Business Context and Reporting Period
Company: iQSTEL Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2024
Business Overview: iQSTEL is a technology company operating primarily in the telecommunications sector (VoIP, SMS, IoT, fiber-optic connectivity) with subsidiaries in the USA, UK, and Switzerland. The company also maintains developing divisions in Fintech, Electric Vehicles (EV), Blockchain, and AI-enhanced Metaverse solutions. The reporting period includes the consolidation of QXTEL Limited, acquired on April 1, 2024.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |
|---|---|---|
| Revenues | $130,050,642 | $57,491,358 |
| Cost of Revenue | $126,507,992 | $55,490,156 |
| Gross Profit | $3,542,650 | $2,001,202 |
| Gross Margin | 2.72% | 3.48% |
| Operating Expenses | $4,068,205 | $2,571,450 |
| Operating Loss | $(525,555) | $(570,248) |
| Net Loss | $(2,544,103) | $(320,466) |
| Cash and Equivalents (End of Period) | $797,227 | $1,126,770 |
| Total Current Assets | $17,220,260 | $15,719,172 |
| Total Current Liabilities | $22,200,638 | $13,840,944 |
| Working Capital | $(4,980,378) | $(1,878,228) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 126.2% year-over-year (YoY) for the six-month period. Approximately 24% of this revenue was contributed by the newly acquired subsidiary, QXTEL Limited, with the remaining 76% representing organic growth.
- Margin Compression: Gross margin decreased from 3.48% in 2023 to 2.72% in 2024. Management attributes this to declining margins in voice services, partially offset by a 297% increase in SMS service margins.
- Operating Expenses: Expenses rose 58% YoY, driven largely by the consolidation of QXTEL (accounting for 44% of the increase) and increased professional fees and technology costs.
- Net Loss Expansion: Net loss widened significantly to $2.54 million from $320,466. This is primarily due to a $1.12 million loss from the change in fair value of derivative liabilities and increased interest expense related to acquisition financing.
- Balance Sheet: Total liabilities increased to $22.4 million, driven by new convertible notes ($3.56 million) and loans payable ($2.54 million) used to fund the QXTEL acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Going Concern: The filing includes a "Going Concern" warning (Note 3). The company has suffered recurring losses and lacks an established revenue source sufficient to cover operating costs. Continued operations depend on raising additional capital.
- Acquisition Contingencies: The QXTEL acquisition includes a $1,000,000 contingent liability (earn-out) payable in 2025 if specific net income targets ($721,035) are met in Q2, Q3, and Q4 of 2024.
- Subsequent Events: On May 10, 2024, the company entered an agreement to acquire 51% of Lynk Telecom, LLC for $1.5 million, with closing expected in Q3 2024. This deal includes potential future loans of up to $3 million contingent on performance.
- Derivative Liabilities: The company recorded a $1.12 million loss due to the change in fair value of derivative liabilities (warrants) classified as Level 3 fair value measurements.
- Internal Controls: Management concluded that disclosure controls and procedures were ineffective as of June 30, 2024, citing material weaknesses in segregation of duties and lack of written accounting policies.
Investor Verification Checklist
- Liquidity Position: Verify the company's ability to meet current liabilities of $22.2 million with only $0.8 million in cash and negative working capital of $5.0 million.
- Debt Structure: Review the terms of the $3.56 million in convertible notes and $2.54 million in loans payable, specifically interest rates (some up to 98.9% effective rate) and conversion triggers.
- Acquisition Integration: Assess the financial performance of QXTEL Limited post-acquisition and the likelihood of meeting the $721,035 net income earn-out target to avoid the $1 million contingent payment.
- Revenue Concentration: Note that 15 customers represented 86% of revenue for the six months ended June 30, 2024, creating significant concentration risk.
- Capital Raising: Monitor upcoming financing efforts, as the company explicitly states it may experience a cash shortfall and requires additional capital to continue operations.