iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. is a telecommunications services provider offering wholesale voice, SMS, data, VoIP, IoT, connectivity, and related technology services. The unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company operates primarily in the United States and Switzerland and consolidated IoT Labs, LLC beginning April 15, 2020 after acquiring a 51% interest.
As of November 11, 2020, 85,373,720 common shares were outstanding. The company is a non-accelerated filer and smaller reporting company.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 |
|---|---|---|---|---|
| Revenue | $13.292 million | $4.173 million | $29.439 million | $12.589 million |
| Gross profit | $0.133 million | $0.243 million | $0.704 million | $0.587 million |
| Gross margin | 1.0% | 5.8% | 2.4% | 4.7% |
| Operating loss | $(0.826) million | $(0.249) million | $(2.457) million | $(0.438) million |
| Net loss | $(0.970) million | $(3.517) million | $(3.502) million | $(5.027) million |
| Net loss attributable to iQSTEL stockholders | $(0.944) million | $(3.533) million | $(3.548) million | $(5.043) million |
| Operating cash flow | Not separately provided | Not separately provided | $(1.527) million | $(1.331) million |
Revenue increased 218.6% year over year in the third quarter and 133.8% for the nine-month period. The nine-month revenue contribution included Etelix of $10.705 million, SwissLink of $3.917 million, QGlobal of $0.278 million, and IoT Labs of $14.539 million.
Cost of revenue was $13.159 million in the third quarter and $28.735 million for the nine-month period. Operating expenses rose to $0.959 million in the quarter and $3.161 million year to date, including $0.618 million of stock-based compensation. Advertising expense was $0.926 million year to date.
Interest expense was $0.914 million in the third quarter and $2.368 million year to date. The company recorded a $1.351 million year-to-date gain from changes in the fair value of derivative liabilities, compared with a $2.802 million loss in the prior-year period. The third-quarter loss also included a $0.331 million loss on settlement of debt.
Balance Sheet, Debt, and Liquidity
| Balance-sheet item | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $0.647 million | $0.271 million |
| Accounts receivable, net | $1.962 million | $2.759 million |
| Total assets | $5.324 million | $5.603 million |
| Current liabilities | $7.941 million | $11.146 million |
| Total liabilities | $8.368 million | $11.373 million |
| Stockholders’ deficit | $(3.043) million | $(5.770) million |
Working capital was negative $4.972 million at September 30, 2020, compared with negative $7.707 million at year-end 2019. Current liabilities included $1.370 million of current loans payable, $1.975 million of related-party loans, $1.279 million of current convertible notes, and $0.658 million of derivative liabilities. Total convertible notes, net of discounts, were $1.281 million, while total loans payable, including current and long-term amounts, were approximately $3.614 million.
Operating activities used $1.527 million of cash during the first nine months. Investing activities used $0.079 million. Financing activities provided $1.969 million, including proceeds from loans, convertible notes, and $0.715 million from common-stock issuances. Cash increased by $0.377 million to $0.647 million.
Management states that existing cash is insufficient to fund operations at the current level for the next twelve months. The financial statements contain a substantial doubt regarding the company’s ability to continue as a going concern.
Material Changes and Unusual Items
- IoT Labs was acquired for total consideration of $0.180 million, with goodwill of $0.082 million, and contributed materially to reported revenue.
- The company issued approximately 60.178 million common shares during the nine months, including shares for cash, debt conversions, debt settlements, services, and cashless warrant exercises. Outstanding shares increased from 18.009 million at December 31, 2019 to 78.186 million at September 30, 2020.
- Convertible notes with principal amounts of $0.681 million and accrued interest of $0.086 million were converted into 35.813 million common shares. The related derivative liability settlement totaled $3.742 million.
- New 2020 convertible notes carried stated interest rates of 5% or 12%, conversion discounts generally ranging from 25% to 60%, and included 6.5 million warrants outstanding at September 30, 2020.
- Revenue growth did not translate into improved operating profitability because gross margins declined and public-company, compensation, advertising, and stock-based expenses increased.
- Fourteen customers represented 80% of nine-month 2020 revenue. Approximately 39% of revenue came from customers under prepayment arrangements.
Guidance, Outlook, Risks, and Controls
The filing provides no quantified revenue, earnings, or margin guidance. Management expects to fund operations through increased sales and additional debt or equity financing, including a best-efforts Regulation A offering for up to 24 million common shares and potential private financing. There is no assurance that sufficient financing will be obtained.
COVID-19 had no material reported impact through September 30, 2020, but management warns that a prolonged outbreak could affect operations, customer collections, and service quality. Other principal risks include the company’s substantial working-capital deficit, recurring losses, high-cost and potentially dilutive debt, customer concentration, reliance on financing, and derivative liabilities whose valuations depend on Level 3 assumptions and stock-price volatility.
Management concluded that disclosure controls and procedures were ineffective as of September 30, 2020. Identified material weaknesses included inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies. No material pending legal proceedings or off-balance-sheet arrangements were reported.
After the quarter, the board approved five-year amended employment agreements with senior executives, including quarterly stock bonuses and rights to convert accrued compensation into common or Series A preferred shares if cash is unavailable. On November 3, 2020, the company designated up to 10,000 Series A preferred shares carrying voting power equal to 51% of the total shareholder vote.
Important Facts for Investors to Verify
- Whether the company can obtain enough debt or equity financing to address the stated going-concern uncertainty and negative working capital.
- The terms, maturity dates, conversion discounts, redemption provisions, and potential dilution from convertible notes, warrants, and preferred stock.
- Whether revenue growth can produce sustainable gross-margin improvement after direct carrier and SMS termination costs.
- The effect of the IoT Labs acquisition on recurring revenue, profitability, cash flow, and noncontrolling interests.
- The extent and remediation status of the disclosed material weaknesses in internal control and ineffective disclosure controls.
- The collectability of accounts receivable and exposure to the fourteen customers representing 80% of nine-month revenue.
- The potential impact of executive stock bonuses, preferred-stock voting rights, and accrued compensation conversions on ownership and control.