Sequans Communications S.A. — FY 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; the filing also provides unaudited quarterly results. Financial statements are presented in U.S. dollars under IFRS as issued by the IASB. Sequans designs and supplies cellular semiconductor chips and modules for Massive, Broadband and Critical IoT markets.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $30.9 million | $40.3 million |
| Product revenue | $21.9 million | $28.9 million |
| Other revenue | $8.9 million | $11.3 million |
| Gross profit / margin | $12.4 million / 40.1% | $15.9 million / 39.5% |
| Operating loss | $28.0 million | $31.5 million |
| Net loss | $36.7 million | $36.2 million |
| Net loss per ADS | $1.54 | $1.55 |
| Operating cash flow | $5.1 million | ($22.8 million) |
| Investing cash flow | ($9.1 million) | ($8.8 million) |
| Financing cash flow | $6.0 million | $40.7 million |
| Cash and cash equivalents at year-end | $14.1 million | $12.1 million |
Operating expenses were $40.3 million, down 15%, including R&D of $23.8 million, sales and marketing of $8.0 million, and general and administrative expense of $8.6 million. Net interest expense increased to $9.6 million from $5.4 million, reflecting additional convertible debt, a full year of venture-debt interest, lease interest and financing costs on a development agreement.
At year-end, total assets were $63.3 million, current assets $37.0 million, current liabilities $38.1 million, and equity was negative $29.6 million. The company reported a working-capital deficiency of approximately $1.0 million. Selected financial data reports current and non-current loans and borrowings of $58.6 million; the filing’s detailed debt disclosures include convertible notes, venture debt, receivables financing, government and research-project financing, and lease liabilities.
Operating cash flow turned positive largely in conjunction with a $15.0 million increase in contract liabilities, including the strategic-partner advance; it should not be read as evidence of operating profitability. Capital expenditures, including intangible assets, were $9.1 million.
Q4 2019 quarterly results (unaudited)
Revenue was $9.2 million, versus $6.1 million in Q4 2018; gross profit was $4.3 million versus $2.6 million. Operating loss was $5.6 million versus $9.3 million, and net loss was $9.2 million versus $9.5 million. Q4 2019 included $4.1 million of other revenue, unusually high due to development services and license activity.
Material changes versus prior periods
- Annual revenue fell 23% from 2018; product revenue declined 24% and other revenue 21%. Shipments fell to approximately 2.5 million units from 3.2 million.
- IoT product revenue declined 30%, mainly due to lower Cat 1 sales after a major customer reduced expected volumes and projects were delayed, leaving channel inventory. Broadband product revenue fell 16%; management attributed continued weakness in part to its earlier decision to prioritize IoT development over a second-generation Cat 6 offering.
- Gross margin improved slightly to 40.1% from 39.5%, while operating loss narrowed as operating expenses fell. Product gross margin remained approximately 23.9%.
- Net loss was broadly unchanged, as lower operating expenses were offset by higher financing costs.
- Operating cash flow improved from a $22.8 million outflow to a $5.1 million inflow, substantially reflecting customer advances and working-capital movements.
- Debt and financing obligations increased, while equity deficit widened. The company issued $8.0 million of convertible notes and received approximately $8.3 million from strategic-investor warrants in 2019.
Outlook, risks and unusual items
- Management outlook: Sequans expected strong Massive IoT growth in 2020, with Cat 1 shipments continuing and a Cat M ramp, particularly in the second half. It expected Broadband IoT to improve slightly as customer design wins launched, including CBRS products. These are expectations, not assured results.
- Costs and development: Management expected operating expenses to be stable or slightly higher in 2020 as it completed Monarch 2 and Monarch N development and increased 5G development. Capital investment was expected to increase slightly.
- Going concern and funding: The company reported recurring losses, a $308.7 million accumulated deficit and a working-capital deficiency. Management said significant additional financing was required and that substantial doubt existed about the company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis; the auditor’s financial-statement opinion was unqualified but included a going-concern explanatory paragraph.
- Strategic-partner agreement: A multi-year license and development-services agreement signed in October 2019 had an estimated value exceeding $35 million, subject to milestones, and included an $18 million upfront payment. Under a March 2020 amendment, Sequans was required to secure at least $25 million in qualifying net financing by September 30, 2020. If it failed, the partner could terminate and seek repayment of $8 million of the upfront payment. The filing’s cash forecast excluded a potential repayment.
- Customer and supplier concentration: The top ten customers represented 95% of 2019 revenue. One foundry, TSMC in Taiwan, supplied all semiconductor wafers; the company had no long-term foundry agreement. Asian manufacturing and customer exposure also heightened supply-chain and demand risks.
- COVID-19: The filing warned that the pandemic could disrupt production, suppliers, customers, remote operations and access to capital. The extent of the effect was uncertain as of the report date.
- Controls and revenue accounting: Management and the auditor identified a material weakness in controls over complex transactions, including certain 2019 revenue arrangements and variable consideration recorded in the wrong period. Management concluded disclosure controls and internal control over financial reporting were ineffective; the auditor issued an adverse opinion on internal control. The financial-statement audit opinion remained unqualified.
- Legal matter: A securities class action concerning historical revenue disclosures remained pending. In March 2020, the parties reached a tentative settlement subject to documentation and court approval; the company said it did not expect resolution costs to exceed insurance coverage.
- Other notable items: Sequans adopted IFRS 16 in 2019 using the modified retrospective method, recognizing lease assets and liabilities; prior years were not restated. It changed the ADS ratio on November 29, 2019, with each ADS thereafter representing four ordinary shares.
Most important facts for investors to verify
- Whether Sequans secured the required $25 million in qualifying financing by September 30, 2020, and whether the strategic-partner agreement continued without repayment or termination.
- Cash runway and financing needs, including timing and terms of new debt, equity, government funding or strategic arrangements.
- Whether operating cash flow can be sustained apart from upfront customer advances and other working-capital changes.
- Customer concentration, Cat 1 channel inventory, Cat M commercialization and actual shipments from expected design wins.
- Progress in remediating the material weakness and whether subsequent filings report revenue adjustments or restatements.
- Debt maturities, interest and potential dilution from convertible notes, warrants and equity awards.
- Developments in the securities litigation and the effect of COVID-19 on production, demand and financing access.