iQSTEL Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
iQSTEL Inc. filed its annual report for the fiscal year ended December 31, 2020, signed April 15, 2021. The company provides international telecommunications and technology services in 13 countries through wholly and majority-owned subsidiaries, including Etelix, SwissLink, QGlobal SMS, IoT Labs and ItsBchain. Its offerings include VoIP, international voice and data connectivity, SMS, IoT, cloud communications, blockchain and fintech solutions.
During 2020, the company expanded its SMS operations through acquisitions of QGlobal SMS and IoT Labs and continued transitioning from a primarily VoIP business toward a mix of VoIP and higher-margin SMS services. The company reported 49 employees at December 31, 2020.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $44.91 million | $18.03 million | Approximately 149% increase |
| Cost of revenue | $43.95 million | $17.25 million | Increase |
| Gross profit | $962,352 | $780,925 | Increase |
| Gross margin | Approximately 2.1% | Approximately 4.3% | Decrease |
| Operating loss | $3.21 million | $668,699 | Worsened |
| Net loss | $6.70 million | $5.44 million | Worsened |
| Net loss attributable to iQSTEL shareholders | $6.57 million | $5.46 million | Worsened |
| Loss per share | $0.10 | $0.35 | Lower loss per share, partly reflecting share issuance |
| Cash and cash equivalents | $753,316 | $270,503 | Increase |
| Net cash used in operating activities | $2.12 million | $1.24 million | Greater use of cash |
| Net cash provided by financing activities | $2.66 million | $1.36 million | Increase |
Revenue growth was driven by expanded commercial activity, acquisitions and increased SMS sales. IoT Labs generated $25.02 million of 2020 revenue, Etelix generated $14.03 million, SwissLink $5.43 million and QGlobal $421,619.
Operating expenses rose to $4.17 million from $1.45 million. Major contributors included salaries and benefits, advertising, stock-based compensation, professional fees, bank fees and allowances for doubtful accounts. Other expense was $3.49 million, including $3.51 million of interest expense and $154,629 of losses on debt settlements, partially offset by a $255,614 benefit from changes in derivative liability fair value.
At year-end, current assets were $3.58 million versus current liabilities of $7.91 million, producing a working-capital deficiency of $4.33 million and a current ratio of approximately 0.45 to 1. Total liabilities were $8.35 million and total stockholders' deficit was $2.40 million. Debt included $1.60 million of loans payable, $2.05 million of loans payable to related parties and $256,370 of convertible notes, net of discounts. Current derivative liabilities were $1.03 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased by approximately 149%, primarily due to acquisitions and expansion of SMS services.
- Gross profit increased in dollars but gross margin declined materially because cost of revenue grew nearly in line with revenue.
- Operating expenses increased by $2.72 million, reflecting a larger consolidated operating structure, management compensation, advertising and stock-based compensation.
- Net loss increased from $5.44 million to $6.70 million, while operating loss increased from $668,699 to $3.21 million.
- Operating cash use increased to $2.12 million, requiring additional debt and equity financing.
- The company issued 100.2 million common shares during 2020 for cash, debt settlement or conversion, services, debt forbearance and cashless warrant exercises. Shares outstanding increased to 118.1 million at year-end from 18.0 million.
- Derivative liabilities declined from $4.74 million to $1.03 million, principally due to settlements and conversions into equity.
- Management established Series A Preferred Stock in November 2020. The 10,000 issued shares carry voting rights equal to 51% of the total shareholder vote and were held by management at year-end.
Guidance, Outlook, Risks and Unusual Items
Management stated that, if revenue continued growing at a similar rate, consolidated revenue could reach approximately $60 million by December 31, 2021. Management also expected gross-margin improvement from better termination costs. This is company commentary, not a formal guaranteed forecast.
The auditor expressed substantial doubt about the company's ability to continue as a going concern. Management stated that available cash was insufficient to operate at the current level for the next twelve months and planned to rely on increased sales, debt financing, private financing and a best-efforts Regulation A offering for up to 80 million common shares. No minimum amount was guaranteed to be raised, and no formal financing commitment existed.
- Customer concentration is significant: the fourteen largest customers represented 80% of 2020 consolidated revenue, while six customers represented 70% of revenue according to the financial statement notes.
- The telecommunications business faces intense price competition, declining per-unit pricing, carrier-agreement dependency and substitution from over-the-top services such as WhatsApp, Skype and Viber.
- International operations expose the company to foreign-exchange, collection, political, regulatory and economic risks.
- COVID-19 had no material adverse effect identified at December 31, 2020, but management stated that future impacts remained uncertain.
- The company disclosed ineffective disclosure controls and ineffective internal control over financial reporting, including inadequate segregation of duties, risk assessment and written accounting policies. The company had not remediated these material weaknesses by year-end.
- Derivative liabilities were classified as Level 3 fair-value measurements and depended on valuation assumptions including volatility, share price, term, exercise price and risk-free interest rates.
- No current legal proceedings or off-balance-sheet arrangements were reported.
- Subsequent to year-end, management converted 21 million common shares into 21,000 Series B Preferred shares. In February 2021, the company settled approximately $1.52 million of loans with Apollo and M2B through share issuances and cash interest payments.
Most Important Facts for Investors to Verify
- Verify the company's ability to raise sufficient capital and address the auditor's going-concern uncertainty.
- Assess whether revenue growth is sustainable and whether SMS expansion can produce materially higher gross margins.
- Reconcile the large increase in outstanding shares, debt conversions, warrant activity and preferred-stock voting rights, including potential future dilution.
- Review the maturity dates, interest rates, conversion terms and default provisions of the company's loans and convertible notes.
- Evaluate customer concentration, accounts-receivable collectability and the adequacy of the allowance for doubtful accounts.
- Monitor remediation of the disclosed material weaknesses in internal control and ineffective disclosure controls.
- Review the valuation methodology and assumptions for derivative liabilities, as changes may materially affect reported earnings.
- Note that the filing's MD&A contains an apparent labeling error referring to both revenue figures as 2019; the audited statements identify $44.91 million as 2020 revenue and $18.03 million as 2019 revenue.