iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2020, filed June 29, 2020. iQSTEL provides wholesale and enhanced telecommunications services, including VoIP, SMS, data, IoT, connectivity, blockchain-based payment, and phone-number mobility services. Operations cover the United States and Switzerland and are consolidated with subsidiaries including Etelix, SwissLink, ITSBCHAIN, and QGlobal SMS.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 / Prior Period |
|---|---|---|
| Revenue | $5.02 million | $4.16 million |
| Gross profit (loss) | $(161,141) | $435,577 |
| Gross margin | (3.2%) | 10.5% |
| Operating income (loss) | $(1.46 million) | $245,070 |
| Net loss | $(3.91 million) | $(1.03 million) |
| Net loss attributable to iQSTEL shareholders | $(3.89 million) | $(1.03 million) |
| Loss per share | $(0.13) | $(0.07) |
| Cash flow from operations | $(541,884) | $(321,149) |
| Cash and equivalents at period end | $257,300 | $71,084 at March 31, 2019 |
Revenue increased 20.5% year over year, driven primarily by higher traffic to African destinations and the contribution of SwissLink, acquired in August 2019. Cost of revenue increased faster than revenue, resulting in a gross loss. Management attributed the higher costs to the greater volume and higher rates of African traffic.
Operating expenses increased to $1.30 million from $190,507. The increase included $500,034 of stock-based compensation, higher management compensation, $285,912 of advertising, and costs associated with operating as a public company. Other expense was $2.45 million, including $1.66 million from changes in derivative-liability fair value and $801,374 of interest expense.
At March 31, 2020, total assets were $5.23 million, total liabilities were $11.37 million, and shareholders’ deficit was $6.14 million. Current assets of $3.03 million compared with current liabilities of $10.98 million produced a working-capital deficit of $7.95 million. Debt included $379,809 of loans payable, $1.89 million of related-party loans, and $1.98 million of convertible notes, net of discounts. Derivative liabilities totaled $3.84 million.
Material Changes Versus the Prior Comparable Period
- Revenue rose $854,209, or 20.5%, to $5.02 million.
- Gross profit declined by $596,718, as cost of revenue increased 38.9% and exceeded revenue.
- Operating expenses increased by $1.11 million, or approximately 581%, primarily because of stock compensation, increased executive compensation, advertising, and public-company costs.
- Net loss increased by $2.88 million, reflecting the operating loss, higher interest expense, and higher derivative-liability losses.
- Operating cash use increased by $220,735. Financing activities provided $586,874, including $810,000 of convertible-note proceeds and $210,000 of loan proceeds, partially offset by debt repayments.
- Shares outstanding increased from 18.0 million at December 31, 2019 to 46.0 million at March 31, 2020. The company reported 63,762,484 shares outstanding as of June 24, 2020.
- During the quarter, the company issued 27,975,557 shares for debt settlement, services, debt conversion, forbearance, and a cashless warrant exercise.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that revenue could reach approximately $23 million for 2020 if growth continued at a similar rate; this is forward-looking and not assured.
- The filing states that the company does not have sufficient cash to operate at its current level for the next twelve months and may require additional debt or equity financing.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance, citing recurring losses, negative working capital, limited cash, and insufficient established revenue to cover operating costs.
- The company’s financing depends substantially on convertible notes and other high-cost debt. Many conversion prices are linked to discounted market prices, creating potential dilution. Warrants outstanding at March 31, 2020 totaled 8,333,334 shares at a weighted-average exercise price of $0.01.
- Derivative liabilities are Level 3 measurements based on a Black-Scholes model and highly sensitive to volatility, share price, term, and other assumptions. The company recognized a $1.66 million derivative fair-value loss in the quarter.
- Twelve customers represented 83% of Q1 2020 revenue, creating significant customer concentration risk.
- Disclosure controls and procedures were ineffective at March 31, 2020. Management identified material weaknesses involving segregation of duties, risk assessment, and written accounting and financial-reporting policies.
- Subsequent events included additional promissory notes, proposed acquisitions in SMS and IoT businesses, additional convertible financing, equity sales, amended repayment terms for a convertible note, and a potential equity purchase commitment of up to $1.04 million at a discount to market prices.
- 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 financing to address its $7.95 million working-capital deficit and ongoing operating cash burn.
- The maturity, conversion, repayment, and default terms of outstanding convertible notes, related-party loans, and other high-interest debt.
- The potential share dilution from convertible notes, reset provisions, warrants, stock-based compensation, and subsequent equity financings.
- The valuation assumptions and future volatility effects underlying the $3.84 million derivative-liability balance.
- The collectability of $2.39 million of accounts receivable and the exposure to major customers representing 83% of revenue.
- The status, funding requirements, and closing conditions of the announced acquisitions and other subsequent transactions.
- The filing’s inconsistent statement in Part II that certain share issuances occurred during the three months ended March 31, 2019; the financial statements and Note 10 indicate the major issuances occurred during Q1 2020.