Business context and reporting period
Sequans Communications S.A. filed this Form 20-F annual report for the fiscal year ended December 31, 2020. The French fabless semiconductor company designs and sells cellular chips and modules for broadband, critical and massive IoT applications. Financial statements are prepared under IFRS in U.S. dollars. The filing also provides unaudited quarterly results, including Q4 2020.
Financial performance and position
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $50.9m | $30.9m | +65% |
| Gross profit / margin | $23.5m / 46.1% | $12.4m / 40.1% | Margin +6.0 percentage points |
| Operating loss | $(24.7)m | $(28.0)m | Loss narrowed |
| Net loss | $(54.5)m | $(36.7)m | Loss widened |
| Operating cash flow | $(19.4)m | $5.1m | Declined |
| Cash, cash equivalents and short-term deposits | $18.5m | $14.1m | +$4.4m |
Revenue growth was driven chiefly by broadband product sales, including modules used in Verizon’s JetPack portable router: broadband product revenue rose 169% to $25.3m. Massive IoT product revenue was approximately flat at $12.6m. Development and other services revenue increased to $12.6m, while license revenue fell to $0.4m. The company shipped approximately 3.5m 4G units, versus 2.5m in 2019.
Research and development expense rose 30% to $30.9m, primarily reflecting investment in 5G development and higher headcount. Net interest expense increased to $14.5m. A $13.1m fair-value loss on the convertible-debt derivative and a $2.7m foreign-exchange loss contributed to the wider net loss.
At December 31, 2020, total assets were $87.2m, total equity was a deficit of $37.1m, and current liabilities exceeded current assets by $10.9m. Reported loans and borrowings were $69.4m; the balance sheet also reports a $12.4m convertible-debt embedded derivative. Contractual obligations totaled $106.8m, including debt, leases, payables and other liabilities. The filing reports $18.5m in cash, cash equivalents and deposits, of which $10.9m was in short-term deposits.
Fourth-quarter 2020
Q4 revenue was $15.8m, compared with $9.2m in Q4 2019. Gross profit was $7.1m and operating loss was $5.4m, versus $4.3m and $5.6m, respectively, in Q4 2019. Net loss was $11.3m, compared with $9.2m. Quarterly results are unaudited and may not indicate future performance.
Material changes versus the prior comparable period
- Revenue recovered from the 2019 decline, with product revenue up 73% and other revenue up 46% year over year.
- Gross margin improved as product mix and service margins became more favorable. Product gross margin increased to 32.4% from 23.9%.
- Despite a narrower operating loss, the net loss increased, primarily reflecting higher interest expense, the convertible-debt derivative remeasurement and foreign-exchange losses.
- Operating cash flow moved from a $5.1m inflow to a $19.4m outflow. The company also invested $24.8m in investing activities, including $10.9m in short-term deposits.
- Share count rose to 133.9m ordinary shares at year-end from 95.6m, including shares issued in public offerings and conversion of debt.
Outlook, risks and unusual items
- Liquidity and going concern: Management and the auditor highlighted substantial doubt about the company’s ability to continue as a going concern. The company reported recurring losses, a $10.9m working-capital deficiency and a need for additional financing; planned funding sources are not assured. The financial statements include no adjustments that might result from this uncertainty.
- 2021 outlook: Management expected massive IoT growth, while broadband IoT revenue was expected to be flat or decline slightly as JetPack demand eased from pandemic-related highs; a second-half CBRS ramp could partly offset that decline. Operating costs and investment were expected to increase moderately as 5G development continued. Management said significant additional financing would be required.
- Supply and customer concentration: COVID-19 and industry supply constraints affected components and production. The company relies on a single wafer foundry, TSMC, and said its 2021 allocation could constrain customer demand in the second half if not increased. The top ten customers generated 98% of 2020 revenue; one customer accounted for 45%.
- COVID-19 exposure: Remote-learning demand boosted JetPack-related orders, but management cautioned that this uplift might not continue. Pandemic-related supply disruptions, project delays and automotive softness also affected business.
- Financing and dilution: The company raised net proceeds of $29.3m from 2020 equity offerings and relied on debt and receivables financing. Convertible-note amendments created a derivative liability whose fair-value movement generated a $13.1m expense. Nokomis converted $9.0m principal plus accrued interest and a conversion bonus into shares in December 2020; further conversion occurred in Q1 2021.
- Other matters: A $2.75m securities-litigation settlement was approved and paid in 2020, with costs above the company’s deductible covered by insurance. A request to forgive debt on an abandoned research project remained pending. Management said the prior material weakness in internal controls was remediated in 2020; management and the auditor reported effective internal control at year-end.
Important facts for investors to verify
- Whether additional financing and government or strategic funding are available on acceptable terms, and whether liquidity forecasts support continued operations.
- Whether customer concentration, JetPack demand and the expected 2021 product ramps develop as management anticipates.
- Whether TSMC and other suppliers can meet demand, particularly after the first half of 2021, and whether component shortages or costs affect shipments and margins.
- The cash, maturity, conversion and dilution implications of outstanding debt and subsequent note conversions; reconcile reported borrowings with the embedded derivative and contractual-obligation disclosures.
- Whether the abandoned-project debt forgiveness is approved, and how the strategic-partner development agreements’ milestones, cash flows and potential termination or repayment terms progress.