UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
OR
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Date of event requiring this shell company report
Commission file number 001-35135
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
French Republic
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chairman and Chief Executive Officer
Sequans Communications S.A.
Telephone: +33 1 70 72 16 00
Facsimile: +33 1 70 72 16 09
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Symbol | Name of each exchange on which registered | ||||||
| * | Not for trading, but only in connection with the registration of American Depositary Shares. | ||||
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares, nominal value €0.01 per share: 193,426,478 as of December 31, 2022
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ¨ Accelerated filer þ
Non-accelerated filer ¨ Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes þ No ¨
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨
Indicate by check mark which basis for accounting the registrant has used to prepare the financing statements included in this filing:
U.S. GAAP ¨ | by the International Accounting Standards Board þ | Other ¨ | ||||||||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
SEQUANS COMMUNICATIONS S.A.
________________________________________________
FORM 20-F
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022
_________________________________________________
TABLE OF CONTENTS
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INTRODUCTION
Unless otherwise indicated, “Sequans Communications S.A.”, “Sequans Communications”, “the Company”, “we”, “us” and “our” refer to Sequans Communications S.A. and its consolidated subsidiaries.
In this annual report, references to the “euro” or “€” are to the euro currency of the European Union and references to “U.S. dollars” or “$” are to United States dollars.
Reference to “the Shares” are references to Sequans Communications’ Ordinary Shares, nominal value €0.02 per share, and references to “the ADSs” are to Sequans Communications’ American Depositary Shares (each representing four Ordinary Shares), which are evidenced by American Depositary Receipts (ADRs).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than present and historical facts and conditions contained in this annual report on Form 20-F, including statements regarding our future results of operations and financial positions, business strategy, plans, including financing alternatives for our 5G business and ability to enter into new 5G strategic agreements, the exploration of strategic options, expectations for a private placement, expectations for Massive IoT sales, the impact of Covid-19 on our supply chain and on customer demand, our expectation for sufficient capacity to meet customer demand in 2023, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue, and our objectives for future operations, are forward looking statements. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation:
•the contraction or lack of growth of markets in which we compete and in which our products are sold;
•unexpected increases in our expenses resulting from inflationary pressures and rising interest rates, including manufacturing and operating expenses and interest expense;
•our inability to adjust spending quickly enough to offset any unexpected revenue shortfall;
•delays or cancellations in spending by our customers;
•unexpected average selling price reductions;
•the significant fluctuation to which our quarterly revenue and operating results are subject due to cyclicality in the wireless communications industry and transitions to new process technologies;
•our inability to anticipate the future market demands and future needs of our customers;
•our inability to achieve new design wins or for design wins to result in shipments of our products at levels and in the timeframes we currently expect;
•our inability to enter into and execute on strategic alliances;
•our ability to meet performance milestones under strategic license agreements;
•the impact of component shortages, suppliers’ lack of production capacity, natural disasters or pandemics on our sourcing operations and supply chain;
•the impact of the Ukraine-Russia conflict on our independent contractors located in Ukraine;
•the impact of the COVID-19 coronavirus on the ability to operate business and research, production of our products or demand for our products by customers whose supply chain is impacted or whose operations have been impacted by government shelter-in-place or similar orders or COVID-19 workforce shortages;
•our ability to raise debt and equity financing; and
•other factors detailed in documents we file from time to time with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” as well as similar expressions. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks, uncertainties and other important factors. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. We cannot assure you that our plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this prospectus supplement as described in “Item 3.D—Risk Factors”, “Item 4—Information on the Company” and “Item 5—Operating and Financial Review and Prospects”. Given these risks,
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uncertainties and other important factors, you should not place undue reliance on these forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this annual report. Also, these forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made. Except as required by law, we assume no obligation to update any forward-looking statements publicly, whether as a result of new information, future events or otherwise.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
[Reserved]
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.
Risk Factor Summary
Risks Related to Our Business and Industry
•Our business may be impacted by political events, war, terrorism, business interruptions and other geopolitical events and uncertainties beyond our control, including the Russian invasion of Ukraine.
•We have a history of losses and may not achieve or sustain profitability in the future.
•Our industry is subject to rapid technological change.
•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.
•If we fail to successfully develop, commercialize, produce and sell our module product line, our business, revenue and operating results may be harmed.
•COVID-19 has impacted our ability to source certain components and could also reduce demand for our products.
•We depend on a small number of customers for a significant portion of our revenue.
•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.
•If customers do not design our semiconductor solutions into their product offerings, our business would be harmed.
•If we are unable to compete effectively, we may not increase or maintain our revenue or market share.
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•If we experience material changes to the competitive structure of our industry, we may not increase or sustain our revenue or market share.
•We have significant ongoing capital requirements.
•The average selling prices of our semiconductor solutions have historically decreased over time.
•The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns.
•The complexity of our semiconductor solutions could result in unforeseen delays or expenses from undetected defects or design errors in hardware or software.
•We are subject to risks inherent in our international operations.
•We depend on the commercial deployment of 4G LTE narrow band variants and 5G communications equipment, products and services to grow our business.
•Rapidly changing standards could make our semiconductor solutions obsolete.
•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.
•Fluctuations in foreign exchange rates may harm our financial results.
•Our global operations are subject to risks for which we may not be adequately insured.
Risks Related to the Manufacture of Our Products
•Global supply chain constrains may negatively impact our business.
•Certain natural disasters may negatively impact our business.
•We depend on one independent foundry to manufacture our semiconductor wafers and do not have a long-term agreement with such foundry.
•If our foundry vendor does not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.
•We depend on one technology partner to provide components for and to manufacture the Monarch SiP.
•Any increase in the manufacturing cost of our products would reduce our gross margins and operating profit.
•We outsource our assembly, testing, warehousing and shipping operations to third parties.
•We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration.
Risks Related to Intellectual Property Rights
•We or our customers may be required to obtain licenses for certain so-called “standard essential patents” in order to comply with applicable standards.
•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.
•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.
•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.
•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.
Risks Related to Material Weaknesses in Our Internal Control Over Financial Reporting
•We are required to document and test our internal control procedures and to provide a report by management on internal control over financial reporting.
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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.
•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.
•We have no present intention to pay dividends on our ordinary shares in the foreseeable future.
•You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
•As a foreign private issuer, we are exempt from certain rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company, which may limit the information available to holders of the ADSs.
•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.
•U.S. holders of the ADSs may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.
•We may be subject to legal actions that could distract our management and increase costs.
•You may be unable to recover in civil proceedings for U.S. securities laws violations.
•ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement.
•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.
•Our by-laws and French corporate law contain provisions that may delay or discourage a takeover attempt.
•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.
•If we raise additional capital in the future, your ownership in us could be diluted.
Risks Relating to Our Indebtedness
•Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under the notes.
•We may be unable to raise the funds necessary to repurchase our convertible notes for cash following a change of control, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the convertible notes or pay cash upon its conversion.
•Provisions in the notes could delay or prevent an otherwise beneficial takeover of us.
General Risks
•The loss of any of our key personnel could seriously harm our business.
•Adverse outcomes in tax disputes could subject us to tax assessments and potential penalties.
•Our business and operations could suffer in the event of security breaches.
•Changes in International Financial Reporting Standards (“IFRS”) could adversely affect our financial results and may require significant changes to our internal accounting systems and processes.
•In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
Risks Related to Our Business and Industry
Our business may be impacted by political events, war, terrorism, business interruptions and other geopolitical events and uncertainties beyond our control, including the Russian invasion of Ukraine.
War, terrorism, geopolitical uncertainties and other business interruptions could cause damage to, disrupt or cancel sales of our products and services on a global or regional basis, which could have a material adverse effect on our business or vendors with which we do business. Such events could also make it difficult or impossible for us to deliver products and services to our customers. In addition, territorial invasions can lead to cybersecurity attacks on technology companies, such as
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ours, located far outside of the conflict zone. In the event of prolonged business interruptions due to geopolitical events, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume our business operations.
While our key engineering competencies are performed in-house, primarily in France, the United Kingdom and Israel, we outsource some application software development and testing activities to an independent third-party provider of engineering services. We work with a dedicated team of 32 software engineers based in Kyiv, Ukraine. If the Russian invasion of Ukraine intensifies or 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 have developed a contingency plan if the engineers in Kyiv are unable to continue working on their projects for us for a sustained period of time, but if our contingency plan is not effective or sanctions are imposed that prevent us from conduction business in Ukraine, 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 do not and cannot know if the current uncertainties in these geopolitical areas, which are unfolding in real-time, may escalate and result in broad economic and security conditions, which could result in material implications for our business. In addition, our insurance policies typically contain a war exclusion of some description and we do not know how our insurers are likely to respond in the event of a loss alleged to have been caused by geopolitical uncertainties.
We have a history of losses 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 $20.3 million and $9.0 million in 2021 and 2022, respectively. At December 31, 2022, our accumulated deficit was $65.1 million. We expect to continue to incur significant expense related to the development of our 5G products and expansion of our business. 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.
These facts and conditions raise substantial doubt about our ability to continue as a going concern, and our independent registered public accounting firm has included an explanatory paragraph regarding going concern qualification in its audit report. The failure to raise additional equity may have a material adverse effect on our business, results of operations and financial position, and may adversely affect our ability to continue as a going concern. If we do not become consistently profitable, our accumulated deficit will grow larger and our cash balances will decline further, and we will require further financings to continue operations. Any such financings may not be accessible on acceptable terms, if at all.
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 for 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, including the evolving trends in IoT and the emergence of 5G. 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 5G 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 expectations, 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 4G and 5G markets;
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•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 markets and the timing of commercial availability of 4G and 5G networks;
•timely and efficient completion of process design and transfer to manufacturing, assembly and testing, 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 in the case of consumer products 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 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, we believe we must, among other things, effectively:
•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;
•add additional sales personnel and expand sales offices;
•add additional finance and information systems personnel;
•implement and improve our administrative, financial and operational systems, procedures and controls; and
•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.
Furthermore, to remain competitive and manage future expansion and growth, we must carry out extensive research and development, which requires significant capital investment. New competitors, technological advances in the semiconductor industry or by competitors, our entry into new markets, or other competitive factors may require us to invest significantly greater resources than we anticipate. If we are required to invest significantly greater resources than anticipated without a corresponding increase in revenue, our operating results could decline. Additionally, our periodic research and development expenses may be independent of our level of revenue, which could negatively impact our financial results. Finally, there can be no guarantee that our research and development investments will result in products that create additional revenue.
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 are likely to incur product and market development 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. Since 2020, we have dedicated a large portion of our operating expenses to our development of 5G products, which we do not expect will result in significant product revenues before late 2023.
If we are unable to manage our business during both periods of economic or market slow-down and periods of 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.
If we fail to successfully develop, commercialize, produce and sell our module product line, our business, revenue and operating results may be harmed.
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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. Currently, and in the coming year at least, modules could represent a large portion of our revenue mix, which would 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 have been and 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 4G LTE functionality; therefore, there is market pressure for us to sell our modules with standard essential IP indemnification from manufacturers of products not normally incorporating a communication function. We intend to seek 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 for standard essential IP on acceptable terms.
COVID-19 has impacted our ability to source certain components and manufacturing services from Asia and could also reduce demand for our products
Our business has been in the past, and may continue to be, affected by the widespread outbreak of COVID-19. Both our suppliers and our customers source certain components and/or services necessary for production from manufacturers in locations that have been or may be adversely affected by the outbreak. Further shortages in components or reduction in manufacturing services may result in a reduction of our production capacity, which could negatively affect our revenues. Any outbreak of contagious diseases, including further expansion of the COVID-19 pandemic, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to operate our business during government shelter-in-place orders, to travel or to manufacture or distribute our products, as well as temporary closures of our facilities and the facilities of our suppliers or customers.
For example, since 2021, we have experienced shortages of printed circuit boards (PCBs), crystals and other components and our supply of silicon wafers from TSMC was restricted, which reduced our ability to produce products to meet demand. This situation may continue in 2023. Any further disruption of our or our suppliers’ or customers’ operations would likely impact our sales and operating results, including our revenue expectations.
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 and services at all, to purchase fewer semiconductor solutions and services than they did in the past or to alter the terms on which they purchase our products and services. 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.
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Our top ten customers accounted for 98%, 92% and 95% of our total revenue in 2020, 2021 and 2022, respectively, and four customers each accounted for more than 10% of our total revenue in 2021. The following table summarizes customers representing a significant portion of total revenue:
| Customer | % of total revenues for the year ended December 31, | % of our trade receivable at December 31, | ||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||||||||||||
| A | — | % | — | % | 33 | % | 39 | % | ||||||||||||||||||
| B | — | % | Less than 10% | 24 | % | 41 | % | |||||||||||||||||||
| C | 18 | % | 23 | % | 14 | % | — | % | ||||||||||||||||||
| D | Less than 10% | 13 | % | 11 | % | — | % | |||||||||||||||||||
| E | 20 | % | 23 | % | Less than 10% | 0 | ||||||||||||||||||||
| F | Less than 10% | 14 | % | Less than 10% | 2 | % | ||||||||||||||||||||
| G | 45 | % | Less than 10% | — | % | — | % | |||||||||||||||||||
We expect that some of these customers, particularly those above 10% during 2022, could each continue to represent at least 10% of our revenue in 2023 given the long product design and life cycles in our markets and the nature of long-term service contracts. 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.
Consolidation among our customers could also lead to increased customer bargaining power, or reduced customer spending. Further, new business may be delayed if a key customer uses its leverage to push for terms that are worse for us and we nonetheless continue to negotiate for better terms, in which case revenue in any particular quarter or year may fail to meet expectations. Also, the loss of any of these customers or the failure to secure new contracts with these customers could further increase our reliance on our remaining customers. Further, if any of our key customers default, declare bankruptcy or otherwise delay or fail to pay amounts owed, or we otherwise have a dispute with any of these customers, our results of operations would be negatively affected in the short term and possibly the long term. These customers may seek to renegotiate pre-existing contractual commitments due to adverse changes in their own businesses or, in some cases, take advantage of contractual provisions that permit the suspension of contracted work for some period if their business experiences a financial hardship, which would harm our operating results. To the extent our customers experience liquidity constraints, we may incur bad debt expense, which may have a significant impact on its results of operations. Major customers may also seek pricing, payment, intellectual property-related, or other commercial terms that are less favorable to us, which may have a negative impact on our business, cash flow, revenue and gross margins. In addition, these events could cause significant fluctuations in results of operations because our expenses are fixed in the short term and it takes us a long time to replace customers or reassign resources.
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 under certain conditions. 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 if certain lead times are respected. 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
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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 that 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 design cycle typically takes at least 12 months and frequently much more to complete before generating sales of our products. 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 as 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 some of our customers, particularly in the massive Internet of Things markets, 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. We face or expect to face competition from established semiconductor companies such as Altair Semiconductor (a Sony Corporation subsidiary), HiSilicon Technologies (a Huawei subsidiary), Mediatek, Nordic Semiconductor, Qualcomm Incorporated, RDA, Samsung Electronics Co. Ltd. and Unisoc (formerly Spreadtrum Communications), 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. 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), Bluetooth, 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. 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. 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:
•our ability to anticipate market and technology trends and successfully develop products that meet market needs;
•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;
•our ability to accurately understand the price points and performance metrics of competing products in the market;
•our products’ performance and cost-effectiveness relative to those of our competitors;
•our ability to develop and maintain relationships with key customers, wireless carriers, OEMs and ODMs;
•our ability to secure sufficient high-quality supply for our products;
•our ability to conform to industry standards while developing new and proprietary technologies to offer products and features previously not available in the 4G and 5G markets;
•our ability to develop or acquire complementary technologies or to partner with others to bring to market products with enhanced functionalities; and
•our ability to recruit design and application engineers with expertise in wireless broadband communications technologies and sales and marketing personnel.
Our current or future competitors may establish cooperative relationships among themselves or with third parties. In addition, there has been consolidation within our industry over the past several years, 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. In addition, actual or speculated consolidation among competitors, or the acquisition by, or of, our partners and/or resellers by competitors can increase the competitive pressures faced by us as customers may delay spending decisions or not purchase our products at all. Consolidation could also delay spending or require us to reduce the prices of our products to compete, which could also adversely affect our business.
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 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.
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, although such decreases have been reduced or eliminated during the inflationary period beginning in 2022, and we expect such declines to continue to occur in the future. 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. In the past, 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.
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
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experienced periods of increased demand and production constraints, including recent supply chain challenges. When 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 testing 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 and increasing inflationary pressure 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. Recent increases in inflation and interest rates 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 5G 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 continue or worsen, 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.
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.
We are subject to risks inherent in our international operations.
Our international revenues account for a substantial majority of our total revenues. As a result, we must provide significant service and support globally. We intend to maintain or expand our international operations and expect to incur costs doing so. We cannot assure you that we will be able to recover our investments in international markets. Our results of operations could be adversely affected by a variety of factors, including:
•the longer payment cycles associated with many foreign customers;
•the typically longer periods from placement of orders to revenue recognition in certain international and emerging markets;
•currency fluctuations;
•the difficulties in interpreting or enforcing our agreements and collecting receivables through many foreign countries’ legal systems;
•unstable regional political and economic conditions or changes in restrictions on trade among countries;
•changes in the political, regulatory, safety or economic conditions in a country or region;
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•the imposition by governments of additional taxes, tariffs, global economic sanctions programs or other restrictions on foreign trade, including U.S. and Chinese tariffs and trade restrictions;
•any inability to comply with export or import laws and requirements or any violation of sanctions regulations, which may result in enforcement actions, civil or criminal penalties and restrictions on exports;
•any increase in the cost of trade compliance functions to comply with changes to regulatory requirements; and
•the possibility that it may be more difficult to protect our intellectual property in foreign countries.
In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. In addition, there is uncertainty regarding how proposed, contemplated or future changes to these complex laws and regulations could affect our business. We may incur substantial expense in complying with the new obligations to be imposed by these laws and regulations, and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall. If we violate these laws and regulations we could be subject to fines, penalties or criminal sanctions, and may be prohibited from conducting business in one or more countries. Although we have implemented policies and procedures to help ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, agents or partners will not violate such laws and regulations. Any violation individually or in the aggregate could have a material adverse effect on our operations and financial condition.
We depend on the commercial deployment of 4G LTE narrow band variants and 5G communications equipment, products and services to grow our business, and our business may be harmed if wireless carriers delay in the adoption of Cat M, Cat NB and 5G standards, or if they deploy technologies that are not supported by our solutions.
We depend upon the continued commercial deployment of 4G and 5G 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. If the rate of deployment of new networks by wireless carriers is slower than we expect, this will reduce the sales of our products and could cause OEMs and ODMs to hold excess inventory. This would harm our revenues and our financial results.
The worldwide commercial deployment and adoption of the narrow band LTE variants, Cat M and Cat NB, are expected to expand further the markets for Internet of Things devices. If deployments of the Cat M or Cat NB standards are delayed or if competing standards for Internet of Things devices become favored by wireless carriers, we may not be able to successfully increase sales of our Cat M and Cat NB products, which would harm our revenues and our financial results.
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, in the Internet of Things markets, we could face indirect competition from companies using alternative technologies such as LoRa Wireless RF technology, a long range, low power consumption and data transmission protocol for Internet of Things devices. Wireless carriers started deploying 5G technology, the next phase of mobile telecommunications standards, beginning in 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.
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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, some of our semiconductor solutions operate in the 2.5 and 3.5 gigahertz, or GHz, bands, which in some countries are 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 by 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.
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 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, in particular 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, as measured using the Company's 2022 weighted average exchange rate of one euro = $1.0598, we estimate the impact, in absolute terms, on operating expenses and on financial liabilities for the year ended December 31, 2022 would have been $3.8 million.
Our exposure to foreign currency risk may change over time as business practices evolve and economic conditions change.
We from time to time 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 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. In addition, we have been in the past, and may in the future be, subject to securities litigation. 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 cyber security incidents, 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 the Manufacture of Our Products
Global supply chain shortages.
Any disruptions to our supply chain, significant increase in component costs, or shortages of critical components, could decrease our sales, earnings, and liquidity or otherwise adversely affect our business and result in increased costs. For example, beginning in 2021, we have experienced significant supply constraints for PCB and other standard components, including crystals and flash, and our supply of silicon wafers from Taiwan Semiconductor Manufacturing Company Limited, or TSMC,
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were placed on allocation. The allocation of wafers have impacted our ability to fulfill customer orders in the past, and we may not get sufficient allocation to meet demand in the future. Such a disruption could occur as a result of any number of events, including, but not limited to: an extended closure of or any slowdown at our suppliers' plants or shipping delays due to efforts to limit the spread of COVID-19, market shortages due to the surge in demand from other purchasers for critical components, increases in prices, the imposition of regulations, quotas or embargoes or tariffs on components or our products themselves, labor stoppages, transportation delays or failures affecting the supply chain and shipment of materials and finished goods, third-party interference in the integrity of the products sourced through the supply chain, cyberattacks, the unavailability of raw materials, severe weather conditions, adverse effects of climate change, natural disasters, geopolitical developments, war or terrorism and disruptions in utilities and other services. In addition, the development, licensing, or acquisition of new products in the future may increase the complexity of supply chain management. Failure to effectively manage the supply of components and products would adversely affect our business.
In response to supply chain disruptions, we purchased our entire allocation of wafers from TSMC, our wafer supplier, in 2022 to ensure adequate supply over the year and to avoid expected further price increases on wafers. This action resulted in increased inventory at the end of 2022 and into 2023. Apart from the increase in inventory, the mitigation actions have not resulted in any known trends or uncertainties or new material risks, but there is no assurance we will be able to procure sufficient wafers in the future.
Certain natural disasters, such as fires, coastal flooding, large earthquakes, volcanic eruptions or pandemics, may negatively impact our business. Any disruption to the operations of our foundry and assembly and testing subcontractors or our supply chain could cause significant delays in the production or shipment of our products.
If fires, coastal flooding, a large earthquake, volcanic eruption, new pandemic or other natural disaster were to directly damage, destroy or disrupt our partners’ manufacturing facilities or the facilities of our testing, assembly and manufacturing contractors or our component suppliers, it could disrupt our operations, delay new production and shipments of existing inventory, or result in costly repairs, replacements, the need to find alternative suppliers or other costs, all of which would negatively impact our business. For example, a fire at Asahi Kasei Microsystem’s semiconductor factory in Japan in October 2020 completely shut down production of its TCXO crystal oscillator products, which account for approximately half of the worldwide industry production of these products and are a primary component in our products. Unimicron, a major supplier of PCB and substrates for packaging, also had a factory fire in October 2020 which has constrained the supply of these components and increased lead times, as well as increasing pricing across. If similar events occur in the future and we are unable to qualify additional suppliers prior to exhausting our current inventory or are unable to source alternative components in sufficient quantity, we could experience significant delays in the production or shipment of our semiconductor solutions or experience significant increases in our supply chain costs until we are able to shift our supply to an alternative vendor. These events and their consequences could negatively impact our results of operations and cash flows, both during and after the period of operational difficulties, and could harm our reputation.
We depend on one independent foundry to manufacture our semiconductor wafers 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, TSMC in Taiwan, to manufacture our semiconductor wafers. Because we outsource our manufacturing to a single foundry, we face several significant risks, including:
•constraints in or unavailability of manufacturing capacity;
•limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and
•the unavailability of, or potential delays in obtaining access to, key process technologies.
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 due to inflationary pressures or is not able to satisfy our required capacity for any reason, including natural or other disasters or as a result of factory shutdowns or slowdowns from the COVID-19 pandemic, 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
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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. As an example, beginning in 2021 TSMC put its customers, including us, on allocation as they announced that demand is in excess of their capacity. We believe that the capacity allocated to us for 2023 is sufficient for our needs. If demand in 2023 increases, our ability to meet all our customer demand could be limited, with a corresponding negative impact on revenues.
Locating and qualifying a new foundry would require a significant amount of time, which would result in a delay in production of our products, and cost, as new production masks would be required. 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 supplier of wafers, 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 products 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.
We depend on one technology partner to provide components for and to manufacture the Monarch SiP. If this partner declares end of life of any of its components included in the Monarch SiP, or decides to no longer produce the Monarch SiP, this would cause us to lose revenue and market share and damage our customer relationships.
The Monarch SiP includes radio components from and is assembled by Skyworks Solutions, Inc. ("Skyworks"). The Monarch SiP is commercialized by both Skyworks and us, under each company's own part number. If Skyworks decides to cease manufacturing any of the components incorporated in the Monarch SiP, or decides to cease manufacturing the Monarch SiP, we do not have an alternative solution for producing this product and would be unable to ship. This would cause us to lose revenue and market share and could damage our customer relationships.
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, inflationary pressures, or due to other factors, will reduce our gross margins and operating profit. For example, in 2021 and 2022 due to the global supply chain disruption stemming from the Covid-19 pandemic, certain of our suppliers increased prices significantly. In most cases we were able to pass on a corresponding price increase to our customers, but this may not always be the case in the future. We do not have long-term supply agreements with our manufacturing, testing or assembly suppliers, although with large suppliers we typically negotiate pricing on an annual basis. With other suppliers we typically negotiate on a purchase order by purchase order basis. We may not be able to obtain price reductions, or anticipate or prevent future price increases from our suppliers. Because we have a sole supplier of wafers and limited sources of testing and assembly for both
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chipsets and modules, 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.
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 chipsets. We rely on Universal Scientific Industrial (Shanghai) Ltd., or USI, and Asiatelco Technologies Co., or Asiatelco, for manufacturing of our modules. 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 most 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.
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 testing and assembly subcontractors to transition to new processes successfully. We cannot assure you that TSMC or our testing 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 testing 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.
Risks Related to Intellectual Property Rights
We or our customers may be required to obtain licenses for certain so-called “standard 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 “standard 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, standard 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 antitrust laws in certain countries may require participating companies to license their standard 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
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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.
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 the 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, testing and assembly takes place in PRC, Taiwan, South Korea 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
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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 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 have infringed or have misappropriated their patents, trade secrets or other intellectual property rights and/or inviting us to license their technology and intellectual property. For example, in August 2022, we were sued in three lawsuits by a company called Bell Semiconductor, LLC, accusing us of infringing certain U.S. patents that we license from another party. While we have certain indemnification rights against the licensor, there is no assurance that they would be sufficient to cover all the expenses incurred to defend against or settle the suits. Any lawsuits resulting from such allegations of infringement or invitations to license, including suits challenging 4G or 5G 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:
•stop selling products or using technology that contain the allegedly infringing intellectual property;
•abandon the opportunity to license our technology to others or to collect royalty payments;
•incur significant legal expenses;
•pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
•redesign those products that contain the allegedly infringing intellectual property; or
•attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
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
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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.
Risks Related to Material Weaknesses in Our Internal Control Over Financial Reporting
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control.
In the past, we identified deficiencies in our internal control over financial reporting that constituted a material weakness in our internal control over financial reporting. Although we were able to remedy the material weaknesses and no new material weaknesses have been identified since 2020, we have a small finance team with limited resources, and we can give no assurances that other material weaknesses will not arise in the future. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, suspension or delisting of our ADSs from the New York Stock Exchange, or otherwise materially adversely affect our business, reputation, results of operations and financial condition.
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 but are not limited to:
•reductions in orders or cancellations by our customers;
•changes in customer mix, the mix of products and services sold and the mix of geographies in which our products and services are sold;
•reduced visibility into our customers’ spending plans and associated revenue;
•current and potential customer, partner and supplier consolidation and concentration;
•changes in the size, growth or growth prospects of the LTE and IoT markets;
•changes in the competitive dynamics of our market, including new entrants or pricing pressures, and our ability to compete in the LTE and IoT markets;
•timing and success of commercial deployments of and upgrades to 4G wireless networks and the next generation 5G wireless networks;
•timely availability, at a reasonable cost, of adequate manufacturing capacity with the sole foundry that manufactures our products;
•our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;
•timing and growth rate of revenues from the LTE and IoT markets;
•changes in manufacturing costs, including wafer, test and assembly costs, mask costs and manufacturing yields;
•the timing of product announcements by competitors or us;
•costs associated with litigation, especially related to intellectual property and securities class actions;
•costs associated with any violation of the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act, or other similar foreign laws;
•the effects of a widespread outbreak of contagious disease, including COVID-19;
•changing economic and political conditions at a global or local level;
•the impact of rising inflation and interest rates on consumer demand for electronic products;
•how well we execute on our strategy and operating plans and the impact of changes in our business model that could result in significant restructuring changes; and
•our ability to achieve targeted cost reductions.
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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 slowdown 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.
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.
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
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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 2022, there is no assurance that we will not be a PFIC in 2023 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.
We have been and in the future may be subject to legal actions that could distract our management and increase costs, which may adversely affect our financial condition or our reputation.
We have been subject to securities class action lawsuits alleging violations of the U.S. federal securities laws by us and certain of our officers. The costs of the ultimate resolution of these lawsuits did not exceed our insurance coverage after our deductible. However, the premium for our directors and officers insurance increased significantly with a higher retention and reduced coverage. An unfavorable outcome in any future lawsuit or proceeding could have an adverse impact on our business, financial condition and results of operations. Further, if our stock price is volatile, we may become involved in further litigation. Any current or future litigation, regardless of its merits, could result in substantial costs and a diversion of our management’s attention and resources that are needed to successfully run our business.
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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.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action. Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
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 shareholder.
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:
•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;
•our shareholders may grant our board of directors, broad authorizations to increase our share capital;
•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;
•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;
•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;
•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;
•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
•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.
The exercise or conversion of outstanding stock options, 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 March 17, 2023, there were outstanding stock options, warrants, and unvested restricted shares representing an aggregate of approximately 22.1 million of our ordinary shares (representing approximately 5.5 million ADSs), 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 issuances of convertible notes issued in 2019 (the " 2019 Notes") and in April 2021 (the "2021 Notes"). The 2019 Notes may be converted into 1.6 million ADSs at a conversion price of $4.12 per ADS, subject to adjustment if the holder converts early or if we elect to extend the maturity. The 2021 Notes may be converted into 6.2 million ADSs at term at a conversion price of $7.66 per ADS. In September 2018 and August 2022, we issued warrants to purchase 0.5 million and 0.2 million ADSs, respectively, with exercise prices of $6.80 per ADS and $4.12 per ADS, respectively, to the holder of the 2019 Notes. In October 2018, we issued warrants to purchase 0.2 million ADSs with an exercise price of $5.36 per ADS to a venture debt lender. In February 2019, we issued warrants to purchase 2.3 million ADSs with an exercise price of €0.08 per ADS to a strategic investor. 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 that are senior to your rights as an ADS holder, which could impair the value of the ADSs.
Risks Relating to Our Indebtedness
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under the notes.
As of December 31, 2022, we had approximately $59.7 million of consolidated indebtedness. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing;
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•requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness if we do not make interest payments in kind, which will reduce the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our business;
•diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of our outstanding convertible notes; and
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, including the convertible notes, and our cash needs may increase in the future.
We may be unable to raise the funds necessary to repurchase our convertible notes for cash following a change of control, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the convertible note or pay cash upon its conversion.
The holder of the 2021 Notes may require us to repurchase its note following a change of control at a cash repurchase price generally equal to the accreted principal amount plus accrued but unpaid interest, if any, plus a cash amount equal to the interest that would otherwise be payable to April 9, 2024. If the holder elects to convert the 2021 Notes in connection with a change of control, the holder will also receive a cash amount equal to the interest that would otherwise be payable to April 9, 2024. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the 2021 Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness, including any future indebtedness, may restrict our ability to repurchase the 2021 Notes or pay the cash amounts due upon conversion. Our failure to repurchase the 2021 Notes or to pay the cash amounts due upon conversion when required will constitute a default under the 2021 Notes. A default under the 2021 Notes could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the note.
Provisions in the 2021 Notes could delay or prevent an otherwise beneficial takeover of us.
Certain provisions in the 2021 Notes could make a third party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a change of control, then the noteholder will have the right to require us to repurchase the 2021 Notes for cash. In this case, and in other cases, our obligations under the 2021 Notes could increase the cost of acquiring us or otherwise discourage a third party from acquiring us, including in a transaction that holders of our ordinary shares, or the ADSs represented thereby, may view as favorable.
General Risks
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. The loss of the services of Dr. Karam, 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
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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.
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 January 2022, we received notification from the French tax authorities that our tax declarations for the years ended December 31, 2019 and 2020 would be reviewed. In December 2022, we received notification of an adjustment related to employment taxes on employees in foreign offices totaling €80,000 ($82,000) for the year ended December 31, 2019. After we contested the finding, the adjustment was reduced to €38,000 ($39,000), which we recorded as an expense in 2022. The tax audits are not yet finalized and other adjustments could be received. 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.
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 could also suffer monetary and other losses, including reputational harm, which costs we may not be able to recover. 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.
Changes in International Financial Reporting Standards (“IFRS”) could adversely affect our financial results and may require significant changes to our internal accounting systems and processes.
We prepare our consolidated financial statements in conformity with IFRS. These principles are subject to interpretation by the International Accounting Standard Board and various bodies formed to interpret and create appropriate accounting principles and guidance. The IFRS periodically issues new accounting standards on a variety of topics. For information regarding new accounting standards, please refer to Note 2.2 of Notes to Consolidated Financial Statements under the heading “Changes in accounting policy and disclosures.” These and other such standards generally result in different accounting principles, which may significantly impact our reported results or could result in variability of our financial results.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
In preparing our financial statements, we make assumptions, judgments and estimates for a number of items. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
Item 4. Information on the Company
| A. | History and Development of the Company | ||||
Our History
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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.
The SEC maintains an Internet site at http:// www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC. 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 including purchase of intangible assets and capitalized development costs for the years ended December 31, 2020, 2021 and 2022 amounted to $13.8 million, $28.9 million and $22.7 million, respectively. They primarily consisted of purchases related to LTE product development through 2020, and thereafter 5G product development as well as capitalized development costs. We anticipate our capital expenditures in the year ended December 31, 2023 to be primarily for ongoing 5G product development, and to a lesser extent 4G product development. We anticipate our capital expenditure in 2023 to be financed from our cash on hand plus financing from strategic alliances, R&D project financing, issuance of debt and/or equity. 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 or multi-feature products.
| B. | Business Overview | ||||
Overview
We are a fabless designer, developer and supplier of cellular semiconductor solutions for the massive and broadband Internet of Things (IoT) markets. We offer a comprehensive set of 5G/4G chips and modules fully optimized for non-smartphone devices. Massive IoT refers to applications with lower data transmission needs but where the technology must be extremely optimized in power consumption and cost to enable massive deployment. It covers applications such as smart mobility and logistics, smart cities, e-health and wellness, and smart homes to name few. On the other side, for broadband IoT applications, the technology is optimized to provide to homes, enterprises and industrial sites the highest possible throughput and the lowest latency. While this requirement is similar to what we can see in a smartphone, our solutions focus on providing better trade-off in cost and performance optimized for broadband IoT devices such as enterprise routers and home gateways. Our product portfolio is composed of chips, or integrated circuits (IC) of baseband processors and radio frequency (RF) transceivers, as well as machine-to-machine (M2M) modules that incorporate these chips along with radio front end subsystem, and rich software that includes advanced modem and signal processing code as well as protocol stack and higher-layer applications. Our goal is to deliver an advanced set of features with technology optimized to address the IoT requirements: power, cost and size for massive IoT, and throughput, cost and latency for broadband and critical IoT. And for both, to deliver high reliability with advanced security algorithms at a competitive price.
As operators are expanding the 4G networks coverage and deploying 5G, the massive, broadband and critical IoT markets are frequently served with single-mode 4G LTE, or LTE-only, devices and with 5G devices that can fallback to 4G LTE. The completion of 3GPP Release 13/14 in 2016 ratified two new LTE categories targeting low power, low data-use machine-type communications to serve the massive IoT market. LTE-M (also known as LTE Cat M) and NB-IoT (also known as Cat NB) enable dramatically better power efficiency, reduced module costs and better coverage for massive IoT devices compared to high-speed LTE (targeting broadband speed). With the evolution in 3GPP release 15 of the standard moving to 5G, compatibility with 4G becomes a requirement. We believe we will be able to deliver dual mode (5G and 4G) products leveraging all our past 4G development efforts and reinforcing our position in both the massive IoT and broadband and critical IoT spaces.
With our solutions we address the rapidly-growing 5G/4G massive IoT market with the NB-IoT and Cat M technologies, which continue to be rolled out around the world. For 5G/4G massive IoT applications, Sequans provides a comprehensive product portfolio based on its flagship Monarch, Monarch 2 dual mode LTE-M/NB IoT, and Calliope and Calliope 2 Cat 1 chip platforms, featuring industry-leading low power consumption, a large set of integrated functionalities, and global deployment capability.
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We also address the broadband IoT market, mainly consisting of wide-area use cases that require higher throughput, lower latency and larger data volumes than massive IoT, as well as wide-area and local-area use cases with requirements for extremely low latency and ultra-high reliability. For 5G/4G broadband IoT applications, Sequans is offering products based on its Cassiopeia 4G Cat 4/Cat 6 platforms and is developing a high-end Taurus 5G/4G chip platform, both optimized for low-cost residential, enterprise, and industrial applications.
Note that many vertical applications, such as Satellite, Avionic, Public Safety and Military are interested to leverage the cellular 5G/4G 3GPP standard to serve their markets. Using our 5G/4G platforms developed originally for the cellular IoT market segments described above, we address this market by offering software services to do the required modifications on such platforms in order to offer optimized solutions for these vertical applications.
Our product portfolio allows us to target the IoT market segments described above, with purpose-built, price/performance-optimized chipset solutions. This includes chips and modules that have the advantage to accelerate the time-to-market in some market segments.
Our 4G LTE solutions are currently or have been in commercial deployments in the United States, Canada, Italy, France, Germany, United Kingdom, Nordic countries, Eastern Europe, the Middle East, Indonesia, Malaysia, Philippines, Vietnam, Japan, China, Taiwan, South Korea, India, Australia, Brazil and elsewhere.
Our 4G LTE solutions have been incorporated into devices sold by many leading OEMs and ODMs, including in the Verizon Wireless Ellipsis Jetpack MHS900L portable router, the Telit Cinterion IoT (formerly Thales Gemalto) ELS31 LTE Category 1 and EMS31 Category M1 industrial M2M modules, the AT&T IMS2 module and in a variety of devices and modules produced by AsiaTEL, Casa Systems, Connected Holdings, Daatrics, Foxconn, Gemtek, Geotab, Inseego, Invoxia, Itron, Lockheed Martin, Multitech, Next Meters, Pebblebee, Polymer Logistics, Positioning Universal Inc, Pycom, Quidel, Renesas, Sercomm, Technicolor, Tozed, Trackimo, Ubiik, Wistron NeWeb, Withings, and others.
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. This has created demand for 4G and 5G broadband technology that can serve mobile devices such as smartphone but also that can serve all other non-handset devices such as routers and gateways that we refer to as broadband IoT devices. On top of this, the price point, size and low power consumption of the more recent 4G LTE variants, Cat 1, Cat M and Cat NB, are expected to facilitate a proliferation of massive IoT devices, such as those using our solutions for cellular connectivity, and further driving wireless data traffic and volumes of cellular devices.
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 deployed by at least 336 operators worldwide, according to a December 2022 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 one gigabit per second (Gbps). These higher speed categories involve aggregating multiple carriers, applying higher-order multiple input multiple output (MIMO) antenna technology, and more advanced modulation techniques. The highest LTE categories as defined in 3GPP Release 15 and used in practice, allow in downlink (among the 26 defined LTE downlink categories) up to 2Gbps (Category 20), and in uplink (among the 26 defined LTE uplink categories) up to 315Mbps (Category 20).
In 2016, the first operators began deploying network equipment using the variants of LTE optimized for massive IoT (Cat M and Cat NB). Operating in licensed spectrum, low power wide area networks can provide low cost, yet secure, connectivity to battery-powered devices in both rural and urban locations. Following successful pilots involving a wide variety of use cases, Cat M and Cat NB connectivity has now been deployed across North America, Japan, most of the rest of the Asia-Pacific region and in many European countries. According to Global Mobile Supplier Association, 124 Cat NB-IoT and 57 LTE-M commercial network launches were already made around the world by September 2022.
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In 2016 as well, major works were going on at 3GPP to add 5G to the cellular landscape through the introduction of New Radio (NR) which makes its entrance in Release 15. This is done through new waveforms and operation in a whole new set of bands. Some bands are referred to as sub-6GHz, or FR1 (frequency range 1), and span from 600MHz up to 7125MHz. The other bands are referred to as millimeter wave (mmwave), or FR2 (frequency range 2), and span today from 24GHz to 40GHz. Future expansions of those ranges may be considered. 3GPP Release 16 completes the initial specifications initiated in Release 15, and 5G continues evolving through the latest 3GPP Release 17. The 3GPP work on Release 17 closed in 2022 and Release 18 is now in process and expected to close by June 2024.
In addition to that, many regions have closed their initial 5G auctions (e.g. United States, Japan, Australia, South Korea, China, Italy, Germany, France, Greece, Slovakia, Croatia, Czech Republic, Austria). According to a report from the Global Mobile Supplier Association issued in February 2023, 245 operators in 195 countries/territories have deployed 5G and 519 operatorsn 156 countries were investing in 5G, including trials, acquisition of licenses, planning, network deployment and launches.
The initial 5G device ecosystem was mostly made of smartphones as these can be launched before the operator achieves full deployment of their 5G network. We are now beginning to see devices to address fixed wireless access, including CPE, portable routers; and we expect that future devices will include mobile computing, and industrial applications. 5G generally has been described as targeting three main segments: enhanced mobile broadband (eMBB), massive machine type communications (mMTC), and ultra-reliable low latency communications (URLLC). The latter has been specifically addressed as part of 3GPP Release 16. This can be illustrated in the figure below with some application examples.
Wireless carriers are seeking to quickly transition existing wireless data services to more efficient 4G and 5G 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 and 5G networks.
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. 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 4G UE category implementations approach or even exceed gigabit per second performance levels. 5G deployment is becoming the natural next step in those regions when the technology matures and reaches mass market.
In addition to deployment driven by the wireless carriers, 4G and 5G technologies are considered for private networks applications leveraging unlicensed or semi-licensed frequency bands. Specifically, as the 3.5GHz CBRS band is currently underused in the U.S., the Federal Communications Commission has opened 150 MHz in this band for access to licensed users with a Priority Access License and to registered users with General Authorized Access. The spectrum is also shared by incumbents who retain the right to use the band. CBRS enables 4G and 5G deployments in this band. Our broadband products have been supporting 3.5GHz devices worldwide for a decade, and we launched low-cost Cat 4 and Cat 6 modules that are cost-
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optimized for CBRS broadband IoT. These bands are also available in Europe, the Middle East and South Asia and are also considered for 5G deployment.
IoT Network Evolution
While increasing demand for mobile and fixed broadband connectivity is driving 4G and 5G technologies along a performance vector, the IoT market is pushing wireless technology along a different vector. Many machine-to-machine (M2M) and other low-power IoT applications are moving to LTE connectivity for its expected longevity, and because the technology is being optimized for reduced power consumption, improved coverage and lower cost. Many M2M 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. 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. This trend is also expanding in European countries and in Australia, with leading operators such as Vodafone and EE announcing their roadmaps to shut down 2G and 3G. As a result, many traditional M2M devices have evolved and replaced 2G by 4G LTE technology, using either Cat 4 (150 Mbps), or more generally Cat 1 (10 Mbps) category and/or Cat M and MB-IoT (see illustration below).
Realizing the demand for low-throughput IoT applications, the industry introduced new variants of 4G LTE which are optimized 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 IoT, i.e., the massive IoT. More specifically, 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 MTC features began to be introduced in 3GPP Release 12, with further additions and optimizations in Releases 13, 14, 15 and 16. The optimizations are summarized in the graphic below.
3GPP Release 13, completed in mid-2016, introduced Cat M, also called LTE Category M1 or LTE-M, 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 or Cat NB, with 200 kHz bandwidth and peak speeds under 200 kbps. The 3GPP Release 14 completed in June 2017 added a higher data rate and multicast support, improved positioning and enhanced voice and mobility for Cat M. For Cat NB, Release 14 added positioning, exclusive chip identification, multicast and low power class (14Bdm). These 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. These 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 other massive IoT applications. The graphic below depicts how various LTE categories might map to a range of IoT applications.
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The narrowband UE categories NB-IoT and LTE-M address most of the applications of the massive IoT market. Nevertheless, they do not replace the need for lower 4G LTE categories, like Cat 1 to address the higher category of the massive IoT devices where higher throughput and high-quality voice are required. Specifically, some applications in the wearable and hearable markets may require Cat 1 to support audio streaming and voice command and calls - features that cannot be served with narrowband LTE (LTE-M and NB-IoT). A new UE category, derived from Cat 1, has been introduced in Release 12 and fully completed in terms of requirements in Release 14: Category 1bis. This Category is very similar to Cat 1, but with a single receive chain, allows for chipsets and modules that can be designed at lower cost while keeping data rates of 10 Mbps in downlink and 5 Mbps in uplink: both LTE-M and NB-IoT categories have also been designed with a single receive chain, notably to help reducing the cellular LPWA module cost.
4G and 5G Wireless Networks
4G architecture represented a fundamental technological change from 3G and 2G in the design of wireless communication networks; 4G is now expanding and evolving in the framework of 5G.
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 (a digital modulation and access technique) 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.
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.
4G LTE has become the dominant technology for 4G wireless broadband access. The GSA counted 817 commercial LTE networks (up from 797 one year earlier) around the world as of February 2023.
The rapid pace of deployment of LTE networks worldwide implies that in some regions, operators already have or are preparing to achieve LTE coverage at parity or better compared to their 2G or 3G coverage footprint. As of August 2022, ABI Research projected that the single-mode LTE IoT (Cat 1, LTE-M/NB-IoT) device market will grow at a CAGR of 36% between 2019 and 2026 to reach annual IoT device shipments of 634 million units in 2026.
5G further expands the principles of 4G, bringing two main values: higher throughput, and lower latency. This opens new opportunities for applications, ranging from gaming, to medical monitoring, and autonomous vehicles. MIMO techniques have been extended compared to 4G, and aggregated bandwidth is coming at a much larger scale. While 4G is mostly using aggregated bandwidth of 20, 40, or, in some rare cases 100MHz, 5G makes use of aggregated bandwidth up to 800MHz. The combination of powerful MIMO schemes and very large bandwidth allows for much higher throughput, in the range of several Gbps. Regulatory aspects have facilitated such a transition; spectrum is known to be a scarce resource. Beyond the re-farming of legacy spectrum (in the sub-6GHz range), new spectrum has been allocated in both this sub-6GHZ, and in the millimeter wave space (24GHz and above). Additionally, 5G was built so as to allow a smooth transition from 4G networks, with two
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main modes of operations: 5G Standalone (SA) for pure 5G operation and Non Standalone (NSA) for coexistence with 4G. This specifically allows legacy devices already deployed to be smoothly integrated in a brand new 5G network. Some mechanisms, like Dynamic Spectrum Sharing (DSS), have been introduced so as to duplex - over time - 4G operation and 5G operation.
The figure below provides a simplified perspective on the evolution of wireless technologies providing ever-increasing performance:
Thanks to the technical evolutions behind 5G New Radio (NR), allowing for high peak data rate, high spectrum efficiency, mobility, and low latency, and hence enabling eMBB and URLLC, 5G is also growing the capability of the IoT space with dedicated evolutions for massive machine type evolutions, through constant additional features over LTE-M and NB-IoT.
Starting in Release 17 with its Reduced Capability (RedCap) category of devices, 5G NR is also trying to address, through NR, the “lower” data rates below 300Mbps, providing an NR solution to replace the legacy LTE Cat 6 and Cat 4. This approach is being pursued as part of 3GPP Release 18 with an evolution of RedCap (eRedCap) that provides capability for an optimized solution addressing the capabilities of an LTE Cat 1 solution today
Challenges Faced By 4G/5G Wireless Semiconductor Providers
Suppliers of 4G and 5G semiconductor solutions face significant challenges:
•Execution Challenges. The rapid evolution of wireless protocols, such as 4G LTE, 4G LTE Advanced and 5G NR, 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. Typical design cycles range from six months for consumer electronics devices up to two years or more for industrial or automotive applications. In addition, wireless carriers require semiconductor solutions to undergo extensive certification qualification and interoperability testing prior to mass production.
•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 with always higher modulation schemes, advanced MIMO, carrier aggregation and millimeter wave support, 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.
•Semiconductor Supply Constraints. In 2020 and 2021, worldwide component shortages crated significant obstacles to on-time production and often resulted in cost increases. In some cases, lead times for components increased without notice from 30 days to over 300 days. Supply of silicon wafers from our single-source supplier was put on allocation in 2021 and in 2022. The situation required us in some cases to qualify new sources of supply. In other cases, we, as well as some of our customers, purchased more inventory than required in the short-term, in order to ensure adequate supply over the following quarters. In 2022, as supply constraints lessened, many companies in the supply chain found
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themselves with excess inventory, resulting in lower purchasing as inventories were worked down. We expect this situation is likely to continue in at least the first half of 2023.
Our Competitive Strengths
We believe the following competitive strengths enable us to address the challenges faced by 4G and 5G wireless semiconductor providers:
•A strong track record of execution in 4G, that we are leveraging for 5G. We believe we are well positioned in the 4G LTE market, with more than 75 end customers having already launched or in the development phase of products using Sequans LTE chipsets, and in particular, we are a recognized innovator and leader in LTE for IoT chipsets. We have released many generations of 4G/5G chips from WiMax to LTE that have been deployed in a variety of devices including smartphones, USB dongles, tablets, mobile routers, broadband access CPEs, in-car telematics devices, smart meters, eHealth/well-being applications, and other industrial and consumer IoT devices. In the past three years, we have accomplished the following milestones:
•in January 2020, Monarch platform certified by Deutsche Telekom, Monarch module validated by Telus, and Monarch SiP and module certified by Sprint
•in March 2020, announced collaboration agreements with Microchip and with NXP;
•in October 2020, announced a collaboration with Renesas on 5G/4G cellular IoT, expanded to 5G collaboration announced in January 2021;
•announced in December 2020, availability of Monarch 2 5G-ready platform;
•announced in December 2020, availability of Monarch module supported by Orange LTE-M Connectivity;
•Calliope 2, new generation of Cat 1 technology, announced in January 2021;
• in January 2021, the Company received a major grant from the French government for the 5G development effort;
•in December 2021, Monarch 2 becomes first Common Criteria EAL5+ certified cellular platform;
•announced in December 2021, availability of GNSS positioning technology on Monarch 2 platform;
•in December 2021, introduced modules based on second-generation Cat 1 chip, Calliope 2;
•announced in January 2022, expansion of 4G and 5G collaboration with Renesas;
•in August 2022, executed a multi-year, strategic 5G licensing agreement in excess of $50 million;
•introduced in November 2022, jointly with Skyworks Solutions, Inc., a SiP (system-in-package) solution combining Sequans’ Monarch 2 modem with Skyworks’ radio front-end solution, creating the world’s smallest LTE-M/NB-IoT connectivity platform in a single package; and
•in February 2023, announced the we have joined forces with Eseye, a leader in IoT connectivity solutions, to deliver the world’s first universal iSIM (integrated eUICC) connectivity solution targeting the GSMA eSIM M2M standard.
•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, 4G LTE, and 5G. This enables us to serve as a trusted advisor to wireless carriers, OEMs and infrastructure vendors to optimize the performance of their 4G and 5G devices and networks. For example, our solutions offer improved standby-mode battery life in wireless 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. 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. We have also implemented another proprietary technique called eco-Paging that allows very low power consumption while maintaining a good level of reachability for the IoT device. We also leveraged our signal processing know-how to embed new functionalities such as GNSS. Security, which is at the heart of the IoT devices, has also been strengthened in our Monarch 2 and Calliope 2 platforms, embedding a Common Criteria EAL5+ secure enclave. To respond to the semiconductor shortage supply, we also invest into enabling our customers to benefit from an integrated development environment on our new platforms, including Monarch 2 and Calliope 2. We also leveraged our signal processing know-how to embed new functionalities such as GNSS. Security, which is a key functionality for IoT devices, has also been strengthened in our Monarch 2 and Calliope 2 platforms, embedding a Common Criteria EAL5+ secure enclave. To respond to the semiconductor shortage supply, we also invest in developing software to enable our customers to benefit from an integrated development environment on our new platforms, including Monarch 2 and Calliope 2.
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•High performance solutions for 4G and 5G applications. Our solutions offer high performance for use in a wide array of wireless devices. The key performance characteristics of our solutions include:
◦high throughput with peak downlink data transfer rates of 150 Mbps and 300 Mbps in our 4G LTE and LTE-Advanced solutions, which is now evolving to up to 7 Gbps in our 5G Taurus chipset product portfolio with support of 5G NR with fallback to high-category 4G LTE;
◦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;
◦support for LTE-Advanced features, including carrier aggregation, a capability of creating a single virtual wide channel from two or more different narrower channels, resulting in higher throughput;
◦integration of complete on-chip support for Voice over LTE (VoLTE), including support for high-definition voice using wideband codecs;
◦support for LTE-Advanced technology band 48 for CBRS solutions available through two of our LTE modules;
◦support of integrated secure element function and iSIM for better end-to-end security and built-in MNO/MVNO data plans;
◦integrated RF and Baseband functions in single die optimizing power consumption and reducing solution cost and size;
◦development and integration of specific high doppler tolerant algorithms to allow for in-plane connectivity; and
◦efficient LTE-to-satellite communication schemes for breakthrough in mobility and connectivity for satellite services;
◦development of Cat 1bis technology to address the cost and power consumption barriers that we believe have inhibited widespread use of 4G in wearables and consumer applications, as well as traditional IoT voice-oriented applications such as alarm systems;
◦support of outdoor location services with embedded GNSS functionality, allowing an efficient cost structure of our customers, while enabling very low power applications requiring positioning; and
•support of an embedded application environment.
•Highly optimized 4G and 5G solutions. We have successfully produced and ramped into commercial production multiple generations of 4G system-on-chip, or SoC, semiconductor solutions. We delivered the first cellular technology (Cat 1 and Cat M) for massive IoT, and we began delivering the second generation Cat M solution for this segment in 2021 and expect to begin delivering the second generation Cat 1 solution in 2023. 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. We also developed and launched our second generation Cat M chipset, the Monarch 2 that provides major improvement in power and cost with many new advanced features. In December 2020, we announced our first module optimized for 5G massive IoT, the GM02S, leveraging our Common Criteria EAL5+ capable secure element to provide an integrated UICC (iUICC) solution. In January 2021, we announced sampling of Calliope 2, a new generation of LTE Cat 1 technology for massive IoT applications and in December 2021 announced modules based on the Calliope 2. 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:
◦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.
◦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.
◦Simplified product design for device manufacturers, as our solutions incorporate all key components required for a 4G device in a single die or 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.
◦Proprietary embedded protocol software that has been exhaustively tested with major base station 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.
◦Provide lowest power consumption with 1µA PSM and eco-Paging™ for optimized Extended Discontinuous Reception (eDRX), a feature that allows IoT devices to remain inactive for longer periods.
◦Optimized dual-mode Cat M/NB-IoT operation.
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◦VoLTE support for integrated voice.
◦GNSS positioning.
◦Common Criteria EAL5+ certified cellular platform.
◦Long-term relationships with wireless carriers. We have developed close relationships with wireless carriers around the world, helping them to test their new networks and specific features of those networks. We believe these relationships are critical to being able to certify our products quickly and to help our customers to certify and deploy their products efficiently.
Our Strategy
Our goal is to be a leading provider of next-generation wireless semiconductors for broadband, critical and massive IoT by providing best-in-class solutions that enable mass-market adoption of 4G and 5G technologies worldwide. Key elements of our strategy include:
•Identifying and optimally serving 4G and 5G market segments. As cellular operators continue to build out their 4G LTE and 5G NR networks and re-farm their 2G and 3G spectrum to support demand for data capacity, we expect to see significant growth in the demand for 4G LTE-only, 5G and 5G with 4G fallback devices. In our estimation, this demand is expected to come from three areas:
1)Massive IoT devices: massive IoT refers to the universe of connected objects that together result in very large number of connections, small data volumes, low-cost devices and stringent requirements on energy consumption. 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, security, asset tracking, mobile/remote healthcare, industrial automation and monitoring, retail, smart cities, consumer wearables, agriculture and environmental monitoring, and more. This trend toward the use of 4G LTE in the massive IoT market began with the arrival of cost- and power-optimized Category 1 LTE solutions in 2015, and is accelerating with the arrival of machine type communications (MTC)-optimized 3GPP Release 13/14/15 LTE solutions, which define Cat M and Cat NB user equipment categories. In 2021, we also observed a slower than expected adoption of NB-IoT in several regions, notably in Japan (which appears to be abandoning NB-IoT networks), in Europe (developing LTE-M on top of NB-IoT), and even in China (where some applications are progressively turning to higher data rate Cat 1bis vs. lower data rate NB-IoT). On the other hand, Cat M has been steadily growing, and new generation Cat 1 and Cat 1bis have been on the rise. Our massive IoT product family is composed of our world-first Calliope Category 1 LTE chipset platform, announced in January 2015, certified and shipping in commercial products. Monarch, the world’s first Cat M/NB chip, was announced in February 2016, certified in 2017 and is shipping in devices for Verizon, AT&T, as well as carriers in Japan, Europe, Australia, and Canada. Monarch 2, the 5G-ready Cat M/NB evolution of our Monarch flagship platform, is now contributing to our massive IoT offering with additional benefits in terms of cost, power saving, and integrated features such as an application development environment, GNSS, and iUICC. The introduction of Calliope 2, our Cat1bis 5G-ready chip, should enable us to gain market share in wearable and consumer application as well to support existing IoT applications, such as smart home and smart metering, that require higher bandwidth than Cat M.
2)Broadband IoT devices: broadband IoT adopts the capabilities of Mobile Broadband connectivity for IoT by providing much higher data rates and lower latencies than for massive IoT, while optimizing the technology for non-smartphone 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 (also sometimes generically called broadband wireless CPE, or customer premise equipment) provide broadband Internet access for residential and industrial applications. Critical IoT refers to Ultra-Reliable Low- Latency Communications (URLLC) introduced by the 3GPP standard in the scope of the 5G and that we plan to support in our Taurus platform. Here the promise is to reduce latency as an important feature for both residential and industrial applications, such as gaming and robotic. Solutions based on our Cassiopeia LTE-Advanced platform (including our CBRS modules), and our 5G Taurus platform are optimized to address these types of devices.
•Accelerating our, and our customers’, time to market and reducing our customers’ development costs. By packaging our LTE semiconductor solutions in a complete, turnkey module form factor and certifying them with key wireless carriers, we have been catalyzing the market for cellular devices, speed time to market for customers wishing to incorporate connectivity in their devices and reduce the cost and complexity for our customers. In 2019, we announced our next generation Monarch 2, which was released for production in 2020, further simplifying the design effort for IoT devices makers, compared to Monarch, thanks to the integration of additional functionalities like an application
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CPU, a secure enclave to facilitate the addition of the connectivity. In 2021, we announced our new generation Calliope 2 and related modules for Cat 1 devices, which is expected to move into mass production in 2023. Moving forward, we are improving our customer time-to-market by integrating features that allow customers to forego using additional external components such as a SIM Card (with our iUICC feature), a mircroprocessor (with our on-platform development environment), and a GNSS component (with our GNSS functionality on our modules). Furthermore, we facilitate cellular technology adoption with all documentation easily available on our customer cloud, and further service enablers for our partners (for device management or connectivity services), and with more development to come in 2023.
•Leveraging our multiple generations of 4G chip design experience to become a leader in advanced 4G and 5G technology and cost efficiency. The cost and power efficiency achieved from our many generations of 4G modem design has enabled us to deliver our 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 massive IoT family are the 4G/5G chips, Monarch 2, and Calliope 2, with increasing level of integration and features.
•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, in 2018 we announced the Monarch SiP combining the Skyworks RF front-end module with our Monarch chipset. We have collaborated with microcontroller vendors like Microchip and NXP, to develop IoT design kits that help customers to easily integrate our Monarch LTE-M/NB-IoT platform with a range of Microchip and NXP microcontrollers. In 2020, we engaged a collaboration with Renesas across our entire product portfolio that will enable Renesas to sell M2M modules based on Sequans chipsets in combination with their own semiconductor offerings. We believe these collaborations will allow us to address the mass market in an effective way and acquire customers which were not yet cellular connected but were integrating Bluetooth and WiFi connectivity. We are also partnering with MVNOs to enable new potential customers using multi-region coverage. We have signed worldwide distribution contracts with Avnet, Digi-Key, Mouser Electronics and Richardson RFPD. This will facilitate access to our technology through the distributors’ wide go-to-market presence.
Our Solutions
We have developed a portfolio of 4G and now 5G semiconductor solutions to address a variety of applications and market segments. We offer baseband solutions used to encode and decode data based on 4G and 5G protocols that serve as the core wireless processing platform for a cellular 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 cellular solution. We offer a family of LTE modules that vastly simplify the task of embedding LTE connectivity for device makers lacking cellular experience. This helps us expanding our options in adjusting our business model on case-by-case basis.
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. 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.
Our primary chipset products during the last three financial years are summarized in the table below. For each baseband chipset, we have a number of modules available as well.
| Platform Name Chipset ID Family | Description | ||||||||||||||||||||||||||||||||||||||||||||||
| Critical IoT | Broadband IoT | Massive IoT | Key Features | ||||||||||||||||||||||||||||||||||||||||||||
Monarch SQN3330 | LTE Release 13/14 BB+RF+ PMIC+RAM | * | LTE UE Category M1 and NB1 supported; Baseband, RF transceiver, memory and power management integrated in a single package; power-optimized for IoT and M2M applications requiring lower throughput. Modules based on this chipset: GM01Q | ||||||||||||||||||||||||||||||||||||||||||||
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Monarch 2 SQN3430 | LTE Release 14/15 dual-mode LTE-M/NB-IoT | * | Highly integrated chip with extremely low power consumption, supporting power class 3 (23 dBm) and lower (20, 14 dBm), with an integrated MCU with Sensor-Hub Mode Secure element & iUICC, EAL5+ security government grade. Modules based on this chipset: GM02S, GM02SP | ||||||||||||||||||||||||||||||||||||||||||||
MonarchSiP SQN66430 | LTE Release 13/14 dual-mode LTE M1/NB1 | * | Ultra-compact complete LTE System in Package; integrated baseband, RF, pSRAM, power management, front-end and passives; eco-Paging™ for optimized eDRX; power class options 20 and 23dBm; supporting bands 1,2,3,4,5,8,12,13,14,17,18,19,20,25,26,28, 66,85 | ||||||||||||||||||||||||||||||||||||||||||||
| Monarch 2 SiP SQN66431 | LTE Release 13/14 dual-mode LTE M1/NB1 | * | Ultra-compact complete LTE System in Package; integrated baseband, RF, pSRAM, power management, front-end and passives; eco-Paging™ for optimized eDRX; power class options 20 and 23dBm; integrated MCU., Secure element & iUICC, EAL5+ security government grade, supporting bands 1,2,3,4,5,8,12,13,14,17,18,19,20,25,26,28, 66, 85 | ||||||||||||||||||||||||||||||||||||||||||||
| Monarch Go | LTE Release 13/14 LTE-M | * | Comprehensive modem component offering device makers the shortest possible route to market and lowest total cost of ownership (TCO) to develop a cellular-IoT connected device - Connected by Verizon | ||||||||||||||||||||||||||||||||||||||||||||
Calliope SQN3223 | LTE Release 9/10 BB | * | 40nm technology, 10Mbps CAT1 peak throughput, USB and HS UART interfaces, integrated processor, cost- and power-optimized for IoT and M2M applications requiring lower throughput. WLCSP. Modules based on this chipset: US130Q , VZ120Q | ||||||||||||||||||||||||||||||||||||||||||||
Colibri / Calliope SQN3241 | LTE RF | * | * | Supports 700-900MHz and 1.8-2.7GHz, up to 20 MHz bandwidth. WLCSP. Modules based on this chipset: VZ22Q/US30Q/EU40Q | |||||||||||||||||||||||||||||||||||||||||||
Calliope 2 SQN3520 | LTE Release 14/15 SoC | * | Cat 1bis SoC, A-CPU, Audio, secure enclave, iUICC (40nm) technology. Baseband, RF, power management and memory integrated in one chip platform. Significant improvement in power consumption. Integrated secure enclave with EAL5 level of security. Module family based on this chipset: GC02S1 | ||||||||||||||||||||||||||||||||||||||||||||
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Cassiopeia SQN3220/ SQN3220sc | LTE-Advanced Release 10 BB | * | Carrier aggregation up to 20 + 20 MHz Modules based on this chipset:CB410 L/CB610L | ||||||||||||||||||||||||||||||||||||||||||||
Cassiopeia SQN3240/SQN3242/SQN3244 | LTE RF | * | * | * | Supports FDD and TDD 700 MHz - 2.7 GHz, up to 20 MHz bandwidth Modules based on this chipset: CB410L/CB610L | ||||||||||||||||||||||||||||||||||||||||||
Abbreviations used in this table: BB = baseband processor, nm = nanometer, dBm = decibels; iUICC = integrated Universal Integrated Circuit Card; MCU = micro controller unit; PMIC = power management IC; RF = radio frequency transceiver, SDRAM = Synchronous Dynamic Random Access Memory, SiP = system in package, SoC = system-on-chip, VoLTE = Voice over LTE.
Competition
The wireless semiconductor business is very competitive. We believe that our competitive strengths will enable us to compete favorably in the 4G and 5G markets. The following are the primary elements on which companies in our industry compete:
•functionality, form factor and cost;
•product performance, as measured by network throughput, signal reach, latency and power consumption;
•software maturity and carrier certification coverage;
•track record of providing high-volume deployments in the industry; and
•systems knowledge helping customers to optimize their products.
We face competition from established semiconductor companies such as Huawei HiSilicon, Mediatek, Qualcomm Incorporated, Samsung Electronics Co. Ltd., Sony Corporation, RDA and Unisoc, as well as smaller actors in the market such as GCT Semiconductor, Nordic Semiconductor and uBlox.
The larger 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 market opportunities in general. Often with broadband IoT business, the carriers have their own product to launch, in this case our sales efforts are focused on determining which OEMs and ODMs are most likely to win in the various carrier product opportunities and securing design wins. With massive IoT, the carriers are often a partner providing the data plan service and our customers are major OEMs or ODMs addressing the various applications of massive IoT, e.g., metering, asset tracking, alarms etc. In this case, we engage with the end customers directly or via our module partners, technology partner or distributors to develop relationships and promote our solutions. We work closely with key players across the wireless industry to understand their requirements and enable them to certify and deploy cellular 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, 2021, we had a direct sales force serving our OEM and ODM customers in the Asia-Pacific region, including Taiwan, China, Korea and Japan; Europe; the Middle East and North and South America. In the United States, Brazil and Israel, we have supplemented our direct sales team with sales representatives who help with sales enablement, lead generation, customer communications and customer support functions. We have continued to reinforce our go-to-market capabilities by expanding our new distributor channels implementation, including the four worldwide agreements with Avnet, Digi-Key, Mouser Electronics and Richardson RFPD. These agreements encompass lead generation and support as well as fulfillment. To further the reach of our sales channels, we are collaborating with
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microcontroller vendors like Renesas, Microchip and NXP, to develop IoT design kits that provide us the scale of these large corporations and also help their existing end customers easily integrate our products while keeping their software legacy intact. They are useful to address the massive IoT market as the numbers of applications and potential customers are very large.
Our sales force works closely with a team of technical support personnel. 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 and 5G 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- and/or 5G-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. Our technical and business relationships with AT&T, ChungHwa Telecom CHT, Deutsche Telekom, KDDI, NTT DoCoMo, Orange, Softbank, Spark Networks, T-Mobile, Telenor, Telstra, Verizon Wireless, Vodafone and other operators 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. Our Monarch and Monarch 2 chipsets and module offerings have been certified between 2016 and 2022 by AT&T, T-Mobile, Verizon, Sprint, NTT DoCoMo, Softbank, KDDI, Telstra, LG U+, Deutsche Telekom, Telus, Orange, Vodafone, CHT, Firstnet, Spark Networks — as well as certified with most global and regional industry and regulatory bodies (GCF, PTCRB, FCC, IC/ISED, ACMA, UKCA, RED, NCC, JATE, TELEC). In addition to these carrier relationships, Sequans has expanded its customer designs in 2021 and 2022 with names such as Thales (now Telit Cinterion), FlorLink, Infrafon, Invoxia, Itron, Next Meters, Ubiik, WiThings. We also announced, and subsequently expanded to include the entire Sequans product line, our partnership with Renesas, in addition to partnerships on massive IoT solutions with NXP and Microchip for integrating our solutions with these microprocessors giving us access to their IoT customers.
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 and 5G 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, 2022, we had 44 employees and three outside contractors in our business development, sales, customer support and marketing teams.
Customers
We maintain relationships with 4G and 5G 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, system integrators, or distributors (who provide certain customer communications, fulfillment and customer support functions).
Our top ten customers accounted for 98%, 92% and 95% of our total revenue in 2020, 2021 and 2022, respectively. Our new strategic partner based in China accounted for 33% of our revenue in 2022. A distributor serving multiple end customers in China and Taiwan, accounted for 20%, 23% and less than 10% of our revenue in 2020, 2021 and 2022, respectively. An ODM based in South Korea accounted for 45% in 2020 and less than 10% in 2021 and 2022. Our oldest strategic partner, a Fortune
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Global 500 company, represented 18%, 23% and 14% of our revenue in in 2020, 2021 and 2022, respectively. Another strategic partner, a new customer in 2020, accounted for 13% and 11% of our revenue in 2021 and 2022, respectively, and less than 10% in 2020. An ODM based in China accounted for 14% in 2021 and less than 10% of our revenue in 2020 and 2022. The following is a list of our top ten customers (names given when we have permission), in alphabetical order, based on total revenue during 2022:
• Asiatelco • EDOM • Elster • Geotab • Renesas Electronics | • RFPD • SkyFive • Telit Cinterion Deutschland GmbH (formerly Thales Dis Ais Deutschland GMBH) • Strategic partner (Fortune Global 500) • Strategic partner (China) | ||||
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, and we use their commercially available mature standard 65nm and 40nm, standard RF, mixed-signal and digital CMOS foundry processes to enable us to produce our products more cost-effectively. We use well-known outsourced semiconductor assembly and test (OSAT) suppliers such as United Test and Assembly Center Limited (UTAC), STATS ChipPAC Limited and Silicon Precision Industries Limited (SPIL) for most of our chipset assembly and testing. We use Universal Scientific Industrial (Shanghai) Company Limited (USI), Asiatel Technologies Co. and BYD Electronic International Co Ltd. for manufacturing of our modules.
We generally manufacture to our internal sales forecasts and fill orders as received. We do not have manufacturing agreements with our foundry or with our testing and packaging or module vendors, other than agreements with UTAC, USI and BYD, 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”.
We strive for continuous improvement in manufacturing processes to deliver year-on-year improvement in output, cost and product quality. We closely monitor the overall production cycle from wafer to finished goods through statistical analysis of the manufacturing 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 performance, quality measures, including customer feedback and reliability.
Our quality management system is based upon the requirements of ISO 9001. We are ISO 9001 (2015) 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, corporate social responsibility and sustainability programs.
We also comply with RoHS and REACH requirements. We perform regular routine supplier audits to ensure that our suppliers meet the required quality standards.
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, 2022, we had 56 issued and allowed United States patents, 22 European patents, and 9 pending United States 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.
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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 4G or 5G 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 4G or 5G 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 May 2029, but which may be terminated in May 2026. This facility accommodates our principal research and development, product marketing, and finance and administrative activities.
We have a 7,843 square-foot facility in Winnersh Triangle, England, which accommodates a research and development center under a lease expiring in October 2025. We have a 4,884 square-foot facility in Ramat Gan, Israel, which houses a research and development center, under a lease that expires in December 2023, with the option to renew. We have a 1,600 square foot office in Singapore under a lease expiring in February 2025. We have a 2,318 square-foot facility in Burnsville, Minnesota for engineering personnel under a lease that expires in January 2024. We have a 645 square-foot facility in Salo, Finland under a lease that expires in November 2023. We rent additional office space in Taipei, Taiwan; Shanghai and Shenzhen, China; Seoul, South Korea and in Bedminster, New Jersey under short-term lease agreements, and in Sophia-Antipolis, France under long-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.
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, 2022: