UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Amendment No. 1)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 001-35135
SEQUANS COMMUNICATIONS S.A. |
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
French Republic
(Jurisdiction of incorporation or organization)
15-55 Boulevard Charles de Gaulle
92700 Colombes, France
(Address of principal executive offices)
Georges Karam
Chairman and Chief Executive Officer
Sequans Communications S.A.
15-55 Boulevard Charles de Gaulle
92700 Colombes, France
Telephone: +33 1 70 72 16 00
Facsimile: +33 1 70 72 16 09
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing one ordinary share, nominal value €0.02 per share | New York Stock Exchange | |
Ordinary shares, nominal value €0.02 per share | New York Stock Exchange* |
* | Not for trading, but only in connection with the registration of American Depositary Shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares, nominal value €0.02 per share: 80,024,707 as of December 31, 2017
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See the definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨
Indicate by check mark which basis for accounting the registrant has used to prepare the financing statements included in this filing:
U.S. GAAP ¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board þ | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
INTRODUCTION
This Amendment No. 1 to Sequans Communications S.A.’s Annual Report on Form 20-F (the “Form 20-F”) for the year ended December 31, 2017 is being filed solely to update the Report of Independent Registered Public Accounting Firm on page F-2 of the Form 20-F to reference the International Accounting Standards Board and to file new Exhibits 12.1, 12.2, 13.1, 13.2 and 15.1 in response to a comment received from the staff of the Securities and Exchange Commission. No other changes have been made to the Form 20-F. This Amendment No. 1 speaks as of the original filing date of the Form 20-F, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 20-F, except as noted above.
PART I
Item 8. Financial Information
A. | Consolidated Statements and Other Financial Information |
Consolidated Financial Statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-1, as part of this annual report.
Legal Proceedings
On August 9, 2017, a putative securities class action captioned Andrew Renner v. Sequans Communications S.A., Georges Karam, and Deborah Choate (Case 1:17-cv-04665) was filed in the U.S. District Court for the Eastern District of New York. The plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on purported misrepresentations regarding Sequans’ revenue recognition policy in the Company’s Form 20-F annual reports filed on April 29, 2016 and March 31, 2017. The complaint seeks unspecified damages and costs and fees. On August 10, 2017, an almost identical class action complaint captioned Kevin Shillito v. Sequans Communications S.A., Georges Karam, and Deborah Choate (Case 2:17-cv-04707) was filed in the same court. On September 28, 2017, the Shillito action was consolidated with the Renner action. On October 10, 2017, candidates to be lead plaintiff filed motions to appoint a lead plaintiff and lead counsel. On February 6, 2018, the Court appointed lead plaintiffs and lead counsel. Lead plaintiffs filed their Consolidated Amended Complaint (the “CAC”) on April 9, 2018, which did not significantly alter the allegations made in the earlier pleadings. Pursuant to a prior stipulation and order, the Company, Mr. Karam and Ms. Choate have until May 24, 2018 to answer, move or otherwise respond to the CAC.
We are not a party to any other material legal proceedings.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying any 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. See “Item 10. B—Memorandum and Articles of Association” 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.
B. | Significant Changes |
No significant changes have occurred since December 31, 2017, except as otherwise disclosed in this annual report.
1
PART III
Item 19. Exhibits
Exhibit Number | Description of Exhibit |
1.1* | By-laws (statuts) of Sequans Communications S.A. effective February 6, 2018 (English translation) |
Exhibit Number | Description of Exhibit |
2.2 | Form of Deposit Agreement among Sequans Communications S.A., The Bank of New York Mellon and owners and holders of American Depositary Shares (incorporated by reference to Exhibit 4.2 to Registration No. 333-173001) |
2.3 | Form of American Depositary Receipt (included in Exhibit 2.2) |
4.1(a) | Stock Option Subscription Plans—2008-1, 2009-1, 2009-2, 2010-1, 2010-2, 2010-1-2, 2011-1, 2011-2 (incorporated by reference to Exhibit 10.1 to Registration No. 333-173001) |
4.1(b) | Stock Option Subscription Plan—2012-1 (incorporated by reference to Exhibit 4.1(b) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012, filed with the SEC on March 29, 2013) |
4.1(c) | Stock Option Subscription Plan—2013-1 (incorporated by reference to Exhibit 4.1(c) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed with the SEC on March 31, 2014) |
4.1(d) | Stock Option Subscription Plan—2014-1 (incorporated by reference to Exhibit 4.1(d) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, filed with the SEC on April 21, 2015) |
4.1(e) | Stock Option Subscription Plan—2015-1 (incorporated by reference to Exhibit 4.1(e) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 29, 2016) |
4.1(f) | Stock Option Subscription Plan—2016-1 (incorporated by reference to Exhibit 99.1 to Registration No. 333-214444) |
4.1(e) | Stock Option Subscription Plan—2017-1 (incorporated by reference to Exhibit 99.1 to Registration No. 333-219430) |
4.2(a) | BSA Subscription Plans—2007-1, 2007-2, 2008-1, 2008-2, 2009-1, 2009-2, 2010-1, 2010-2, 2010-1-2, 2010-2-2, 2011-1, 2011-2 (incorporated by reference to Exhibit 10.2 to Registration No. 333-173001) |
4.2(b) | BSA Subscription Plan—2012-2 (incorporated by reference to Exhibit 4.2(b) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012, filed with the SEC on March 29, 2013) |
4.2(c) | BSA 2013-1 (Warrants) Issuance Agreement (incorporated by reference to Exhibit 4.2(c) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed with the SEC on March 31, 2014) |
4.2(d) | BSA Subscription Plan—2014-1 (incorporated by reference to Exhibit 4.2(d) to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, filed with the SEC on April 21, 2015) |
4.3 | BSA (Warrants) Issuance Agreement, dated January 11th, 2011 (incorporated by reference to Exhibit 4.4 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012) |
4.4 | BSA (Warrants) Issuance Agreement, dated January 11th, 2011 (incorporated by reference to Exhibit 4.5 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012) |
4.5 | BSA (Warrants) Issuance Agreement, dated March 8th, 2011 (incorporated by reference to Exhibit 4.5 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012) |
4.6 | BSA (Warrants) Issuance Agreement, dated June 26, 2012 (6,000 BSA) (incorporated by reference to Exhibit 4.6 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012, filed with the SEC on March 29, 2013) |
4.7 | BSA (Warrants) Issuance Agreement, dated June 26, 2012 (25,000 BSA) (incorporated by reference to Exhibit 4.7 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012, filed with the SEC on March 29, 2013) |
4.8 | BSA (Warrants) Issuance Agreement, dated June 25, 2013 (incorporated by reference to Exhibit 4.8 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed with the SEC on March 31, 2014) |
4.10 | Form of Letter Agreement by and between Sequans Communications S.A. and Board Nominee (incorporated by reference to Exhibit 10.7 to Registration No. 333-173001) |
4.11 | BSA (Warrants) Issuance Agreement, dated June 26, 2014 (incorporated by reference to Exhibit 4.12 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, filed with the SEC on April 21, 2015) |
2
Exhibit Number | Description of Exhibit |
4.12 | Consulting Agreement with Alok Sharma, member of the board of directors, dated December 10, 2014 (incorporated by reference to Exhibit 4.13 to Sequans Communications S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, filed with the SEC on April 21, 2015) |
4.13 | Convertible Note Agreement by and between Sequans Communications S.A. and Nokomis Capital Master Fund, LP, dated April 14, 2015 (incorporated by reference to Exhibit 4.1 to Sequans Communications S.A.’s Report on Form 6-K filed with the SEC on April 15, 2015) |
4.14 | Convertible Promissory Note issued by Sequans Communications S.A. to Nokomis Capital Master Fund, LP on April 14, 2015 (incorporated by reference to Exhibit 4.2 to Sequans Communications S.A.’s Report on Form 6-K filed with the SEC on April 15, 2015) |
4.15 | Loan Agreement by and between Bpifrance Financement and Sequans Communications S.A., dated September 14, 2015 (English translation) (incorporated by reference to Exhibit 4.15 to Sequans Communications S.A.'s Annual Report on Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 29, 2016) |
4.16 | Interest-Free Innovation Loan Agreement by and between Bpifrance Financement and Sequans Communications S.A., dated August 17, 2015 (English translation) (incorporated by reference to Exhibit 4.16 to Sequans Communications S.A.'s Annual Report on Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 29, 2016) |
4.17 | BSA (Warrants) Issuance Agreement, dated June 29, 2015 (incorporated by reference to Exhibit 4.17 to Sequans Communications S.A.'s Annual Report on Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 29, 2016) |
4.18 | Convertible Note Agreement by and between Sequans Communications S.A. and the purchasers signatory thereto, dated April 27, 2016 (including the Form of Convertible Promissory Note attached thereto as Exhibit B) (incorporated by reference to Exhibit 4.18 to Sequans Communications S.A.'s Annual Report on Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 29, 2016) |
4.18(a) | Amendment No 1 to the Convertible Note Agreement dated April 14, 2015 by and between Sequans Communications S.A. and Nokomis Capital Master Fund, LP dated June 30, 2017 (incorporated by reference to Exhibit 99.2 to the Form 6-K filed with the SEC on August 1, 2017) |
4.18(b) | Amendment No 1 to the Convertible Note Agreement dated April 27, 2016 by and between Sequans Communications S.A. and Nokomis Capital Master Fund, LP dated June 30, 2017 (incorporated by reference to Exhibit 99.3 to the Form 6-K filed with the SEC on August 1, 2017) |
4.18(c) | Amendment No 1 to the Convertible Note Agreement dated April 27, 2016 by and between Sequans Communications S.A. and Manatuck Hill Scout Fund, LP dated June 30, 2017 (incorporated by reference to Exhibit 99.4 to the Form 6-K filed with the SEC on August 1, 2017) |
4.18(d) | Amendment No 2 to the Convertible Note Agreement dated April 14, 2015 by and between Sequans Communications S.A. and Nokomis Capital Master Fund, LP dated October 30, 2017 (incorporated by reference to Exhibit 99.2 to the Form 6-K filed with the SEC on October 31, 2017) |
4.18(e) | Amendment No 2 to the Convertible Note Agreement dated April 27, 2016 by and between Sequans Communications S.A. and Nokomis Capital Master Fund, LP dated October 30, 2017 (incorporated by reference to Exhibit 99.3 to the Form 6-K filed with the SEC on October 31, 2017) |
4.18(f) | Amendment No 2 to the Convertible Note Agreement dated April 27, 2016 by and between Sequans Communications S.A. and Manatuck Hill Scout Fund, LP dated October 30, 2017 (incorporated by reference to Exhibit 99.4 to the Form 6-K filed with the SEC on October 31, 2017) |
4.19 | Restricted Share Award Plan 2016-1 (incorporated by reference to Exhibit 99.2 to Registration No. 333-214444) |
4.20 | BSA (Warrants) Subscription Plan 2016-1 (incorporated by reference to Exhibit 99.3 to Registration No. 333-214444) |
4.21 | BSA (Warrants) Subscription Plan 2016-2 (incorporated by reference to Exhibit 99.4 to Registration No. 333-214444) |
4.22 | BSA (Warrants) Issuance Agreement, dated June 28, 2016 (incorporated by reference to Exhibit 99.5 to Registration No. 333-214444) |
4.23 | Restricted Share Award Plan 2016-2 (incorporated by reference to Exhibit 99.1 to Registration No. 333-215911) |
3
Exhibit Number | Description of Exhibit |
4.24 | Restricted Share Award Plan 2017-1 (incorporated by reference to Exhibit 99.2 to Registration No. 333-219430) |
4.25 | Restricted Share Award Plan 2017-2 (incorporated by reference to Exhibit 99.1 to Registration No. 333-219430) |
4.26 | Restricted Share Award Plan 2017-3 (incorporated by reference to Exhibit 99.1 to Registration No. 333-219430) |
4.27 | BSA (Warrants) Subscription Plan 2017-1 (incorporated by reference to Exhibit 99.3 to Registration No. 333-219430) |
4.28 | BSA (Warrants) Subscription Plan 2017-2 (incorporated by reference to Exhibit 99.4 to Registration No. 333-219430) |
4.29 | BSA (Warrants) Issuance Agreement, dated June 30, 2017 (incorporated by reference to Exhibit 99.5 to Registration No. 333-219430) |
4.30 | Board Observer Rights agreement dated October 30, 2017 by and among Sequans Communications S.A and Nokomis Capital Master Fund, LP (incorporated by reference to Exhibit 99.5 to the Form 6-K filed with the SEC on October 31, 2017) |
4.31 | Standstill Agreement by and among Sequans Communications S.A and Nokomis Capital Master Fund, LP (incorporated by reference to Exhibit 99.6 to the Form 6-K filed with the SEC on October 31, 2017) |
8.1* | List of Subsidiaries |
Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002 | |
Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002 | |
Certificate of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 | |
Certificate of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 | |
Consent of Ernst & Young Audit, independent registered public accounting firm |
* | Previously filed. |
** | Filed herewith. |
4
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Sequans Communications S.A. | |
By: | /s/ Dr. Georges Karam |
Name: Dr. Georges Karam | |
Title: Chief Executive Officer and Chairman |
Date: January 8, 2019
5
F- 1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Sequans Communications S.A.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Sequans Communications S.A. (the “Company”) as of December 31, 2015, 2016 and 2017, and the related consolidated statements of operations, comprehensive loss, consolidated cash flows and changes in equity (deficit) for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 12, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Ernst & Young Audit
We have served as the Company’s auditor since 2008.
/s/ Ernst & Young Audit
Paris-La Défense, April 12, 2018
F- 2
Year ended December 31, | |||||||||||||
Note | 2015 | 2016 | 2017 | ||||||||||
(in thousands, except share and per share amounts) | |||||||||||||
Revenue: | |||||||||||||
Product revenue | $ | 24,669 | $ | 34,581 | $ | 37,353 | |||||||
Other revenue | 7,863 | 10,998 | 10,910 | ||||||||||
Total revenue | 3 | 32,532 | 45,579 | 48,263 | |||||||||
Cost of revenue: | |||||||||||||
Cost of product revenue | 17,970 | 22,574 | 24,725 | ||||||||||
Cost of other revenue | 1,481 | 3,022 | 2,397 | ||||||||||
Total cost of revenue | 4.2 | 19,451 | 25,596 | 27,122 | |||||||||
Gross profit | 13,081 | 19,983 | 21,141 | ||||||||||
Operating expenses: | |||||||||||||
Research and development | 4.4 | 25,305 | 26,334 | 25,202 | |||||||||
Sales and marketing | 5,985 | 7,126 | 8,785 | ||||||||||
General and administrative | 5,428 | 6,267 | 6,679 | ||||||||||
Total operating expenses | 4.2 | 36,718 | 39,727 | 40,666 | |||||||||
Operating income (loss) | (23,637 | ) | (19,744 | ) | (19,525 | ) | |||||||
Financial income (expense): | |||||||||||||
Interest expense | 4.1 | (1,542 | ) | (3,734 | ) | (4,672 | ) | ||||||
Interest income | 4.1 | 26 | 48 | 60 | |||||||||
Other financial expense | 4.1 | (145 | ) | (83 | ) | — | |||||||
Convertible debt amendments | 4.1 | — | — | (322 | ) | ||||||||
Change in the fair value of convertible debt embedded derivative | 4.1 | (2,036 | ) | (1,583 | ) | — | |||||||
Foreign exchange gain (loss), net | 4.1 | 249 | 593 | (1,401 | ) | ||||||||
Profit (Loss) before income taxes | (27,085 | ) | (24,503 | ) | (25,860 | ) | |||||||
Income tax expense (benefit) | 5 | 317 | 284 | 300 | |||||||||
Profit (Loss) | $ | (27,402 | ) | $ | (24,787 | ) | $ | (26,160 | ) | ||||
Attributable to: | |||||||||||||
Shareholders of the parent | $ | (27,402 | ) | $ | (24,787 | ) | $ | (26,160 | ) | ||||
Non-controlling interests | — | — | — | ||||||||||
Basic earnings (loss) per share | 6 | $ | (0.46 | ) | $ | (0.39 | ) | $ | (0.34 | ) | |||
Diluted earnings (loss) per share | 6 | $ | (0.46 | ) | $ | (0.39 | ) | $ | (0.34 | ) | |||
Weighted average number of shares used for computing: | |||||||||||||
Basic | 59,144,905 | 63,805,442 | 77,668,404 | ||||||||||
Diluted | 59,144,905 | 63,805,442 | 77,668,404 |
The following notes form an integral part of the annual financial statements
F- 3
Sequans Communications S.A.
Consolidated Statements of Comprehensive Income (Loss)
Year ended December 31, | |||||||||||
2015 | 2016 | 2017 | |||||||||
(in thousands) | |||||||||||
Profit (Loss) for the year | $ | (27,402 | ) | $ | (24,787 | ) | $ | (26,160 | ) | ||
Other comprehensive income (loss) | |||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent years : | |||||||||||
Net gain (loss) on cash flow hedge | 78 | (91 | ) | 195 | |||||||
Exchange differences on translation of foreign operations | (150 | ) | (375 | ) | 212 | ||||||
Net other comprehensive income to be reclassified to profit or loss in subsequent years | (72 | ) | (466 | ) | 407 | ||||||
Other comprehensive income not to be reclassified to profit or loss in subsequent years : | |||||||||||
Re-measurement gains (losses) on defined benefit plans | 215 | 120 | (46 | ) | |||||||
Net other comprehensive income not to be reclassified to profit or loss in subsequent years | 215 | 120 | (46 | ) | |||||||
Total other comprehensive income (loss) | 143 | (346 | ) | 361 | |||||||
Total comprehensive income (loss) | $ | (27,259 | ) | $ | (25,133 | ) | $ | (25,799 | ) | ||
Attributable to: | |||||||||||
Shareholders of the parent | $ | (27,259 | ) | $ | (25,133 | ) | $ | (25,799 | ) | ||
Non-controlling interests | — | — | — |
The following notes form an integral part of the annual financial statements
F- 4
At December 31, | |||||||||||||
Note | 2015 | 2016 | 2017 | ||||||||||
(in thousands) | |||||||||||||
ASSETS | |||||||||||||
Non-current assets: | |||||||||||||
Property, plant and equipment | 7 | $ | 7,116 | $ | 6,659 | $ | 6,992 | ||||||
Intangible assets | 8 | 5,255 | 7,707 | 9,562 | |||||||||
Deposits and other receivables | 19 | 345 | 332 | 402 | |||||||||
Available for sale financial assets | 19 | 321 | 310 | 353 | |||||||||
Total non-current assets | 13,037 | 15,008 | 17,309 | ||||||||||
Current assets: | |||||||||||||
Inventories | 9 | 4,065 | 8,693 | 7,376 | |||||||||
Trade receivables | 10 | 16,497 | 15,285 | 20,926 | |||||||||
Prepaid expenses and other receivables | 3,170 | 3,172 | 4,214 | ||||||||||
Recoverable value added tax | 541 | 470 | 688 | ||||||||||
Research tax credit receivable | 4.4 | 2,865 | 1,902 | 3,248 | |||||||||
Deposit | 393 | 345 | 347 | ||||||||||
Cash and cash equivalents | 11 | 8,288 | 20,202 | 2,948 | |||||||||
Total current assets | 35,819 | 50,069 | 39,747 | ||||||||||
Total assets | $ | 48,856 | $ | 65,077 | $ | 57,056 | |||||||
EQUITY AND LIABILITIES | |||||||||||||
Equity: | |||||||||||||
Issued capital, euro 0.02 nominal value, 80,024,707 shares issued and outstanding at December 31, 2017 (75,030,078 and 59,166,741 at December 31, 2016 and 2015, respectively) | 12 | $ | 1,568 | $ | 1,923 | $ | 2,031 | ||||||
Share premium | 12 | 165,536 | 189,029 | 204,952 | |||||||||
Other capital reserves | 13 | 16,864 | 28,257 | 33,313 | |||||||||
Accumulated deficit | (184,766 | ) | (209,553 | ) | (235,712 | ) | |||||||
Other components of equity | (450 | ) | (796 | ) | (436 | ) | |||||||
Total equity (deficit) | (1,248 | ) | 8,860 | 4,148 | |||||||||
Non-current liabilities: | |||||||||||||
Government grant advances and loans | 15 | 5,385 | 5,144 | 5,030 | |||||||||
Convertible debt and accrued interest | 14 | 8,984 | 16,338 | 17,063 | |||||||||
Provisions | 16 | 1,396 | 1,306 | 1,532 | |||||||||
Other liabilities | 17 | 3,267 | 22 | 52 | |||||||||
Deferred revenue | 17 | 1,940 | 1,940 | 1,293 | |||||||||
Total non-current liabilities | 20,972 | 24,750 | 24,970 | ||||||||||
Current liabilities: | |||||||||||||
Trade payables | 18 | 9,498 | 18,358 | 13,023 | |||||||||
Interest-bearing financing of receivables | 14 | 6,472 | 7,712 | 7,413 | |||||||||
Government grant advances and loans | 15 | 916 | 601 | 1,592 | |||||||||
Convertible debt embedded derivative | 14 | 6,091 | — | — | |||||||||
Finance lease obligations | 14 | 12 | — | — | |||||||||
Other current liabilities | 18 | 4,604 | 4,415 | 5,138 | |||||||||
Deferred revenue | 18 | 1,222 | 335 | 740 | |||||||||
Provisions | 16 | 317 | 46 | 32 | |||||||||
Total current liabilities | 29,132 | 31,467 | 27,938 | ||||||||||
Total equity and liabilities | $ | 48,856 | $ | 65,077 | $ | 57,056 |
The following notes form an integral part of the annual financial statements
F- 5
Attributable to the shareholders of the parent | ||||||||||||||||||||||||||||||
Ordinary shares | Share premium | Other capital reserves | Accumulated deficit | Cumulative translation adjustments | Accumulated other comprehensive income (loss) | Total equity (deficit) | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
(Note 12) | (Note 12) | (Note 12) | (Note 13) | |||||||||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||
At January 1, 2015 | 59,144,741 | $ | 1,568 | $ | 165,507 | $ | 15,997 | $ | (157,363 | ) | $ | (2 | ) | $ | (592 | ) | $ | 25,115 | ||||||||||||
Loss for the year | (27,402 | ) | (27,402 | ) | ||||||||||||||||||||||||||
Re-measurement gains (losses) on defined benefit plans | 215 | 215 | ||||||||||||||||||||||||||||
Foreign currency translation | (150 | ) | (150 | ) | ||||||||||||||||||||||||||
Net loss on cash flow hedge | 78 | 78 | ||||||||||||||||||||||||||||
Total comprehensive income (loss) | (27,402 | ) | (150 | ) | 293 | (27,259 | ) | |||||||||||||||||||||||
Issue of shares in connection with the exercise of options and warrants | 22,000 | 29 | 29 | |||||||||||||||||||||||||||
Transaction costs | — | |||||||||||||||||||||||||||||
Share-based payment | 867 | 867 | ||||||||||||||||||||||||||||
At December 31, 2015 | 59,166,741 | $ | 1,568 | $ | 165,536 | $ | 16,864 | $ | (184,765 | ) | $ | (152 | ) | $ | (299 | ) | $ | (1,248 | ) | |||||||||||
Loss for the year | (24,787 | ) | (24,787 | ) | ||||||||||||||||||||||||||
Re-measurement gains (losses) on defined benefit plans | 120 | 120 | ||||||||||||||||||||||||||||
Foreign currency translation | (375 | ) | (375 | ) | ||||||||||||||||||||||||||
Net gain on cash flow hedge | (91 | ) | (91 | ) | ||||||||||||||||||||||||||
Total comprehensive income (loss) | (24,787 | ) | (375 | ) | 29 | (25,133 | ) | |||||||||||||||||||||||
Issue of shares in connection with the exercise of options and warrants | 187,901 | 4 | 275 | 279 | ||||||||||||||||||||||||||
Issue of shares in connection with the public offering of September 2016 (Note 12) | 15,675,436 | 351 | 25,514 | 25,865 | ||||||||||||||||||||||||||
Transaction costs | (2,296 | ) | (2,296 | ) | ||||||||||||||||||||||||||
Reclassification of embedded derivative of convertible debts | 10,271 | 10,271 | ||||||||||||||||||||||||||||
Share-based payment | 1,122 | 1,122 | ||||||||||||||||||||||||||||
At December 31, 2016 | 75,030,078 | $ | 1,923 | $ | 189,029 | $ | 28,257 | $ | (209,552 | ) | $ | (527 | ) | $ | (270 | ) | $ | 8,860 | ||||||||||||
Loss for the year | (26,160 | ) | (26,160 | ) | ||||||||||||||||||||||||||
Re-measurement gains (losses) on defined benefit plans | (46 | ) | (46 | ) | ||||||||||||||||||||||||||
Foreign currency translation | 212 | 212 | ||||||||||||||||||||||||||||
Net loss on cash flow hedge | 195 | 195 | ||||||||||||||||||||||||||||
Total comprehensive income (loss) | (26,160 | ) | 212 | 149 | (25,799 | ) | ||||||||||||||||||||||||
Issue of shares in connection with the exercise of options and warrants | 618,871 | 10 | 956 | 966 |
F- 6
Issue of shares in connection with the public offering of June 2017 (Note 12) | 4,312,500 | 96 | 16,291 | 16,387 | ||||||||||||||||||||||||||
Transaction costs | (1,489 | ) | (1,489 | ) | ||||||||||||||||||||||||||
Conversion of convertible debt (Note 12) | 63,258 | 2 | 165 | 167 | ||||||||||||||||||||||||||
Convertible debt amendments (Note 14.1) | 3,418 | 3,418 | ||||||||||||||||||||||||||||
Share-based payment | 1,638 | 1,638 | ||||||||||||||||||||||||||||
At December 31, 2017 | 80,024,707 | $ | 2,031 | $ | 204,952 | $ | 33,313 | $ | (235,712 | ) | $ | (315 | ) | $ | (121 | ) | $ | 4,148 |
The following notes form an integral part of the annual financial statements
F- 7
Year ended December 31, | ||||||||||||
Note | 2015 | 2016 | 2017 | |||||||||
(in thousands) | ||||||||||||
Operating activities: | ||||||||||||
Profit (Loss) before income taxes | $ | (27,085 | ) | $ | (24,503 | ) | $ | (25,860 | ) | |||
Non-cash adjustment to reconcile income (loss) before tax to net cash used in operating activities: | ||||||||||||
Amortization and impairment of property, plant and equipment | 7 | 3,408 | 3,080 | 2,760 | ||||||||
Amortization and impairment of intangible assets | 8 | 1,867 | 2,215 | 2,815 | ||||||||
Share-based payment expense | 4.3 | 867 | 1,122 | 1,638 | ||||||||
Increase (Decrease) in provisions | 152 | (240 | ) | 165 | ||||||||
Interest expense, net | 1,516 | 3,686 | 4,612 | |||||||||
Convertible debt amendments | 14.1 | — | — | 322 | ||||||||
Change in fair value of convertible debt embedded derivative | 14.1 | 2,036 | 1,583 | — | ||||||||
Other financial expenses | 145 | 83 | — | |||||||||
Foreign exchange loss (gain) | (340 | ) | (18 | ) | 561 | |||||||
Loss on disposal of property, plant and equipment | 5 | 2 | — | |||||||||
Working capital adjustments: | ||||||||||||
Decrease (Increase) in trade receivables and other receivables | (9,091 | ) | 705 | (7,084 | ) | |||||||
Decrease (Increase) in inventories | 5,134 | (4,628 | ) | 1,317 | ||||||||
Decrease (Increase) in research tax credit receivable | 578 | 963 | (1,087 | ) | ||||||||
Increase (Decrease) in trade payables and other liabilities | 2,041 | 2,354 | (5,939 | ) | ||||||||
Increase (Decrease) in deferred revenue | 2,848 | (737 | ) | (242 | ) | |||||||
Decrease in government grant advances | (170 | ) | (1,030 | ) | (2,271 | ) | ||||||
Income tax paid | (312 | ) | (226 | ) | (333 | ) | ||||||
Net cash flow used in operating activities | $ | (16,401 | ) | $ | (15,589 | ) | $ | (28,626 | ) | |||
Investing activities: | ||||||||||||
Purchase of intangible assets and property, plant and equipment | 7-8 | $ | (5,097 | ) | $ | (5,368 | ) | $ | (4,232 | ) | ||
Capitalized development expenditures | (386 | ) | (22 | ) | (2,190 | ) | ||||||
Sale (Purchase) of financial assets | 345 | 24 | (113 | ) | ||||||||
Increase (Decrease) of short-term deposit | (233 | ) | 48 | (2 | ) | |||||||
Interest received | 26 | 48 | 60 | |||||||||
Net cash flow used in investments activities | $ | (5,345 | ) | $ | (5,270 | ) | $ | (6,477 | ) | |||
Financing activities: | ||||||||||||
Public equity offering proceeds, net of transaction costs paid | $ | — | $ | 23,569 | $ | 14,898 | ||||||
Proceeds from issue of warrants and exercise of stock options/warrants, net of transaction costs | 29 | 279 | 966 | |||||||||
Proceeds (repayment of) from interest-bearing receivables financing | 14.3 | 4,339 | 1,240 | (299 | ) | |||||||
Proceeds from interest-bearing research project financing | 15.2 | — | 1,021 | 2,716 | ||||||||
Proceeds from government loans, net of transaction cost | 15.3 | 2,134 | — | — | ||||||||
Proceeds from convertible debt, net of transaction cost | 14.1 | 11,572 | 6,932 | — | ||||||||
Repayment of government loans | 15.3 | — | — | (116 | ) | |||||||
Repayment of borrowings and finance lease liabilities | (183 | ) | (12 | ) | — | |||||||
Interest paid | (181 | ) | (251 | ) | (327 | ) | ||||||
Net cash flows from financing activities | $ | 17,710 | $ | 32,778 | $ | 17,838 | ||||||
Net increase (decrease) in cash and cash equivalents | (4,036 | ) | 11,919 | (17,265 | ) | |||||||
Net foreign exchange difference | (5 | ) | (5 | ) | 11 | |||||||
Cash and cash equivalent at January 1 | 12,329 | 8,288 | 20,202 | |||||||||
Cash and cash equivalents at period end | 11 | $ | 8,288 | $ | 20,202 | $ | 2,948 |
The following notes form an integral part of the annual financial statements
F- 8
1. Corporate information
Sequans Communications S.A. (“Sequans”) is organized as a limited liability company (“société anonyme”) incorporated and domiciled in the Republic of France, with its principal place of business at 15-55 boulevard Charles de Gaulle, 92700 Colombes, France. Sequans, together with its subsidiaries (the “Company”), is a leading fabless designer, developer and supplier of 4G semiconductor solutions for wireless broadband applications. The Company’s semiconductor solutions incorporate baseband processor and radio frequency transceiver integrated circuits along with its proprietary signal processing techniques, algorithms and software stacks.
2. Summary of significant accounting and reporting policies
2.1. Basis of preparation
The Consolidated Financial Statements are presented in U.S. dollars.
These Consolidated Financial Statements for the year ended December 31, 2017 have been prepared on a going concern assumption. The Company’s internal cash forecast is built from sales forecasts by products and by customer and assumes a stable operating cost structure. Taking into account forecasted operating cash flow, government funding of research programs and proceeds from expected financing activities (from institutional or strategic investors, or from the capital markets) management believes that Company’s existing cash and cash equivalents plus cash generated from these activities will be sufficient at least for the 12 months following December 31, 2017. As disclosed in Note 23, "Events after the reporting date", the Company raised net proceeds of $20.9 million from a capital increase in January 2018. Should these net proceeds and other existing sources of financing not be sufficient to fund operating activities, the Company expects to be able to obtain additional funding through one or more possible licenses, business partnerships or other similar arrangements, equity offerings, debt financing, or a combination of the above. The Company cannot guarantee if or when any such transactions will occur or whether they will be on satisfactory terms. The Company’s failure to raise financing as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategies. If adequate funds are not available, the Company may be required to reduce its current level of expenses and investments.
Statement of compliance
The Consolidated Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standard Board (“IASB”) and whose application is mandatory for the year ended December 31, 2017. Comparative figures are presented for December 31, 2015 and 2016.
The accounting policies are consistent with those of the same period of the previous financial year, except for the changes disclosed in Note 2.2 to the Consolidated Financial Statements.
The Consolidated Financial Statements of the Company for the years ended December 31, 2015, 2016 and 2017 have been authorized for issue in accordance with a resolution of the board of directors on March 27, 2018.
Basis of consolidation
The Consolidated Financial Statements comprise the financial statements of Sequans Communications S.A., which is the ultimate parent of the group, and its subsidiaries at December 31, 2017:
Name | Country of incorporation | Year of incorporation | % equity interest | |||
Sequans Communications Ltd. | United Kingdom | 2005 | 100 | |||
Sequans Communications Inc. | United States | 2008 | 100 | |||
Sequans Communications Ltd. Pte. | Singapore | 2008 | 100 | |||
Sequans Communications Israel (2009) Ltd. | Israel | 2010 | 100 |
The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full. The subsidiaries have been fully consolidated from their date of incorporation.
F- 9
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
2.2. Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies used in 2017 are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of January 1, 2017:
• | Amendments to IAS 7: Disclosure Initiative |
The amendments to IAS 7 require companies to provide information about changes in liabilities arising from financial activities, including changes from cash flows and non-cash changes (such as foreign exchange gains or losses).
• | Amendments to IAS12: Recognition of deferred tax assets for unrealized losses |
The amendments to IAS 12 clarifies how to account for deferred tax assets related to debt instruments measured at fair value.
• | Annual improvement to IFRS (Cycle 2014 - 2016) |
This improvement relate to IFRS 12 : Disclosure of Interests in Other Entities
The adoption of these new standard and interpretations had no impact on the Company's financial statements.
Standards issued but not yet effective
Standards and interpretations issued but not yet effective up to the date of issue of the Company’s Consolidated Financial Statements are listed below. The Company intends to adopt these standards when they become effective:
• | IFRS 9 - Financial Instruments: Classification and Measurement |
In July 2014, the IASB issued IFRS 9 (Financial Instruments). Effective January 1, 2018, IFRS 9 will replace the currently applicable standards on the presentation, recognition and measurement of financial instruments (IAS 32 and IAS 39). IFRS 9 covers three key issues: classification and measurement, impairment, and hedge accounting. It also provides a new credit risk recognition model (using the expected losses approach versus the incurred losses approach), in particular regarding accounts receivable. The standard is mandatorily applicable to annual reporting periods beginning on or after January 1, 2018. The Company is currently assessing the impacts of IFRS 9.
• | IFRS 15 - Revenue from contracts with customers |
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing the impacts of IFRS 15 and intends to apply the modified retrospective application method.
• | IFRS 16 - Leases |
In January 2016, the IASB issued IFRS 16 (Leases), which aligns the accounting treatment of operating leases of lessees with that already applied to finance leases (i.e. recognition in the balance sheet of a liability for future lease payments, and of an asset for the Sequans Communications S.A. associated rights of use). Application of IFRS 16 will also require a change in the presentation of lease expenses both in the income statement (i.e. depreciation and interest expense) and in the statement of cash flows (the amount allocated to repayment of the liability will be reported as a cash outflow from financing activities, while the amount allocated to the asset will be reported as a cash outflow from investing activities). IFRS 16 is applicable to annual reporting periods beginning on or after January 1, 2019. The Company is currently assessing the impacts of IFRS 16.
• | Amendments to IFRS2: Classification and measurement of share-based payment transactions |
The amendments clarify how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the classification of
F- 10
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
the transaction from cash-settled to equity settled. These amendments will be effective for annual periods commencing on or after January 1, 2018. The Company is currently assessing the impact of these amendments.
• | Annual Improvements to IFRS (2014-2016) |
They include improvements to IAS 28 : Investments in associates and joint ventures, which will be effective from annual periods commencing on or after January 1, 2018 and are not expected to have a significant impact on the Company’s financial statements.
• | IFRIC 22 Foreign Currency Transactions and Advance Considerations |
IFRIC Interpretation 22 addresses the exchange rate to use in transactions that involve advance considerations paid or received in a foreign currency. The interpretation will be effective from annual periods commencing on or after January 1, 2018. The Company is currently assessing the impact of this interpretation.
• | IFRIC 23 Uncertainty over Income Tax Treatments |
This Interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. The interpretation will be effective from annual periods commencing on or after January 1, 2019. The Company is currently assessing the impact of this interpretation.
• | Amendments to IFRS9: Prepayments with negative compensation features |
The amendments clarify how to classify particular pre-payable financial assets and how to account financial liabilities following a modification. These amendments will be effective for annual period commencing on or after January 1, 2019. The Company is currently assessing the impact of these amendments.
• | Amendments to IAS 28: Investments in associates and joint ventures which will be effective from annual periods commencing on or after January 1, 2019 and are not expected to have a significant impact on the Company’s financial statements. |
• | Annual Improvements to IFRS (2015-2017), including amendments to IFRS 3 : Business Combinations, amendments to IAS 12 : Income Taxes, and amendments to IAS 23 : Borrowing Costs, applicable from annual periods commencing on or after January 1, 2019. The Company is currently assessing the impact of these improvements. |
2.3. Summary of significant accounting policies
Functional currencies and translation of financial statements denominated in currencies other than the U.S. dollar
The Consolidated Financial Statements are presented in U.S. dollars, which is also the functional currency of Sequans Communications S.A. The Company uses the U.S. dollar as its functional currency due to the high percentage of revenues, cost of revenue, capital expenditures and operating costs, other than those related to headcount and overhead, which are denominated in U.S. dollars. Each subsidiary determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.
As at the reporting date, the assets and liabilities of each subsidiary are translated into the presentation currency of the Company (the U.S. dollar) at the rate of exchange in effect at the Statement of Financial Position date and their Statement of Operations are translated at the weighted average exchange rate for the reporting period. The exchange differences arising on the translation are taken directly to a separate component of equity (“Cumulative translation adjustments”).
Foreign currency transactions
Foreign currency transactions are initially recognized by Sequans Communications S.A. and each of its subsidiaries at their respective functional currency rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange in effect at the reporting date. All differences are taken to the Consolidated Statement of Operations within financial income or expense. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transactions.
The table below sets forth, for the periods and dates indicated, the average and closing exchange rate for the U.S. dollar (USD) to the euro (EUR), the U.K. pound sterling (GBP), the Singapore dollar (SGD) and the New Israeli shekel (NIS):
F- 11
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
USD/EUR | USD/GBP | USD/SGD | USD/NIS | |||||||||
December 31, 2015 | ||||||||||||
Average rate | 1.1096 | 1.5285 | 0.7278 | 0.2573 | ||||||||
Closing rate | 1.0887 | 1.4834 | 0.7062 | 0.2563 | ||||||||
December 31, 2016 | ||||||||||||
Average rate | 1.1066 | 1.3555 | 0.7244 | 0.2605 | ||||||||
Closing rate | 1.0541 | 1.2312 | 0.6919 | 0.2604 | ||||||||
December 31, 2017 | ||||||||||||
Average rate | 1.1293 | 1.2885 | 0.7244 | 0.2780 | ||||||||
Closing rate | 1.1993 | 1.3518 | 0.7484 | 0.2880 |
Earnings (loss) per share
Basic earnings (loss) per share amounts are computed using the weighted average number of shares outstanding during each period.
Diluted earnings per share include the effects of dilutive options and warrants as if they had been exercised.
Revenue recognition
The Company’s total revenue consists of product revenue and other revenue.
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured and when the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue is measured at the fair value of the consideration received, excluding sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized:
Product revenue
Substantially all of the Company’s product revenue is derived from the sale of semiconductor solutions for 4G wireless broadband applications.
Revenue from the sale of products is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, whether direct end customer, end customer's manufacturing partner or distributor, and when no continuing managerial involvement to the degree usually associated with ownership nor effective control over the sale of products is retained, which usually occurs on shipment of the goods. Products are not sold with a right of return but are covered by warranty. Although the products sold have embedded software, the Company believes that software is incidental to the products it sells.
Other revenue
Other revenue consists of the sale of licenses to use the Company’s technology solutions and fees for the associated annual software maintenance and support services, as well as the sale of technical support and development services. Development services include advanced technology development services for technology partners and product development and integration services for customers, and wireless operators.
Revenue from the sale of licenses is recognized when (i) there is a legally binding arrangement with the customer, (ii) the software has been delivered (assuming no other significant obligations exist), (iii) collection of the resulting receivable is probable and (iv) the amount of fees is fixed or determinable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. If the contract for a licensing agreement includes a clause allowing for free updates if and when available and if fair value for this post-contract customer support cannot be determined at the time the contract is signed, the revenue is recognized over the life of the contract.
Revenue from the sale of software maintenance and support services is recognized over the period of the maintenance (generally one year). When the first year of maintenance is included in the software license price, an amount equal to the negotiated rate for one year of maintenance is deducted from the value of the license and recognized as revenue over the period of maintenance as described above. The difference between license and maintenance services invoiced and the amount recognized in revenue is recorded as deferred revenue.
F- 12
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Revenue from technical support and development services is generally recognized using the percentage-of-completion method when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and costs can be estimated reliably and it is probable that the economic benefits associated with the contract will flow to the Company and the stage of contract completion can be measured. In certain circumstances, when no incremental costs exist, revenue is recognized based on the achievement of contract milestones. The costs associated with these arrangements are recognized as incurred. Revenue from development contracts where no related incremental costs were identified amounted to $1,321,000 for the year ended December 31, 2017 ($3,684,000 in 2016 and $2,636,000 in 2015).
In the case of multiple arrangements, the Company evaluates each component to determine whether they represent separate units of accounting, each with its own separate earnings process, and its relative fair value.
Cost of revenue
Cost of product revenue includes all direct and indirect costs incurred with the sale of products, including shipping and handling. Cost of other revenue includes incremental costs incurred to support the obligations covered by development services contracts (mainly employees and subcontractors costs). Research and development costs associated with product development (including normal customer support which generates product improvement) are recorded in research and development expenses.
Research and development costs
Research costs are expensed as incurred. Development costs are recognized as an intangible asset if the Company can demonstrate:
• | the technical feasibility of completing the intangible asset so that it will be available for use or sale; |
• | its intention to complete the asset and use or sell it; |
• | its ability to use or sell the asset; |
• | how the asset will generate future economic benefits; |
• | the availability of adequate resources to complete the development and to use or sell the asset; and |
• | the ability to measure reliably the expenditure during development. |
The asset is tested for impairment annually.
Prior to January 1, 2015, all research and development costs were charged directly to expense in the Statement of Operations. Beginning in the year ended December 31, 2015, some development costs met the criteria for capitalization and have been recorded as intangible assets. (See Note 8 to the Consolidated Financial Statements). Beginning in 2015, certain development costs incurred at the end of the product development cycle when the criteria for capitalization are met, became material as the Company began making its product available on more operator networks which require significant testing and qualification work in order to finalize the product for sale on that network. Beginning in 2017, the Company capitalized costs related to the development of the chipsets for LTE Category M, the Monarch and Monarch 2.
Research and development costs associated with product development (including normal customer support which generates product improvements) are recorded in operating expense. In some cases, the Company has negotiated agreements with customers and partners whereby the Company provides certain development services beyond its normal practices or planned product roadmap. Amounts received from these agreements are recorded in other revenue. Incremental costs incurred by the Company as a result of the commitments in the agreements are recorded in cost of other revenue. Other research and development costs related to the projects covered by the agreements, but which would have been incurred by the Company without the existence of such agreements are recorded in research and development expense.
Government grants, loans and research tax credits
The Company operates in certain jurisdictions which offer government grants or other incentives based on the qualifying research expense incurred or to be incurred in that jurisdiction. These incentives are recognized as the qualifying research expense is incurred if there is reasonable assurance that all related conditions will be complied with and the grant will be received. When the grant relates to an expense item, it is recognized as a reduction of the related expense over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Any cash received in advance of the expenses being incurred is recorded as a liability.
F- 13
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Some long-term research projects are also financed through low-interest forgivable loans. The present value of forgivable loans is calculated based on expected future payments discounted using interest rate applied for standard loans with the same maturity. The difference between present value and amount received is accounted for as a grant.
Where loans or similar assistance provided by governments or related institutions are interest-free, the present value is calculated based on expected future payments discounted using interest rate applied for standard loans with same maturity. The difference between present value and amount received is accounted for as a grant.
The Company also benefits from research incentives in the form of tax credits which are detailed in Note 4.4 to the Consolidated Financial Statements. 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 costs, whether capitalized or expensed.
Financial income and expense
Financial income and expense include:
• | interest expense related to financial debt (financial debt consists of finance-lease liabilities, accounts receivable financing, the debt component of convertible debt and government loans, and a supplier payable with extended payment terms); |
• | other expenses paid to financial institutions for financing operations; |
• | foreign exchange gains and losses |
• | changes in fair value of financial assets and liabilities |
• | impact of convertible debt amendments. |
The Company reflects foreign exchange gains and losses related to hedges (through derivatives) of euro-based operating expenses in operating expenses.
Taxation
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.
Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except with respect to taxable temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognized for all deductible temporary differences, carry forwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forwards of unused tax credits and unused tax losses can be utilized.
Deferred tax is computed based on the temporary difference that exists between the tax and accounting basis for non-monetary items.
The carrying amount of deferred income tax assets is reviewed at the reporting date and adjusted to the extent that it is probable that sufficient future taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.
Deferred income tax relating to items recognized directly in equity is recognized in equity.
F- 14
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right of offset exists.
Value added tax
Revenue, expenses and assets are recognized net of the amount of value added tax except:
• | where the value added tax incurred on a purchase of assets or services is not recoverable from the tax authorities, in which case the value added tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and |
• | receivables and payables that are stated with the amount of value added tax included. |
Value added tax recoverable consists of value added tax paid by the Company to vendors and suppliers located in the European Union and recoverable from the tax authorities. Value added tax recoverable is collected on a quarterly basis.
Inventories
Inventories consist primarily of the cost of semiconductors, including wafer fabrication, assembly, testing and packaging; components; and modules purchased from subcontractors. Inventories are valued at the lower of cost (determined using the weighted average cost method) or net realizable value (estimated market value less estimated cost of completion and the estimated costs necessary to make the sale).
The Company writes down the carrying value of its inventories for estimated amounts related to the lower of cost or net realizable value, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value. The estimated net realizable value of the inventory is based on historical usage and assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions on a product-by-product basis. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the write-down is reversed (i.e. the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised net realizable value.
Financial assets
Receivables
Receivables are initially recognized at fair value, which in most cases approximates the nominal value as the Company does not grant payment terms beyond normal business conditions. If there is any subsequent indication that those assets may be impaired, they are reviewed for impairment. Any difference between the carrying value and the impaired value (present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the receivable’s original effective interest rate) is recorded in operating income (loss). If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed. In that case, the reversal of the impairment loss is reported in operating income (loss).
Short-term investments
Short-term investments are financial instruments with an initial maturity of greater than 90 days, but less than one year, and are reported as current financial assets.
Deposits
Deposits are reported as non-current financial assets (loans and receivables) when their initial maturity is more than twelve months.
F- 15
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Cash and cash equivalents
Cash and cash equivalents in the Consolidated Statements of Financial Position includes cash at banks, term deposits and money market funds, which correspond to highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of change in value.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment loss. Depreciation is computed using the straight-line method over the estimated useful lives of each component. The useful lives most commonly used are the following:
Machinery and equipment | 3 to 5 years | |
Building and leasehold improvements | Lesser of 6 years or the life of the lease | |
Computer equipment | 3 years | |
Furniture and office equipment | 5 years |
Impairment tests are performed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any indication exists, the Company estimates the asset’s recoverable amount, which is the higher of the fair value less cost to sell and the value in use. Where the carrying amount exceeds that recoverable amount, the asset is considered impaired and it is written down to its recoverable amount.
Depreciation expense is recorded in cost of revenue or operating expenses, based on the function of the underlying assets.
Intangible assets
Intangible assets, primarily purchased licenses for development or production technology and tools, as well as standard-related patent licenses and development costs meeting the criteria for capitalization, are stated at cost less accumulated amortization and any accumulated impairment loss. Amortization is computed using the straight-line method over the estimated useful life of each component. Acquired licenses are amortized over their contractual life or five years in the case of perpetual licenses. Capitalized development costs are generally amortized over periods ranging from 3 to 5 years, representing the expected life of the related technology.
Useful lives are reviewed on a regular basis and changes in estimates, when relevant, are accounted for on a prospective basis. The amortization expense is recorded in cost of revenue or operating expenses, based on the function of the underlying assets.
Impairment tests are performed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any indication exists, the Company estimates the asset’s recoverable amount, which is the higher of the fair value less cost to sell and the value in use. Where the carrying amount exceeds that recoverable amount, the asset is considered impaired and it is written down to its recoverable amount.
Leases
Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the interest expense and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.
Operating lease payments are recognized as an expense in the Statement of Operations on a straight line basis over the lease term.
Costs of Public Offerings
Incremental costs directly attributable to the equity transaction are recorded as a deduction from equity.
F- 16
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in operating income (loss) net of any reimbursement.
Provisions include the provision for pensions and post-employment benefits. Pension funds in favor of employees are maintained in France, the United Kingdom, Singapore, the United States and Israel, and they comply with the respective legislation in each country and are financially independent of the Company. The pension funds are generally financed by employer and employee contributions and are accounted for as defined contribution plans with the employer contributions recognized as expense as incurred. There are no actuarial liabilities in connection with these plans.
French law also requires payment of a lump sum retirement indemnity to employees based on years of service and annual compensation at retirement. Benefits do not vest prior to retirement. This defined benefit plan is self-funded by the Company. It is calculated as the present value of estimated future benefits to be paid, applying the projected unit credit method whereby each period of service is seen as giving rise to an additional unit of benefit entitlement, each unit being measured separately to build up the final obligation. Following the application of IAS 19 revised, actuarial gains and losses are recognized in equity. The actualization rate is based on iBoxx Corporates AA.
Share-based payment transactions
Employees (including senior executives and members of the board of directors) and certain service providers of the Company receive remuneration in the form of share-based payment transactions, whereby they render services as consideration for equity instruments (“equity-settled transactions”).
The cost of equity-settled transactions is measured by reference to the fair value at the date on which they are granted. The exercise price is based on closing market price on the date of grant.
The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the beneficiary becomes fully entitled to the award (the “vesting date”). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The Statement of Operations charge or credit for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.
Financial liabilities
Convertible debt
As described in Note 14.1 to the Consolidated Financial Statements, the Company issued debt with an option to convert into shares of the Company. This option component has been accounted for as an embedded derivative and recorded as a financial liability:
• | On the date of issue, the fair value of the embedded derivative is estimated based on a Black-Scholes valuation model. The debt component equals the present value of future contractual cash flows for a similar instrument with the same conditions (maturity, cash flows) excluding any option or any obligation for conversion or redemption in shares. |
• | Subsequently, the debt component is accounted for based on amortized cost, using the effective interest rate calculated at the date of issue and the embedded derivative is accounted as a financial liability, with changes in fair value recognized in the statement of operations until the date when the conversion rate is fixed. At this date, the fair value of the derivative - if not exercised - is reclassified in equity. |
Costs incurred related to the convertible debt are deducted from the liability component and from the embedded derivative, proportionally. The part related to the embedded derivative has been recognized in the Consolidated Statements of Operations in “Other financial expenses”.
F- 17
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
On October 30, 2017, the convertibles notes were amended to extend the term of the notes and reduce the conversion rate for one convertible debt agreement (see Note 14.1). The change in fair value of the conversion options before and after the amendment has been recorded in Other Capital Reserves in shareholders’ equity. The debt components on October 30, 2017 have been re-measured based on the extended term of the notes using the effective interest rate calculated at the date of issue of each convertible note. The impact of the term extension and reduction of the conversion rate has been recorded in the Consolidated Statements of Operations in "Convertible debt amendments".
Short-term debt secured by accounts receivables
As described in Note 14.3 to the Consolidated Financial Statements, the Company has a factoring agreement with a French financial institution. The Company transfers to the finance company all invoices issued to qualifying customers, and the customers are instructed to settle the invoices directly with the finance company. Consequently, the Company retains all receivables on its Consolidated Statements of Financial Position until they are paid and any amounts drawn on the line of credit are reflects in short-term debt. The Company pays a commission on the face value of the accounts receivable submitted, which is recorded in General and Administration expense, and pays interest on any draw-down of the resulting line of credit.
Derivative financial instruments and hedge accounting
The Company uses financial instruments, including derivatives such as foreign currency forward and options contracts, to reduce the foreign exchange risk on cash flows from firm and highly probable commitments denominated in euros. The effective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income (loss) in the cash flow hedge reserve, while any ineffective portion is immediately accounted for in financial results in the Consolidated Statement of Operations. Amounts recognized as other comprehensive income (loss) are transferred to the Consolidated Statement of Operations when the hedged transaction affects profit or loss. If the forecasted transaction is no longer expected to occur, the cumulative gain or loss previously recognized in equity is transferred to the Consolidated Statement of Operations.
All derivative financial instruments are recorded at fair value. Changes in fair value are recorded in current earnings or other comprehensive income (loss), depending on whether the derivative is designated as a hedge, its effectiveness as a hedge, and the type of hedge transaction. Any change in the fair value of the derivatives deemed ineffective as a hedge is immediately recognized in earnings.
Commitments
Commitments comprise primarily future operating lease payments and purchase commitments with its third-party manufacturers for future deliveries of equipment and components, which are described in Note 20 to the Consolidated Financial Statements.
2.4. Significant accounting judgments, estimates and assumptions
In the process of applying the Company’s accounting policies, management must make judgments and estimates involving assumptions. These judgments and estimates can have a significant effect on the amounts recognized in the financial statements and the Company reviews them on an ongoing basis taking into consideration past experience and other relevant factors. The evolution of the judgments and assumptions underlying estimates could cause a material adjustment to the carrying amounts of assets and liabilities as recognized in the financial statements. The most significant management judgments and assumptions in the preparation of these financial statements are:
Revenue recognition
The Company’s policy for revenue recognition, in instances where multiple deliverables are sold contemporaneously to the same counterparty, is in accordance with paragraph 13 of IAS 18 Revenue. When the Company enters into contracts for the sale of products, licenses, maintenance and support services and development services, the Company evaluates all deliverables in the arrangement to determine whether they represent separate units of accounting, each with its own separate earnings process, and its relative fair value. When the Company enters into contracts for development services for which revenues are recognized as the project advances, the Company evaluates the percentage of completion of the project. Such determinations (identification of deliverables, fair value evaluation of each component and percentage of completion evaluation for development contracts) require judgment and are based on an analysis of the facts and circumstances surrounding the transactions.
F- 18
Inventories
As disclosed in Note 2.3 to the Consolidated Financial Statements, the Company writes down the carrying value of its inventory to the lower of cost or net realizable value. The estimated net realizable value of the inventory is based on historical usage and assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions on a product-by-product basis. Actual demand may differ from the forecast established by the Company, which may materially impact recorded inventory values and cost of revenue.
Share-based compensation
As disclosed in Note 13 to the Consolidated Financial Statements, the Company has various share-based compensation plans for employees and non-employees that may be affected, as to the expense recorded in the Consolidated Statements of Operations, by changes in valuation assumptions. 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, the risk-free interest rate and the expected dividend payout rate. The fair value of the Company’s shares underlying stock option grants equals to the closing price on the New York Stock Exchange on the date of grant.
Fair value of financial instruments
Fair value corresponds to the quoted price for listed financial assets and liabilities. Where no active market exists, the Company establishes fair value by using a valuation technique determined to be the most appropriate in the circumstances, for example:
• | available-for-sale assets: comparable transactions, multiples for comparable transactions, discounted present value of future cash flows; |
• | loans and receivables, financial assets at fair value through profit and loss: net book value is deemed to be approximately equivalent to fair value because of their relatively short holding period; |
• | trade payables: book value generally is deemed to be equivalent to fair value because of their relatively short holding period. Trade payables with extended payment terms are discounted to present value; |
• | convertible debt and embedded derivative: the Company’s convertible debt has optional redemption periods/dates occurring before their contractual maturity, as described in Note 14.1 to the Company’s Consolidated Financial Statements. The holder of the convertible debt has the right to request conversion at any time from their issue. Specifically and as described in Note 14.1 to the Consolidated Financial Statements, the option component of the convertible debt has been recorded as an embedded 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 the Company at different dates and market yields applicable to the Company’s straight debt (without the conversion option). The assumptions used in calculating the value of the conversion represent the Company’s best estimates based on management’s judgment and subjective future expectations, and |
• | Other derivatives: fair value based on mark-to-market value. |
3. Segment information
The Company has one operating segment, which is the design and marketing of semiconductor components for 4G broadband wireless systems. All information required to be disclosed under IFRS 8 Operating Segments is shown in the Consolidated Financial Statements and these associated Notes.
Sales to external customers disclosed below are based on the geographical location of the customers. The following table sets forth the Company’s total revenue by region for the periods indicated. The Company categorizes its total revenue geographically based on the location to which it invoices.
F- 19
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Europe, Middle East, Africa | Americas | Asia | Total | |||||||||
(in thousands) | ||||||||||||
Year ended December 31, 2015 | ||||||||||||
Total revenue | ||||||||||||
Sales to external customers | $ | 3,635 | $ | 3,954 | $ | 24,943 | $ | 32,532 | ||||
Year ended December 31, 2016 | ||||||||||||
Total revenue | ||||||||||||
Sales to external customers | $ | 5,593 | $ | 6,669 | $ | 33,317 | $ | 45,579 | ||||
Year ended December 31, 2017 | ||||||||||||
Total revenue | ||||||||||||
Sales to external customers | $ | 5,641 | $ | 10,045 | $ | 32,577 | $ | 48,263 |
The substantial majority of the Company’s non-current assets are held by the parent company, Sequans Communications S.A. and located in France. See Note 19.3 to these Consolidated Financial Statements for information about major customers.
4. Other revenues and expenses
4.1. Financial income and expenses
Financial income:
Year ended December 31, | |||||||||||
2015 | 2016 | 2017 | |||||||||
(in thousands) | |||||||||||
Income from short-term investments and term deposits and other finance revenue | $ | 26 | $ | 48 | $ | 60 | |||||
Foreign exchange gain | 1,769 | 2,069 | 2,027 | ||||||||
Total financial income | $ | 1,795 | $ | 2,117 | $ | 2,087 |
Financial expenses:
Year ended December 31, | |||||||||||
2015 | 2016 | 2017 | |||||||||
(in thousands) | |||||||||||
Interests on loans and finance leases | $ | 1,401 | $ | 3,212 | $ | 4,153 | |||||
Interests on supplier payable with extended payment terms | — | 411 | 213 | ||||||||
Other bank fees and financial charges | 141 | 111 | 306 | ||||||||
Other financial expenses | 145 | 83 | — | ||||||||
Convertible debt amendments | — | — | 322 | ||||||||
Change in the fair value of convertible debt embedded derivative | 2,036 | 1,583 | — | ||||||||
Foreign exchange loss | 1,520 | 1,476 | 3,428 | ||||||||
Total financial expenses | $ | 5,243 | $ | 6,876 | $ | 8,422 |
For the year ended December 31, 2017, interest on loans and finance leases included $4,094,000 related to convertible debts issued in 2016 and 2015 and government loans granted in 2015 ($3,039,000 and $1,350,000 for the year ended December 31, 2016 and 2015, respectively). (See Note 14.1 to the Consolidated Financial Statements).
The net foreign exchange loss of $1,401,000 for the year ended December 31, 2017 (2016: net foreign exchange gain of $593,000; 2015: net foreign exchange gain $249,000) arises primarily from euro-based monetary liabilities.
For the year ended December 31, 2017, net expense of $322,000 was recognized related to the convertible debt amendments (see Note 14.1 to the Consolidated Financial Statements). For the years ended December 31, 2016 and 2015, expenses of $1,583,000 and $2,036,000, respectively, were recognized, related to the change in fair value of the convertible debt embedded
F- 20
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
derivative. (See Note 14.1 to the Consolidated Financial Statements). Other financial expenses of $83,000 and $145,000 for the years ended December 31, 2016 and 2015, respectively, correspond to costs related to the embedded derivative.
4.2. Cost of revenue and operating expenses
The tables below present the cost of revenue and operating expenses by nature of expense :
Year ended December 31, | ||||||||||||||
Note | 2015 | 2016 | 2017 | |||||||||||
(in thousands) | ||||||||||||||
Included in cost of revenue: | ||||||||||||||
Cost of components | $ | 15,343 | $ | 20,277 | $ | 22,137 | ||||||||
Depreciation and impairment | 7 | 905 | 1,270 | 1,037 | ||||||||||
Amortization of intangible assets | 8 | — | 157 | 157 | ||||||||||
Wages and benefits | 1,571 | 2,374 | 2,233 | |||||||||||
Share-based payment expense | 13 | 17 | 11 | 7 | ||||||||||
Assembly services, royalties and other | 1,615 | 1,507 | 1,551 | |||||||||||
$ | 19,451 | $ | 25,596 | $ | 27,122 |
Year ended December 31, | ||||||||||||||
Note | 2015 | 2016 | 2017 | |||||||||||
(in thousands) | ||||||||||||||
Included in operating expenses (between gross profit and operating result): | ||||||||||||||
Depreciation and impairment | 7 | $ | 2,472 | $ | 1,811 | $ | 1,723 | |||||||
Amortization of intangible assets | 8 | 1,897 | 2,057 | 2,658 | ||||||||||
Wages and benefits | 20,436 | 22,615 | 26,044 | |||||||||||
Share-based payment expense | 13 | 850 | 1,111 | 1,631 | ||||||||||
Foreign exchange gains and losses related to hedges of euro | 296 | 12 | 99 | |||||||||||
Other, net | 10,767 | 12,121 | 8,511 | |||||||||||
$ | 36,718 | $ | 39,727 | $ | 40,666 |
4.3. Employee benefits expense
Year ended December 31, | ||||||||||||||
Note | 2015 | 2016 | 2017 | |||||||||||
(in thousands) | ||||||||||||||
Wages and salaries | $ | 16,555 | $ | 18,996 | $ | 21,535 | ||||||||
Social security costs and other payroll taxes | 5,219 | 5,805 | 6,584 | |||||||||||
Other benefits | 93 | 100 | 58 | |||||||||||
Pension costs | 140 | 88 | 100 | |||||||||||
Share-based payment expenses | 13 | 867 | 1,122 | 1,638 | ||||||||||
Total employee benefits expense | $ | 22,874 | $ | 26,111 | $ | 29,915 |
The amount recognized as an expense for defined contributions plans amounts to $1,230,000 for the year ended December 31, 2017 ($957,000 and $1,077,000 for the years ended December 31, 2015 and 2016, respectively).
F- 21
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
4.4. Research and development expense and tax credit receivable
The research tax credit in France is deducted from corporate income taxes due; if taxes due are not sufficient to cover the full amount of the credit, the balance is received in cash three years later (one year later if the Company is below certain size criteria). Total research tax credit receivable as of December 31, 2017 is $3,056,000, relating to tax credits receivables for 2017, which are expected to be recovered in 2018 in cash.
The Company also has research tax credits available in the United Kingdom. In May 2015, the United Kingdom tax authorities made inquiries regarding the calculation method used in 2014 and discussions with the authorities were ongoing at December 31, 2015. As described in Note 16 to the Consolidated Financial Statements, the Company had decided to record a provision for risk related to the 2014 tax credit and had opted to calculate the 2015 tax credit using a less favorable regime pending outcome of the inquiry. In 2016, the audit was concluded and the final assessment was not significantly different from the provision.
In the years ended December 31, 2015 and 2016 the costs capitalized related mainly to operator certification. In the year ended December 31, 2017, the Company capitalized costs related to the development of the chipsets for LTE Category M, the Monarch and Monarch 2.
The reduction of research and development expense from government grants, research tax credit and development costs capitalized was as follows:
Year ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Research and development costs | $ | 29,528 | $ | 30,022 | $ | 33,318 | ||||||
Research tax credit | (2,658 | ) | (1,962 | ) | (3,345 | ) | ||||||
Government and other grants | (1,179 | ) | (1,704 | ) | (3,072 | ) | ||||||
Development costs capitalized (*) | (386 | ) | (22 | ) | (1,931 | ) | ||||||
Amortization of capitalized development costs | — | — | 232 | |||||||||
Total research and development expense | $ | 25,305 | $ | 26,334 | $ | 25,202 |
(*) Net of Research tax credit for $259,000 for the year ended December 31, 2017.
5. Income tax
The major components of income tax expense are:
Year ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Consolidated Statement of Operations | ||||||||||||
Current income tax | $ | 311 | $ | 272 | $ | 273 | ||||||
Deferred income tax | 6 | 12 | 27 | |||||||||
Income tax expense reported in the Consolidated Statement of Operations | $ | 317 | $ | 284 | $ | 300 |
A reconciliation of income taxes computed at the French statutory rate (34.43% from the year ended December 31, 2015, 2016 and 2017) to the income tax expense (benefit) is as follows:
Year ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Profit (loss) before income taxes | $ | (27,085 | ) | $ | (24,503 | ) | $ | (25,860 | ) | |||
At France’s statutory income tax rate of 34.43% | (9,325 | ) | (8,436 | ) | (8,904 | ) | ||||||
Non-deductible share-based payment expense | 299 | 386 | 564 | |||||||||
Tax credits | (915 | ) | (676 | ) | (1,152 | ) | ||||||
Unrecognized benefit of tax loss carryforwards and permanent differences | 10,258 | 9,010 | 9,792 | |||||||||
Income tax expense reported in the Consolidated Statement of Operations | $ | 317 | $ | 284 | $ | 300 |
F- 22
As of December 31, 2017 the Company had accumulated tax losses which arose in France of $244,918,000 that are available for offset against future taxable profits of Sequans Communications S.A within a limit of one million euro per year, plus 50% of the profit exceeding this limit. Remaining unapplied losses would continue to be carried forward indefinitely.
Deferred tax assets were recognized in 2015, 2016 and 2017 only to the extent that deferred tax liabilities existed in the same jurisdiction.
6. Earnings (loss) per share
Basic earnings (loss) per share amounts are calculated by dividing net income (loss) for the year attributable to all shareholders of the Company by the weighted average number of all shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net earnings attributable to equity holders of the Company by the weighted average number of shares outstanding during the year plus the weighted average number of shares that would be issued on the exercise of all the dilutive stock options and warrants, and upon vesting of restricted stock awards as well as conversion of convertible debt. Dilution is defined as a reduction of earnings per share or an increase of loss per share. As the exercise of all outstanding stock options and warrants as well as vesting as restricted stock awards and conversion of convertible debt, would decrease loss per share, they are considered to be anti-dilutive and excluded from the calculation of loss per share.
The following reflects the income and share data used in the basic and diluted earnings (loss) per share computations:
Year ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands, except share and per share data) | ||||||||||||
Profit (Loss) | $ | (27,402 | ) | $ | (24,787 | ) | $ | (26,160 | ) | |||
Weighted average number of shares outstanding for basic EPS | 59,144,905 | 63,805,442 | 77,668,404 | |||||||||
Net effect of dilutive stock options | — | — | — | |||||||||
Net effect of dilutive warrants | — | — | — | |||||||||
Net effect of vesting of restricted stock | — | — | — | |||||||||
Net effect of conversion of convertible notes | — | — | — | |||||||||
Weighted average number of shares outstanding for diluted EPS | 59,144,905 | 63,805,442 | 77,668,404 | |||||||||
Basic earnings (loss) per share | $ | (0.46 | ) | $ | (0.39 | ) | $ | (0.34 | ) | |||
Diluted earnings (loss) per share | $ | (0.46 | ) | $ | (0.39 | ) | $ | (0.34 | ) |
F- 23
7. Property, plant and equipment
Property, plant and equipment include:
Leasehold improvements | Plant and equipment | IT and office equipment | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Cost: | ||||||||||||||||
At January 1, 2015 | $ | 1,313 | $ | 23,522 | $ | 4,300 | $ | 29,135 | ||||||||
Additions | — | 1,713 | 85 | 1,798 | ||||||||||||
Disposals | — | (4 | ) | (1 | ) | (5 | ) | |||||||||
Exchange difference | (14 | ) | (64 | ) | (19 | ) | (97 | ) | ||||||||
At December 31, 2015 | 1,299 | 25,167 | 4,365 | 30,831 | ||||||||||||
Additions | 34 | 2,549 | 78 | 2,661 | ||||||||||||
Disposals | — | (345 | ) | (643 | ) | (988 | ) | |||||||||
Exchange difference | (30 | ) | (221 | ) | (51 | ) | (302 | ) | ||||||||
At December 31, 2016 | 1,303 | 27,150 | 3,749 | 32,202 | ||||||||||||
Additions | 9 | 2,979 | 58 | 3,046 | ||||||||||||
Disposals | (87 | ) | (4,327 | ) | (81 | ) | (4,495 | ) | ||||||||
Exchange difference | 17 | 111 | 35 | 163 | ||||||||||||
At December 31, 2017 | $ | 1,242 | $ | 25,913 | $ | 3,761 | $ | 30,916 | ||||||||
Depreciation and impairment: | ||||||||||||||||
At January 1, 2015 | 375 | 16,103 | 3,914 | 20,392 | ||||||||||||
Depreciation charge for the year | 208 | 2,904 | 296 | 3,408 | ||||||||||||
Disposals | — | (1 | ) | (1 | ) | (2 | ) | |||||||||
Exchange difference | (5 | ) | (40 | ) | (38 | ) | (83 | ) | ||||||||
At December 31, 2015 | 578 | 18,966 | 4,171 | 23,715 | ||||||||||||
Depreciation charge for the year | 214 | 2,678 | 189 | 3,081 | ||||||||||||
Disposals | — | (346 | ) | (641 | ) | (987 | ) | |||||||||
Exchange difference | (9 | ) | (140 | ) | (117 | ) | (266 | ) | ||||||||
At December 31, 2016 | 783 | 21,158 | 3,602 | 25,543 | ||||||||||||
Depreciation charge for the year | 226 | 2,405 | 129 | 2,760 | ||||||||||||
Disposals | (87 | ) | (4,327 | ) | (81 | ) | (4,495 | ) | ||||||||
Reclassification | 275 | 326 | (601 | ) | — | |||||||||||
Exchange difference | 16 | 60 | 40 | 116 | ||||||||||||
At December 31, 2017 | $ | 1,213 | $ | 19,622 | $ | 3,089 | $ | 23,924 | ||||||||
At January 1, 2015 | $ | 938 | $ | 7,419 | $ | 386 | $ | 8,743 | ||||||||
At December 31, 2015 | 721 | 6,201 | 194 | 7,116 | ||||||||||||
At December 31, 2016 | 520 | 5,992 | 147 | 6,659 | ||||||||||||
At December 31, 2017 | $ | 29 | $ | 6,291 | $ | 672 | $ | 6,992 |
The cost of equipment purchased under capital leases included in tangible assets totaled $346,000 at December 31, 2015. Accumulated amortization of this equipment totaled $337,000 at December 31, 2015. There was no equipment purchased under capital leases at December 31, 2016 and 2017.
F- 24
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
8. Intangible assets
Intangible assets include:
Licenses and other intangible assets | |||
(in thousands) | |||
Cost: | |||
At January 1, 2015 | $ | 13,272 | |
Additions | 3,686 | ||
Disposals | — | ||
Exchange difference | (12 | ) | |
At December 31, 2015 | 16,946 | ||
Additions | 4,836 | ||
Disposals | (3,620 | ) | |
Exchange difference | (47 | ) | |
At December 31, 2016 | 18,115 | ||
Additions | 4,641 | ||
Disposals | (64 | ) | |
Exchange difference | 23 | ||
At December 31, 2017 | $ | 22,715 | |
Depreciation and impairment: | |||
At January 1, 2015 | 9,832 | ||
Amortization | 1,867 | ||
Disposals | — | ||
Exchange difference | (8 | ) | |
At December 31, 2015 | 11,691 | ||
Amortization | 2,215 | ||
Disposals | (3,468 | ) | |
Exchange difference | (30 | ) | |
At December 31, 2016 | 10,408 | ||
Amortization | 2,815 | ||
Disposals | (64 | ) | |
Exchange difference | (6 | ) | |
At December 31, 2017 | $ | 13,153 | |
Net book value: | |||
At January 1, 2015 | $ | 3,440 | |
At December 31, 2015 | 5,255 | ||
At December 31, 2016 | 7,707 | ||
At December 31, 2017 | $ | 9,562 |
Prior January 1, 2015, the only intangible assets recorded in the Consolidated Statements of Financial Position were acquired licenses for technology used primarily in the product development process, as no development costs had been capitalized. For the years ended December 31, 2015, 2016 and 2017, the Company identified certain external development costs that met the criteria for capitalization (see note 4.4), in addition to the acquisition of technology licenses.
F- 25
9. Inventories
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Components | $ | 1,486 | $ | 4,686 | $ | 2,964 | ||||||
Finished goods (at lower of cost or net realizable value) | 5,519 | 6,975 | 5,035 | |||||||||
Total inventories at cost | $ | 7,005 | $ | 11,661 | $ | 7,999 | ||||||
Depreciation of components (at cost) | $ | 268 | $ | 277 | $ | 30 | ||||||
Depreciation of finished goods | 2,672 | 2,691 | 593 | |||||||||
Total depreciation | $ | 2,940 | $ | 2,968 | $ | 623 | ||||||
Components, net | $ | 1,218 | $ | 4,409 | $ | 2,934 | ||||||
Finished goods, net | 2,847 | 4,284 | 4,442 | |||||||||
Total net inventories | $ | 4,065 | $ | 8,693 | $ | 7,376 |
In the year ended December 31, 2015, the Company decided to depreciate its remaining WiMAX finished goods inventory as the previously anticipated demand from identified customers and projects was canceled, reduced or delayed. This resulted in a provision of $760,000 included in the Consolidated Statements of Operations in “Cost of product revenue.”
In the year ended December 31, 2016, there was no significant change in the provision on components and finished goods.
In the year ended December 31, 2017, all the WiMAX inventory, fully depreciated in previous years, was physically scrapped, resulting in a provision reversal of $2,755,000. The Company also depreciated the value of inventory for one LTE product for which units on hand were in excess of the units needed to serve the expected demand for identified customers and projects. This resulted in a provision of $199,000. The Company further depreciated $265,000 in 2017 related to goods damaged during production over the course of the year, and is expected to be recovered from a manufacturing supplier and has been recorded in the Consolidated Statement of Financial Position as Prepaid Expenses and Other Receivables.
10. Trade receivables
Trade receivables are non-interest bearing and are generally on 30-90 day payment terms.
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Trade receivables | $ | 16,345 | $ | 14,427 | $ | 18,754 | ||||||
Unbilled revenue | 740 | 1,624 | 3,467 | |||||||||
Unissued credit notes | — | (138 | ) | (485 | ) | |||||||
Provisions on trade receivables | (588 | ) | (628 | ) | (810 | ) | ||||||
Net trade receivables | $ | 16,497 | $ | 15,285 | $ | 20,926 |
The movements in the provision for impairment of receivables were as follows:
December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
At January 1, | $ | 1,965 | $ | 588 | $ | 628 | ||||||
Charge for the year | 15 | 40 | 182 | |||||||||
Utilized amounts | (1,392 | ) | — | — | ||||||||
At year end | $ | 588 | $ | 628 | $ | 810 |
F- 26
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
As at year end, the aging analysis of trade receivables that were not impaired is as follows:
Total | Neither past due nor Impaired | Past due but not impaired | ||||||||||||||||||||||
<30 days | 30-60 days | 60-120 days | >120 days | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
At December 31, 2015 | $ | 16,497 | $ | 12,589 | $ | 3,520 | $ | 138 | $ | 250 | $ | — | ||||||||||||
At December 31, 2016 | $ | 15,285 | $ | 12,995 | $ | 412 | $ | 374 | $ | 1,494 | $ | 10 | ||||||||||||
At December 31, 2017 | $ | 20,926 | $ | 12,746 | $ | 4,771 | $ | 1,036 | $ | 1,673 | $ | 700 |
11. Cash and cash equivalents
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Cash at banks | $ | 2,408 | $ | 8,765 | $ | 2,039 | ||||||
Cash equivalents | 5,880 | 11,437 | 909 | |||||||||
Cash and cash equivalents | $ | 8,288 | $ | 20,202 | $ | 2,948 |
Cash at banks earns no interest. Cash equivalents in money market funds are invested for short-term periods depending on the immediate cash requirements of the Company, and earn interest at market rates for short-term investments. The fair value of cash and cash equivalents is equal to book value. Most of the cash and cash equivalents is held in U.S. dollar and euros as follows:
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
U.S. dollar denominated accounts | $ | 7,352 | $ | 19,122 | $ | 1,343 | ||||||
Euro denominated accounts | 826 | 949 | 1,503 | |||||||||
GBP denominated accounts | 15 | 23 | 30 | |||||||||
SGP denominated accounts | 31 | 53 | 16 | |||||||||
NIS denominated accounts | 25 | 36 | 11 | |||||||||
RMB denominated accounts | 18 | 2 | 21 | |||||||||
Other currencies denominated accounts | 21 | 17 | 24 | |||||||||
Cash and cash equivalents | $ | 8,288 | $ | 20,202 | $ | 2,948 |
12. Issued capital and reserves
The share capital of Sequans Communications S.A. is denominated in euros, as required by law in France. Any distributions to shareholders are denominated in euros. Amounts of capital and reserves presented in the Consolidated Statements of Financial Position in U.S. dollars have been translated using historical exchange rates.
Authorized capital, in number of shares
Authorized capital includes all shares issued as well as all potential shares which may be issued upon exercise of stock options, founders warrants, other warrants and restricted share awards, or which the shareholders have otherwise authorized for specific capital increases. At December 31, 2017, authorized capital was 139,359,831 ordinary shares with a nominal of 0.02 each (93,277,508 and 98,462,155 ordinary shares at December 31, 2015 and 2016, respectively).
There is one category of authorized shares: ordinary shares.
F- 27
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Shares issued and fully paid
At December 31, | |||||||||||||||||||||
2015 | 2016 | 2017 | |||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||
(in thousands, except for share data) | |||||||||||||||||||||
Ordinary shares | 59,166,741 | € | 1,183 | 75,030,078 | € | 1,501 | 80,024,707 | € | 1,597 | ||||||||||||
Converted to U.S. dollars at historical exchange rates | $ | 1,568 | $ | 1,923 | $ | 2,031 |
Other capital reserves
Other capital reserves include the accumulated share-based payment expense as of period end, the counterpart of which is in retained earnings (deficit) as the expense is reflected in profit and loss, as well as the fair value of the convertible debt embedded derivatives at the time of conversion rate was fixed in 2016, and the change in fair value of the conversion options at resulting from the 2017 amendments.
Dividend rights
Dividends may be distributed from the statutory retained earnings and additional paid-in capital, subject to the requirements of French law and the by-laws of Sequans Communications S.A. There were no distributable retained earnings at December 31, 2015, 2016 or 2017. Dividend distributions by the Company, if any, will be made in euros.
Capital transactions
On May 9, 2017, a holder of convertible notes issued in 2016 with a principal value of $160,000 converted the debt, plus accrued interest of $11,594 into a total of 63,258 ordinary shares. $1,380 was recorded in share capital in the Consolidated Statement of Financial Position and $165,114 in share premium.
On June 16, 2017, the Company increased its capital in connection with a public offering by issuing 4,312,500 ordinary shares (including 562,500 shares from the underwriters' over-allotment option) at $3.80 per share. The total offering amounted to $16,387,500. Accordingly, issued capital in the Consolidated Statement of Financial Position was increased by $96,246 recorded in share capital and $16,291,254 in share premium. Costs directly attributable to the equity transaction amounting to approximately $1.5 million were deducted from the share premium.
On September 16, 2016, the Company increased its capital in connection with a public offering by issuing 15,151,520 ordinary shares at $1.65 per share. On October 7, 2016, the underwriters purchased an additional 523,916 ordinary shares at the public offering price. The total offering amounted to $25,864,486. Accordingly, issued capital in the Consolidated Statement of Financial Position was increased by $350,456 recorded in share capital and $25,514,030 in share premium. Costs directly attributable to the equity transaction amounting to approximately $2.3 million were deducted from the share premium.
In the years ended December 31, 2015, 2016 and 2017, ordinary shares were issued upon exercise of options and warrants as described in Note 13 to the Consolidated Financial Statements.
13. Share-based payment plans
The expense recognized for employee and other services received during the year ended December 31, 2017 and arising from equity-settled share-based payment transactions was $1,638,000 (2015: $867,000; 2016: $1,122,000). Of this total, $24,000 in 2017 (2015: $13,000; 2016: $14,000), related to warrants plans for consultants considered equivalent to employees.
The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during the years ended December 31, 2015, 2016 or 2017.
General employee stock option, founders warrant plans and restricted shares awards
All employees of the French parent company and its subsidiaries are entitled to a grant of stock options or restricted shares awards. Founders warrants were granted to residents of France prior to the Company’s IPO. Founders warrants are a specific
F- 28
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
type of option available to qualifying young companies in France and had more favorable tax treatment for both the employee and the employer compared to stock options. Otherwise, founders warrants function in the same manner as stock options.
In general, vesting of the founders warrants and stock options occurs over four years, with 25% vesting after the first anniversary of grant and the remaining 75% vesting monthly over the remaining 36 months. Restricted shares awards (RSA) vest over four years, with either 25% vesting after the 1-year anniversary of the grant and the remaining 75% of the grant vesting quarterly over the remaining 3 years, or with 50% vesting after the 2-year anniversary of the grant and the remaining 50% vesting quarterly over the remaining 2 years. From time to time, vesting of founders warrants, stock options and restricted shares may be linked to employee performance with different vesting periods. Restricted shares may be sold only beginning two years after the date of grant.
All expenses related to these plans have been recorded in the Consolidated Statement of Operations in the same line items as the related employees’ cash-based compensation.
Warrant plans for certain consultants considered equivalent to employees
The Company awards warrants to a limited number of consultants who have long-term relationships with the Company and who are considered equivalent to employees. Vesting may be either on a monthly basis over a two-year, three-year or four-year period, or may be immediate, depending on the nature of the service contract. All expenses related to these plans have been recorded in the Consolidated Statements of Operations in the same line items as the related service provider’s cash-based compensation.
Founders warrants, stock options, warrants and restricted share awards give the right to acquire ordinary shares. Following completion of the initial public offering of the Company’s shares, the exercise price for options and warrants is based on the closing market price on the date of grant. There is no exercise price for restricted share awards; the beneficiary receives title to the underlying ordinary shares with no cash payment at the end of the vesting period. In general, the contractual life of the founders warrants, stock options and warrants is ten years. There are no cash settlement alternatives and the Company has not developed a practice of cash settlement.
Movements in the periods presented
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, founders warrants, stock options and warrants during the period:
December 31, | |||||||||||||||||||||
2015 | 2016 | 2017 | |||||||||||||||||||
Number | WAEP | Number | WAEP | Number | WAEP | ||||||||||||||||
Outstanding at January 1, | 6,455,048 | $ | 3.93 | 7,428,931 | $ | 3.58 | 7,177,500 | $ | 3.55 | ||||||||||||
Granted during the year | 1,321,850 | $ | 1.74 | 643,350 | $ | 2.07 | 230,000 | $ | 3.39 | ||||||||||||
Forfeited during the year | (325,967 | ) | $ | 3.01 | (317,880 | ) | $ | 2.97 | (336,365 | ) | $ | 4.75 | |||||||||
Exercised during the year(1) | (22,000 | ) | $ | 1.70 | (187,901 | ) | $ | 1.53 | (431,790 | ) | $ | 2.28 | |||||||||
Expired during the year | — | (389,000 | ) | $ | 3.12 | (441,497 | ) | $ | 3.25 | ||||||||||||
Outstanding at period end | 7,428,931 | $ | 3.58 | 7,177,500 | $ | 3.55 | 6,197,848 | $ | 3.59 | ||||||||||||
Of which, warrants for consultants equivalent to employees | 369,798 | $ | 3.38 | 404,798 | $ | 3.23 | 151,500 | $ | 3.29 | ||||||||||||
Exercisable at period end | 4,691,741 | $ | 4.69 | 5,049,015 | $ | 4.28 | 4,900,052 | $ | 3.90 | ||||||||||||
Of which, warrants for consultants equivalent to employees | 360,798 | $ | 3.44 | 360,215 | $ | 3.41 | 131,917 | $ | 3.51 |
________________________
(1) | The weighted average share estimated fair value at the dates of exercise of these options was $3.49 in 2017, $2.21 in 2016 and $1.73 in 2015. |
F- 29
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
The following table illustrates the number of, and movements in, restricted shares awards (RSA) during the period:
December 31, | |||||||||
2015 | 2016 | 2017 | |||||||
Outstanding at January 1, | — | — | 634,720 | ||||||
Granted during the year | — | 634,720 | 1,002,650 | ||||||
Forfeited during the year | — | — | (15,200 | ) | |||||
Vested during the year | — | — | (155,004 | ) | |||||
Outstanding at period end | — | 634,720 | 1,467,166 |
Prior to the initial public offering in April 2011, exercise prices were denominated in euros. Since the IPO, exercise prices are denominated in U.S. dollars. Euro-denominated exercise prices have been converted to U.S. dollars at the historical exchange rate for purposes of presentation in this table.
The weighted average remaining contractual life of founders warrants, stock options and warrants outstanding as at December 31, 2017 was 6.0 years (2016: 6.7 years; 2015: 6.3 years).
The range of exercise prices, with euro-denominated exercise prices converted to U.S. dollars at the year-end exchange rate, for founders warrants, stock options, and warrants outstanding at December 31, 2017, 2016 and 2015 was $1.20—$8.50.
The weighted average fair value of founders warrants, stock options and warrants granted during the year ended December 31, 2017 was €1.52 (2016: €0.97 ; 2015: €0.84). The weighted average fair value of the restricted shares awards granted during the year ended December 31, 2017 was €2.15 (2016: €1.65; 2015: no grant)The fair value is measured at the grant date. The following table lists the inputs to the models used for determining the value of the grants made for the years ended December 31, 2015, 2016 and 2017:
December 31, | |||||||||
2015 | 2016 | 2017 | |||||||
Dividend yield (%) | — | — | — | ||||||
Expected volatility (%) | 68 - 70 | 63 - 69 | 63 - 64 | ||||||
Risk–free interest rate (%) | 0.34 - 0.87 | 0.00 - 0.47 | 0.43 | ||||||
Assumed annual lapse rate of awards (%) | 10 | 10 (5 for RSA) | 10 for RSA 2 for stock options, warrants and a limited group of beneficiaries | ||||||
Sell price multiple (applied to exercise price) | 2 | 2 | 2 | ||||||
Weighted average share price (€) | 1.59 | 1.76 | 2.30 | ||||||
Model used | Binomial | Binomial | Binomial |
For the years ended December 31, 2017, 2016 and 2015 the expected volatility assumption has been based on the Company’s volatility.
Founders warrants, stock options and warrants can be exercised during a period after the vesting date until the plan terminates. In the pricing model, the assumption was made that plan participants will exercise before the end of the exercise period if the share price reaches a certain multiple of the exercise price.
If a sell-price multiple of 3 instead of 2 had been used (no impact on the restricted shares) and if the weighted average share price used in the pricing model had been decreased by 10%, share-based payment total compensation for founders warrants, stock options, warrants and restricted shares awards granted through December 31, 2017 would have decreased by approximately (8.73)% (2016: 7.09%; 2015: 3.57%).
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.
F- 30
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
14. Interest-bearing loans and borrowings
At December 31, | |||||||||||||||
Note | 2015 | 2016 | 2017 | ||||||||||||
(in thousands) | |||||||||||||||
Current | |||||||||||||||
Convertible debt embedded derivative | 14.1 | $ | 6,091 | $ | — | $ | — | ||||||||
Finance lease obligation | 14.2 | 12 | — | — | |||||||||||
Interest-bearing receivables financing | 14.3 | 6,472 | 7,712 | 7,413 | |||||||||||
Total current portion | $ | 12,575 | $ | 7,712 | $ | 7,413 | |||||||||
Non-current | |||||||||||||||
Convertible debt and accrued interest | 14.1 | $ | 8,984 | $ | 16,338 | $ | 17,063 | ||||||||
Total non-current portion | $ | 8,984 | $ | 16,338 | $ | 17,063 |
As of December 31, 2017, the Company had no drawn or undrawn committed borrowing or overdraft facilities in place.
14.1. Convertible debt
On April 14, 2015, the Company entered into a convertible note agreement with Nokomis Capital, L.L.C., one of the Company’s existing shareholders, regarding the issuance and sale of a convertible note in the principal amount of $12 million(the “2015 note”), which note shall be convertible into the Company’s American Depositary Shares (“ADSs”), each representing one ordinary share, nominal value €0.02 per share, at a conversion rate of 540.5405 ADSs for each $1,000 principal amount of the 2015 note, subject to certain adjustments, which equates to an initial conversion price of $1.85 per ADS. On October 30, 2017, the convertible note was amended to extend the term from April 14, 2018 to April 14, 2019.
On April 27, 2016, the Company entered into a convertible note agreement with Nokomis Capital, L.L.C. and two other financial institutions (the “Holders”) regarding the issuance and sale of convertible notes in the aggregate principal amount of $7.16 million (the “2016 notes”), which are convertible into the Company’s ADS. The initial conversion price of the 2016 notes was $2.7126 per ADS. On October 30, 2017, the convertible note was amended to extend the term from April 27, 2019 to April 27, 2020. In addition, the conversion price was decreased from $2.71 to $2.25.
The 2015 note and the 2016 notes (together, “the Notes”) are unsecured obligation of the Company, will mature on the third anniversary of the issuance dates and are not redeemable prior to maturity at the option of the Company. The accreted principal amounts of the notes are convertible at any time or times on or after the issuance dates until maturity, in whole or in part, subject to certain adjustments for significant corporate events, including dilutive issuances, dividends, stock splits and other similar events. Interest accrues on the unconverted portion of the notes at the rate of 7% per year, paid in kind annually on the anniversaries of the issuance of the Notes. The notes also provide for customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the notes to become or to be declared due and payable.
In the event of a recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company’s assets or other transaction, which in each case results in the Company’s shareholders receiving stock, securities or assets with respect to or in exchange for their ADSs or ordinary shares, the holders shall elect, at their option, either (a) to require the Company to repurchase for cash the entire accreted principal amount of the Notes or (b) to convert the Notes in their entirety.
The notes contain customary ongoing covenants of the Company. In addition, the notes provide that the Company will not grant a consensual security interest or pledge its personal property assets to a third party lender (with certain limited exceptions) during the time that the notes are outstanding. Any amendment or waiver of the terms of the notes requires the affirmative consent of the holders.
Due to the potential adjustment of the conversion rate of the 2015 note during the first twelve months of the term under certain conditions, and of the 2016 notes during the period beginning on April 28, 2016 and ending on May 12, 2016, the notes were accounted for as compound financial instruments with two components:
F- 31
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
• | A liability component reflecting the Company’s contractual obligation to pay interest and redeem the bonds in cash; and |
• | An embedded derivative, which is the Holders’ call option whereby the Company can be required to issue a number of shares in exchange for notes at a rate which may vary during the first twelve months after issuance of the 2015 Note and during the period beginning on April 28, 2016 and ending on May 12, 2016 for the 2016 Notes. |
The initial fair value of the Notes was split between these two components.
The fair value of the liability component on the issuance date represents the fair value of a similar liability that does not have an associated equity conversion feature, calculated as the net present value of contractually determined future cash flows, discounted at the rate of interest applied by the market at the time of issue to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. The Company has used 24.26% as the market rate of interest in order to value the liability component of the 2015 note and 25.69% for the 2016 notes.
The embedded derivatives of the notes were valued using the Black-Scholes valuation model. On April 14, 2015, the initial fair value of the embedded derivative of the 2015 note was calculated to be $4,055,000. The change in fair value was remeasured and recorded as financial income or loss at each balance sheet date and on the date on which the conversion price became fixed: April 14, 2016. At December 31, 2015, the recalculated fair value was $6,091,000 and the change of this fair value of $2,036,000 for the year ended December 31, 2015 was recorded in the Consolidated Statement of Operations. On April 14, 2016, when the conversion rate of the 2015 notes was fixed, the fair value of the embedded derivative was calculated to be $8,324,000. The change in fair value was recorded as financial expense for $2,233,000 in the year ended December 31, 2016 and the fair value of the embedded derivative was transferred from liabilities to Other Capital Reserves in shareholders’ equity. Following the extension of the term, the change in fair value of the conversion option before and after the amendment was calculated to be $2,120,000 and was recorded as financial expense and in Other Capital Reserves in shareholders’ equity. The debt component on October 30, 2017 was re measured to take into account the new term using the effective interest rate calculated at the date of issue of each convertible note. The debt was reduced by an amount of $1,994,000 recorded in financial income.
The fair value of the embedded derivative of the 2016 notes on the issuance date of April 27, 2016 was calculated to be $2,597,000 and was recalculated to be $1,947,000 when the conversion rate of the 2016 Notes was fixed on May 12, 2016. The change in fair value was recorded as financial income for $650,000 in the year ended December 31, 2016 and the value of the embedded derivative as of May 12, 2016 was transferred from liabilities to Other Capital Reserves in shareholders’ equity. Following the extension of the term and the decrease of the conversion price, the change in fair value of the conversion option before and after the amendment was calculated to be $1,298,000 and was recorded as financial expense and in Other Capital Reserves in shareholders’ equity. The debt component on October 30, 2017 was re measured to take into account the new term using the effective interest rate calculated at the date of issue of each convertible note. The debt was reduced by an amount of $1,103,000 recorded in financial income.
The net impact of the October 30, 2017 amendments of the convertible notes recorded in financial expense amounted to $322,000.
On May 9, 2017, a holder of convertible notes issued in 2016 with a principal value of $160,000 converted the debt, plus accrued interest of $11,594 into a total of 63,258 ADS.
14.2. Finance lease obligation
In June 2012, the Company entered into a finance lease agreement with a French financial institution whereby the Company had the possibility to finance acquisitions of qualifying equipment with a total purchase price of up to €1,500,000 ($1,918,000), through finance leases which are reimbursed over a 36-month period at an effective rate of interest of 4.6%. The finance lease obligation was secured by pledged money market funds with the financial institution equal to one-third of the original principal financed. This agreement expired February 28, 2013. The outstanding debt was secured by $51,000 at December 31, 2015 in pledged money market funds, which was included in available-for-sale financial assets.
The finance lease obligations were paid in full by December 31, 2016.
F- 32
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
14.3. Interest-bearing financing of receivables
In June 2014, the Company entered into a factoring agreement with a French financial institution whereby a line of credit was made available equal to 90% of the face value of accounts receivable from product sales to qualifying customers. In July 2017, the Company signed an amendment to the initial agreement to include financing of accounts receivable from service revenue. The Company transfers to the finance company all invoices issued to qualifying customers, and the customers are instructed to settle the invoices directly with the finance company. The Company pays a commission on the face value of the accounts receivable submitted and interest at the rate of 1.20% (LIBOR 3 months +0.75%) in 2015 and 1.60% (LIBOR 3 months +1%) from September 30, 2016 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, and recovery becomes the Company’s responsibility. At December 31, 2017, $7,413,000 ($7,712,000 at December 31, 2016 and $6,472,000 at December 31, 2015) had been drawn on the line of credit and recorded as a current borrowing.
15. Government grant advances and loans
December 31, | ||||||||||||||
Note | 2015 | 2016 | 2017 | |||||||||||
(in thousands) | ||||||||||||||
Current | ||||||||||||||
Government grant advances | 15.1 | $ | 916 | $ | 390 | $ | 93 | |||||||
Research project financing | 15.2 | — | — | 899 | ||||||||||
Government loans | 15.3 | — | 211 | 600 | ||||||||||
Total current portion | $ | 916 | $ | 601 | $ | 1,592 | ||||||||
Non-current | ||||||||||||||
Government grant advances | 15.1 | $ | 587 | $ | 197 | $ | 350 | |||||||
Research project financing | 15.2 | 2,889 | 3,223 | 2,946 | ||||||||||
Government loans | 15.3 | 1,851 | 1,571 | 1,353 | ||||||||||
Accrued interest | 15.2 | 58 | 153 | 381 | ||||||||||
Total non-current portion | $ | 5,385 | $ | 5,144 | $ | 5,030 |
15.1. Government grant advances
In 2015, the Company was named as a participant in two new collaborative projects with funding of €816,000 ($909,000), which were released to the Consolidated Statement of Operations over the two years-life of the projects.
In 2016, the Company was named as a participant in one new collaborative project with funding of €121,000 ($131,000), which is expected to be released to the Consolidated Statement of Operations over the life of the project, estimated to be between one and four years.
In 2017, the Company was named as a participant in one new collaborative project with funding of €349,000 ($386,000) which is expected to be released to the Consolidated Statement of Operations over the life of the project, estimated to be between one and two years.
F- 33
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
15.2. Research project financing
In October 2014, Bpifrance, one of the Company’s shareholders and the financial agency of the French government, provided funding to the Company in the context of a long-term research project, estimated to be completed over a 3-year period. In December 2016, Bpifrance and the Company signed an amendment to extend the period from three to four years. The total funding remains unchanged and amounts to €6,967,000 ($8,988,000) comprising a portion in the form of a grant (€2,957,000 or $3,815,000) and a portion in the form of a forgivable loan (€4,010,000 or $5,173,000). The funding will be paid in three installments: the first tranche at the contract signature date, the second and the third installments after milestones defined in the contract. The grant is recognized as a reduction of research and development expense when corresponding expense is incurred. The forgivable loan advance will be repaid, except if the project is a commercial failure, from June 30, 2018 to June 30, 2020 and bears interests at a 1.53% fixed contractual rate. The difference between the amount of grant received and the present value amounted to a reduction of $115,000 in the debt carrying value, with such difference being amortized over the contract period. In the event of commercial success, and sales of the product developed under this program are in excess of €350 million ($425 million) during a period of three years, then the Company shall pay for three consecutive years after the date of the termination of the refund a bonus to Bpifrance of 1% of annual revenues generated by products issued from the project (up to a maximum of €350,000,000 or $419,755,000 over a period of ten years).
In January 2016, Bpifrance provided funding to the Company for a new long-term research project, estimated to be completed over a 27-month period. The total of the funding amounts to €2,095,000 ($2,288,000) comprising a portion in the form of a grant (€668,000 or $729,000) and a portion in the form of a forgivable loan (€1,427,000 or $1,558,000). The funding will be paid in four installments: the first tranche at the contract signature date, the second, the third and the fourth installments after milestones defined in the contract. The grant is recognized as a reduction of research and development expense when corresponding expense is incurred. The forgivable loan advance will be repaid, except if the project is a commercial failure, from July 1, 2019 to July 1, 2023 and bears interests at a 1.17% fixed contractual rate. The difference between the amount of grant received and the present value of future payments discounted using interest rate applied for standard loans with similar maturity amounted to a reduction of $30,000 in the debt carrying value, with such difference being amortized over the contract period. In the event of commercial success, and sales of the product developed under this program are in excess of €3 million ($3.3 million), then the Company shall pay for 4 consecutive years after the date of the termination of the refund 13% of the revenues generated by the sales of the products or services (up to a maximum of €600,000, or $655,000, over a period of 10 years).
In 2016, the Company received payments for the two foregoing projects of €342,000 ($379,000) as grant and €594,000 ($642,000) as forgivable loan. In 2017, the Company received payments for one project €176,000 ($207,000) as grant and for the two projects €2,132,000 ($2,509,000) as forgivable loan. No funds were received from the Bpifrance projects in 2015.
The estimated market rate of interest applied in 2017, 2016 and 2015 was between 1.80% and 2.30%. Accrued interest of $159,000 was recorded as of December 31, 2017 ($83,000 as of December 2016 and $46,000 as of December 31, 2015).
15.3. Government loans
In September 2015, the Company received two loans from Bpifrance for a total amount of €2,000,000 ($2,228,000). One loan of €1,000,000 bears interest at 5.24% per year, paid quarterly; the second loan of €1,000,000 is interest-free. The interest-free loan has been revalued using the 5.24% interest rate payable on the other loan. Both loans have seven year terms with the principal being amortized on a quarterly basis beginning in June 2017.
F- 34
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
16. Provisions
Post- employment benefits | Others | Total | Current | Non current | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
At January 1, 2015 | $ | 893 | $ | 883 | $ | 1,776 | $ | 548 | $ | 1,228 | ||||||||||
Arising (released) during the year | (165 | ) | 670 | 505 | — | — | ||||||||||||||
Released (used) during the year | — | (467 | ) | (467 | ) | — | — | |||||||||||||
Released (unused) during the year | — | (101 | ) | (101 | ) | — | — | |||||||||||||
At December 31, 2015 | 728 | 985 | 1,713 | 317 | 1,396 | |||||||||||||||
Arising (released) during the year | (29 | ) | 75 | 46 | — | — | ||||||||||||||
Released (used) during the year | (11 | ) | (269 | ) | (280 | ) | — | — | ||||||||||||
Released (unused) during the year | — | (127 | ) | (127 | ) | — | — | |||||||||||||
At December 31, 2016 | 688 | 664 | 1,352 | 46 | 1,306 | |||||||||||||||
Arising (released) during the year | 216 | 443 | 659 | — | — | |||||||||||||||
Released (used) during the year | — | (50 | ) | (50 | ) | — | — | |||||||||||||
Released (unused) during the year | — | (397 | ) | (397 | ) | — | — | |||||||||||||
At December 31, 2017 | $ | 904 | $ | 660 | $ | 1,564 | $ | 32 | $ | 1,532 |
The provision for post-employment benefits is for the lump sum retirement indemnity required to be paid to French employees. The comprehensive income for 2017 includes $46,000 of actuarial loss (actuarial gain of $120,000 in 2016 and actuarial gain of $215,000 in 2015). One employee has retired during the year ended December 31, 2016. No employee retired in 2015 or 2017.
The main assumptions used in the calculation are the following:
2015 | 2016 | 2017 | ||||
Discount rate | 2.03% | 1.31% | 1.30% | |||
Salary increase | 3% | Between 1.5% and 3.5% | Between 1.5% and 3.5% | |||
Retirement age | 60-62 years | 60-62 years | 60-62 years | |||
Turnover: depending on the seniority | 3.32%, nil as from 64 year old | 4.35%, nil as from 64 year old | 4.35%, nil as from 64 year old |
In May 2015, the Company was notified by the United Kingdom tax authorities of inquiries regarding the calculation method used in 2014 UK research tax credit. Based on the assessment of the potential exposure in this dispute, in the year ended December 31, 2015, the Company recorded a provision for risk related to the UK tax credit in the amount of £170,000 ($252,000). In May 2016, the review was finalized and the assessment was not significantly different from the amount accrued.
In 2014, the Company canceled a final shipment of components ordered from a supplier and was invoiced a contractual penalty of $507,000. The Company had recorded the full amount as a provision, which was recorded in G&A expense. In the year ended December 31, 2015, the supplier and the Company came to an agreement to reduce this penalty to $402,000 and the amount was paid during 2015.
At December 31, 2015, 2016 and 2017, “Other provisions” include primarily estimated royalty payments assessed on sales of modules to holders of patents which may be deemed as essential under the requirements of the LTE standard. The royalty provision is based on management’s judgment, taking into consideration the various legal decisions, articles, reports and industry discussions on the subject which were available, and is recorded in the cost of product revenue. The Company’s modules are considered as final products incorporating the full LTE function, and therefore may have royalties assessed on their sale; no royalties are accrued on the sales of chips as the full LTE functionality is not included in the chip. In the year ended December 31, 2017, the Company revised the estimated royalty provision and reduced provisions from 2015 and 2016 by a total of $397,000 (provisions from 2014 and 2015 reduced by $127,000 in the year ended December 31, 2016).
F- 35
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
17. Other non-current liabilities
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Payables | $ | 3,257 | $ | — | $ | — | ||||||
Deferred tax | 10 | 22 | 52 | |||||||||
Total other non-current liabilities | $ | 3,267 | $ | 22 | $ | 52 | ||||||
Deferred revenue | $ | 1,940 | $ | 1,940 | $ | 1,293 |
In the year ended December 31, 2015, the Company signed a contract with a supplier for a total amount of €5,000,000 ($5,368,000), to be paid in three installments in 2016 and 2017. The total debt was recorded for $4,744,000 corresponding to the discounted value calculated with an interest rate of 8.34% of which $3,257,000 was recorded as non-current liabilities and $1,487,000 as trade payables in 2015 as the first installment of €1,500,000 was due on December 31, 2016, the two others during the year ended 2017. At December 31, 2016 and 2017, the liability was recorded in trade payables.
In December 2015, the Company entered into a contract with a customer for certain development services which resulted in the recognition of deferred revenues for $1,940,000 to be recognized on a straight-line basis over four years beginning when the customer’s product is certified by a major U.S. carrier. As revenues were expected to be recognized subsequent to December 31, 2017, these deferred revenues were presented as non–current liabilities as of December 31, 2016 and 2015. The certification occurred in September 2017 and therefore $121,000 was recognized as revenue in 2017, $485,000 of the deferred revenues has been classified as current as of December 31, 2017 and the remainder as non-current liabilities as of December 31, 2017.
18. Trade payables and other current liabilities
At December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Trade payables | $ | 9,498 | $ | 18,358 | $ | 13,023 | ||||||
Other current liabilities: | ||||||||||||
Employees and social debts | 3,254 | 3,283 | 3,720 | |||||||||
Others | 1,350 | 1,132 | 1,418 | |||||||||
Total other current liabilities | $ | 4,604 | $ | 4,415 | $ | 5,138 | ||||||
Deferred revenue | $ | 1,222 | $ | 335 | $ | 740 |
Terms and conditions of the above financial liabilities:
• | Trade payables are non-interest bearing and are generally settled on 30-day terms. |
• | Other payables, primarily accrued compensation and related social charges, are non-interest bearing. |
As of December 31, 2015, 2016 and 2017, trade payables included the current part of a supplier debt recorded at the discounted value and amounting to $1,487,000, $5,061,000 and $2,399,000, respectively (see note 17). The final installment of the supplier debt was settled in January 2018.
As of December 31, 2015, 2016 and 2017, deferred revenue is related to maintenance revenue, recognized over the 12-month maintenance period. In 2015 and 2017, in addition to deferred maintenance revenue, the Company recognized deferred revenue related to development services agreements. At December 31, 2015 and 2017, deferred development services revenue totaled $978,000 and $61,000, respectively, which was expected to be recognized during the year ending December 31, 2016 and December 31, 2018, respectively. There was no deferred development services revenue at December 31, 2016.
F- 36
19. Information about financial instruments
19.1. Financial assets and liabilities
Carrying amount | Fair value | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
2015 | 2016 | 2017 | 2015 | 2016 | 2017 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||
Trade and other receivables | ||||||||||||||||||||||||
Trade receivables | $ | 16,497 | $ | 15,285 | $ | 20,926 | $ | 16,497 | $ | 15,285 | $ | 20,926 | ||||||||||||
Loans and other receivables | ||||||||||||||||||||||||
Deposits | 345 | 332 | 402 | 345 | 332 | 402 | ||||||||||||||||||
Available for sale instruments | ||||||||||||||||||||||||
Long-term investments | 321 | 310 | 353 | 321 | 310 | 353 | ||||||||||||||||||
Cash, cash equivalents and short-term investments | 8,681 | 20,547 | 3,295 | 8,681 | 20,547 | 3,295 | ||||||||||||||||||
Total financial assets | $ | 25,844 | $ | 36,474 | $ | 24,976 | $ | 25,844 | $ | 36,474 | $ | 24,976 | ||||||||||||
Total current | $ | 25,178 | $ | 35,832 | $ | 24,221 | $ | 25,178 | $ | 35,832 | $ | 24,221 | ||||||||||||
Total non-current | $ | 666 | $ | 642 | $ | 755 | $ | 666 | $ | 642 | $ | 755 | ||||||||||||
Financial liabilities: | ||||||||||||||||||||||||
Interest-bearing loans and borrowings: | ||||||||||||||||||||||||
Finance lease liability | 12 | — | — | 12 | — | — | ||||||||||||||||||
Interest-bearing receivables financing | 6,472 | 7,712 | 7,413 | 6,472 | 7,712 | 7,413 | ||||||||||||||||||
Convertible debt and accrued expenses | 8,984 | 16,338 | 17,063 | 8,984 | 16,115 | 16,309 | ||||||||||||||||||
Government loans | 1,851 | 1,852 | 2,071 | 1,851 | 1,852 | 2,071 | ||||||||||||||||||
Research project financing | 2,947 | 3,306 | 4,004 | 2,947 | 3,306 | 4,004 | ||||||||||||||||||
Trade and other payables (current and non current) | 12,755 | 18,358 | 13,023 | 12,755 | 18,358 | 13,023 | ||||||||||||||||||
Financial instruments at fair value through other comprehensive income: | ||||||||||||||||||||||||
Cash flow hedges | 39 | 150 | — | 39 | 150 | — | ||||||||||||||||||
Financial instruments at fair value through profit and loss: | ||||||||||||||||||||||||
Convertible debt embedded derivative | 6,091 | — | — | 6,091 | — | — | ||||||||||||||||||
Total financial liabilities | $ | 39,151 | $ | 47,716 | $ | 43,574 | $ | 39,151 | $ | 47,493 | $ | 42,820 | ||||||||||||
Total current | $ | 22,112 | $ | 26,431 | $ | 21,935 | $ | 22,112 | $ | 26,431 | $ | 21,935 | ||||||||||||
Total non-current | $ | 17,039 | $ | 21,285 | $ | 21,639 | $ | 17,039 | $ | 21,062 | $ | 20,885 |
The carrying values of current financial instruments (cash and cash equivalents, short-term investments, trade receivables and trade and other payables, and interest-bearing receivables financing) approximate their fair values, due to their short-term nature.
Available for sale long-term investments are primarily related to:
• | a bank guarantee secured by pledges of investments in money market funds issued in favor of the owners of leased office space to secure annual lease payments by the Company for its office space in Colombes; |
• | bank credit lines used in connection with the purchase of hedging instruments and finance lease, also secured by pledged money market funds. |
Government loans received from the financial agency of the French government were recorded as financial instruments in compliance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
F- 37
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
The convertible debts are compound financial instruments. As described under Note 14.1, the fair value of the embedded derivative convertible debt was recalculated at the end of each reporting period until the related conversion prices were fixed. At December 31, 2016, as the conversion prices of both convertible debt issues had been fixed during the year, there was no longer any embedded derivative.
Fair Value Hierarchy
The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
• | Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities |
• | Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly |
• | Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data |
As at December 31, 2015, the Company held the following financial instruments carried at fair value on the statement of financial position:
Assets measured at fair value
At December 31, | ||||||||||||||
2015 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Available-for-sale instruments: | ||||||||||||||
Long-term investments | $ | 321 | — | $ | 321 | — |
Liabilities measured at fair value
At December 31, | ||||||||||||||
2015 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Financial instruments at fair value through other comprehensive income: | ||||||||||||||
Cash flow hedge | $ | (39 | ) | — | $ | (39 | ) | — | ||||||
Financial instruments at fair value through profit and loss: | ||||||||||||||
Convertible debt embedded derivative | $ | (6,091 | ) | — | $ | (6,091 | ) | — |
As at December 31, 2016, the Company held the following financial instruments carried at fair value on the statement of financial position:
Assets measured at fair value
At December 31, | ||||||||||||||
2016 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Available-for-sale instruments: | ||||||||||||||
Long-term investments | $ | 310 | — | $ | 310 | — |
F- 38
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Liabilities measured at fair value
At December 31, | ||||||||||||||
2016 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Financial instruments at fair value through other comprehensive income: | ||||||||||||||
Cash flow hedge | $ | (150 | ) | — | $ | (150 | ) | — |
As at December 31, 2017, the Company held the following financial instruments carried at fair value on the statement of financial position:
Assets measured at fair value
At December 31, | ||||||||||||||
2017 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Available-for-sale instruments: | ||||||||||||||
Long-term investments | $ | 353 | — | $ | 353 | — |
Liabilities measured at fair value
At December 31, | ||||||||||||||
2017 | Level 1 | Level 2 | Level 3 | |||||||||||
(in thousands) | ||||||||||||||
Financial instruments at fair value through other comprehensive income: | ||||||||||||||
Cash flow hedge | $ | 72 | — | $ | 72 | — |
19.2. Financial instruments at fair value
The Company uses financial instruments, including derivatives such as foreign currency forward and options contracts, to reduce the foreign exchange risk on cash flows from firm and highly probable commitments denominated in euros.
The following tables present fair values of derivative financial instruments at December 31, 2015, 2016 and 2017.
F- 39
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
At December 31, 2015 | ||||||||
Notional Amount | Fair value | |||||||
(in thousands) | ||||||||
Forward contracts (buy U.S dollars, sell euros) | € | 2,300 | $ | (38 | ) | |||
Options (buy euros, sell U.S. dollars) | 2,500 | (1 | ) | |||||
Total | € | 4,800 | $ | (39 | ) | |||
At December 31, 2016 | ||||||||
Notional Amount | Fair value | |||||||
(in thousands) | ||||||||
Forward contracts (buy euros, sell U.S. dollars) | € | 5,750 | $ | (142 | ) | |||
Options (buy euros, sell U.S. dollars) | 1,500 | (8 | ) | |||||
Total | € | 7,250 | $ | (150 | ) | |||
At December 31, 2017 | ||||||||
Notional Amount | Fair value | |||||||
(in thousands) | ||||||||
Forward contracts (buy euros, sell U.S. dollars) | € | 2,250 | $ | 53 | ||||
Options (buy euros, sell U.S. dollars) | 3,000 | 19 | ||||||
Total | € | 5,250 | $ | 72 |
The fair value of foreign currency related derivatives are included in the Consolidated Statement of Financial Position in “Other current financial liabilities” at December 31, 2015 and 2016 and in "Prepaid and other receivables" at December 31, 2017. The earnings impact of cash flow hedges relating to forecasted operating expense transactions is reported in operating expense. Realized and unrealized gains and losses on these instruments deemed effective for hedge accounting are deferred in accumulated other comprehensive income until the underlying transaction is recognized in earnings or the instruments are designated as hedges.
During the year ended December 31, 2017, the Company recorded a gain of $195,000 (loss of $91,000 and gain of $78,000 for the years ended December 31, 2016 and 2015, respectively) in other comprehensive income related to the effective portion of the change in fair value of its cash flow hedges. During the year ended December 31, 2017, the amount transferred from other comprehensive income to Consolidated Statement of Operations was a loss of $74,000 (losses of $44,000 and $309,000 during the year ended December 31, 2016 and 2015, respectively).
During the years ended December 31, 2015 and 2017, the Company recognized net losses of $6,000 and $3,000, respectively, related to the ineffective position of its hedging instrument. There was no ineffective portion of hedging instrument in the year ended December 31, 2016.
The derivatives have maturity dates of less than 12 months. Management believes counterparty risk on financial instruments is minimal since the Company deals with major banks and financial institutions.
The use of different estimations, methodologies and assumptions could have a material effect on the estimated fair value amounts. The methodologies are as follows:
• | Cash, cash equivalents, short-term investments, accounts receivable, accounts payable, other receivable and accrued liabilities: due to the short-term nature of these balances, carrying amounts approximate fair value. |
• | Available for sale long-term investments are composed of debt-based mutual funds with traded market prices. Their fair values amounted to $321,000, $310,000 and $353,000 at December 31, 2015, 2016 and 2017, respectively. |
• | Foreign exchange forward and option contracts: the fair values of foreign exchange forward and option contracts were calculated using the market price that the Company would pay or receive to settle the related agreements, by reference to published exchange rates. |
F- 40
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
19.3. Financial risk management objectives and policies
The Company’s principal financial liabilities comprise trade payables (current and non-current), interest-bearing receivables financing, government loans and convertible debt. The Company has various financial assets such as trade receivables and cash and cash equivalents, which arise directly from its operations, as well as from capital increases.
The main risks arising from the Company’s financial instruments are foreign currency risk, credit risk, interest rate risk and cash flow liquidity risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarized below.
Foreign currency risk
The Company faces the following foreign currency exposures:
• | Transaction risk arising from: |
• | Operating activities, when revenues or expenses are denominated in different currencies from the functional currency of the entity carrying out these transactions. |
• | Non derivative monetary financial instruments that are denominated and settled in a currency different from the functional currency of the entity which holds them. |
Nearly 100% of total revenues and approximately 89% of total cost of sales are denominated in U.S. dollars. However, as a result of significant headcount and related costs from operations in France, which are denominated and settled in euros (the “structural costs”), the Company has transactional currency exposures which can be affected significantly by movements in the US dollar/euro exchange rates. Approximately 57% of operating expense is denominated in euros. (See Note 19.2 regarding the hedging arrangement in progress as of December 31, 2017).
If there were a 10% increase or decrease in exchange rate of the U.S. dollar to the euro, as measured using the Company's 2017 weighted average exchange rate of one euro = $1.1185, the Company estimates the impact, in absolute terms, on operating expenses for the year ended December 31, 2017 would have been approximately $2.3 million.
Credit risk
The Company trades only with recognized, creditworthy third parties. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. The Company has subscribed to a credit insurance policy which provides assistance in determining credit limits and collection, in addition to some coverage of uncollectible amounts. In addition, receivable balances are monitored on an ongoing basis.
The following table summarizes customers representing a significant portion of the Company’s total revenue:
Customer | Customer Location | % of total revenues for the year ended December 31, | Trade receivables at December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||
A | Taiwan | 17 | % | 29 | % | — | $ | 5,352,000 | $ | 4,870,000 | $ | — | |||||||||||
B | Taiwan | 16 | % | Less than 10% | — | $ | 4,060,000 | $ | — | $ | — | ||||||||||||
C | China | Less than 10% | 15 | % | 14 | % | $ | 246,800 | $ | (100,000 | ) | $ | 1,167,000 | ||||||||||
D | China | — | Less than 10% | 27 | % | $ | — | $ | (3,000 | ) | $ | 3,102,000 | |||||||||||
E | Taiwan | — | — | 16 | % | $ | — | $ | — | $ | 2,222,000 |
With respect to credit risk arising from the other financial assets, which comprise cash and cash equivalents, the Company’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Nearly all cash and cash equivalents are held in France at two large and international banks.
Vendor concentration risk
Access to foundry capacity is critical to the Company’s operations as a fabless semiconductor company. The Company depends on a sole independent foundry in Taiwan to manufacture its semiconductor wafers.
F- 41
Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
Liquidity risk
The Company monitors its risk of a shortage of funds using a cash flow planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivables, other financial assets) and projected cash flows from operations.
Within 1 year | 1 to 2 years | 2 to 3 years | 3 to 4 years | 4 to 5 years | More than 5 years | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||||
At December 31, 2015 | |||||||||||||||||||||
Research project financing | $ | 1,132 | $ | — | $ | 330 | $ | 645 | $ | 840 | $ | — | $ | 2,947 | |||||||
Interest-bearing receivables financing | 6,472 | — | — | — | — | — | 6,472 | ||||||||||||||
Government loans | — | 93 | 370 | 370 | 370 | 648 | 1,851 | ||||||||||||||
Convertible debt and accrued interests | — | — | 8,984 | — | — | — | 8,984 | ||||||||||||||
Finance lease | 39 | — | — | — | — | — | 39 | ||||||||||||||
Trade payables | 9,498 | 3,257 | — | — | — | — | 12,755 | ||||||||||||||
Other financial liabilities | 4,604 | — | — | — | — | — | 4,604 | ||||||||||||||
$ | 21,745 | $ | 3,350 | $ | 9,684 | $ | 1,015 | $ | 1,210 | $ | 648 | $ | 37,652 | ||||||||
At December 31, 2016 | |||||||||||||||||||||
Research project financing | $ | 1,376 | $ | 631 | $ | 742 | $ | 425 | $ | 19 | $ | 30 | $ | 3,223 | |||||||
Interest-bearing receivables financing | 7,712 | — | — | — | — | — | 7,712 | ||||||||||||||
Government loans | 167 | 376 | 373 | 370 | 368 | 198 | 1,852 | ||||||||||||||
Convertible debt and accrued interests | — | — | 16,338 | — | — | — | 16,338 | ||||||||||||||
Trade payables | 18,358 | — | — | — | — | — | 18,358 | ||||||||||||||
Other financial liabilities | 4,415 | — | — | — | — | — | 4,415 | ||||||||||||||
$ | 32,028 | $ | 1,007 | $ | 17,453 | $ | 795 | $ | 387 | $ | 228 | $ | 51,898 | ||||||||
At December 31, 2017 | |||||||||||||||||||||
Research project financing | $ | 899 | $ | 1,246 | $ | 671 | $ | 291 | $ | 297 | $ | 441 | $ | 3,845 | |||||||
Interest-bearing receivables financing | 7,413 | — | — | — | — | — | 7,413 | ||||||||||||||
Government loans | 600 | 398 | 398 | 398 | 159 | — | 1,953 | ||||||||||||||
Convertible debt and accrued interests | — | 11,861 | 5,202 | — | — | — | 17,063 | ||||||||||||||
Trade payables | 13,023 | — | — | — | — | — | 13,023 | ||||||||||||||
Other financial liabilities | 5,138 | — | — | — | — | — | 5,138 | ||||||||||||||
$ | 27,073 | $ | 13,505 | $ | 6,271 | $ | 689 | $ | 456 | $ | 441 | $ | 48,435 |
Company’s liquidity risk for the next 12 months is described in note 2.1.
Capital management
The primary objective of the Company’s capital management is to continue to execute according to its business plans and budgets in order to achieve profitability and positive cash flow, and to maximize shareholder value.
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Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
19.4. Changes in liabilities arising from financing activities
January 1, 2017 | Cash flows | Foreign exchange movement | Other | December 31, 2017 | ||||||||
(In thousands) | ||||||||||||
Government grant advances and loans | $ | 5,745 | 2,600 | 915 | (2,638 | ) | $ | 6,622 | ||||
Convertible debt and accrued interest | $ | 16,338 | — | — | 725 | $ | 17,063 | |||||
Interest-bearing financing of receivables | $ | 7,712 | (299 | ) | — | — | $ | 7,413 | ||||
Total | $ | 29,795 | 2,301 | 915 | (1,913 | ) | $ | 31,098 |
20. Commitments and contingencies
Contingencies
From time to time, the Company has been and may become involved in legal proceedings arising in the ordinary course of its business.
On August 9, 2017, a putative securities class action captioned Andrew Renner v. Sequans Communications S.A., Georges Karam, and Deborah Choate (Case 1:17-cv-04665) was filed in the U.S. District Court for the Eastern District of New York. The plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on purported misrepresentations regarding Sequans’ revenue recognition policy in the Company’s Form 20-F annual reports filed on April 29, 2016 and March 31, 2017. The complaint seeks unspecified damages and costs and fees. On August 10, 2017, an almost identical class action complaint captioned Kevin Shillito v. Sequans Communications S.A., Georges Karam, and Deborah Choate (Case 2:17-cv-04707) was filed in the same court. On September 28, 2017, the Shillito action was consolidated with the Renner action. On October 10, 2017, candidates to be lead plaintiff filed motions to appoint a lead plaintiff and lead counsel. On February 6, 2018 the Court appointed lead plaintiffs and lead counsel. Lead plaintiffs filed their Consolidated Amended Complaint (the “CAC”) on April 9, 2018, which did not significantly alter the allegations made in the earlier pleadings. Pursuant to a prior stipulation and order, the Company, Mr. Karam and Ms. Choate have until May 24, 2018 to answer, move or otherwise respond to the CAC.
The Company is unable to make a reasonable estimate of the financial effect that will result from ultimate resolution of the proceedings - if any. Management is not aware of any other legal proceedings that, if concluded unfavorably, would have a significant impact of financial position, operations or cash flows.
In May 2015, the United Kingdom tax authorities made inquiries regarding the calculation method used in 2014 UK research tax credit and discussions with the authorities are ongoing . The Company disagreed with tax authorities position and intended to defend its position. As described in Note 16, the Company recorded a provision for risk of £170,000 ($252,000) related to the 2014 tax credit at December 31, 2015 and opted to calculate the 2015 tax credit using a less favorable regime pending outcome of the inquiry. The UK tax authorities completed their review in 2016 and the final assessment did not differ significantly from the provision recorded.
Bank guarantee
A bank guarantee was issued in favor of the owners of new leased office space in France, in order to secure six months of lease payments, for an amount of $352,000 as of December 31, 2017. This guarantee was secured by the pledge of certificates of deposit and mutual funds for 100% of the amount of the guarantee. The total value of investments secured to cover this bank guarantee was $353,000 at December 31, 2017.
Operating leases
The Company has long-term operating leases for office rental. Future minimum undiscounted lease payments under long-term operating leases are as follows:
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Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
December 31, | |||||||||
2015 | 2016 | 2017 | |||||||
(in thousands) | |||||||||
Within one year | $ | 909 | $ | 879 | $ | 1,072 | |||
After one year but not more than five years | 2,358 | 1,932 | 1,035 | ||||||
More than five years | — | — | — | ||||||
Total minimum lease payments | $ | 3,267 | $ | 2,811 | $ | 2,107 |
Total operating lease expense for the year ended December 31, 2017 was $1,528,000 (2016;$1,440,000; 2015: $1,370,000).
Purchase commitments
As of December 31, 2017, the Company had $3.7 million of non-cancelable purchase commitments with its third-party manufacturer and suppliers for future deliveries of equipment and components, principally during the first half of 2018.
21. Related party disclosures
There is no single investor who has the ability to control the Board of Directors or the vote on shareholder resolutions. There is one investor who owns in excess of 10% of the share capital of the Company: BPI France Participation – Fonds Large Venture, a fund managed by Bpifrance. At the annual shareholders meeting on June 30, 2017, the shareholders approved the nomination of Mailys Ferrere to the board of directors. Mrs. Ferrere is employed by BPI France Participation - Fonds Large Venture. Bpifrance provided funding to two consortiums which include the Company in the context of long-term research projects (See Note 15.2 Research project financing) and in loans (See Note 19.3 Government loans).
On December 11, 2014, the Board of Directors approved a consulting agreement with Alok Sharma, member of the board of directors, for services in business development and strategy. This agreement was renewed in 2015 and 2016, and expired in July 2016. During the years ended December 31, 2015 and 2016, Mr Sharma earned fees totaling $155,000 and $108,000, respectively, under this contract. No consulting fees were paid or accrued during the year ended December 31, 2017.
In April 2015 the Company completed the sale of a $12 million convertible note, and in April 2016 the sale of a $6.0 million convertible note, to an affiliate of Nokomis Capital, L.L.C., an investor who owns in excess of 5% of the share capital of the Company, in private placement transactions (See Note 14.1 Convertible debt). In 2017, the Company amended the terms of both notes and as part of the agreement, a representative of Nokomis Capital, L.L.C. became a board observer in November 2017 and will be nominated to become a board member at the next annual shareholders' meeting. As of December 31, 2017, the principal amount and accrued interests of the convertible note held by an affiliate of Nokomis Capital, L.L.C amounts to $21.6 million.
No other transactions have been entered into with these or any other related parties in 2015, 2016 and 2017, other than normal compensation (including share based payment arrangements) for and reimbursement of expenses incurred in their roles as Directors or employees of the Company.
Compensation of key management personnel
Year ended December 31, | |||||||||
2015 | 2016 | 2017 | |||||||
(in thousands) | |||||||||
Fixed and variable wages, social charges and benefits expensed in the year | $ | 2,112 | $ | 1,896 | $ | 2,376 | |||
Share-based payment expense for the year | 380 | 490 | 1,043 | ||||||
Board members fees to non-executive members | 196 | 188 | 190 | ||||||
Total compensation expense for key management personnel | $ | 2,688 | $ | 2,574 | $ | 3,609 |
Key management personnel comprises the chief executive officer and all executive vice presidents reporting directly to him.
The employment agreement with the chief executive officer calls for the payment of a termination indemnity of an amount equal to one year of his gross annual base remuneration and bonus in the event of his dismissal by the Board of Directors of the Company.
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Sequans Communications S.A.
Notes to the Consolidated Financial Statements—(Continued)
In 2015 through 2016, the Company had in place a consulting agreement with a non-executive board member as described above.
Directors’ interests in an employee share incentive plan
The Company granted warrants to certain members of the Board of Directors during the years ended December 31, 2015, 2016 and 2017:
- On June 29, 2015, the shareholders authorized the Board of Directors to grant to Messrs. de Pesquidoux, Maitre, Patterson, Pitteloud, Sharma and Slonimsky 10,000 warrants each. On June 29, 2015, the Board used this authorization to make such grants with an exercise price of $1.59 per ordinary share.
- On June 28, 2016, the shareholders authorized the Board of Directors to grant to Messrs. de Pesquidoux, Maitre, Pitteloud, Sharma and Slonimsky 20,000 warrants each and to Mr Nottenburg 40,000 warrants. On June 29, 2016, the Board used this authorization to make such grants with an exercise price of $1.86 per ordinary share.
- On June 30, 2017, the shareholders authorized the Board of Directors to grant to Messrs. de Pesquidoux, Maitre, Nottenburg, Pitteloud, Sharma and Slonimsky 30,000 warrants each. On July 3, 2017, the Board used this authorization to make such grants with an exercise price of $3.31 per ordinary share.
The board members were required to subscribe to the warrants at a price of €0.01 per warrant, as required by French law. There is no subscription required for founders warrants.
Share-based payment expense incurred in connection with these transactions amounted to $89,000 in the year ended December 31, 2017 (2016: $35,000; 2015: $48,000).
22. Events after the reporting date
In its meeting of February 6, 2018, the Board of Directors granted 409,500 restricted share awards.
On January 17, 2018, the Company increased its capital in connection with a public offering by issuing 12,500,000 ordinary shares at $1.60 per share, with participation by Bpifrance (3,125,000 shares), Nokomis Capital, L.L.C (3,125,000 shares) and one board member (25,000 shares). On January 19, 2018, the underwriters purchased an additional 1,875,000 ordinary shares at the public offering price. The total gross proceeds from the offering amounted to $23.0 million and the related expenses costs amounted to $2.1 million resulting in a net proceeds of $20.9 million.
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