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
     þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
SEQUANS COMMUNICATIONS S.A.
(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)
15-55 Boulevard Charles de Gaulle
92700 Colombes, France
(Address of principal executive offices)
Georges Karam
Chairman and Chief Executive Officer
Sequans Communications S.A.
15-55 Boulevard Charles de Gaulle
92700 Colombes, France
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
American Depositary Shares, each representing four ordinary shares, nominal value €0.02 per share
SQNS
New York Stock Exchange
Ordinary shares, nominal value €0.02 per share
 
New York Stock Exchange*
 
*
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 €0.02 per share: 95,587,146 as of December 31, 2019
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 which basis for accounting the registrant has used to prepare the financing statements included in this filing:
 
U.S. GAAP  ¨
 
International Financial Reporting Standards as issued
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, 2019 
_________________________________________________
TABLE OF CONTENTS

1
1
 
 
 
 
 
 
 
 
Item 1.
3
Item 2.
3
Item 3.
3
Item 4.
28
Item 4A.
43
Item 5.
43
Item 6.
68
Item 7.
77
Item 8.
82
Item 9.
83
Item 10.
84
Item 11.
90
Item 12.
90
 
 
 
 
 
 
 
 
Item 13.
93
Item 14.
93
Item 15.
93
Item 16A.
95
Item 16B.
95
Item 16C.
96
Item 16D.
96
Item 16E.
96
Item 16F.
96
Item 16G.
96
Item 16H.
97
 
 
 
 
 
 
 
 
Item 17.
98
Item 18.
98
Item 19.
98
 
 
 
 
 

i



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 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, including manufacturing expenses;
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 and financing obligations under strategic license and development services agreements;
the impact of natural disasters or pandemics on our sourcing operations and supply chain;
our ability to remediate material weaknesses in our internal controls relating to the accounting for certain revenue transactions;
the potential impact of the COVID-19 coronavirus on the production of our products in China and elsewhere, our ability to operate remotely during government shelter-in-place orders, or demand for our products by customers whose supply chain is impacted or whose demand is curtailed thereby reducing demand for our products; 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, 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

1



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.

2



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
The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial data in conjunction with “Item 5 — Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this annual report. Our historical results are not necessarily indicative of results to be expected for future periods. The consolidated statements of operations data for the years ended December 31, 2017, 2018 and 2019, the consolidated statements of financial position data at December 31, 2017, 2018 and 2019, and the consolidated statements of cash flow data for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited Consolidated Financial Statements included elsewhere in this annual report. The consolidated statement of operations data for the years ended December 31, 2015 and 2016, consolidated statement of financial position data at December 31, 2015 and 2016, and the consolidated statement of cash flow data for the years ended December 31, 2015 and 2016, have been derived from our audited Consolidated Financial Statements that are not included in this annual report.

3



Our financial statements included in this annual report were prepared in U.S. dollars in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.
 
Year ended December 31,
 
2015 (1) (2)
2016 (1) (2)
2017 (1) (2)
2018 (2)
2019
 
(in thousands, except per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue:
 
 
 
 
 
Product revenue
$
24,669

$
34,581

$
37,353

$
28,938

$
21,947

Other revenue
7,863

10,998

10,910

11,312

8,917

Total revenue
32,532

45,579

48,263

40,250

30,864

Cost of revenue(3):
 
 
 
 
 
Cost of product revenue
17,970

22,574

24,725

21,957

16,703

Cost of other revenue
1,481

3,022

2,397

2,405

1,782

Total cost of revenue
19,451

25,596

27,122

24,362

18,485

Gross profit
13,081

19,983

21,141

15,888

12,379

% of revenue
40
%
44
%
44
%
39
%
40
%
Operating expenses(3):
 
 
 
 
 
Research and development
25,305

26,334

25,202

27,909

23,799

Sales and marketing
5,985

7,126

8,785

9,411

7,968

General and administrative
5,428

6,267

6,679

10,085

8,570

Total operating expenses
36,718

39,727

40,666

47,405

40,337

Operating income (loss)
(23,637
)
(19,744
)
(19,525
)
(31,517
)
(27,958
)
Financial income (expense)
(3,448
)
(4,759
)
(6,335
)
(5,675
)
(9,522
)
Profit (Loss) before income taxes
(27,085
)
(24,503
)
(25,860
)
(37,192
)
(37,480
)
Income tax expense (benefit)
317

284

300

(968
)
(783
)
Profit (Loss)
$
(27,402
)
$
(24,787
)
$
(26,160
)
$
(36,224
)
$
(36,697
)
Basic earnings (loss) per ordinary share
$
(0.46
)
$
(0.39
)
$
(0.34
)
$
(0.39
)
$
(0.39
)
Diluted earnings (loss) per ordinary share
$
(0.46
)
$
(0.39
)
$
(0.34
)
$
(0.39
)
$
(0.39
)
Number of ordinary shares used for computing:
 
 
 
 
 
Basic per ordinary share
59,145

63,805

77,668

93,767

95,009

Diluted per ordinary share
59,145

63,805

77,668

93,767

95,009

Basic earnings (loss) per ADS*
$
(1.85
)
$
(1.55
)
$
(1.35
)
$
(1.55
)
$
(1.54
)
Diluted earnings (loss) per ADS*
$
(1.85
)
$
(1.55
)
$
(1.35
)
$
(1.55
)
$
(1.54
)
Number of ADS used for computing:
 
 
 
 
 
Basic per ADS*
14,786

15,951

19,417

23,442

23,752

Diluted per ADS*
14,786

15,951

19,417

23,442

23,752

* taking into account the November 29, 2019 adjustment in the ratio of shares to ADS : each ADS represents 4 ordinary shares

 
At December 31,
 
2015 (1) (2)
2016 (1) (2)
2017 (1) (2)
2018 (2)
2019
 
(in thousands)
Consolidated Statements of Financial Position Data:
 
 
 
 
Cash, cash equivalents and short-term deposit
$
8,681

$
20,547

$
3,295

$
12,086

$
14,098

Total current assets
35,819

50,069

39,747

43,163

37,025

Total assets
48,856

65,077

57,056

62,574

63,315

Current and non-current loans and borrowings (1)
26,482

29,310

30,655

48,834

58,645

Total current liabilities
29,132

31,467

27,938

27,197

38,064

Total equity (deficit)
(1,248
)
8,860

4,148

(5,019
)
(29,561
)
(1) Including convertible debts, venture debt, lease liabilities, government grant advances and loans, and interest-bearing financing of receivables.

4





 
Year ended December 31,
 
2015 (1) (2)
2016 (1) (2)
2017 (1) (2)
2018 (2)
2019
 
(in thousands)
Consolidated Statements of Cash Flow Data:
 
 
 
 
Net cash flow from (used in) operating activities
$
(16,401
)
$
(15,589
)
$
(28,626
)
$
(22,838
)
$
5,093

Net cash flow used in investing activities
(5,345
)
(5,270
)
(6,477
)
(8,766
)
(9,101
)
Net cash flow from financing activities
17,710

32,778

17,838

40,744

6,019

Net foreign exchange difference
(5
)
(5
)
11

(2
)
1

Cash and cash equivalents at January 1
12,329

8,288

20,202

2,948

12,086

Cash and cash equivalents at December 31
8,288

20,202

2,948

12,086

14,098

(1) In 2018, the Company adopted IFRS 15 “Revenue from Contracts with Customers” using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
(2) In 2019, the Company adopted IFRS 16 "Leases" standard using the modified retrospective approach. Accordingly, prior period amounts have not been restated.
(3) Includes share-based compensation as follows:
 
Year ended December 31,
 
2015
2016
2017
2018
2019
 
(in thousands)
Cost of revenue
$
17

$
11

$
7

$
8

$
10

Operating expenses
850

1,111

1,631

1,804

1,787

Share-based compensation
$
867

$
1,122

$
1,638

$
1,812

$
1,797


Exchange Rate Information
In this annual report, for convenience only, we have translated the euro amounts reflected in our financial statements as of and for the year ended December 31, 2019 into U.S. dollars at the rate of €1.00 = $1.1227, the noon buying rate for euros in New York City, as certified for customs purposes by the Federal Reserve Bank of New York, on December 31, 2019. You should not assume that, on that or on any other date, one could have converted these amounts of euros into U.S. dollars at that or any other exchange rate.

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

5



certain factors including the risks described below and elsewhere in this report and our other SEC filings. See “Special Note Regarding Forward-Looking Statements” on page 1.
Risks Related to Our Business and Industry
We, as well as our customers, source certain components from Asia and our chips and modules are manufactured in Asia, which expose us to risks related to health epidemics, and the COVID-19 in particular, that could impact our results of operations. The impact of COVID-19 could also reduce demand for our products and the ability to operate our business remotely during government shelter-in-place orders.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, China. Currently, our sole foundry is located in Taiwan, our module suppliers are located in China and our test and assembly suppliers are in Taiwan, Singapore and South Korea. We also operate an office in Shenzhen, China and have teams throughout Asia, including Hong Kong, Taiwan, South Korea and Singapore. In addition, we have significant customers based in China, South Korea, Taiwan and the United States. Any outbreak of contagious diseases, including further expansion of the COVID-19 coronavirus pandemic, and other adverse public health developments 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. Any disruption of our or our suppliers’ or customers’ operations would likely impact our sales and operating results, including our revenue expectations. For example, the government of France ordered that all non-essential businesses close until at least April, which has required that we move to remote working. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could impact our operating results. As the circumstances surrounding the COVID-19 pandemic are rapidly changing, the extent to which it may impact our business is uncertain.
We have a history of losses and have experienced a significant decline in revenue from 2011, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.
We were established in 2003 and began operations in 2004, and have incurred losses on an annual basis since inception. We experienced net losses of $26.2 million, $36.2 million and $36.7 million in 2017, 2018 and 2019, respectively. At December 31, 2019, our accumulated deficit was $308.7 million. We expect to continue to incur significant expense related to the development of our 4G and 5G products and expansion of our business, including research and development and sales and administrative expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expense. As a result of these expenditures, we will have to generate and sustain substantially increased revenue to achieve profitability. If we do not, we may not be able to achieve or maintain profitability, and we may continue to incur significant losses in the future.
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. Furthermore, the effects of COVID-19 coronavirus pandemic might have a negative impact on the production of our products in affected regions or on the demand for our products by customers whose supply chain or end demand are negatively affected by COVID-19, and as a result could affect our financial condition. The effects of COVID-19 have also had and may continue to have a prolonged negative impact on the capital markets globally, which could in turn negatively impact our ability to raise funds to meet our financial needs in the next twelve months and beyond. If we cannot generate sufficient cash or obtain additional financing, we may be required to downsize our business operations. If we are unable to obtain additional financing as specified in a certain license and development services agreement, we may be required to repay a portion of the related advance payments.


6



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 4G and 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 markets, and in particular the market for 4G-only, also referred to as single-mode 4G, products where no fall back to 2G or 3G technology is required, and the market for the variants of 4G optimized for the Internet of Things (the narrow band versions referred to as Cat M and Cat NB);
accurate prediction of the size and growth of the 5G market;
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 adoption of industry standards allowing devices to connect and communicate with each other;
accurate prediction of the timing of commercial availability of 4G and 5G networks, including the network operators' deployment of Cat M and Cat NB);
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 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.
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 or are unsuccessful in the adoption of Cat M and Cat NB 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. During network deployment, wireless carriers often anticipate a certain rate of subscriber additions and, in response, operators typically procure devices to satisfy this forecasted demand. If the rate of deployment of new networks by wireless carriers is slower than we expect or if 4G LTE technology is not as widely adopted by

7



consumers as we expect, the rate of subscriber additions may be slower than expected, which will reduce the sales of our products and cause OEMs and ODMs to hold excess inventory. This would harm our sales and our financial results.
As we expand into the broader Internet of Things markets, we depend on the commercial deployment of narrow band LTE variants, beginning with Cat M and, later, Cat NB. The adoption of the Cat M and Cat NB standards is expected to expand the markets for Internet of Things devices. If the Cat M or Cat NB standards are not successfully adopted and deployed, are further delayed or if competing standards for Internet of Things devices become favored by wireless carriers, we may not be able to successfully commercialize our Cat M and Cat NB products, which would harm our sales and our financial results.
In the future, we are likely to have similar dependencies regarding the deployment of other 4G variants and 5G networks.
In addition, wireless carriers may choose to deploy technologies not supported by our solutions. If a technology that is not supported by our semiconductor solutions gains significant market share or is favored by a significant wireless carrier, we could be required to expend a significant amount of time and capital to develop a solution that is compatible with that alternative technology. If we are not successful, we could lose design wins with respect to that technology and our business and financial results would be harmed. Moreover, once a competitor’s solution is chosen by a wireless carrier, OEM or ODM we will have difficulty supplanting those solutions with ours.
We 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 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.
If we fail to successfully develop, commercialize, produce and sell our module product line, our business, revenue and operating results may be harmed.
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 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

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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 negotiate license agreements for the module in order to offer standard indemnification to our manufacturing partners, but there can be no assurance that we will be successful in obtaining licenses for standard essential IP on acceptable terms.
Our 4G semiconductor solutions do not incorporate support for 2G or 3G protocols, and we currently focus on selling our solutions into the market for 4G-only devices. If the market for 4G-only devices materializes more slowly or at a lower volume level than we anticipate, our results of operations may be harmed.
Our current semiconductor solutions support only 4G protocols. As a result, our 4G strategy focuses primarily on selling into the 4G-only device market. The growth rate and size of the market for 4G-only devices is dependent on a number of factors, including the degree of geographic and population coverage by 4G networks. If this coverage does not continue to materialize as quickly as we expect, if fewer 4G carriers than we expect offer comprehensive 4G coverage in their geographic operating areas, or if these 4G carriers require support for 2G or 3G protocols in a larger proportion of their overall device portfolio than we expect, then demand for 4G-only semiconductor solutions like ours would be lower and our results of operations would be harmed.
If we are unsuccessful in developing and selling new products on a timely and cost-effective basis or in penetrating new markets, in particular the single-mode 4G market, our business and operating results would suffer.
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.
If we are unable to meet a financing milestone as required by a recent strategic agreement, we could be required to return certain advance payments to a strategic partner
Pursuant to an agreement with a strategic partner, a Fortune Global 500 company, in order to comfort the strategic partner on the funding of the Company, we have agreed to secure by September 30, 2020 at least $25 million in net proceeds from new equity, debt, government financing, none of which can be repayable before April 30, 2024.  If the financing milestone is not completed, the strategic partner will have the option to terminate the contract and receive a refund of $8 million of the $18 million upfront payment received from them in 2019.  In this situation, we may not have sufficient funds to repay our strategic partner, or any repayment would reduce the amount of funds that we have available to invest in and operate our business, and the failure to satisfy the financing requirement could result in the cancellation of the strategic agreement.
We depend on a small number of customers for a significant portion of our revenue. If we fail to retain or expand customer relationships, our business could be harmed.
A significant amount of our total revenue is attributable to a small number of customers, and we anticipate that this will continue to be the case for the foreseeable future. These customers may decide not to purchase our semiconductor solutions at all, to purchase fewer semiconductor solutions than they did in the past or to alter the terms on which they purchase our products. In addition, to the extent that any customer represents a disproportionately high percentage of our accounts receivable, our exposure to that customer is further increased should they be unable or choose not to pay such accounts receivable on a timely basis or at all.

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Our top ten customers accounted for 78%, 86% and 95% of our total revenue in 2017, 2018 and 2019, respectively. 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,
 
 
2017
 
2018
 
2019
 
2019
A
 
16
%
 
32
%
 
27
%
 
16
%
B
 
%
 
%
 
22
%
 
32
%
C
 
%
 
Less than 10%

 
10
%
 
21
%
D
 
Less than 10%

 
13
%
 
Less than 10%

 
%
E
 
17
%
 
Less than 10%

 
Less than 10%

 
2
%
Customers A and C are distributors who serves multiple customers in China and Taiwan. Customer B is an ODM based in South Korea. We expect that some of these customers, particularly those above 10% during 2019, could each continue to represent at least 10% of our revenue in 2020 as the market for single-mode 4G devices is still concentrated in a relatively small number of device makers. The loss of any significant customer, a significant reduction in sales we make to them in general or during any period, or any issues with collection of receivables from customers would harm our financial condition and results of operations. Furthermore, we must obtain orders from new customers on an ongoing basis to increase our revenue and grow our business. If we fail to expand our customer relationships, our business could be harmed.
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 customer experiences 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.
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, Taiwan Semiconductor Manufacturing Company Limited, or TSMC, in Taiwan to manufacture our semiconductor wafers. Because we outsource our manufacturing to a single foundry, we face several significant risks, including:
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 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 semiconductors, or if our business

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relationship with TSMC deteriorates, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, in a timely manner, or at all.
Locating and qualifying a new foundry would require a significant amount of time, which would result in a delay in production of our products. In addition, using foundries with which we have no established relationship could expose us to unfavorable pricing and terms, delays in developing and qualifying new products, unsatisfactory quality or insufficient capacity allocation. We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. Many of the customers of TSMC, or foundries that we may use in the future, are larger than we are, or have long-term agreements with such foundries, and as a result, those customers may receive preferential treatment from the foundries in terms of price, capacity allocation and payment terms. Any delay in qualifying a new foundry or production issues with any new foundry would result in lost sales and could damage our relationship with existing and future customers as well as our reputation in the market.
If our foundry vendor does not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.
The fabrication of semiconductor solutions such as ours is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. TSMC, or foundries that we may use in the future, could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendor could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendor, or defects, integration issues or other performance problems in our semiconductor solutions could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. In addition, because we have a sole 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.
Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory, which could harm our business.
We do not have firm, long-term purchase commitments from our customers. Substantially all of our sales are made on a purchase order basis, and in most cases, our customers are not contractually committed to buy any quantity of products from us beyond firm purchase orders.  Additionally, customers may cancel, change or delay purchase orders already in place with little or no notice to us. Because production lead times often exceed the amount of time required to fulfill orders, we often must manufacture in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our ability to accurately forecast demand can be harmed by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably, that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory, which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not manufacture enough semiconductor solutions, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers significantly increase their requested production quantities with little or no advance notice. If we do not

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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 12 months or 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 the narrow band variants of 4G LTE technology are rapidly emerging and many 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. In the 4G and 5G markets, 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, Samsung Electronics Co. Ltd. and Spreadtrum, as well as smaller actors in the market such as GCT Semiconductor. Many of our competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of existing customers than us. 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;
our success in identifying and penetrating new markets, applications and customers;

12



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.
If we experience material changes to the competitive structure of our industry due to cooperation or consolidation among our competitors, we may not increase or sustain our revenue or market share, which would harm our business.
Our current or future competitors may establish cooperative relationships among themselves or with third parties. In addition, there has 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.
If we are unable to effectively manage our business through periods of economic or market slow-down and any subsequent future growth, we may not be able to execute our business plan and our operating results could suffer.
Our future operating results depend to a large extent on our ability to successfully manage our business through periods of economic or market slow-down, and periods of subsequent expansion and growth. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must, among other things, effectively:
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 accounting 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. In 2018, as we expected that the market for our CatM solutions would begin ramping significantly, we increased our investment in research and development and sales in marketing. In addition, a stronger euro versus the U.S. dollar, resulted in increased operating expenses in 2018. Given the delay experienced in the ramp in the Cat M market, we reduced operating expenses in 2019. 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.
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.

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The average selling prices of our semiconductor solutions have historically decreased over time and will likely do so in the future, which could harm our gross profits and financial results.
Average selling prices of our semiconductor solutions have historically decreased over time, and we expect such declines to continue to occur. Our gross profits and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced semiconductor solutions on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Even if we are successful in reducing our costs or improving sales volumes, such improvements may not be sufficient to offset declines in average selling prices in the future. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs and our costs may even increase, either of which would reduce our margins. We have reduced the prices of our semiconductor solutions in line with, and at times in advance of, competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to do so again in the future.
Any increase in the manufacturing cost of our products would reduce our gross margins and operating profit.
The semiconductor business is characterized by ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price or manufacturing cost variances or due to other factors, will reduce our gross margins and operating profit. We do not have long-term supply agreements with our manufacturing, testing or assembly suppliers, and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions, or anticipate or prevent future price increases from our suppliers. Because we have a sole supplier of wafers and limited sources of testing and assembly for both 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.
The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows.
The semiconductor industry has historically been cyclical, experiencing significant downturns in customer demand. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation occurs, it could harm our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. If this occurs, we may not be able to obtain sufficient quantities of our semiconductor solutions to meet the increased demand, resulting in lost sales, loss of market share and harm to our customer relationships. We may also have difficulty in obtaining sufficient assembly and 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 could have adverse, wide-ranging effects on demand for our semiconductor solutions and for the products of our customers, particularly wireless communications equipment manufacturers or other participants in the wireless industry, such as wireless carriers. Inflation, deflation and economic recessions that harm the global economy and capital markets also harm our customers and our end consumers. Specifically, the continued deployment of new 4G and 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 occur, our operating results, cash flow and financial condition could be harmed. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of the ADSs.
Though we rely to a significant extent on proprietary intellectual property, we may not be able to obtain, or may choose not to obtain, sufficient intellectual property rights to provide us with meaningful protection or commercial advantage.
We depend significantly on intellectual property rights to protect our products and proprietary technologies against misappropriation by others. We generally rely on the patent, trademark, copyright and trade secret laws in Europe, the United States and certain other countries in which we operate or in which our products are produced or sold, as well as licenses and nondisclosure and confidentiality agreements, to protect our intellectual property rights.

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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 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. 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;

15



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 successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.
The complexity of our semiconductor solutions could result in unforeseen delays or expenses from undetected defects or design errors in hardware or software, which could reduce the market acceptance for our semiconductor solutions, damage our reputation with current or prospective customers and increase our costs.
Highly complex semiconductor solutions such as ours can contain defects and design errors, which, if significant, could impair performance or prevent compliance with industry standards. We have not in the past, but may in the future, experience such significant defects or design errors. In addition, our semiconductor solutions must be certified by individual wireless carriers that such solutions function properly on the carrier’s network before our solutions can be designed into a particular product. If any of our semiconductor solutions have reliability, quality or compatibility problems from defects or design errors, we may not be able to successfully correct these problems in a timely manner, or at all. Furthermore, we may experience production delays and increased costs correcting such problems. Issues in the carrier certification process, which varies among carriers, may also create delays. Consequently, and because our semiconductor solutions are a critical component of our customers’ products, our reputation may be irreparably damaged, and customers may be reluctant to buy our semiconductor solutions, which could harm our ability to retain existing customers and attract new customers and harm our financial results. In addition, these defects or design errors or delays in the carrier certification process could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new semiconductor solution, we may be required to incur additional development costs and product recalls, repairs or replacement costs. Furthermore, we provide warranties on our products ranging from one to two years, and thus may be obligated to refund

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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;
the imposition by governments of additional taxes, tariffs, global economic sanctions programs or other restrictions on foreign trade, including recent U.S. and Chinese tariffs;
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.
The decision by British voters to exit the European Union may negatively impact our operations.
The United Kingdom's formal exit from the European Union on January 31, 2020, commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets. The U.K. is expected to enter a transition period until December 31, 2020.
If the United Kingdom and the European Union do not reach acceptable agreements, it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the United Kingdom’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Any adjustments we make to our business and operations as of Brexit could result in significant time and expense to complete.
While we have not experienced any material financial impact from Brexit on our business to date as we only make intercompany sales from Sequans Communications Ltd., our United Kingdom subsidiary, to Sequans Communications S.A., we cannot predict its future implications. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the United Kingdom conducts.
A portion of our software development and testing activity is outsourced to a third-party provider based in Kiev, Ukraine. If political developments in Ukraine and Russia escalate to open hostilities, some of our product development activities and some customer software support activities could be adversely affected.
While we have our key engineering competencies in-house, primarily in France, the United Kingdom, Israel and the United States, we outsource some application software development and testing activities to an independent third-party

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provider of engineering services. We work with a dedicated team of 31 software engineers based in Kiev, Ukraine. As a result of the decision of the Russian government to annex the Crimea region of Ukraine, the United States and the European Community have imposed economic sanctions on Russia. If Ukraine experiences further political instability, these engineers may be unable to work for a sustained period of time, which could adversely impact our research and development operations. We also have our own electronic equipment physically in place in Kiev, which could be at risk in the event of violence in the region. We have developed a contingency plan to trigger if the engineers in Kiev are unable to continue working on their projects for us, but if our contingency plan is not effective, we could suffer delays in product introduction or delays in resolution of customer software bugs, which could have a negative impact on our revenues.
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 and engineering personnel in our industry is very intense. If we are unable to hire, train and retain qualified marketing, sales, technical and engineering personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenue will be harmed.
Rapidly changing standards could make our semiconductor solutions obsolete, which would cause our operating results to suffer.
We design our semiconductor solutions to conform to standards set by industry standards bodies such as the Institute of Electrical and Electronics Engineers, Inc. (IEEE), the 3rd Generation Partnership Project (3GPP) and Open Mobile Alliance (OMA). We also depend on industry groups such as the Global Certification Forum (GCF) and the PTS Type Certification Review Board (PTCRB) to help certify and maintain certification of our semiconductor solutions. If our customers adopt new or competing industry standards that are not compatible with our semiconductor solutions, if industry groups fail to adopt standards compatible with our semiconductor solutions or if our customers are requiring chip certifications that we did not design our products for, our existing semiconductor solutions would become less desirable to our customers and our sales would suffer. The emergence of markets for our products is affected by a variety of factors beyond our control. In particular, our semiconductor solutions are designed to conform to current specific industry standards. Competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures to develop new semiconductor solutions. For example, in the Internet of Things markets, we expect to face indirect competition from companies such as SIGFOX or others using LoRa Wireless RF technology, a long range, low power consumption and data transmission protocol for Internet of Things devices. Wireless carriers have started testing 5G technology, the next phase of mobile telecommunications standards, which is expected to be introduced in scale to the market starting 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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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 any of these vendors. If one or more of these vendors terminates its relationship with us, allocates capacity to other customers or if we encounter any problems with our supply chain, it could harm our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.
Certain natural disasters, such as coastal flooding, large earthquakes, volcanic eruptions or pandemics, may negatively impact our business. Any disruption to the operations of our foundry and assembly and testing subcontractors could cause significant delays in the production or shipment of our products.
If coastal flooding, a large earthquake, volcanic eruption, pandemic or other natural disaster were to directly damage, destroy or disrupt TSMC’s manufacturing facilities or the facilities of our testing, assembly and manufacturing contractors, it could disrupt our operations, delay new production and shipments of existing inventory, or result in costly repairs, replacements or other costs, all of which would negatively impact our business. For example, substantially all of our semiconductor solutions are manufactured by a third-party contractor located in Taiwan. The risk of an earthquake or tsunami in Taiwan, such as the major earthquakes that occurred in Taiwan in December 2006 and February 2016, and elsewhere in the Pacific Rim region, is significant due to the proximity of major earthquake fault lines to the facilities of our foundry vendor and assembly and testing subcontractors. Even if these facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains. Although our third-party contractors did not suffer any significant damage as a result of the most recent earthquakes, the February 2016 earthquake caused shipment delays in the first and second quarter of 2016, and the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry vendor or assembly and testing capacity. For instance, the last major earthquake and tsunami in Japan, though it did not directly cause damage to any of our third-party contractors, may impair the ability of such contractors to procure components from vendors in Japan, and alternative suppliers may not be available in a timely manner or at all, and may impair the ability of our customers to procure components other than ours that are necessary to their production process, which in turn could result in a slowing of their production, and consequently, of purchases of our products. Any disruption resulting from such events could cause significant delays in the production or shipment of our semiconductor solutions as well as significant increases in our transportation costs until we are able to shift our manufacturing, assembling or testing from an affected contractor to an alternative vendor.
We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs.
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries and to achieve higher levels of design integration. These ongoing efforts require us from time to time to modify the manufacturing processes for our semiconductor solutions and to redesign some solutions, which in turn may result in delays in product deliveries. We periodically evaluate the benefits of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and increased expenses as we transition our products to new processes. We depend on our relationship with TSMC and our 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

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in product deliveries and increased costs, all of which could harm our relationships with our customers, our margins and our operating results. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as end-customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely or cost-effective basis.

Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products or otherwise harm our business.
Wireless networks can only operate in the spectrum allowed by regulators and in accordance with rules governing how that spectrum can be used. Regulators in various countries have broad jurisdiction over the allocation of spectrum for wireless networks, and we therefore rely on these regulators to provide sufficient spectrum and usage rules. For example, countries such as China, India, Japan or Korea heavily regulate all aspects of their wireless communication industries, and may restrict spectrum allocation or usage. If further restrictions were to be imposed over the frequency bands where our semiconductor solutions are designed to operate, we may have difficulty selling our products in those regions. In addition, 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.
Adverse outcomes in tax disputes could subject us to tax assessments and potential penalties.
From time to time, we are subject to tax audits that could result in tax assessments and potential penalties, particularly with respect to claimed research tax credits due to the judgment involved in determining which projects meet the tax code’s criteria for innovation and fundamental research. For example, in May 2015, we received notification from the United Kingdom tax authorities that they made inquiries regarding the calculation method used in our 2014 United Kingdom research tax credit. We disagreed with the tax authorities’ position and defended our position, but ultimately the tax authorities' position prevailed and we settled the matter in 2016 for approximately the amount of the provision recorded in 2015: £170,000 ($252,000). Our actual costs for any disputes in the future may be materially different from the provisions recorded if we are not successful in our appeal of any assessment, which could have a material adverse effect on our business.
Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. Some of these metals are commonly used in electronic equipment and devices, including our products. Depending on various circumstances, these requirements require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. We have an extremely complex supply chain, with numerous suppliers (many of whom are not obligated by the law to investigate their own supply chains) for the components and parts used in each of our products. As a result, we may incur significant costs to comply with the diligence and disclosure requirements, including costs related to determining the source of any of the relevant metals used in our products. In addition, because our supply chain is so complex, we may not be able to sufficiently verify the origin of all the relevant metals used in our products through the due diligence procedures that we implement, which may harm our business reputation. We may also face difficulties in satisfying customers if they require that we prove or certify that our products are “conflict free.” Key components and parts that can be shown to be “conflict free” may not be available to us in sufficient quantity, or at all, or may only be available at significantly higher cost to us. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier. Any of these outcomes could adversely impact our business, financial condition or results of operations.

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Fluctuations in foreign exchange rates may harm our financial results.
Our functional currency is the U.S. dollar. Substantially all of our sales are denominated in U.S. dollars and the payment terms of all of our significant supply chain vendors are also denominated in U.S. dollars. We incur operating expenses and hold assets and liabilities denominated in currencies other than the U.S. dollar, principally the euro, and to a lesser extent the British pound sterling, the Chinese yuan and the New Israeli shekel. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, primarily the U.S. dollar to euro exchange rate. As we grow our operations, our exposure to foreign currency risk could become more significant. If there had been a 10% increase or decrease in the exchange rate of the U.S. dollar to the euro, as measured using the Company's 2019 weighted average exchange rate of one euro = $1.1218, we estimate the impact, in absolute terms, on operating expenses for the year ended December 31, 2019 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 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.
Our global operations are subject to risks for which we may not be adequately insured.
Our global operations are subject to many risks including errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters. No assurance can be given that we will not incur losses beyond the limits or outside the scope of coverage of our insurance policies. From time-to-time, various types of insurance may not be available on commercially acceptable terms or, in some cases, at all. We cannot assure you that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially. We maintain limited insurance coverage and in some cases no coverage for natural disasters and sudden and accidental environmental damages as these types of insurance are sometimes not available or available only at a prohibitive cost. Accordingly, we may be subject to an uninsured or under-insured loss in such situations.
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.

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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.

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 course of preparing our 2018 consolidated financial statements, we identified a deficiency in our internal control over financial reporting that constituted a material weakness in our internal control over financial reporting. We determined that our management’s review controls and other controls over the accounting and presentation of complex, non-routine transactions were not adequately designed and documented. In 2018, the complex, non-routine transaction that exposed the material weakness was the amendment of convertible bonds issued in prior years as well as the issuance of new financial instruments with equity components and their associated deferred tax impacts. Specifically, our management identified that our controls lacked sufficient specificity, including evaluation of all relevant accounting standards for these complex transactions.
This material weakness was not remediated in 2019 as we identified that our management’s review controls and other controls over the accounting and presentation of certain transactions were not adequately designed and operated. These included certain complex revenue arrangements entered into in 2019 and certain revenue transactions including the related variable consideration in certain instances that were not recorded in the proper period for annual or interim financial information purposes. Specifically, our management identified that our controls lacked sufficient specificity, including proper evaluation of all relevant accounting standards for these transactions.
We have historically relied on internal resources to address complex and unusual International Financial Reporting Standards accounting treatment, such as in the case of our convertible bonds and revenue recognition for complex agreements. In an effort to remediate our material weakness, we intend to engage external consultants with appropriate training going forward to assist us with respect to the documentation of assumptions used and the development of accounting positions for complex or unusual transactions, including commercial contracts.
Although we are working to remedy the material weakness, there can be no assurance as to when the remediation will be completed, 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 have not been remediated or 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;

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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;
impairment of our ability to transact business in the European Union and uncertainty as to national laws and regulations, including intellectual property rights, following the United Kingdom’s exit from the European Union;
the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel COVID-19 first identified in Wuhan, Hubei Province, China;
changing economic and political conditions at a global or local level;
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.
Moreover, sales of our semiconductor solutions fluctuate from period to period due to cyclicality in the semiconductor industry and the short product life cycles and wide fluctuations in product supply and demand characteristic of this industry. We expect these cyclical conditions to continue. Due to our limited operating history, we have yet to experience an established pattern of seasonality. However, business activities in Asia generally slow down in the first quarter of each year during the lunar new year period, which could harm our sales and results of operations during the period. Our expense levels are relatively fixed in the short-term and are based, in part, on our future revenue projections. If revenue levels are below our expectations, we may experience declines in margins and profitability or incur a loss from our operations. As a result, our quarterly operating results are difficult to predict, even in the near term, which may result in our revenue and results of operations being below the expectations of analysts and investors, and which could cause the market price of the ADSs to decline.
If securities or industry analysts cease to publish research reports about us or our industry, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
The trading market for the ADSs is influenced by research reports that industry or securities analysts publish about us or our industry. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of the ADSs appreciates.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any recommendation by our board of directors to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of the ADSs falls in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends. In addition, even if we were to pay a dividend on our ordinary shares, French law may prohibit paying such dividends to holders of the ADSs or the tax implications of such payments may significantly diminish what you receive.

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French law may limit the amount of dividends we are able to distribute and exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.
Although our consolidated financial statements are denominated in U.S. dollars, under French law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements under the French commercial code in accordance with generally accepted accounting principles in France, which we refer to as French GAAP. Therefore, we may be more restricted in our ability to declare dividends than companies not based in France. In addition, exchange rate fluctuations may affect the amount of euros that we are able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. These factors could harm the value of the ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of the ADSs.
You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us and (ii) a statement as to the manner in which instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary share so that you can vote them yourself. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions, or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
You may be subject to limitations on the transfer of your ADSs.
Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time, or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs when our books or the books of the depositary are closed, or at any time, if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company, our ordinary shares are not listed, and we do not intend to list our shares, on any market in France, our home country. This may limit the information available to holders of the ADSs.
We are a “foreign private issuer”, as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act, including the U.S. proxy rules under Section 14 of the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we have and expect to continue to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies, and are not required to file quarterly reports on Form 10-Q or current reports on Form 8-K under the Exchange Act. Furthermore, our ordinary shares are not listed, and we do not currently intend to list our ordinary shares on any market in France, our home country. As a result, we are not subject to the reporting and other requirements of listed companies in France. For instance, we are not required to publish quarterly or semi-annual financial statements. Accordingly, there is less publicly available information concerning our company than there would be if we were a U.S. public company.

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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 2019, there is no assurance that we will not be a PFIC in 2020 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 are subject to legal actions that could distract our management and increase costs, which may adversely affect our financial condition or our reputation.
In August 2017, two securities class action lawsuits were filed, which were consolidated into a single lawsuit in September 2017, alleging violations of the U.S. federal securities laws by us, our President and CEO, and our Chief Financial Officer. The plaintiffs asserted claims primarily based on purported misrepresentations regarding Sequans’ revenue recognition policy in its Annual Reports on Form 20-F for the fiscal years ended 2015 and 2016. In particular, plaintiffs claim that an August 1, 2017 press release, in which we disclosed a $740,000 reduction in previously-recognized revenue, indicated that representations in earlier public disclosures regarding revenue were false or misleading. An amended complaint was filed in April 2018, and the Company and the individual defendants subsequently filed a motion to dismiss. On September 30, 2019, the Court issued a decision dismissing the claims against our CFO, but permitting the claims against the Company and our CEO to proceed. Following a second mediation session in the latter half of March 2020, the parties reached a tentative settlement on March 25, 2020 subject to formal documentation and court approval. If the settlement is not approved, we intend to vigorously defend against this lawsuit. In any case we currently do not expect that the costs of the ultimate resolution will exceed our insurance coverage. However, an unfavorable outcome in any 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.
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

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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;
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;

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our board of directors has the right to appoint directors to fill a vacancy created by the resignation, death or removal of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;
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, founders' warrants, restricted shares, warrants and convertible notes into ordinary shares will dilute the percentage ownership of our other shareholders and the sale of such shares may adversely affect the market price of the ADSs.
As of March 20, 2020, there were outstanding stock options, founders' warrants, and restricted shares to purchase an aggregate of approximately 12.2 million of our ordinary shares (representing approximately 3.1 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: one issued in 2015 with further subscription of notes in 2018 (the "2015 Notes"), one issued in 2016 (the "2016 Notes"), one issued in May 2019 (the "May 2019 Notes") and one issued in August 2019 (the "August 2019 Notes"). The 2015 Notes may be converted into 3.4 million ADSs at a conversion price of $6.80 per ADS, the 2016 Notes may be converted into 1.7 million ADSs at a conversion price of $4.90 per ADS, the May 2019 Notes may be converted into 0.7 million ADSs at a conversion price of $4.84 per ADS and the August 2019 Notes may be converted into 1.5 million ADSs at a conversion price of $4.12 per ADS. In September 2018, we issued warrants to purchase 0.5 million ADSs with an exercise price of $6.80 per ADS to the holder of the Notes. In October 2018, we issued warrants to purchase 0.2 million ADSs with an exercise price of $5.36 per ADS to the venture debt lender in connection with a €12,000,000 debt financing done at that time. 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.
We are subject to the Continued Listing Criteria of the New York Stock Exchange (NYSE), and our failure to satisfy these criteria may result in the delisting of our ADSs.
On June 12, 2019, we received written notification from the NYSE that we were not in compliance with the continued listing standard set forth in Section 802.01C of the NYSE Listed Company Manual (Section 802.01C) because the average closing price of our ADSs was less than $1.00 per share over a consecutive 30 trading-day period. In order to regain compliance with the compliance with the continued listing standard set forth in Section 802.01C, we changed the number of our ordinary shares represented by American Depositary Shares, issued by the Bank of New York Mellon as depositary, from 1 ordinary share per ADS to 4 ordinary shares per ADS, effective November 29, 2019. We regained compliance under Section 802.01C after our closing share price on December 12, 2019 and our average closing share price for the 30 trading-day period ending December 12, 2019 both exceeded $1.00.
There can be no assurance that we will remain compliant with the Continued Listing Criteria of the NYSE. If our ADSs are ever delisted and we are not able to list our ADSs on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our ADSs and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our ADSs will develop or be sustained.
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,

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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.

Item 4. Information on the Company
A.
History and Development of the Company
Our History
Sequans Communications S.A. was incorporated as a société anonyme under the laws of the French Republic on October 7, 2003, for a period of 99 years. We are registered at the Nanterre Commerce and Companies Register under the number 450 249 677. Our principal executive offices are located at 15-55 boulevard Charles de Gaulle, 92700 Colombes, France, and our telephone number is +33 1 70 72 16 00. Our agent for service of process in the U.S. is GKL Corporate/Search, Inc., One Capitol Mall, Suite 660, Sacramento, California 95814.
Our website is www.sequans.com. The information on, or that can be accessed through, our website is not part of this annual report.
As of the date of this annual report, there has been no indication of any public takeover offers by third parties in respect of our ADSs or ordinary shares or by the Company in respect of other companies’ shares.
Principal Capital Expenditures
Our capital expenditures including purchase of intangible assets for the years ended December 31, 2017, 2018 and 2019 amounted to $6.4 million, $9.2 million and $9.1 million, respectively. They primarily consisted of purchases related to LTE product development as well as capitalized development costs. We anticipate our capital expenditures in the year ended December 31, 2020 to be primarily for ongoing 4G and 5G product development. We anticipate our capital expenditure in 2020 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
Sequans Communications S.A. (NYSE: SQNS) is a fabless designer, developer and supplier of cellular semiconductor solutions for Massive, Broadband and Critical 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 where the connectivity can be limited in throughput but 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 and Critical 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 modules that incorporate these chips along with 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 the old 2G/3G cellular networks are switching-off around the world and operators are expanding the 4G networks coverage and deploying 5G, the Massive, Broadband and Critical IoT markets will be increasingly served with single-mode 4G LTE, or LTE-only, devices and, beginning in 2021, with 5G devices that can fallback to 4G LTE. Sequans has always focused on 4G and 5G as there is very limited value to have 2G/3G for non-smartphone IoT devices . Specifically, we believe there are significant advantages in size, power consumption, product cost, development costs and operator certification costs for our customers to produce LTE-only devices compared to their more expensive, larger, more power hungry and more complex multi-mode 2G/3G/4G counterparts. This is particularly true for Broadband and Critical IoT applications. In addition, the

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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) or even 2G or 3G solutions, historically used to provide machine-to-machine (M2M) cellular connectivity. 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 while 3G and 2G networks have begun to decline in terms of growth as telecom operators are starting to shut down their 3G and 2G networks. 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, Monarch N NB-IoT and Calliope Cat 1 chip platforms, featuring industry-leading low power consumption, a large set of integrated functionalities, and global deployment capability.
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, and the Critical IoT market that includes both wide-area and local-area use cases with requirements for extremely low latency and ultra-high reliability. For 5G/4G Broadband and Critical IoT applications, Sequans is offering products based on its Cassiopeia 4G Cat 4/Cat 6 platform and 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 4G/5G 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 services to do the required software modifications on such platforms in order to offer optimized solutions for these vertical applications.
The figure below highlights our product portfolio, which 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.
From 2005 through December 31, 2019, we shipped approximately 31.9 million 4G baseband-based semiconductor solutions, which have been deployed by leading wireless carriers around the world.
Our 4G LTE solutions are currently in commercial deployments in the United States, Canada, Italy, France, Germany, United Kingdom, Nordic countries, Eastern Europe, Middle East, Indonesia, Malaysia, Philippines, Vietnam, Japan, China, South Korea, India, Australia, Brazil and elsewhere.
In 2013, we introduced a family of 4G LTE modules, complementing our chipset portfolio. We developed it further with the introduction of the Monarch platform in 2016, reinforcing Sequans’ go-to-market strategy with an offering focused on both chipsets and modules. Our value proposal consists of bringing complete ownership of the technology from chipset to module, allowing fast issue resolution, guaranteed longevity, and no external dependency - which provides a unique value compared to traditional module providers.
According to Ericsson Mobility report from November 2019, the number of 4G LTE and 5G devices shipped annually is expected to increase from 178 million in 2019 to 890 million in 2024. Around 8 billion 4G LTE and 5G devices are projected to be deployed in 2024 from 4.2 billion in 2019.
Our 4G LTE solutions are incorporated into devices sold by many leading OEMs and ODMs, including in the Verizon Wireless Ellipsis Jetpack MHS900L portable router, the Thales IoT (formerly 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, Connected Holdings , Daatrics, Foxconn, Gemtek, Geotab, Geotraq, Inseego, Invoxia, LinkLabs, Lockheed Martin, Multitech, Netcomm, Nimbelink, Pebblebee, Polymer Logistics, PoLTE, Positioning Universal Inc, Pycom, Sercomm, Seongji, USI, Technicolor, Tozed, Trackimo, Wistron NeWeb, ZMTel, ZTEWeLink 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. According to Ericsson Mobility Report from November 2019, mobile data traffic is expected to grow by 27% annually between 2019 and 2025 and most of this will come from video traffic.
This increase in wireless data traffic has been driven by two primary trends. First, the pervasiveness of the Internet with its vast array of rich media content and applications along with users’ desire to be connected anywhere and anytime using a

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variety of different wireless broadband devices is driving a fundamental change in wireless data usage models and increasing demand for high speed wireless data connectivity. Second, rapid advances in performance and functionality have resulted in mobile phones evolving from solely voice-centric communications devices into data-intensive devices, such as smartphones and tablets, that support high-definition video, bandwidth-intensive Internet applications and streaming multimedia content, all of which require additional wireless network throughput. 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 and 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 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. As a result, wireless carrier networks using 2G or 3G technology, originally designed primarily for voice traffic and not optimized for low-power connectivity, strain to reliably handle the dramatic increase in wireless broadband data demand and machines and things connectivity. This has been a major driver of the rapid shift by operators in many regions to 4G LTE technology to better meet this demand.
2G and 3G networks remain constrained by legacy technologies that were designed primarily for voice traffic, which are characterized by limited throughput and inefficient utilization of spectrum. Unable to effectively address the fast-growing demand for wireless broadband data services in a cost-effective manner using legacy 2G and 3G networks, most wireless carriers have moved to what are commonly referred to as ‘4G’ networks using LTE technology, which provide much higher peak downlink and uplink speeds in a more spectrally-efficient manner. The first version of the 3GPP LTE specification, Release 8, defined four User Equipment (UE) categories, or performance levels. UE Category 1 provides peak downlink speeds of 10 Mbps, and uplink of 5 Mbps. UE Category 2 provides 50 Mbps downlink and 25 Mbps uplink, while Categories 3 and 4 deliver 100 Mbps and 150 Mbps downlink, respectively, each with a peak uplink speed of 50 Mbps. In subsequent releases of the 3GPP LTE specifications, Releases 10 and later-called LTE-Advanced, additional improvements in features and performance were specified. These LTE-Advanced networks are already deployed by at least 311operators worldwide, according to an October 2019 report by the Global Mobile Suppliers Association. The initial versions of LTE-Advanced can provide as much as 300 Mbps of downlink speed (3GPP Release 10 UE Category 6), with subsequent versions providing downlink speeds of up to 600 Mbps and peak uplink speeds of up to 100 Mbps (3GPP Release 12 User Equipment Category 12). More recently, several UE Categories (16 and above, introduced as part of 3GPP Release 12 and 13) have specified speeds up to or exceeding 1 gigabit per second (Gbps). These higher speed categories involve aggregating multiple carriers, applying higher-order multiple input multiple output (MIMO) antenna technology, and more advanced modulation techniques. The latest LTE categories as defined in 3GPP Release 15, allow, in downlink (among the 26 defined LTE downlink categories) up to 25Gbps (Category 17), and in uplink (among the 26 defined LTE uplink categories) up to 13Gbps (Category 19).
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, East Asia and in many European countries. According to Global Mobile Supplier Association, 145 Cat M/NB commercial network launches were already made around the world by October 2019, up from 42 networks in February 2018.
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 will continue evolving in future releases. In addition to that, many regions have closed their initial 5G auctions (e.g. United States, Japan, Australia, South Korea, China, Italy and Germany), and many new auctions are planned in 2020. Trials began taking place in several regions in 2018 and 2019, and actual commercial launches were announced in 2019. In total, 62 operators in 26 countries have announced the deployment of 5G and 46 operators in 26 countries have announced 3GPP 5G service launches according to Global Mobile Supplier Association. The initial device ecosystem is mostly made of smartphones as these can be launched before the operator achieves full deployment of their 5G network. We expect that future devices will address fixed wireless access, including CPE, portable routers, 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.

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A5GFEATURESTRIANGLE.JPG
Wireless carriers are seeking to quickly deploy and 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. According to Ericsson Mobility Report November 2019, the video traffic in mobile networks is forecast to grow by around 30% annually to account for three-quarters of mobile traffic from slightly more than 60% percent in 2019 which is particularly problematic for legacy networks to support economically. These factors are key drivers of the move by mobile network operators to LTE technology.
Additionally, carriers in developing regions are increasingly embracing 4G wireless technology as a cost-effective and easier-to-deploy alternative to wireline networks for delivering broadband capability to subscribers. According to a 2019 report by the International Telecommunications Union, in the developing regions of the world, internet penetration was projected to reach 53.6% by the end of 2019, up from 41.3% at the end of 2017. 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 would likely come in a future 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 is opening 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 will also be shared by incumbents who retain the right to use the band. CBRS will enable 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-optimized for CBRS Broadband IoT. These bands are 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. According to Cisco Annual internet Report (2018-2023) updated in February 2020, total M2M connections is expected to grow 2.4-fold from 6.1 billion in 2018 to 14.7 billion by 2023. 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. As a result, many traditional M2M devices have evolved and replaced 2G by 4G LTE technology, using at the beginning Cat 1 (10 Mbps) category and sometimes Cat 4 (150 Mbps) despite the fact that some may not need the throughput performance provided by Cat 1 and Cat 3 LTE UE Categories.

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Realizing the demand for low-throughput IoT applications, the industry has 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 new MTC features began to be introduced in 3GPP Release 12, with further additions and optimizations in Releases 13, 14 and 15. The optimizations are summarized in the graphic below.
MTCOPTIMIZATIONS.JPG
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 has added a higher data rate and multicast support, has improved positioning and has enhanced voice and mobility for Cat M. For Cat NB, Release 14 has added positioning, exclusive chip identification, multicast and low power class (14Bdm). These new categories provide excellent power efficiency, enabling years-long battery life for the devices they connect. They also provide superior network coverage and reduced module costs compared to their predecessor technologies, including traditional LTE, 2G and 3G. These new technologies are compatible with existing LTE networks, generally via a software upgrade to the network infrastructure already deployed, and they can operate on the same spectrum already deployed by LTE operators. This combination of attributes is expected to drive significant demand for these technologies in M2M and other Massive IoT applications. The graphic below depicts how various LTE categories might map to a range of IoT applications.
APPLICATIONSEGMENTATION.JPG
The narrowband UE categories NB-IoT and LTE-M will address most of the applications of the Massive IoT market. Nevertheless, they will 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).

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4G and 5G Wireless Networks
4G architecture represented a fundamental technological change in the design of wireless communication networks and this change has been expanded in the framework of 5G. 2G and 3G networks were originally designed to support voice communications and utilize older circuit switching technology based on wireline telephone system design concepts.
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, particularly among large mobile operators who have historically deployed 3GPP or 3GPP2 technology. The GSA counted 777 commercial LTE networks in 228 countries as of October 2019, making it the fastest developing mobile communications system technology ever. Worldwide subscribers were estimated at 6.3 billion at the end of September 2019 by the Ericsson Mobility Report published in November 2019. Leading this trend, according to Ericsson, the Asia-Pacific region was estimated to represent 70% of global subscriptions followed by Europe with 17.5% and North and Latin America with 16.9% at the end of September 2018. According to Ericsson, 4G LTE and 5G subscribers should exceed 7.2 billion by 2025. The number of 5G subscriptions should reach 2.6 billion in 2025 while 4G LTE is projected to be 4.79 billion.
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. ABI Research projects that the single-mode LTE IoT device market will grow at a CAGR of 75% between 2019 and 2024 to reach annual IoT device shipments of 1.05 billion units in 2024.
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 refarming 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 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:
A3GPPRELEASE.JPG
Thanks to the technical evolutions behind 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.

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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 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, 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.
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 5GWe believe we are well positioned in the 4G LTE market, with approximately 60 customers having already launched or in the development phase of products using Sequans LTE chipsets, and in particular we have become recognized as a market leader in LTE for IoT chipsets. We have released eight generations of 4G semiconductor solutions - including five generations of 4G LTE - that have been deployed in a variety of devices including smartphones, USB dongles, tablets, mobile routers, broadband access CPEs, in-car telematics devices, industrial and consumer IoT devices. In early 2020, we announced the increase of the size of our 5G design center in Israel to continue developing our 5G portfolio, leveraging our expertise in 4G. In the past five years, we have accomplished the following milestones:
announced in December 2014 that Verizon selected Sequans for Ellipsis JetPack hotspot, a design win that continues to ship in 2020;
announced in January 2015 Calliope, the first Cat 1 LTE chipset solution;
announced in July 2015 Calliope Cat 1 chipset platform certified by Verizon Wireless and collaboration with Gemalto on IoT beginning with Cat 1;
introduced in February 2016 Monarch, first LTE-M chipset and extended Gemalto partnership to LTE-M;
announced in January 2017 that Verizon had certified Sequans' Monarch Cat M chip in December 2016, making it the world's first carrier-certified Cat M chip;
in February 2018, announced two new IoT products: the Monarch SiP, in collaboration with Skyworks, and Monarch N, our NB-IoT only platform;
in April 2018, announced Monarch LTE chip is validated for Cat M1 on SoftBank network;
disclosed in May 2018, that Verizon certified Sequans Cat M/NB-IoT Monarch SiP;
Sequans, Gemtek, and Telrad delivered in September 2018 new LTE solutions for the 3.5 GHz CBRS spectrum band;
in January 2019, collaborated with Polymer Logistics and Sequans on Cat M smart IoT tracker for pallet tracking or use on USA networks;
announced in February 2019, Sequans worked with STMicroelectronics to deliver Cat M/NB-IoT connected MCU solutions;

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introduced in February 2019, Monarch 2: the second generation of the world’s most advanced LTE for IoT chip platform;
announced in February 2019, new Cat M module for Orange’s live booster program is powered by Sequans Monarch Technology;
announced in February 2019, Monarch Cat M technology is certified for use on Telstra;
partnered in March 2019, with Deutsche Telekom on integrated SIM for IoT;
announced in March 2019, collaborating with Lockheed Martin on world-first LTE over satellite solution;
introduced in June 2109, new LTE Cat 4 and Cat 6 modules for CBRS spectrum;
announced in July 2019, Monarch certified by KDDI for Cat-M and validated by SoftBank for NB-IoT;
announced in October 2019, three largest mobile operators in Japan certified Monarch SiP and module
introduced in October 2019, first module based on Monarch N with integrated SIM capability
announced in November 2019, Monarch module certified in South Korea;
announced in December 2019 Monarch chip and module certified by T-Mobile for NB-IoT network
in January 2020, Monarch platform certified by Deutsche Telekom, Monarch module validated by Telus, and Monarch SiP and module certified by Sprint
announced in February 2020, Monarch Go, embedded with an optimized LTE antenna and pre-installed ThingSpace IoT SIM, is certified by Verizon as an end device;
announced in February 2020, global distribution agreements executed with Richardson RFPD and Avnet; and
announced in March 2020, collaboration agreements with Microchip and with NXP.

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. For instance, we have implemented a proprietary technique called Dynamic Power Management in our Monarch chip that assures the longest possible battery life for IoT devices by dynamically adapting the chip’s deep-sleep implementation to the traffic patterns of various IoT use cases. 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. In addition, we are now leveraging our years developing 5G essential technology, through a partnership with TCL from 2015 to 2019, for development of our 5G NR Taurus product.
High performance solutions for 4G and 5G applicationsOur 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 5 Gbps in our 5G Taurus chipset platform which will support 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;
inclusion of LTE broadcast support in our LTE solutions using a feature called evolved multimedia broadcast multicast service, or eMBMS, which enables carriers to deliver new multimedia services in an economical and spectrally efficient manner;
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 new LTE modules;

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support of integrated secure element function and iSiM for better end-to-end security and built-in MNO/MVNO data plans
support of location positioning via software enabling indoor and outdoor positioning service and reducing the need of a power-hungry GNSS function
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.
Highly optimized 4G and 5G solutions. We have successfully produced and ramped into commercial production eight generations of 4G system-on-chip, or SoC, semiconductor solutions. This experience has resulted in what we believe to be one of the industry’s most efficient implementations, providing high performance at low cost and low power consumption. Some of our solutions have integrated the baseband processor and the RF transceiver into a single die, resulting in extremely high integration, small footprint and low cost. With the introduction of our Monarch Cat M/NB-IoT chip in 2016, we delivered a very high level of integration, providing baseband, RF transceiver, power management and memory all in a single chip In February 2018, we announced our Monarch SiP, an all-in-one solution integrating all components needed around Monarch to support ultra-compact and tiny IoT devices, and Monarch N, our chip optimized for Cat NB1/NB2 single-mode and integrated power amplifier and all RF and baseband functions in a single die. In February 2019, we announced our second generation Category M chipset, the Monarch 2 that provides another major improvement in power and cost with many new advanced features. In October 2019, we announced our first module optimized for 5G Massive IoT, the NB02S, which is based on our recent Monarch N platform, leveraging our EAL5+ capable secure element to provide an integrated UICC (iUICC) solution. 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. For instance, our Monarch chip incorporates baseband processor, RF transceiver, power management and memory in a single 6.5 x 8 mm package. Our Monarch N chip incorporates, in a single die, all these functions in addition to the power amplifier. 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 network selection Cat M/NB-IoT with the proprietary feature IoT-Select™
VoLTE support for integrated voice
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:

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Identifying and optimally serving 4G and 5G market segments. As the cellular market grows and matures, and as operators aggressively build out their 4G LTE and 5G NR networks and refarm 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, asset tracking, industrial automation and monitoring, retail, smart cities, consumer wearables, agriculture and environmental monitoring, mobile/remote healthcare, security 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. 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. More carrier approvals are expected in 2020. Monarch 2 and Monarch N, 5G-ready Cat M/NB as subsequent evolutions of our Monarch flagship platform, are expected to contribute to developing our Massive IoT offering with additional benefits in terms of cost, power saving, and integrated features.
2)
Broadband and Critical IoT devices: Broadband IoT adopts the capabilities of Mobile Broadband connectivity for IoT by providing much higher data rates and lower latencies than 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. The Ericsson Mobility Report released in November 2019 projects that, together, shipments of Broadband and Critical IoT devices will exceed 1.2 billion units from 2019 to 2024. Solutions from our Cassiopeia LTE-Advanced platform, our CBRS modules, and our future modules based on our 5G Taurus platform are optimized to address these device types.
3)
Vertical Markets: Many applications in vertical markets, such as satellite, public safety and avionic, are interested to leverage the cellular 3GPP technology to enable connectivity in extreme situations, like satellite or ground-to-aircraft broadband or connectivity in emergency situations with ultra-low latency, and secure data access. Using our existing chipset platforms developed for our regular Massive, Broadband and Critical IoT devices, our strategy is to provide services to our customers to adapt such platforms to the specific requirements of these vertical markets. We have projects in this space with customers such as Thales and Lockheed Martin.

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 February 2018, we announced Monarch SiP, a highly integrated system-in-package that combines Monarch with a front-end radio module from Skyworks to create an all-in-one design that simplifies the design process and shorten development time. In addition, in 2019, we announced our new generation of chipsets, Monarch 2 and Monarch N, expected to be commercially available in the fourth and second quarters of 2020, respectively, further simplifying the design effort for IoT devices makers, compared to Monarch, thanks to the integration of additional functionalities like an application CPU, a secure enclave to facilitate the addition of the connectivity.

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 eight 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 our fifth generations 4G/5G chips, Monarch 2, and Monarch N - with increasing level of integration and features.


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Partnering with other leading technology companies to complement our technology offerings. We regularly collaborate with ecosystem partners who provide complementary technology or strengthen our capabilities to address customer needs and competitive pressure. For instance, in March 2018 announced the Monarch SiP combining the Skyworks RF front-end module with our Monarch chipset. We have collaborated with microcontroller vendors like STMicroelectronics, 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 STMicroelectronics, Microchip and NXP microcontrollers. 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 and 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. In 2013, we introduced 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.

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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
 
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 and Emb. Voice Proc., Secure element & iUICC, EAL5+ security government grade, On-modem VoLTE.
 Modules based on this chipset: GM02S
 
Monarch N
SQN3410
LTE Release 14/15 NB-IoT
 
 
 
*
Highly integrated chip with extremely low power consumption, supporting power class 5 (20 dBm) and lower (14 dBm), with an integrated MCU with Sensor-Hub Mode, Secure element & iUICC, EAL5+ security government grade
Modules based on this chipset: NB02S
 
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 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: SP150Q, 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
 
Cassiopeia
SQN3220/ SQN3220sc

 
LTE-Advanced Release 10 BB
 
*
 
 
 
 
 
 
Carrier aggregation up to 20 + 20 MHz
Modules based on this chipset:CB410 L/CB610L
 
Mont Blanc/ 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: VZ20Q/VZ20M
 
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.

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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, Intel Corporation, Mediatek, Qualcomm Incorporated, Samsung Electronics Co. Ltd., Sony Corporation and RDA, as well as smaller actors in the market such as GCT Semiconductor or newcomers such as Nordic Semiconductor.
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 partner 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, 2019, 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, China, Taiwan, Japan and Korea, we supplement our direct sales team with local distributors and/or sales representatives who handle certain customer communications, fulfillment and customer support functions. In the United States, we recently reinforced our go-to-market capabilities through our new distributor channels implementation, including the two worldwide agreements with RFPD and AVNET. These agreements encompass lead generation and support as well as fulfillment. 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.

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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, Deutsche Telekom, KDDI, NTT DoCoMo, Orange, Softbank, Sprint, 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. For instance, in 2018 and 2019, Thales IoT (formerly Gemalto) EMS31 LTE Category M1 M2M module was certified at Verizon, AT&T, Docomo, and Softbank. Our Monarch chipset has been certified between 2016 and 2020 by AT&T, T-Mobile, Verizon, Sprint, NTT DoCoMo, Softbank, KDDI, Telstra, LG U+, DTAG, Telus, and Orange. Our Monarch SiP was certified by Verizon, Docomo, Softbank, Sprint, and KDDI. With NTT DoCoMo we have partnered to help mature the Cat M and NB-IoT networks. In addition to these carrier relationships, Sequans has successfully won, throughout 2019, customer design with Inseego, Invoxia, OneCare and Pebblebee, with Monarch, in LTE-M and with Multitech in CBRS with Cassiopeia. We have also announced our partnership with PoLTE for integrating its low-cost positioning software solution.
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, 2019, we had 38 employees and five outside contractors in our business development, sales, customer support and marketing team.
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 78%, 86% and 95% of our total revenue in 2017, 2018 and 2019, respectively. A distributor serving multiple end customers in China and Taiwan, accounted for 16%, 32% and 27% of our revenue in 2017, 2018 and 2019, respectively. An ODM based in South Korea, a new customer, accounted for 22% of our revenues in 2019. A second distributor serving multiple end customers in China and Taiwan 10% of our revenues in 2019 and less than 10% in prior years. An ODM based in China accounted for 13% of our revenue in 2018 and less than 10% in 2017 and 2019. A third distributor serving multiple end customers in China and Taiwan, accounted for 17% in 2017 and less than 10% in 2018 and 2019. The following is a list of our top ten customers (names given when we have permission), in alphabetical order, based on total revenue during 2019:
•    ATM Electronic
 
•    Franklin Wireless
 
•    Geotab
 
•    Lockheed Martin
 
•    Macnica Galaxy Inc
•    Oceus Networks Inc.
 
•    TCL
 
•    Top Intercube Co.
 
•    Verizon Wireless
 
•    Strategic partner
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.

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We use well-known outsourced semiconductor assembly and test (OSAT) suppliers such as United Test and Assemby 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), AcSIP Technology Corp and Asiatel Technologies Co. for manufacturing of our modules.
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 quality and reliability. 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 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.
We do not have manufacturing agreements with our foundry or with our testing and packaging or module vendors, other than a framework agreement with UTAC, and we place our orders with our foundry and other vendors on a purchase order basis. See “Risk Factors—Risks Related to Our Business and Industry”.
Intellectual Property
We rely on a combination of intellectual property rights, or IPR, including patents, trade secrets, copyrights and trademarks, and contractual protections, to protect our core technology and intellectual property. At December 31, 2019, we had 41 issued and allowed United States patents, 22 European patents, and 14 pending United States and European patents. The first of our issued and allowed patents is not expected to expire until 2025.
In addition to our own intellectual property, we have also entered into a number of licensing arrangements pursuant to which we license third-party technologies and intellectual property. In particular, we have entered into such arrangements for certain technologies embedded in our semiconductor, hardware and software designs. These are typically non-exclusive contracts provided under royalty-accruing or paid-up licenses. These licenses are generally perpetual or automatically renewed for so long as we continue to pay any royalty that may be due and in the absence of any uncured material breach of the agreement. Certain licenses for technology used for development of a particular product are for a set term, generally at least two years, with a renewal option, and can be easily replaced with other currently available technology in subsequent product developments. In the event that such licenses are not renewed, they nevertheless continue with regard to products distributed in the field. Except for our licenses to the so called “essential patents” described below, we do not believe our business is dependent to any significant degree on any individual third-party license.
In the past, we have entered into licensing arrangements with respect to so called “essential patents” that claim features or functions that are incorporated into applicable industry standards and that we are required to provide in order to comply with the standard. We may be required to enter into such licensing arrangements in the future in order to comply with applicable industry standards, in particular with respect to the sales of our module products, which have full 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 canceled in May 2026. This facility accommodates our principal research and development, product marketing, and finance and administrative activities.
We have a 4,236 square-foot facility in Winnersh Triangle, England, which accommodates a research and development center under a lease expiring in October 2020. 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 2020, with the option to renew. We have a 1,600 square foot office in Singapore under a lease expiring in February 2022. 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 Kista, Sweden under a lease that expires in April 2020. We rent additional office space in Sophia-Antipolis, France; Salo, Finland; Taipei, Taiwan; Shanghai and Shenzhen, China; Seoul, South Korea and in Bedminster, New Jersey under short-term lease agreements.

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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, 2019:
Name
 
Country of
incorporation
 
Year of
incorporation
 
% equity
interest
Sequans Communications Ltd.
 
United Kingdom
 
2005
 
100

Sequans Communications Inc.
 
United States
 
2008
 
100

Sequans Communications Ltd. Pte.
 
Singapore
 
2008
 
100

Sequans Communications (Israel) Ltd.
 
Israel
 
2010
 
100

D.
Property, Plants and Equipment
For a discussion of property, plants and equipment, see “Item 4.B—Business Overview—Facilities.”
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
Summary
We are a fabless designer, developer and supplier of semiconductor solutions for Broadband, Critical “Internet of Things” (IoT) and Massive IoT applications. Our solutions incorporate baseband processor and radio frequency, or RF, transceiver integrated circuits, or ICs, along with a front end subsystem and our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low power consumption and high reliability in a small form factor and at a competitive price.
We shipped 2.5 million semiconductor units during 2019, compared to 3.2 million units during 2018 and 3.3 million units during 2017. Our total revenue was $30.9 million in 2019, $40.3 million in 2018 and $48.3 million in 2017.
We currently have more than 60 end customers worldwide, consisting primarily of OEMs and ODMs for modules, telematics devices, tracking devices, security devices, CPE, home routers, mobile routers, embedded devices and other data devices. We derive a significant portion of our revenue from a small number of end customers, and we anticipate that we will continue to do so for the foreseeable future. We do not have long-term purchase agreements with any of our end customers, and substantially all of our sales are made on a purchase order basis. We expect that the percentage of revenue derived from each end customer may vary significantly due to the order patterns of our end customers, the timing of new product releases by our end customers, and consumer demand for the products of our end customers. Customers representing more than 10% of total revenue in any of the years 2017, 2018 or 2019 and their locations are as follows:
Customer
Customer Location
 
% of total revenue for the year ended
December 31,
 
 
 
2017
 
2018
 
2019
A
Taiwan
 
16%
 
32%
 
27%
B
Korea
 
—%
 
—%
 
22%
C
Taiwan
 
—%
 
Less than 10%
 
10%
D
China
 
Less than 10%
 
13%
 
Less than 10%
E
Taiwan
 
17%
 
Less than 10%
 
Less than 10%
Our Consolidated Financial Statements for 2017, 2018 and 2019, have been prepared in accordance with IFRS as issued by the IASB.


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A.
Operating Results
Revenue
Our total revenue consists of product revenue and other revenue. Revenue from contracts with customers is recognized when control of the goods or services is transferred to the customer at an amount that reflects the fair value of the consideration to which the Company is entitled, excluding sales taxes or duties.
The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied.
When a contract includes multiple promised goods and services, the Company evaluates each component to determine whether they represent separate performance obligations and determines the appropriate allocation of the contract consideration to each identified performance obligation based on estimated relative stand-alone selling prices.
Product Revenue
We derive the large majority of our revenue from the sale of semiconductor solutions and modules for 4G wireless broadband and narrowband applications, and we currently expect to continue to do so for the foreseeable future. Our solutions are sold both directly to our end customers and indirectly through distributors.
Our sales cycles typically take 12 months or more to complete, and our solutions are generally incorporated into our end customers’ products at the design stage. Prior to an end customer’s selection and purchase of our solutions, our sales force and applications engineers provide our end customers with technical assistance in the use of our solutions in their products. Once our solution is designed into an end customer’s product offering, it becomes more difficult for a competitor to sell its semiconductor solutions to that end customer for that particular product offering given the significant cost, time, effort and risk involved in changing suppliers. In addition, once we win a particular design with an end customer, we believe our ability to penetrate other product families at that end customer increases significantly.
Our product revenue is also affected by changes in the unit volume and average selling prices, or ASPs, of our semiconductor solutions. The ASP of the module is much higher than the ASP of our semiconductor solutions as many other components are added in order to provide a complete LTE solution. Our products are typically characterized by a life cycle that begins with higher ASPs and lower volumes as our new products use more advanced designs or technology and are usually incorporated into new devices that consumers adopt over a period of time. This is followed by broader market adoption with higher volumes and ASPs that are lower than initial levels, due to the maturity of the technology, greater availability of competing products or less demand as our end customers’ products reach the end of their life cycle.
The proportion of our product revenue that is generated from the sale of various products, also referred to as product mix, affects our overall ASP, product revenue and profitability. Given the varying ASPs of our solutions, any material change in our product mix may affect our gross margins and operating results from period to period. We expect to continue to broaden our product portfolio by introducing new solutions.
Other Revenue
Other revenue consists of the sale of licenses to use our technology solutions and revenue from associated annual software maintenance and support services, as well as revenue from technical support services and development services. Development services include advanced technology development services for technology partners and product development and integration services for customers, and wireless operators.
We license the right to use our solutions, including embedded software that enables our end customers to customize our solutions for use in their products. The license generally is perpetual and covers unlimited product designs by the end customer. We expect that we will continue to sign new license agreements as we begin working with new customers, but we do not expect that such licenses will generate significant revenues.
Development services agreements typically call for a number of milestones to be delivered over several quarters, with revenue generally recognized on the percentage of completion method as the contract progresses. The amount of development services can vary over time depending on the timing of when new contracts are won and the length of the contract period.

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Development service revenue increased slightly in 2018 compared with 2017, and decreased again in 2019 as some large contracts were completed.
With the execution in October 2019 of a large license and development services contract with a strategic partner, as well as our expectation that we will continue to enter into similar smaller agreements, we expect other revenue, compared to 2019, to increase significantly in future periods as we continue to provide services on particularly complex projects, and in the short term it is likely to remain a significant percentage of our total revenue.
The following table sets forth our total revenue by region for the periods indicated. We categorize our total revenue geographically based on the location to which we invoice.
 
 
Year ended December 31,
 
 
2017(1)
 
2018
 
2019
 
 
(in thousands)
Asia:
 
 
 
 
 
 
  Taiwan
 
$
8,126

 
$
16,704

 
$
11,387

  Korea
 
373

 
261

 
6,813

  China (including Hong-Kong)
 
21,819

 
11,638

 
2,139

  Rest of Asia
 
2,291

 
1,911

 
106

      Total Asia
 
32,609

 
30,514

 
20,445

  United States of America
 
11,282

 
7,042

 
9,221

  Rest of world
 
4,372

 
2,694

 
1,198

Total revenue
 
$
48,263

 
$
40,250

 
$
30,864

(1) In 2018, the Company adopted IFRS 15 using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
We categorize our total revenue based on technology.
 
 
Year ended December 31,
 
 
2017(1)
 
2018
 
2019
 
 
(in thousands)
Broadband
 
$
27,900

 
$
11,657

 
$
10,431

IOT
 
11,568

 
19,679

 
12,816

Vertical
 
8,795

 
8,914

 
7,617

Total revenue
 
$
48,263

 
$
40,250

 
$
30,864

(1) In 2018, the Company adopted IFRS 15 using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
Additionally, we categorize our total revenue based on product and service revenue including license revenue and development and other services.
 
 
Year ended December 31,
 
 
2017(1)
 
2018
 
2019
 
 
(in thousands)
Product
 
$
37,353

 
$
28,938

 
$
21,947

License
 
2,838

 
2,707

 
2,578

Development and other services
 
8,072

 
8,605

 
6,339

Total revenue
 
$
48,263

 
$
40,250

 
$
30,864

(1) In 2018, the Company adopted IFRS 15 using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
Cost of Revenue
Our cost of revenue includes cost of product revenue and cost of other revenue.
Cost of Product Revenue
A significant portion of our cost of semiconductor solution product revenue consists of the cost of wafers manufactured by third-party foundries and costs associated with assembly and test services. Cost of product revenue is impacted by

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manufacturing variances such as cost and yield for wafer, assembly and test operations and package cost. To a lesser extent, cost of product revenue includes expenses relating to depreciation of production mask sets, the cost of shipping and logistics, royalties, personnel costs, including share-based compensation expense, valuation provisions for excess inventory and warranty costs.
For our module products, the cost of product revenue includes not only the cost of the semiconductor solution but also other components such as power amplifiers and filters, as well as greater packaging costs.
Early in the life cycle of our products, we typically experience lower yields and higher associated costs. Over the life cycle of a particular product, our experience has been that the cost of product revenue has typically declined as volumes increase and test operations mature, while ASPs generally decline.
We use third-party foundry, assembly and test subcontractors, which are primarily located in Asia, to manufacture, package and test our semiconductor solutions. We purchase processed wafers from our fabrication supplier, currently TSMC. We also rely on third-party assembly and test subcontractors to assemble, package and test our products, and on third-party logistics specialists for logistics and storage. We generally do not have long-term agreements with our suppliers. Our obligations with our vendors for manufacturing, assembly and testing are generally negotiated on a purchase order basis.
Cost of Other Revenue
As most of the costs related to other revenue are incurred as part of our normal research and development efforts, we allocate to cost of other revenue only the specific direct costs related to providing maintenance and technical support and generating development services revenue.
Gross Profit
Our gross profit is affected by a variety of factors, including our product and revenue mix, the ASPs of our products, the volumes sold, the purchase price of fabricated wafers, assembly and test service costs and royalties, provision for inventory valuation charges, and changes in wafer, assembly and test yields. We expect our gross profit will fluctuate over time depending upon competitive pricing pressures, the timing of the introduction of new products, product and revenue mix, volume pricing, variances in manufacturing costs and the level of royalty payments to third parties possessing intellectual property necessary for our products.
Operating Expenses
Research and Development
We engage in substantial research and development efforts to develop new products and integrate additional capabilities into our core products. Research and development expense consists primarily of personnel costs, including share-based compensation, for our engineers engaged in design and development of our products and technologies. These expenses also include the depreciation cost of intellectual property licensed from others for use in our products and depreciation of capitalized internal development costs, and directly expensed product development costs, which include external engineering services, cost of development software and hardware tools, cost of fabrication of mask sets for prototype products, external laboratory costs for certification procedures, equipment depreciation and facilities expenses.
We expect research and development expense to increase moderately in the short-term as we complete development of the current 4G products in our roadmap and ramp up our development for 5G, which will require additional resources and investments.
Under IFRS, research and development expense is required to be capitalized if certain criteria are met and then amortized over the life of the product. In 2017, we capitalized costs related to the development of the chipsets for LTE Category M (Monarch and Monarch 2) and certification costs for an amount of $1.9 million (net of research tax credit for $0.3 million); in 2018 we continued to capitalize certification costs and costs related to Monarch 2 and began capitalizing costs for the LTE Category NB (Monarch N) for a total amount of $3.4 million (net of research tax credit for $0.5 million); in 2019 we continued capitalizing certification costs and costs for the LTE Category NB (Monarch N) and began capitalizing costs for the LTE Category 1 (Calliope 2) for a total amount of $5.0 million (net of research tax credit for $0.6 million). We expect that we may be able continue to capitalize development costs going forward if the relevant accounting criteria are met.

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Research and Development Incentives
In France and the United Kingdom, we receive certain tax incentives based on the qualifying research and development expense incurred in those jurisdictions. When the incentive is available only as a reduction of taxes owed, such incentive is accounted for as a reduction of tax expense; otherwise, it is accounted for as a government grant with the benefit recorded as a reduction of research and development expense. We expect to be able to continue to qualify for such tax incentives in these jurisdictions in future periods. We expect the tax incentives, which are based on a percentage of qualifying research and development expense, to remain fairly stable in the short term. For 2019, we recorded a net amount of approximately $3.1 million in tax incentives compared with $3.0 million in 2018 and $3.3 million in 2017.
In France, we also receive incentives in the form of grants from agencies of the French government and the European Union, based on qualifying research and development expense incurred pursuant to collaborative programs carried out with other companies and universities. These incentives are recorded as a reduction of research and development expense and are recognized when there is a reasonable assurance that the grant will be received, and all relevant conditions will be complied with. For 2019, we recorded approximately $0.2 million in grants compared with approximately $1.1 million in 2018 and $3.1 million in 2017. In 2017, 2018 and 2019, we received $1.1 million, $1.6 million and $2.1 million, respectively, in advances on grants and debt financing related to a large research project funded by the French government, called FELIN. The total value of the project funding to date for the Company is €7.0 million ($9.0 million). The funding was paid in three installments, the last of which was received in 2019. Of the €7.0 million, €3.0 million is in the form of a grant and €4.0 million is in the form of interest-bearing debt to be repaid beginning in 2019 and through 2022. The Company began to make principal and interest payments of €150,000 ($168,000) in 2019. We expect that the amounts we recognize from such grants overall may increase in 2020 as we intend to apply for new grants for our 5G development program. In 2017, we received $1.6 million in advances on grants and debt financing related to a second large research project funded by the French government, called LTE4PMR. The total value of the project funding for the Company is €2.1 million ($2.3 million) to be received over four years. Of the €2.1 million, €0.7 million is in the form of a grant and €1.4 million is in the form of interest-bearing debt to be repaid beginning in 2020 and through 2024.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs, including sales commissions, and share-based compensation for our business development, sales, customer support and marketing personnel, commissions paid to independent sales agents, marketing fees paid to industrial partners, the costs of advertising and participation in trade shows. We expect the size of our business development, sales and marketing organization, and sales and marketing expense, to remain flat or increase slightly in 2020.
General and Administrative
General and administrative expense consists primarily of personnel costs and share-based compensation for our finance, human resources, purchasing, quality and administrative personnel; professional services costs related to recruiting, accounting, tax and legal services; bad debt expense, investor relations costs; insurance; and depreciation. Information technology and facilities expenses are accounted for as overhead and allocated across all departments of the Company based on a pro rata basis. We expect general and administrative expense to remain fairly flat in 2020.
Interest Income (Expense), Net
Interest income consists of interest earned on cash and cash equivalent balances. We have historically invested our cash primarily in commercial bank accounts, short term deposits and money market funds.
Interest expense relates to our convertible debts issued in 2015, 2016, 2018 and 2019; our venture debt issued to Harbert European Specialty Lending Company II S.a.r.l in 2018; an upfront payment received in October 2019; our government debt put in place in 2015; our accounts receivable financing facility put in place in 2014; and research project loans received from 2014 to 2019.
Convertible Debt Amendments
On October 30, 2017, the convertibles notes were amended to extend the term of the notes and reduce the conversion rate for one convertible debt agreement. The change in fair value of the conversion options before and after the amendment has been recorded in Other Capital Reserves in shareholders’ equity. The debt components on October 30, 2017 have been re-measured based on the extended term of the notes using the effective interest rate calculated at the date of issue of each convertible note.

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The impact of the term extension and reduction of the conversion rate has been recorded in the Consolidated Statements of Operations in "Convertible debt amendments" for a loss of $322,000.
On September 27, 2018, the convertible notes issued in 2015 were amended to extend the term of the notes and reduce the conversion rate for the 2015 convertible debt agreement. The fair value of the debt just prior to amendment was estimated in order to record a loss on extinguishment of $265,000 recorded as Convertible debt amendments in the Consolidated Statements of Operations. The new debt was then recorded at its fair value assuming a market rate of interest, with the calculated value of the conversion option of $4,559,000 with the net change in the value upon amendment of $3,788,000 recorded in Other Capital Reserves in shareholders’ equity.
In addition, all of the convertible notes issued in 2015 and convertible notes with a principal amount of $6 million issued in 2016 were amended to allow the convertible notes to be subordinated to new debt to be issued by the Company. The holder of the remaining convertible notes issued in 2016 with a principal value of $1 million did not agree to amend the terms and therefore the Company redeemed the principal and accrued interest in October 2018.
In February 2020, the convertible note issued in 2016 was amended to extend the term of the note by one year and reduce the conversion rate.
Effective March 20, 2020, the convertible notes issued in April 2015, April 2016, September 2018, May 2019 and August 2019 were amended to grant the Company three options to extend the term of each note, except for the August 2019 note which has two options to extend. Each option will give the Company the right to extend the term of such note by one year and consequently reset the conversion price to a 20% premium above the 20-day volume weighted average price (VWAP) if it is lower than the existing conversion price. On the first option exercise, the payment-in-kind interest (PIK) will stay at 7% but the holder will be granted a warrant for 10% of the value of the note with a three year term, at an exercise price of 20% premium above 20-day VWAP. On the second option exercise, the PIK will be adjusted to 9.5%, the previous warrants granted on the first option exercise will be extended by one year and the holder will be granted an additional warrant for 15% of the value of the note with a three year term, at an exercise price of 20% premium above 20-day VWAP. On the third option exercise, the PIK will be adjusted to 13.5%, and the holder will be granted an additional warrant for 20% of the value of the note with a three year term, at an exercise price of 20% premium above 20-day VWAP. If at any time, the holder converts a note prior to the date of April 2022, it will receive an extra year’s worth of PIK so as to incentivize early conversion. In consideration for entering into the amendments, the warrants that Nokomis owns that were scheduled to expire April 2021 were extended to April 2024 upon the signing of the note amendments.
Foreign Exchange Gain (Loss), Net
Foreign exchange gain (loss) represents exchange gains and losses on our exposures to non-U.S. dollar denominated transactions, primarily associated with the changes in exchange rates between the U.S. dollar and the euro, and re-measurement of foreign currency balances at reporting date. As a result of our international operations, we are subject to risks associated with foreign currency fluctuations. Almost all of our revenues are in U.S. dollars and a portion of our expenses are also in U.S. dollars. However, a significant portion of our personnel costs is in euros and some long-term items on our balance sheet are also denominated in euros. We use hedging instruments in order to reduce volatility in operating expenses related to exchange rate fluctuations. We classify foreign exchange gains and losses related to hedges of euro-based operating expenses as operating expenses.
Income Tax Expense (Benefit)
We are subject to income taxes in France, the United States and numerous other jurisdictions. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable. Our effective tax rates differ from the statutory rate primarily due to any valuation allowance, the tax impact of local taxes, international operations, research and development tax credits, tax audit settlements, non-deductible compensation, and transfer pricing adjustments. In respect of our subsidiaries outside of France, we operate on a “cost plus” basis.
In France, we have significant net deferred tax assets resulting from net operating loss carry forwards, tax credit carry forwards and deductible temporary differences that reduce our taxable income. Our ability to realize our deferred tax assets

48



depends on our ability to generate sufficient taxable income within the carry back or carry forward periods provided for in the tax law for each applicable tax jurisdiction. Following the issuance of convertible debts and debt with warrants attached, we have deferred tax liabilities resulting from the bifurcation of the conversion feature and warrants from the debts. The deferred tax liabilities have allowed us to recognize deferred tax assets, subject to certain limitations on their use under French tax law. In 2018 and 2019, $1,818,000 and $773,000, respectively, was recognized as deferred tax liabilities through shareholders’ equity (deficit) under IAS 12, Income Taxes. In the year ended December 31, 2018 and 2019, deferred tax assets of $1,162,000 and $1,018,000, respectively, were recognized through income tax benefit on our consolidated statement of operations. Over time, as we generate taxable income, we expect our tax rate to increase significantly.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements contained elsewhere in this annual report, which are prepared in accordance with IFRS as described in Note 2 to our Consolidated Financial Statements.
Some of the accounting methods and policies used in preparing our Consolidated Financial Statements under IFRS are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our earnings could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted. We believe that the most significant management judgments and assumptions in the preparation of our financial statements are described below.
Revenue Recognition
Through December 31, 2017, our policy for revenue recognition, in instances where multiple deliverables are sold contemporaneously to the same counterparty, was in accordance with IAS 18.13. When we entered into contracts for the sale of products, licenses and maintenance and support and development services, we evaluated all deliverables in the arrangement to determine whether they represented separate units of accounting, each with its own separate earnings process, and their relative fair value. Such determination required judgment and was based on an analysis of the facts and circumstances surrounding the transactions. We applied judgment for contracts when the first year of maintenance was included in the software license price. For such contracts, an amount equal to the relative fair value of one year of maintenance was deducted from the value of the license and recognized as revenue over the period of maintenance. The difference between license and maintenance services invoiced and the amount recognized in revenue was recorded as deferred revenue.
In accordance with IAS 18, revenue from technical support and development services was generally recognized using the percentage-of-completion method when the outcome of the contract could be estimated reliably. This occurs when total contract revenue and costs can be estimated reliably, and it is probable that the economic benefits associated with the contract will flow to the Company and the stage of contract completion can be measured. Estimating the cost to complete the services requires judgment. We based our estimate on the estimated hours and level of engineer to complete the project, plus any external costs required to perform the services. In certain circumstances, revenue was recognized based on the achievement of contract milestones. We recognized revenue on milestones when the milestone was substantive based on technical merits, and we had obtained customer acceptance that the milestone had been achieved.
Effective January 1, 2018, we adopted IFRS 15, Revenue from Contracts with Customers, with modified retrospective application approach, meaning that the effect of adoption recorded in opening retained deficit. Upon the adoption of the new guidance, arrangements with customers are considered contracts if all the following criteria are met: (a) parties have approved the contract and are committed to perform their respective obligations; (b) each party’s rights regarding the goods or services to be transferred can be identified; (c) payment terms related to the goods or services to be transferred can be identified; (d) the contract has commercial substance and (e) collectability of substantially all of the consideration is probable.
The standard’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Our contracts with customers often include promises to transfer multiple products and/or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus

49



together may require significant judgment. Judgment is also required to determine the stand-alone selling price (“SSP") for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.
If the consideration in a contract includes a variable amount, we use our judgment to estimate the amount of consideration to which we will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in comparison to the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
We sometimes receive advance payments from customers for the provision of development services. We determine if there is a significant financing component for these contracts considering the length of time between the customers’ payment and the transfer of control of the goods and services. When a significant financing component has been identified, the transaction price for these contracts is discounted, using the rate that we estimate would be reflected in a separate financing transaction at contract inception.
We recognize revenue when we satisfy the performance obligation by transferring the control over a product to the customer. Judgment is required to assess the pattern of transfer of control, in particular with regards to products’ sales to distributors and the rendering of services. Where we render services to the customers, they usually correspond to performance obligations which are satisfied over time, which are accounted for using the percentage-of-completion method, electing an input method of estimated costs as a measure of performance completed.
We rely on estimates around the total estimated costs to complete the contract (“Estimated Costs at Completion”). Total Estimated Costs at Completion include direct labor, material and subcontracting costs. Due to the nature of the efforts required to be performed to meet the underlying performance obligation, determining Estimated Costs at Completion is subject to many variables. Management quarterly reviews the progress and performance of open contracts in order to determine the best estimate of Estimated Costs at Completion. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion, the project schedule, identified risks and opportunities, and the related changes in estimates of costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the project schedule, technical requirements, and other contract obligations.
Trade receivables
We maintain an allowance for doubtful accounts for potential estimated losses resulting from our customers’ inability to make required payments. Impairment losses on trade accounts receivable are estimated using the expected loss method, in order to take into account the risk of payment default throughout the lifetime of the receivables. Based on an analysis of historical credit losses, we have not applied any expected credit losses to our outstanding receivables as of the reporting date beyond specific provisions for doubtful accounts. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, or there are indicators that amounts receivable will become uncollectible, additional allowances could be required. We record an allowance for any specific account we consider as doubtful based on the particular circumstances of the account. The carrying amount of the receivable is thus reduced through the use of an allowance account, and the amount of the charge is recognized in the Consolidated Statement of Operations. Subsequent recoveries, if any, of amounts previously provided for are credited against the same line in the Consolidated Statement of Operations. When a trade accounts receivable is uncollectible, it is written-off against the allowance account for trade accounts receivable.
Inventories
Inventories consist primarily of the cost of semiconductors, including wafer fabrication, assembly, testing and packaging; components; and modules purchased from subcontractors. We write down the carrying value of our inventories to the lower of cost (determined using the moving average method) or net realizable value (estimated market value less estimated costs of completion and the estimated costs necessary to make the sale). We write down the carrying value of our inventory for estimated amounts related to lower of cost or net realizable value, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value. The estimated net realizable value of the inventory is based on historical usage and assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions on a product-by-product basis. Once established, inventory reserves are not reversed until the related inventory has been sold or scrapped. Actual demand may differ from forecasted demand and these differences may have a material effect on recorded inventory values and cost of revenue.

50



When we consider future demand for a product, there are a number of factors that we take into consideration, including purchase orders and forecasts from customers, which in normal market conditions give us visibility for the next three months and some view on the following three months, our own internal projections based on customer inputs and new business opportunities, and estimates of market potential based on reports from industry analysts. The time horizon considered for future demand varies depending on the nature of the product, meaning we consider if the product is newly-introduced or approaching end-of-life, if the product is in finished good form or in component form, and if the product is incorporated in a large or small number of different end-user products from few or many customers.
We evaluate the realizability of our inventory at each balance sheet date. In doing so, we consider, among other things, demand indicated by our customers, overall market potential based on input from operators and analysts, and the remaining estimated commercial life of our products.
In 2017, 2018 and 2019, we recorded provisions for slow-moving LTE inventory totaling $0.2 million, $0.2 million and $0.7 million, respectively. In 2017, all the WiMAX inventory, fully depreciated in previous years, was physically scrapped, resulting in a provision reversal of $2.8 million.
Share-Based Compensation
We have various share-based compensation plans for employees and non-employees. The expense recorded in our statement of operations for equity awards under these plans is affected by changes in valuation assumptions. For example, the fair value of stock options is estimated by using the binomial model on the date of grant based on certain assumptions, including, among others, expected volatility, the expected option term and the expected dividend payout rate.
For the years ended December 31, 2017, 2018 and 2019, the assumption for expected volatility has been based on the Company’s historical volatility since the initial public offering in 2011.
We recognize compensation expense only for the portion of share options that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from our estimates.
For 2017, 2018 and 2019, we recorded employee share-based compensation expense of $1.6 million, $1.8 million and $1.8 million, respectively. Share-based compensation expense related to non-employees was not material for 2017, 2018 and 2019.
Functional Currency
We use the U.S. dollar as the functional currency of Sequans Communications S.A. due to the high percentage of our revenues, cost of revenue, capital expenditures and operating costs, other than those related to headcount and overhead, which are denominated in U.S. dollars. Our IPO proceeds, the proceeds from our follow-on offerings and the proceeds from issuance of convertible debt were also denominated in U.S. dollars. However, the venture debt with Harbert European Specialty Lending Company II S.a.r.l t issued in 2018 and all debt and equity proceeds that we received since our inception prior to our initial public offering were denominated in euros.
Each subsidiary determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. As of each reporting date, the assets and liabilities of each subsidiary are translated into the U.S. dollar, our functional and reporting currency, at the rate of exchange at the balance sheet date and each subsidiary’s statement of operations is translated at the average exchange rate for the year. Exchange differences arising on the translation are taken directly to a separate component of equity, cumulative translation adjustments.
Fair Value of Financial Instruments
The Company determined that the fair values of cash, trade receivables and trade payables approximate their carrying amounts largely due to the short-term maturities of these instruments.
Where no active market exists, we establish fair value by using a valuation technique determined to be the most appropriate in the circumstances, regarding compound debt instruments, the fair value of the debt component was determined using a valuation model that requires judgment, including estimating the change in value of the Company at different dates and market yields applicable to the Company’s straight debt (without the conversion option). The assumptions used in calculating the value of the conversion option represent the Company’s best estimates based on management’s judgment and subjective future expectations.

51



Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management makes assumptions, judgments and estimates to determine our deferred tax assets and liabilities, including whether deferred tax assets are likely to be realized.
Research and Development Costs
Costs incurred internally in research and development activities are charged to expense until technological feasibility and commercial viability has been established for the project. Once technological feasibility and commercial viability are established, development costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility and commercial viability of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved. Generally, this occurs when the preliminary design review has been completed.


52



Results of Operations
The following tables set forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our Consolidated Financial Statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.
Comparison of Years Ended December 31, 2018 and 2019
 
 
Year ended December 31,
 
Change
 
 
2018 (1)
 
2019
 
%
 
 
(in thousands)
 
 
Revenue:
 
 
 
 
 
 
Product revenue
 
$
28,938

 
$
21,947

 
(24
)%
Other revenue
 
11,312

 
8,917

 
(21
)
Total revenue
 
40,250

 
30,864

 
(23
)
Cost of revenue:
 
 
 
 
 
 
Cost of product revenue
 
21,957

 
16,703

 
(24
)
Cost of other revenue
 
2,405

 
1,782

 
(26
)
Total cost of revenue
 
24,362

 
18,485

 
(24
)
Gross profit
 
15,888

 
12,379

 
(22
)
Operating expenses:
 
 
 
 
 
 
Research and development
 
27,909

 
23,799

 
(15
)
Sales and marketing
 
9,411

 
7,968

 
(15
)
General and administrative
 
10,085

 
8,570

 
(15
)
Total operating expenses
 
47,405

 
40,337

 
(15
)
Operating income (loss)
 
(31,517
)
 
(27,958
)
 
(11
)
Financial income (expense):
 
 
 
 
 
 
Interest income (expense), net
 
(5,376
)
 
(9,593
)
 
78

Other financial expense
 
(400
)
 

 
(100
)
Convertible debt amendments
 
(265
)
 

 
(100
)
Foreign exchange gain (loss)
 
366

 
71

 
(81
)
Profit (Loss) before income taxes
 
(37,192
)
 
(37,480
)
 
 
Income tax expense (benefit)
 
(968
)
 
(783
)
 
(19
)
Profit (Loss)
 
$
(36,224
)
 
$
(36,697
)
 
 
(1) In 2019, the Company adopted IFRS 16 "Leases" standard using the modified retrospective approach. Accordingly, prior period amounts have not been restated.




53



The following table sets forth a summary of our statements of operations as a percentage of total revenue:
 
 
Year ended
December 31,
 
 
2018 (1)
 
2019
 
 
(% of total revenue)
Revenue:
 
 
 
 
Product revenue
 
72

 
71

Other revenue
 
28

 
29

Total revenue
 
100

 
100

Cost of revenue:
 
 
 
 
Cost of product revenue
 
55

 
54

Cost of other revenue
 
6

 
6

Total cost of revenue
 
61

 
60

Gross profit
 
39

 
40

Operating expenses:
 
 
 
 
Research and development
 
69

 
77

Sales and marketing
 
23

 
26

General and administrative
 
25

 
28

Total operating expenses
 
117

 
131

Operating income (loss)
 
(78
)
 
(91
)
Financial income (expense):
 
 
 
 
Interest income (expense), net
 
(13
)
 
(31
)
Other financial expense
 
(1
)
 

Convertible debt amendments
 
(1
)
 

Foreign exchange gain (loss)
 
1

 

Profit (Loss) before income taxes
 
(92
)
 
(122
)
Income tax expense (benefit)
 
(2
)
 
(3
)
Profit (Loss)
 
(90
)
 
(119
)
(1) In 2019, the Company adopted IFRS 16 "Leases" standard using the modified retrospective approach. Accordingly, prior period amounts have not been restated.
Revenue
Product Revenue
Product revenue decreased 24% from $28.9 million in 2018 to $21.9 million in 2019. Total broadband product revenue decreased 16% from $11.1 million in 2018 to $9.4 million in 2019, particularly in emerging markets. The broadband business has suffered from our decision to focus our development efforts on the IoT business rather than on a second generation Cat 6 product offering, resulting in a loss of market share. Total IoT product revenue decreased 30% from $17.6 million in 2018 to $12.3 million in 2019 primarily due to lower product revenue in Cat 1. Mid-year a major customer's forecasted increase in volumes was reduced as some major projects were delayed causing inventory to build in the channels. Consequently sales of Cat 1 product decreased significantly in the second half of the year. In 2019 and 2018, broadband product revenue accounted for approximately 43% and 38%, respectively, of total product revenue, and IoT product revenue for approximately 56% and 62%,respectively, of total product revenue. Decreased revenue also reflects a product mix with a lower percentage of module sales, which have a higher average selling price than chipsets.
In 2019, we shipped approximately 2.5 million of units of 4G products compared to 3.2 million units in 2018. We expect strong Massive IoT growth in 2020, supported by continued shipment of Cat 1 products in both U.S. and Japan and the ramp of Cat M particularly during the second half of 2020. We believe that the Broadband IoT business should improve slightly in 2020, as new design wins are launched by our customers, particularly for CBRS products in the United States, and as we evolve our products toward 5G technology.


54



Other Revenue
Other revenue decreased 21% from $11.3 million in 2018 to $8.9 million in 2019, reflecting a decrease in development services revenue as projects begun in prior years were completed and there were some delays in executing new agreements. Development services revenue decreased 26% from $8.0 million in 2018 to $5.9 million in 2019. License and maintenance revenue also decreased in 2019 compared to the prior year. License revenue decreased slightly from $2.7 million in 2018 to $2.6 million in 2019, and maintenance revenue decreased 35% from $600,000 in 2018 to $400,000 in 2019.  
Cost of Revenue
Cost of product revenue decreased 24% from $22.0 million in 2018 to $16.7 million in 2019 mainly due to the decreased number of units sold. Cost of other revenue decreased 26% from $2.4 million in 2018 to $1.8 million in 2019 reflecting the decreased volume of service revenue.
Gross Profit
Gross profit decreased 22% from $15.9 million in 2018 to $12.4 million in 2019, and the gross margin percentage increased from 39.5% in 2018 to 40.1% in 2019. Product gross margin percentage decreased slightly from 24.1% in 2018 to 23.9% in 2019.
Research and Development
Research and development expense decreased 15% from $27.9 million in 2018 to $23.8 million in 2019 primarily due to headcount expenses in euros impacted by a favorable foreign exchange rate between euros and US dollars compared to the rate in the same period in 2018, and higher development costs capitalized (which are accounted for as a reduction of research and development expense).
Research and development incentives decreased from $4.1 million in 2018 to $3.4 million in 2019. In the years ended December 31, 2019 and 2018, we capitalized costs related to the development of the chipsets for LTE Category M (Monarch 2), for LTE Category NB (Monarch N) and in 2019 we began capitalizing costs for the LTE Category 1 (Calliope 2) as well. We also capitalized other development costs related mainly to operator certifications. The total amount of capitalized costs was $5.0 million, net of research tax credit of $0.6 million in 2019 compared to $3.4 million, net of research tax credit of $0.5 million in 2018. In the year ended December 31, 2019, the amount of the amortization of these capitalized costs was $1.1 million compared to $0.4 million in 2018.
Research and development costs associated with product development (including normal customer support which generates product improvements) are recorded in operating expense. In some cases, we have negotiated agreements with customers and partners whereby we provide certain development services beyond our normal practices or planned product roadmap. Amounts received from these agreements are recorded in other revenue. Direct costs, including both internal resources and out-of-pocket expenses, that we incur as a result of the commitments in the agreements are recorded in cost of other revenue, rather than in research and development expense. Other research and development costs related to the projects covered by the agreements, but which we would have incurred without the existence of such agreements, are recorded in research and development expense.

There were 204 employees and independent contractors in research and development at December 31, 2019 compared to 203 at December 31, 2018.

Sales and Marketing

Sales and marketing expense decreased 15% from $9.4 million in 2018 to $8.0 million in 2019. The decrease primarily reflects headcount expenses in euros impacted by a favorable foreign exchange rate between euros and US dollars compared to the rate in the same period in 2018 and lower expenses in trade shows. There were 42 employees and independent contractors in sales and marketing at December 31, 2019 compared to 43 employees at December 31, 2018.

55



General and Administrative
General and administrative expense decreased 15% from $10.1 million in 2018 to $8.6 million in 2019 primarily due to a decrease in stock-based compensation and bad debt expense, partially offset by an increase in legal fees. There were 19 employees in general and administrative functions at December 31, 2019 compared to 21 at December 31, 2018.
Interest Income (Expense), Net
Net interest expense increased to $9.6 million in 2019 compared to $5.4 million in 2018. The increase in interest expense in 2019 reflected the issuance of $3.0 million in May 2019 and $5.0 million in August 2019 in new convertible debt. The interest expense increase reflected a full year of interest of venture debt issued in October 2018. Interest expense in the year ended in December 31, 2019 included $0.6 million related to lease liabilities recorded in conjunction with the adoption of IFRS 16 and $0.6 million related to the financing component of a long term development services agreement. Interest income was insignificant in both years.
Convertible Debt Amendment, Other Financial Expenses
On September 27, 2018, the convertible notes issued on April 14, 2015 and April 27, 2016 were amended to extend the term of the notes issued in 2015 from April 14, 2019 to April 14, 2020, to decrease the conversion price of the notes issued in 2015 from $1.85 to $1.70 and to permit the subordination of the convertible notes to new debt to be issued by the Company. Following the amendment signed in September 27, 2018, the fair value of the debt just prior to amendment was estimated in order to record a loss on extinguishment of $265,000 recorded as Convertible debt amendments in the Consolidated Statements of Operations. On October 30, 2018 and in connection with entering into the bond issuance agreement, the Company retired convertible notes issued on April 27, 2016 and due on April 27, 2020, with a principal amount of $1 million, by paying the principal and accrued interest due as of October 30, 2018 to the noteholder. The impact of the retirement was recorded as financial expenses in 2018 for an amount of $400,000.
Foreign Exchange Gain (Loss), Net
We had a net foreign exchange gain of $71,000 in 2019 compared to a net foreign exchange gain of $366,000 in 2018 primarily due to movements in the U.S. dollar versus the euro.
Income Tax Expense (Benefit)
In 2019, we recorded current tax expense of $251,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax benefit amounting to $1,034,000, mainly due to the recognition of deferred tax assets that were determined to be realizable as a result of the deferred tax liability recorded (through equity) related to convertible debt and debt with warrants attached. The deferred tax liability resulted from the recognition of the equity components following the separation between the equity and liability components of these financial instruments. In 2018, we recorded current tax expense of $210,000 arising from taxable income incurred at certain subsidiaries, and deferred tax benefit amounting to $1,178,000 mainly due to the recognition of deferred tax assets that were determined to be realizable as a result of the deferred tax liability recorded (through equity) related to convertible debt and debt with warrants attached.


56



Comparison of Years Ended December 31, 2017 and 2018
 
 
Year ended December 31,
 
Change
 
 
2017(1) (2)
 
2018 (2)
 
%
 
 
(in thousands)
 
 
Revenue:
 
 
 
 
 
 
Product revenue
 
$
37,353

 
$
28,938

 
(23
)%
Other revenue
 
10,910

 
11,312

 
4

Total revenue
 
48,263

 
40,250

 
(17
)
Cost of revenue:
 
 
 
 
 
 
Cost of product revenue
 
24,725

 
21,957

 
(11
)
Cost of other revenue
 
2,397

 
2,405

 

Total cost of revenue
 
27,122

 
24,362

 
(10
)
Gross profit
 
21,141

 
15,888

 
(25
)
Operating expenses:
 
 
 
 
 
 
Research and development
 
25,202

 
27,909

 
11

Sales and marketing
 
8,785

 
9,411

 
7

General and administrative
 
6,679

 
10,085

 
51

Total operating expenses
 
40,666

 
47,405

 
17

Operating income (loss)
 
(19,525
)
 
(31,517
)
 
61

Financial income (expense):
 
 
 
 
 
 
Interest income (expense), net
 
(4,612
)
 
(5,376
)
 
17

Other financial expense
 

 
(400
)
 
100

Convertible debt amendments
 
(322
)
 
(265
)
 
(18
)
Foreign exchange gain (loss)
 
(1,401
)
 
366

 
(126
)
Profit (Loss) before income taxes
 
(25,860
)
 
(37,192
)
 
 
Income tax expense (benefit)
 
300

 
(968
)
 
(423
)
Profit (Loss)
 
$
(26,160
)
 
$
(36,224
)
 
 
(1) In 2018, the Company adopted IFRS 15 using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
(2) Neither 2017 nor 2018 were restated for IFRS 16 "Leases" standard adopted in 2019.

57



The following table sets forth a summary of our statements of operations as a percentage of total revenue:
 
 
Year ended
December 31,
 
 
2017(1) (2)
 
2018 (2)
 
 
(% of total revenue)
Revenue:
 
 
 
 
Product revenue
 
77

 
72

Other revenue
 
23

 
28

Total revenue
 
100

 
100

Cost of revenue:
 
 
 
 
Cost of product revenue
 
51

 
55

Cost of other revenue
 
5

 
6

Total cost of revenue
 
56

 
61

Gross profit
 
44

 
39

Operating expenses:
 
 
 
 
Research and development
 
52

 
69

Sales and marketing
 
18

 
23

General and administrative
 
14

 
25

Total operating expenses
 
84

 
117

Operating income (loss)
 
(40
)
 
(78
)
Financial income (expense):
 
 
 
 
Interest income (expense), net
 
(10
)
 
(13
)
Other financial expense
 

 
(1
)
Convertible debt amendments
 
(1
)
 
(1
)
Foreign exchange gain (loss)
 
(3
)
 
1

Profit (Loss) before income taxes
 
(54
)
 
(92
)
Income tax expense (benefit)
 
1

 
(2
)
Profit (Loss)
 
(55
)
 
(90
)
(1) In 2018, the Company adopted IFRS 15 using the modified retrospective application approach. Accordingly, prior period amounts have not been restated.
(2) Neither 2017 nor 2018 were restated for IFRS 16 "Leases" standard adopted in 2019.
Revenue
Product Revenue
Product revenue decreased 23% from $37.4 million in 2017 to $28.9 million in 2018. The IoT business experienced strong growth, with Cat 1 chip volume tripling in 2018 and a more moderate increase in Cat 1 module volumes, as a major US operator's extension of CDMA activations in the second half of last year caused one of our major Cat1 module customers to delay deployment of LTE solutions on this network. During 2018, the LTE M products ramped up and grew more than 50% year over year. This overall IoT growth was more than offset by a decline in the broadband business, particularly in emerging markets. The broadband business has suffered from our decision to focus our development efforts on the IoT business rather than on a second generation Cat 6 product offering. Total IoT product revenue grew 92% from $9.1 million in 2017 to $17.8 million in 2018 and accounted for approximately 61% of total product revenue. Total broadband product revenue decreased 60% from $27.6 million in 2017 to $11.1 million in 2018.
In 2018, we shipped approximately 3.2 million of units of LTE products compared to 3.4 million units in 2017. We expect strong IoT growth in 2019, supported by continued shipment of Cat 1 products in both U.S. and Japan and the ramp of Cat M particularly during the second half of 2019. We believe that the broadband business will remain stable or decline slightly in the short-term, but could be a source of growth longer term, as new design wins are launched by our customers and as we evolve our products toward 5G technology.

58



Other Revenue
Other revenue increased 4% from $10.9 million in 2017 to $11.3 million in 2018, reflecting an increase in development services revenue with new projects signed during the year and higher maintenance revenue. 
Development services revenue increased from $7.7 million in 2017 to $8.0 million in 2018. License revenue decreased slightly from $2.8 million in 2017 to $2.7 million in 2018, and maintenance revenue increased from $300,000 in 2017 to $600,000 in 2018.  
Cost of Revenue
Cost of product revenue decreased 11% from $24.7 million in 2017 to $22.0 million in 2018 due to lower product and manufacturing costs associated with the decreased number of units sold. Cost of other revenue remained flat at $2.4 million in 2017 and 2018.
Gross Profit
Gross profit decreased 25% from $21.1 million in 2017 to $15.9 million in 2018, and the gross margin percentage decreased from 43.8% in 2017 to 39.5% in 2018, primarily due to a reduction of product gross margin. Product gross margin percentage decreased from 33.8% in 2017 to 24.1% in 2018 due to the impact of a higher percentage of lower-margin module sales in the product revenue mix compared to 2017.
Research and Development
Research and development expense increased 11% from $25.2 million in 2017 to $27.9 million in 2018 primarily due to higher headcount expenses, lower research and development credit and lower grant recognition partially offset by more capitalized costs related to the development of the chipsets for Cat M recorded in 2018. Headcount expenses in euros were impacted by a higher average foreign exchange rate between euros and US dollars in 2018 compared to 2017.
Research and development incentives decreased from $6.4 million in 2017 to $4.1 million in 2018. In the years ended December 31, 2018 and 2017, we capitalized costs mainly related to the development of the chipsets for Cat M, the Monarch and Monarch 2 ($3.4 million, net of research tax credit of $0.5 million and $1.9 million, net of research tax credit of $0.3 million, respectively).
Research and development costs associated with product development (including normal customer support which generates product improvements) are recorded in operating expense. In some cases, we have negotiated agreements with customers and partners whereby we provide certain development services beyond our normal practices or planned product roadmap. Amounts received from these agreements are recorded in other revenue. Direct costs, including both internal resources and out-of-pocket expenses, that we incur as a result of the commitments in the agreements are recorded in cost of other revenue, rather than in research and development expense. Other research and development costs related to the projects covered by the agreements, but which we would have incurred without the existence of such agreements are recorded in research and development expense.

There were 203 employees and independent contractors in research and development at December 31, 2018 compared to 235 at December 31, 2017. Some of this reduction is due to a reorganization in 2018 in which 21 technical support engineers were transferred from engineering to customer support in Sales and Marketing.

Sales and Marketing

Sales and marketing expense increased 7% from $8.8 million in 2017 to $9.4 million in 2018. There were 43 employees and independent contractors in sales and marketing at December 31, 2018 compared to 28 employees at December 31, 2017. Some of this increase is due to a reorganization in 2018 in which 21 technical support engineers were transferred from engineering to customer support in Sales and Marketing.

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General and Administrative
General and administrative expense increased 51% from $6.7 million in 2017 to $10.1 million in 2018 primarily due to an increase in bad debt expense and legal fees. Bad debt expenses are related primarily to aged trade receivables, which the Company no longer expects to collect. There were 21 employees in general and administrative at December 31, 2018 compared to 20 at December 31, 2017.
Interest Income (Expense), Net
Net interest expense increased to $5.4 million in 2018 compared to $4.6 million in 2017. The increase in interest expense in 2018 reflected the issuance of $4.5 million in new convertible debt at the end of September 2018 and €12 million of venture debt at the end of October 2018. Interest income was insignificant in both years.
Convertible debt amendment, other financial expenses
On October 30, 2017, the convertible notes issued on April 14, 2015 and April 27, 2016 were amended to extend the term of the notes issued in 2015 from April 14, 2018 to April 14, 2019 and the term of the notes issued in 2016 from April 27, 2019 to April 27, 2020. In addition, the conversion price of the notes issued in 2016 was decreased from $2.71 to $2.25. Following the extension of the term, the change in fair value of the conversion options before and after the amendment was calculated to be $3,418,000 and was recorded as financial expense. The debt components on October 30, 2017 were remeasured to take into account the new terms using the effective interest rate calculated at the date of issue of each convertible note. The debts were reduced by a total amount of $3,096,000 recorded in financial income in 2017.
On September 27, 2018, the convertible notes issued on April 14, 2015 and April 27, 2016 were amended to extend the term of the notes issued in 2015 from April 14, 2019 to April 14, 2020, to decrease the conversion price of the notes issued in 2015 from $1.85 to $1.70 and to permit the subordination of the convertible notes to new debt to be issued by the Company. In addition, warrants to purchase 1.8 million shares of Sequans were issued to the holder of the amended convertible notes. Following the amendment signed in September 27, 2018, the fair value of the debt just prior to amendment was estimated in order to record a loss on extinguishment of $265,000 recorded as Convertible debt amendments in the Consolidated Statements of Operations. On October 30, 2018 and in connection with entering into the bond issuance agreement, the Company retired convertible notes issued on April 27, 2016 and due on April 27, 2020, with a principal amount of $1 million, by paying the principal and accrued interest due as of October 30, 2018 to the noteholder. The impact of the retirement was recorded as financial expenses in 2018 for an amount of $400,000.
Foreign Exchange Gain (Loss), Net
We had a net foreign exchange gain of $0.4 million in 2018 compared to a net foreign exchange loss of $1.4 million in 2017 primarily due to movements in the U.S. dollar versus the euro.
Income Tax Expense (Benefit)
In 2018, we recorded current tax expense of $210,000 arising from taxable income incurred at certain subsidiaries, and a deferred tax benefit amounting to $1,178,000, mainly due to the recognition of deferred tax assets that were determined to be realizable as a result of the deferred tax liability recorded (through equity) related to convertible debt and debt with warrants attached. The deferred tax liability resulted from the recognition of the equity components following the separation between the equity and liability components of these financial instruments. In 2017, we recorded current tax expense of $273,000 arising from taxable income incurred at certain subsidiaries, and deferred tax expense amounting to $27,000.
Selected Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations for 2018 and 2019. This unaudited quarterly information has been prepared on the same basis as our audited Consolidated Financial Statements and includes all adjustments necessary for the fair presentation of the information for the quarters presented. You should read this table together with our Consolidated Financial Statements and the related notes thereto included in this annual report. Our quarterly results of operations will vary in the future. The results of operations for any quarter are not necessarily indicative of results for the entire year and are not necessarily indicative of any future results.
 

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Three months ended
 
 
March 31,
2018

June 30,
2018

Sept. 30, 2018

Dec. 31, 2018

March 31,
2019

June 30,
2019

Sept. 30, 2019

Dec. 31, 2019
 
 
(in thousands) (unaudited)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
$
7,635

 
$
9,921

 
$
7,526

 
$
3,856

 
$
4,111

 
$
6,774

 
$
6,008

 
$
5,054

Other revenue
 
3,599

 
2,737

 
2,759

 
2,217

 
2,357

 
1,136

 
1,312

 
4,112