Business Context and Reporting Period
Company: Sequans Communications S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2017 (Unaudited)
Business Overview: A fabless designer and supplier of 4G LTE semiconductor solutions for wireless broadband applications, including baseband processors and RF transceivers.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2016 | 9 Months Ended Sep 30, 2017 |
|---|---|---|
| Total Revenue | $31,626 | $36,946 |
| Gross Profit | $14,649 | $16,420 |
| Operating Loss | $(14,878) | $(13,899) |
| Net Loss | $(19,416) | $(18,514) |
| Cash and Cash Equivalents (End of Period) | $20,202 | $12,982 |
| Net Cash Used in Operating Activities | $(9,910) | $(19,594) |
| Convertible Debt (Current + Non-Current) | $16,338 | $19,107 |
Note: Convertible debt increased due to reclassification of current portion and accrued interest.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17% to $36.9 million, driven by a 27% increase in product revenue ($28.7 million) due to higher sales in the Internet of Things (IoT) market and a shift toward higher-priced module sales.
- Operating Expenses: Sales and marketing expenses rose 34% to $6.6 million due to team expansion. Research and development (R&D) expenses decreased 4% to $19.2 million, aided by higher R&D tax credits and capitalized development costs ($1.5 million) for the CAT M product.
- Financial Expenses: Net interest expense increased 33% to $3.5 million. Foreign exchange losses widened significantly to $0.96 million (from $0.08 million) due to USD/Euro fluctuations.
- Liquidity: Cash and cash equivalents decreased by approximately $7.2 million to $13.0 million, primarily due to operating cash burn and working capital needs, partially offset by $14.9 million in net proceeds from a June 2017 public offering.
Outlook, Risks, and Contingencies
- Going Concern: Management believes existing cash plus expected financing (government grants, capital markets) will sustain operations for at least 12 months from September 30, 2017. Failure to secure additional financing could negatively impact financial condition.
- Legal Contingency: Two putative securities class actions were filed in August 2017 alleging violations regarding revenue recognition policies. The cases were consolidated; management is not aware of other proceedings with significant potential impact.
- Convertible Debt Amendments: Post-reporting date (October 2017), the company amended convertible notes to extend maturity dates to 2019 and 2020 and reduced the conversion price of 2016 notes from $2.71 to $2.25.
- Customer Concentration: The top ten customers accounted for 81% of revenue in the nine months ended September 30, 2017. The largest customer (a Taiwan-based distributor) represented 15% of total revenue.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $13.0 million cash balance against the high operating burn rate ($19.6 million used in 9 months) and the reliance on future financing.
- Revenue Quality: Assess the sustainability of the 27% product revenue growth and the impact of the shift from chipsets to modules on future margins.
- Debt Obligations: Review the terms of the amended convertible debt (due 2019/2020) and the impact of the lower conversion price on potential future dilution.
- Legal Exposure: Monitor the status of the consolidated securities class action regarding revenue recognition allegations.
- Customer Dependency: Evaluate the risk associated with the top 10 customers representing 81% of revenue.