iQSTEL Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; filed April 14, 2023. The filing reports full-year results rather than standalone fourth-quarter results. iQSTEL is a global telecommunications and technology company operating in 13 countries. Telecom generated 100% of revenue; fintech, electric vehicles, metaverse and other initiatives remained pre-revenue.
Business Context
- Core services include wholesale voice, SMS, VoIP, 4G/5G connectivity, Cloud-PBX, IoT and related technology solutions.
- Whisl Telecom and Smartbiz Telecom were acquired during 2022, each with 51% ownership. Their results were consolidated from the acquisition dates.
- The company had 56 employees at December 31, 2022 and operated primarily through Etelix, SwissLink, QGlobal, IoT Labs, Whisl and Smartbiz.
Financial Performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $93.20 million | $64.70 million | +44% |
| Cost of revenue | $91.41 million | $63.17 million | +45% |
| Gross profit | $1.79 million | $1.53 million | +17% |
| Gross margin | Approximately 1.9% | Approximately 2.4% | Decreased |
| Operating expenses | $4.98 million | $4.52 million | +10% |
| Operating loss | $3.19 million | $2.98 million | Loss increased |
| Net loss | $5.87 million | $3.86 million | Loss increased |
| Net loss attributable to iQSTEL shareholders | $5.97 million | $3.84 million | Loss increased |
| Basic and diluted loss per share | $0.04 | $0.03 | Loss per share increased |
The 2022 net loss was materially affected by a $2.65 million unfavorable change in the fair value of derivative liabilities. Operating expenses increased primarily because of the newly acquired Whisl and Smartbiz businesses, partially offset by lower corporate expenses.
Revenue and Operating Metrics
- Voice revenue was $39.61 million, or 42.50% of consolidated revenue, compared with $20.13 million, or 31.11%, in 2021. Voice gross margin increased to 5.81% from 4.72%.
- SMS revenue represented 57.50% of revenue, compared with 68.89% in 2021. SMS gross margin declined to 0.40% from 0.54%.
- Voice traffic increased to approximately 2.7 billion minutes from 670 million minutes, while SMS and short-code volume increased to approximately 8.5 billion from 7.1 billion.
- Twelve customers represented 88% of consolidated revenue. Approximately 57% of revenue was generated under prepaid arrangements.
Cash Flow, Liquidity and Debt
- Cash at December 31, 2022 was $1.33 million, down from $3.33 million.
- Current assets were $6.44 million versus current liabilities of $6.45 million, producing negative working capital of $15,089 and a current ratio of approximately 0.99 to 1.
- Net cash used in operating activities was $1.77 million, compared with $3.15 million in 2021.
- Net cash used in investing activities was $2.00 million, including $1.89 million for the Whisl and Smartbiz acquisitions and $112,074 for equipment.
- Net cash provided by financing activities was $1.77 million, including $1.10 million from common stock issuance, $400,000 from warrant exercises and $500,000 from common stock purchase options.
- Total loans payable were $202,492, including $94,342 current and $108,150 non-current. Related-party loans payable were $235,949 and due on demand. Current derivative liabilities were $1.36 million.
- Total liabilities were $6.71 million and stockholders’ equity was $5.84 million at year-end.
- Management stated that available cash was insufficient to operate at the current level for the next twelve months and that additional debt or equity financing would be required.
Material Changes and Unusual Items
- Revenue increased substantially, but cost of revenue increased at a similar rate, resulting in a lower consolidated gross margin.
- The company acquired Whisl and Smartbiz for total stated purchase consideration of $3.60 million, consisting of cash and common stock. The acquisitions generated approximately $3.63 million of goodwill.
- Common shares outstanding increased to 161.6 million at December 31, 2022 from 147.5 million at December 31, 2021. The filing reports 164.2 million shares as of April 10, 2023.
- The company issued 14.1 million common shares during 2022 for cash, acquisitions, an asset acquisition, director compensation, debt settlement and warrant exercises.
- Derivative liabilities increased to $1.36 million, with a $2.65 million fair-value expense recognized in 2022. The liabilities were valued using a Level 3 Black-Scholes model with significant volatility and other assumptions.
- Subsequent to year-end, the company issued 2.94 million shares for warrant exercises and received $400,000.
Guidance, Outlook and Risks
- Management indicated that, if revenue continues growing at a similar rate, consolidated revenue could reach approximately $105 million by December 31, 2023. This is management’s expectation, not a guarantee.
- The company expects voice gross margin to improve in 2023 and is targeting increased sales of higher-margin QGlobal SMS products.
- The mobile-number-portability blockchain solution was being tested before a planned June 2023 commercial release. Fintech services had a non-commercial release in June 2022, while the electric-vehicle initiative remained subject to European Union certification.
- The independent auditor reported substantial doubt about the company’s ability to continue as a going concern because of recurring losses, insufficient established operating revenue and dependence on additional financing or future profitable operations.
- Key risks include limited liquidity, reliance on external financing, intense telecommunications price competition, very low gross margins, customer concentration, collection risk, carrier-agreement renewals, regulatory requirements, cybersecurity threats, international and currency exposure, and uncertainty around new business initiatives.
- Disclosure controls and internal control over financial reporting were reported ineffective. Management identified inadequate segregation of duties and insufficient written accounting and reporting policies as material weaknesses. Auditor attestation was not required because the company is a non-accelerated filer.
- The company reported no current legal proceedings, no off-balance-sheet arrangements and no long-term leases, contracts or commitments.
Important Facts to Verify
- Whether the company can secure sufficient debt or equity financing to fund operations for the next twelve months and address the going-concern uncertainty.
- Whether revenue growth translates into materially higher gross margins and positive operating cash flow rather than primarily higher low-margin traffic.
- The sustainability and collectability of revenue from the twelve customers representing 88% of 2022 revenue.
- The terms, potential dilution and settlement requirements associated with the remaining derivative liabilities and approximately 23.1 million warrants outstanding at December 31, 2022.
- The integration and profitability of Whisl and Smartbiz, including the substantial goodwill recorded from those acquisitions.
- Progress toward remediating ineffective disclosure controls and internal control weaknesses.
- Actual commercialization and revenue generation from the fintech, blockchain, IoT, electric-vehicle and metaverse initiatives.