Business Context and Reporting Period
iQSTEL Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company provides wholesale telecommunications services, including voice, SMS, data, VoIP, IoT connectivity, and related technology services, primarily through operations in the United States and Switzerland.
On April 15, 2020, iQSTEL acquired a 51% interest in IoT Labs LLC, which provides SMS services between the United States and Mexico. IoT Labs contributed $6.4 million of reported revenue during the six months ended June 30, 2020.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $11.1 million | $4.3 million | $16.1 million | $8.4 million |
| Gross profit | $0.7 million | $(0.1) million | $0.6 million | $0.3 million |
| Gross margin | 6.6% | (2.2%) | 3.5% | 4.1% |
| Operating loss | $(0.2) million | $(0.4) million | $(1.6) million | $(0.2) million |
| Net income (loss) | $1.4 million | $(0.5) million | $(2.5) million | $(1.5) million |
| Net income (loss) attributable to iQSTEL shareholders | $1.3 million | $(0.5) million | $(2.6) million | $(1.5) million |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(1.1) million | $(0.7) million |
Second-quarter revenue increased 161.7% year over year. The quarterly net profit was substantially affected by a $1.9 million gain from the change in fair value of derivative liabilities and a $0.3 million gain on debt settlement. For the six-month period, interest expense was $1.5 million, including substantial amortization of debt discounts.
At June 30, 2020, cash and cash equivalents were $779,553, compared with $270,503 at December 31, 2019. Accounts receivable were $2.7 million. Current assets totaled $3.9 million versus current liabilities of $8.5 million, producing a working capital deficit of $4.7 million.
Total liabilities were $8.9 million and stockholders’ deficit was $2.7 million. Current debt included $1.2 million of loans payable, $1.9 million of related-party loans, $1.1 million of current convertible notes, and $1.2 million of derivative liabilities. The filing reports $0.3 million of non-current loans and an immaterial non-current convertible-note balance.
Financing activities provided $1.6 million during the six months, including proceeds from loans, convertible notes, and a $360,000 common-stock issuance. Operating activities consumed $1.1 million, leaving the company dependent on financing and revenue growth to fund operations.
Material Changes Versus the Prior Comparable Period
- Revenue increased from $4.3 million to $11.1 million in the second quarter and from $8.4 million to $16.1 million for the six-month period, primarily reflecting expanded operations, SwissLink, and the IoT Labs acquisition.
- Quarterly gross profit improved from a $91,728 loss to $732,308 of profit, although the gross margin remained low at 6.6%.
- Six-month operating expenses increased to $2.2 million from $0.5 million. The increase included expanded subsidiary costs, management and board compensation, advertising, and $500,034 of stock-based compensation.
- The six-month operating loss worsened to approximately $1.6 million from $188,211, despite higher revenue.
- Second-quarter net income shifted to $1.4 million from a $0.5 million loss, but the six-month net loss increased to $2.5 million from $1.5 million.
- Derivative liabilities declined to $1.2 million from $4.7 million, partly through settlement in connection with common-stock issuances and changes in fair value.
- Common shares outstanding increased to 68.3 million at June 30, 2020 from 18.0 million at December 31, 2019; 72.6 million shares were outstanding as of August 11, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal revenue, earnings, or margin guidance. Management stated that the company did not have sufficient cash to operate at its current level for the next twelve months and expects to rely on increased sales, debt financing, and equity financing. Management cautioned that additional financing may not be available on acceptable terms or at all.
The financial statements include a going-concern warning. Management reported insufficient cash, negative working capital, and a six-month net loss, raising substantial doubt about the company’s ability to continue as a going concern for one year from issuance of the financial statements.
COVID-19 had no material adverse impact on reported results or financial position as of June 30, 2020, but management stated that a prolonged outbreak could affect operations, collections, service quality, and future results.
The company issued substantial equity in connection with debt conversions, debt settlements, services, warrants, and compensation. During the six months, 50.3 million common shares were issued. Convertible notes generally contain variable conversion prices, including substantial discounts to market prices, creating dilution and derivative-liability risk. Approximately 8.7 million warrants were outstanding at June 30, 2020.
Subsequent events included a July 2020 $160,000 common-stock issuance, a $200,000 convertible note with a $40,000 original issue discount and a 2.0 million-share warrant, additional bridge financing, and a proposed exchange of debt and warrants for 650,000 shares.
Management concluded that disclosure controls and procedures were ineffective as of June 30, 2020. Reported material weaknesses included inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies.
Twelve customers represented 83% of consolidated revenue during the six months ended June 30, 2020, indicating significant customer concentration. The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the company can obtain sufficient debt or equity financing to address its $4.7 million working capital deficit and ongoing operating cash burn.
- The terms, maturity dates, conversion discounts, default provisions, and potential dilution associated with convertible notes, loans, and warrants.
- The sustainability of revenue growth and whether the low gross margins can support the substantially higher corporate and subsidiary operating expenses.
- The extent to which second-quarter profitability depended on non-cash derivative-liability gains and debt-settlement gains rather than recurring operations.
- The integration, ownership, payment obligations, and performance of the IoT Labs acquisition.
- The effect of customer concentration, COVID-19-related collection or service risks, and foreign-currency exposure.
- Management’s remediation plans for ineffective disclosure controls and material weaknesses in internal control over financial reporting.
- The filing contains an apparent inconsistency: the financial statements report a six-month operating loss of $1,631,376, while the MD&A discussion cites approximately $1,627,117.