over the past two years, with multiple module vendors now offering LTE-only modules. It is our goal to increasingly rely on module vendors to provide these solutions, allowing us to focus our sales on chipsets.
The research firm Strategy Analytics projects that the number of LTE devices shipped annually will increase from 1.24 billion in 2016 to 2.1 billion in 2021, representing a CAGR of approximately 11%. Over 9.9 billion LTE devices are expected to ship over this timeframe, and according to Strategy Analytics, more than 1.3 billion of them will be single-mode LTE devices, about one quarter of them in the Internet of Things market. The firm goes on to project that the single-mode LTE device market will grow at a CAGR of nearly 88% in this period to reach annual shipments of 563 million units in 2021, with nearly half of the 2021 shipments coming in devices for the Internet of Things market.
Our LTE solutions are incorporated into devices sold by many leading OEMs and ODMs, including in the Verizon Wireless Ellipsis Jetpack MHS800L and MHS815L portable routers, the Gemalto Cinterion
®
ELS31 LTE Category 1 industrial M2M module, the Encore Networks EN-1000 industrial router and in a variety of devices and modules produced by Autonet, Baicells, Fibocom, Gemtek, Geotab, Huawei, LinkLabs, Netcomm, Nimbelink, Orion Labs, USI, Wistron NeWeb, Wivity, ZMTel, ZTEWeLink and others.
Our total revenue increased from $22.6 million in 2014 to $32.5 million in 2015 to $45.6 million in 2016, and our annual net loss decreased from $34.1 million in 2014 to $27.4 million in 2015 to $24.8 million in 2016.
Industry Background
Evolution of Wireless Networks
The use of wireless communications devices has increased dramatically in the past decade, and mobile phones and wireless data services have become an integral part of day-to-day communication. According to the February 2017 Cisco
®
Visual Networking Index, mobile data traffic is expected to grow more than seven-fold from 2016 to 2021, a compound annual growth rate of 47%, and by 2021 over 79% of this data will run on 4G networks.
This increase in wireless data traffic is driven by two primary trends. First, the pervasiveness of the Internet with its vast array of rich media content and applications along with users’ desire to be connected anywhere and anytime using a variety of different wireless devices is driving a fundamental change in wireless data usage models and increasing demand for high speed
wireless data connectivity. Second, rapid advances in performance and functionality have resulted in mobile phones evolving from solely voice-centric communications devices into data-intensive devices, such as smartphones and tablets, that support high-definition video, bandwidth-intensive Internet applications and streaming multimedia content, all of which require additional wireless network throughput. As a result, wireless carrier networks using 2G or 3G technology, originally designed primarily for voice traffic, strained to reliably handle the dramatic increase in wireless broadband data demand. This has been a major driver of the rapid shift by operators in many regions to 4G LTE technology to better meet this demand.
Wireless technologies have evolved through successive generations of protocols driven by the need for more efficient networks with greater bandwidth and capacity to handle a rising number of subscribers and increasing usage of broadband data services. Launched in 1991, 2G wireless networks, based on the Global System for Mobile Communications, or GSM, standard, and later the IS-95 standard based on Code Division Multiple Access, or CDMA, technology, were the first mobile telephone networks to use digital technology to digitize and compress voice traffic for more efficient use of spectrum bandwidth. These networks were designed primarily to support voice traffic, although ultimately they were capable of supporting data rates up to 64 kilobits per second, or Kbps, using a circuit-switched data connection.
In the late 1990s, 3rd Generation Partnership Project, or 3GPP, began defining 3G networks based on the Universal Mobile Telecommunications System, or UMTS, standard. The first UMTS networks were established in the early 2000s and ultimately supported peak downlink data rates of 28 Mbps and higher. In parallel to these 3GPP efforts, 3rd Generation Partnership Project 2, or 3GPP2, defined the specifications for CDMA2000, which supported 1xEV-DO (EVolution Data Only) implementations capable of up to 3.1 Mbps downlink speeds.
Despite the advances in data rates provided by these improvements on both the 3GPP and 3GPP2 paths, these 2G and 3G networks remain constrained by legacy technologies that were designed primarily for voice traffic, which are characterized by limited throughput and inefficient utilization of spectrum. Unable to effectively address the fast growing demand for wireless broadband data services in a cost effective manner using legacy 2G and 3G networks, most wireless carriers have moved to what are commonly referred to as ‘4G’ networks using LTE technology, which provide much higher peak downlink and uplink speeds in a more spectrally-efficient manner. The first version of the 3GPP LTE specification, Release 8, defined four User Equipment (UE) categories, or performance levels. UE Category 1 provides peak downlink speeds of 10 Mbps, and uplink of 5 Mbps. UE Category 2 provides 50 Mbps downlink and 25 Mbps uplink, while Categories 3 and 4 deliver 100 Mbps and 150 Mbps downlink, respectively, each with a peak uplink speed of 50 Mbps. In subsequent releases of the 3GPP LTE specifications, Releases 10 and later), called LTE-Advanced, additional improvements in features and performance were specified. These LTE-Advanced networks are already deployed by at least 187 operators worldwide, according to a February 2017 report by the Global Mobile Suppliers Association. The initial versions of LTE-Advanced can provide as much as 300 Mbps of downlink speed (3GPP Release 10 UE Category 6), with subsequent versions providing downlink speeds of up to 600 Mbps and peak uplink speeds of up to 100 Mbps (3GPP Release 12 User Equipment Category 12). More recently several UE Categories (16 and above, introduced as part of 3GPP Release 12 and 13) have specified speeds up to or exceeding 1 gigabit per second (Gbps). These higher speed categories involve aggregating multiple carriers, applying higher-order MIMO antenna technology, and more advanced modulation techniques.
The figure below provides a simplified perspective on the evolution of wireless technologies providing ever-increasing performance:
Wireless carriers are seeking to quickly deploy and transition existing wireless data services to more efficient 4G networks, which require less capital expenditure for a given amount of data throughput. At the same time, potential average revenue per account, or ARPA, can be increased by providing value-added mobile broadband services and solutions that are better enabled by the speed and performance of 4G networks. According to the February 2017 Cisco
®
Visual Networking Index, mobile video will increase 8.7-fold between 2016 and 2021, accounting for 78% of total mobile data traffic, which is particularly problematic for legacy networks to support economically. These factors are key drivers of the move by mobile network operators to LTE technology.
Additionally, carriers in developing regions are increasingly embracing 4G wireless technology as a cost-effective and easier-to-deploy alternative to wireline networks for delivering broadband capability to subscribers. According to a 2016 report by the International Telecommunications Union, developing regions of the world had only 8.2 wired broadband subscriptions per 100 inhabitants, about 72% below that of developed regions. 4G wireless technology is being deployed in many of these developing regions to increase access to broadband services. This trend is expected to continue, especially as the higher UE category implementations approach gigabit per second performance levels.
While increasing demand for mobile and fixed broadband connectivity is driving LTE technology along a performance vector, the emerging IoT market is pushing wireless technology along a different vector. Many M2M and IoT applications are moving to LTE connectivity for its expected longevity, and because the technology is being optimized for improved coverage, reduced power consumption and lower cost. Many machine-to-machine connections are of the “set it and forget it” variety, and are expected to remain operational for ten or more years, sometimes powered by a battery. According to the February 2017 Cisco
®
Visual Networking Index, global M2M traffic is expected to grow at a 70% CAGR from 2016 to 2021, and over 3.3 billion M2M modules are expected to be connected by 2021. The overall surge in the number of mobile and M2M connections and the traffic they produce, coupled with the relative scarcity of available wireless spectrum, has prompted a number of operators, including AT&T in the United States and others in South Korea and Japan, to shut down their aging 2G networks so they can re-farm the spectrum for use with 4G LTE technology. As a result, many new machine-to-machine and “Internet of Things” device deployments are incorporating LTE technology, despite the fact that some may not need the throughput performance provided by traditional LTE UE Categories.
Recently, the industry has introduced new variants of LTE which optimize for low power consumption and reduced complexity, rather than high speed, in order to address the needs of machine-to-machine and other connected objects in the Internet of Things. Specifically, in 2015 and 2016, LTE Category 1, with a peak downlink speed of 10 Mbps, was deployed by
operators such as Verizon, T-Mobile, AT&T and NTT DoCoMo to enable their IoT and M2M customers to move from legacy 2G and 3G technology to LTE.
Meanwhile, 3GPP has defined LTE-based standards for Machine-Type Communications (MTC), introducing narrower bandwidths, reduced complexity, reduced throughput, improved coverage and reduced power modes to the LTE standard. These new MTC features began to be introduced in 3GPP Release 12, with further additions and optimizations in Release 13. The optimizations are summarized in the graphic below.
3GPP Release 13, completed in mid-2016, introduced LTE-M, also called LTE Category M1, featuring 1.4 MHz bandwidth and peak speeds under 1 Mbps; and it also introduced a narrowband IoT (NB-IoT) category, also called Category NB1, with 200 kHz bandwidth and peak speeds under 200 kbps. These new categories provide excellent power efficiency, enabling years-long battery life for the devices they connect. They also provide superior network coverage and reduced module costs compared to their predecessor technologies, including traditional LTE, 2G and 3G. In addition, these new technologies are compatible with existing LTE networks, generally via a software upgrade to the network infrastructure already deployed, and they can operate on the same spectrum already deployed by LTE operators. This combination of attributes is expected to drive significant demand for these technologies in M2M and IoT applications. The graphic below depicts how various LTE categories might map to a range of IoT applications.
4G Wireless Networks
4G architecture represents a fundamental technological change in the design of wireless communication networks. 2G and 3G networks were originally designed to support voice communications and utilize older circuit switching technology based on wireline telephone system design concepts. Circuit switching technology is inflexible as it requires a continuous dedicated connection between the source and destination of the communication, and is inefficient as network capacity is wasted on connections that are established but not in continuous use. 4G, which employs concepts such as packet switching and internet protocol, or IP, improves the scalability and performance of data networks. Packet switching technology makes more efficient use of network capacity for data communication by transmitting data in packets over multiple shared connections as compared to a dedicated connection. OFDMA and MIMO have emerged as key technologies that increase efficient use of spectrum, signal reliability, throughput and range in 4G networks compared to 2G and 3G networks.
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OFDMA
is a digital modulation and access technique that achieves significantly higher throughput within a given frequency spectrum than the TDMA and CDMA techniques used in 2G and 3G wireless networks. OFDMA splits the wireless signal into multiple lower frequency sub-signals spread throughout available spectrum during transmission, effectively reducing the demands on the network for each sub-signal and enabling increased overall speed and performance.
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MIMO
is a smart antenna technology that enables higher data throughput and signal range without requiring additional bandwidth or transmit power. MIMO employs multiple antennae to more efficiently transmit and receive wireless data.
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The throughput and range extension capabilities of OFDMA and MIMO technologies also enable infrastructure installations to cover a larger service area and provide increased network capacity, thereby reducing capital expenditures for wireless carriers.
The commonly accepted 4G protocols, LTE and WiMAX, are IP-based, share the same OFDMA and MIMO technologies and have very similar radio designs, coding schemes and signal processing algorithms. WiMAX was defined as a standard and deployed ahead of LTE as carriers sought to monetize available frequency spectrum using a Time Division Duplexing, or TDD, RF technology. TDD transmits and receives signals on the same frequency using a time-sharing scheme, whereas Frequency Division Duplexing, or FDD, uses different, but 'paired' frequencies to transmit and receive signals simultaneously. While WiMAX is deployed almost exclusively in one of a limited number of TDD frequency bands, LTE is compatible with both TDD and FDD spectrum and can be deployed in many different frequency bands.
LTE has become the dominant technology for 4G wireless broadband access, particularly among large mobile operators who have historically deployed 3GPP or 3GPP2 technology. The Global Mobile Suppliers Association counted 581 commercial LTE networks in 186 countries as of January 31, 2017, making it the fastest developing mobile communications system technology ever. Worldwide subscribers were estimated at 1.74 billion at the end of 2016 by GSMA. Leading this trend, according to company reports, China Mobile had over 535 million LTE subscribers at the end of 2016, Reliance Jio in India had over 100 million LTE subscribers by February 2017, and Verizon Wireless in the U.S. had over 90 million active LTE connections at the end of 2016. According to GSMA, LTE subscribers will exceed 3.6 billion by 2020. This growth in subscribers accompanies an LTE device market that is expected to grow from 1.2 billion units shipped in 2016 to 2.1 billion units shipped in 2020, according to Strategy Analytics.
The rapid pace of deployment of LTE networks worldwide implies that in some regions, operators are preparing to achieve LTE coverage at parity or better compared to their 2G or 3G coverage footprint. Verizon Wireless for instance has said that it has substantially completed its LTE network build as of mid-2013, achieving population coverage parity with their 3G network of over 97%. Meanwhile, South Korean and Japanese LTE operators achieved 100% population coverage in 2012. In this environment, many devices will not require 2G or 3G support. Initially, this is especially true outside the handset market, in devices such as tablets, laptops, mobile hotspots, USB modems, consumer electronics devices, and M2M applications. In these data devices the usage models are data-centric rather than voice-centric, and there are significant advantages in size, power consumption, product cost, development costs and certification costs for LTE-only implementations compared to their more expensive, larger, more power hungry and more complex multi-mode equivalents. In some regions, LTE-only handsets will emerge as well, particularly for domestic use. These LTE-only device-level advantages, coupled with the network-level economic benefits to carriers, imply that a significant market exists for LTE-only devices. Strategy Analytics expects 9.9 billion total LTE devices will be shipped worldwide from 2016 to 2021, and that the LTE-only share of the total LTE device market is expected to exceed 25% by 2021.
Challenges Faced By 4G Wireless Semiconductor Providers
Suppliers of 4G semiconductor solutions face significant challenges:
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Execution Challenges
. The rapid evolution of wireless protocols, such as LTE to LTE Advanced, requires sustained product development excellence and ongoing collaboration with carriers to meet market technology needs. Subscriber demand and carriers’ push to increase revenues by providing new and higher performance devices have driven OEM and ODM product life cycles to become shorter and require semiconductor solution providers to adhere to quick time-to-market schedules while providing fast and efficient transition from design-in to volume production. In addition, wireless carriers require semiconductor solutions to undergo extensive certification qualification and interoperability testing prior to mass production.
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Technology Challenges
. In order to increase throughput with minimal cost, wireless carriers require more efficient use of spectrum through the implementation of complex signal processing algorithms, such as OFDMA and MIMO, that require a significant amount of system-level and software expertise in addition to IC design knowledge. In addition, OEM and ODM customers’ desire for continuous improvements in power efficiency, reduced form factor and lower cost require rapid design cycles employing increasingly advanced silicon processes, improved RF transceiver performance and integration of additional features. Furthermore, until LTE networks are fully deployed by the carrier, the need to provide an optimal user experience in areas of poor network coverage or areas where coverage changes from 2G or 3G to 4G requires multi-mode system designs that are capable of seamlessly transitioning between the technologies.
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Our Competitive Strengths
We believe the following competitive strengths enable us to address the challenges faced by 4G wireless semiconductor providers:
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A strong track record of execution in 4G
.
We believe we are well positioned in the single-mode LTE market, with approximatively 60 customers having already launched or in the development phase of products using Sequans LTE chipsets, and in particular we have become recognized as a market leader in LTE for IoT chipsets. We were an early provider of WiMAX products and have been shipping our wireless broadband semiconductor solutions since 2005. Since we commenced operations in 2004, we have accomplished the following milestones:
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released seven generations of 4G semiconductor solutions – including four generations of LTE – that have been deployed in a variety of devices including smartphones, USB dongles, tablets, mobile routers, broadband access CPEs, in-car telematics devices and industrial IoT devices;
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became the leading provider of WiMAX chipsets by 2010, having designed our WiMAX solution into multiple devices, including the highly successful HTC EVO 4G, the first mass-market 4G smartphone, followed by eight more HTC devices;
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introduced our first generation LTE chipset in May 2010, a full 20MHz bandwidth TDD LTE solution, which was used by China Mobile in the first TDD LTE network demonstration and was launched in several commercial networks, including in Australia and Brazil;
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at the end of 2011, introduced our StreamrichLTE
TM
family of second-generation LTE chipset solutions, one of the industry’s first solutions to support Category 4 throughput of up to 150Mbps in the downlink. In 2012, this solution was certified on Verizon Wireless’ network;
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introduced our StreamliteLTE
TM
family of products in the fourth quarter of 2012, optimized for the price/performance requirements of the “Internet of Things” market, including connected consumer electronics and machine-to-machine devices;
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introduced our third-generation LTE chipset solution in the first quarter of 2013, supporting LTE Advanced and 3GPP Release 10 features, including support for carrier aggregation up to a total of 40MHz bandwidth and 300 Mbps Category 6 performance, an industry-first capability;
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introduced our EZLinkLTE
TM
family of LTE modules in the second quarter of 2013, designed to reduce time to market for LTE-only device manufacturers, and achieved Verizon Wireless certification of the first two members of the EZLinkLTE module family;
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introduced our Colibri LTE chipset platform in June 2014, an all-new, cost-optimized Category 4 LTE solution and member of our StreamliteLTE family, designed for mobile computing and the Internet of Things markets. The chipset and two EZLinkLTE modules were certified by Verizon in 2015;
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introduced the world’s first LTE Category 1 chipset, Calliope, in January 2015, a cost- and power-optimized Category 1 LTE solution and member of our StreamliteLTE family, targeting M2M and Internet of Things
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applications where high throughput is not a requirement. The chipset and an EZLinkLTE module were also certified by Verizon in 2015;
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announced a partnership with TCL Communication on 5G research in March 2015;
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announced in July 2015 that Gemalto M2M had selected Sequans’ Calliope LTE Category 1 chipset to power a family of Cinterion
®
industrial M2M modules, and in February 2016 the extension of our strategic partnership with Gemalto choosing Sequans’ LTE Release 13 Category M chipset for future IoT and M2M modules;
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disclosed in September 2015 that T-Mobile US had chosen our Calliope LTE Category 1 chipset for their M2M demonstration at CTIA’s Super Mobility Week event;
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announced that Sequans’ Colibri LTE Category 4 chipset is certified for use on AT&T’s network, having passed their ADAPT chipset verification program in December 2015;
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announced in January 2016 a strategic partnership with Foxconn subsidiary Socle, aimed at creating system-on-chip solutions for the IoT market based on Sequans’ LTE technology;
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announced in February 2016 a strategic partnership with Verizon wireless to accelerate availability of LTE for IoT chipsets supporting 3GPP Release 13 standards for narrowband LTE technology;
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announced a collaboration in February 2016 with Skyworks for developing IoT-optimized RF front-end solutions for Sequans LTE for IoT chipsets;
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introduced in February 2016 Sequans’ fourth-generation LTE chip, Monarch, the world’s first 3GPP Release 13 LTE Category M and narrowband IoT capable chipsets, targeting low data-use IoT applications;
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announced in March 2016 the certification of Sequans’ Calliope LTE Cat 1 chipset with Japan’s largest operator, NTT DoCoMo;
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introduced the US60L, an EZLinkLTE module designed for multiple US carrier networks, and disclosed that it has been certified by AT&T’s Network Ready Labs in April 2016;
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announced in May 2016 the certification of Sequans' Calliope LTE Cat 1 chipset at AT&T;
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announced that Sequans' Cassiopeia LTE Advanced chipset was selected by ZTE WeLink in August 2016, and by Baicells in November 2016 for use in broadband wireless devices;
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demonstrated Sequans' Monarch LTE-M chip at CTIA's Mobility Week event in September 2016, marking what we believe was the world's first LTE-M live demonstration;
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completed what we believe was the world's first over-the-air LTE-M data call with Verizon in October 2016;
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in October 2016, announced four customer design wins for Sequans' Monarch LTE-M chip, including Gemalto, LinkLabs, Nimbelink and Encore Networks;
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demonstrated Sequans' Monarch LTE-M chip at NTT DoCoMo in November 2016;
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announced that Pycom selected Sequans' Monarch LTE-M chip;
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announced in December 2016 that SIMCom selected Sequans' Calliope LTE Cat 1 chipset for a family of IoT modules;
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in December 2016, announced that Fibocom chose Sequans' Monarch LTE-M chip for a family of IoT modules;
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disclosed in January 2017 that Verizon had certified Sequans' Monarch LTE-M chip in December 2016, making it the world's first carrier-certified LTE-M chip;
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announced in January 2017 that Geotab selected Sequans' Calliope LTE Cat 1 chipset for use in vehicle telematics devices;
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in February 2017, completed Europe's first LTE-M data call with Telefónica in Spain;
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announced in February 2017 a collaboration with STMicroelectronics on the creation of an LTE-M IoT design kit using Sequans' Monarch chip;
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in February 2017, introduced Monarch SX, a highly integrated LTE-M/NB-IoT system-on-chip for IoT;
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announced in February 2017 that Orion Labs selected Sequans' Monarch LTE-M chip for their voice-enabled wearables products; and
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in February 2017, announced that Huawei selected Sequans' Monarch LTE-M chip for a family of IoT modules, marking the eighth publicly announced Monarch customer.
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Understanding of wireless system-level architecture and expertise in signal processing.
We have an end-to-end understanding of wireless system-level architectures and networks based on our team’s experience in a broad range of wireless technologies including 2G, 3G, Wi-Fi, WiMAX and LTE. This enables us to serve as a trusted advisor to wireless carriers, OEMs and infrastructure vendors to optimize the performance of their 4G devices and networks. For example, our solutions offer improved standby-mode battery life in 4G devices as a result of our in-depth understanding of the interactions between the device and the network and of our implementation of advanced power-saving techniques in our solutions. For instance, we have implemented a proprietary technique called Dynamic Power Management in our Monarch chip that assures the longest possible battery life for IoT devices by dynamically adapting the chip’s deep-sleep implementation to the traffic patterns of various IoT use cases.
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High performance solutions for 4G applications
.
Our solutions offer high performance for use in a wide array of 4G-enabled devices. The key performance characteristics of our solutions include:
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high throughput with peak downlink data transfer rates of 150 Mbps in our LTE solutions and up to 300 Mbps in our LTE-Advanced solution;
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high power efficiency in both active and idle modes using our patented idle mode optimization algorithms that improve standby time and help maximize device battery life;
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support for an advanced technology called hybrid automatic repeat request, or hybrid ARQ, which significantly enhances RF link robustness and throughput, improving mobility and range;
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inclusion of LTE broadcast support in our LTE solutions using a feature called evolved multimedia broadcast multicast service, or eMBMS, which enables carriers to deliver new multimedia services in an economical and spectrally efficient manner;
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development and integration of a unique LTE interference mitigation technology, Sequans Active Interference Rejection (Sequans AIR
TM
) into our LTE solutions for improved cell edge performance, enhanced network capacity and enhanced user experience;
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support for LTE-Advanced features, including carrier aggregation, a capability of creating a single virtual wide channel from two different narrower channels, resulting in higher throughput; and
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integration of complete on-chip support for Voice over LTE (VoLTE), including support for high-definition voice using wideband codecs.
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Highly optimized 4G solutions.
We have successfully produced and ramped into commercial production seven generations of 4G system-on-chip, or SoC, semiconductor solutions. This experience has resulted in what we believe to be one of the industry’s most efficient implementations, providing high performance at low cost and low power consumption. Some of our solutions have integrated the baseband processor and the RF transceiver into a single die, resulting in extremely high integration, small footprint and low cost. In addition, we successfully migrated our baseband processors from 130nm to 65nm CMOS technology in 2009, and again to 40nm CMOS technology with our second-generation LTE SoC which became available in 2012. With the introduction of our Monarch LTE-M/NB-IoT chip in 2016, we delivered a very high level of integration, providing baseband, RF transceiver, power management and memory all in a single chip of less than 50mm2. And in February 2017, we announced our Monarch SX LTE-M system-on-chip, with even more integration, including an application processor, graphics processor and display controller, sensor hub and media processing engine, along with our Monarch LTE-M/NB-IoT modem, all in a single chip, further reducing the design effort for makers of IoT devices. Furthermore, our comprehensive software solutions help our customers get to market quickly with an optimized, mature and field proven solution. Our highly optimized solutions offer key advantages for both ourselves and our end customers:
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Lower overall system cost for our end customers, coupled with higher functionality and smaller form factor. Our ability to integrate digital and RF functions into a single device also allows us to maintain higher product margins as we believe device manufacturers are willing to pay a premium for our integrated 4G solutions, while also enabling us to reduce our manufacturing costs for wafer fabrication, assembly and testing.
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The implementation of advanced “known good die” and wafer-level chip-scale packaging (WLCSP) technology, which reduces chip cost and design footprint, enables the creation of very small and cost-effective LTE modules
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Simplified product design for device manufacturers, as our solutions incorporate all key components required for a 4G device in a single die or package. For instance, our Monarch chip incorporates baseband processor, RF transceiver, power management and memory in a single 6.5 x 8 mm package. We believe these advantages enable our products to be incorporated into leading edge devices that offer a high quality user experience, as well as accelerate our end customers’ time-to-market.
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Proprietary embedded protocol software that has been exhaustively tested with major basestation vendors’ equipment to ensure reliable performance in the field. We also offer host software that facilitates rapid development of high performance device drivers, connection managers and other key application-layer software functionality.
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Our Strategy
Our goal is to be a leading provider of next-generation single-mode wireless semiconductors by providing best-in-class solutions that enable mass-market adoption of 4G technologies worldwide. Key elements of our strategy include:
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Identifying and optimally serving LTE-only market segments
. As the LTE market grows and matures, and as operators aggressively build out their LTE networks and refarm their 2G and 3G spectrum to support demand for data capacity on LTE, we expect to see significant growth in the demand for single-mode LTE, or LTE-only, devices. In our estimation, this demand will come from three areas:
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1)
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Broadband devices: Mobile routers, also called mobile hotspots, provide convenient, on-the-go Internet access via WiFi for users in homes, offices, hotel rooms, vehicles and outdoor locations. Fixed-location (non-mobile) routers provide broadband Internet access for homes and businesses. Mobile routers are popular with customers of traditional mobile operators, and because of the favorable economics of LTE networks compared to 2G and 3G networks, and the potential for heavy data consumption by a mobile router user, LTE-only versions of this device type are expected to become more common. Fixed, or home, routers (also sometimes generically called broadband wireless CPE, or customer premise equipment) are increasingly being deployed as a ‘last-mile’ or wireless local loop solution by emerging operators to provide basic broadband access where it may be prohibitively expensive to deploy wireline broadband infrastructure using fiber, cable or DSL. Single mode LTE-only designs are a logical choice for these home routers for cost and performance reasons, and because the devices are not mobile and therefore do not need to ‘fall back’ to a 2G or 3G connection. Strategy Analytics projects that, together, shipment of LTE-only versions of these two device types will exceed 400 million units from 2016 to 2021. Solutions from both our StreamrichLTE family (Cassiopeia LTE-Advanced platform, for instance) and our StreamliteLTE family (Colibri LTE chipset platform) can ideally address these device types.
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2)
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Internet of Things and M2M devices: Increasingly, established mobile network operators are looking beyond the saturated smartphone marketplace to add the devices and users needed to maintain profitable growth. One area of particular interest to these operators is the opportunity to add connected ‘things’ (rather than people) to their networks. The traditional machine-to-machine market is considered a subset of this larger connected objects space, often called “The Internet of Things” (or IoT). While a large number of IoT connections are expected to use WiFi, Bluetooth or some other local-area or personal-area networking technology, there are many applications for wide-area connectivity which can be addressed by cellular networks. Applications for cellular connectivity include smart utility meters, asset tracking, industrial automation and monitoring, retail, smart cities, consumer wearables, agriculture and environmental monitoring, mobile/remote healthcare, security and more. Given the rapid move to LTE by network operators, the spectral efficiency and low latency of LTE networks, and the longer life cycles of some of these applications, the use of LTE in many of these applications is expected to increase, despite the fact many of them do not require high throughput. According to data from ABI Research and Strategy Analytics, over 500 million LTE-based M2M modules and wearable devices will ship from 2016 to 2021. This trend toward the use of LTE in the IoT market began with the arrival of cost- and power-optimized Category 1 LTE solutions in 2015, and is expected to accelerate with the arrival of machine type communications (MTC)-optimized 3GPP Release 13 LTE solutions, which define LTE-M and NB-IoT user equipment categories. Among other things, these new specifications simplify the LTE requirements, reducing cost and power even further, such that these Release 13 implementations are expected to rival 2G in terms of cost and power. Our StreamliteLTE family is targeted at the IoT market, and our world-first Calliope Category 1 LTE chipset platform, announced in January 2015, is certified and shipping in commercial products. Monarch, the world’s first LTE-M/NB-IoT chip, was announced in
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February 2016, and is now certified and shipping in devices for Verizon. More carrier approvals are anticipated in 2017.
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3)
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Public safety and vertical applications: The public safety and emergency responders equipment market is undergoing a technology transition that favors the use of LTE in terminals and handhelds. We have several products in both our StreamrichLTE family (Cassiopeia LTE-Advanced platform, for instance) and our StreamliteLTE family (Colibri LTE chipset platform) that can ideally address these device types. LTE is also being adopted for use in delivering ground-to-aircraft broadband Internet connectivity for commercial aircraft, and in other vertical markets in aviation and military applications.
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Accelerating our, and our customers’, time to market and reducing our customers’ development costs.
In 2013, we introduced the EZLinkLTE
TM
family of LTE-only modules. By packaging our LTE semiconductor solutions in a complete, turnkey module form factor and certifying them with key wireless carriers, we expect to catalyze the market for LTE-only devices, speed time to market for customer wishing to incorporate LTE connectivity in their devices, and reduce the cost and complexity for our customers. And by pre-integrating and validating third-party WiFi chipset designs, we are able to help our mobile router customers get to market faster. In addition, our highly integrated, single-chip Monarch LTE-M solution minimizes the design effort for IoT device makers. And in February 2017, we announced our Monarch SX LTE-M system-on-chip, with even more integration, including an application processor, graphics processor and display controller, sensor hub and media processing engine, along with our Monarch LTE-M/NB-IoT modem, all in a single chip, further reducing the design effort for makers of IoT devices.
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Leveraging our multiple generations of 4G chip design experience to become a leader in advanced LTE technology and cost efficiency
.
We have more than ten years and seven generations of 4G chip design experience, resulting in highly optimized and cost-efficient chip implementations and deep technical expertise, allowing us to be among the first in the industry to deliver new capabilities to market, as well as to enable extremely cost-competitive solutions. For example, in February 2013, we announced Cassiopeia, a third generation LTE chipset platform with support for LTE Advanced features, including carrier aggregation support for up to 40MHz aggregated bandwidth and 300 Mbps Category 6 downlink performance, the only such capability in the industry at that time. In May 2013, we introduced our EZLinkLTE
TM
family of LTE-only modules, aimed at speeding time to market for our customers. In February 2014, we demonstrated a commercial-ready implementation of LTE Broadcast in Verizon Wireless’ LTE Multicast demonstration in New York during Super Bowl week. Finally, the cost and power efficiency achieved from our multiple generations of 4G modem design has enabled us to deliver our StreamliteLTE family of products at attractive price points, enabling LTE connectivity to be embedded in a wide range of cost-sensitive IoT applications in both consumer and machine-to-machine applications. The most recent members of our StreamliteLTE family are the Colibri LTE Category 4 chipset platform, announced in 2014, the Calliope LTE Category 1 chipset platform, introduced in January 2015, and our fourth generation LTE chip, Monarch, an LTE-M/NB-IoT single-chip, announced in February 2016. A year later we announced Monarch SX, a highly-integrated SoC that integrates an application processor, media processor, sensor hub and display controller alongside the Monarch LTE-M/NB-IoT modem.
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Partnering with other leading technology companies to complement our technology offerings
. We regularly collaborate with ecosystem partners who provide complementary technology or strengthen our capabilities to address customer needs and competitive pressure. For instance, we have worked closely with Skyworks Solutions to ensure the availability of RF front-end modules that are optimized for use with our LTE chipsets to simplify the RF design task for our customers. We have collaborated with STMicroelectronics to develop IoT design kits that help customers easily integrate our Monarch LTE-M/NB-IoT platform with a range of STMicroelectronics' microcontrollers. And we have partnered with TCL to jointly develop next generation 5G wireless technologies in order to accelerate their development.
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Our Solutions
We have developed a portfolio of 4G semiconductor solutions to address a variety of applications and market segments. We offer baseband solutions used to encode and decode data based on 4G protocols that serve as the core wireless processing platform for a 4G device; RF transceivers used to transmit and receive wireless transmissions; and highly integrated SoC solutions that combine these and other functions into a single die or package. Some of our SoC solutions integrate the baseband and RF transceiver functions, in some cases with an applications processor and memory. This advanced integration reduces the size, cost, design complexity and power consumption of the 4G solution. In 2013, we introduced a family of LTE modules that vastly simplify the task of embedding LTE connectivity in many computing, consumer and machine-to-machine devices.
All of our baseband, SoC products and modules are provided with comprehensive software, including relevant source code and tools, to enable manufacturers to easily integrate our solutions into their devices in a wide variety of environments, including Apple MAC OSX, Microsoft Windows, Chrome OS and embedded operating systems such as Android and Linux. In addition, we provide our customers with design support, in the form of reference designs that specify recommended methods for interconnecting our chips to surrounding devices, such as host processors, memory and RF front-end components as well as tools to integrate with products from major automatic test equipment vendors. Further, we provide our customers with a warranty, for a period of one to two years, that our solutions are free from defects in materials and workmanship and will operate in material conformance with the provided specifications, entitling the customer to have the defective product repaired or replaced at our expense.
Many of today’s LTE-enabled devices, including smartphones, home routers, tablets, laptops and mobile hotspots, tend to require the highest performance and richest set of features in their LTE solution, driven by consumer demand for these attributes and by a highly competitive device market. For these performance segments, we typically propose our StreamrichLTE family of products, as these solutions deliver the required higher performance and comprehensive feature set. However, in the nascent market for connected devices in segments like consumer electronics and machine-to-machine modules, attributes like size, power consumption and cost are often much more important than raw performance. For these products, we typically propose our StreamliteLTE family of products, which provide performance levels suitable for these kinds of devices in a smaller, more power-efficient and more cost-effective implementation.
Our primary products during the last three financial years are summarized in the table below.
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Platform Name
Chipset ID
Family
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Description
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Target Applications
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Key Features
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Handsets
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Tablets/
Embedded
Laptops
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Mobile
Routers
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IoT and
M2M
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CPE
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Monarch
SQN3330
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LTE Release 13
BB+RF+ PMIC+RAM
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LTE UE Category M1 and NB1 supported; Baseband, RF transceiver, memory and power management integrated in a single package; power-optimized for Internet of Things and M2M applications requiring lower throughput.
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Calliope
SQN3223
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LTE Release 9/10
BB
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40nm technology, 10Mbps CAT1 peak throughput, USB and HS UART interfaces, integrated processor, cost- and power-optimized for Internet of Things and M2M applications requiring lower throughput. WLCSP.
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Colibri
SQN3221
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LTE Release 9/10
BB
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40nm technology, 150Mbps CAT4 peak throughput, USB and HS UART interfaces, integrated processor, optimized price/performance for mobile computing and high performance M2M markets. WLCSP.
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Colibri / Calliope
SQN3241
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LTE
RF
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Supports 700-900MHz and 1.8-2.7GHz, up to 20 MHz bandwidth. WLCSP.
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Platform Name
Chipset ID
Family
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Description
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Target Applications
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Key Features
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Handsets
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Tablets/
Embedded
Laptops
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Mobile
Routers
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IoT and
M2M
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CPE
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VZ120Q
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Calliope-based surface-mount all-in-one LTE module for Verizon Wireless network
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20mm x 21mm x 1.5mm, surface-mountable module with integrated power management, clocks, Flash and DDR memories, and RF front-end supporting bands 4 and 13; Verizon Wireless and GCF certified. eMBMS and VoLTE capable
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VZ22Q
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Colibri-based surface-mount all-in-one LTE module for Verizon Wireless network
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20mm x 21mm x 1.5mm, surface-mountable module with integrated power management, clocks, Flash and DDR memories, and RF front-end supporting bands 4 and 13; Verizon Wireless and GCF certified. eMBMS and VoLTE capable
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VZ22M
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Colibri-based M.2 form-factor LTE module for Verizon Wireless network
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M.2 module with integrated power management, clocks, Flash and DDR memories, and RF front-end supporting bands 4 and 13; Verizon Wireless and GCF certified. eMBMS and VoLTE capable
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US60L
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Colibri-based surface-mount all-in-one LTE module for multiple US carrier networks
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31.5 x 22 x 1.85 mm, surface-mountable module with integrated power management, clocks, Flash and DDR memories, and RF front-end supporting bands 2, 4, 5, 12, 13 and 17; AT&T certified. eMBMS and VoLTE capable
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Cassiopeia
SQN3220
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LTE-Advanced Release 10 BB
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Carrier aggregation up to 20 + 20 MHz
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Mont Blanc/ Cassiopeia
SQN3240
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LTE RF
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Supports FDD and TDD 700 MHz – 2.7 GHz, up to 20 MHz bandwidth
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Mont Blanc
SQN3120
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LTE Release 9 BB
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40nm technology, 150Mbps Category 4 peak throughput, USB, SDIO and gigabit Ethernet interfaces, embedded SDRAM plus integrated processor.
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Mont Blanc
SQN5120
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LTE Release 9
+ WiMAX BB
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As in SQN3120, plus integrated WiMAX baseband, seamless WiMAX-LTE handover support
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Platform Name
Chipset ID
Family
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Description
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Target Applications
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Key Features
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Handsets
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Tablets/
Embedded
Laptops
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Mobile
Routers
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IoT and
M2M
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CPE
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Mont Blanc
SQN3140
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LTE RF
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Supports 2.3—2.7 GHz and 3.3—3.8 GHz TDD LTE bands, up to 20 MHz bandwidth
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Abbreviations used in this table: BB = baseband processor, CPE = customer premise equipment, EOL = product declared end-of-life, FDD = frequency division duplexing, IoT = Internet of Things, nm = nanometer, PMIC = power management IC, RF = radio frequency transceiver, SDRAM = Synchronous Dynamic Random Access Memory, SoC = system-on-chip, TDD = time division duplexing, VoIP = Voice over Internet Protocol.
In June 2014, we announced a cost-optimized LTE chipset platform in our StreamliteLTE family of products, Colibri, based on the SQN3221 baseband and SQN3241 RFIC. Colibri provides up to Category 4 150Mbps peak downlink throughput, and is offered in a WLCSP known-good die format, which reduces cost and footprint compared to traditional packaged semiconductors.
In January 2015, we announced a cost- and power-optimized LTE chipset platform in our StreamliteLTE family of products, Calliope, based on the SQN3223 baseband and SQN3241 RFIC. Calliope is limited to Category 1 10Mbps peak downlink throughput, and is offered in a WLCSP known-good die format, which reduces cost and footprint compared to traditional packaged semiconductors. Because of the new die design, which is optimized for the lower throughput, the chip is smaller and consumes less power than higher-performance implementations, making it ideal for M2M and Internet of Things applications.
In February 2016, we announced a Release 13 chipset, Monarch, capable of supporting both LTE-M and NB-IoT. Monarch includes the baseband processor, RF transceiver and power management circuitry in a single package. It is targeted at lower data-use IoT applications, including sensors, wearables and utility meters.
In February 2017, we announced Monarch SX, a highly integrated system-on-chip that integrates an ARM Cortex M4 processor, a sensor hub, a media processing engine, a graphics processor and display controller alongside the Monarch LTE-M/NB-IoT modem, in a single chip.
Competition
The wireless semiconductor business is very competitive. We believe that our competitive strengths will enable us to compete favorably in the LTE markets. The following are the primary elements on which companies in our industry compete:
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functionality, form factor and cost;
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product performance, as measured by network throughput, signal reach, latency and power consumption;
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track record of providing high-volume deployments in the industry; and
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In the LTE market, we expect to face competition from established semiconductor companies such as Intel Corporation, Mediatek, Qualcomm Incorporated, Samsung Electronics Co. Ltd., Sony Corporations (following the acquisition of Altair Semiconductor in January 2016) and Spreadtrum, as well as smaller actors in the market such as GCT Semiconductor.
Many of our competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of existing customers than us. In addition, some of them may provide incentives to customers or offer bundled solutions with complementary products, which could be attractive to some customers, or adopt more aggressive pricing policies to offset what we believe are the performance and cost advantages of our solutions.
Business Development, Sales and Marketing
Our business development efforts are focused on developing relationships with wireless carriers to identify the potential product opportunities at each carrier. Our sales efforts are then focused on determining which OEMs and ODMs are most likely to win in the various carrier product opportunities, and securing design wins for mobile broadband devices to be manufactured
by the OEMs and ODMs. We work closely with key players across the 4G wireless broadband industry to understand their requirements and enable them to certify and deploy 4G solutions in high volume.
Our business development team is organized regionally and by wireless carrier. In addition to identifying new business opportunities based on the wireless carriers product launch plan, the business development team also works to understand the wireless carriers’ future technological requirements, so that we can incorporate appropriate features in our product roadmap. We have a business development team of both dedicated employees and outside contractors.
Our sales force is organized regionally to provide account management and customer support functions as close to customer physical locations as practical. As of December 31, 2016, we had a direct sales force serving our OEM and ODM customers in the Asia-Pacific region, including Taiwan, China, Korea and Japan; India; Europe; the Middle East and North and South America. In China, Japan and Korea we supplement our direct sales team with local distributors and/or sales representatives who handle certain customer communications, logistics and customer support functions.
Our sales force works closely with a team of technical support personnel, which previously was part of the engineering and product development department. This team assists customers in solving technical challenges during the design, manufacturing implementation and certification phases of a customer’s product life cycle. The information obtained from customer support is then communicated back to the direct product development teams to be considered in future software releases or hardware development. This high-touch approach allows us to facilitate the successful certification and acceptance by the wireless carriers of our customers’ products, which speeds time-to-market for our customers and reinforces our role as a trusted advisor to our customers.
Our sales cycles typically take 12 months or more to complete and our solutions are generally incorporated into our customers’ products at the design stage. Prior to an end customer’s selection and purchase of our solutions, our sales force and technical support engineers provide our end customers with technical assistance in the use of our solutions in their products. Once our solution is designed into a customer’s product offering, it becomes more difficult for a competitor to sell its semiconductor solutions to that end customer for that particular product offering given the significant cost, time, effort and risk involved in changing suppliers. In addition, once we win a particular design with an end customer, we believe our ability to penetrate other product families at that end customer increases significantly.
Our marketing strategy is focused on enabling broad adoption of 4G solutions and communicating our technology advantages to the marketplace. This includes building awareness of and preference for our technology at wireless carriers who generate demand for 4G-enabled devices. By working to understand carrier services strategies, device roadmaps and technical requirements, we believe we are better positioned to drive our roadmap to meet these needs, to influence their choice of technology suppliers, and to identify manufacturers in the wireless industry who are best prepared to serve the needs of the wireless carrier. For example, by engaging early with China Mobile, we were able to understand their requirements and achieve aggressive timelines for delivering our LTE solution for their demonstration network. In addition, our collaboration with Sprint allowed us to understand their user experience goals, which led to the implementation of an optimized 3G-4G handover capability and reduced idle-mode power consumption for handsets incorporating our solutions. More recently, our technical and business relationships with Verizon Wireless, T-Mobile, AT&T and NTT DoCoMo have allowed us to anticipate requirements and develop solutions tailored for their respective networks, which helped us secure several design wins and launch multiple products. For instance, in 2014, the Verizon Ellipsis Jetpack MHS800L and the Best Buy Insignia Flex 8” LTE tablet was launched for Verizon; in 2015 the Encore Networks EN-1000 industrial router, the eFun Nextbook Ares 8L and Ares 10L tablets available at Walmart, and the Zubie GL700C In-Car WiFi and Vehicle Monitoring device available at Best Buy were all launched for Verizon; in 2016, Gemalto's ELS31 LTE Category 1 M2M module was certified at Verizon, our Calliope LTE Category 1 chipset was certified by AT&T, T-Mobile and NTT DoCoMo, D-Link launched an industrial IoT modem using our Colibri LTE Category 4 chipset, ZTEWelink introduced a CPE based on our Cassiopiea LTE-Advanced chipset, and Nimbelink, LinkLabs and Encore Networks all launched LTE-M devices based on Sequans' Monarch LTE-M chip.
Our marketing team is also responsible for product management, strategic planning, product roadmap creation, OEM, ODM and wireless carrier business development and corporate communications. All of these functions are aimed at strengthening the competitiveness of our solutions in response to evolving industry needs and competitive activities, and at articulating the value proposition of our technology throughout the 4G broadband wireless industry. Our business development, sales and marketing organizations work closely together to ensure that evolving industry requirements are reflected in our product plans, and that customers have early access to our roadmaps and can communicate the value of our technology to the wireless carriers. This end-to-end value chain management approach is designed to grow and preserve our market share in the segments we serve.
As of
December 31, 2016
, we had 41 employees and 1 outside contractor in our business development, sales, customer support and marketing team.
Customers
We maintain relationships with 4G wireless carriers and with OEMs and ODMs who supply devices to those carriers and their end users. We do not typically sell directly to wireless carriers, except from time to time in the context of selling services to enable new technologies or markets being developed by the carrier. Our sales are conducted on a purchase order basis with OEMs, ODMs, contract manufacturers or system integrators, or to a lesser extent with distributors who provide certain customer communications, logistics and customer support functions.
Our top ten customers accounted for 96%, 92% and 86% of our total revenue in 2014, 2015 and 2016, respectively.
Comtech, a new distributor serving multiple end customers in China and Taiwan, accounted for 29% of our revenue in 2016. Gemtek accounted for 39% in 2014, 14% in 2015 and 15% in 2016. Wistron accounted for 27% of our revenue in 2015 and less than 10% in 2016 and 2014. Asian Information Technology Inc., a distributor, accounted for 12% of total revenue in 2014 and 16% in 2015, but less than 10% in 2016 as we switched to other distributors. Huawei, through sales via dedicated distributors, accounted for 25% of our revenue in 2014, but was less than 10% of revenue in 2015 and 2016. The following is a list of our top ten customers, in alphabetical order, based on total revenue during 2016:
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• ATM Electronic
• Comtech
• Gemalto
• Gemtek Electronics Co
• Netcomm Wireless, Ltd
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• TCL Communications Ltd
• Thales Avionics
• T Mobile
• Verizon Wireless
• Wistron
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Manufacturing
We operate a fabless business model and use third-party foundries and assembly and test contractors to manufacture, assemble and test our semiconductor solutions. Our sole foundry vendor is TSMC. In our latest products, we use 65nm and 40nm standard RF, mixed-signal and digital CMOS production processes. The use of these commercially available standard processes is designed to enable us to produce our products more cost-effectively and, by migrating to lower process geometries, we expect to achieve advantages in cost, size and power consumption.
We use UTAC, STATSchipPAC and Silicon Precision Industries for most of our assembly and testing. We rely on extensive simulation, practical application and standardized test bed studies to validate and verify our products.
We us use USI (Universal Scientific Industrial (Shanghai) Company Limited) and AcSIP Technology for manufacturing of our modules.
We closely monitor the production cycle from wafer to finished goods by reviewing electrical parameters and manufacturing process and test yield data. We also run routine reliability monitoring programs to ensure long term product reliability. This enables us to operate certain test processes on demand to reduce the time-to-market for our products and to help ensure their quality and reliability. We are ISO 9001 certified, and all of our major suppliers and subcontractors are required to have quality management systems certified to ISO 9000 and ISO 14000 levels, as well as appropriate environmental control programs.
We do not have any manufacturing agreements with our foundry or with our testing and packaging or module vendors, other than a framework agreement with UTAC, and we place our orders with our foundry and other vendors on a purchase order basis. See “Risk Factors—Risks Related to Our Business and Industry”.
Intellectual Property
We rely on a combination of intellectual property rights, or IPR, including patents, trade secrets, copyrights and trademarks, and contractual protections, to protect our core technology and intellectual property. At December 31, 2016, we had 34 issued and allowed United States patents, 20 European patents, and 31 pending United States and European patents. The first of our issued and allowed patents is not expected to expire until 2025.
In addition to our own intellectual property, we have also entered into a number of licensing arrangements pursuant to which we license third-party technologies and intellectual property. In particular, we have entered into such arrangements for certain technologies embedded in our semiconductor, hardware and software designs. These are typically non-exclusive contracts provided under royalty-accruing or paid-up licenses. These licenses are generally perpetual or automatically renewed for so long as we continue to pay any royalty that may be due and in the absence of any uncured material breach of the agreement. Certain licenses for technology used for development of a particular product are for a set term, generally at least two years, with a renewal option, and can be easily replaced with other currently available technology in subsequent product developments. In the event that such licenses are not renewed, they nevertheless continue with regard to products distributed in the field. Except for our licenses to the so called “essential patents” described below, we do not believe our business is dependent to any significant degree on any individual third-party license.
In the past, we have entered into licensing arrangements with respect to so called “essential patents” that claim features or functions that are incorporated into applicable industry standards and that we are required to provide in order to comply with the standard. We may be required to enter into such licensing arrangements in the future in order to comply with applicable industry standards, in particular with respect to the sales of our module products, which have full LTE functionality. We believe that general practice in the industry is that essential patent holders’ licensing policy is to license only to licensees selling a full LTE product, not to component vendors.
In 2015, we entered into an agreement to license the patent portfolio of Gemalto S.A., including at least one patent which may be considered essential for the LTE standard.
Facilities
Our principal executive offices are located in Colombes, France, consisting of approximately 21,625 square feet under a lease that expires in December 2023, but which may be cancelled in December 2020. This facility accommodates our principal research and development, product marketing, and finance and administrative activities.
We have a 4,236 square-foot facility in Winnersh Triangle, England, which accommodates a research and development center under a lease expiring in October 2020, with the option to cancel in October 2017. We have a 1,973 square-foot facility in Petach Tikva, Israel, which houses a small research and development team, and sales and technical support personnel, under a lease that expires in December 2018. We have a 1,600 square foot office in Singapore under a lease expiring in February 2018. We have a 1,207 square-foot facility in Burnsville, Minnesota for engineering personnel under a lease that expires in June 2017. We have a 645 square-foot facility in Kista, Sweden under a lease that expires in April 2020. We rent additional office space in Sophia-Antipolis, France; Taipei, Taiwan; Shanghai and Shenzhen, China; Seoul, South Korea and in Bedminster, New Jersey under short-term lease agreements.
We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities will be available on suitable, commercially reasonable terms to accommodate any future needs.
|
|
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C
.
|
Organizational Structure
|
The Company is the ultimate parent of the group comprised of the Sequans Communications S.A. and its subsidiaries at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
Name
|
|
Country of
incorporation
|
|
Year of
incorporation
|
|
% equity
interest
|
Sequans Communications Ltd.
|
|
United Kingdom
|
|
2005
|
|
100
|
|
Sequans Communications Inc.
|
|
United States
|
|
2008
|
|
100
|
|
Sequans Communications Ltd. Pte.
|
|
Singapore
|
|
2008
|
|
100
|
|
Sequans Communications (Israel) Ltd.
|
|
Israel
|
|
2010
|
|
100
|
|
|
|
|
D
.
|
Property, Plants and Equipment
|
For a discussion of property, plants and equipment, see “Item 4.B—Business Overview—Facilities.”
Item 5. Operating and Financial Review and Prospects
Summary
We are a leading fabless designer, developer and supplier of 4G LTE semiconductor solutions for wireless broadband applications. Our solutions incorporate baseband processor and RF transceiver ICs along with our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low power consumption and high reliability in a small form factor and at a low cost.
We shipped 2.6 million semiconductor units during 2016, compared to 1.8 million units during 2015 and 1.5 million units during 2014. Our total revenue was $45.6 million in
2016
, compared to $32.5 million in
2015
and $22.6 million in
2014
.
We currently have approximatively 60 end customers worldwide, consisting primarily of OEMs and ODMs for CPE, home routers, mobile routers, USB dongles, embedded devices, mobile computing devices and other data devices. We derive a significant portion of our revenue from a small number of end customers, and we anticipate that we will continue to do so for the foreseeable future. We do not have long-term purchase agreements with any of our end customers, and substantially all of our sales are made on a purchase order basis. We expect that the percentage of revenue derived from each end customer may vary significantly due to the order patterns of our end customers, the timing of new product releases by our end customers, and consumer demand for the products of our end customers. Customers representing more than 10% of total revenue in any of the years
2014
,
2015
or
2016
and their locations are as follows:
|
|
|
|
|
|
|
|
Customer Location
|
|
% of total revenue for the year ended
December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
Taiwan
|
|
—
|
|
—
|
|
29%
|
China
|
|
39%
|
|
14%
|
|
15%
|
China
|
|
Less than 10%
|
|
27%
|
|
Less than 10%
|
Taiwan
|
|
12%
|
|
16%
|
|
—
|
China
|
|
25%
|
|
Less than 10%
|
|
—
|
Our Consolidated Financial Statements for
2014
,
2015
and
2016
, have been prepared in accordance with IFRS as issued by the IASB.
Revenue
Our total revenue consists of product revenue and other revenue.
Product Revenue
We derive substantially all of our revenue from the sale of semiconductor solutions for 4G wireless broadband applications, and we currently expect to continue to do so for the foreseeable future. Our solutions are sold both directly to our end customers and, to a lesser extent, indirectly through distributors.
Our sales cycles typically take 12 months or more to complete, and our solutions are generally incorporated into our end customers’ products at the design stage. Prior to an end customer’s selection and purchase of our solutions, our sales force and applications engineers provide our end customers with technical assistance in the use of our solutions in their products. Once our solution is designed into an end customer’s product offering, it becomes more difficult for a competitor to sell its semiconductor solutions to that end customer for that particular product offering given the significant cost, time, effort and risk involved in changing suppliers. In addition, once we win a particular design with an end customer, we believe our ability to penetrate other product families at that end customer increases significantly.
Prior to 2013, our product revenues were primarily generated by sales of our WiMAX products. Sales of our LTE products began to contribute materially to revenues in the second half of 2013 due to the timing of our products availability and
the deployment timing of the operators where we were focused. Our product revenues increased in 2014 primarily due to increasing sales of LTE products. Product revenues in 2015 and 2016 were derived nearly entirely from sales of LTE products.
Our product revenue is also affected by changes in the unit volume and average selling prices, or ASPs, of our semiconductor solutions. Our products are typically characterized by a life cycle that begins with higher ASPs and lower volumes as our new products use more advanced designs or technology and are usually incorporated into new devices that consumers adopt over a period of time. This is followed by broader market adoption with higher volumes and ASPs that are lower than initial levels, due to the maturity of the technology, greater availability of competing products or less demand as our end customers’ products reach the end of their life cycle.
In the second half of 2013, we had initial sales of our module products, which continued in 2014, 2015 and 2016. We introduced our modules in order to accelerate market adoption of LTE functionality in data devices such as tablets, notebook computers, consumer devices and machine-to-machine devices. The ASP of the module is much higher than the ASP of our semiconductor solutions as many other components are added in order to provide a complete LTE solution.
The proportion of our product revenue that is generated from the sale of various products, also referred to as product mix, affects our overall ASP, product revenue and profitability. Given the varying ASPs of our solutions, any material change in our product mix may affect our gross margins and operating results from period to period. We expect to continue to broaden our product portfolio by introducing new solutions.
Other Revenue
Other revenue consists of the sale of licenses to use our technology solutions and revenue from associated annual software maintenance and support services, as well as technical support services and development services. Development services include advanced technology development services for technology partners and product development and integration services for customers, and wireless operators.
We license the right to use our solutions, including embedded software that enables our end customers to customize our solutions for use in their products. The license generally is perpetual and covers unlimited product designs by the end customer. We expect that we will continue to sign new license agreements as we begin working with new customers, but we do not expect that such licenses will generate significant revenues.
Development services agreements typically call for a number of milestones to be delivered over several quarters, with revenue generally recognized on the percentage of completion method as contract progresses. Until 2015, such service agreements were occasional in nature, where we earned revenue from three customers in 2014. In 2015 and 2016, with the signature of several agreements with large companies such as TCL, Gemalto, and others, development service revenue increased in both 2015 and 2016.
With the continuation in 2017 of many of the development services contracts executed in 2016, as well as our expectation that we will continue to enter into these kind of agreements, we expect other revenue, compared to 2016, to remain flat or increase slightly in absolute terms in future periods as we continue to provide services on particularly complex projects, and in the short term it is likely to remain a significant percentage of our total revenue.
The following table sets forth our total revenue by region for the periods indicated. We categorize our total revenue geographically based on the location to which we invoice.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(in thousands)
|
Asia
|
|
$
|
19,984
|
|
|
$
|
24,943
|
|
|
$
|
33,317
|
|
Europe, Middle East, Africa
|
|
101
|
|
|
3,635
|
|
|
5,593
|
|
Americas
|
|
2,517
|
|
|
3,954
|
|
|
6,669
|
|
Total revenue
|
|
$
|
22,602
|
|
|
$
|
32,532
|
|
|
$
|
45,579
|
|
Cost of Revenue
Our cost of revenue includes cost of product revenue and cost of other revenue.
Cost of Product Revenue
A significant portion of our cost of semiconductor solution product revenue consists of the cost of wafers manufactured by third-party foundries and costs associated with assembly and test services. Cost of product revenue is impacted by manufacturing variances such as cost and yield for wafer, assembly and test operations and package cost. To a lesser extent, cost of product revenue includes expenses relating to depreciation of productions mask sets, the cost of shipping and logistics, royalties, personnel costs, including share-based compensation expense, valuation provisions for excess inventory and warranty costs.
For our module products, the cost of product revenue includes not only the cost of the semiconductor solution but also other components such as power amplifiers and filters, as well as greater packaging costs.
Early in the life cycle of our products, we typically experience lower yields and higher associated costs. Over the life cycle of a particular product, our experience has been that the cost of product revenue has typically declined as volumes increase and test operations mature, while ASPs generally decline.
We use third-party foundry, assembly and test subcontractors, which are primarily located in Asia, to manufacture, package and test our semiconductor solutions. We purchase processed wafers from our fabrication supplier, currently TSMC. We also rely on third-party assembly and test subcontractors to assemble, package and test our products, and on third-party logistics specialists for logistics and storage. We do not have long-term agreements with our suppliers. Our obligations with our vendors for manufacturing, assembly and testing are generally negotiated on a purchase order basis.
Cost of Other Revenue
As most of the costs related to other revenue are incurred as part of our normal research and development efforts, we allocate to cost of other revenue only the specific incremental costs related to generating maintenance and technical support and development services revenue.
Gross Profit
Our gross profit is affected by a variety of factors, including our product and revenue mix, the ASPs of our products, the volumes sold, the purchase price of fabricated wafers, assembly and test service costs and royalties, provision for inventory valuation charges, and changes in wafer, assembly and test yields. We expect our gross profit will fluctuate over time depending upon competitive pricing pressures, the timing of the introduction of new products, product and revenue mix, volume pricing, variances in manufacturing costs and the level of royalty payments to third parties possessing intellectual property necessary for our products.
Operating Expenses
Research and Development
We engage in substantial research and development efforts to develop new products and integrate additional capabilities into our core products. Research and development expense consists primarily of personnel costs, including share-based compensation, for our engineers engaged in design and development of our products and technologies. These expenses also include the depreciation cost of intellectual property licensed from others for use in our products, product development costs, which include external engineering services, development software and hardware tools, cost of fabrication of mask sets for prototype products, external laboratory costs for certification procedures, equipment depreciation and facilities expenses.
We expect research and development expense to remain fairly stable in the short term as we continue to control costs, and then to increase in absolute terms as we enhance and expand our features and offerings for our product portfolio and we continue to develop new products for LTE, which will require additional resources and investments.
Under IFRS, research and development expense is required to be capitalized if certain criteria are met and then amortized over the life of the product. As we operate in a highly innovative, dynamic and competitive sector, the costs incurred from the point that the criteria for capitalization are met to the point when the product is made generally available on the market are not material. Through 2014, all research and development expense had been expensed as incurred. In 2015, a total of $0.4 million of development costs incurred late in the development cycle was capitalized as we considered that the criteria for capitalization had been met. 2015 was the first year that material amounts of these kind of costs had been incurred and that the capitalization criteria had all been met. A small amount of development costs were capitalized in 2016 ($22,000); we expect that we will continue to capitalize some development costs going forward.
Research and Development Incentives
In France and the United Kingdom, we receive certain tax incentives based on the qualifying research and development expense incurred in those jurisdictions. When the incentive is available only as a reduction of taxes owed, such incentive is accounted for as a reduction of tax expense; otherwise, it is accounted for as a government grant with the benefit recorded as a reduction of research and development expense. We expect to be able to continue to qualify for such tax incentives in these jurisdictions in future periods. We expect the tax incentives, which are based on a percentage of qualifying research and development expense, to remain fairly stable or decline slightly in the short term. For 2016, we recorded a net amount of approximately $2.0 million in tax incentives compared with $2.5 million in 2015.
In France, we also receive incentives in the form of grants from agencies of the French government and the European Union, based on qualifying research and development expense incurred pursuant to collaborative programs carried out with other companies and universities. These incentives are recorded as a reduction of research and development expense and are recognized when there is a reasonable assurance that the grant will be received and all relevant conditions will be complied with. For 2016, we recorded approximately $1.7 million in grants compared with approximately $1.2 million in 2015. In November 2014 and December 2016, we received $3.9 million and $0.6 million, respectively, in advances on grants and debt financing related to a large research project funded by the French government, called FELIN. The total value of the project funding for the Company is €7.0 million ($9.0 million) to be received over three years. Of the €7.0 million, €3.0 million is in the form of a grant and €4.0 million is in the form of interest-bearing debt to be repaid beginning in 2018 and through 2020. We expect that the amounts we recognize from such grants overall will remain fairly flat in 2017.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs, including sales commissions, and share-based compensation for our business development, sales, customer support and marketing personnel, commissions paid to independent sales agents, marketing fees paid to industrial partners, the costs of advertising and participation in trade shows, depreciation and facilities expenses. We expect the size of our business development, sales and marketing organization to increase slightly in 2017 and expect sales and marketing expense to increase slightly.
General and Administrative
General and administrative expense consists primarily of personnel costs and share-based compensation for our finance, human resources, purchasing, quality and administrative personnel; professional services costs related to recruiting, accounting, tax and legal services; investor relations costs; insurance; and depreciation. Information technology and facilities expenses are accounted for as overhead and allocated across all departments of the Company based on a pro rata basis. We expect general and administrative expense to remain fairly flat or increase slightly in 2017.
Interest Income (Expense), Net
Interest income consists of interest earned on cash and cash equivalent balances. We have historically invested our cash primarily in commercial bank accounts, short term deposits and money market funds.
Interest expense relates to our 2015 and 2016 issuances of convertible debt, our government debt put in place in 2015, our accounts receivable financing facility put in place in 2014, and the research project loan received in 2014.
Foreign Exchange Gain (Loss), Net
Foreign exchange gain (loss) represents exchange gains and losses on our exposures to non-U.S. dollar denominated transactions, primarily associated with the changes in exchange rates between the U.S. dollar and the euro, and re-measurement of foreign currency balances at reporting date. As a result of our international operations, we are subject to risks associated with foreign currency fluctuations. Almost all of our revenues are in U.S. dollars and a portion of our expenses are also in U.S. dollars. However, a significant portion of our personnel costs is in euros and some long-term items on our balance sheet are also denominated in euros. We use hedging instruments in order to reduce volatility in operating expenses related to exchange rate fluctuations. We classify foreign exchange gains and losses related to hedges of euro-based operating expenses as operating expenses.
Income Tax Expense (Benefit)
We are subject to income taxes in France, the United States and numerous other jurisdictions. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we
recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable. Our effective tax rates differ from the statutory rate primarily due to any valuation allowance, the tax impact of local taxes, international operations, research and development tax credits, tax audit settlements, non-deductible compensation, and transfer pricing adjustments. In respect of our subsidiaries outside of France, we operate on a “cost plus” basis.
In France, we have significant net deferred tax assets resulting from net operating loss carry forwards, tax credit carry forwards and deductible temporary differences that reduce our taxable income. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carry back or carry forward periods provided for in the tax law for each applicable tax jurisdiction. Over time, as we generate taxable income, we expect our tax rate to increase significantly.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements contained elsewhere in this annual report, which are prepared in accordance with IFRS as described in Note 2 to our Consolidated Financial Statements.
Some of the accounting methods and policies used in preparing our Consolidated Financial Statements under IFRS are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our earnings could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted. We believe that the most significant management judgments and assumptions in the preparation of our financial statements are described below.
Revenue Recognition
Our policy for revenue recognition, in instances where multiple deliverables are sold contemporaneously to the same counterparty, is in accordance with IAS 18.13. When we enter into contracts for the sale of products, licenses and maintenance and support and development services, we evaluate all deliverables in the arrangement to determine whether they represent separate units of accounting, each with its own separate earnings process, and their relative fair value. Such determination requires judgment and is based on an analysis of the facts and circumstances surrounding the transactions. We apply judgment for contracts when the first year of maintenance is included in the software license price. For such contracts, an amount equal to the relative fair value of one year of maintenance is deducted from the value of the license and recognized as revenue over the period of maintenance. The difference between license and maintenance services invoiced and the amount recognized in revenue is recorded as deferred revenue.
Revenue from technical support and development services is generally recognized using the percentage-of-completion method when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and costs can be estimated reliably and it is probable that the economic benefits associated with the contract will flow to the Company and the stage of contract completion can be measured. Estimating the cost to complete the services requires judgment. We base our estimate on the estimated hours and level of engineer to complete the project, plus any external costs required to perform the services. In certain circumstances, revenue is recognized based on the achievement of contract milestones. We recognize revenue on milestones when the milestone is substantive based on technical merits, and we have obtained customer acceptance that the milestone has been achieved. Our policy for revenue recognition is further explained in Note
2.3
to our Consolidated Financial Statements contained elsewhere in this annual report.
Inventories
Inventories consist primarily of the cost of semiconductors, including wafer fabrication, assembly, testing and packaging; components; and modules purchased from subcontractors. We write down the carrying value of our inventories to the lower of cost (determined using the moving average method) or net realizable value (estimated market value less estimated costs of completion and the estimated costs necessary to make the sale). We write down the carrying value of our inventory for estimated amounts related to lower of cost or market value, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. The estimated market value of the inventory is based on historical usage and assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions on a product-by-product basis. Once established, inventory reserves are not reversed until the
related inventory has been sold or scrapped. Actual demand may differ from forecasted demand and these differences may have a material effect on recorded inventory values and cost of revenue.
When we consider future demand for a product, there are a number of factors that we take into consideration, including purchase orders and forecasts from customers, which in normal market conditions give us visibility for the next three months and some view on the following three months, our own internal projections based on customer inputs and new business opportunities, and estimates of market potential based on reports from industry analysts. The time horizon considered for future demand varies depending on the nature of the product, meaning we consider if the product is newly-introduced or approaching end-of-life, if the product is in finished good form or in component form, and if the product is incorporated in a large or small number of different end-user products from few or many customers.
We evaluate the realizability of our inventory at each balance sheet date. In doing so, we consider, among other things, demand indicated by our customers, overall market potential based on input from operators and analysts, and the remaining estimated commercial life of our products.
In 2014, the last major WiMAX project shipped throughout the year, but the customer indicated to us in the fourth quarter that quantities for 2015 would be much lower. In addition, while we were selected for one other major WiMAX project in the third quarter of 2014, during the fourth quarter other projects that we had been working on were delayed or canceled. Consequently, we provided for all remaining WiMAX inventory except for amounts of two products which were expected to ship for identified projects. The total inventory provision recorded in 2014 was $1.9 million. WiMAX inventory of finished goods and components remaining on the balance sheet at December 31, 2014 totaled $0.9 million.
In 2015, we sold $0.2 million of the remaining inventory from December 31, 2014 to an existing customer in the first quarter of 2015. The new WiMAX projects identified in 2014 were either further delayed or were put on hold. Therefore, we recorded a provision for slow-moving inventory for the remaining $0.7 million of WiMAX inventory as of December 31, 2015.
In 2016, we recorded a provision for slow-moving LTE inventory totaling $0.1 million.
Share-Based Compensation
We have various share-based compensation plans for employees and non-employees. The expense recorded in our statement of operations for equity awards under these plans is affected by changes in valuation assumptions. For example, the fair value of stock options is estimated by using the binomial model on the date of grant based on certain assumptions, including, among others, expected volatility, the expected option term and the expected dividend payout rate.
Prior to January 1, 2015, as the Company had a short history of being publicly traded, it was not practicable to determine the volatility of the underlying shares based on the Company’s own experience. Therefore, as allowed by Appendix B (paragraphs 26 to 29) of IFRS2
Share-based Payment
, the historical volatility of similar entities (a selection of publicly-traded semiconductor companies) after a comparable period in such companies’ lives was used). For the years ended December 31, 2015 and 2016, the assumption has been based on the Company’s volatility.
We recognize compensation expense only for the portion of share options that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from our estimates.
For
2014
,
2015
and
2016
, we recorded employee share-based compensation expense of $1.3 million, $0.9 million and $1.1 million, respectively. Share-based compensation expense related to non-employees was not material for
2014
,
2015
and
2016
.
Functional Currency
We use the U.S. dollar as the functional currency of Sequans Communications S.A. due to the high percentage of our revenues, cost of revenue, capital expenditures and operating costs, other than those related to headcount and overhead, which are denominated in U.S. dollars. Our IPO proceeds and the proceeds from our follow-on offerings were also denominated in U.S. dollars. However, all debt and equity proceeds we received since our inception prior to our initial public offering were denominated in euros.
Each subsidiary determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. As of each reporting date, the assets and liabilities of each subsidiary are translated into the U.S. dollar, our functional and reporting currency, at the rate of exchange at the balance sheet date and each
subsidiary’s statement of operations is translated at the average exchange rate for the year. Exchange differences arising on the translation are taken directly to a separate component of equity, cumulative translation adjustments.
Fair Value of Financial Instruments
Fair value corresponds to the quoted price for listed financial assets and liabilities. Where no active market exists, we establish fair value by using a valuation technique determined to be the most appropriate in the circumstances, for example:
|
|
•
|
available-for-sale assets: comparable transactions, multiples for comparable transactions, discounted present value of future cash flows;
|
|
|
•
|
loans and receivables, financial assets at fair value through profit and loss: net book value is deemed to be approximately equivalent to fair value because of their relatively short holding period;
|
|
|
•
|
trade payables: book value generally is deemed to be equivalent to fair value because of their relatively short holding period. Trade payables with extended payment terms are discounted to present value;
|
|
|
•
|
convertible debt and embedded derivative: Company’s convertible debt has optional redemption periods/dates occurring before their contractual maturity. The holder of the convertible debt has the right to request conversion at any time from their issue. Specifically, the option component of the convertible debt has been recorded as an embedded derivative at fair value
.
The fair value was determined using a valuation model that requires judgment, including estimating the change in value of the Company at different dates and market yields applicable to the Company’s straight debt (without the conversion option). The assumptions used in calculating the value of the conversion represent the Company’s best estimates based on management’s judgment and subjective future expectations, and
|
|
|
•
|
Other derivatives: fair value based on mark to market value.
|
Results of Operations
The following tables set forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our Consolidated Financial Statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.
Comparison of Years Ended December 31, 2015 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change
|
|
|
2015
|
|
2016
|
|
%
|
|
|
(in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
Product revenue
|
|
$
|
24,669
|
|
|
$
|
34,581
|
|
|
40
|
%
|
Other revenue
|
|
7,863
|
|
|
10,998
|
|
|
40
|
|
Total revenue
|
|
32,532
|
|
|
45,579
|
|
|
40
|
|
Cost of revenue:
|
|
|
|
|
|
|
Cost of product revenue
|
|
17,970
|
|
|
22,574
|
|
|
26
|
|
Cost of other revenue
|
|
1,481
|
|
|
3,022
|
|
|
104
|
|
Total cost of revenue
|
|
19,451
|
|
|
25,596
|
|
|
32
|
|
Gross profit
|
|
13,081
|
|
|
19,983
|
|
|
53
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
25,305
|
|
|
26,334
|
|
|
4
|
|
Sales and marketing
|
|
5,985
|
|
|
7,126
|
|
|
19
|
|
General and administrative
|
|
5,428
|
|
|
6,267
|
|
|
15
|
|
Total operating expenses
|
|
36,718
|
|
|
39,727
|
|
|
8
|
|
Operating income (loss)
|
|
(23,637
|
)
|
|
(19,744
|
)
|
|
(16
|
)
|
Financial income (expense):
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(1,516
|
)
|
|
(3,686
|
)
|
|
(143
|
)
|
Other financial expense
|
|
(145
|
)
|
|
(83
|
)
|
|
43
|
|
Change in the fair value of convertible debt embedded derivative
|
|
(2,036
|
)
|
|
(1,583
|
)
|
|
22
|
|
Foreign exchange gain (loss)
|
|
249
|
|
|
593
|
|
|
(138
|
)
|
Profit (Loss) before income taxes
|
|
(27,085
|
)
|
|
(24,503
|
)
|
|
|
Income tax expense (benefit)
|
|
317
|
|
|
284
|
|
|
10
|
|
Profit (Loss)
|
|
$
|
(27,402
|
)
|
|
$
|
(24,787
|
)
|
|
|
The following table sets forth a summary of our statement of operations as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2015
|
|
2016
|
|
|
(% of total revenue)
|
Revenue:
|
|
|
|
|
Product revenue
|
|
76
|
|
|
76
|
|
Other revenue
|
|
24
|
|
|
24
|
|
Total revenue
|
|
100
|
|
|
100
|
|
Cost of revenue:
|
|
|
|
|
Cost of product revenue
|
|
55
|
|
|
50
|
|
Cost of other revenue
|
|
5
|
|
|
7
|
|
Total cost of revenue
|
|
60
|
|
|
56
|
|
Gross profit
|
|
40
|
|
|
44
|
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
78
|
|
|
58
|
|
Sales and marketing
|
|
18
|
|
|
16
|
|
General and administrative
|
|
17
|
|
|
14
|
|
Total operating expenses
|
|
113
|
|
|
88
|
|
Operating income (loss)
|
|
(73
|
)
|
|
(44
|
)
|
Financial income (expense):
|
|
|
|
|
Interest income (expense), net
|
|
(5
|
)
|
|
(8
|
)
|
Other financial expense
|
|
—
|
|
|
—
|
|
Change in the fair value of convertible debt embedded derivative
|
|
(6
|
)
|
|
(3
|
)
|
Foreign exchange gain (loss)
|
|
1
|
|
|
1
|
|
Profit (Loss) before income taxes
|
|
(83
|
)
|
|
(54
|
)
|
Income tax expense (benefit)
|
|
1
|
|
|
1
|
|
Profit (Loss)
|
|
(84
|
)
|
|
(55
|
)
|
Revenue
Product Revenue
Product revenue increased 40% from $24.7 million in
2015
to $34.6 million in
2016
. This increase was due entirely to higher sales of LTE products. LTE product revenues were driven primarily by customers with products for emerging markets and emerging carriers and by customers selling into the U.S. market. Increased revenues also reflect a product mix with a higher percentage of module sales; modules have a higher average selling price than chipsets.
In
2016
, we shipped approximately 2.6 million of units of LTE products compared to 1.7 million units in
2015
. We expect our LTE product revenue to continue to increase in 2017 as the single-mode LTE market, including the market for LTE for IoT, continues its growth and as our LTE solutions are currently in commercial deployments with multiple wireless carriers in the U.S. and in multiple countries outside of the U.S. In addition, our solutions are under evaluation or trials with other leading wireless carriers.
Other Revenue
Other revenue increased 40% from $7.9 million in
2015
to $11.0 million in
2016
, reflecting an increase in development services revenue offset slightly by a small decline in license and maintenance revenue. Development services revenue increased from $5.9 million in
2015
to $9.3 million in
2016
. License revenue decreased from $1.6 million in
2015
to $1.5 million in 2016, and maintenance revenue decreased from $400,000 in
2015
to $200,000 in
2016
.
Cost of Revenue
Cost of product revenue increased 26% from $18.0 million in
2015
to $22.6 million in
2016
due to higher product and manufacturing costs associated with the increased number of units sold. Cost of other revenue increased 104% from $1.5
million in
2015
to $3.0 million in
2016
, reflecting the 58% increase of development services revenue, some of which involved re-selling external services, such as certification costs.
Gross Profit
Gross profit increased 53% from $13.1 million in
2015
to $20.0 million in
2016
, while gross margin percentage increased from 40.2% in
2015
to 43.8% in
2016
, primarily due to an improved product gross margin. Product gross margin percentage increased from 27.2% in
2015
to 34.7% in
2016
due to better absorption of fixed production costs by a higher product revenue base and a lower provision for slow-moving inventory, partially offset by the impact of a higher percentage of lower-margin module sales in the product revenue mix compared to 2015.
Research and Development
Research and development expense increased 4% from $25.3 million in
2015
to $26.3 million in
2016
. While there were
186 employees and independent contractors in research and development at both December 31,
2016
and December 31,
2015
, we had decreased headcount early in 2015 and only built it up again in the latter part of 2015.
These expenses are net of research and development incentives earned during the periods, which are accounted for as a reduction of research and development expense. Research and development incentives remained flat at $3.7 million in
2015
and in
2016
. In 2015, for the first time certain development expenses met the criteria for capitalization and consequently $386,000 in expenses were capitalized in late 2015 ($22,000 in 2016) and will be amortized over the three year estimated useful life of the related product.
Research and development costs associated with product development (including normal customer support which generates product improvements) are recorded in operating expense. In some cases, we have negotiated agreements with customers and partners whereby we provide certain development services beyond our normal practices or planned product roadmap. Amounts received from these agreements are recorded in other revenue. Incremental costs, including both internal resources and out-of-pocket expenses, that we incur as a result of the commitments in the agreements are recorded in cost of other revenue, rather than in research and development expense. Other research and development costs related to the projects covered by the agreements, but which we would have incurred without the existence of such agreements are recorded in research and development expense.
Sales and Marketing
Sales and marketing expense increased 19% from $6.0 million in
2015
to $7.1 million in
2016
. The increase primarily
reflects the impact of a reorganization that occurred mid-2016 as 13 sales support engineers who previously were part of the research and development organization became part of the sales and marketing organization. In addition, we reinforced the sales team, including the hiring of the Chief Marketing Officer and the Vice President Worldwide Sales. The increase was partially offset by lower marketing incentive fees related to a major business initiative in 2015 and early 2016. Overall, there were 42 employees and independent contractors in sales and marketing at December 31,
2016
compared to 19 employees at December 31,
2015
.
General and Administrative
General and administrative expense increased 15% from $5.4 million in
2015
to $6.3 million in
2016
primarily due to an increase in recruitment fees and in stock based compensation, and a penalty paid to a customer. In addition, 2015 expenses benefited from the reversal of a $0.5 million provision recorded in 2014 related to a component order cancellation penalty which was reduced in the final negotiation. There were 17 employees in general and administrative at December 31,
2016
compared to 19 at December 31,
2015
.
Interest Income (Expense), Net
Net interest expense increased to $3.7 million in
2016
compared to $1.5 million in
2015
. Interest expense increased due to the convertible debt issued in April 2016 and reflected a full year of interest on the convertible debt issued in April 2015 and the two government loans received in September 2015. Interest income was insignificant in both years.
Change in Fair Value of Convertible Debt Embedded Derivative
In April 2015, we issued convertible debt. For the first year of the debt term, the conversion price was subject to change in certain circumstances if we issued equity at a price lower than the nominal conversion rate of $1.85. This option component of the convertible debt has been recorded as an embedded derivative at fair value in accordance with the provisions of IAS 39
Financial Instruments: Recognition and Measurement.
The fair value was determined using a valuation model that requires judgment, including estimating the change in value of the Company at different dates and market yields applicable to the Company’s straight debt (without the conversion option). The assumptions used in calculating the value of the conversion represent the Company’s best estimates based on management’s judgment and subjective future expectations. As long as the conversion price was subject to change, the embedded derivative was revalued at each balance sheet date, with the change in value recorded in financial income (expense). On April 14, 2015, the initial fair value of the embedded derivative was $4,055,000. The fair value was recalculated at the end of each reporting period resulting in a fair value of $6,091,000 at December 31, 2015. The change of this fair value of $2,036,000 for the year ended December 31, 2015 was recorded in the Consolidated Statement of Operations. The embedded derivative value was fixed in April 2016 at a value of $8,324,000 when the conversion price was no longer subject to change. The change of this fair value from December 31, 2015 of 2,233,000 was recorded as financial expense in the Consolidated Statement of Operations for the year ended December 31, 2016.
In April 2016, we issued additional convertible debt. The conversion price was based on the average market price during the period beginning on April 28, 2016 and ending on May 12, 2016, resulting in a short-term embedded derivative period. The final conversion price is $2.7126 per ADS. The fair value of the embedded derivative on the issuance date was calculated to be $2,597,000 and was recalculated to be $1,947,000 when the conversion rate was fixed on May 12, 2016. The change of this fair value of $650,000 was recorded as financal income in the Consolidated Statement of Operations for the year ended December 31, 2016.
The change in fair value was recorded as financial income in the year ended December 31, 2016 and the value of the embedded derivative as of May 12, 2016 was transferred from liabilities to Other Capital Reserves in shareholders’ equity.
Foreign Exchange Gain (Loss), Net
We had a net foreign exchange gain of $593,000 in 2016 compared to $249,000 in 2015 primarily due to movements in the U.S. dollar versus the euro.
Income Tax Expense (Benefit)
In
2016
, we recorded current tax expense of $272,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax loss amounting to $12,000. In
2015
, we recorded current tax expense of $311,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax loss amounting to $6,000. Deferred tax assets have not been recognized in 2016 or 2015 with respect to our losses as we have not generated taxable profits since beginning operations in 2004.
Comparison of Years Ended December 31, 2014 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change
|
|
|
2014
|
|
2015
|
|
%
|
|
|
(in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
Product revenue
|
|
$
|
19,836
|
|
|
$
|
24,669
|
|
|
24
|
%
|
Other revenue
|
|
2,766
|
|
|
7,863
|
|
|
184
|
|
Total revenue
|
|
22,602
|
|
|
32,532
|
|
|
44
|
|
Cost of revenue:
|
|
|
|
|
|
|
Cost of product revenue
|
|
15,435
|
|
|
17,970
|
|
|
16
|
|
Cost of other revenue
|
|
346
|
|
|
1,481
|
|
|
328
|
|
Total cost of revenue
|
|
15,781
|
|
|
19,451
|
|
|
23
|
|
Gross profit
|
|
6,821
|
|
|
13,081
|
|
|
92
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
28,634
|
|
|
25,305
|
|
|
(12
|
)
|
Sales and marketing
|
|
5,278
|
|
|
5,985
|
|
|
13
|
|
General and administrative
|
|
6,969
|
|
|
5,428
|
|
|
(22
|
)
|
Total operating expenses
|
|
40,881
|
|
|
36,718
|
|
|
(10
|
)
|
Operating income (loss)
|
|
(34,060
|
)
|
|
(23,637
|
)
|
|
(31
|
)
|
Financial income (expense):
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(20
|
)
|
|
(1,516
|
)
|
|
|
Other financial expense
|
|
—
|
|
|
(145
|
)
|
|
|
Change in the fair value of convertible debt embedded derivative
|
|
—
|
|
|
(2,036
|
)
|
|
|
Foreign exchange gain (loss)
|
|
118
|
|
|
249
|
|
|
|
Profit (Loss) before income taxes
|
|
(33,962
|
)
|
|
(27,085
|
)
|
|
|
Income tax expense (benefit)
|
|
162
|
|
|
317
|
|
|
|
Profit (Loss)
|
|
$
|
(34,124
|
)
|
|
$
|
(27,402
|
)
|
|
|
The following table sets forth a summary of our statement of operations as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2014
|
|
2015
|
|
|
(% of total revenue)
|
Revenue:
|
|
|
|
|
Product revenue
|
|
88
|
|
|
76
|
|
Other revenue
|
|
12
|
|
|
24
|
|
Total revenue
|
|
100
|
|
|
100
|
|
Cost of revenue:
|
|
|
|
|
Cost of product revenue
|
|
68
|
|
|
55
|
|
Cost of other revenue
|
|
2
|
|
|
5
|
|
Total cost of revenue
|
|
70
|
|
|
60
|
|
Gross profit
|
|
30
|
|
|
40
|
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
127
|
|
|
78
|
|
Sales and marketing
|
|
23
|
|
|
18
|
|
General and administrative
|
|
31
|
|
|
17
|
|
Total operating expenses
|
|
181
|
|
|
113
|
|
Operating income (loss)
|
|
(151
|
)
|
|
(73
|
)
|
Financial income (expense):
|
|
|
|
|
Interest income (expense), net
|
|
—
|
|
|
(5
|
)
|
Other financial expense
|
|
—
|
|
|
—
|
|
Change in the fair value of convertible debt embedded derivative
|
|
—
|
|
|
(6
|
)
|
Foreign exchange gain (loss)
|
|
1
|
|
|
1
|
|
Profit (Loss) before income taxes
|
|
(150
|
)
|
|
(83
|
)
|
Income tax expense (benefit)
|
|
1
|
|
|
1
|
|
Profit (Loss)
|
|
(151
|
)
|
|
(84
|
)
|
Revenue
Product Revenue
Product revenue increased 24% from $19.8 million in 2014 to $24.7 million in 2015. This increase was due to higher sales of LTE products, while WiMAX product revenue decreased significantly. LTE product revenues were driven primarily by customers with products for emerging markets and emerging carriers and by customers selling into the U.S. market. Increased revenues also reflect a product mix with a higher percentage of module sales; modules have a higher average selling price than chipsets.
In 2015, we shipped approximately 1.7 million of units of LTE products compared to 900,000 units in 2014, and approximately 100,000 units of WiMAX products compared to 800,000 units in 2014. We expect our LTE product revenue to continue to increase in 2016 as the single-mode LTE market, including the market for LTE for IoT, continues its growth and as our LTE solutions are currently in commercial deployments in the U.S. and multiple countries outside of the U.S.. In addition, our solutions are under evaluation or trials with other leading wireless carriers. We do not expect any material WiMAX product revenue going forward.
Other Revenue
Other revenue increased 184% from $2.8 million in 2014 to $7.9 million in 2015, reflecting increases in both license and development services revenue 2015. License revenue increased from $400,000 in 2014 to $1.6 million in 2015, while development services revenue increased from $2.0 million to $5.9 million. Maintenance revenue remained flat at $400,000 in both years. Prior to the issuance of the audited 2015 financial statements, the estimate of costs to complete for one service contract were revised based on the best information available at that time, resulting in a remeasurement of the percentage of
completion as of December 31, 2015. This remeasurement resulted in a shift of $177,000 in revenue from the fourth quarter of 2015 to the first quarter of 2016, and a corresponding increase in net loss in the fourth quarter of 2015.
Cost of Revenue
Cost of product revenue increased 16% from $15.4 million in 2014 to $18.0 million in 2015 due to higher product and manufacturing costs associated with the increased number of units sold. Cost of other revenue increased 328% from $0.3 million in 2014 to $1.5 million in 2015, reflecting the tripling of development services revenue.
Gross Profit
Gross profit increased 92% from $6.8 million in 2014 to $13.1 million in 2015, while gross margin percentage increased from 30.2% in 2014 to 40.2% in 2015, primarily due to revenue mix with more license and development services revenue in 2015. Product gross margin percentage increased from 22.2% in 2014 to 27.2% in 2015 due to better absorption of fixed production costs by a higher product revenue base and a lower provision for slow-moving WiMAX inventory, partially offset by the impact of a higher percentage of lower-margin module sales in the product revenue mix compared to 2014.
Research and Development
Research and development expense decreased 12% from $28.6 million in 2014 to $25.3 million in 2015. While there were 186 employees and independent contractors in research and development at December 31, 2015 compared to 176 at December 31, 2014, we had decreased headcount early in 2015 and only built it up again in the latter part of 2015.
These expenses are net of research and development incentives earned during the periods, which are accounted for as a reduction of research and development expense. Research and development incentives decreased by 16% from $4.4 million in 2014 to $3.7 million in 2015. In 2015, for the first time certain development expenses met the criteria for capitalization and consequently $386,000 in expenses were capitalized in late 2015 and will be amortized over the estimated useful life of the related product, three years.
Research and development costs associated with product development (including normal customer support which generates product improvements) are recorded in operating expense. In some cases, we have negotiated agreements with customers and partners whereby we provide certain development services beyond our normal practices or planned product roadmap. Amounts received from these agreements are recorded in other revenue. Incremental costs, including both internal resources and out-of-pocket expenses, that we incur as a result of the commitments in the agreements are recorded in cost of other revenue, rather than in research and development expense. Other research and development costs related to the projects covered by the agreements, but which we would have incurred without the existence of such agreements are recorded in research and development expense.
Sales and Marketing
Sales and marketing expense increased 13% from $5.3 million in 2014 to $6.0 million in 2015. The increase primarily reflects the payment of marketing incentives related to a major business initiative in 2015. Overall, there were 19 employees and independent contractors in sales and marketing at December 31, 2015 compared to 21 employees at December 31, 2014.
General and Administrative
General and administrative expense decreased 22% from $7.0 million in 2014 to $5.4 million in 2015 primarily due to a decrease of $0.2 million in stock based compensation expenses, a decrease of $0.3 million related to lower bad debt expense and the reversal of a provision for $0.5 million related to a component order cancellation penalty which was reduced in the final negotiation. There were 19 employees in general and administrative at December 31, 2015 compared to 22 employees at December 31, 2014.
Interest Income (Expense), Net
Net interest expense increased $20,000 in 2014 to $1.5 million in 2015. Interest expense increased due to the accounts receivable financing facility put in place in June 2014, the research project loan received in November 2014, the convertible debt issued in April 2015 and the two government loans received in September 2015. Interest income decreased due to lower amounts of cash and cash equivalents invested in interest-bearing accounts.
Change in Fair Value of Convertible Debt Embedded Derivative
In April 2015, we issued convertible debt. For the first year of the debt term, the conversion price was subject to change in certain circumstances if we issued equity at a price lower than the nominal conversion rate of $1.85. This option component of the convertible debt has been recorded as an embedded derivative at fair value in accordance with the provisions of IAS 39
Financial Instruments: Recognition and Measurement.
The fair value was determined using a valuation model that requires judgment, including estimating the change in value of the Company at different dates and market yields applicable to the Company’s straight debt (without the conversion option). The assumptions used in calculating the value of the conversion represent the Company’s best estimates based on management’s judgment and subjective future expectations. As long as the conversion price is subject to change, the embedded derivative is revalued at each balance sheet date, with the change in value recorded in financial income (expense). The embedded derivative value will be fixed in April 2016 when the conversion price is no longer subject to change. On April 14, 2015, the initial fair value of the embedded derivative was $4,055,000. The fair value is recalculated at the end of each reporting period resulting in a fair value of $6,091,000 at December 31, 2015. The change of this fair value of $2,036,000 for the year ended December 31, 2015 was recorded in the Consolidated Statement of Operations.
Foreign Exchange Gain (Loss), Net
We had a net foreign exchange gain of $249,000 in 2015 compared to $118,000 in 2014 primarily due to movements in the U.S. dollar versus the euro.
Income Tax Expense (Benefit)
In 2015, we recorded current tax expense of $311,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax loss amounting to $6,000. In 2014, we recorded current tax expense of $197,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax benefit amounting to $35,000. Deferred tax assets have not been recognized in 2015 or 2014 with respect to our losses as we have not generated taxable profits since beginning operations in 2004.
Selected Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations for
2015
and
2016
. This unaudited quarterly information has been prepared on the same basis as our audited Consolidated Financial Statements and includes all adjustments necessary for the fair presentation of the information for the quarters presented. You should read this table together with our Consolidated Financial Statements and the related notes thereto included in this annual report. Our quarterly results of operations will vary in the future. The results of operations for any quarter are not necessarily indicative of results for the entire year and are not necessarily indicative of any future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
2015
|
|
June 30,
2015
|
|
Sept. 30, 2015
|
|
Dec. 31, 2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
Sept. 30, 2016
|
|
Dec. 31, 2016
|
|
|
(in thousands) (unaudited)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
3,988
|
|
|
$
|
6,243
|
|
|
$
|
7,887
|
|
|
$
|
6,551
|
|
|
$
|
5,412
|
|
|
$
|
7,699
|
|
|
$
|
9,523
|
|
|
$
|
11,947
|
|
Other revenue
|
|
820
|
|
|
1,253
|
|
|
1,471
|
|
|
4,319
|
|
|
3,873
|
|
|
2,185
|
|
|
2,934
|
|
|
2,006
|
|
Total revenue
|
|
4,808
|
|
|
7,496
|
|
|
9,358
|
|
|
10,870
|
|
|
9,285
|
|
|
9,884
|
|
|
12,457
|
|
|
13,953
|
|
Cost of revenue
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
2,762
|
|
|
4,427
|
|
|
5,153
|
|
|
5,628
|
|
|
4,128
|
|
|
4,667
|
|
|
5,900
|
|
|
7,879
|
|
Cost of other revenue
|
|
124
|
|
|
345
|
|
|
391
|
|
|
621
|
|
|
747
|
|
|
804
|
|
|
731
|
|
|
740
|
|
Total cost of revenue
|
|
2,886
|
|
|
4,772
|
|
|
5,544
|
|
|
6,249
|
|
|
4,875
|
|
|
5,471
|
|
|
6,631
|
|
|
8,619
|
|
Gross profit
|
|
1,922
|
|
|
2,724
|
|
|
3,814
|
|
|
4,621
|
|
|
4,410
|
|
|
4,413
|
|
|
5,826
|
|
|
5,334
|
|
Operating expenses
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
6,893
|
|
|
6,135
|
|
|
5,525
|
|
|
6,752
|
|
|
6,727
|
|
|
6,889
|
|
|
6,391
|
|
|
6,327
|
|
Sales and marketing
|
|
1,722
|
|
|
1,348
|
|
|
1,406
|
|
|
1,509
|
|
|
1,501
|
|
|
1,495
|
|
|
1,926
|
|
|
2,204
|
|
General and administrative
|
|
1,483
|
|
|
1,286
|
|
|
1,119
|
|
|
1,540
|
|
|
1,378
|
|
|
1,761
|
|
|
1,459
|
|
|
1,669
|
|
Total operating expenses
|
|
10,098
|
|
|
8,769
|
|
|
8,050
|
|
|
9,801
|
|
|
9,606
|
|
|
10,145
|
|
|
9,776
|
|
|
10,200
|
|
Operating income (loss)
|
|
(8,176
|
)
|
|
(6,045
|
)
|
|
(4,236
|
)
|
|
(5,180
|
)
|
|
(5,196
|
)
|
|
(5,732
|
)
|
|
(3,950
|
)
|
|
(4,866
|
)
|
Financial income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(34
|
)
|
|
(432
|
)
|
|
(509
|
)
|
|
(541
|
)
|
|
(628
|
)
|
|
(916
|
)
|
|
(1,062
|
)
|
|
(1,080
|
)
|
Other financial expense
|
|
—
|
|
|
(141
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(83
|
)
|
|
—
|
|
|
—
|
|
Change in the fair value of convertible debt embedded derivative
|
|
—
|
|
|
(275
|
)
|
|
2,488
|
|
|
(4,249
|
)
|
|
(3,127
|
)
|
|
1,544
|
|
|
—
|
|
|
—
|
|
Foreign exchange gain (loss)
|
|
226
|
|
|
(120
|
)
|
|
(91
|
)
|
|
234
|
|
|
(212
|
)
|
|
196
|
|
|
(61
|
)
|
|
670
|
|
Profit (Loss) before income taxes
|
|
(7,984
|
)
|
|
(7,013
|
)
|
|
(2,348
|
)
|
|
(9,740
|
)
|
|
(9,163
|
)
|
|
(4,991
|
)
|
|
(5,073
|
)
|
|
(5,276
|
)
|
Income tax expense (benefit)
|
|
64
|
|
|
55
|
|
|
81
|
|
|
117
|
|
|
66
|
|
|
70
|
|
|
53
|
|
|
95
|
|
Profit (Loss)
|
|
$
|
(8,048
|
)
|
|
$
|
(7,068
|
)
|
|
$
|
(2,429
|
)
|
|
$
|
(9,857
|
)
|
|
$
|
(9,229
|
)
|
|
$
|
(5,061
|
)
|
|
$
|
(5,126
|
)
|
|
$
|
(5,371
|
)
|
|
|
(1)
|
Includes share-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
2015
|
|
June 30,
2015
|
|
Sept. 30, 2015
|
|
Dec. 31, 2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
Sept. 30, 2016
|
|
Dec. 31, 2016
|
|
|
(in thousands) (unaudited)
|
Cost of revenue
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Operating expenses
|
|
232
|
|
|
193
|
|
|
183
|
|
|
242
|
|
|
250
|
|
|
222
|
|
|
179
|
|
|
459
|
|
Share-based compensation
|
|
$
|
238
|
|
|
$
|
197
|
|
|
$
|
186
|
|
|
$
|
246
|
|
|
$
|
254
|
|
|
$
|
226
|
|
|
$
|
183
|
|
|
$
|
459
|
|
The following table sets forth a summary of our quarterly statement of operations as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
2015
|
|
June 30,
2015
|
|
Sept. 30, 2015
|
|
Dec. 31, 2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
Sept. 30, 2016
|
|
Dec. 31, 2016
|
|
|
(% of revenue) (unaudited)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
83
|
|
|
83
|
|
|
84
|
|
|
60
|
|
|
58
|
|
|
78
|
|
|
76
|
|
|
86
|
|
Other revenue
|
|
17
|
|
|
17
|
|
|
16
|
|
|
40
|
|
|
42
|
|
|
22
|
|
|
24
|
|
|
14
|
|
Total revenue
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
57
|
|
|
59
|
|
|
55
|
|
|
51
|
|
|
44
|
|
|
47
|
|
|
47
|
|
|
56
|
|
Cost of other revenue
|
|
3
|
|
|
5
|
|
|
4
|
|
|
6
|
|
|
8
|
|
|
8
|
|
|
6
|
|
|
5
|
|
Total cost of revenue
|
|
60
|
|
|
64
|
|
|
59
|
|
|
57
|
|
|
53
|
|
|
55
|
|
|
53
|
|
|
62
|
|
Gross profit
|
|
40
|
|
|
36
|
|
|
41
|
|
|
43
|
|
|
47
|
|
|
45
|
|
|
47
|
|
|
38
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
143
|
|
|
82
|
|
|
59
|
|
|
62
|
|
|
72
|
|
|
70
|
|
|
51
|
|
|
45
|
|
Sales and marketing
|
|
36
|
|
|
18
|
|
|
15
|
|
|
15
|
|
|
16
|
|
|
15
|
|
|
15
|
|
|
16
|
|
General and administrative
|
|
31
|
|
|
17
|
|
|
12
|
|
|
14
|
|
|
15
|
|
|
18
|
|
|
12
|
|
|
12
|
|
Total operating expenses
|
|
210
|
|
|
117
|
|
|
86
|
|
|
90
|
|
|
103
|
|
|
103
|
|
|
78
|
|
|
73
|
|
Operating income (loss)
|
|
(170
|
)
|
|
(81
|
)
|
|
(45
|
)
|
|
(48
|
)
|
|
(56
|
)
|
|
(58
|
)
|
|
(32
|
)
|
|
(35
|
)
|
Financial income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
(1
|
)
|
|
(6
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(7
|
)
|
|
(9
|
)
|
|
(9
|
)
|
|
(8
|
)
|
Other financial expense
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Change in the fair value of convertible debt embedded derivative
|
|
—
|
|
|
(3
|
)
|
|
26
|
|
|
(39
|
)
|
|
(33
|
)
|
|
16
|
|
|
—
|
|
|
—
|
|
Foreign exchange gain (loss)
|
|
5
|
|
|
(1
|
)
|
|
(1
|
)
|
|
2
|
|
|
(2
|
)
|
|
2
|
|
|
—
|
|
|
6
|
|
Profit (Loss) before income taxes
|
|
(166
|
)
|
|
(93
|
)
|
|
(25
|
)
|
|
(90
|
)
|
|
(98
|
)
|
|
(50
|
)
|
|
(41
|
)
|
|
(37
|
)
|
Income tax expense (benefit)
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Profit (Loss)
|
|
(167
|
)
|
|
(94
|
)
|
|
(26
|
)
|
|
(91
|
)
|
|
(99
|
)
|
|
(51
|
)
|
|
(41
|
)
|
|
(38
|
)
|
While the overall trend in product revenue is showing growth over time as more design wins begin shipping, we continue to have some volatility in quarterly revenue as many of the new design wins either ramp with some delay versus expectations, or do not ramp smoothly over time. Other revenue has increased over time as we have begun providing more development services to key customers and partners. The increase has masked the inherent fluctuation in this revenue stream due to the timing of the execution of software licenses and, the timing of performance milestones in development service agreements. Other revenue in the fourth quarter of 2015 and first quarter of 2016 was unusually high due a number of new development services starting as well as the execution in the fourth quarter of 2015 of a large license agreement.
Cost of product revenue in general increased and decreased from the second quarter of 2015 consistent with the increases and decreases in product revenue quarter to quarter. Cost of product revenue the fourth quarter of 2015 reflected the impact of a provision of $0.7 million related to slow-moving WiMAX inventory. Cost of other revenue increased in 2016 compared to 2015 as other revenues increased primarily due to an increase in development services; incremental costs incurred by the Company
and related to development service agreements negotiated with customers and partners to develop services are recorded in cost of other revenue.
In the first three quarters of 2016, gross margin remained above 45%. In the fourth quarter of 2016, gross margin declined to 38% reflecting the impact of sales of lower margin modules in the product mix and a lower contribution from high margin other revenues. Gross margin remained below 45% in 2015 as we continued to generate a portion of our revenues from our LTE modules with lower margins than our chip solutions. In the fourth quarter of 2015, gross margin reflected the impact of a write-down of the remaining WiMAX inventory, although this was partly offset by the high proportion of high margin other revenue. Excluding this inventory write-down, gross margin was 49.5%.
Research and development expenses in the second and third quarters of 2015 were lower due to cost control measures and some delay of spending combined with the third quarter being seasonally low due to the summer vacation period. Research and development expense increased in the fourth quarter of 2015 and first half of 2016 due to headcount increases, while the decreased expense in the third quarter of 2016 reflected seasonality and some support resources becoming dedicated to customer support and therefore reallocated to sales and marketing expense. Research and development expense in the fourth quarter of 2016 then remained flat compared to the third quarter due to the benefit of more resources being allocated to projects which qualified for research grant recognition which therefore reduced expense.
Sales and marketing expense remained flat in 2015 and the first half of 2016. The increase in the second half of 2016 reflects some support resources becoming dedicated to customer support and therefore reallocated to sales and marketing expense, as well as some hiring of new sales personnel.
General and administrative expense has tended to increase slightly over time, although expenses in the second and third quarters of 2015 were lower due to cost control measures and some delay of spending and hiring.
Interest expense increased from the second quarter of 2015 due to the convertible debt issued in April 2015, the two government loans received in September 2015 and an additional convertible debt issuance in April 2016. Interest income was insignificant. In 2015 and 2016, financial income (expense) was impacted by the change in fair value related to the reevaluation of the embedded derivatives in the convertible debt issuances, which values became fixed in the second quarter of 2016. Foreign exchange gains and losses resulted primarily from the change in the U.S. dollar to euro exchange rate and remeasurement of euro-based assets and liabilities at settlement or balance sheet date.
We have yet to experience an established pattern of seasonality. However, business activities in Asia generally slow-down in the first quarter of each year during the Chinese New Year period, which could harm our sales and results of operations during the period.
|
|
|
B.
|
Liquidity and Capital Resources
|
Sources of Liquidity
Our cash and cash equivalents and short-term investments were $20.5 million at
December 31, 2016
. We believe that our available cash and cash equivalents, proceeds from government funded projects and payment of research credits will be sufficient to fund our operations for at least the next 12 months.
Since inception, we have financed our operations primarily through proceeds from the issues of our shares and convertible notes, which totaled €54.7 million ($73.1 million) from 2004 to the end of 2010; from the $59.1 million in net proceeds from our initial public offering on the New York Stock Exchange in April 2011 and from $60.7 million in net proceeds from our follow-on public offerings in February and November 2013 and in September 2016.
In June 2012, we entered into a finance lease agreement with a French financial institution whereby we had the possibility to finance acquisitions of qualifying equipment with a total purchase price of up to €1.5 million ($2.0 million) through finance leases that were reimbursed over a 36-month period at an effective rate of interest of 4.6%. The finance lease obligation was secured by restricted cash balances on deposit with the financial institution equal to one-third of the original principal financed. The facility expired February 28, 2013 and has not been renewed. At December 31, 2016, our capital lease obligations had all been repaid.
In June 2014, the Company entered into a factoring agreement with a French financial institution whereby a line of credit was made available equal to 90% of the face value of accounts receivable from qualifying customers. The Company transfers to the finance company all invoices issued to qualifying customers and the customers are instructed to settle the invoices directly
with the finance company. At December 31, 2016, $7.7 million had been drawn on the line of credit and recorded as a current borrowing.
In October 2014, Bpifrance, the financial agency of the French government, provided funding to the Company in the context of a long-term research project, estimated to be completed over a 3-year period. The total funding will amount to €7.0 million ($9.0 million) comprising a portion in the form of a grant (€3.0 million or $3.8 million) and a portion in the form of a loan (€4.0 million or $5.2 million). The funding will be paid in three installments: the first tranche at the contract signature date, the second and the third installments after milestones defined in the contract. The advance will be repaid from June 30th, 2018 to June 30th, 2020 and bears interests at a 1.53% fixed contractual rate. In 2014, the Company received €2.1 million ($2.7 million) as grant and €1.0 million ($1.2 million) as a loan. In 2016, the Company received €0.6 million ($0.6 million) as a loan.
The next funding is expected to be received by the end of 2018 for approximately $3.5 million.
In April 2015, we completed the sale of a $12 million convertible note in a private placement transaction. The convertible note matures in April 2018 and bears interest at a rate of 7% per year, paid in kind annually on the anniversary of the issuance of the note. The note is convertible, at the holder’s option, into the company’s ADSs at a conversion rate of 540.5405 ADSs for each $1,000 principal amount of the note, subject to certain adjustments, which equates to an initial conversion price of $1.85 per ADS.
In September 2015, the Company received two loans from the financial agency of the French government for a total amount of €2 million ($2.2 million). One loan of €1 million bears interest at 5.24% per year, paid quarterly; the second loan of €1 million is interest-free. The interest-free loan has been revalued using the 5.24% interest rate payable on the other loan. Both loans have seven year terms with the principal being amortized on a quarterly basis beginning in September 2017.
On April 27, 2016, we raised net proceeds of $7.0 million from the sale of convertible notes to certain institutional investors in a private placement transaction. The convertible notes mature in April 2019 and bear interest at a rate of 7% per year, paid in kind annually on the anniversary of the issuance of the note. The notes are convertible, at the holder’s option, into the Company’s ADSs at a conversion price equal to 1.2 times the 10-trading day volume weighted average price of the ADSs on the New York Stock Exchange beginning on April 28, 2016 and ending on May 12, 2016; provided, however, in no event shall the conversion price be below $2.00 or exceed $3.00.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
(in thousands)
|
Net cash used in operating activities
|
|
$
|
(24,406
|
)
|
|
$
|
(16,401
|
)
|
|
$
|
(15,589
|
)
|
Net cash used in investing activities
|
|
(5,625
|
)
|
|
(5,345
|
)
|
|
(5,270
|
)
|
Net cash from financing activities
|
|
5,121
|
|
|
17,710
|
|
|
32,778
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(24,910
|
)
|
|
$
|
(4,036
|
)
|
|
$
|
11,919
|
|
Cash Flows from Operating Activities
Net cash used in operating activities during 2016 was $15.6 million, reflecting a net loss (before income tax) of $24.5 million, increases in inventories of $4.6 million and in trade payables and other liabilities of $2.4 million and decreases in government grant advances and deferred revenue of $1.8 million, in research tax credit receivable of $1.0 million and in trade and other receivables of $0.7 million. These and other smaller working capital adjustments were a net $2.4 million use of cash. In addition, there were several non-cash charges, including depreciation and amortization of $5.3 million, the change in the fair value of the convertible debt embedded derivative of $1.6 million, non-cash interest expense of $3.7 million and share-based compensation expense of $1.1 million during the period.
Net cash used in operating activities during 2015 was $16.4 million, reflecting a net loss (before income tax) of $27.1 million, an increase in trade receivables and other receivables of $9.1 million, a decrease in inventories of $5.1 million, an increase of trade payables and other liabilities of $2.0 million and an increase of deferred revenue of $2.8 million. These and other smaller working capital adjustments were a net $0.9 million source of cash. In addition, there were several non-cash charges, including depreciation and amortization of $5.3 million, the change in the fair value of the convertible debt embedded
derivative of $2.0 million, non-cash interest expense of $1.5 million and share-based compensation expense of $0.9 million during the period.
Net cash used in operating activities during 2014 was $24.4 million, reflecting a net loss (before income tax) of $34.0 million, an increase in trade receivables and other receivables of $1.6 million, an increase in inventories of $2.6 million, an decrease in research tax credit receivable of $4.6 million and an increase of trade payables and other liabilities of $3.4 million. These uses of cash were partially offset by non-cash charges, including depreciation and amortization of $5.3 million, and share-based compensation expense of $1.3 million during the period.
Cash Used in Investing Activities
Cash used in investing activities during 2016, 2015 and 2014, consisted primarily of purchases of property and equipment and intangible assets of $5.4 million, $5.5 million and $6.2 million, respectively. The higher level of capital expenditures in 2014 reflects leasehold improvement and furniture related to the new headquarter office in addition to ongoing purchases related to LTE product development.
Cash Flows from Financing Activities
Net cash provided by financing activities was $32.8 million in 2016, reflecting $23.6 million in net proceeds from our follow-on public offering in September 2016, $6.9 million net proceeds from the issuance of convertible debt, $1.2 million net proceeds drawn on the factoring line of credit, and $1.0 million proceeds from government project financing, offset by payment of interest and final repayment of finance lease liabilities.
Net cash provided by financing activities was $17.7 million in 2015, reflecting $11.6 million net proceeds from the issuance of convertible debt, $4.3 million proceeds drawn on the factoring line of credit, $2.1 million proceeds from government loans, offset by repayment of finance lease liabilities and payment of interest.
Net cash provided by financing activities was $5.1 million in 2014, reflecting $2.1 million proceeds drawn on the factoring line of credit, $3.6 million proceeds from the research project financing and repayment of finance lease liabilities.
Operating and Investing Requirements
We expect our operating expenses to remain fairly flat or slightly higher in each quarter of 2017 compared to the fourth quarter of 2016. We expect that investments in tangible and intangible assets are likely to increase slightly due to increased product development activity expected in 2017.
Based on our current plans, we believe that our available capital resources will be adequate to satisfy our cash requirements at least for 12 months from the date of this annual report. If our plans change, or if we do not achieve profits or if our profitability is significantly lower than anticipated, we may need additional financing.
If our available cash balances are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into a credit facility, which may contain restrictive covenants. The sale of equity and convertible debt securities may result in dilution to our shareholders and those securities may have rights senior to those of the ADSs. If we raise additional funds through the issue of convertible debt securities, these securities could contain covenants that would restrict our operations.
Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in “Item 3.D—Risk Factors”. We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Our short and long-term capital requirements will depend on many factors, including the following:
|
|
•
|
our ability to generate cash from operations or to minimize the cash used in operations;
|
|
|
•
|
our ability to control our costs;
|
|
|
•
|
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities; and
|
|
|
•
|
the acquisition of businesses, products and technologies.
|
|
|
|
C
.
|
Research and Development, Patents and Licenses, etc.
|
We engage in substantial research and development efforts to develop new products and integrate additional capabilities into our core products. Our research and development team of 186 employees and consultants, at December 31, 2016, includes experienced semiconductor designers, software developers and test engineers. Key areas of expertise include wireless systems architecture, SoC architecture, digital and RF IC design, digital signal processing, embedded real-time and application software design, protocol stack development, hardware and software integration, quality assurance test development and scripting and field testing. Our team has significant experience in the principal wireless domains, including LTE, WiMAX, 2G, 3G and Wi-Fi. More than 81% of our employee engineers have more than 10 years of experience in their specific domain, and 96% of our engineers hold masters degrees.
The ability to successfully integrate and mass-produce digital and/or RF functionality in advanced process technology with acceptable yields is a significant industry challenge. Due to the robustness of our silicon design and verification methodologies, we have demonstrated competency in repeatedly achieving production-capable products with the first version of our chip designs, reducing time to market and avoiding costs associated with additional design revisions. Each of our 65nm WiMAX SoC products, which consisted of integrated baseband and RF transceiver functions, and our first three generations of 40nm LTE baseband and our first four 65nm LTE RF products, were production-ready from the initial version of the design. We believe this experience positioned us well for our migration to denser process geometry such as 28nm for our future high end products and for further integration for low cost and low power in our future chipsets for IoT. Looking ahead to future generations such as 5G, we expect this competency will serve us well as we develop ever more complex designs in more advanced process technologies.
We design our products with careful attention to quality, flexibility, cost- and power-efficiency requirements. Our 4G modem architecture, which has been refined through multiple generations of integrated circuit designs, is designed to optimize hardware and software partitioning to provide more flexibility and better cost without compromising performance. As a result, we achieve equivalent or higher throughput and lower power consumption in a smaller die size than other single-mode LTE chip competitors.
Since February 2009, we have been certified as ISO 9001 compliant, an international standard set by the International Organization for Standardization, or ISO, that sets forth requirements for an organization’s quality management system. We believe this certification gives our customers confidence in our quality control procedures. We also participate in a number of organizations and standards bodies, including the 3rd Generation Partnership Project (3GPP), Open Mobile Alliance (OMA), the WiMAX Forum, the PTS Type Certification Review Board (PTCRB) the Global Certification Forum, the GSMA, European Telecommunications Standards Institute (ETSI) and CTIA—The Wireless Association. In addition, we participate in multiple European Union and French collaborative projects for advanced studies focusing on future evolutions of the 4G technology or addressing the longer term 5G technology challenges.
Our research and development expense was $28.6 million for 2014, $25.3 million for 2015 and $26.3 million for 2016.
Since mid-2011, the most significant change in trends that effected our business, results of operations and financial condition was the decline experienced in the WiMAX market driven by a change in strategy by Sprint, the largest driver of demand for WiMAX semiconductor solutions, who in the third quarter of 2011 introduced the 3G iPhone and announced their intention to begin deploying LTE in 2012. This change in the WiMAX market harmed our results of operations for the years ended December 31, 2012 and 2013, particularly as we did not generate significant revenue from LTE products until the second half of 2013 due to the time necessary to get our LTE products ready for mass production, certify them at various LTE carriers and the timing of the LTE carriers’ LTE-only products. In addition, as we are focused on single-mode LTE solutions, the market for our products and our revenue are dependent on operators deploying extensively LTE in order to seek to benefit from the cost and performance advantages of single-mode LTE products. Other than these items, or as disclosed elsewhere in this annual report, including in “Item 5. A. Operating Results”, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonable likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
|
|
|
E.
|
Off-Balance Sheet Arrangements
|
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
|
|
|
F.
|
Contractual Obligations
|
The following table summarizes our outstanding contractual obligations at
December 31, 2016
and the effect those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
|
(in thousands)
|
Liabilities :
|
|
|
|
|
|
|
Government grant advances
|
|
$
|
587
|
|
|
$
|
390
|
|
|
$
|
197
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Research project financing
|
|
3,306
|
|
|
1,459
|
|
|
1,373
|
|
|
444
|
|
|
30
|
|
Government loans
|
|
1,852
|
|
|
167
|
|
|
749
|
|
|
738
|
|
|
198
|
|
Convertible debt and accrued expenses
|
|
23,473
|
|
|
4,037
|
|
|
19,436
|
|
|
—
|
|
|
—
|
|
Provisions
|
|
1,352
|
|
|
46
|
|
|
618
|
|
|
—
|
|
|
688
|
|
Trade payables
|
|
18,358
|
|
|
18,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest-bearing receivables financing
|
|
7,712
|
|
|
7,712
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other liabilities
|
|
22
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other current liabilities
|
|
4,415
|
|
|
4,415
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
61,077
|
|
|
$
|
36,606
|
|
|
$
|
22,373
|
|
|
$
|
1,182
|
|
|
$
|
916
|
|
Off-balance sheet commitments:
|
|
|
|
|
|
|
Operating leases
|
|
2,811
|
|
|
879
|
|
|
1,405
|
|
|
527
|
|
|
—
|
|
Inventory component and equipment purchase commitments
|
|
4,417
|
|
|
3,247
|
|
|
1,170
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
7,228
|
|
|
$
|
4,126
|
|
|
$
|
2,575
|
|
|
$
|
527
|
|
|
$
|
—
|
|
Item 6. Directors, Senior Management and Employees
|
|
|
A.
|
Directors and Senior Management
|
Executive Officers and Directors
The following table sets forth information about our executive officers and directors as the date of this annual report.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position(s)
|
Executive Officers
|
|
|
|
|
Dr. Georges Karam
|
|
55
|
|
|
Chairman of the Board and Chief Executive Officer
|
Deborah Choate
|
|
53
|
|
|
Chief Financial Officer
|
Bertrand Debray
|
|
52
|
|
|
Chief Operating Officer
|
Didier Dutronc
|
|
57
|
|
|
Chief Marketing Officer
|
Nikhil Taluja
|
|
45
|
|
|
Vice President Worldwide Sales
|
Directors
|
|
|
|
|
Yves Maitre
|
|
54
|
|
|
Director
|
Richard Nottenburg
|
|
63
|
|
|
Director
|
Hubert de Pesquidoux
|
|
51
|
|
|
Director
|
Dominique Pitteloud
|
|
55
|
|
|
Director
|
Alok Sharma
|
|
52
|
|
|
Director
|
Zvi Slonimsky
|
|
67
|
|
|
Director
|
Executive Officers
Dr. Georges Karam
has served as our chairman of the board and chief executive officer since the company was founded in 2003. Before founding Sequans, Dr. Karam was vice president of cable access at Juniper Networks, running the cable engineering and marketing departments and managing the cable sales launch in the Europe, Middle East and Africa region. He joined Juniper Networks when the company acquired Pacific Broadband Communications (PBC), where he was vice president of engineering and general manager for Europe. Dr. Karam has served in a variety of senior management positions at Alcatel, SAGEM and Philips. He is a senior member of IEEE, has authored numerous technical and scientific papers and holds several patents in digital communications. Dr. Karam holds a PhD in signal processing and communication theory from Ecole Nationale Supérieure des Télécommunications, Paris.
Deborah Choate
has served as our chief financial officer since July 2007. Prior to joining Sequans she was chief financial officer at Esmertec AG from September 2005 to June 2007 and at Wavecom SA, from August 1998 to August 2004, and vice president of finance at Platinum Equity from October 2004 to September 2005. Earlier in her career, she was an audit partner with Ernst & Young. Ms. Choate has over 30 years of experience in management, finance and accounting, including over 15 years working with technology companies, in particular communications hardware, software and services. Ms. Choate holds a BS from the University of California at Berkeley.
Bertrand Debray
has served as our chief operating officer since July 2013 and prior to that as vice president, engineering since the company was founded in 2003
.
Before joining Sequans, Mr. Debray was director of hardware and ASIC development in the cable product division at Juniper Networks. He joined Juniper Networks after the company acquired Pacific Broadband Communications, where he played the same role and was significantly involved in developing the cable product and team. Mr. Debray has held technical and management positions at Alcatel. He has nearly 20 years’ experience in large project development covering all access technologies, including wireless, satellite and cable. Mr. Debray holds a MSE from Ecole Nationale Supérieure des Télécommunications, Paris.
Didier Dutronc
has served as chief marketing officer since March 2016. From January 2014 until March 2016, Mr. Dutronc was a director of Tapcheck Limited and Asia Business Consulting Limited both based in Hong Kong and providing services for companies targeting the IoT market. Previously, Mr. Dutronc served as senior vice president and general manager,M2M Embedded Solutions Business Unit at Sierra Wireless from February 2009 until October 2013. He also worked for Wavecom as general manager Handset BU (until Wavecom was acquired by Sierra Wireless). Earlier, he held positions at Alcatel Optronics USA, Alcatel Optronics France and Texas Instruments. Mr. Dutronc holds a BS in Electrical Engineering from ESME Sudria (France) and a MBA from IAE of Paris.
Nikhil Taluja
has served as our vice president of worldwide sales since September 2016. From July 2013 until August 2016, Mr. Taluja was vice president of sales at SK hynix, a leading supplier of DRAM and Flash memory solutions, where he led the sales organization for the Americas. From March 2012 until July 2013, Mr.Taluja led the Americas’ sales and marketing organizations at ST-Ericsson, the former multinational supplier of wireless semiconductor products, including LTE solutions. From November 2007 until March 2012, Mr. Taluja held various other sales and marketing position at ST-Ericsson. Mr. Taluja
has more than 20 years of sales, product marketing and business development experience, including having worked for Texas Instruments and TranSwitch, specifically in the areas of wireless and wireline communications and has co-authored three patents in the field of near field communications (NFC). Mr. Taluja holds an M.S. in electrical engineering and a B.S in computer engineering and mathematics from Kansas State University.
Directors
Yves Maitre
has served as a director since June 2014. Mr. Maitre is currently Executive VP for Connected Objects and Partnerships at Orange Corporate where he is responsible for managing Orange’s relationships with global device makers as well as partnering with ecosystem players from chipset upwards to internet companies. Prior to joining Orange, Mr. Maitre spent six years working for the consumer electronics company Thomson. He was President of Key MRO America, a subsidiary of Thomson United States and whilst living in Singapore he worked for Thomson Asia as Director of Manufacturing Supply Chain and Product Management. Before Thomson, Mr. Maitre spent five years as the COO of Quante-Pouyet, a subsidiary of 3M, making connectors for the telecoms business. He is also a Board member of Orange China and several midsize / start-up companies. Mr. Maitre is an Engineering graduate in Nuclear Physics from Polytech Grenoble (France).
Richard Notteburg
has served as a director since June 2016. Dr. Nottenburg is currently an investor in early stage technology companies and a business consultant. He served as president, chief executive officer, and member of the board of directors of Sonus Networks, Inc. from 2008 through 2010. From 2004 until 2008, Dr. Nottenburg was an officer with Motorola, Inc., ultimately serving as its executive vice president, chief strategy officer and chief technology officer. He served on the boards of Aeroflex Corporation from 2010 until 2014, and PMC Sierra, where he was a member of the audit committee, from 2011 until January 2016. Dr. Nottenburg is currently a member of the board of directors of Violin Memory Inc., where he is chairman and a member of the compensation, corporate governance, and nominating committees, and Verint Systems Inc., where he is chairman of the compensation committee. Dr. Nottenburg has a BSEE in Electrical Engineering from New York University, an MSEE in Electrical Engineering from Colorado State University and a PhD in Electrical Engineering from Ecole Polytechnique Federal Lausanne.
Hubert de Pesquidoux
has served as a director since March 2011. Mr. de Pesquidoux is an Executive Partner at Siris Capital, a private equity firm focused on making control investments in data/telecom, technology and technology-enabled business service companies in North America. He is also currently Executive Chairman of Xura, a Siris Capital portfolio company. From 1991 until December 2009, Mr. de Pesquidoux held various positions at the telecommunications company Alcatel-Lucent SA (and its predecessor, Alcatel S.A. and its affiliates), where he most recently served as Chief Financial Officer from November 2007 until December 2008 and as President of the Enterprise business from November 2006 until December 2008. Mr. de Pesquidoux was also previously a member of the Alcatel Executive Committee and held various executive positions including President and Chief Executive Officer of Alcatel North America, Chief Executive Officer of Alcatel Canada (formerly NewbridgeNetworks) and Chief Financial Officer of Alcatel USA. Mr. de Pesquidoux also served as the Chairman of the Board of Tekelec and currently serves as a director and audit committee chair of Radisys Corporation, and Criteo S.A., as a director of Transaction Network Services, as executive chairman of Premiere Global Services, Inc. and Mavenir Systems, Inc. He is also a member of the University of Pittsburg Medical Center Information Technology Board of Visitors, which advises UPMC on matters generally related to information technology strategy, acquisition and implementation. Mr. de Pesquidoux holds a Master in Law from University of Nancy II, a Master in Economics and Finance from Institut d’Etudes Politiques de Paris, a DESS in International Affairs from University of Paris Dauphine and was a laureate in the “Concours Général de Droit”.
Dominique Pitteloud
has served as a director since January 2005. Mr. Pitteloud has been a Managing Partner with Ginko Ventures in Geneva since 2015, was a partner with Endeavour Vision from 2007 to 2015, and was a principal at Vision Capital from 2001 to 2007. Mr. Pitteloud is also an advisor to ASSIA, a provider of DSL management solutions. Mr. Pitteloud also serves as a director of number of private companies. Prior to becoming a venture capitalist, Mr. Pitteloud was vice president of marketing at 8×8, a Silicon Valley semiconductor and telecommunication company, which he joined in 1999 as part of the acquisition of Odisei, a VoIP start-up from Sophia Antipolis, France. At Odisei, Mr. Pitteloud led the development of the company’s business and financing activities. Prior to Odisei, Mr. Pitteloud held various engineering and management positions at Logitech, including Vice President of the scanner and video camera business units. Mr. Pitteloud received a BS in electrical engineering and telecommunications from the School of Business and Engineering in Vaud, Switzerland and an MBA from Santa Clara University.
Dr. Alok Sharma
has served as a director since January 2011. Dr. Sharma has served as the Chief Executive Officer of MobileNerd, a private cloud-based software-as-service company, since 2014. From September 2010 to December 2012, Dr. Sharma was the chief executive officer of Accelera Inc., a company focused on building network optimization software for
mobile broadband networks. From February 2009 to August 2010, Dr. Sharma was the Senior Vice President, Corporate Development and Alliances, at Aviat Networks (earlier known as Harris-Stratex, Microwave Division of Harris Corporation), where he was responsible for leading corporate strategy, mergers and acquisitions, as well as the development of key strategic relationships for the company. Beginning in June 2004, Dr. Sharma was the founder and chief executive officer of Telsima Corporation, a provider of WiMAX broadband wireless solutions, until it was acquired by Aviat Networks in February 2009. Prior to Telsima, Dr. Sharma was the vice president and general manager of the Worldwide Cable Business at Juniper Networks from December 2001 to May 2003. Before Juniper Networks, Dr. Sharma was the founder and chief executive officer of Pacific Broadband Communications, which was acquired by Juniper Networks in December 2001. Prior to that, Dr. Sharma held senior management and technical positions at Hewlett Packard, Fujitsu/Amdahl, Integrated Device Technology and Siara Systems, a metro routing company acquired by Redback/Ericsson. Dr. Sharma holds a bachelor of engineering from the Indian Institute of Technology, Roorkee, India and a PhD in electrical engineering from the University of Wisconsin-Madison, and holds seven patents.
Zvi Slonimsky
has served as a director since November 2006. Since 2005, Mr. Slonimsky has been chairman of the board of several Israeli high tech companies, currently including Awear, Maradin and Surf, and previously Alvarion, Extricom, Pentalum and Teledata. He served as CEO of Alvarion Ltd. from 2001 to October 2005, following Alvarion’s establishment via merger of BreezeCOM and Floware in August 2001. Prior to the merger, Mr. Slonimsky was CEO of BreezeCom. Before that, he served as president and CEO of MTS Ltd. and was general manager of DSP Group, Israel. Earlier in his career, he held senior positions at several Israeli telecom companies, including C.Mer and Tadiran. Mr. Slonimsky holds a BSEE and a MSEE from the Technion Israel Institute for Technology and an MBA from Tel-Aviv University.
Compensation of Executive Officers and Directors
The aggregate compensation paid and benefits in kind granted by us to our executive officers and directors, including share-based compensation, for the year ended
December 31, 2016
was approximately $2.4 million. For the year ended
December 31, 2016
, we estimate that approximately $13,000 of the amounts set aside or accrued to provide pension, retirement or similar benefits to our employees was attributable to our executive officers.
Our non-employee directors are entitled to the following annual compensation:
|
|
|
|
|
|
|
Attendance fees
|
$
|
20,000
|
|
Attendance fees for lead independent director
|
$
|
20,000
|
|
Attendance fees for board committee chairperson
|
|
Audit committee
|
$
|
12,000
|
|
Compensation committee
|
$
|
9,000
|
|
Nominating and corporate governance committee
|
$
|
5,000
|
|
Attendance fees for board committee members
|
|
Audit committee
|
$
|
6,000
|
|
Compensation committee
|
$
|
4,500
|
|
Nominating and corporate governance committee
|
$
|
2,500
|
|
In addition, our non-employee directors are also entitled to the following equity awards:
|
|
|
|
|
Initial equity award for new directors
(1)(3)
|
Warrants to purchase 40,000 shares
|
Annual award for continuing board members
(2)(3)
|
Warrants to purchase 20,000 shares
|
|
|
(1)
|
The initial equity award for new directors will have an exercise price equal to the fair market value of the ADSs on the date of grant and will be subject to vesting over a period of three years in equal installments commencing on the date of grant, subject to the non-employee director’s continued service to us through the vesting date.
|
|
|
(2)
|
The annual equity award for continuing board members will have an exercise price equal to the fair market value of the ADSs on the date of grant and will fully vest on the earlier of (a) the one year anniversary of the date of grant of the award and (b) the date immediately preceding the date of the annual meeting of our shareholders for the year following the year of grant for the award, subject to the non-employee director’s continued service to us through the vesting date. A non-employee director will receive an annual warrant award only if he or she has served on the board of directors for at least the preceding twelve months.
|
|
|
(3)
|
All such awards will become fully vested upon a change of control.
|
Employment Agreements with Executive Officers
We have entered into a managing director agreement with Georges Karam, our chairman and chief executive officer. See “Item 7.B—Related Party Transactions—Agreements with Executive Officers and Directors—Employment Agreement”. We have entered into standard employment agreements with each of our other executive officers. There are no arrangements or understanding between us and any of our other executive officers providing for benefits upon termination of their employment, other than as required by applicable law.
Equity Plans
Beginning in 2004, we have issued to our employees and consultants stock options, founders warrants and warrants to purchase our ordinary shares, and restricted share awards. Due to French corporate law and tax considerations, we have issued such equity awards under four types of equity plans, collectively referred to in this discussion as our equity plans. Our equity plans provide for the issue of stock options to employees pursuant to our Stock Option Plans, warrants to our business partners, including consultants and advisors, who have long-term relationships with us and advise us on a regular basis, pursuant to our BSA Subscription Plans, and restricted share awards pursuant to our Restricted Share Award Plans, and prior to our initial public offering in the United States in April 2011, founders warrants to employees in France until the time of our initial public offering, pursuant to our BCE Subscription Plans. Founders warrants are a specific type of option available to qualifying young companies in France and have a more favorable tax treatment for both the employee and the employer compared to stock options, but otherwise function in the same manner as stock options, in particular in terms of vesting. Following completion of our initial public offering in the Unites States in April 2011, we no longer issue founders warrants.
Under French law, the creation of each of these equity plans and the issuance of the underlying shares must be approved at the shareholders’ general meeting. The shareholders may delegate to our board of directors the authority to finalize the form of the plans and to grant the securities within a period that cannot exceed 18 months for restricted share awards, founders warrants and warrants, and 38 months for stock options. The shareholders have nevertheless historically delegated the authority to our board to grant these securities within a period that cannot exceed 12 months. Once approved by the shareholders’ general meeting, these equity plans cannot be extended either in duration or in size. We have therefore implemented new equity plans each year.
From 2004 through March 24, 2017, our shareholders have approved and authorized the issuance of an aggregate of
13,655,500 shares under our equity plans. At March 24, 2017, there were outstanding stock options, founders warrants and warrants to purchase a total of 6,881,385 of our shares issued under our equity plans at a weighted average exercise price of $3.10, of which 2,831,200 were held by our directors and executive officers at a weighted average exercise price of $3.60 per share. Of these outstanding stock options, founders warrants and warrants, at March 24, 2017, options to purchase 4,529,606 ordinary shares were vested and exercisable, of which 1,857,135 were held by our directors and executive officers. At March 24, 2017, there were 720,970 restricted share awards outstanding, of which 420,000 were held by our directors and executive officers. No restricted share awards had vested as of March 24, 2017.
The stock options, founders warrants and warrants granted under each of our equity plans were granted on substantially the same terms. In general, vesting of the stock options and founders warrants occurs over four years, with 25% vesting after an initial 12 months and the remaining 75% vesting monthly over the remaining 36 months, or may be immediate when linked to employee performance. Restricted shares also vest over four years with either 25% vesting after an initial 12 months or 50% vesting after the initial 24 months, and the remainder vesting over the remaining 36 or 24 months, respectively. In addition, restricted shares cannot be sold during the first 24 months after the grant date. In general, vesting of other warrants may be either on a monthly basis over a two-year or four-year period, or may be immediate, depending on the nature of the service contract with the consultant or adviser. The stock options, founders warrants and warrants generally expire ten years after the date of grant if not exercised earlier. In general, when a stock option, restricted share or founders warrant holder’s employment service with us, or a warrant holder’s service with us, terminates for any reason, his or her stock options or restricted shares or founders warrants or warrants, as the case may be, will no longer continue to vest following termination. The holder may
exercise any vested stock options or founders warrants or warrants for a period of 30-90 days. In the event of death, the holder’s heirs or beneficiaries shall have a period of six months to exercise such founders warrants, stock options or warrants. In the event that a third party acquires a 100% interest in us, an employee holder of stock options, restricted shares and founders warrants, who is subsequently dismissed has the right to exercise all of his or her options or warrants within 30 days, notwithstanding the current vesting schedule, and all unvested restricted shares shall vest immediately, conditional upon such dismissal being at least one year from grant date and subject to the same requirement to hold the restricted shares until two years from the grant date. In the event of a change of control, as defined in the warrant equity plans subject to vesting, warrants that are not yet exercisable will become exercisable for 30 days following the effective date of the change of control.
Since our public listing in April 2011, the exercise price of the stock options or warrants is the fair market value of the shares on the date of grant as determined by our board of directors, typically the closing price of the ADSs on the grant date. Prior to the public listing, the exercise price of the stock options, founders warrants and warrants was equal to the estimated fair value of the shares on the date of grant, based on our valuation, as negotiated with new investors, at the time of the last round of financing prior to the grant or based upon independent valuation analyses.
In the event of certain changes in our share capital structure, such as a consolidation or share split or dividend, appropriate adjustments will be made to the numbers of shares and exercise prices under outstanding stock options, founders warrants and warrants.
The following table provides information regarding the options to purchase our ordinary shares and restricted shares held by each of our directors and officers who beneficially own greater than one percent of our ordinary shares or have options to purchase more than one percent of our ordinary shares as of March 24, 2017:
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|
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|
Options
|
Name (Title)
|
|
Restricted Shares
|
|
Number
|
|
Exercise
Price
|
|
Expiration Date
|
Dr. Georges Karam, Chairman and Chief Executive Officer
|
|
300,000 (1)
|
|
500,000
|
|
€6.26 ($8.63)
|
|
Mar. 8, 2021
|
|
|
|
|
50,000
|
|
$2.04
|
|
Dec. 13, 2022
|
|
|
|
|
150,000
|
|
$1.90
|
|
Dec. 12, 2023
|
|
|
|
|
170,000
|
|
$1.58
|
|
July 22, 2024
|
|
|
|
|
130,000
|
|
$1.25
|
|
Dec. 11, 2024
|
|
|
|
|
98,000
|
|
$1.94
|
|
Apr. 21, 2025
|
|
|
|
|
170,000
|
|
$1.55
|
|
July 20, 2025
|
|
|
|
|
100,000
|
|
$1.97
|
|
Dec. 14, 2025
|
Bertrand Debray, Chief Operating Officer
|
|
30,000 (1)
|
|
150,000
|
|
€6.26 ($8.63)
|
|
Mar. 8, 2021
|
|
|
|
|
24,000
|
|
$2.04
|
|
Dec. 13, 2022
|
|
|
|
|
24,000
|
|
$1.90
|
|
Dec. 12, 2023
|
|
|
|
|
50,000
|
|
$1.58
|
|
July 22, 2024
|
|
|
|
|
28,000
|
|
$1.25
|
|
Dec. 11, 2024
|
|
|
|
|
50,000
|
|
$1.55
|
|
July 20, 2025
|
|
|
|
|
24,000
|
|
$1.97
|
|
Dec. 14, 2025
|
(1) On December 12, 2016, Dr. Karam and Mr. Debray received grants of 300,000 and 30,000 restricted shares, respectively, having a grant date fair value of $1.73 per share. The restricted shares also vest over four years with 25% vesting after an initial 12 months and the remainder vesting over the remaining 36 months. The restricted shares cannot be sold during the first 24 months after the grant date.
In accordance with French law governing a
société anonyme
, our business is overseen by our board of directors and by our chairman. The board of directors has appointed Dr. Karam as our chairman, who also serves as our chief executive officer. Subject to the prior authorization of the board of directors for certain decisions as required under French law, the chief executive officer has full authority to manage our affairs.
Our board of directors is responsible for, among other things, presenting our accounts to our shareholders for their approval and convening shareholder meetings. The board of directors also reviews and monitors our economic, financial and technical strategies. The directors are elected by the shareholders at an ordinary general meeting. Under French law, a director may be an individual or a corporation and the board of directors must be composed at all times of a minimum of three members.
Within the limits set out by the corporate purposes (
objet social
) of our company and the powers expressly granted by law to the shareholders’ general meeting, the board of directors may deliberate upon our operations and make any decisions in accordance with our business. However, a director must abstain from voting on matters in which the director has an interest. The board of directors can only deliberate if at least half of the directors attend the meeting in the manners provided for in our by-laws. Decisions of the board of directors are taken by the majority of the directors present or represented. Under French law, our directors and chief executive officer may not, under any circumstances, borrow money from us or obtain an extension of credit or obtain a surety from us.
Our board of directors currently consists of seven directors. Under our by-laws, our board of directors may comprise up to nine members. Pursuant to an arrangement with Bpifrance Participations S.A., or Bpifrance, one of our major shareholders, Dr. Karam has agreed, subject to certain exceptions, as long as Bpifrance owns at least 5% of our outstanding shares or voting rights, to support the designation of a director by Bpifrance to serve on our board. Bpifrance has informed us that it intends to designate a director for election to our board at the next annual meeting of shareholders, which would increase the number of directors on our board to eight members. Our board of directors is not currently seeking to fill the remaining vacant position. Our board of directors has determined that each of Messrs. Maitre, Nottenburg, de Pesquidoux, Pitteloud and Slonimsky qualify as independent under the applicable rules and regulations of the SEC and the NYSE.
Under our by-laws, the sections of the by-laws relating to the number of directors, election and removal of a director from office may be modified only by a resolution adopted by 66
2/3% of our shareholders present or represented. A director’s term expires at the end of the ordinary shareholders’ general meeting convened to vote upon the accounts of the then-preceding fiscal year and is held in the year during which the term of such director comes to an end unless such director’s term expires earlier in the event of a resignation or removal. The following table sets forth the names of the directors of our company, the dates of their initial appointment as directors and the expiration dates of their current term.
|
|
|
|
|
|
|
|
Name
|
|
Current
position
|
|
Year of
appointment
|
|
Term
expiration
year
|
Georges Karam
|
|
Chairman
|
|
2003
|
|
2018
|
Yves Maitre
|
|
Director
|
|
2014
|
|
2017
|
Richard Nottenburg
|
|
Director
|
|
2016
|
|
2019
|
Hubert de Pesquidoux
|
|
Director
|
|
2011
|
|
2017
|
Dominique Pitteloud
|
|
Director
|
|
2005
|
|
2019
|
Alok Sharma
|
|
Director
|
|
2011
|
|
2019
|
Zvi Slonimsky
|
|
Director
|
|
2006
|
|
2018
|
Each director is elected for a three-year term by a vote of the majority of the shareholders present or represented. Under French law, a director who is an individual cannot serve on more than five boards of directors or supervisory boards in corporations (
société anonyme
) registered in France; directorships in companies controlled by us, as defined in article L.233-16 of the French Commercial Code, are not taken into account.
Directors may resign at any time and their position as members of the board of directors may be revoked at any time by a majority vote of the shareholders present or represented at a shareholders’ general meeting, excluding abstentions. The number of directors who are over 70 years old may not exceed one third of the total number of directors and the chairman of our board must not be over 65 years old. A director does not need to be a French national and there is no limitation on the number of terms that a director may serve. In case of removal without cause, directors may be entitled to damages.
Vacancies on our board of directors, including vacancies resulting from there being fewer than the maximum number of directors permitted by our by-laws, provided there are at least three directors remaining, may be filled by a vote of a simple majority of the directors then in office. The appointment must then be ratified by the next shareholders’ general meeting. Directors chosen or appointed to fill a vacancy shall be elected by the board for the remaining duration of the current term of the replaced director. In the event the board would be composed of less than three directors as a result of a vacancy, meetings of the board of directors shall no longer be permitted to be held except to immediately convene a shareholders’ general meeting to
elect one or several new directors so there are at least three directors serving on the board of directors, in accordance with French law.
Under French law, employees may be elected to serve as a director. However, such employee-director must perform actual functions separate from his/her role as director in order to retain the benefit of his/her employment agreement. The number of directors who are our employees cannot exceed one third of the directors then in office. No director can enter into an employment agreement with us after his/her election to the board of directors.
French law requires that companies having at least 50 employees for a period of 12 consecutive months have a
Comité d’Entreprise
, or Workers’ Council, composed of representatives elected from among the personnel. Our Workers’ Council was formed in 2007. Two of these representatives are entitled to attend all meetings of the board of directors and the shareholders, but they do not have any voting rights.
Directors are required to comply with applicable law and with our by-laws. Our directors may be jointly and severally liable for actions that they take that are contrary to our interests. Directors are jointly and severally liable for collective decisions. However, each director may avoid liability by proving that he or she acted diligently and with caution, in particular by not approving the decision at issue or even by resigning in the event of certain critical situations. In certain critical situations, in order to avoid liability for decisions made by the board, a director must resign from his or her office. Directors may be individually liable for actions fully attributable to them in connection with a specific mission assigned to them by the board of directors. As a director, the chairman of the board is liable under the same conditions. The chief executive officer may be liable with respect to third parties if he commits a fault that is severable from his duties and which is only attributable to him.
Directors’ Service Contracts
We entered into a letter agreement with Alok Sharma before he became a director. In December 2014, we entered into a consulting agreement with Alok Sharma. See “Item 7.B—Related Party Transactions—Agreements with Executive Officers and Directors—Director Compensation and Agreements”. There are no arrangements or understandings between us and any of our non-employee directors providing for benefits upon termination of their employment or service as directors of our company, other than as required by applicable law.
Board Leadership Structure
We believe that the interests of our shareholders are best served by maintaining our Board of Directors’ flexibility in determining the board leadership structure that is best suited to the needs of the Company at any particular time. Our Board Internal Charter provides that where the Chairman is also the Chief Executive Officer, the independent directors will appoint a lead independent director to coordinate their efforts and activities. Yves Maitre currently services as lead independent director. The defined role of the lead independent director is designed to ensure a strong, independent and active Board of Directors. As set forth in the Board Internal Charter, the lead independent director has clearly delineated and comprehensive duties. These duties include:
|
|
•
|
Presiding at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors.
|
|
|
•
|
Calling meetings of the independent directors.
|
|
|
•
|
Serving as liaison between the independent directors and the chairman and chief executive officer.
|
|
|
•
|
Collecting feedback from the board members in order to help the chairman finalize the meeting agendas.
|
|
|
•
|
Based on feedback from the other board members, recommending to the chairman that a special board of directors meeting be called focused on a specific agenda.
|
|
|
•
|
If a shareholder requests to talk with an independent director and not to the chairman and/or the chief executive officer, representing the board of directors for such communication in coordination with the chairman.
|
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.
Audit Committee
Our audit committee consists of Hubert de Pesquidoux, Richard Nottenburg and Dominique Pitteloud, with Mr. de Pesquidoux serving as chairperson. Our audit committee oversees our corporate accounting and financial reporting process and internal controls over financial reporting. Our audit committee evaluates the independent registered public accounting firm’s
qualifications, independence and performance; recommends to the shareholders with respect to the identity and compensation of the independent registered public accounting firm; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; reviews our Consolidated Financial Statements; reviews our critical accounting policies and estimates and internal controls over financial reporting; discusses with management and the independent registered public accounting firm the results of the annual audit and the reviews of our quarterly Consolidated Financial Statements; and reviews the scope and results of internal audits and evaluates the performance of the internal auditor. Our board of directors has determined that each of our audit committee members meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Mr. de Pesquidoux is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication under the applicable rules and regulations of the NYSE. The audit committee operates under a written charter that satisfies the applicable rules of the SEC and the NYSE.
Compensation Committee
Our compensation committee consists of Zvi Slonimsky, Richard Nottenburg and Dominique Pitteloud, with Mr. Slonimsky serving as chairperson. Our compensation committee reviews and recommends policies relating to the compensation and benefits of our officers and employees, which includes reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations. The compensation committee also recommends to the board of directors the issue of stock options and other awards. Our board of directors has determined that each member our compensation committee meets the requirements for independence under the applicable rules and regulations of the SEC and the NYSE. The compensation committee operates under a written charter.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Yves Maitre and Zvi Slonimsky, with Mr. Maitre serving as chairperson. The nominating and corporate governance committee is responsible for making recommendations regarding candidates for directorships and the size and composition of our board. In making such recommendations, the nominating and corporate governance committee considers the skills and experience of the directors or nominees in the context of the needs of our board of directors as well as the directors’ or nominees’ diversity of skills and experience in areas that are relevant to our business and activities. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations concerning governance matters. Our board of directors has determined that each member of our nominating and corporate governance committee meets the requirements for independence under the applicable rules and regulations of the NYSE. The nominating and corporate governance committee operates under a written charter.
At
December 31, 2016
, we had 213 full-time employees, of whom 130 were located in France, 24 were in the United Kingdom, 20 were in the United States, 11 were in China, 7 were in Singapore, 7 were in Israel, 6 were in Taiwan, 3 were in Sweden, 2 were in India, 1 was in South Korea, 1 was in Ukraine and 1 was in Hong Kong. These employees include 148 in research and development, 41 in sales and marketing, 17 in general and administration and 7 in operations. Management considers labor relations to be good. We also have independent contractors and consultants. At
December 31, 2016
, we had 24 dedicated engineers from Global Logic in Ukraine for software development and testing, and also had 15 independent contractors in both research and development and sales and marketing in France, the United Kingdom and Japan.
At each date shown, we had the following employees, broken out by department and geography:
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|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
Department:
|
|
|
|
|
|
|
Research and development
|
|
150
|
|
|
153
|
|
|
148
|
|
Sales and marketing
|
|
19
|
|
|
18
|
|
|
41
|
|
General and administration
|
|
22
|
|
|
19
|
|
|
17
|
|
Operations
|
|
5
|
|
|
6
|
|
|
7
|
|
Total
|
|
196
|
|
|
196
|
|
|
213
|
|
Geography:
|
|
|
|
|
|
|
Europe, Middle East, Africa
|
|
150
|
|
|
152
|
|
|
165
|
|
Asia
|
|
31
|
|
|
28
|
|
|
28
|
|
Americas
|
|
15
|
|
|
16
|
|
|
20
|
|
Total
|
|
196
|
|
|
196
|
|
|
213
|
|
For information regarding the share ownership of our directors and executive officers, please refer to “Item 6.B.—Compensation—Equity Plans” and “Item 7.A—Major Shareholders.”E
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth information with respect to the beneficial ownership of our shares as of March 24, 2017:
|
|
•
|
each person, or group of affiliated persons, known by us to own beneficially more than 5% of our outstanding ADSs or ordinary shares;
|
|
|
•
|
each of our executive officers;
|
|
|
•
|
each of our directors; and
|
|
|
•
|
all of our executive officers and directors as a group.
|
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities, and include shares subject to options that are exercisable within 60 days after the date of this annual report. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option, but not the percentage ownership of any other person.
For the purpose of calculating the percentage of shares beneficially owned by any shareholder, this table lists applicable percentage ownership based on 75,122,137 ordinary shares outstanding as of March 24, 2017.
Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares. To our knowledge, none of our selling shareholders is a broker-dealer or is affiliated with a broker-dealer.
Unless otherwise indicated in the footnotes to the table, the address of each individual listed in the table is c/o Sequans Communications S.A., 15-55 boulevard Charles de Gaulle, 92700 Colombes, France.
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
Beneficially Owned
|
|
|
Number
|
|
Percent
|
5% Shareholders
|
|
|
|
|
Bpifrance Participations
(1)
|
|
8,960,561
|
|
|
11.9
|
%
|
Nokomis Capital, L.L.C.
(2)
|
|
7,667,292
|
|
|
9.9
|
|
AWM Investment Co. Participations
(3)
|
|
7,320,230
|
|
|
9.7
|
|
Add Partners and affiliates
(4)
|
|
4,308,557
|
|
|
5.7
|
|
Dr. Georges Karam
(5)
|
|
3,989,492
|
|
|
5.2
|
|
Executive Officers and Directors
|
|
|
|
|
Dr. Georges Karam
(5)
|
|
3,989,492
|
|
|
5.2
|
%
|
Deborah Choate
(6)
|
|
417,676
|
|
|
*
|
|
Bertrand Debray
(7)
|
|
1,175,742
|
|
|
1.6
|
|
Didier Dutronc
|
|
51,970
|
|
|
*
|
|
Yves Maitre
(8)
|
|
56,363
|
|
|
*
|
|
Richard Nottenburg
|
|
577,257
|
|
|
*
|
|
Hubert de Pesquidoux
(9)
|
|
89,403
|
|
|
*
|
|
Dominique Pitteloud
(10)
|
|
97,000
|
|
|
*
|
|
Alok Sharma
(11)
|
|
77,181
|
|
|
*
|
|
Zvi Slonimsky
(12)
|
|
97,380
|
|
|
*
|
|
Nikhil Taluja
|
|
18,181
|
|
|
*
|
|
All executive officers and directors as a group (11 persons)
(13)
|
|
6,647,645
|
|
|
8.6
|
%
|
|
|
*
|
Represents beneficial ownership of less than 1%.
|
|
|
(1)
|
Based on a Schedule 13D filed with the SEC on September 20, 2016 and information provided to the Company. Includes 8,960,561 shares held by Bpifrance Participations S.A., or Bpifrance. Bpifrance is the wholly owned subsidiary of BPI-Groupe (bpifrance), or BPI. The Caisse des Dépôts et Consignations, or CDC, and EPIC BPI-Groupe, or EPIC, each hold 50% of the share capital of BPI and jointly control BPI. Nicolas Dufourcq is the Chief Executive Officer of Bpifrance and he may be deemed to have shared voting and investment power over the shares held by Bpifrance. Paul-François Fournier is the director of the Innovation Business Unit of Bpifrance and Maïlys Ferrère is the director of the Large Venture Fund of Bpifrance, and they may be deemed to have shared voting and investment power over the shares held by Bpifrance. None of BPI, CDC, EPIC, Nicolas Dufourcq, Paul-François Fournier or Maïlys Ferrère holds any shares directly. BPI may be deemed to be the beneficial owner of 8,960,561 shares, indirectly through its sole ownership of Bpifrance. CDC and EPIC may be deemed to be the beneficial owner of 8,960,561 shares, indirectly through their joint ownership and control of BPI. Nicolas Dufourcq,. Paul-François Fournier and Maïlys Ferrère disclaim beneficial ownership of the shares held by Bpifrance. The principal address for Bpifrance, BPI, EPIC, and Nicolas Dufourcq is 6-8 Boulevard Haussmann, 75009 Paris, France.
|
|
|
(2)
|
Based on a Schedule 13G/A filed with the SEC on February 13, 2017. Includes 5,429,292 shares held by Nokomis Capital, L.L.C., or Nokomis Capital, purchased by Nokomis Capital through the accounts of certain private funds and managed accounts (collectively, the Nokomis Accounts) and approximately 2,238,000 Ordinary Shares receivable upon conversion of presently convertible notes. Nokomis Capital is prohibited from converting the presently convertible notes held by them to obtain ownership in excess of 9.9%. Nokomis Capital serves as the investment adviser to the Nokomis Accounts and may direct the voting and disposition of the shares held by the Nokomis Accounts. As the principal of Nokomis Capital, Brett Hendrickson holds voting and investment power with respect to all securities beneficially owned by the Nokomis Accounts. The address of Nokomis Capital is 2305 Cedar Springs Rd., Suite 420, Dallas, TX 75201.
|
|
|
(3)
|
Based on a Schedule 13G filed with the SEC on February 10, 2017. Includes 7,320,230 shares held by AWM Investment Company, Inc., a Delaware corporation (“AWM”), that is the investment adviser to Special Situations Cayman Fund, L.P., a Cayman Island limited partnership ("CAYMAN"), Special Situations Fund III QP, L.P., a Delaware limited partnership ("SSFQP") Special Situations Private Equity Fund, L.P., a Delaware limited partnership ("SSPE"), Special Situations Technology Fund, L.P., a Delaware limited partnership ("TECH") and Special Situations Technology Fund II, L.P., a Delaware limited partnership ("TECH II"), (CAYMAN, SSFQP, SSPE, TECH and TECH II, will hereafter be referred to as the “Funds”). As the investment adviser to the Funds, AWM holds sole voting and investment power over 640,000 shares of Common Stock of the Issuer (the “Shares”) held by CAYMAN, 1,920,000 shares held by SSFQP,
|
840,276 shares held by SSPE, 580,543 Shares held by TECH and 3,339,411 Shares held by TECH II. Austin W. Marxe (“Marxe”), David M. Greenhouse (“Greenhouse”) and Adam C. Stettner (“Stettner”) are members of: SSCayman, L.L.C., a Delaware limited liability company ("SSCAY"), the general partner of CAYMAN; MGP Advisers Limited Partnership, a Delaware limited partnership ("MGP"), the general partner of SSFQP; MG Advisers, L.L.C., a New York limited liability company ("MG"), the general partner of SSPE; and SST Advisers, L.L.C., a Delaware limited liability company ("SSTA"), the general partner of TECH and TECH II. Marxe, Greenhouse and Stettner are also controlling principals of AWM. The principal business address for AWM is c/o Special Situations Funds, 527 Madison Avenue, Suite 2600, New York, NY 10022.
|
|
(4)
|
Based on information provided to the Company in March 2017. Includes 4,308,557 shares held by ADD One LP, or ADD;. Pursuant to the constitutional documents of ADD , ADD Management Limited, or AML, has sole voting and investment power over the shares held by ADD . AML is the managing general partner of ADD One General Partner LP which in turn is the managing general partner of ADD . The board of directors of AML consists of Barry McClay, James Martin and Ipes Director (Guernsey) Limited, who share such voting and investment power. Each of Barry McClay, James Martin and Ipes Director (Guernsey) Limited disclaims beneficial ownership except to the extent of his or its pecuniary interest therein. The address of AML is 1 Royal Plaza, Royal Avenue, St. Peter Port, Guernsey, GY1 2HL.
|
|
|
(5)
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Includes 1,041,458 shares subject to options that are exercisable within 60 days of March 24, 2017.
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(6)
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Includes 377,373 shares subject to options that are exercisable within 60 days of March 24, 2017.
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(7)
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Includes 120,000 shares held by Mr. Debray as custodian for his sons. Includes 278,250 shares subject to options that are exercisable within 60 days of March 24, 2017.
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(8)
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Includes 20,000 shares subject to warrants that are exercisable within 60 days of March 24, 2017.
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(9)
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Includes 47,000 shares subject to warrants that are exercisable within 60 days of March 24, 2017.
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(10)
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Includes 47,000 shares subject to warrants that are exercisable within 60 days of March 24, 2017.
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(11)
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Includes 47,000 shares subject to warrants that are exercisable within 60 days of March 24, 2017.
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(12)
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Includes 47,000 shares subject to warrants that are exercisable within 60 days of March 24, 2017.
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(13)
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Includes 1,926,748 shares subject to options and warrants that are exercisable within 60 days of March 24, 2017.
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None of our principal shareholders have voting rights different than our other shareholders.
At March 24, 2017, there were 74,904,096 of our ADSs outstanding, representing 74,904,096 our ordinary shares or 99.7% of our outstanding ordinary shares. At such date, there were 94 holders of record registered with the Bank of New York Mellon, depositary of our ADSs.
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B.
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Related Party Transactions
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Since January 1, 2016, we have engaged in the following transactions with our directors and executive officers, holders of more than 5% of our voting securities and affiliates of our directors, executive officers and 5% shareholders.
Under French law, agreements entered into directly or indirectly between us and either one of our officers or one of our shareholders owning more than 10% of our shares, or any company controlling one of our shareholders owning more than 10% of our shares, are subject to the prior approval of the board of directors and must be ratified by our ordinary shareholders’ general meetings on the basis of a specific report issued by our statutory auditors on such agreements. Our managing director agreement with Georges Karam, our letter agreements with each James Patterson and Alok Sharma, and our consultancy services agreement with Alok Sharma described below have been submitted to the prior approval of the board of directors and have been or will be submitted to our shareholders at each annual shareholders’ general meeting.
Agreements with Major Shareholders
In October 2014, Bpifrance, the financial agency of the French government, provided funding to the Company in the context of a long-term research project, estimated to be completed over a 3-year period. The total funding will amount to €7.0 million ($9.0 million) comprising a portion in the form of a grant (€3.0 million or $3.8 million) and a portion in the form of a loan (€4.0 million or $5.2 million). The funding will be paid in three installments: the first tranche at the contract signature date, the second and the third installments after milestones defined in the contract. The advance will be repaid from June 30th, 2018 to June 30th, 2020 and bears interests at a 1.53% fixed contractual rate. In 2014, the Company received €2.1 million ($2.7 million) as grant and €1.0 million ($1.2 million) as a loan; in 2016, the Company received €0.6 million ($0.6 million) as a loan; the next/final funding is expected to be received by the end of 2018 for approximately $3.5 million.
In April 2015, we completed the sale of a $12 million convertible note to an affiliate of Nokomis Capital, L.L.C. in a private placement transaction. The convertible note matures in April 2018 and bears interest at a rate of 7% per year, paid in kind annually on the anniversary of the issuance of the note. The note is convertible, at the holder’s option, into the company’s ADSs at a conversion rate of 540.5405 ADSs for each $1,000 principal amount of the note, subject to certain adjustments, which equates to an initial conversion price of $1.85 per ADS.
In September 2015, the Company received two loans from the financial agency of the French government for a total amount of €2 million ($2.2 million). One loan of €1 million bears interest at 5.24% per year, paid quarterly; the second loan of €1 million is interest-free. The interest-free loan has been revalued using the 5.24% interest rate payable on the other loan. Both loans have seven year terms with the principal being amortized on a quarterly basis beginning in September 2017.
On April 27, 2016, we raised net proceeds of $7.0 million from the sale of convertible notes to certain institutional investors, including an affiliate of Nokomis Capital, L.L.C., in a private placement transaction. The convertible notes mature in April 2019 and bear interest at a rate of 7% per year, paid in kind annually on the anniversary of the issuance of the note. The notes are convertible, at the holder’s option, into the Company’s ADSs at a conversion price of $2.7126 per ADS.
On September 16, 2016, Bpifrance Participations purchased 3,000,000 ADSs, each representing one ordinary share, at a price of $1.65 per ADS in connection with our public offering in which we issued a total of 15,151,520 ordinary shares.
Agreements with Executive Officers and Directors
Employment Agreement
We have entered into a managing director agreement with Georges Karam, our chairman and chief executive officer, which contains provisions regarding salary, severance payment and benefits. If Dr. Karam is terminated for any reason, he is entitled to a lump sum severance payment equal to one year of base salary and bonus, plus accelerated vesting of his founders warrants, stock options and restricted share awards. In accordance with French law, our chief executive officer (“directeur général” or “managing director”) cannot be an employee in connection with the performance of his duties in such capacity. The managing director agreement entered into with Dr. Karam does not constitute, and does not contain the compulsory provisions under French law to be construed as, an employment agreement. Therefore, Dr. Karam does not benefit from the status of employee nor from any benefit that French laws and regulations grant to employees. The managing director agreement only sets forth the terms and conditions, including compensation, under which Dr. Karam performs his duties as chief executive officer.
Director Compensation and Agreements
The non-employee members of our board of directors receive compensation based on our director compensation policy. A description of the cash compensation and equity awards that non-employee members of our board of directors will be entitled to receive is described under “Item 6. B—Compensation—Compensation of Executive Officers and Directors”.
Immediately prior to their appointment to our board of directors, we entered into letter agreements with each of James Patterson and Alok Sharma setting forth the cash compensation and equity awards they would receive upon their appointment to our board of directors pursuant to the director compensation policy. The letter agreement with Mr. Patterson terminated when he left the board in June 2016.
Effective December 11, 2014, we entered into an agreement whereby Dr. Sharma provides to the Company consultancy services in the area of business development in the broadband wireless access industry, with a focus on the India market. This agreement was renewed in 2015 and was terminated in October 2016. During the year ended December 31, 2016, $108,000 was paid to Dr. Sharma under the contract.
Stock Options, Founders Warrants and Warrants
Since our inception, we have granted restricted shares, stock options, founders warrants and warrants to purchase our shares to certain of our executive officers and board members. For more information about our option and warrant plans see “Item 6. B—Compensation—Equity Plans”.
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C.
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Interests of Experts and Counsel
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Not applicable.