Sequans Communications S.A. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; the filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise. Sequans is a fabless designer and supplier of 4G LTE semiconductor solutions, focused increasingly on IoT and single-mode LTE. Financial statements are prepared under IFRS.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $40.25 million | $48.26 million |
| Product revenue | $28.94 million | $37.35 million |
| Other revenue | $11.31 million | $10.91 million |
| Gross profit / margin | $15.89 million / 39.5% | $21.14 million / 43.8% |
| Operating expenses | $47.41 million | $40.67 million |
| Operating loss | $(31.52) million | $(19.53) million |
| Net loss | $(36.22) million | $(26.16) million |
| Operating cash flow | $(22.84) million | $(28.63) million |
| Cash used in investing | $(8.77) million | $(6.48) million |
| Cash from financing | $40.74 million | $17.84 million |
- Cash and cash equivalents were $12.09 million at year-end, versus $2.95 million in 2017. Total assets were $62.57 million; current assets $43.16 million and current liabilities $27.20 million.
- Loans and borrowings were reported at $48.83 million, up from $30.66 million. Total equity was a deficit of $5.02 million.
- Fourth-quarter revenue was $6.07 million, gross profit $2.63 million, operating loss $9.33 million and net loss $9.47 million. Q4 2017 revenue was $11.32 million and net loss $7.65 million.
Material changes and business drivers
- Annual revenue fell 17%, principally because product revenue declined 23%. IoT product revenue grew 92% to $17.8 million, about 61% of product revenue; broadband product revenue fell 60% to $11.1 million. The company attributed the broadband decline to weaker emerging-market sales and its choice to prioritize IoT development over a second-generation Cat 6 product.
- Gross margin declined from 43.8% to 39.5%; product gross margin fell from 33.8% to 24.1%, primarily due to a higher mix of lower-margin module sales.
- Operating expenses rose 17%. R&D increased 11%, sales and marketing 7%, and general and administrative expense 51%, the latter primarily due to bad-debt expense and legal fees. A $1.78 million receivables impairment charge was recorded.
- Sequans shipped approximately 3.2 million units in 2018, compared with 3.4 million in 2017. The annual loss widened despite a lower operating cash outflow, with financing proceeds supporting the year-end cash increase.
Outlook, risks and unusual items
- Management expected 2019 operating expenses and capital investment to be slightly lower than 2018. It forecast strong IoT growth, including Cat M ramping particularly in the second half of 2019; broadband was expected to be stable or decline slightly in the near term. These are forward-looking expectations, not guarantees.
- Management stated available resources were expected to fund operations for at least 12 months, relying in part on expected financing and government research-program funding. After year-end, a strategic investor provided approximately $8.4 million through warrants; Nokomis committed to buy a $3 million convertible note, and CEO Georges Karam committed to lend up to $700,000 if needed.
- Liquidity remains exposed to recurring losses and operating cash burn. The company depends on a single wafer foundry, TSMC, has concentrated customers (top ten represented 86% of 2018 revenue; one customer represented 32%), and generally sells on purchase orders without long-term customer commitments. A Harbert venture loan is secured by assets including intellectual property and is senior to convertible notes.
- A securities class action concerning historical revenue-recognition disclosures remained pending; a $352,000 provision was recorded. A February 2019 mediation did not resolve the case, and the motion to dismiss awaited a court decision.
- Management and the auditor identified a material weakness in controls over accounting for complex, non-routine transactions, including convertible-debt amendments and financial instruments with equity components. Management deemed disclosure controls ineffective; the auditor issued an adverse opinion on internal control over financial reporting, while giving an unmodified opinion on the financial statements.
- IFRS 15 was adopted in 2018 using the modified retrospective method, reducing opening equity by $0.1 million. The filing states comparative periods were not restated. The company reported no dividends and no distributable retained earnings at year-end.
Important facts for investors to verify
- Whether IoT Cat M/NB-IoT design wins convert into shipments and revenue on the timing management anticipated, particularly in the second half of 2019.
- Customer concentration, aged receivables, the $2.59 million year-end receivables allowance and any further collection or bad-debt developments.
- Cash runway and funding conditions, including the post-year-end strategic warrant proceeds, the Nokomis note commitment, CEO backstop and repayment terms for Harbert debt.
- Progress in remediating the material weakness and whether controls over complex financing transactions become effective.
- Developments in the securities class action, including the court’s decision and any eventual settlement or loss beyond the recorded provision.
- Potential dilution from outstanding convertible notes, warrants and other equity awards, and compliance with NYSE listing requirements.