iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL provides global telecommunications and technology services, including voice, SMS, data, VoIP, 4G/5G connectivity, cloud communications, IoT, blockchain, and payment solutions. The company operates primarily through Etelix, SwissLink, QGlobal, IoT Labs, and other subsidiaries. This unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
The company reported 138,826,964 common shares outstanding at March 31, 2021 and 136,881,964 shares as of May 14, 2021. It is a non-accelerated filer and smaller reporting company.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $14.20 million | $5.02 million | Up 183.0% |
| Gross profit | $487,370 | $(161,141) | Improved by $648,511 |
| Gross margin | 3.4% | (3.2%) | Improved |
| Operating loss | $(1.01) million | $(1.46) million | Improved by $447,927 |
| Operating margin | (7.1%) | (29.1%) | Improved |
| Net loss | $(1.88) million | $(3.91) million | Improved by $2.03 million |
| Net loss attributable to iQSTEL stockholders | $(1.94) million | $(3.89) million | Improved by $1.95 million |
| Loss per common share | $(0.01) | $(0.13) | Improved |
| Cash flow from operations | $(1.04) million | $(541,884) | Higher cash use |
| Cash flow from financing | $3.42 million | $586,874 | Higher inflow |
Revenue growth was primarily attributable to the acquisition and inclusion of IoT Labs, which contributed $9.25 million of Q1 2021 revenue, and QGlobal, which contributed $250,014. Etelix revenue declined to $3.56 million from $3.82 million, while SwissLink revenue declined modestly to $1.14 million.
Cash and cash equivalents increased to $3.03 million at March 31, 2021 from $753,316 at December 31, 2020. Current assets were $5.83 million versus current liabilities of $6.41 million, resulting in a working-capital deficit of $573,952, improved from $4.33 million at year-end 2020.
Total liabilities were $6.81 million, including $1.92 million of loans payable to related parties, $248,437 of other loans payable, $3,180 of convertible notes, $2.06 million of stock payable, and $39,505 of derivative liabilities. Debt reductions during the quarter included the settlement of $1.52 million of loans payable through shares and the conversion of $422,295 of convertible debt into common stock.
Material Changes Versus the Prior Comparable Period
- Revenue increased 183.0%, while cost of revenue increased 164.7% to $13.71 million.
- Gross profit improved from a loss of $161,141 to profit of $487,370, reflecting better termination economics and higher sales volume.
- Operating expenses increased 15.5% to $1.50 million, including $758,596 of stock-based compensation and higher professional fees.
- Other expense declined to $867,748 from $2.45 million, largely because the change in fair value of derivative liabilities shifted from a $1.66 million expense to a $277,575 gain and interest expense declined.
- Operating cash use increased to $1.04 million, despite the lower net loss, partly reflecting working-capital movements.
- Financing provided $3.42 million, including $3.59 million from common-stock issuances under a Regulation A offering.
- The company issued 42,988,132 common shares for cash, compensation, services, debt conversion, and debt forbearance. Management converted 21,000,000 common shares into 21,000 Series B preferred shares.
Guidance, Outlook, Risks, and Unusual Items
Management expects gross margin to increase over the following twelve months as a result of improved termination costs. No specific revenue, earnings, or cash-flow guidance was provided.
Management states that existing cash is insufficient to operate at the current level for the next twelve months. The company expects to rely on increased sales and additional debt or equity financing, including a best-efforts Regulation A offering for up to 80,000,000 common shares and a potential private equity offering. There is no assurance that additional funding will be available on acceptable terms or at all.
The financial statements include a going-concern disclosure. The company has recurring operating losses, a working-capital deficiency, and no established source of revenue sufficient to cover operating costs. Management states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
COVID-19 had no material adverse impact identified at March 31, 2021, but management warns that a prolonged outbreak could affect operations, receivable collections, and service quality. Customer concentration is significant: four customers represented 86% of Q1 2021 revenue.
Disclosure controls and procedures were deemed ineffective as of March 31, 2021. Reported material weaknesses were inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies relating to U.S. GAAP and SEC requirements.
Unusual items included a $539,863 loss on settlement of debt, $758,596 of stock-based compensation, a $277,575 derivative-liability fair-value gain, and $2.06 million recorded as stock payable for shares not yet issued at quarter-end. No material pending legal proceedings or off-balance-sheet arrangements were reported.
Investor Verification Checklist
- Verify whether the company can achieve positive operating cash flow and eliminate its working-capital deficit.
- Assess the sustainability and quality of revenue growth, particularly the contribution from IoT Labs and customer concentration.
- Review the terms, dilution impact, and availability of the Regulation A and potential private financing.
- Confirm settlement and issuance of the 2,230,994 shares recorded as stock payable and evaluate additional dilution from equity-linked instruments.
- Evaluate related-party loans, including $1.92 million payable to related parties and the $221,790 due from related parties.
- Monitor remediation of ineffective disclosure controls and the identified internal-control material weaknesses.
- Review the going-concern uncertainty and the company’s ability to fund operations for the next twelve months.