F-1 1 df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on March 22, 2011

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

SEQUANS COMMUNICATIONS S.A.

(Exact Name of Corporation as Specified in its Charter)

 

French Republic   3674   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Sequans Communications S.A.

19 Le Parvis

92073 Paris-La Défense, France

Telephone : +33 1 70 72 16 00

(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)

 

 

GKL Corporate/Search, Inc.

915 L Street, Suite 1250

Sacramento, California 95814

Telephone: +1 916 442 7652

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to

 

John V. Bautista, Esq.

Christopher A. Grew, Esq.

Orrick, Herrington & Sutcliffe LLP

1000 Marsh Road

Menlo Park, California 94025

Telephone: +1 650 614 7400

Facsimile: +1 650 614 7401

 

Timothy R. Curry, Esq.

Linda A. Hesse, Esq.

Jones Day

1755 Embarcadero Road

Palo Alto, California 94303

Telephone: +1 650 739 3939

Facsimile: +1 650 739 3900

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable following the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Securities to be Registered   Proposed Maximum Aggregate
Offering Price (1) (2)
  Amount of
Registration Fee

Ordinary Shares, nominal value €0.02 per share (3)

  $110,000,000   $12,771
 
 
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes ordinary shares represented by American Depositary Shares, or ADSs, which the underwriters have the option to purchase to cover over-allotments, if any.
(3) Each ADS represents one ordinary share. ADSs issuable upon deposit of the ordinary registered shares registered hereby are being registered pursuant to a separate Registration Statement on Form F-6.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, March 22, 2011

Preliminary Prospectus

American Depositary Shares

LOGO

Representing              Ordinary Shares

This is the initial public offering of American Depositary Shares, or ADSs, representing ordinary shares of Sequans Communications S.A., a French company. Each ADS will represent one ordinary share, nominal value €0.02 per share. We are offering                      ADSs and the selling shareholders identified in this prospectus are offering an aggregate of                      ADSs. We will not receive any proceeds from the sale of the ADSs by the selling shareholders. Prior to this offering, there has been no public market for the ADSs or our ordinary shares. The estimated initial public offering price is between $             and $             per ADS.

We have applied to list the ADSs on the New York Stock Exchange, or NYSE, under the symbol “SQNS”.

 

 

Investing in the ADSs involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

    

Per ADS

     Total  

Initial public offering price

   $         $     

Underwriting discounts and commissions

   $         $     

Proceeds to us, before expenses

   $         $     

Proceeds to the selling shareholders, before expenses

   $                    $                

We and the selling shareholders have granted the underwriters an option to purchase up to an aggregate of additional ADSs at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

The underwriters are offering the ADSs as set forth under “Underwriting”. Delivery of the ADSs will be made on or about                     ,             .

 

UBS Investment Bank    Jefferies

 

 

 

Baird   Needham & Company, LLC    Natixis

The date of this prospectus is                     ,             .


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LOGO


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You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by or on behalf of us and delivered or made available to you. We have not authorized anyone to provide you with information that is different from that contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us and delivered or made available to you. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

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Prospectus Summary

     1   

Risk Factors

     8   

Special Note Regarding Forward-Looking Statements

     29   

Use of Proceeds

     30   

Dividend Policy

     31   

Capitalization

     32   

Dilution

     33   

Selected Consolidated Financial Data

     35   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Business

     57   

Management

     69   

Certain Relationships and Related Transactions

     78   

Principal and Selling Shareholders

     80   

Description of Share Capital

     83   

Limitations Affecting Shareholders of a French Company

     90   

Description of American Depositary Receipts

     91   

Shares and ADSs Eligible for Future Sale

     98   

Taxation

     100   

Underwriting

     107   

Notice to Investors

     111   

Enforcement of Certain Civil Liabilities

     115   

Legal Matters

     115   

Experts

     116   

Where You Can Find Additional Information

     116   

Sequans Communications S.A. Index to the Consolidated Financial Statements

     F-1   

 

 

No action is being taken in any jurisdiction outside the United States to permit a public offering of the ADSs or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.


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Through and including                     , (the 25th date after the date of this prospectus) federal securities law may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their allotments or subscriptions.

Unless we indicate otherwise, U.S. dollar translations of euro amounts presented in this prospectus are translated at the rate of €1.00 = $1.3269, the noon buying rate for euros in New York City on December 30, 2010, set forth in the H.10 statistical release of the Federal Reserve Board.


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Prospectus Summary

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making an investment decision. 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.

Overview

We are a leading fabless designer, developer and supplier of 4G semiconductor solutions for wireless broadband applications. Our solutions incorporate baseband processor and radio frequency, or RF, transceiver integrated circuits, or ICs, along with our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low latency, strong signal reach, low power consumption and high reliability in a small form factor and at a low cost.

We leverage our deep understanding of system-level architecture and our advanced wireless signal processing and RF expertise to provide 4G semiconductor solutions for a wide range of wireless broadband devices. Our solutions serve as the core wireless broadband communications platform in these devices, including smartphones; USB dongles; portable routers; embedded wireless modems for laptops, netbooks, tablets, and other consumer multimedia and industrial devices; consumer premises equipment, or CPE, such as residential gateways; and basestations. Since 2005 through 2010, we have shipped over 6.3 million semiconductor solutions, which have been deployed by leading wireless carriers around the world. Our solutions are incorporated into the highly successful HTC EVO 4G, the first mass-market 4G smartphone, which was launched by Sprint in the United States in June 2010, as well as the HTC EVO Shift smartphone, launched by Sprint in January 2011. In February 2011, KDDI announced that the HTC EVO WiMAX smartphone, which also incorporates our solutions, is expected to be introduced in Japan in April 2011. In addition, on March 22, 2011, Sprint announced the HTC EVO View 4G 7” tablet computer and the HTC EVO 3D smartphone, both of which incorporate our solutions.

According to ABI Research, the number of 4G chipsets shipped annually will increase from 14.5 million in 2010 to 245.9 million in 2014, representing a compound annual growth rate, or CAGR, of approximately 103%. Our semiconductor solutions support the two commonly accepted wireless broadband 4G protocols, Worldwide Interoperability for Microwave Access, or WiMAX, and Long-Term Evolution, or LTE. Our products have been deployed by many wireless carriers worldwide, including 7 of the 10 largest WiMAX carriers globally by number of subscribers according to BWA Research UK. Given that WiMAX and LTE share a common technology platform, we have also leveraged our leadership in WiMAX to successfully develop LTE semiconductor solutions that are being deployed globally as existing 2G and 3G networks are upgraded to 4G. Our LTE solutions are currently in trials with wireless carriers in the United States and China, where China Mobile has successfully demonstrated its LTE capabilities using our solution at the World Expo in Shanghai and at the Asian Games in Guangzhou, which were both held in 2010. Our solutions are incorporated into devices sold by many leading original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, including HTC, Huawei, MitraStar Technology (a spin-off of Zyxel), Gemtek, Sagemcom, Teltonika, Accton Wireless Broadband and ZTE.

For 2008 and 2010, our total revenue increased from $22.7 million to $68.5 million and our annual net loss decreased from $8.3 million to $2.7 million. One customer, HTC, accounted for 66% of our total revenue in 2010.

Industry Overview

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. Wireless technologies have evolved through successive generations of protocols driven by the need for more efficient networks with

 

 

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greater bandwidth and adequate capacity to handle a rising number of subscribers and increasing usage of data services. Unable to effectively address the fast growing demand for wireless broadband services in a cost-effective manner using 2G and 3G networks that are constrained by legacy technologies that were originally designed for voice traffic, many wireless carriers are moving to 4G networks using WiMAX or LTE, which provide peak downlink data capacity of 46 megabits per second, or Mbps, and of 173 Mbps, respectively, to enable higher data throughput.

4G architecture represents a fundamental technological change in the design of wireless communication networks. 2G and 3G networks were originally designed to support voice communications and utilize older circuit switching technology based on wireline telephone system design concepts. Circuit switching technology is inflexible as it requires a continuous dedicated connection between the source and destination of the communication, and is inefficient as network capacity is wasted on connections that are established but not in continuous use. 4G, which employs concepts such as packet switching and internet protocol, or IP, improves the efficiency, 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. Orthogonal Frequency Division Multiple Access, or OFDMA, and Multiple-Input Multiple-Output, or 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. Both commonly accepted 4G protocols, WiMAX and LTE, are IP-based, share the same OFDMA and MIMO technologies and have very similar radio designs, coding schemes and signal processing algorithms.

Suppliers of 4G semiconductor solutions face significant execution challenges due to the ongoing evolution of wireless protocols, rapid product lifecycles and extensive certification processes, which require sustained product development excellence and ongoing collaboration with carriers to meet technology needs. In addition, high performance standards, system integration, power efficiency, shrinking form factors and the need to reduce cost create challenges that 4G semiconductor solution suppliers must overcome.

Our Competitive Strengths

We believe the following competitive strengths enable us to address the challenges faced by 4G wireless semiconductor providers:

 

  §  

A strong track record of execution in 4G.    We were an early provider of WiMAX products and have been shipping our wireless broadband semiconductor solutions since 2005. We believe we have a strong position in the WiMAX market and are an early leader in the LTE market;

 

  §  

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 deep experience and expertise in a broad range of wireless technologies including 2G, 3G, Wi-Fi, WiMAX and LTE;

 

  §  

High performance solutions for 4G applications.    We offer high performance solutions for use in a wide variety of 4G-enabled devices; and

 

  §  

Fully integrated 4G solutions.    We believe that we provide the industry’s most highly integrated 4G semiconductor solutions integrating baseband, RF and other functionality into a single die or package.

Our Strategy

Our goal is to be the leading provider of next-generation wireless semiconductors by providing best-in-class solutions that enable mass-market adoption of 4G technologies worldwide. Key elements of our strategy include:

 

  §  

Maintaining and extending our market position in WiMAX.    We intend to maintain our market position in WiMAX by growing our revenues through continued penetration into 4G WiMAX devices that are deployed by large wireless carriers and the expansion of our sales in CPE broadband wireless applications for emerging markets;

 

 

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  §  

Leveraging WiMAX expertise to become a leader in LTE.    We are leveraging our strong market position and technical expertise in WiMAX to deploy best-in-class LTE solutions, as WiMAX and LTE share many common technologies;

 

  §  

Continuing to provide complete 4G-specific semiconductor solutions.    We believe single-mode 4G solutions, such as those in our portfolio, are the most appropriate and cost-effective approach for providing high-speed data connectivity in a more efficient manner in data-only devices such as USB dongles, embedded applications and CPE devices. In smartphones, our 4G solutions provide independent RF functionality implemented separately from their legacy 2G or 3G counterparts, significantly simplifying RF system design; and

 

  §  

Extending our relationships across the wireless industry to facilitate broad adoption of 4G technologies.    Our relationships with OEMs, ODMs, infrastructure vendors and wireless carriers, including our global interoperability testing partnerships, offer a key advantage and act as a strong differentiator of our solutions.

Risk Factors

Our business is subject to a number of risks, which you should understand before making an investment decision. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. The following is a summary of some of the principal risks we face:

 

  §  

We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.

 

  §  

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.

 

  §  

We currently derive substantially all of our revenue from sales of our semiconductor solutions to the WiMAX segment of the 4G market. If the WiMAX market declines, our results of operations will be harmed.

 

  §  

If the LTE market does not develop or develops more slowly than expected, or if we fail to accurately predict market requirements or market demand for LTE solutions, our business will be harmed.

 

  §  

We depend on commercial deployment and upgrades of 4G wireless communications equipment, products and services to grow our business, and our business may be harmed if wireless carriers delay or are unsuccessful in the commercial deployment of or upgrades to 4G technology or if they deploy technologies that are not supported by our solutions.

 

  §  

If we are unsuccessful in developing and selling new products on a timely and cost-effective basis or in penetrating new markets, including the LTE market, our business and operating results would suffer.

Corporate Information

We were 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 19 Le Parvis, 92073 Paris-La Défense, 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., 915 L Street, Suite 1250, 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 prospectus.

 

 

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The Offering

 

Price per ADS

$            

 

ADSs offered by us

                     ADSs representing                      ordinary shares

 

ADSs offered by the selling shareholders

                     ADSs representing                      ordinary shares

 

Over-allotment option

We and the selling shareholders have granted a 30-day option (commencing on the date of this prospectus) to the underwriters to purchase up to an aggregate of                      additional ADSs, including                      ADSs from us and                      ADSs from the selling shareholders, to cover over-allotments, if any.

 

American Depositary Shares

Each ADS will represent one ordinary share, nominal value €0.01 per share. You will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Receipts”. We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Depositary

The Bank of New York Mellon

 

ADSs outstanding after the offering

                     ADSs representing                      ordinary shares (or                      ADSs representing                      ordinary shares if the underwriters exercise their over-allotment option in full)

 

Use of proceeds

We intend to use the proceeds from this offering for general corporate purposes. We will not receive any proceeds from the sale of the ADSs by the selling shareholders.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs.

 

Proposed NYSE symbol

SQNS

 

Lock-Up

We, the selling shareholders, our directors, executive officers, employees and substantially all of our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or options or warrants to purchase our ordinary shares for a period of 180 days or more after the date of this prospectus. See “Underwriting”.

 

 

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Financial advisor

We have retained Qatalyst Partners LP, or Qatalyst, to act as our independent financial advisor in connection with the offering. Qatalyst is engaged to represent our interests only and conducts no business with other offering participants. Qatalyst is independent of the underwriters and does not engage in proprietary trading or asset management, nor is it a party to any securities purchase agreement with us, the underwriters or investors in relation to this offering. Qatalyst’s principal services to us consist of (i) analyzing our business, condition and financial position, including advice on positioning the offering in the market, (ii) assisting us in assessing the relative strengths of prospective underwriters and in selecting the underwriting syndicate in light of our business and the industry in which we operate, (iii) advising us on, and negotiating on our behalf with the underwriters the key terms of any underwriting arrangements, (iv) advising us on, and negotiating on our behalf with the underwriters the fee structure for the underwriters, (v) advising us on, and assisting us in negotiating, the final pricing terms with the underwriters, and (vi) advising us in determining allocations in the offering.

 

  Qatalyst is not acting as an underwriter and will not sell or offer to sell any securities in this offering, nor will it identify or solicit potential investors in this offering. For its services, Qatalyst will receive 1% of the gross proceeds of this offering. Qatalyst will also be reimbursed for its reasonable out-of-pocket expenses in an amount up to $12,500.

The number of our ordinary shares outstanding after this offering is based on 27,720,013 ordinary shares, assuming conversion of all outstanding preference shares into ordinary shares as described below, outstanding at December 31, 2010, and excludes, at December 31, 2010:

 

  §  

an aggregate of 733,000 shares available for issue under stock options, founders warrants and warrants pursuant to our currently outstanding equity plans;

 

  §  

2,329,850 shares issuable upon the exercise of outstanding stock options, founders warrants and warrants granted pursuant to our currently outstanding equity plans at a weighted average exercise price of €2.86 ($3.79) per share;

 

  §  

82,500 shares issuable upon exercise of warrants issued in connection with a sale-leaseback transaction; and

 

  §  

the conversion of €2.5 million ($3.3 million) aggregate principal amount of convertible notes held by Natixis, a French financial institution, into shares at a conversion price equal to the initial public offering price (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity” for additional information).

Unless otherwise noted, all information in this prospectus, except for the Consolidated Financial Statements, reflects or assumes the following:

 

  §  

a 1-for-2 reverse split of our share capital that will be effective immediately prior to completion of this offering;

 

  §  

no exercise of the over-allotment option by the underwriters;

 

  §  

no exercise of options or warrants outstanding at December 31, 2010; and

 

  §  

the conversion of all of our outstanding preference shares into an aggregate of 27,720,013 ordinary shares upon completion of this offering.

 

 

 

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Summary Consolidated Financial Information

The following tables summarize our consolidated financial information for the periods indicated. The consolidated statements of operations data for each of the three years ended December 31, 2008, 2009 and 2010, and the consolidated statements of financial position data at December 31, 2010, are derived from, and qualified by reference to, our audited Consolidated Financial Statements included elsewhere in this prospectus. You should read all of this information in conjunction with our Consolidated Financial Statements and the accompanying notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected for future periods.

Our Consolidated Financial Statements included in this prospectus were prepared in U.S. dollars in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.

 

     Years ended December 31,  
      2008     2009     2010  
     (in thousands, except per share
amounts)
 

Consolidated Statements of Operations Data:

      

Revenue:

      

Product revenue

   $ 15,777      $ 15,564      $
64,933
  

Other revenue

     6,967        3,992        3,611   
                        

Total revenue

     22,744        19,556        68,544   
                        

Cost of revenue(1):

      

Cost of product revenue

     7,370        7,863        33,272   

Cost of other revenue

     320        330        340   
                        

Total cost of revenue

     7,690        8,193        33,612   

Gross profit

     15,054        11,363        34,932   

% of revenue

     66     58     51

Operating expenses(1):

      

Research and development

     12,030        13,857        18,024   

Sales and marketing

     8,277        9,242        13,620   

General and administrative

     3,546        3,410        3,980   
                        

Total operating expenses

     23,853        26,509        35,624   
                        

Operating income (loss)

     (8,799     (15,146     (692

Financial income (expense)

     593        (1,665     (1,850

Profit (Loss) before income taxes

     (8,206     (16,811     (2,542

Income tax expense (benefit)

     70        61        150   

Profit (Loss)

   $ (8,276   $ (16,872   $
(2,692

                        

Pro forma basic earnings (loss) per share (unaudited)(2)

   $ (0.36   $ (0.73   $ (0.11
                        

Pro forma diluted earnings (loss) per share (unaudited)(2)

   $ (0.36   $ (0.73   $ (0.11
                        

Pro forma number of shares used for computing (unaudited)(2):

      

Basic

     22,906        23,257        24,980   
                        

Diluted

     22,906        23,257        24,980   
                        

 

 

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The following table presents consolidated statements of financial position data at December 31, 2010:

 

  §  

on an actual basis (which considers all preference shares as ordinary shares); and

 

  §  

on a pro forma basis to reflect the receipt by us of the estimated net proceeds from the sale of                      ADSs by us in this offering at an assumed initial public offering price of $             per ADS, the mid-point of the estimated offering price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     At December 31, 2010  
      Actual      Pro Forma  
     (in thousands)  

Consolidated Statements of Financial Position Data:

     

Cash and cash equivalents

   $ 9,739      

Total current assets

     39,365      

Total assets

     49,717      

Current loans and borrowings

     3,564      

Total current liabilities

     27,556      

Total equity

     20,699      

 

(1) Includes share-based compensation as follows:

 

     Years ended December 31,  
      2008      2009      2010  
     (in thousands)  

Cost of revenue

   $ 31       $ 24       $ 23   

Operating expenses

     902         1,151         1,108   
                          

Share-based compensation

   $ 933       $ 1,175         1,131   
                          

 

(2) Since we currently have no ordinary shares outstanding, all preference shares were reflected as ordinary shares in the calculation. In addition, this reflects a 1-for-2 reverse stock split of our share capital to be effective immediately prior to completion of this offering. See Note 6 to the Consolidated Financial Statements.

 

 

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Risk Factors

You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing the ADSs. The risks below include risks we consider material of which we are currently aware. Investing in the ADSs involves a high degree of risk. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. In addition, the trading price of the ADSs could decline due to the occurrence of any of these risks, or for reasons different than the risks set forth below, and you may lose all or a part of your investment. Please read “Cautionary Notice Regarding Forward-Looking Statements”.

Risks Related to Our Business and Industry

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:

 

  §  

reductions in orders or cancellations by our customers, particularly HTC and Huawei;

 

  §  

changes in the size, growth or growth prospects of the WiMAX and LTE markets;

 

  §  

changes in the competitive dynamics of our market, including new entrants or pricing pressures, and our ability to compete in the LTE market;

 

  §  

timing and success of commercial deployments of and upgrades to 4G 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;

 

  §  

changes in manufacturing costs, including wafer, test and assembly costs, mask costs and manufacturing yields;

 

  §  

the timing of product announcements by competitors or us; and

 

  §  

costs associated with litigation, especially related to intellectual property.

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.

 

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We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.

We were established in 2003 and began operations in 2004, and have incurred losses on an annual basis since inception. We experienced net losses of $8.3 million, $16.9 million and $2.7 million in 2008, 2009 and 2010, respectively. At December 31, 2010, our accumulated deficit was $54.3 million. We expect to incur significant expense related to the development of our products and expansion of our business, including research and development and sales and administrative expenses. As a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expense. As a result of these increased expenditures, we will have to generate and sustain substantially increased revenue to achieve profitability. Our revenue growth trends in prior periods may not be sustainable. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future.

We depend on a small number of customers for a significant portion of our revenue. If we fail to retain or expand customer relationships, our business could be harmed.

A significant amount of our total revenue is attributable to a small number of customers and we anticipate that this will continue to be the case for the foreseeable future. These customers may decide not to purchase our semiconductor solutions at all, to purchase fewer semiconductor solutions than they did in the past or to alter the terms on which they purchase our products. In addition, to the extent that any customer represents a disproportionately high percentage of our accounts receivable, our exposure to that customer is further increased should they be unable or choose not to pay such accounts receivable on a timely basis or at all.

Our top ten customers accounted for 58%, 70% and 91% of our total revenue in 2008, 2009 and 2010, respectively. HTC accounted for 66% of our total revenue in 2010 and less than 10% for each of 2008 and 2009. HTC also accounted for 63% of our accounts receivable at December 31, 2010. Huawei accounted for less than 10%, 30% and less than 10% of our total revenue in 2008, 2009 and 2010, respectively. We expect that these customers, who currently purchase WiMAX solutions exclusively, will continue to represent a significant percentage of our revenue in future periods because we expect that the number of new WiMAX customers is likely to be limited as customers prepare for the adoption and commercialization of LTE technology. We also expect to have a limited number of LTE customers and to experience similar customer concentration in that market as it evolves. The loss of any significant customer, a significant reduction in sales we make to them in general or during any period, or any issues with collection of receivables from customers would harm our financial condition and results of operations. Furthermore, we must obtain orders from new customers on an ongoing basis to increase our revenue and grow our business. If we fail to expand our customer relationships, our business could be harmed.

We currently derive substantially all of our revenue from sales of our semiconductor solutions for the WiMAX segment of the 4G market. If the WiMAX market declines, our results of operations will be harmed.

We currently derive substantially all of our revenue from the sale of our semiconductor solutions for the WiMAX market and expect to do so through at least 2011. If the WiMAX market declines, our results of operations would be harmed. In addition to the impact of factors unique to the WiMAX market and the impact of global economic factors, the WiMAX market may decline significantly in anticipation of LTE deployments. If customers believe LTE deployments will provide the same or superior coverage as WiMAX networks in the near future, customers may prefer to adopt LTE services and products instead of WiMAX, which in turn is likely to cause the WiMAX market to grow at a slower pace than expected or to decline. If the WiMAX market declines prior to the commercial viability and acceptance of our LTE solutions, our business, operating results and financial condition will be harmed.

 

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If the LTE market does not develop or develops more slowly than expected, or if we fail to accurately predict market requirements or market demand for LTE solutions, our business will be harmed.

We have invested substantial time and resources in developing products that support LTE. If we fail to accurately predict market requirements or market demand for LTE, or if our solutions are not successfully developed or adopted by our customers, our business will suffer. If LTE networks are deployed to a lesser extent or more slowly than we currently anticipate, or if other competing 4G protocols achieve greater market acceptance or operators do not migrate to LTE, we may not realize any benefits from this investment. As a result, our business will be harmed.

Our semiconductor solutions currently focus solely on 4G protocols. If certain wireless carriers, OEMs or ODMs require 4G solutions to have backwards compatibility with 2G/3G protocols, companies that also provide a 2G/3G solution may be able to compete more effectively than we can, and our results of operations may be harmed.

Our semiconductor solutions currently focus solely on 4G protocols, including WiMAX and LTE. While our 4G-specific solutions can be incorporated into a given device alongside 2G/3G solutions, some wireless carriers, or OEMs or ODMs serving such carriers, that have deployed substantial 3G networks or that prefer to deal with a single company for their 2G/3G and 4G solutions may require 4G semiconductor solutions that include backwards compatibility with 2G/3G protocols. As a result, to compete effectively for design wins with these carriers, OEMs or ODMs, we may be required to acquire or license a solution compatible with 2G/3G protocols or to partner with an entity that offers such a solution. Such a plan would take considerable time and investment, and our competitors that have 2G/3G capabilities may be able to compete more effectively for those design opportunities. As a result, our results of operations would be harmed.

We depend on the commercial deployment of and upgrades to 4G wireless communications equipment, products and services to grow our business, and our business may be harmed if wireless carriers delay or are unsuccessful in the commercial deployment of or upgrades to 4G technology or if they deploy technologies that are not supported by our solutions.

We depend upon the commercial deployment of and upgrades to 4G wireless communications equipment, products and services based on our technology. While many wireless carriers have commercially deployed 3G networks, we cannot predict the timing or success of commercial deployments of 4G networks or further expansion of 3G networks to include or support 4G protocols. Deployment of new networks by wireless carriers requires significant capital expenditures, well in advance of any revenue from such networks. In the past, wireless carriers have cancelled or delayed planned deployments of new networks. If existing deployments are not commercially successful or do not continue to grow their subscriber base, or if new commercial deployments of 4G networks are delayed or unsuccessful, our business and financial results would be harmed.

During network deployment, wireless carriers often anticipate a certain rate of subscriber additions and, in response, operators typically procure devices to satisfy this forecasted demand. If the rate of deployment of new networks by wireless carriers is slower than we expect or if 4G technology is not as widely adopted by consumers as we expect, the rate of subscriber additions may be slower than expected, which will reduce the sales of our products and cause OEMs and ODMs to hold excess inventory. This would harm our sales and our financial results. A limited number of wireless carriers have started testing 4G networks and a smaller number of wireless carriers have launched limited 4G networks, but the timing and extent of 4G network deployments remains uncertain, and we might not be successful in developing and marketing our semiconductor solutions targeting 4G markets.

In addition, wireless carriers may choose to deploy technologies not supported by our solutions. If a 4G 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.

 

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If we are unsuccessful in developing and selling new products on a timely and cost-effective basis or in penetrating new markets, including the LTE market, our business and operating results would suffer.

The markets in which we and our customers compete or plan to compete are characterized by rapidly changing technologies and industry standards and technological obsolescence. Our ability to compete successfully depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our target markets could harm our competitive position within these markets. 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 and it is possible that our development efforts will not be successful and that our new technologies and products will not be accepted by customers or result in meaningful revenue. If the semiconductor solutions we develop fail to meet market or customer requirements or do not achieve market acceptance, our operating results and competitive position would suffer.

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 WiMAX and LTE markets;

 

  §  

accurate prediction of changes in device manufacturer requirements, technology, industry standards or consumer expectations, demands and preferences;

 

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timely and efficient completion of process design and transfer to manufacturing, assembly and test, and securing sufficient manufacturing capacity to allow us to continue to timely and cost-effectively deliver products to our customers;

 

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market acceptance, adequate consumer demand and commercial production of the products in which our semiconductor solutions are incorporated;

 

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the quality, performance and reliability of our products as compared to competing products and technologies; and

 

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effective marketing, sales and customer service.

The markets for our semiconductor solutions are characterized by frequent introduction of next generation and new products, 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 one independent foundry to manufacture our products and do not have a long-term agreement with such foundry, and loss of this foundry or other failure to obtain sufficient foundry capacity would significantly delay our ability to ship our products, cause us to lose revenue and market share and damage our customer relationships.

Access to foundry capacity is critical to our business because we are a fabless semiconductor company. We depend on a sole independent foundry, Taiwan Semiconductor Manufacturing Company Limited, or TSMC, in Taiwan to manufacture our semiconductor wafers. Because we outsource our manufacturing to a single foundry, we face several significant risks, including:

 

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constraints in or unavailability of manufacturing capacity;

 

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  §  

limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and

 

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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. For example, in the third quarter of 2010, an unexpected sharp increase in demand for one of our products caused us to incur capacity utilization surcharges from TSMC in order to secure the necessary capacity and production of our semiconductor solutions in quantities and on a timeline sufficient to meet our customers’ expectations. Payment of these surcharges increased our cost of product revenue significantly and reduced our product margins in the third quarter of 2010 and for the year ended December 31, 2010.

The ability of TSMC to provide us with semiconductor wafers is limited at any given time by their available capacity and we do not have a guaranteed level of manufacturing capacity. We do not have any agreement with TSMC and place our orders on a purchase order basis. As a result, if TSMC raises its prices or is not able to satisfy our required capacity for any reason, including natural or other disasters, allocates capacity to larger customers or to different sectors of the semiconductor industry, experiences labor issues or shortages or delays in shipment of semiconductor equipment or materials used in the manufacture of our semiconductors, or if our business relationship with TSMC deteriorates, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, in a timely manner, or at all.

Locating and qualifying a new foundry would require a significant amount of time, which would result in a delay in production of our products. In addition, using foundries with which we have no established relationship could expose us to unfavorable pricing and terms, delays in developing and qualifying new products, unsatisfactory quality or insufficient capacity allocation. We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. Many of the customers of TSMC, or foundries that we may use in the future, are larger than we are, or have long-term agreements with such foundries, and as a result those customers may receive preferential treatment from the foundries in terms of price, capacity allocation and payment terms. Any delay in qualifying a new foundry or production issues with any new foundry would result in lost sales and could damage our relationship with existing and future customers as well as our reputation in the market.

If our foundry vendor does not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.

The fabrication of semiconductor solutions such as ours is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. TSMC, or foundries that we may use in the future, could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendor could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendor, or defects, integration issues or other performance problems in our semiconductor solutions could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. In addition, because we have a sole source of wafer supply, these risks are magnified because we do not have an alternative source to purchase from should these risks materialize. If TSMC vendor fails to provide satisfactory product to us, we would be required to identify and qualify other sources, which could take a significant amount of time and would result in lost sales. In addition, we indemnify our customers for losses resulting from defects in our products, which costs could be substantial. A product liability or other indemnification claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend.

 

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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 which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty. Because production lead times often exceed the amount of time required to fulfill orders, we often must manufacture in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our ability to accurately forecast demand can be harmed by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory, which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not manufacture enough semiconductor solutions, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers significantly increase their requested production quantities with little or no advance notice. If we do not fulfill customer demands in a timely manner, our customers may cancel their orders and we may be subject to customer claims for cost of replacement. Underestimating or overestimating demand would lead to insufficient, excess or obsolete inventory and could harm our operating results, cash flow and financial condition, as well as our relationships with our customers and our reputation in the marketplace.

If customers do not design our semiconductor solutions into their product offerings or if our customers’ product offerings are not commercially successful, our revenue and our business would be harmed.

We sell our semiconductor solutions directly to OEMs who include them in their products, and to ODMs who include them in their products they supply to OEMs. As a result, we rely on OEMs to design our semiconductor solutions into the products they sell. Because our semiconductor solutions are generally a critical component of our customers’ products, they are typically incorporated into our customers’ products at the design stage and the sales cycle typically takes 12 months or more to complete. Without these design wins, our revenue and our business would be significantly harmed. We often incur significant expenditures on the development of a new semiconductor solution without any assurance that an OEM will select our semiconductor solution for design into its own product. Because the types of semiconductor solutions we sell are a critical aspect of an OEM’s product, once an OEM designs a competitor’s semiconductor into its product offering, it becomes significantly more difficult for us to sell our semiconductor solutions to that customer for a particular product offering because changing suppliers involves significant cost, time, effort and risk for the customer. Further, if we are unable to develop new products in a timely manner for inclusion in such products, or if major defects or errors that might significantly impair performance or standards compliance are found in our products after inclusion by an OEM, OEMs will be unlikely to include our semiconductor solutions into their products and our reputation in the market and future prospects would be harmed.

Furthermore, even if an OEM designs one of our semiconductor solutions into its product offering, we cannot be assured that its product will be commercially successful and that we will receive any revenue from that OEM. This risk is heightened because 4G technology is rapidly emerging and most of our customers 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 WiMAX market, we compete with suppliers such

 

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as Beceem Communications Inc., which was recently acquired by Broadcom Corporation, GCT Semiconductor, Inc. and MediaTek Inc. We also compete with Intel Corporation and Samsung Electronics Co. Ltd., who embed their own WiMAX semiconductor solutions in modules and consumer products, respectively. In the emerging LTE market, we expect to face competition from semiconductor companies such as Broadcom Corporation, Infineon Technologies AG, Intel Corporation, Qualcomm Incorporated, Samsung Electronics Co. Ltd. and ST-Ericsson N.V.

Many of our competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of existing customers than us. In addition, recently there has been consolidation within the industry, notably the acquisition of smaller competitors by larger competitors. The significant resources of these larger competitors may allow them to respond more quickly than us to new or emerging technologies or changes in customer requirements or to bring new products to market in a more timely manner than us. In addition, these competitors may have greater credibility with our existing and potential customers. Further, many of these competitors are located in Asia or have a significant presence and operating history in Asia and, as a result, may be in a better position than we are to work with manufacturers and customers located in Asia. Moreover, many of our competitors have been doing business with customers for a longer period of time and have well-established relationships, which may provide them with advantages, including access to information regarding future trends and requirements that may not be available to us. In addition, some of our competitors may provide incentives to customers or offer bundled solutions with complementary products, which could be attractive to some customers, or adopt more aggressive pricing policies, which may make it difficult for us to gain or maintain market share.

Our ability to compete effectively will depend on a number of factors, including:

 

  §  

our ability to anticipate market and technology trends and successfully develop products that meet market needs;

 

  §  

our ability to deliver products in large volume on a timely basis at competitive prices;

 

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our success in identifying and penetrating new markets, applications and customers;

 

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our ability to accurately understand the price points and performance metrics of competing products in the market;

 

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our products’ performance and cost-effectiveness relative to those of our competitors;

 

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our ability to develop and maintain relationships with key customers, wireless carriers, OEMs and ODMs;

 

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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 market; and

 

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our ability to recruit design and application engineers with expertise in wireless broadband communications technologies and sales and marketing personnel.

If we experience material changes to the competitive structure of our industry due to cooperation or consolidation among our competitors, we may not increase or sustain our revenue or market share, which would harm our business.

Our current or future competitors may establish cooperative relationships among themselves or with third parties. In addition, there has recently been consolidation within our industry, notably the acquisition of smaller competitors by larger competitors with significantly greater resources than ours. These events may result in the emergence of new competitors with greater resources and scale than ours that could acquire significant market share, which could result in a decline of our revenue and market share. Our ability to maintain our revenue and market share will depend on our ability to compete effectively despite material changes in industry structure. If we are unable to do so, we may not increase or sustain our revenue or market share, which would harm our business.

 

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If we do not sustain our growth rate our financial results could suffer and the trading price of our ADSs could decline.

We have experienced significant growth in a short period of time. Our total revenue increased from $22.7 million in 2008 to $68.5 million in 2010. We may not achieve similar growth rates in future periods. You should not rely on our revenue growth, gross margins or operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and the trading price of the ADSs could decline.

If we are unable to effectively manage any 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 further expansion and growth. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must, among other things, effectively:

 

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recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering, and applications engineering;

 

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add additional sales personnel and expand sales offices;

 

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add additional finance and accounting personnel;

 

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implement and improve our administrative, financial and operational systems, procedures and controls; and

 

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enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.

Furthermore, to remain competitive and manage further expansion and growth, we must carry out extensive research and development, which requires significant capital investment. We are also increasing our investment in sales and marketing, general and administrative and other functions to grow our business. We are likely to incur the costs associated with these increased investments 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 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.

We have significant ongoing capital requirements in addition to our financing arrangements 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. In addition to cash generated from operations, we have entered into certain financing arrangements and have received interest free loans from a French government agency (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”). If we are unable to generate sufficient cash from operations to fund our capital requirements and do not continue to receive such government support, we may be unable to repay our current borrowings, and may be required to limit our growth, utilize our existing capital, or enter into additional financing arrangements at less favorable terms, any of which could harm our business and financial condition. If our cash from operations and existing financing arrangements and loans are not sufficient to fund our capital requirements, we may not be able to obtain additional financing at all or on terms acceptable to us.

 

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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 anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to do so again in the future.

Any increase in the manufacturing cost of our products would reduce our gross margins and operating profit.

The semiconductor business is characterized by ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price or manufacturing cost variances or due to other factors, will reduce our gross margins and operating profit. We do not have long-term supply agreements with our manufacturing, test or assembly suppliers and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers. Because we have a sole source of wafer supply and limited sources of test and assembly, we may not be able to negotiate favorable pricing terms from our suppliers. These and other related factors could impair our ability to control our costs and could harm our operating results.

The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows.

The semiconductor industry has historically been cyclical, experiencing significant downturns in customer demand. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation occurs, it could harm our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. For example, in the third quarter of 2010, an unexpected sharp increase in demand for one of our products caused us to incur capacity utilization surcharges from our foundry, TSMC, in order to secure the necessary capacity and production of our semiconductor solutions in quantities and on a timeline sufficient to meet our customers’ expectations, resulting in increased costs and lower margins. If this occurs again, we may not be able to obtain sufficient quantities of our semiconductor solutions to meet the increased demand, resulting in lost sales, loss of market share and harm to our customer relationships. We may also have difficulty in obtaining sufficient assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that we target, may harm our ability to generate revenue and could negatively impact our operating results.

The communications industry has experienced pronounced downturns, and these cycles may continue in the future. A future decline in global economic conditions could have adverse, wide-ranging effects on demand for our semiconductor solutions and for the products of our customers, particularly wireless communications equipment manufacturers or other participants in the wireless industry, such as wireless carriers. Inflation, deflation and economic recessions that harm the global economy and capital markets also harm our customers and our end consumers. Specifically, the deployment of new 4G networks requires significant capital expenditures and wireless carriers may choose not to undertake network expansion efforts during an economic downturn or time of other economic uncertainty. Our customers’ ability to purchase or pay for our semiconductor solutions and services, obtain financing and upgrade wireless networks could be harmed, and networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their

 

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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 chose not to obtain, sufficient intellectual property rights to provide us with meaningful protection or commercial advantage.

We depend significantly on intellectual property rights to protect our products and proprietary technologies against misappropriation by others. We generally rely on the patent, trademark, copyright and trade secret laws in Europe, the United States and certain other countries in which we operate or in which our products are produced or sold, as well as licenses and nondisclosure and confidentiality agreements, to protect our intellectual property rights.

We may have difficulty obtaining patents and other intellectual property rights, and the patents and other intellectual property rights we have and obtain may be insufficient to provide us with meaningful protection or commercial advantage. We currently do not apply for patent protection in all countries in which we operate. Instead we select and focus on key countries for each patent family. In addition, the protection offered by patents and other intellectual property rights may be inadequate or weakened for reasons or circumstances that are out of our control. For instance, we may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which we have filed patent applications or in which we operate, and under the laws of such countries, patents and other intellectual property rights may be or become unavailable or limited in scope.

We may not be able to adequately protect or enforce our intellectual property against improper use by our competitors or others and our efforts to do say may be costly to us, which may harm our business, financial condition and results of operations.

Our patents and patent applications, or those of our licensors, could face challenges, such as interference proceedings, opposition proceedings, nullification proceedings and re-examination proceedings. Any such challenge, if successful, could result in the invalidation or narrowing of the scope of any such patents and patent applications. Any such challenges, regardless of their success, would also likely be time-consuming and expensive to defend and resolve, and would divert management time and attention. Further, our unpatented proprietary processes, software, designs and trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. While we generally enter into confidentiality agreements with such persons to protect our intellectual property, we cannot assure you that our confidentiality agreements will not be breached, that they will provide meaningful protection for our proprietary technology and trade secrets or that adequate remedies will be available in the event they are used or disclosed without our authorization. Also, intellectual property rights are difficult to enforce in the People’s Republic of China, or PRC, and certain other countries, particularly in Asia, where the application and enforcement of the laws governing such rights may not have reached the same level as compared to other jurisdictions where we operate, such as Europe and the United States. Consequently, because we operate in these countries and all of our manufacturing, test and assembly takes place in Taiwan and Singapore, we may be subject to an increased risk that unauthorized parties may attempt to copy or otherwise use our intellectual property or the intellectual property of our suppliers or other parties with whom we engage or have licenses.

There can be no assurance that we will be able to protect our intellectual property rights, that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable, or that we will have adequate legal recourse in the event that we seek legal or judicial enforcement of our intellectual property rights. Any inability on our part to adequately protect or enforce our intellectual property may harm our business, financial condition and results of operations. We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights to protect these rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel, and we may not prevail in making these claims.

 

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We or our customers may be required to obtain certain so-called “essential patents” in order to comply with applicable standards, which could require us to pay additional royalties on certain of our products. If we are unable to obtain such patents, our business, results of operations, financial condition and prospects would be harmed.

We or our customers may be required to obtain licenses for third-party intellectual property. In particular, we may be required to obtain licenses to certain third-party patents, so-called “essential patents”, that claim features or functions that are incorporated into applicable industry standards and that we are required to provide in order to comply with the standard. If we need to license any third-party intellectual property, essential patents or other technology, we could be required to pay royalties on certain of our products. In addition, while the industry standards bodies and the antitrust laws in certain countries may require participating companies to license their essential patents on fair, reasonable, and nondiscriminatory terms, there can be no assurances that we will be able to obtain such licenses on commercially reasonable terms or at all. Although we have implemented a dedicated standard essential patents licensing-in reference policy, our inability to obtain required third-party intellectual property licenses on commercially reasonable terms or at all could harm our business, results of operations, financial condition or prospects. If our customers are required to obtain such licenses, there can be no assurances that their businesses will not be adversely affected.

Assertions by third parties of infringement by us or our customers of their intellectual property rights could result in significant costs and cause our operating results to suffer.

The markets in which we compete are characterized by rapidly changing products and technologies and there is intense competition to establish intellectual property protection and proprietary rights to these new products and the related technologies. The semiconductor and wireless communications industries, in particular, are characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies.

We may be unaware of the intellectual property rights of others that may cover some of our technology, products and services. In addition, third parties may claim that we or our customers are infringing or contributing to the infringement of their intellectual property rights.

We have in the past received and, particularly as a public company operating in a highly competitive marketplace, we expect that in the future we will receive communications and offers from various industry participants and others alleging that we infringe or have misappropriated their patents, trade secrets or other intellectual property rights and/or inviting us to license their technology and intellectual property. Any lawsuits resulting from such allegations of infringement or invitations to license, including suits challenging the WiMAX or the LTE standard, could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

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stop selling products or using technology that contain the allegedly infringing intellectual property;

 

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lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

 

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incur significant legal expenses;

 

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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;

 

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redesign those products that contain the allegedly infringing intellectual property; or

 

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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

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

 

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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. If any of our semiconductor solutions have reliability, quality or compatibility problems from such 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. 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 could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new semiconductor solution, we may be required to incur additional development costs and product recalls, repairs or replacement costs. Furthermore, we provide warranties on our products ranging from one to two years, and thus may be obligated to refund sales with respect to products containing defects, errors or bugs. These problems may also result in claims against us by our customers or others, all of which could damage our reputation and increase our costs.

 

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The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing employees could impair our ability to grow our business.

We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled management, engineering and sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel could delay the development and introduction of and harm our ability to sell our semiconductor solutions. We believe that our future success is dependent on the contributions of Georges Karam, our co-founder and chief executive officer, and Bertrand Debray, our co-founder and vice president, engineering. The loss of the services of Dr. Karam, Mr. Debray, other executive officers or certain other key personnel could materially harm our business, financial condition and results of operations. For example, if any of these individuals were to leave unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for any such successor and while any successor is integrated into our business and operations.

Our key technical and engineering personnel represent a significant asset and serve as the source of our technological and product innovations. We plan to recruit additional design and application engineers with expertise in wireless broadband communications technologies. We may not be successful in attracting, retaining and motivating sufficient technical and engineering personnel to support our anticipated growth. In addition, to expand our customer base and increase sales to existing customers, we will need to hire additional qualified sales personnel. The competition for qualified marketing, sales, technical and engineering personnel in our industry is very intense. If we are unable to hire, train and retain qualified marketing, sales, technical and engineering personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenue will be harmed.

Rapidly changing standards could make our semiconductor solutions obsolete, which would cause our operating results to suffer.

We design our semiconductor solutions to conform to standards set by industry standards bodies such as the Institute of Electrical and Electronics Engineers, Inc., or IEEE. We also depend on industry groups such as the WiMAX Forum, an industry-led, non-profit corporation formed to help promote and certify the compatibility and interoperability of broadband wireless products, to 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, or these industry groups fail to adopt standards compatible with our semiconductor solutions, 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. Governments and foreign regulators may adopt standards that are incompatible with our semiconductor solutions, favor alternative technologies or adopt stringent regulations that would impair or make commercially unviable the deployment of our semiconductor solutions. In addition, existing standards may be challenged as infringing upon the intellectual property rights of other companies or may become obsolete.

We outsource our assembly, testing, warehousing and shipping operations to third parties, and if these parties fail to produce and deliver our products in a timely manner and in accordance with our specifications, our reputation, customer relationships and operating results could suffer.

We rely on third parties for the assembly, testing, warehousing and shipping of our products. We rely on United Test and Assembly Center Ltd., or UTAC, Siliconware Precision Industries Limited, or SPIL, and other third-party assembly and test subcontractors for assembly and testing. We further rely on a single company for logistics and storage. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We are unable to maintain the same level of oversight and control of these outsourced operations as we would if we were to conduct them internally.

 

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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.

We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs.

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries and to achieve higher levels of design integration. These ongoing efforts require us from time to time to modify the manufacturing processes for our semiconductor solutions and to redesign some solutions, which in turn may result in delays in product deliveries. We periodically evaluate the benefits of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and increased expenses as we transition our products to new processes. We depend on our relationship with TSMC and our test and assembly subcontractors to transition to new processes successfully. We cannot assure you that TSMC or our test and assembly subcontractors will be able to effectively manage the transition or that we will be able to maintain our relationship with TSMC or our test and assembly vendors or develop relationships with new foundries and vendors if necessary. If TSMC, any of our subcontractors or we experience significant delays in transitioning to smaller geometries or fail to efficiently implement transitions, we could experience reduced manufacturing yields, or delays in product deliveries and increased costs, all of which could harm our relationships with our customers, our margins and our operating results. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as end-customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely or cost-effective basis.

Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products or otherwise harm our business.

Wireless networks can only operate in the spectrum allowed by regulators and in accordance with rules governing how that spectrum can be used. Regulators in various countries have broad jurisdiction over the allocation of spectrum for wireless networks, and we therefore rely on these regulators to provide sufficient spectrum and usage rules. For example, countries such as China, India, Japan or Korea heavily regulate all aspects of their wireless communication industries, and may restrict spectrum allocation or usage. If further restrictions were to be imposed over the frequency bands where our semiconductor solutions are designed to operate, we may have difficulty selling our products in those regions. In addition, our semiconductor solutions operate in the 2.5 and 3.5 gigahertz, or GHz, bands, which in some countries is also used by government and commercial services such as military and commercial aviation. European and United States regulators have traditionally protected government uses of the 2.5 and 3.5 GHz bands by setting power limits and indoor and outdoor designation and requiring that wireless local area networking devices not interfere with other users of the band such as government and civilian satellite services. Changes in current laws or regulations or the imposition of new laws and regulations in the markets in which we operate regarding the allocation and usage of the 2.5 and 3.5 GHz band may harm the sale of our products and our business, financial condition and results of operations.

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

 

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operating expenses and hold assets and liabilities denominated in currencies other than the U.S. dollar, principally the euro, and to a lesser extent the British pound sterling and the New Israeli shekel. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, primarily the U.S. dollar to euro exchange rate. As we grow our operations, our exposure to foreign currency risk could become more significant. If there had been a 10% increase or decrease in the exchange rate of the U.S. dollar to the euro, we estimate the impact, in absolute terms, on operating expenses for 2010 would have been $2.1 million.

In the past, due to financing rounds denominated in euros, we had euro cash balances acting as a natural hedge of our operating expense exposure. Commencing in 2009, we entered 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.

Certain natural disasters, such as coastal flooding, large earthquakes or volcanic eruptions, may negatively impact our business. Any disruption to the operations of our foundry and assembly and test subcontractors could cause significant delays in the production or shipment of our products.

If coastal flooding, a large earthquake, volcanic eruption or other natural disaster were to directly damage, destroy or disrupt TSMC’s manufacturing facilities or the facilities of our test and assembly contractors, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. For example, substantially all of our semiconductor solutions are manufactured and assembled by third-party contractors located in Taiwan and Singapore. The risk of an earthquake or tsunami in Taiwan or Singapore, such as the major earthquakes that occurred in Taiwan in December 2006 and June 2003, and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines to the facilities of our foundry vendor and assembly and test subcontractors. Even if these facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains. Although our third-party contractors did not suffer any significant damage as a result of the most recent earthquakes, the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry vendor or assembly and test capacity. For instance, the recent earthquake and tsunami in Japan, though it did not directly cause damage to any of our third-party contractors, may impair the ability of such contractors to procure components from vendors in Japan, and alternative suppliers may not be available in a timely manner or at all, and may impair the ability of our customers to procure components other than ours that are necessary to their production process, which in turn could result in a slowing of their production and consequently of purchases of our products. Additionally, the dislocation of air transport services following volcanic eruptions in Iceland in April 2010 caused us delays in distribution of our semiconductor solutions. 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.

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.

 

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Risks Related to this Offering and Ownership of Our Shares and ADSs

There has been no prior market for the ADSs and an active and liquid market for our securities may fail to develop, which could harm the market price of the ADSs.

Prior to this offering, there has been no public market for our ordinary shares or ADSs. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for the ADSs will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that investors in the market will be willing to pay to buy and sell the ADSs following this offering. If you purchase the ADSs, you may not be able to resell those ADSs at or above the initial public offering price. If an active public market does not develop or is not sustained, it may be difficult for you to sell your ADSs at a price that is attractive to you, or at all. The market price of the ADSs could be subject to wide fluctuations in response to the risk factors listed in this section and others beyond our control, including:

 

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actual or anticipated fluctuations in our quarterly operating results;

 

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failure to meet our or research analysts’ financial projections;

 

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changes in financial estimates by securities research analysts;

 

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conditions in the wireless telecommunications industry;

 

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changes in the economic performance or market valuations of other companies in the wireless telecommunications industry;

 

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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint venture or capital commitments;

 

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addition or departure of key personnel;

 

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fluctuations of exchange rates between the euro and the U.S. dollar;

 

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intellectual property or other litigation;

 

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release of lock-up or other transfer restrictions on our outstanding ADSs or sales of additional ADSs; and

 

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general economic or political conditions in the regions in which we operate.

If securities or industry analysts do not 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 will be 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.

After the offering, share ownership will remain concentrated in the hands of our principal shareholders and management, who will continue to be able to exercise a direct or indirect controlling influence on us.

Following the completion of this offering, our executive officers and directors, and entities that are affiliated with them, will beneficially own an aggregate of approximately         % of our outstanding ordinary shares. As a result, these shareholders, acting together, may be able to control our management and affairs and matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change of control would benefit our other shareholders.

 

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The sale or availability for sale of substantial amounts of the ADSs could harm the market price of the ADSs.

Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could cause the market price of the ADSs to decline and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be              ADSs (equivalent to an equal number of ordinary shares) outstanding immediately after this offering, or              ADSs (equivalent to an equal number of ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we and our officers, directors and shareholders have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of the ADSs appreciates.

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

French law may limit the amount of dividends we are able to distribute and exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.

Although our Consolidated Financial Statements are denominated in U.S. dollars, under French law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated annual financial statements under the French commercial code in accordance with generally accepted accounting principles in France, which we refer to as French GAAP. Please see “Description of Share Capital—Dividend and Liquidation Rights” for further details on the limitations on our ability to declare and pay dividends. 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.

 

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You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary share so that you can vote them yourself. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company; our ordinary shares are not listed, and we do not intend to list our shares, on any market in France, our home country. This may limit the information available to holders of the ADSs.

We are a “foreign private issuer”, as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or 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 expect to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies and will not be 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 will be less publicly available information concerning our company than there would be if we were a U.S. public company.

As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from NYSE corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with NYSE corporate governance listing standards.

As a foreign private issuer listed on the NYSE, we will be 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

 

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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 our 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 our ordinary shares is likely to fluctuate after this offering and may be volatile, 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. 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 our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. 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 if we did provide such information 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 “Taxation—Material United States Federal Income Tax Consequences”.

You may be unable to recover in civil proceedings for U.S. securities laws violations.

We are a corporation organized under the laws of France. The majority of our directors are citizens and residents of countries other than the United States, and the majority of our assets are located outside of the United States. Accordingly, it may be difficult for investors to obtain jurisdiction over us or our directors in courts in the United States and enforce against us or them judgments obtained against us or them. In addition, we cannot assure you that civil liabilities predicated upon the federal securities laws of the United States will be enforceable in France. See “Enforceability of Certain Civil Liabilities”.

The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.

We are a French company with limited liability. Our corporate affairs are governed by our by-laws and by the laws governing companies incorporated in France. The rights of shareholders and the responsibilities of members of our board of directors are in many ways different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a stockholder. See “Management—Board Practices” and “Description of Share Capital”.

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

 

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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;

 

  §  

we expect that at the next shareholders general meeting held following completion of the offering, our by-laws will be amended to provide for a staggered board, whereby directors will be elected for three year terms, with one third of the directors elected every year;

 

  §  

our shareholders may grant our board of directors broad authorizations to increase our share capital;

 

  §  

our board of directors has the right to appoint directors to fill a vacancy created by the resignation, death or removal of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;

 

  §  

our board of directors can only be convened by its chairman except when no board meeting has been held for more than two consecutive months;

 

  §  

our board of directors meetings can only be regularly held if at least half of the directors attend either physically or by way of secured telecommunications;

 

  §  

approval of at least a majority of the shares entitled to vote at an ordinary shareholders’ general meeting is required to remove directors with or without cause;

 

  §  

advance notice is required for nominations for election to the board of directors or for proposing matters that can be acted upon at a shareholders’ meeting; and

 

  §  

the sections of the by-laws relating to the number of directors and election and removal of a director from office may only be modified by a resolution adopted by 66 2/3% of our shareholders present or represented at the meeting.

We will incur increased costs as a result of being a public company.

Upon completion of this offering, we will become a public company in the United States and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, imposes various requirements on the corporate governance practices of public companies. We expect these rules and regulations to significantly increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of becoming a public company in the United States, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company in the United States often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and ability to attract officers and directors and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could harm our financial condition and results of operations.

 

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We will be subject to additional regulatory compliance requirements, including internal control over financial reporting requirements under section 404 of the Sarbanes-Oxley Act of 2002, as a result of becoming a public company.

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives, and we may not successfully or efficiently manage our transition into a public company. We expect rules and regulations which are applicable to public companies, such as the Sarbanes-Oxley Act of 2002, to increase our legal and finance compliance costs and to make some activities more time-consuming and costly. We may need to hire additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company. We are in the process of further evaluating our internal control systems to allow management to report on, and our independent registered public accounting firm to assess, our internal control over financial reporting. We will be performing the system and process evaluation and testing (and necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to comply with Section 404 by no later than December 31, 2012. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of these actions on our operations. We may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations as we continue the evaluation process. Remediation of any significant deficiencies or material weaknesses could require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we may implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies.

If we fail to comply with the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and the trading price of our common stock may decline.

 

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Special Note Regarding Forward-Looking Statements

This prospectus, particularly the sections entitled “Prospectus Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”, contains forward-looking statements. All statements other than present and historical facts and conditions contained in this prospectus, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward looking statements. When used in this prospectus the words “anticipate”, “objective”, “may”, “might”, “should”, “could”, “can”, “intend”, “expect”, “believe”, “estimate”, “predict”, “potential”, “plan”, “is designed to” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

  §  

forecast and trends the markets in which we compete and in which our products are sold, including statements regarding the WiMAX and LTE markets;

 

  §  

our expectations regarding our expenses, sales and operations;

 

  §  

our expectations regarding our operating results;

 

  §  

our expectations regarding our customer concentration;

 

  §  

trends and challenges in the markets in which we operate, including average selling price reductions, cyclicality in the wireless communications industry and transitions to new process technologies;

 

  §  

our ability to anticipate the future market demands and future needs of our customers;

 

  §  

our ability to achieve new design wins;

 

  §  

our intent to expand our product platform to address the LTE market;

 

  §  

our plans for future products and enhancements of existing products;

 

  §  

anticipated features and benefits of our current and future products;

 

  §  

our growth strategy elements and our growth rate;

 

  §  

our ability to protect and defend our intellectual property against potential third party intellectual property infringement claims;

 

  §  

general economic conditions in our domestic and international markets; and

 

  §  

our future cash needs and our estimates regarding our capital requirements and our need for additional financing.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risk and uncertainties. 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. 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, including those under the heading “Risk Factors”.

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 prospectus. Other than as required by applicable securities laws, we are under no obligation to update any forward-looking statement, whether as result of new information, future events or otherwise.

 

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Use of Proceeds

We estimate that the net proceeds to us from the sale of the ADSs that we are offering will be approximately $             million, after deducting estimated underwriters’ discounts and commissions and estimated offering expenses and assuming an initial public offering price of $             per ADS, the mid-point of the estimated offering price range set forth on the cover of this prospectus. If the underwriters’ over-allotment option is exercised in full, we estimate that the net proceeds to us will be approximately $             million.

The principal purposes of this offering are to create a public market for the ADSs, obtain additional equity capital and facilitate future access to the public markets. We intend to use the net proceeds from this offering for general corporate purposes. If the opportunity arises, we may use a portion of the net proceeds from this offering to acquire or invest in businesses, products or technologies that are complementary to our own. We are not currently a party to any agreements or commitments for any acquisitions, and we have no current understandings with respect to any acquisitions.

Management’s plans for the use of the proceeds of this offering are subject to change due to unforeseen events and opportunities, and the amounts and timing of our actual expenditures depend on several factors, including our expansion plans and the amount of cash generated or used by our operations. We cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this offering. Accordingly, our management team will have broad discretion in using the net proceeds of this offering. Pending the use of the net proceeds, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing instruments.

 

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Dividend Policy

We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying cash dividends on our ordinary shares in the foreseeable future and intend to retain all available funds and any future earnings for use in the operation and expansion of our business.

Subject to the requirements of French law and our by-laws, dividends may only be distributed from our statutory retained earnings. Please see “Description of Share Capital—Dividend and Liquidation Rights” for further details on the limitations on our ability to declare and pay dividends. Dividend distributions, if any, will be made in euros and converted into U.S. dollars with respect to the ADSs, as provided in the deposit agreement.

 

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Capitalization

The following table summarizes our capitalization at December 31, 2010:

 

  §  

on an actual basis (which considers all preference shares as ordinary shares);

 

  §  

on a pro forma basis to reflect the conversion of all of our outstanding preference shares into an aggregate of 27,720,013 ordinary shares immediately prior to completion of this offering; and

 

  §  

on a pro forma as adjusted basis to reflect the receipt by us of the net proceeds from the sale of ADSs by us in this offering at an assumed initial public offering price of $             per ADS, the mid-point of the estimated offering price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the information in this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the accompanying notes appearing elsewhere in this prospectus.

 

     At December 31, 2010  
      Actual     Pro Forma    

Pro Forma

as Adjusted

 
     (in thousands)        

Equity

      

Issued capital

   $ 710      $ 710      $                

Share premium

     68,972        68,972     

Other capital reserves

     5,194        5,194     

Accumulated deficit

     (54,262     (54,262  

Accumulated other comprehensive income (loss)

     85        85     
                        

Total equity

   $ 20,699      $ 20,699      $     

Long-term liabilities (current and non-current)

      

Bank (Natixis) convertible notes

     3,340        3,340     

Interest-free loans

     1,158        1,158     
                        

Total capitalization

   $ 25,197      $ 25,197      $     
                        

The number of our ordinary share outstanding after this offering in the above table excludes, at December 31, 2010:

 

  §  

an aggregate of 733,000 shares available for issue under stock options, founders warrants and warrants pursuant to our currently outstanding equity plans;

 

  §  

2,329,850 shares issuable upon the exercise of outstanding stock options, founders warrants and warrants granted pursuant to our currently outstanding equity plans at a weighted average exercise price of €2.86 ($3.79) per share;

 

  §  

82,500 shares issuable upon exercise of warrants issued in connection with a sale-leaseback transaction; and

 

  §  

the conversion of €2.5 million ($3.3 million) aggregate principal amount of convertible notes held by Natixis into shares at a conversion price equal to the initial public offering price,

and gives effect to a 1-for-2 reverse split of our share capital that will be effective immediately prior to completion of this offering.

 

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Dilution

If you invest in the ADSs, your interest will be diluted to the extent of the difference between the public offering price per ADS of the ADSs and the pro forma as adjusted net tangible book value per share of the ADSs after this offering.

Our historical and pro forma net tangible book value, both of which assume the conversion of all preference shares into an equal number of ordinary shares, at December 31, 2010 was $17.6 million, or $0.63 per ADS. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of ordinary shares outstanding. After giving effect to the issue and sale by us of              ADSs in this offering at the assumed initial public offering price of $             per ADS, and after deducting the underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value at December 31, 2010 would have been $             million, or $             per share. This represents an immediate increase in net tangible book value of $             per share to our existing shareholders and an immediate dilution of $             per share to our new investors purchasing shares of ADSs in this offering. The following table illustrates this dilution on a per ADS basis:

 

                  

Assumed initial public offering price

      $                

Net tangible book value per ADS at December 31, 2010

   $ 0.63      

Increase per ADS attributable to new investors

     
           

Pro forma as adjusted net tangible book value per ADS after this offering

     
           

Dilution per ADS to new investors

      $     
           

A $1.00 increase (decrease) in the assumed initial public offering price of $         per ADS would increase (decrease) the net tangible book value, as adjusted to give effect to this offering, by $         per ADS and the dilution to new investors by $         per ADS, assuming the number of ADSs offered by us remains the same and after deducting underwriting discounts and commissions and estimated expenses.

The following table sets forth at December 31, 2010, on a pro forma as adjusted basis described above, the difference between the number of ADSs purchased from us, the total consideration paid, and the average price per ADS paid by existing shareholders, and the number of ADS from us, the total consideration paid, and the average price per ADS paid by investors purchasing shares in this offering, based on an assumed initial public offering price of $ per ADS and before deducting estimated underwriting discounts and commissions and estimated offering expenses:

 

     ADSs purchased
from us
     Total consideration
to us
     Average
price per
ADS
 
      Number      Percent      Amount      Percent     

Existing shareholders

              

New investors

              
                                            

Total

              
                                            

If the underwriters’ over-allotment option is exercised in full, the number of ADSs held by the new investors will be increased to                     , or approximately         % of the total number of the ADSs outstanding after this offering.

The number of our ordinary shares outstanding after this offering in the above table excludes at December 31, 2010:

 

  §  

an aggregate of 733,000 shares available for issue under stock options, founders warrants and warrants pursuant to our currently outstanding equity plans;

 

  §  

2,329,850 shares issuable upon the exercise of outstanding stock options, founders warrants and warrants granted pursuant to our currently outstanding equity plans at a weighted average exercise price of €2.86 ($3.79) per share;

 

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  §  

82,500 shares issuable upon exercise of warrants issued in connection with a sale-leaseback transaction; and

 

  §  

the conversion of €2.5 million ($3.3 million) aggregate principal amount of convertible notes held by Natixis into shares at a conversion price equal to the initial public offering price,

and gives effect to a 1-for-2 reverse split of our share capital that will be effective immediately prior to completion of this offering.

 

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Selected Consolidated Financial Data

The consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010, the consolidated statements of financial position data at December 31, 2008, 2009 and 2010, and the consolidated statements of cash flow data for the years ended December 31, 2008, 2009 and 2010 have been derived from our audited Consolidated Financial Statements included elsewhere in this prospectus. The consolidated statements of operations data for the year ended December 31, 2007, consolidated statements of financial position data at December 31, 2007, and the consolidated statements of cash flow data for the year ended December 31, 2007, have been derived from our audited Consolidated Financial Statements not included in this prospectus. The consolidated statements of operations data for the year ended December 31, 2006, the consolidated statements of financial position data at December 31, 2006, and the consolidated statements of cash flow data for the year ended December 31, 2006 have been derived from our unaudited Consolidated Financial Statements not included in this prospectus. You should read the financial and other data set forth below in conjunction with our Consolidated Financial Statements and the accompanying notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected for future periods.

Our financial statements included in this prospectus were prepared in U.S. dollars in accordance with IFRS.

 

     Years ended December 31,  
      2006     2007     2008     2009     2010  
     (unaudited)        
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue:

          

Product revenue

   $ 3,404      $ 9,316      $ 15,777      $ 15,564      $ 64,933   

Other revenue

     3,033        4,663        6,967        3,992        3,611   
                                        

Total revenue

     6,437        13,979        22,744        19,556        68,544   
                                        

Cost of revenue(1):

          

Cost of product revenue

     1,967        5,982        7,370        7,863        33,272   

Cost of other revenue

     310        316        320        330        340   
                                        

Total cost of revenue

     2,277        6,298        7,690        8,193        33,612   

Gross profit

     4,160        7,681        15,054        11,363        34,932   

% of revenue

     65     55     66     58     51

Operating expenses(1):

          

Research and development

     7,761        10,927        12,030        13,857        18,024   

Sales and marketing

     4,122        6,405        8,277        9,242        13,620   

General and administrative

     826        2,032        3,546        3,410        3,980   
                                        

Total operating expenses

     12,709        19,364        23,853        26,509        35,624   
                                        

Operating income (loss)

     (8,549     (11,683     (8,799     (15,146     (692

Financial income (expense)

     1,108        243        593        (1,665     (1,850
                                        

Profit (Loss) before income taxes

     (7,441     (11,440     (8,206     (16,811     (2,542

Income tax expense (benefit)

                   70        61        150   
                                        

Profit (Loss)

   $ (7,441   $ (11,440   $ (8,276   $ (16,872   $ (2,692
                                        

Pro forma basic earnings (loss) per share (unaudited)(2)

   $ (0.46   $ (0.53   $ (0.36   $ (0.73   $ (0.11
                                        

Pro forma diluted earnings (loss) per share (unaudited)(2)

   $ (0.46   $ (0.53   $ (0.36   $ (0.73   $ (0.11
                                        

Pro forma number of shares used for computing (unaudited)(2):

          

Basic

     16,138        21,562        22,906        23,257        24,980   
                                        

Diluted

     16,138        21,562        22,906        23,257        24,980   
                                        

 

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     At December 31,  
      2006      2007      2008      2009      2010  
     (unaudited)         
     (in thousands)  

Consolidated Statements of Financial Position Data:

              

Cash and cash equivalents

   $ 19,061       $ 10,546       $ 15,849       $ 7,792       $ 9,739   

Total current assets

     27,997         20,438         27,643         21,919         39,365   

Total assets

     33,821         26,604         34,591         28,813         49,717   

Current loans and borrowings

     550         810         255         3,754         3,564   

Total current liabilities

     7,527         11,651         8,520         14,182         27,556   

Total equity

     23,139         12,798         14,810         893         20,699   

 

     Year ended December 31,  
      2006     2007     2008     2009     2010  
     (unaudited)                          
     (in thousands)  

Consolidated Statements of Cash Flow Data:

          

Net cash flow from (used in) operating activities

   $ (6,864   $ (3,511   $ (7,960   $ (11,852   $ 1,481   

Net cash flow used in investments activities

     (4,992     (4,103     (4,141     (3,555     (7,377

Net cash flow from (used in) financing activities

     29,308        (901     17,424        7,338        7,844   

Net foreign exchange difference

     —          —          (20     12        (1

Cash and cash equivalents at January 1

     1,609        19,061        10,546        15,849        7,792   

Cash and cash equivalents at December 31

     19,061        10,546        15,849        7,792        9,739   

 

(1) Includes share-based compensation as follows:

 

     Year ended December 31,  
      2006      2007      2008      2009      2010  
     (unaudited)         
     (in thousands)  

Cost of revenue

   $ 29       $ 36       $ 31       $ 24       $ 23   

Operating expenses

     550         1,083         902         1,151         1,108   
                                            

Share-based compensation

   $ 579       $ 1,119       $ 933       $ 1,175       $ 1,131   
                                            

 

(2) Since we currently have no ordinary shares outstanding, all preference shares were reflected as ordinary shares. In addition, this reflects a 1-for-2 reverse stock split of our share capital to be effective immediately prior to completion of this offering. See Note 6 to the Consolidated Financial Statements.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly under the captions “Risk Factors” and “Special Note Regarding Forward-Looking Statements”.

Overview

We are a leading fabless designer, developer and supplier of 4G semiconductor solutions for wireless broadband applications. Our solutions incorporate baseband processor and RF transceiver ICs along with our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low latency, strong signal reach, low power consumption and high reliability in a small form factor and at a low cost.

We shipped more than 4.6 million units during 2010, compared to more than 0.9 million units during 2009. Our total revenue was $68.5 million in 2010, compared to $19.6 million in 2009.

We currently have more than 45 end customers worldwide, consisting primarily of OEMs and ODMs for smartphones, USB dongles, embedded devices, CPE and basestations. 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. In 2010, HTC accounted for 66% of our total revenue, compared to less than 10% of our total revenue in 2009. The increase in revenue from HTC in 2010 was driven by the success of the HTC EVO 4G smartphone, which was launched in June 2010. In 2009, Huawei accounted for 30% of our total revenue. In 2008, Gemtek accounted for 10% of our total revenue. 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.

Our Consolidated Financial Statements for 2008, 2009 and 2010, have been prepared in accordance with IFRS as issued by the IASB.

Revenue

Our total revenue consists of product revenue and other revenue.

Product Revenue

We derive substantially all of our revenue from the sale of semiconductor solutions for 4G wireless broadband applications and we currently expect to continue to do so for the foreseeable future. Our solutions are sold both directly to our end customers and, to a lesser extent, indirectly through distributors.

Our sales cycles typically take 12 months or more to complete and our solutions are generally incorporated into our end customers’ products at the design stage. Prior to an end customer’s selection and purchase of our solutions, our sales force and field applications engineers, or FAEs, 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.

 

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Our product revenue is growing rapidly, driven primarily by increased sales volume of our products due to various trends in the 4G wireless broadband market. These trends include deployment and broader adoption of the commonly accepted 4G protocols, WiMAX and LTE, and a dramatic increase in the number and type of devices subscribers use to access the wireless broadband network. Our product revenue is also affected by changes in the unit volume and average selling prices, or ASPs, of our semiconductor solutions. Our products are typically characterized by a life cycle that begins with higher ASPs and lower volumes as our new products use more advanced designs or technology and are usually incorporated into new devices that consumers adopt over a period of time. This is followed by broader market adoption with higher volumes and ASPs that are lower than initial levels, due to the maturity of the technology, greater availability of competing products or less demand as our end customers’ products reach the end of their life cycle. 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.

A small portion of our product revenue is derived from sales of reference designs or electronic boards on which our end customers develop and test their own designs.

Other Revenue

Other revenue consists of the sale of licenses to use our technology solutions and revenue from associated annual software maintenance and support services, as well as technical support services. 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 is perpetual and covers unlimited product designs by the end customer. In our early years, we used this licensing strategy as a way to qualify our end customers as we continued to develop our solutions. We expect that we will sign fewer new license agreements as we increasingly focus our efforts on sales of our solutions. We therefore expect other revenue to remain flat or decline in absolute terms in future periods and to decline as a 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,  
      2008      2009      2010  
     (in thousands)  

Asia

   $ 13,559       $ 14,737       $ 61,182   

Europe, Middle East, Africa

     5,536         2,187         4,914   

Americas

     3,649         2,632         2,448   
                          

Total revenue

   $ 22,744       $ 19,556       $ 68,544   
                          

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 product revenue consists of the cost of wafers manufactured by third-party foundries and costs associated with assembly and test services. Cost of product revenue is impacted by manufacturing variances such as cost and yield for wafer, assembly and test operations and package cost. To a lesser extent, cost of product revenue includes expenses relating to depreciation of productions mask sets, the cost of shipping and logistics, royalties, personnel costs, including share-based compensation expense, valuation provisions for excess inventory and warranty costs.

 

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Early in the life cycle of our products, we typically experience lower yields and higher associated costs, which are offset by higher ASPs. Over the life cycle of a particular product, our experience has been that the cost of product revenue has typically declined as volumes increase and test operations mature, while ASPs generally decline.

We use third-party foundry, assembly and test subcontractors, which are primarily located in Asia, to manufacture, package and test our semiconductor solutions. We purchase processed wafers from our fabrication supplier, currently TSMC. We also rely on third-party assembly and test subcontractors to assemble, package and test our products, and on third-party logistics specialists for logistics and storage. We do not have long-term agreements with our suppliers. Our obligations with our vendors for manufacturing, assembly and testing are generally negotiated on a purchase order basis.

Cost of Other Revenue

As most of the costs related to other revenue, particularly our licenses, are incurred as part of our normal research and development efforts, we allocate to cost of other revenue only the specific incremental costs related to generating maintenance and technical support services revenue.

Gross Profit

Our gross profit is affected by a variety of factors, including our product 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 mix, volume pricing, variances in manufacturing costs and the level of royalty payments to third parties possessing intellectual property necessary for our products.

Operating Expenses

Research and Development

We engage in substantial research and development efforts to develop new products and integrate additional capabilities into our core products. Research and development expense consists primarily of personnel costs, including share-based compensation, for our engineers engaged in design and development of our products and technologies. These expenses also include the depreciation cost of intellectual property licensed from others for use in our products, product development costs, which include external engineering services, development software and hardware tools, cost of fabrication of mask sets for prototype products, equipment depreciation and facilities expenses.

We expect research and development expense to increase in absolute terms, but decrease as a percentage of total revenue, as we enhance and expand our features and offerings for our product portfolio and we continue to develop new products for LTE, which will require additional resources and investments. Over time, we expect research and development expense with respect to our WiMAX products to decrease as the technology matures, and we expect research and development expense with respect to LTE to increase as we focus on bringing our LTE products to market.

Under IFRS, research and development expense is required to be capitalized if certain criteria are met and then amortized over the life of the product. As we operate in a highly innovative, dynamic and competitive sector, the costs incurred from the point that the criteria for capitalization are met to the point when the product is made generally available on the market are not material. Through 2010, all research and development expense has been expensed as incurred.

Research and Development Incentives

In France, we are classified as a Jeune Entreprise Innovante, or JEI, which allows us to pay reduced payroll taxes on the salaries of our engineers based in France for the first eight fiscal years after our incorporation, as long as certain criteria are met in terms of research and development expenses, revenues, assets, headcount and

 

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shareholder structure. We were eligible to receive this benefit through 2010. For 2010, if we had not been classified as a JEI, our payroll tax expense would have increased by approximately $1.5 million.

In France and the United Kingdom, we also 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 decline as a percentage of total revenue as research and development expense also declines as a percentage of total revenue. For 2010, we received approximately $2.0 million in tax incentives.

Finally, we 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. We expect that the amounts we receive from such incentives will be flat or decline over time in absolute terms and as a percentage of total revenue. For 2010, we received approximately $1.4 million in grants and interest-free loans.

Sales and Marketing

Sales and marketing expense consists primarily of personnel costs, including sales commissions, and share-based compensation for our sales and marketing personnel, commissions paid to independent sales agents, the costs of advertising and participation in trade shows, depreciation and facilities expenses. We expect to increase the size of our sales and marketing organization to support the growth of our business. We expect sales and marketing expense to increase in absolute terms, but decrease as a percentage of total revenue, as we add resources and incur additional expenses to market our solutions.

General and Administrative

General and administrative expense consists primarily of personnel costs and share-based compensation for our finance, human resources, information technology, purchasing, quality and administrative personnel; professional services costs related to recruiting, accounting, tax and legal services; depreciation and facilities expenses. We expect to increase the size of our general and administrative staff to support the expected growth of our business. We expect general and administrative expense to increase in absolute terms, and as a percentage of total revenue, in the short-term as we develop the infrastructure necessary to operate as a public company, including increased audit and legal fees, costs to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations applicable to companies listed on the NYSE, as well as expenses related to investor relations and higher insurance premiums.

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 and money market funds. Interest income was offset primarily by interest expense on our Category E convertible notes issued in 2008 and 2009, and on amounts drawn on the line of credit secured by our accounts receivable. Net interest expense is expected to decrease in future periods due to the reduction of debt through the conversion of Category E convertible notes in 2010 and the debt conversion or the repayment of debt expected in 2011. See “Liquidity and Capital Resources” for a more detailed description of our convertible notes.

 

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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.

Other Financial Income (Expense), Net

Other financial income (expense), net represents changes in fair value connected with financial assets and liabilities at fair value through profit and loss.

Income Tax Expense (Benefit)

We are subject to income taxes in France, the United States and numerous other jurisdictions. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable. Our effective tax rates differ from the statutory rate primarily due to any valuation allowance, the tax impact of local taxes, international operations, research and development tax credits, tax audit settlements, non-deductible compensation, and transfer pricing adjustments. In respect of our subsidiaries outside of France, we operate on a “cost plus” basis.

In France, we have significant net deferred tax assets resulting from net operating loss carry forwards, tax credit carry forwards and deductible temporary differences that reduce our taxable income. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carry back or carry forward periods provided for in the tax law for each applicable tax jurisdiction.

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 prospectus, which are prepared in accordance with IFRS as described in Note 2 to our Consolidated Financial Statements.

Some of the accounting methods and policies used in preparing our Consolidated Financial Statements under IFRS are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our earnings could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted. We believe that the most significant management judgments and assumptions in the preparation of our financial statements are described below.

Revenue Recognition

Our policy for revenue recognition, in instances where multiple deliverables are sold contemporaneously to the same counterparty, is in accordance with IAS 18.13. When we enter into contracts for the sale of products, licenses and maintenance and support services, we evaluate all deliverables in the arrangement to determine whether they represent separate units of accounting, each with its own separate earnings process, and their relative fair value. Such determination requires judgment and is based on an analysis of the facts and circumstances surrounding the transactions.

Our policy for revenue recognition is further explained in Note 2.3 to our Consolidated Financial Statements contained elsewhere in this prospectus.

 

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Inventories

Inventories consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, packaging and testing. We write down the carrying value of our inventories to the lower of cost (determined using the moving average method) or net realizable value (estimated market value less estimated costs of completion and the estimated costs necessary to make the sale). We write down the carrying value of our inventory for estimated amounts related to lower of cost or market value, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. The estimated market value of the inventory is based on historical usage and assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions on a product-by-product basis. Once established, inventory reserves are not reversed until the related inventory has been sold or scrapped. Actual demand may differ from forecasted demand and these differences may have a material effect on recorded inventory values and cost of revenue.

In 2010, we decided to bring the SQN1140 and SQN1145 to end-of-life and an aggregate of $0.4 million in inventories were written down as a cost of product revenue. In 2008 and 2009, there were no write-downs of any inventories. As we expect to announce the end-of-life of any products a year in advance, we expect to minimize inventories and we do not expect inventory reserves to be material.

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. As a private company, the assumption as to volatility has been determined by reference to the historical volatility of similar publicly traded semiconductor companies.

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 2008, 2009 and 2010, we recorded employee share-based compensation expense of $0.9 million, $1.2 million and $1.1 million, respectively. Share-based compensation expense related to non-employees was immaterial for 2008, 2009 and 2010.

The fair value of our shares underlying our share option grants was determined by our board of directors with input from management at each grant date upon review of a variety of factors, including the valuation used in our latest financing rounds. Beginning in September 2010, we have regularly conducted contemporaneous third-party valuations to assist us in the determination of the fair value of our shares. Our board of directors ensured that the relevant objective and subjective factors deemed important by our board of directors were accounted for in each valuation. Our board of directors also ensured that the assumptions and inputs used in connection with such valuations reflected our board of director’s best estimate of our business condition, prospects and operating performance at each valuation date.

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. However, all financing proceeds we have received since our inception 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

 

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year. Exchange differences arising on the translation are taken directly to a separate component of equity, cumulative translation adjustments.

Fair Value of Financial Instruments

Fair value corresponds to the quoted price for listed financial assets and liabilities. Where no active market exists, we establish fair value by using a valuation technique determined to be the most appropriate in the circumstances, for example:

 

  §  

available-for-sale assets: comparable transactions, multiples for comparable transactions, discounted present value of future cash flows;

 

  §  

loans and receivables, financial assets at fair value through profit and loss: net book value is deemed to be approximately equivalent to fair value because of their relatively short holding period;

 

  §  

trade payables: book value is deemed to be approximately equivalent to fair value because of their relatively short holding period;

 

  §  

convertible notes: some of our convertible notes had optional redemption periods/dates occurring before their contractual maturity, as described in Notes 12 and 14 to our Consolidated Financial Statements contained elsewhere in this prospectus. Holders of our Category E convertible notes had the right to request conversion at any time from their issue. As from the expiration of an 18-month period from issue of the Category E convertible notes, we had the right to request the conversion of all the convertible notes then held; and

 

  §  

derivatives: either option pricing models or discounted present value of future cash flows. Specifically and as described in Note 14.1 to the Consolidated Financial Statements, the option component of the Category E convertible notes was recorded as a derivative at fair value in accordance with the provisions of AG 28 of IAS 39 Financial Instruments: Recognition and Measurement. The fair value was determined using a valuation model that requires judgment, including estimating the change in value of our company at different dates and market yields applicable to our straight debt (without the conversion option). We elected to develop, use and maintain a valuation model for evaluating the option component, using a “with or without” analysis. To determine the fair value of the Category E convertible notes (including the conversion option) at each reported date, we considered (i) the conditions of the new issuances of Category E convertible notes which all included new investors and (ii) the effect of changes in market capitalization of comparable public companies. In order to determine the fair value of straight notes without that conversion option, we used a discounted cash flow analysis applying a discount interest rate derived from market yield indices at each reporting date. These assumptions used in calculating the value of the option component represent our best estimates based on management’s judgment and subjective future expectations.

 

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Results of Operations

The following table sets 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 prospectus. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

 

     Year ended
December 31,
    Change  
          2009             2010         %  
     (in thousands)        

Revenue:

      

Product revenue

   $ 15,564      $ 64,933        317

Other revenue

     3,992        3,611        (10
                  

Total revenue

     19,556        68,544        251   
                  

Cost of revenue:

      

Cost of product revenue

     7,863        33,272        323   

Cost of other revenue

     330        340        3   
                  

Total cost of revenue

     8,193        33,612        310   
                  

Gross profit

     11,363        34,932        207   

Operating expenses:

      

Research and development

     13,857        18,024        30   

Sales and marketing

     9,242        13,620        47   

General and administrative

     3,410        3,980        17   
                  

Total operating expenses

     26,509        35,624        34   
                  

Operating income (loss)

     (15,146     (692     95   

Financial income (expense):

      

Interest income (expense), net

     (781     (879  

Foreign exchange gain (loss)

     (315     1,138     

Other

     (569     (2,109  
                  

Profit (Loss) before income taxes

     (16,811     (2,542  

Income tax expense (benefit)

     61        150     
                  

Profit (Loss)

   $ (16,872   $ (2,692  
                  

 

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The following table sets forth a summary of our statement of operations as a percentage of total revenue:

 

     Year ended
December 31,
 
          2009             2010      
     (% of total revenue)  

Revenue:

    

Product revenue

     80        95   

Other revenue

     20        5   
                

Total revenue

     100        100   
                

Cost of revenue:

    

Cost of product revenue

     40        49   

Cost of other revenue

     2        —     
                

Total cost of revenue

     42        49   
                

Gross profit

     58        51   

Operating expenses:

    

Research and development

     71        26   

Sales and marketing

     47        20   

General and administrative

     17        6   
                

Total operating expenses

     136        52   
                

Operating income (loss)

     (77     (1

Financial income (expense):

    

Interest income (expense), net

     (4     (2

Foreign exchange gain (loss)

     (2     2   

Other

     (3     (3
                

Profit (Loss) before income taxes

     (86     (4

Income tax expense (benefit)

     —          —     
                

Profit (Loss)

     (86     (4
                

Comparison of Years Ended December 31, 2009 and 2010

Revenue

Product Revenue

Product revenue increased 317% from $15.6 million in 2009 to $64.9 million in 2010. This increase was primarily due to an increase of over 397% in the number of units sold, driven by the initial deployment of the EVO 4G smartphone by HTC, which accounted for 66% of our total revenue, partially offset by lower ASPs due to volume discounts to large customers and a maturing WiMAX product line. We expect our WiMAX product revenue to continue to grow in absolute terms, in line with the overall market growth rate as the WiMAX market eventually matures.

Other Revenue

Other revenue decreased 10% from $4.0 million in 2009 to $3.6 million in 2010, reflecting a decrease in license revenue from $1.6 million to $1.2 million.

Cost of Revenue

Cost of product revenue increased 323% from $7.9 million in 2009 to $33.3 million in 2010 due to higher product and manufacturing costs associated with the increased number of units sold, including $0.4 million in capacity utilization surcharges imposed by our foundry, TSMC, due to higher than expected demand for our products. Cost of other revenue remained flat at nearly $0.3 million in 2009 and 2010.

 

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Gross Profit

Gross profit increased 207% from $11.4 million in 2009 to $34.9 million in 2010, while gross margin decreased from 58.1% to 51.0% for the same periods, respectively, due to the higher proportion of our total revenue coming from product revenue in 2010. Product gross margin decreased from 49.5% in 2009 to 48.8% in 2010, primarily due to declining ASPs and capacity utilization surcharges, partially offset by higher volumes of products sold, which better absorbed the fixed portion of our manufacturing-related costs, and lower cost of materials.

Research and Development

Research and development expense increased 30% from $13.9 million in 2009 to $18.0 million in 2010. The increase in research and development expense was primarily due to headcount increases in engineering to develop LTE as well as new WiMAX solutions. Research and development expense in 2010 included $0.9 million for the cost of a production mask set for our first LTE silicon as this first solution was not expected to be produced in quantity before being replaced by a newer model. These expenses are net of any research and development incentives earned during the periods, which are accounted for as a reduction of research and development expense. Research and development incentives increased by 4% from $3.4 million in 2009 to $3.5 million in 2010. Without these research and development incentives, research and development expenses would have increased 25% from $17.2 million in 2009 to $21.5 million in 2010.

Sales and Marketing

Sales and marketing expense increased 47% from $9.2 million in 2009 to $13.6 million in 2010, primarily due to increased commissions to our Taiwan-based sales agency, particularly on sales to HTC. In addition, sales and marketing expense increased due to an increase in headcount and increased participation in trade shows.

General and Administrative

General and administrative expense increased 17% from $3.4 million in 2009 to $4.0 million in 2010 due to an increase in finance and accounting expenses attributable to an increase in reporting requirements as we expanded internationally, and an increase in headcount and recruiting fees.

Interest Income (Expense), Net

Net interest expense increased 13% from $0.8 million in 2009 to $0.9 million in 2010. This reflects an increase in interest on loans and finance leases from $0.5 million in 2009 to $0.6 million in 2010, resulting from the issue of €4.0 million ($6.0 million) in Category E convertible notes in October 2009 and, to a lesser extent, an increased interest rate on convertible notes from Natixis, beginning in July 2010, and interest arising from the use of a receivables-backed line of credit established in May 2010. The increases were partially offset by a reduction in debt due to the conversion of €4.3 million ($5.7 million) of convertible notes in July 2010. See “Liquidity and Capital Resources” for a more detailed description of our debt facilities and convertible notes.

Foreign Exchange Gain (Loss), Net

We had a net foreign exchange loss of $0.3 million in 2009 compared to a net foreign exchange gain of $1.1 million in 2010, due to an increase in the value of our net monetary assets and the appreciation of the U.S. dollar compared to the euro in the 2010 period.

Other Financial Income (Expense)

Other financial expenses increased 271% from $0.6 million in 2009 to $2.1 million in 2010, due to the increase in fair value of the option component of the Category E convertible notes, calculated prior to their conversion (see Note 14.1 to the Consolidated Financial Statements). The increase in fair value of the option component of the Category E convertible notes was due to an increase in the estimated fair value of our shares.

 

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Income Tax Expense (Benefit)

Deferred tax assets have not been recognized in 2010 or 2009 with respect to our losses as we have not generated taxable profits since beginning operations in 2004. Income tax expense was negligible for both 2009 and 2010.

Comparison of Years Ended December 31, 2008 and 2009

 

     Year ended
December 31,
    Change  
      2008     2009     %  
     (in thousands)        

Revenue:

      

Product revenue

   $ 15,777      $ 15,564        (1 )% 

Other revenue

     6,967        3,992        (43
                  

Total revenue

     22,744        19,556        (14
                  

Cost of revenue:

      

Cost of product revenue

     7,370        7,863        7   

Cost of other revenue

     320        330        3   
                  

Total cost of revenue

     7,690        8,193        7   
                  

Gross profit

     15,054        11,363        (25

Operating expenses:

      

Research and development

     12,030        13,857        15   

Sales and marketing

     8,277        9,242        12   

General and administrative

     3,546        3,410        (4
                  

Total operating expenses

     23,853        26,509        11   
                  

Operating income (loss)

     (8,799     (15,146     (72

Financial income (expense):

      

Interest income (expense), net

     (341     (781  

Foreign exchange gain (loss), net

     22        (315  

Other

     912        (569  
                  

Profit (Loss) before income taxes

     (8,206     (16,811  

Income tax expense (benefit)

     70        61     
                  

Profit (Loss)

   $ (8,276   $ (16,872  
                  

 

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The following table sets forth a summary of our statement of operations as a percentage of total revenue:

 

     Year ended
December 31,
 
          2008             2009      
     (% of total revenue)  

Revenue:

    

Product revenue

     69        80   

Other revenue

     31        20   
                

Total revenue

     100        100   
                

Cost of revenue:

    

Cost of product revenue

     32        40   

Cost of other revenue

     2        2   
                

Total cost of revenue

     34        42   
                

Gross profit

     66        58   

Operating expenses:

    

Research and development

     53        71   

Sales and marketing

     36        47   

General and administrative

     16        17   
                

Total operating expenses

     105        136   
                

Operating income (loss)

     (39     (77

Financial income (expense):

    

Interest income (expense), net

     (1     (4

Foreign exchange gain (loss), net

            (2

Other

     4        (3
                

Profit (Loss) before income taxes

     (36     (86

Income tax expense (benefit)

              
                

Profit (Loss)

     (36     (86
                

Revenue

Product Revenue

Product revenue decreased 1% from $15.8 million in 2008 to $15.6 million in 2009. In 2009, the number of products sold increased 73%, but this volume increase was more than offset by the effect of the decrease of higher ASP basestation solutions in our product mix, and increase in higher volume, lower ASP solutions for USB dongles, embedded devices, and CPE applications. In 2008, basestation solutions represented 7% of our unit volume and 24% of product revenue, while in 2009, basestation solutions represented 1% of our unit volume and 12% of product revenue. The global economic crisis also affected our product revenue in 2009, particularly during the three months ended March 31, 2009.

Other Revenue

Other revenue decreased 43% from $7.0 million in 2008 to $4.0 million in 2009 as we signed fewer license agreements in 2009 than in 2008, due to an increased focus on increasing product revenue relative to licensing our software. Within other revenue, license revenue decreased by $3.8 million, or 56%, and technical support services revenue increased by $0.8 million, or 326%.

Cost of Revenue

Cost of product revenue increased 7% from $7.4 million in 2008 to $7.9 million in 2009. This increase was primarily due to higher product and manufacturing costs associated with the increased number of units sold to our end customers. Cost of other revenue remained flat at $0.3 million in 2008 and 2009 as the cost of providing maintenance and support services is a fixed cost.

 

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Gross Profit

Gross profit decreased 25% from $15.1 million in 2008 to $11.4 million in 2009. Our gross margin decreased from 66% in 2008 to 58% in 2009, primarily due to the 43% decrease in other revenue. Our product gross margin decreased from 53% in 2008 to 49.5% in 2009 due to a decrease in our ASPs, arising from volume increases and the shift in the product mix away from higher-margin basestation solutions to higher volume solutions for USB dongles, embedded devices, and CPE applications. Our gross profit on other revenue decreased from 95% in 2008 to 92% in 2009 due to a lower level of license sales in the other revenues mix in 2009.

Research and Development

Research and development expense increased 15% from $12.0 million in 2008 to $13.9 million in 2009. This increase is primarily due to an increase in consulting and external services of $1.0 million to complement internal resources, as well as an increase in headcount, resulting in an increase in personnel costs and share-based compensation expense of $0.4 million. The increase in personnel reflected our commitment to continue to develop new products for the WiMAX market and, during the second quarter of 2009, we commenced development work on our LTE solutions. Research and development incentives decreased 3% from $3.5 million in 2008 to $3.4 million in 2009. Without these research and development incentives, research and development expenses would have increased 11% or $1.7 million.

Sales and Marketing

Sales and marketing expense increased 12% from $8.3 million in 2008 to $9.2 million in 2009, primarily due to an increase in compensation expense associated with increased headcount.

General and Administrative

General and administrative expense decreased slightly from $3.5 million in 2008 to $3.4 million in 2009, as we endeavored to keep our structural costs low during the general economic downturn in 2009.

Interest Income (Expense), Net

Net interest expense increased from $0.3 million in 2008 to $0.8 million in 2009. This reflects an increase in interest expense and other bank fees and financial charges from $0.7 million in 2008 to $0.9 million in 2009, resulting from the issue of €4.3 million ($6.5 million) in convertible notes in February and July 2008 and €4.0 million ($6.0 million) in October 2009. Interest income declined from $0.3 million in 2008 to $0.1 million in 2009 due to an overall lower invested cash balance during most of 2009, as well as lower interest rates.

Foreign Exchange Gain (Loss), Net

We had a net foreign exchange gain of $22,000 in 2008 compared to a net foreign exchange loss of $0.3 million in 2009. The net foreign exchange loss in 2009 was due in large part to the impact of the declining value of the euro on cash balances.

Other Financial Income (Expense)

We had other financial income of $0.9 million in 2008 and other financial expense of $0.6 million in 2009. The financial expense was attributable to an increase in the fair value of the option component of the Category E convertible notes, due to an increase in the estimated fair value of our shares (see Note 14.1 to the Consolidated Financial Statements).

Income Tax Expense (Benefit)

Deferred tax assets have not been recognized in 2009 or 2008 with respect to our losses as we have not generated taxable profits since beginning operations in 2004. Income tax expense was negligible for both 2008 and 2009.

 

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Selected Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for 2009 and 2010. 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 prospectus. Our quarterly results of operations will vary in the future. The results of operations for any quarter are not necessarily indicative of results for the entire year and are not necessarily indicative of any future results.

 

     Three months ended  
      March 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
 
     (in thousands) (unaudited)  

Revenue:

                

Product revenue

   $ 2,183      $ 4,085      $ 5,499      $ 3,797      $ 8,855      $ 15,700      $ 18,238      $ 22,140   

Other revenue

     1,041        1,112        772        1,067        1,323        938        626        724   
                                                                

Total revenue

     3,224        5,197        6,271        4,864        10,178        16,638        18,864        22,864   
                                                                

Cost of revenue(1):

                

Cost of product revenue

     946        2,188        3,022        1,707        4,114        8,077        9,834        11,247   

Cost of other revenue

     83        83        83        83        85        85        85        85   
                                                                

Total cost of revenue

     1,029        2,271        3,105        1,780        4,199        8,162        9,919        11,332   
                                                                

Gross profit

     2,195        2,926        3,166        3,074        5,979        8,476        8,945        11,532   

Operating expenses(1):

                

Research and development

     2,674        3,485        3,772        3,927        4,514        4,260        3,848        5,402   

Sales and marketing

     1,777        2,089        2,325        3,051        2,855        3,545        3,077        4,143   

General and administrative

     626        569        915        1,300        796        898        861        1,425   
                                                                

Total operating expenses

     5,077        6,143        7,012        8,278        8,165        8,703        7,786        10,970   
                                                                

Operating income (loss)

     (2,882     (3,217     (3,844     (5,203     (2,186     (228     1,159        562   

Financial income (expense):

                

Interest income (expense), net

     (51     (132     (240     (358     (204     (13     (329     (332

Foreign exchange gain (loss)

     35        (458     (22     130        1,017        716        (38     (557

Other

     (375     (436     149        93        18        119        36        (2,282
                                                                

Profit (Loss) before income taxes

     (3,273     (4,243     (3,957     (5,338     (1,355     594        828        (2,609

Income tax expense (benefit)

                          (61                          150   
                                                                

Profit (Loss)

   $ (3,273   $ (4,243   $ (3,957   $ (5,399   $ (1,356   $ 594      $ 828      $ (2,759
                                                                

 

(1) Includes share-based compensation as follows:

 

     Three months ended  
      March 31,
2009
     June 30,
2009
     Sept. 30,
2009
     Dec. 31,
2009
     March 31,
2010
     June 30,
2010
     Sept. 30,
2010
     Dec. 31,
2010
 
     (in thousands) (unaudited)         

Cost of revenue

   $ 7       $ 5       $ 6       $ 6       $ 5       $ 4       $ 3       $ 11   

Operating expenses

     347         262         294         248         278         259         256         315   
                                                                       

Share-based compensation

   $ 354       $ 267       $ 300       $ 254       $ 283       $ 263       $ 259       $ 326   
                                                                       

 

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The following table sets forth a summary of our quarterly statement of operations as a percentage of total revenue:

 

     Three months ended  
      March 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
 
     (% of revenue) (unaudited)  

Revenue:

                

Product revenue

     68        79        88        78        87        94        97        97   

Other revenue

     32        21        12        22        13        6        3        3   
                                                                

Total revenue

     100        100        100        100        100        100        100        100   
                                                                

Cost of revenue:

                

Cost of product revenue

     29        42        48        35        40        48        52        49   

Cost of other revenue

     3        2        2        2        1        1        1        1   
                                                                

Total cost of revenue

     32        44        50        37        41        49        53        50   
                                                                

Gross profit

     68        56        50        63        59        51        47        50   

Operating expenses:

                

Research and development

     83        67        60        81        44        26        20        24   

Sales and marketing

     55        40        37        63        28        21        16        18   

General and administrative

     19        11        15        26        8        5        5        6   
                                                                

Total operating expenses

     157        118        112        170        80        52        41        48   
                                                                

Operating income (loss)

     (89     (62     (61     (107     (22     (1     6        3   

Financial income (expense):

                

Interest income (expense), net

     (2     (3     (4     (7     (2            (2     (1

Foreign exchange gain (loss)

     1        (9            3        11        4               (2

Other

     (12     (9     2        1               1               (10
                                                                

Profit (Loss) before income taxes

     (102     (82     (63     (110     (13     4        4        (11

Income tax expense (benefit)

                          1                             1   
                                                                

Profit (Loss)

     (102     (82     (63     (111     (13     4        4        (12
                                                                

Our product revenue generally increased sequentially in each of the quarters presented, with the exception of the fourth quarter of 2009. The decline in the fourth quarter of 2009 reflected an inventory correction by our end customers as a result of the general economic slowdown. Other revenue decreased in the third quarter of 2009 as compared to the second quarter of 2009 and increased in the fourth quarter of 2009 primarily due to the timing of the execution of software licenses.

Cost of product revenue declined in the fourth quarter of 2009 as product revenue decreased. Cost of other revenue remained flat as the cost of providing maintenance services was provided by the same number of personnel during each of these periods and does not vary significantly with the level of maintenance revenues.

In the third quarter of 2010, our product gross margin was 46% compared to 49% for the second and the fourth quarters of 2010. The lower level was due to manufacturing capacity constraints resulting in surcharges paid to our foundry, TSMC.

Research and development expense increased in the fourth quarter of 2010 due to new hiring and an increase of external services related to the development of our LTE solution. Sales and marketing expense has varied in each quarter presented primarily due to amounts paid as sales commissions to independent agents in certain geographies, and the increase in headcount of our customer support team. General and administrative expense increased in the second half of 2009 primarily due to recruiting fees as we increased our engineering staff for our LTE solutions. In the fourth quarter of 2010, general and administrative expenses increased due to the increase of staff and external services to support the increased operating structure and to prepare for the contemplated public offering.

Financial income (expense) has varied each quarter presented primarily due to changes in the fair value of the option component of the Category E convertible notes, reflected in other financial income (expense), prior to

 

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their conversion, and due to foreign exchange gains and losses. As the estimated fair value of our shares increased, the change in the fair value of the option component of the Category E convertible notes resulted in a loss to the Company (see Note 14.1 to the Consolidated Financial Statements). Foreign exchange gains and losses resulted primarily from the change in the U.S. dollar to euro exchange rate and remeasurement of euro-based assets and liabilities at settlement or balance sheet date.

Interest expense can vary from quarter to quarter as the interest rates on some of our debt are adjusted each quarter based on market rate changes. In the second quarter of 2010, we amended our bank convertible notes, resulting in an elimination of the repayment penalty and a reversal of the accrued penalty reducing interest expense. Interest expense increased in the second half of 2010 reflecting the higher quarterly interest rate on the bank convertible notes and the interest expense related to the factoring agreement put in place in May 2010.

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 Chinese New Year period, which could harm our sales and results of operations during the period.

Liquidity and Capital Resources

Sources of Liquidity

Our cash and cash equivalents were $9.7 million at December 31, 2010. We believe that our available cash and cash equivalents will be sufficient to fund our operations for the next 12 months.

Since inception, we have financed our operations primarily through proceeds from the issues of our preference shares and convertible notes, which totaled €54.7 million ($73.1 million) from 2004 to the end of 2010.

Convertible notes originally issued to equity investors in 2008, in connection with an equity financing, in the aggregate principal amount of €4.3 million ($6.5 million) were converted into Category E preference shares in July 2010. Additional convertible notes issued to equity investors in 2009, also in connection with an additional equity financing, in the aggregate principal amount of €4.0 million ($6.0 million) were converted into Category E preference shares on December 30, 2010.

From January 2008 through June 2010, we had a convertible notes subscription facility with Natixis of up to €10.0 million ($14.7 million). Of this amount, €2.5 million ($3.5 million) was drawn down in October 2008 in the form of convertible notes. In June 2010, the terms of the agreement were amended to extend repayment of the drawn balance to June 2011 and to eliminate the unused portion of the line of credit facility. In the event of an initial public offering before June 30, 2011, the term will be extended to the end of the applicable lock-up period for such offering. Natixis has the option to convert the notes into ordinary shares at the IPO price or to request repayment of the notes. These notes currently bear interest at an annual rate equal to 3-month Euribor plus 525 basis points. The outstanding amount of the Natixis convertible notes becomes payable immediately in the event of a change in control of us or our liquidation, or if our statutory accounts are not approved in a timely manner or are not certified by our statutory auditors. In addition, the convertible notes require that we comply with the following financial covenants:

 

  §  

We are required to maintain a net cash balance at the end of each quarter equal to at least 30% of any issued Natixis convertible notes and other financial debt. Net cash balance is defined as cash and cash equivalents less financial debt, which is defined as our outstanding indebtedness excluding the issued Natixis and Category E convertible notes.

 

  §  

Operating results, excluding the impact of depreciation, amortization and LTE development costs, shall be positive.

We were in compliance with these financial covenants at the end of each quarter during 2008, 2009 and 2010.

In May 2010, we entered into a factoring agreement with Natixis Factor, an affiliate of Natixis, under which we transfer to Natixis Factor all invoices issued in U.S. dollars to qualifying customers, and the customers are instructed to settle the invoices directly with Natixis Factor. The line of credit available to us at any given time is

 

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equal to 90% of the face value of our insured accounts receivable, represented by the invoices submitted to Natixis Factor. We maintain credit insurance on all customers for which our credit insurer is willing to insure. We pay a commission on the face value of the accounts receivable submitted and interest on any draw-down of the resulting line of credit. In the event that the customer does not pay the invoice within 60 days of the due date, the receivable is excluded from the line of credit. At December 31, 2010, less than $0.1 million had been drawn on the line of credit and recorded as a current borrowing, and $2.3 million remained undrawn on the line of credit.

We have received three interest-free loans from Oséo, the French Agency for Innovation, to finance specific research and development projects in France. The financing arrangements call for the loan to be repaid according to a set timeline, but repayments may be reduced in the event of technical or commercial failure or partial technical or commercial success of the financed programs. The following is a summary of the interest-free loans:

 

  §  

In 2004, we were awarded an interest-free loan of €0.7 million ($1.0 million) to finance the development of the first generation of products using the 802.16d WiMAX standard. The loan was received in installments in 2004 and 2005 as various milestones were met. Due to the commercial success of the product, the loan was repaid in full in three installments in 2006, 2007 and 2008.

 

  §  

In 2006, we were awarded an interest-free loan of €1.3 million ($1.8 million) to finance the development of products using the 802.16e WiMAX standard. The loan was received in 2006 and, as the criteria for commercial success of the products has been satisfied, it was repayable in four installments in 2008, 2009, 2010 and 2011. We repaid the installment in 2008 and a portion of the installment in 2009. Oséo agreed to defer the remaining portion of the 2009 installment until 2010, which we paid in 2010 with the 2010 installment. We will repay the final sum of €0.4 million ($0.5 million) by March 31, 2011.

 

  §  

In January 2010, we were awarded an interest-free loan of €1.4 million ($2.0 million) to finance the development of LTE technology. We received €0.5 million ($0.8 million) in January 2010 and we expect to receive the remainder in 2011. Repayment of this loan is scheduled from 2012 to 2016.

Cash Flows

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

 

     Year ended December 31,  
      2008     2009    

2010

 
     (in thousands)  

Net cash from (used in) operating activities

   $ (7,960   $ (11,852   $ 1,481   

Net cash used in investing activities

     (4,141     (3,555     (7,377

Net cash from financing activities

     17,424        7,338        7,844   
                        

Net increase (decrease) in cash and cash equivalents

   $ 5,323      $ (8,069   $ 1,948   
                        

Cash Flows from Operating Activities

Net cash from operating activities during 2010 was $1.5 million, reflecting a net loss (before income tax) of $2.5 million and increases in trade receivables and other receivables of $9.3 million and in inventories of $7.2 million. These uses of cash were partially offset by non-cash charges, including depreciation and amortization of $3.9 million, share-based compensation expenses of $1.1 million, an increase in the fair value of the Category E convertible notes option component of $2.1 million, and increases in trade payables and other liabilities of $14.1 million during the period.

Net cash used in operating activities in 2009 primarily reflected a net loss (before income tax) of $16.8 million, and increases in trade receivables and other receivables of $2.3 million, offset by non-cash charges, including depreciation and amortization of $3.6 million, share-based compensation of $1.2 million, increases in trade payables and other liabilities of $0.8 million, and an increase in the fair value of the Category E convertible notes option component of $0.6 million.

 

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Net cash used in operating activities in 2008 primarily reflected a net loss (before income tax) of $8.2 million, and increases in trade receivables and other receivables of $2.3 million, inventories of $1.3 million, and deferred revenue of $0.5 million, offset by depreciation and amortization of $3.3 million, increases in trade payables and other liabilities of $2.1 million and share-based compensation of $0.9 million.

Cash Used in Investing Activities

Cash used in investing activities during 2010, 2009 and 2008, consisted primarily of purchases of property and equipment and intangible assets of $6.4 million, $3.4 million and $4.0 million, respectively. The increase in capital expenditures in 2010 reflects purchases related to LTE product development in addition to ongoing WiMAX product development. In 2010, the factoring agreement we entered into with Natixis Factor also required establishing a financial deposit of $641,000.

Cash Flows from Financing Activities

During 2010, net cash provided by financing activities was $7.8 million, reflecting $9.0 million in proceeds from the issue of shares and warrants (net of transaction costs), an interest-free loan to finance research projects in the amount of $0.8 million. These sources of cash were partially offset by the repayment of an interest-free loan in the amount of $0.9 million.

Cash flows from financing activities reflect our equity financing transactions and our bank or capital lease financings. Net cash provided by financing activities in 2009 consisted primarily of $7.3 million in net proceeds from the sale of Category E preference shares and convertible notes in October 2009 and $0.4 million in proceeds from stock option exercises.

Net cash provided by financing activities during 2008 included $15.4 million in net proceeds from the sale of preference shares and convertible notes in February and July 2008, and the issue of $3.5 million in the form of convertible notes from the Natixis facility. The proceeds from these financings were partially offset by the repayment of interest-free government loans in the amount of $0.7 million and repayment on our finance lease liability of $0.8 million. The Category E convertible notes issued in 2008 were converted into Category E preference shares in July and December 2010.

Operating and Investing Requirements

We expect our operating expenses and investments in tangible and intangible assets to increase in absolute terms in the foreseeable future as we increase headcount, expand our business activities, broaden our product offering, grow our end customer base and implement and enhance our internal reporting, control and management systems. We expect our accounts receivable and inventory balances to increase, partially offset by increases in trade payables, which will result in a higher need for working capital.

If our available cash balances and net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into a credit facility, which may contain restrictive covenants. The sale of equity and convertible debt securities may result in dilution to our shareholders and those securities may have rights senior to those of the ADSs. If we raise additional funds through the issue of convertible debt securities, these securities could contain covenants that would restrict our operations.

Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this prospectus. We have based our estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Our short and long-term capital requirements will depend on many factors, including the following:

 

  §  

our ability to generate cash from operations;

 

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  §  

our ability to control our costs;

 

  §  

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities; and

 

  §  

the acquisition of businesses, products and technologies.

Contractual Obligations

The following table summarizes our outstanding contractual obligations at December 31, 2010 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

 

     Payments due by period  
      Total      Less than
1 year
     1-3 years      3-5 years     

More than

5 years

 
     (in thousands)  

Operating leases

   $ 5,544       $
1,860
  
   $ 3,084       $ 600       $ —     

Bank (Natixis) convertible notes

     3,340         3,340         —           —           —     

Interest-free loans

     1,255         534         144         433         144   
                                            

Total

   $ 10,139       $ 5,734       $ 3,228       $ 1,033       $
144
  
                                            

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Quantitative and Qualitative Disclosure of Market Risks

Interest Rate Risk

We had cash and cash equivalents totaling $15.8 million, $7.8 million and $9.7 million at December 31, 2008, 2009 and 2010, respectively. Our cash and cash equivalents consist of cash in commercial bank accounts and investments in money market funds. The primary objectives of our investment activities are to preserve principal, and provide liquidity without significantly increasing risk. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash invested in money market funds. Due to the short-term and highly liquid nature of our portfolio, a movement in interest rates of 100 basis points during 2010 would not have a material effect on interest income.

Foreign Currency Risk

We use the U.S. dollar as the functional currency of Sequans Communications S.A. Substantially all of our sales are denominated in U.S. dollars. Therefore, we have very limited foreign currency risk associated with our revenue. The payment terms 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. In addition, we have limited exposure to the British pound sterling, the New Israeli shekel, the Taiwan dollar, the Chinese yuan and the Japanese yen. As a result, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, primarily the U.S. dollar to euro exchange rate. As we grow our operations, our exposure to foreign currency risk could become more significant. If there had been a 10% increase or decrease in the exchange rate of the U.S. dollar to the euro, we estimate the impact, in absolute terms, on operating expenses for 2010, would have been $2.1 million.

Commencing in 2009, we entered 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. Currently, we do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.

 

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Recent Authoritative Accounting Guidance

Standards and interpretations issued but not yet effective up to the date of issue of our Consolidated Financial Statements are listed below. We intend to adopt those standards when they become effective.

IAS 24 Related Party Disclosures (Amendment)

The amendment to IAS 24 is effective for annual periods beginning on or after January 1, 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. We do not expect this amendment to have any impact on our financial position or performance.

IAS 32 Financial Instruments: Presentation—Classification of Rights Issues (Amendment)

The amendment to IAS 32 is effective for annual periods beginning on or after February 1, 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. We are currently assessing the potential impact of this amendment.

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 9 as issued reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and derecognition. The completion of this project is expected in early 2011. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of our financial assets. We will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 19 is effective for annual periods beginning on or after July 1, 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss. We are currently assessing the potential impact of this amendment.

Improvements to IFRSs (issued in May 2010)

The IASB issued additional Improvements to IFRSs, omnibus amendments to its IFRS standards in May 2010. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011. The amendments listed below are considered to have a reasonable possible impact on our presentation of our Consolidated Financial Statements:

 

  §  

IFRS 7 Financial Instruments: Disclosures

 

  §  

IAS 1 Presentation of Financial Statements

 

  §  

IAS 27 Consolidated and Separate Financial Statements

 

  §  

IAS 34 Interim Financial Reporting

We do not expect any significant impact from the adoption of the above amendments on our accounting policies, financial position or performance.

 

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Business

Overview

We are a leading fabless designer, developer and supplier of 4G semiconductor solutions for wireless broadband applications. Our solutions incorporate baseband processor and RF transceiver ICs along with our proprietary signal processing techniques, algorithms and software stacks. Our high performance ICs deliver high throughput, low latency, strong signal reach, low power consumption and high reliability in a small form factor and at a low cost.

We leverage our deep understanding of system-level architecture and our advanced wireless signal processing and RF expertise to provide 4G semiconductor solutions for a wide range of wireless broadband devices. Our solutions serve as the core wireless broadband communications platform in these devices, including smartphones; USB dongles; portable routers; embedded wireless modems for laptops, netbooks, tablets, and other consumer multimedia and industrial devices; CPE, such as residential gateways; and basestations. Since 2005 through December 31, 2010, we have shipped over 6.3 million semiconductor solutions, which have been deployed by leading wireless carriers around the world. Our solutions are incorporated into the highly successful HTC EVO 4G, the first mass-market 4G smartphone, which was launched by Sprint in the United States in June 2010, as well as the HTC EVO Shift smartphone, launched by Sprint in January 2011. In February 2011, KDDI announced that the HTC EVO WiMAX smartphone, which also incorporates our solutions, is expected to be introduced in Japan in April 2011. In addition, on March 22, 2011, Sprint announced the HTC EVO View 4G 7" tablet computer and the HTC EVO 3D smartphone, both of which incorporate our solutions.

According to ABI Research, the number of 4G chipsets shipped annually will increase from 14.5 million in 2010 to 245.9 million in 2014, representing a CAGR of approximately 103%. Our semiconductor solutions support the two commonly accepted wireless broadband 4G protocols, WiMAX and LTE. Our products have been deployed by many wireless carriers worldwide, including 7 of the 10 largest WiMAX carriers globally by number of subscribers according to BWA Research UK: Clearwire/Sprint, Yota, UQ Communications, KT, Axtel, Packet One Networks and Globe Telecom. Given that WiMAX and LTE share a common technology platform, we have also leveraged our leadership in WiMAX to successfully develop LTE semiconductor solutions that are being deployed globally as existing 2G and 3G networks are upgraded to 4G. Our LTE solutions are currently in trials with wireless carriers in the United States and China, where China Mobile has successfully demonstrated its LTE capabilities using our solution at the World Expo in Shanghai and at the Asian Games in Guangzhou, which were both held in 2010. Our solutions are incorporated into devices sold by many leading OEMs and ODMs, including HTC, Huawei, MitraStar Technology (a spin-off of Zyxel), Gemtek, Sagemcom, Teltonika, Accton Wireless Broadband and ZTE.

For 2008 and 2010, our total revenue increased from $22.7 million to $68.5 million and our annual net loss decreased from $8.3 million to $2.7 million, respectively.

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 ABI Research, the total number of wireless devices shipped annually will increase from 1.5 billion in 2010 to 2.0 billion in 2014. Furthermore, ABI Research projects that global wireless data traffic will reach 19.5 billion gigabytes in 2014, more than a five-fold increase from 3.7 billion gigabytes estimated for 2010.

This increase in wireless devices and wireless data traffic is driven by two primary trends. First, the pervasiveness of the Internet with its vast array of rich media content and applications along with users’ desire to be connected anywhere and anytime using a variety of different wireless devices is driving a fundamental change in wireless data usage models and increasing demand for high speed wireless data connectivity. Second, rapid advances in performance and functionality have resulted in mobile phones evolving from solely voice-centric communications devices into data-intensive devices, such as smartphones, that support high-definition video,

 

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bandwidth-intensive Internet applications and streaming multimedia content, all of which require additional wireless network throughput. As a result, current wireless carrier networks, originally designed primarily for voice traffic, are straining to reliably handle the dramatic increase in wireless broadband data demand.

Wireless technologies have evolved through successive generations of protocols driven by the need for more efficient networks with greater bandwidth and capacity to handle a rising number of subscribers and increasing usage of data services. Launched in 1991, the first 2G wireless networks, based on the Global System for Mobile Communications, or GSM, standard, were designed to support voice traffic and supported data rates up to 9.6 kilobits per second, or Kbps, using a circuit-switched data connection. By 2003, GSM networks began adding Evolved Data Rates for GSM Evolution, or EDGE, technology that improved peak downlink data rates to 474 Kbps. EDGE is considered to be a 2.5G technology on the path to 3G.

In the late 1990s, 3rd Generation Partnership Project, or 3GPP, began defining 3G networks based on Universal Mobile Telecommunications System, or UMTS, standard, which was intended to minimize capital expenditure for wireless carriers as they added data capability. The first UMTS networks were established in the early 2000s and supported peak downlink data rates of 384 Kbps, and later generation UMTS networks evolved to offer data rates of up to 2 Mbps. After several enhancements to the technology, 3G wireless carriers in 2006 began to upgrade their networks to High Speed Downlink Packet Access, or HSDPA, which provides peak downlink data rates of 14.4 Mbps. Some 3G networks are now moving to Evolved High Speed Packet Access, or HSPA+, which provides peak downlink data rates of up to 28 Mbps and eventually up to 42 Mbps.

Despite the advances in data rates provided by these improvements, 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 services in a cost effective manner using legacy 2G and 3G networks, many wireless carriers are moving to 4G networks using WiMAX, which provides peak downlink capacity of 46 Mbps, or LTE, which provides peak downlink capacity of 173 Mbps, to enable higher data throughput. Both WiMAX and LTE have next-generation improvements in the planning phase in the form of WiMAX 2 and LTE-Advanced, respectively, as networks continue to evolve to address the demand for higher bandwidth.

The figure below provides a simplified perspective on the evolution of wireless technologies:

LOGO

Note: User rates vary depending on channel bandwidth, network loading, RF conditions, device capabilities and other factors.

 

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Wireless carriers are seeking to quickly deploy and transition existing wireless data services to more efficient 4G networks, which require less capital expenditure for a given amount of data throughput. At the same time, potential average revenue per user, or ARPU, can be increased by providing value-added mobile broadband services and solutions that are better enabled by the speed and performance of 4G networks. As such, ABI Research projects that operators will experience a 38% increase in data revenue from 2010 to 2014.

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 an October 2010 report by the International Telecommunications Union, developing regions of the world are forecasted to have only 4.4% wired broadband penetration by the end of 2010, compared to 24.6% for developed regions. 4G wireless technology is being deployed in many of these developing regions to increase access to broadband services.

4G Wireless Networks

4G architecture represents a fundamental technological change in the design of wireless communication networks. 2G and 3G networks were originally designed to support voice communications and utilize older circuit switching technology based on wireline telephone system design concepts. Circuit switching technology is inflexible as it requires a continuous dedicated connection between the source and destination of the communication, and is inefficient as network capacity is wasted on connections that are established but not in continuous use. 4G, which employs concepts such as packet switching and internet protocol, or IP, improves the scalability and performance of data networks. Packet switching technology makes more efficient use of network capacity for data communication by transmitting data in packets over multiple shared connections as compared to a dedicated connection. OFDMA and MIMO have emerged as key technologies that increase efficient use of spectrum, signal reliability, throughput and range in 4G networks compared to 2G and 3G networks.

 

  §  

OFDMA is a digital modulation and access technique that achieves significantly higher throughput within a given frequency spectrum than techniques used in 2G and 3G wireless networks. OFDMA splits the wireless signal into multiple lower frequency sub-signals spread throughout available spectrum during transmission, effectively reducing the demands on the network for each sub-signal and enabling increased overall speed and performance.

 

  §  

MIMO is a smart antenna technology that enables higher data throughput and signal range without requiring additional bandwidth or transmit power. MIMO employs multiple antennae to more efficiently transmit and receive wireless data.

The throughput and range extension capabilities of OFDMA and MIMO technologies also enable infrastructure installations to cover a larger service area and provide increased network capacity, thereby reducing capital expenditures for wireless carriers.

The commonly accepted 4G protocols, WiMAX and LTE, are IP-based, share the same OFDMA and MIMO technologies and have very similar radio designs, coding schemes and signal processing algorithms. WiMAX was defined as a standard and deployed ahead of LTE as carriers sought to monetize available frequency spectrum using a Time Division Duplexing, or TDD, RF technology. TDD transmits and receives signals on the same frequency using a time-sharing scheme, whereas Frequency Division Duplexing, or FDD, uses different frequencies to transmit and receive signals simultaneously. While WiMAX is deployed almost exclusively in one of a limited number of TDD frequency bands, LTE is compatible with both TDD and FDD spectrum and can be deployed in many different frequency bands.

Wireless carriers that have deployed WiMAX included new market entrants seeking competitive differentiation from incumbents in addition to carriers in emerging markets who utilized WiMAX networks as an economical alternative to wired broadband networks. The availability of WiMAX technology prior to the development of LTE led to adoption and deployment of WiMAX networks first. Carriers who choose to deploy LTE networks will typically be incumbents who are upgrading their existing 2G or 3G networks to 4G networks, and in certain cases from WiMAX networks to LTE networks.

 

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WiMAX

According to the WiMAX Forum™, an industry-led, non-profit corporation formed to help promote and certify the compatibility and interoperability of broadband wireless products, as of December 2010 there have been more than 590 WiMAX networks deployed in over 149 countries around the world since 2006. ABI Research forecasts shipments of WiMAX chipsets to increase from 13.6 million units in 2010 to 60.5 million units in 2014, representing an annual growth rate of 45%.

In developed countries, WiMAX services address the increasing demand for mobile broadband access to the Internet and other data services that create significant challenges for existing 3G networks. Carriers who deploy WiMAX networks often expect to gain an immediate advantage over competitors using 2G and 3G networks by delivering high data throughput at competitive prices using their existing or newly allocated frequency spectrum. For example, Sprint and Clearwire launched their 4G wireless broadband services in the United States in September 2008 and January 2009, respectively. According to Clearwire, as of December 31, 2010, its 4G mobile broadband network covered an estimated population of 112.0 million people.

In developing countries or regions where wireline infrastructure is limited and often insufficient to support broadband access, the market opportunity for WiMAX lies in providing broadband connectivity to the home or enterprise. For example, according to the Telecom Regulatory Authority of India, India has over 235 million households and less than 9 million wireline broadband connections. BSNL, a leading carrier with 29.4% of wireline market share in India, launched the country’s first WiMAX network in the fourth quarter of 2009 to address this opportunity.

LTE

LTE is segmented into TDD and FDD technologies. Each version is specific to the type of spectrum allocation wireless carriers are granted by a country’s or region’s government. In the near term, we believe deployments of FDD LTE networks will be driven largely by legacy 3G wireless carriers who possess FDD spectrum licenses. In 2010, wireless carriers including Verizon Wireless in the U.S., TeliaSonera in Sweden and Norway and Mobyland in Poland deployed FDD LTE networks. Deployments of TDD LTE networks are expected to be driven by wireless carriers such as China Mobile in China, Reliance Industries in India, Rostelecom in Russia, Softbank in Japan and Clearwire in the U.S. According to ABI Research, shipments of LTE chipsets are expected to grow from 39.0 million in 2011 to 185.4 million in 2014, representing a CAGR of 68%.

Challenges Faced By 4G Wireless Semiconductor Providers

Suppliers of 4G semiconductor solutions face significant challenges:

 

  §  

Execution Challenges.    The rapid evolution of wireless protocols, such as WiMAX to WiMAX2 and LTE to LTE Advanced, requires sustained product development excellence and ongoing collaboration with carriers to meet market technology needs. Subscriber demand and carriers’ push to increase revenues by providing new and higher performance devices have driven OEM and ODM product lifecycles to become shorter and require semiconductor solution providers to adhere to quick time-to-market schedules while providing fast and efficient transition from design-in to volume production. In addition, wireless carriers require semiconductor solutions to undergo extensive certification qualification and interoperability testing prior to mass production.

 

  §  

Technology Challenges.    In order to increase throughput with minimal cost, wireless carriers require more efficient use of spectrum through the implementation of complex signal processing algorithms, such as OFDMA and MIMO, that require a significant amount of system-level and software expertise in addition to IC design knowledge. In addition, OEM and ODM customers’ desire for continuous improvements in power efficiency, reduced form factor and lower cost require rapid design cycles employing increasingly advanced silicon processes, improved RF transceiver performance and integration of additional features. Furthermore, the need to provide an optimal user experience in areas of poor network coverage or areas where coverage changes from 2G or 3G to 4G requires versatile multi-mode system designs that are capable of seamlessly transitioning between the technologies.

 

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Our Competitive Strengths

We believe the following competitive strengths enable us to address the challenges faced by 4G wireless semiconductor providers:

 

  §  

A strong track record of execution in 4G.    We were an early provider of WiMAX products and have been shipping our wireless broadband semiconductor solutions since 2005. We believe we have a strong position in the WiMAX market and are an early leader in the LTE market. Since we commenced operations in 2004, we have accomplished the following milestones:

 

  §  

released four generations of WiMAX semiconductor solutions that have been deployed in a variety of devices including smartphones, USB dongles, embedded wireless modems and CPE systems, and two generations of WiMAX semiconductor solutions for use in basestations;

 

  §  

delivered advanced broadband semiconductor solutions such as a single chip solution for WiMAX that incorporates baseband and RF transceiver functionality, utilizes cost-effective and power-efficient 65nm complementary metal-oxide-semiconductor, or CMOS, technology and delivers high network throughput, low latency, strong signal reach, low power consumption and high reliability in a small form factor and at a low cost;

 

  §  

designed our WiMAX solution into the highly successful HTC EVO 4G, the first mass-market 4G smartphone, which was launched by Sprint in the United States in June 2010; and

 

  §  

leveraged our WiMAX expertise to rapidly develop LTE solutions including a full 20MHz bandwidth TDD LTE device, which was used by China Mobile in the first TDD LTE network demonstration.

 

  §  

Understanding of wireless system-level architecture and expertise in signal processing.    We have an end-to-end understanding of wireless system-level architectures and networks based on our team’s experience in a broad range of wireless technologies including 2G, 3G, Wi-Fi, WiMAX and LTE. This enables us to serve as a trusted advisor to wireless carriers, OEMs and infrastructure vendors to optimize the performance of their 4G devices and networks. For example, our solutions offer improved standby-mode battery life in 4G smartphones as a result of our in-depth understanding of the interactions between the device and the network and implementation of advanced power-saving techniques in our solutions. We also utilize our system-level knowledge to optimize handover performance between 3G and 4G networks in the same smartphone allowing for seamless transitions between networks and providing an enhanced user experience for mobile users. In addition, we provide our customers with Wi-Fi-WiMAX coexistence systems designs that ensure that Wi-Fi transmissions in adjacent frequencies are properly filtered to maintain WiMAX performance.

 

  §  

High performance solutions for 4G applications.    Our solutions offer high performance for use in a wide array of 4G-enabled devices. The key performance characteristics of our solutions include:

 

  §  

high throughput with peak downlink data transfer rates of 38 Mbps in our WiMAX solutions and support for peak downlink data transfer rates of 150 Mbps in our LTE solutions;

 

  §  

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;

 

  §  

low latency and make-before-break handover technology in mixed 3G—4G networks so that our solutions can provide quick and seamless network connectivity for improved user experience;

 

  §  

patented dual-transmit technology that improves coverage and provides higher data throughput from the device to the network compared to traditional single transmitter approaches; and

 

  §  

support for an advanced technology called hybrid automatic repeat request, or hybrid ARQ, which significantly enhances RF link robustness and throughput improving mobility and range.

 

  §  

Fully integrated 4G solutions.    We provide the industry’s most highly integrated 4G system-on-chip, or SoC, and system-in-package, or SiP, semiconductor solutions integrating the baseband, the RF and other

 

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functionality into a single die or package. In addition, we have successfully migrated from 130nm to 65nm CMOS technology to further reduce device form factor while offering improved device performance and added cost savings. Furthermore, our comprehensive software solutions help our customers get to market quickly with a field proven solution. Our integrated 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.

 

  §  

Simplified product design for device manufacturers, as our solutions incorporate all key components required for a 4G device in a single die or package. We believe these advantages enable our products to be incorporated into leading edge devices that offer a high quality user experience, as well as accelerate our end customers’ time-to-market.

 

  §  

Proprietary embedded protocol software that has been exhaustively tested with major basestation vendors’ equipment to ensure reliable performance in the field. We also offer host software that facilitates rapid development of high performance device drivers, connection managers and other key application-layer software functionality.

Our Strategy

Our goal is to be the leading provider of next-generation wireless semiconductors by providing best-in-class solutions that enable mass-market adoption of 4G technologies worldwide. Key elements of our strategy include:

 

  §  

Maintaining and extending our market position in WiMAX.    We intend to maintain our market position in WiMAX by growing our revenues through continued penetration into 4G WiMAX devices that are deployed by large wireless carriers and the expansion of our sales in CPE broadband wireless applications for emerging markets. Since we began commercial shipments of our semiconductor solutions in 2005, we have shipped over 6.3 million WiMAX semiconductor solutions through 2010, including more than 4.6 million units in 2010. We believe we have the most power-efficient and the smallest form factor solution for WiMAX smartphones, and we are the sole supplier of such solutions to HTC for their EVO 4G, the first mass-market 4G phone released in the U.S. ABI Research estimates that 3.2 million WiMAX smartphones shipped in 2010. In 2010, we shipped 3.4 million semiconductor solutions to smartphones OEMs. We believe that we can extend our WiMAX market position as carriers in the U.S., Korea and Japan continue to expand their WiMAX networks and release new smartphones, and WiMAX-enabled CPE devices continue to be deployed in markets such as India.

 

  §  

Leveraging WiMAX expertise to become a leader in LTE.    We are leveraging our strong market position and technical expertise in WiMAX to deploy best-in-class LTE solutions, as WiMAX and LTE share many common technologies. For example, we developed a full 20MHz bandwidth TDD LTE solution which was used in the first TDD LTE network demonstration by China Mobile. We plan to offer differentiated products serving all potential LTE markets, including TDD LTE solutions for large wireless carriers such as China Mobile; dual-mode WiMAX and LTE solutions; and FDD LTE products to enable 3G wireless carriers to migrate to 4G. In addition, our 4sight program offers WiMAX and LTE network migration and coexistence solutions for wireless carriers, OEMs and ODMs.

 

  §  

Continuing to provide complete 4G-specific semiconductor solutions.    Currently, 4G wireless broadband technologies are primarily being deployed to provide high-speed data connectivity in a more efficient manner in data-only devices such as USB dongles, portable routers, embedded applications and CPE devices. In these wireless devices, we believe single-mode 4G solutions, such as those in our portfolio, are the appropriate and cost-effective approach. In devices such as smartphones that also include voice functionality, wireless carriers primarily use 4G technology to provide broadband data services while voice services continue to utilize 2G and 3G technologies. As 4G networks typically operate in different frequency bands from legacy 2G and 3G networks, each network requires its own respective RF implementation. In

 

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smartphones, our 4G solutions provide independent RF functionality implemented separately from their legacy 2G or 3G counterparts, significantly simplifying RF system design. This architecture also eliminates the burden of integrating the 4G protocol into a complex, monolithic multi-protocol stack. We believe this approach allows manufacturers to leverage their proven 2G and 3G platforms while reducing cost and accelerating their time-to-market.

 

  §  

Extending our relationships across the wireless industry to facilitate broad adoption of 4G technologies.    Our relationships with OEMs, ODMs, infrastructure vendors and wireless carriers, including our global interoperability testing partnerships, offer a key advantage and act as a strong differentiator of our solutions. We intend to continue to work directly with wireless carriers that provide subscriber services and maintain and operate networks and with equipment manufacturers to provide improved solutions that can reduce wireless carriers’ infrastructure investment costs and accelerate the deployment of 4G networks. For example, we believe that our ongoing relationships and dialogue with these industry participants, particularly with respect to new deployments of wireless broadband infrastructure in emerging markets and by new market entrants has helped expand our market opportunity and has enhanced our reputation as a leading provider of 4G solutions. More recently, we believe our SQN3010, one of the first available TDD LTE SoCs in the market, enabled China Mobile to meet its TDD LTE goals. We also participate in a number of organizations and standards bodies, including the WiMAX Forum, the IEEE 802.16 Working Group on Broadband Wireless Access Standards, Next General Mobile Networks and 3GPP. We believe our relationships across the 4G wireless industry, from OEMs, ODMs and infrastructure vendors, to wireless carriers, to industry standards bodies, is a significant competitive advantage that we will be able to leverage for LTE and other next-generation solutions.

Our Solutions

We have developed a portfolio of 4G semiconductor solutions to address a variety of applications and market segments. We offer baseband solutions used to encode and decode data based on 4G protocols that serve as the core wireless processing platform for a 4G device; RF transceivers used to transmit and receive wireless transmissions; and highly integrated SoC and SiP solutions that combine these and other functions into a single die or package. Our SoC solutions integrate the baseband and RF transceiver functions, in some cases with an applications processor and memory. This advanced integration reduces the size, cost, design complexity and power consumption of the 4G solution. Our SiP solutions incorporate additional components that are typically required to build a wireless device, including the radio front-end and power management components from third party suppliers, and integrate them along with our SoC into a single package. This advanced packaging provides a near turn-key solution that reduces the footprint of the 4G solution and simplifies the design, manufacturing and testing burden for OEMs, reducing their investment and accelerating their time-to-market for 4G devices.

All of our baseband, SoC and SiP products are provided with comprehensive software, including relevant source code, to enable manufacturers to easily integrate our solutions into their devices in a wide variety of environments, including Apple MAC OSX, Microsoft Windows and embedded operating systems such as Android. 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. Further, we provide our customers with a warranty, for a period of one to two years, that our solutions are free from defects in materials and workmanship and will operate in material conformance with the provided specifications, entitling the customer to have the defective product repaired or replaced at our expense.

 

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In addition to our various WiMAX and LTE solutions that are currently available to our customers, we also have a number of LTE, WiMAX and combined WiMAX/LTE solutions in development that we expect will become available throughout 2011. Our products, including the expected availability of those products currently in the design stage of development, are summarized in the table below.

 

Product
Family

 

Product

Name

  Description   Target Applications  

Expected

Availability

  Key Features
      Smartphones   Embedded
devices
  USB
dongles
  CPE   Basestations    
LOGO   SQN1210     BB + RF SoC     ·   ·   ·           Now   Integrated DRAM, multi-band RF
  SQN1220   BB + RF SoC           ·   ·       Now   Integrated applications processor with VoIP support, multi-band RF
  SQN1280   SiP   ·   ·               Now   Complete turnkey WiMAX solution
  SQN1310   BB + RF SoC   ·                   1st half 2011   Handset-optimized power and size
  SQN1130   BB   ·   ·   ·   ·       Now   Dual-transmit mobile WiMAX
  SQN1140   RF   ·   ·   ·   ·       Now   Supports 2.3 GHz – 2.7 GHz
  SQN1145   RF   ·   ·   ·   ·       Now   Supports 3.3 GHz – 3.8 GHz
  SQN1010   BB               ·       Now   WiMAX / 802.16d version
  SQN2010   BB                   ·   Now   WiMAX / 802.16d version
  SQN2130   BB                   ·   Now   Supports >100 users for microcells and macrocells
  SQN2131   BB                   ·   Now   Supports <20 users for femtocells and picocells
LOGO   SQN3010   BB           ·   ·       Now   Supports TDD LTE
  SQN3110   BB   ·   ·   ·   ·       3rd quarter 2011     Supports TDD LTE & FDD LTE, 40nm process geometry, low-power
  SQN3140   RF   ·   ·   ·   ·       3rd quarter 2011   Supports 2.3 GHz – 2.7 GHz TDD LTE at up to 20 MHz bandwidth

LOGO

 

LOGO

  SQN5110   Dual BB   ·   ·   ·   ·       2nd half 2011   Supports seamless WiMAX-LTE handover, 40nm process geometry, low-power

Abbreviations used in this table: BB = baseband processor, CPE = customer premise equipment, DRAM = Dynamic Random Access Memory, FDD = frequency division duplexing, RF = radio frequency transceiver, SoC = system-on-chip, SiP = system-in-package, TDD = time division duplexing, VoIP = Voice over Internet Protocol.

Research and Development

We engage in substantial research and development efforts to develop new products and integrate additional capabilities into our core products. Our research and development team of 141 employees and consultants, at December 31, 2010, includes experienced semiconductor designers, software developers and test engineers. Key areas of expertise include wireless systems architecture, SoC architecture, digital and RF IC design, digital signal processing, embedded real-time and application software design, protocol stack development, hardware and software integration, quality assurance test development and scripting and field testing. Our team has significant experience in the principal wireless domains, including WiMAX, LTE, 2G, 3G and Wi-Fi. More than 25% of our engineers have more than 10 years of experience in their specific domain and over 98% of our engineers hold masters degrees.

 

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The ability to successfully integrate and mass-produce digital and RF functionality in advanced 65nm CMOS process technology with acceptable yields is a significant industry challenge. Due to the robustness of our design and verification methodologies, each of our 65nm SoC products was production-ready from the initial design and has achieved high levels of performance and manufacturing yield, reducing time to market and avoiding costs associated with additional design revisions. We believe this record of success positions us well as we migrate to 40nm and lower process geometries. Furthermore, first-silicon for each of our four generations of WiMAX integrated circuits has performed within our targeted specifications. We design our products with careful attention to quality, flexibility, cost and power consumption requirements. Our integrated circuit architecture is designed to optimize hardware and software partitioning to provide more flexibility and better cost without compromising performance. Our single-die baseband/RF integration allows advanced architecture choices, such as balanced filtering and gain splitting, which result in smaller die size, lower cost and reduced power consumption.

Since February 2009, we have been certified as ISO 9001 compliant, an international standard set by the International Organization for Standardization, or ISO, that sets forth requirements for an organization’s quality management system. We believe this certification gives our customers confidence in our quality control procedures. We also participate in a number of organizations and standards bodies, including the WiMAX Forum, the IEEE 802.16 Working Group on Broadband Wireless Access Standards, an organization that develops standards and recommended practices to support the development and deployment of broadband wireless metropolitan area networks, Next General Mobile Networks, and 3GPP. In addition, we participate in multiple European Union and French collaborative projects for advanced studies focusing on future evolutions of the 4G technology.

Our research and development expense was $12.0 million, $13.9 million and $18.0 million for 2008, 2009 and 2010, respectively.

Competition

The wireless semiconductor business is very competitive. We believe that our competitive strengths will enable us to compete favorably in the WiMAX and LTE 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;

 

  §  

track record of providing high-volume deployments in the industry; and

 

  §  

systems knowledge.

In the WiMAX market, we compete with suppliers such as Beceem Communications Inc., which was recently acquired by Broadcom Corporation, GCT Semiconductor, Inc. and MediaTek Inc. We also compete with Intel Corporation and Samsung Electronics Co. Ltd., who embed their own WiMAX semiconductor solutions in modules and devices, respectively. In the LTE market, we expect to face competition from semiconductor companies such as Broadcom Corporation, Infineon Technologies AG, Intel Corporation, Qualcomm Incorporated, Samsung Electronics Co. Ltd. and ST-Ericsson N.V.

Many of our competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of existing customers than us. In addition, some of them may provide incentives to customers or offer bundled solutions with complementary products, which could be attractive to some customers, or adopt more aggressive pricing policies to offset what we believe are the performance and cost advantages of our solutions.

Sales and Marketing

Our sales efforts are focused on securing design wins at leading OEMs and ODMs for mobile broadband devices. We work closely with key players across the 4G wireless broadband industry to understand their requirements and enable them to certify and deploy 4G solutions in high volume.

 

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Our sales force is organized regionally to provide account management and customer support functions as close to customer physical locations as practical. Currently, we have a direct sales force consisting of six individuals serving our OEM and ODM customers in the Asia-Pacific region, including Taiwan, China, Korea and Japan, India, Europe the Middle East and North and South America. In China, Japan, India and Korea we supplement our direct sales team with local distributors and sales representatives who handle certain customer communications, logistics and customer support functions. We do not have an agreement in place with the majority of such distributors. We have only one distributor agreement in effect, which is non-exclusive, and is terminable by us for any reason upon 90-day written notice or less in certain circumstances.

Our sales force is complemented by a team of FAEs that assists customers in solving technical challenges during the design, manufacturing implementation and certification phases of a customer’s product life cycle. 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 field applications engineers provide our end customers with technical assistance in the use of our solutions in their products. Once our solution is designed into a customer’s product offering, it becomes more difficult for a competitor to sell its semiconductor solutions to that end customer for that particular product offering given the significant cost, time, effort and risk involved in changing suppliers. In addition, once we win a particular design with an end customer, we believe our ability to penetrate other product families at that end customer increases significantly.

Our marketing strategy is focused on enabling broad adoption of 4G solutions and communicating our technology advantages to the marketplace. This includes building awareness of and preference for our technology at wireless carriers who generate demand for 4G-enabled devices. By working to understand carrier services strategies, device roadmaps and technical requirements, we believe we are better positioned to drive our roadmap to meet these needs, to influence their choice of technology suppliers, and to identify manufacturers in the wireless industry who are best prepared to serve the needs of the wireless carrier. For example, by engaging early with China Mobile, we were able to understand their requirements and achieve aggressive timelines for delivering our TDD LTE solution for their demonstration network. In addition, our collaboration with Sprint allowed us to understand their user experience goals, which led to the implementation of an optimized 3G-4G handover capability and reduced idle-mode power consumption for handsets incorporating our solutions.

Our marketing team is also responsible for product management, strategic planning, product roadmap creation, OEM, ODM and wireless carrier business development and corporate communications. All of these functions are aimed at strengthening the competitiveness of our solutions in response to evolving industry needs and competitive activities, and at articulating the value proposition of our technology throughout the 4G broadband wireless industry. Our 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.

Customers

We maintain relationships with 4G wireless carriers and with OEMs and ODMs who supply devices to those carriers and their end users. We do not typically sell directly to wireless carriers. Our sales are conducted on a purchase order basis with OEMs, ODMs, contract manufacturers or system integrators, or to a lesser extent with distributors who provide certain customer communications, logistics and customer support functions.

 

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Our top ten customers accounted for 58%, 70% and 91% of our total revenue in 2008, 2009 and 2010, respectively. HTC accounted for 66% of our total revenue in 2010, though less than 10% in each of 2008 and 2009. Huawei accounted for less than 10%, 30% and less than 10% of our total revenue in 2008, 2009 and 2010, respectively. The following is a list of our top ten customers, in alphabetical order, based on total revenue during 2010:

 

§Accton Wireless Broadband

 

§Flextronics

 

§Gemtek

 

§HTC

 

§Huawei

 

§MitraStar Technology (a spin-off of Zyxel)

 

§Sagemcom

 

§Silicon Technology

 

§Teltonika

 

§ZTE

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. We currently use 65nm standard RF, mixed-signal and digital CMOS production processes and are presently designing products for fabrication in 40nm technology. The use of these commercially available standard processes is designed to enable us to produce our products more cost-effectively and, by migrating to lower process geometries, we expect to achieve advantages in cost, size and power consumption.

We use UTAC and Siliconware Precision Industries Limited for most of our assembly and testing. We rely on extensive simulation, practical application and standardized test bed studies to validate and verify our products.

We closely monitor the production cycle from wafer to finished goods by reviewing electrical parameters and manufacturing process and test yield data. We also run routine reliability monitoring programs to ensure long term product reliability. This enables us to operate certain test processes on demand to reduce the time-to-market for our products and to help ensure their quality and reliability. We are ISO 9001 certified, and all of our major suppliers and subcontractors are required to have quality manufacturing systems certified to ISO 9000 and ISO 14000 levels, as well as appropriate environmental control programs.

We do not have any agreements with our foundry or with our testing and packaging 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, 2010, we had 5 issued and allowed United States and European patents and 24 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 replaced with other technology in subsequent product developments. Except for our licenses to the so called “essential patents” described below, we do not believe our business is dependent to any significant degree on any individual third-party license.

 

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We have also 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 have entered into an agreement with France Telecom with respect to such a patent portfolio under a common licensing program. The agreement provides for a royalty-bearing, non-exclusive license, for an initial term that expires on June 30, 2012 and is renewable for an additional term of at least five years. The agreement may be terminated (i) by either party in the event that any material breach is not cured within 60 days or (ii) by us upon 90 days written notice. In the event that France Telecom grants the same license to another party on more favorable royalty rates, we are entitled to an amendment to provide for such rates.

Employees

At December 31, 2010, we had 182 full-time employees, of whom 114 were located in France, 18 were in the United Kingdom, 14 were in China, 11 were in Israel, 10 were in the United States, 6 were in Singapore, 6 were in Taiwan, and 1 each were in Japan, Hong Kong and India. These employees include 108 in research and development, 48 in sales and marketing and 20 in general and administration and 6 in operations. Management considers labor relations to be good. We also have independent contractors and consultants. At December 31, 2010, we had 27 dedicated engineers from Global Logic in Ukraine for software development and testing, and also had 16 independent contractors in other fields and geographic locations.

Facilities

Our principal executive offices are located in Paris, France, consisting of approximately 22,390 square feet under a lease that expires in May 2014. 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 2015. We have a 1,973 square-foot facility in Petach Tikva, Israel, which houses a small research and development team, and sales and technical support personnel, under a lease that expires in January 2013. We have a 1,957 square-foot facility in Xindian City, Taipei, Taiwan for sales and technical support personnel under a lease that expires in November 2011. We have a 1,447 square-foot facility in Shenzhen, China, which accommodates sales and technical support personnel, under a lease that expires in June 2012. In February 2011, we entered into a new office lease of 1,600 square feet in Singapore, expiring in February 2012. We rent additional office space in Shanghai, China; Singapore; and Burnsville, Minnesota, U.S. under short-term lease agreements.

We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities will be available on suitable, commercially reasonable terms to accommodate any future needs.

Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings, the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.

 

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Management

Executive Officers and Directors

The following table sets forth information about our executive officers and directors as the date of this prospectus. Unless otherwise stated, the address for our directors and officers is c/o Sequans Communications S.A., 19 Le Parvis, 92073 Paris-La Défense, France.

 

Name   Age      Position(s)

Executive Officers

    

Dr. Georges Karam

    49       Chairman and Chief Executive Officer

Deborah Choate

    47       Chief Financial Officer

Bertrand Debray

    45       Vice President, Engineering

Sylvie Deschamps

    48       Vice President, Worldwide Sales

T. Craig Miller

    45       Vice President, Marketing and Business Development

Eddy Tang

    52       Vice President, Manufacturing Operations

Hugues Waldburger

    47       Vice President, Product Line Management

Directors

    

Michael Elias

    51       Director

David Ong

    48       Director

James Patterson

    43       Director

Hubert de Pesquidoux

    45       Director

Dominique Pitteloud

    48       Director

Alok Sharma

    46       Director

Zvi Slonimsky

    61       Director

Executive Officers

Dr. Georges Karam has served as our chairman and chief executive officer since the company was founded in 2003. Before founding Sequans, Dr. Karam was vice president of cable access at Juniper Networks, running the cable engineering and marketing departments and managing the cable sales launch in the Europe, Middle East and Africa region. He joined Juniper Networks when the company acquired Pacific Broadband Communications (PBC), where he was vice president of engineering and general manager for Europe. Dr. Karam has served in a variety of senior management positions at Alcatel, SAGEM and Philips. He is a senior member of IEEE, has authored numerous technical and scientific papers and holds several patents in digital communications. Dr. Karam holds a PhD from Ecole Nationale Supérieure des Télécommunications, Paris.

Deborah Choate has served as our chief financial officer since July 2007. Prior to joining Sequans she was chief financial officer at Esmertec AG from September 2005 to June 2007 and at Wavecom SA, from August 1998 to August 2004, and vice president of finance at Platinum Equity from October 2004 to September 2005. Earlier in her career, she was an audit partner with Ernst & Young. Ms. Choate has 26 years of experience in management, finance and accounting, including over 12 years working with technology companies, in particular communications hardware, software and services. Ms. Choate holds a BS from the University of California at Berkeley.

Bertrand Debray has served as our vice president, engineering since the company was founded in 2003. Before joining Sequans, Mr. Debray was director of hardware and ASIC development in the cable product division at Juniper Networks. He joined Juniper Networks after the company acquired Pacific Broadband Communications, where he played the same role and was significantly involved in developing the cable product and team. Mr. Debray has held technical and management positions at Alcatel. He has 15 years experience in large project development covering all access technologies, including wireless, satellite and cable. Mr. Debray holds a MSE from Ecole Nationale Supérieure des Télécommunications, Paris.

 

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Sylvie Deschamps has served as our vice president, worldwide sales since March 2010. Ms. Deschamps leads our global sales and customer support organizations. Prior to joining Sequans, from June 2009 to February 2010, Ms. Deschamps was a founding shareholder and member of the investment committee of Succes Europe Fund (France). From 1988 to June 2009, Ms. Deschamps held a number of positions at Texas Instruments, a leading global semiconductor company, where she most recently was member of the French board of directors from 1996 to June 2009 and general manager of strategic alliances for the Wireless Terminal Business Unit, managing IP strategic sourcing from 2006 to June 2009. Before that, she ran the GSM/GPRS/EDGE Wireless Business Unit where she had worldwide operational and financial responsibility. Ms. Deschamps holds a PhD from the University of Nice (France).

T. Craig Miller has served as our vice president, marketing and business development since June 2009. Mr. Miller is responsible for coordinating our marketing strategy and business development activities. He is a technology industry veteran with experience in product management, marketing, strategic planning and business development over the course of his twenty-plus year career. Prior to joining Sequans, Mr. Miller was vice president of product management and marketing at NextWave Wireless from September 2006 to March 2009, where he was responsible for strategic marketing, product planning, product management, applications engineering and marketing communications for a portfolio of WiMAX and LTE chipsets. Prior to NextWave, from July 1988 to May 2006 he held numerous positions in product marketing, strategy, business development and product engineering at Intel Corporation and was director of marketing for the Wireless Networking Group. Mr. Miller holds a BS in electrical engineering from the University of Cincinnati and an MBA from Arizona State University.

Eddy Tang has served as our vice president, manufacturing operations since 2005. Before joining Sequans, from 2003 to 2005, Mr. Tang was with STATSChipPAC Ltd., a provider of outsource assembly and test services, where he was a senior manager in the company’s corporate strategy organization. He was responsible for assessing the future needs of the outsourcing industry and making strategic recommendations to upper management. From 1999 to 2004, Mr. Tang held various management positions at Singapore Technologies Assembly and Test Services (STATS Ltd.), including director of marketing in outsource assembly and test services. He started his career in 1982 as a sales engineer at Jebson Company, Siemens Division in Hong Kong. In 1984, he joined Fairchild Semiconductor’s manufacturing operations in Singapore. He brings with him more than 20 years of experience in the semiconductor industry. Mr. Tang holds a Bachelor of Engineering from National University of Singapore and an MBA from University of Southern Australia.

Hugues Waldburger has served as our vice president, product line management since June 2008. From December 2003 to June 2008, Mr. Waldburger was with Wavecom SA, where he held various positions, including director of performance and validation, director of program management, and member of the steering committee. Prior to joining Wavecom he led the product integration program for cable networks at Pacific Broadband Communications from June 2000 to November 2003, which was acquired by Juniper Networks in 2001. Earlier, Mr. Waldburger held technical management positions for embedded systems with the electronics group, Thales. Mr. Waldburger has more than 20 years of experience in embedded systems and technology. Mr. Waldburger holds a MSE from Ecole Nationale Supérieure des Télécommunications, Paris.

Directors

Michael Elias has served as a director of the company since July 2006. Mr. Elias had been a managing director of Kennet Partners since 1997. Prior to founding Kennet in 1997, he spent 11 years at the venture capital firm Thompson Clive. Mr. Elias was responsible for establishing Thompson Clive’s offices in both Silicon Valley and Paris. He currently serves, and has previously served, as a director of a number of private companies. Mr. Elias has an MS from Cambridge University, where he was a Marshall Scholar, and a BA from Harvard University.

David Ong has served as a director since February 2005. Mr. Ong joined the investment team at Add Partners as Investment Director in July 2003 after 17 years in technology and venture capital. Previously Mr. Ong was an investment director at Vertex Management, a multinational private equity firm based in Singapore. Prior to that, Mr. Ong spent 13 years in the semiconductor industry, working as a chip designer and head of product development in Silicon Valley and Singapore, and then heading product marketing. He currently serves, and has previously served, as a director of a number of private companies. Mr. Ong holds a bachelor of electrical engineering from the National University of Singapore.

 

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James Patterson has served as a director since January 2011. Mr. Patterson is currently the chief executive officer and co-founder of Mobile Symmetry, a mobile and database applications company. Prior to that Mr. Patterson held various leadership roles during his 14 year tenure with Sprint, including President of Wholesale Services from 2008 to 2009, Vice President of Cable Solutions from 2005 to 2008, Vice President of Carrier Markets and of Network Access Management from 2001 to 2005, and Vice President of Sprint E|Solutions Finance from 2000 to 2001. Prior to Sprint, Mr. Patterson was a consultant to the financial services industry at Andersen Consulting (now Accenture). Mr. Patterson holds a bachelor’s in economics from Davidson College and an MBA from the University of Virginia. He has also studied British literature and economic history at Cambridge University and completed additional post-graduate work at Georgetown University.

Hubert de Pesquidoux has served as a director since March 2011. Since November 2009, Mr. de Pesquidoux has served as Chief Executive Officer of HDP Consulting, a consulting company. From 1991 until December 2009, Mr. de Pesquidoux held various positions at the telecommunications company Alcatel-Lucent SA (and its predecessor, Alcatel S.A. and its affiliates), where he most recently served as Chief Financial Officer from November 2007 until December 2008 and as President of the Enterprise business from November 2006 until December 2008. Mr. de Pesquidoux’s recent positions also include President of Alcatel North America from June 2003 until November 2006. Mr. de Pesquidoux also serves as a director of Tekelec and currently serves, or has served, as a director or member of the advisory board of a number of private companies. Mr. de Pesquidoux holds a Master in Law from University of Nancy II, a Master in Economics and Finance from Institut d’Etudes Politiques de Paris, a DESS in International Affairs from University of Paris Dauphine and was a laureate in the “Concours Général de Droit”.

Dominique Pitteloud has served as a director since January 2005. Mr. Pitteloud was a senior investment director at Endeavour Vision from 2007 to February 2011 and was a principal at Vision Capital from 2001 to 2007. Mr. Pitteloud is also an advisor to ASSIA, a provider of DSL management solutions. Prior to becoming a venture capitalist, Mr. Pitteloud was vice president of marketing at 8×8, a Silicon Valley semiconductor and telecommunication company, which he joined in 1999 as part of the acquisition of Odisei, a VoIP start-up from Sophia Antipolis, France. At Odisei, Mr. Pitteloud led the development of the company’s business and financing activities. Prior to Odisei, Mr. Pitteloud held various engineering and management positions at Logitech, including Vice President of the scanner and video camera business units. Mr. Pitteloud received a BS in telecommunications from the Swiss engineering school of Yverdon and an MBA from Santa Clara University.

Alok Sharma has served as a director since January 2011. Since September 2010, Dr. Sharma has been an independent consultant. From February 2009 to August 2010, Dr. Sharma was the Senior Vice President, Corporate Development and Alliances, at Aviat Networks (earlier known as Harris-Stratex), where he was responsible for leading corporate strategy, mergers and acquisitions, as well as the development of key strategic relationships for the company. Beginning in June 2004, Dr. Sharma was the founder and chief executive officer of Telsima Corporation, a provider of WiMAX broadband wireless solutions, until it was acquired by Aviat Networks in February 2009. Prior to Telsima, Dr. Sharma was the vice president and general manager of the Worldwide Cable Business at Juniper Networks from December 2001 to May 2003. Before Juniper Networks, Dr. Sharma was the founder and chief executive officer of Pacific Broadband Communications, which was acquired by Juniper Networks in December 2001. Prior to that, Dr. Sharma held senior management and technical positions at Hewlett Packard, Fujitsu/Amdahl, Integrated Device Technology and Siara Systems, a metro routing company acquired by Redback/Ericsson. Dr. Sharma holds a bachelor of engineering from the Indian Institute of Technology, Roorkee, India and a PhD in electrical engineering from the University of Wisconsin-Madison.

Zvi Slonimsky has served as a director since November 2006. Since 2005, Mr. Slonimsky has provided telecom and information technology consulting. He served as CEO of Alvarion Ltd. from 2001 to October 2005, following Alvarion’s establishment via merger of BreezeCOM and Floware in August 2001. Prior to the merger, Mr. Slonimsky was CEO of BreezeCom. Before that, he served as president and CEO of MTS Ltd. and was general manager of DSP Group, Israel. Earlier in his career, he held senior positions at several Israeli telecom companies, including C.Mer and Tadiran. Mr. Slonimsky also serves as the chairman or a director of numerous private companies and serves as a director Alvarion. Mr. Slonimsky holds a BSEE and a MSEE from the Technion Israel Institute for Technology and an MBA degree from Tel-Aviv University.

 

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Corporate Governance Practices

As a French société anonyme we are subject to various corporate governance requirements under French law. In addition, as a foreign private issuer listed on the NYSE, we will be subject to the NYSE corporate governance listing standards. The NYSE Listed Company Manual provides that foreign private issuers are permitted to follow home country corporate governance practices in lieu of the NYSE rules, with certain exceptions. Currently, we plan to rely exclusively on the NYSE Listed Company Manual with respect to our corporate governance after we complete this offering, although we may choose to rely on home country practice in the future in the event the NYSE Listed Company Manual conflicts with imperative corporate governance requirements under French law.

Board Practices

In accordance with French law governing a société anonyme, our business is overseen by our board of directors and by our chairman. The board of directors has appointed Dr. Karam as our chairman, who also serves as our chief executive officer. Subject to the prior authorization of the board of directors for certain decisions as required under French law, the chief executive officer has full authority to manage our affairs.

Our board of directors is responsible for, among other things, presenting our accounts to our shareholders for their approval and convening shareholder meetings. The board of directors also reviews and monitors our economic, financial and technical strategies. The directors are elected by the shareholders at an ordinary general meeting. Under French law, a director may be an individual or a corporation and the board of directors must be composed at all times of a minimum of three members.

Within the limits set out by the corporate purposes (objet social) of our company and the powers expressly granted by law to the shareholders’ general meeting, the board of directors may deliberate upon our operations and make any decisions in accordance with our business. However, a director must abstain from voting on matters in which the director has an interest. The board of directors can only deliberate if at least half of the directors attend the meeting in the manners provided for in our by-laws. Decisions of the board of directors are taken by the majority of the directors present or represented. Under French law, our directors and chief executive officer may not, under any circumstances, borrow money from us or obtain an extension of credit or obtain a surety from us.

Our board of directors currently consists of eight directors. Under our by-laws to be in effect prior to the completion of this offering, our board of directors will be comprised of up to nine members. We expect that a majority of our directors will be considered independent directors, as defined by the NYSE and the SEC. We expect that Messrs. Elias and Ong will resign as directors after the expiration of the lock-up period applicable to this offering. Our board of directors is currently seeking to fill one of the resulting vacancies, and we expect that two will remain vacant.

Upon the closing of this offering, all of our preference shares will be automatically converted into ordinary shares and any contractual rights under the shareholders agreement dated January 31, 2008 to appoint directors will be automatically terminated. Under our by-laws to be in effect prior to the completion of this offering, the sections of the by-laws relating to the number of directors, election and removal of a director from office may be modified only by a resolution adopted by 66 2/3% of our shareholders present or represented. A director’s term expires at the end of the ordinary shareholders’ general meeting convened to vote upon the accounts of the then-preceding fiscal year and is held in the year during which the term of such director comes to an end unless such director’s term expires earlier in the event of a resignation or removal. The following table sets forth the names of the directors of our company, the dates of their initial appointment as directors and the expiration dates of their current term.

 

Name    Current position    Year of
appointment
   Term expiration
year

Georges Karam

   Chairman    2003    2012

Michael Elias

   Director    2006    2012

David Ong

   Director    2005    2012

James Patterson

   Director    2011    2013

Hubert de Pesquidoux

   Director    2011    2013

Dominique Pitteloud

   Director    2005    2012

Alok Sharma

   Director    2011    2013

Zvi Slonimsky

   Director    2006    2012

 

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We expect that at the next shareholders’ general meeting held following completion of the offering, our by-laws will be amended to provide that each director is elected for a maximum three-year term by a vote of the majority of the shareholders present or represented, and each of our directors will be elected to a new three-year term. In addition, at such time we expect that for the purposes of the first renewal of the board of directors, the terms of approximately one-third of the directors will expire early after one year, one-third will expire early after two years and one-third will expire after three years, and our directors will decide unanimously or draw lots to determine their initial early term expiration.

Under French law, a director who is an individual cannot serve on more than five boards of directors or supervisory boards in corporations (société anonyme) registered in France; directorships in companies controlled by us, as defined in article L.233-16 of the French Commercial Code, are not taken into account.

Directors may resign at any time and their position as members of the board of directors may be revoked at any time by a majority vote of the shareholders present or represented at a shareholders’ general meeting, excluding abstentions. The number of directors who are over 70 years old may not exceed one third of the total number of directors and the chairman of our board must not be over 70 years old. A director does not need to be a French national and there is no limitation on the number of terms that a director may serve. In case of removal without cause, directors may be entitled to damages.

Vacancies on our board of directors, including vacancies resulting from there being fewer than the maximum number of directors permitted by our by-laws, provided there are at least three directors remaining, may be filled by a vote of a simple majority of the directors then in office. The appointment must then be ratified by the next shareholders’ general meeting. Directors chosen or appointed to fill a vacancy shall be elected by the board for the remaining duration of the current term of the replaced director. In the event the board would be composed of less than three directors as a result of a vacancy, meetings of the board of directors shall no longer be permitted to be held except to immediately convene a shareholders’ general meeting to elect one or several new directors so there are at least three directors serving on the board of directors, in accordance with French law.

Under French law, employees may be elected to serve as a director. However, such employee-director must perform actual functions separate from his/her role as director in order to retain the benefit of his/her employment agreement. The number of directors who are our employees cannot exceed one third of the directors then in office. No director can enter into an employment agreement with us after his/her election to the board of directors.

French law requires that companies having at least 50 employees for a period of 12 consecutive months have a Comité d’Entreprise, or Workers’ Council, composed of representatives elected from among the personnel. Our Workers’ Council was formed in 2007. Two of these representatives are entitled to attend all meetings of the board of directors and the shareholders, but they do not have any voting rights.

Directors are required to comply with applicable law and with our by-laws. Our directors may be jointly and severally liable for actions that they take that are contrary to our interests. Directors are jointly and severally liable for collective decisions. However, each director may avoid liability by proving that he or she did not approve the decision. Directors may be individually liable for actions fully attributable to them in connection with a specific mission assigned to them by the board of directors. As a director, the chairman of the board is liable under the same conditions. The chief executive officer may be liable with respect to third parties if he commits a fault that is severable from his duties and which is only attributable to him.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.

Audit Committee

Our audit committee consists of Hubert de Pesquidoux, James Patterson and Dominique Pitteloud, with Mr. de Pesquidoux serving as chairperson. Our audit committee oversees our corporate accounting and financial reporting process and internal controls over financial reporting. Our audit committee evaluates the independent registered public accounting firm’s qualifications, independence and performance; recommends to the shareholders with

 

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respect to the identity and compensation of the independent registered public accounting firm; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; reviews our Consolidated Financial Statements; reviews our critical accounting policies and estimates and internal controls over financial reporting; discusses with management and the independent registered public accounting firm the results of the annual audit and the reviews of our quarterly Consolidated Financial Statements; and reviews the scope and results of internal audits and evaluates the performance of the internal auditor. We expect that each of our audit committee members each will meet the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Mr. de Pesquidoux is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication under the applicable rules and regulations of the NYSE. The audit committee will operate under a written charter that satisfies the applicable rules of the SEC and the NYSE.

Compensation Committee

Our compensation committee consists of Zvi Slonimsky, Hubert de Pesquidoux and Dominique Pitteloud, with Mr. Slonimsky serving as chairperson. Our compensation committee reviews and recommends policies relating to the compensation and benefits of our officers and employees, which includes reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations. The compensation committee also recommends to the board of d