Business Context and Reporting Period
iQSTEL Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed April 15, 2020. The company provides international wholesale telecommunications services, including VoIP, SMS, data connectivity, submarine fiber capacity, and related technology platforms. Its principal operating subsidiaries were Etelix.com USA, LLC and, following an August 2019 acquisition, SwissLink Carrier AG.
The filing is an annual report rather than a quarterly filing; the provided period metadata identifies 2019 Q4, but the financial statements cover the full years ended December 31, 2019 and 2018.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $18.03 million | $13.78 million | Up 30.9% |
| Cost of goods sold | $17.25 million | $12.58 million | Up 37.1% |
| Gross profit | $780,925 | $1.19 million | Down 34.5% |
| Gross margin | 4.33% | 8.66% | Down 4.33 percentage points |
| Operating loss | $668,699 | $27,895 | Higher loss |
| Net loss | $5.44 million | $2.10 million | Higher loss |
| Net loss attributable to iQSTEL shareholders | $5.46 million | $2.10 million | Higher loss |
| Loss per share | $0.35 | $0.15 | Higher loss per share |
| Net cash used in operating activities | $1.24 million | $356,551 | Higher cash use |
| Cash and cash equivalents | $270,503 | $4,570 | Higher ending cash |
Revenue consisted of $16.32 million from Etelix and $1.71 million from SwissLink. Management attributed growth primarily to increased traffic to higher-revenue African destinations and reported that existing infrastructure could accommodate more than twice the current traffic volume.
Operating expenses were $1.45 million in 2019 versus $1.22 million in 2018. Salaries, wages and benefits increased substantially, while professional fees included SwissLink due-diligence and audit costs. Other expense was $4.77 million, principally reflecting $2.65 million of interest expense and a $2.11 million loss from changes in the fair value of derivative liabilities.
Liquidity, Debt and Capital Resources
| Balance-sheet metric | December 31, 2019 | December 31, 2018 |
|---|---|---|
| Current assets | $3.44 million | $2.11 million |
| Current liabilities | $11.15 million | $3.99 million |
| Working-capital deficiency | $7.71 million | $1.88 million |
| Current ratio | 0.31 to 1 | 0.54 to 1 |
| Total liabilities | $11.37 million | $3.99 million |
| Shareholders’ deficit | $5.77 million | $1.60 million |
Cash flow from financing activities provided $1.36 million, including $2.27 million of convertible-note proceeds, partly offset by $824,401 of convertible-note repayments. The company stated that it did not have sufficient cash to operate at its current level for the next twelve months and expects to rely on increased sales and additional debt or equity financing.
Convertible notes, derivative liabilities and related obligations were significant. Current derivative liabilities were $4.74 million, compared with $1.79 million in 2018. Convertible notes, net of discount, totaled approximately $1.26 million, and related-party loans totaled $1.89 million, substantially higher than in 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased 30.9%, but cost of sales grew faster, reducing gross margin by approximately half.
- Operating expenses increased 18.8%, driven primarily by higher management compensation, professional fees and costs associated with SwissLink.
- Net loss increased to $5.44 million from $2.10 million, largely because of higher interest expense and derivative-liability losses.
- Operating cash burn increased to $1.24 million from $356,551.
- Current liabilities rose sharply, primarily due to derivative liabilities, convertible notes and related-party debt.
- The company acquired 51% of SwissLink Carrier AG on August 7, 2019 for $500,000, consisting of $50,000 in cash and $450,000 in common stock. The acquisition generated $1.46 million of goodwill and included significant liabilities assumed.
- The company issued 2,985,941 common shares during 2019, including shares issued with convertible notes, debt conversions, warrant exercises and the SwissLink acquisition.
Guidance, Outlook, Risks and Unusual Items
Management projected consolidated revenue of approximately $23 million by December 31, 2020 if recent growth continued. It also expected improved gross margins from renegotiated vendor termination costs and approximately $80,000 of annual operating-cost savings from the HostSBC platform. These are forward-looking statements and are not guaranteed.
The independent auditor expressed substantial doubt about the company’s ability to continue as a going concern for one year from issuance of the financial statements. The company reported recurring losses, a material working-capital deficiency and no established funding source sufficient to cover operating costs.
- Eight customers represented approximately 70% of 2019 consolidated revenue, creating significant customer-concentration and collection risk.
- The business faces declining international voice prices, intense competition, substitution by over-the-top communication applications, carrier-agreement renewal risk and regulatory exposure.
- Management reported ineffective disclosure controls and ineffective internal control over financial reporting, citing inadequate segregation of duties, risk assessment and written accounting policies.
- Convertible notes contain variable conversion features and discounts tied to the company’s trading price, creating potential dilution and derivative-liability volatility.
- The company’s common stock trades on the OTC Pink market, has limited liquidity and is subject to penny-stock risks.
- Subsequent to year-end, the company issued or entered into convertible notes totaling at least $811,111 in principal amount with M2B Funding Corp. These notes generally bore 12% interest and were convertible at a substantial discount to market prices.
- The filing identifies COVID-19 as a risk that could adversely affect operations, financial condition and results, although the ultimate impact could not be determined.
Important Facts for Investors to Verify
- Reconcile the reported annual net loss and operating-expense disclosures, as portions of the narrative contain apparent year-labeling or wording errors.
- Review the detailed terms, maturity dates, default provisions, conversion discounts and potential share dilution from convertible notes and warrants.
- Assess whether additional financing was obtained after filing and whether it was sufficient to address the stated going-concern uncertainty.
- Evaluate SwissLink’s actual contribution to revenue, cash flow and profitability relative to the liabilities and goodwill recognized in the acquisition.
- Monitor customer concentration, accounts-receivable collectability and the absence of an allowance for doubtful accounts at December 31, 2019.
- Review remediation of the reported material weaknesses in internal control and the effectiveness of disclosure controls.
- Confirm subsequent share issuances and the difference between 18.0 million shares outstanding at December 31, 2019 and 44.6 million shares reported as outstanding at March 31, 2020.