iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. is a technology and telecommunications company providing wholesale voice, SMS, data, VoIP, 4G/5G connectivity, cloud-PBX, IoT, blockchain, payment, electric-vehicle and metaverse services. The company operates primarily through subsidiaries in the United States and Switzerland and reported 404 active interconnection agreements. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the same period in 2022.
Financial Results and Key Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $24.67 million | $19.42 million |
| Gross profit | $1.22 million | $0.48 million |
| Gross margin | 4.93% | 2.49% |
| Operating loss | $0.32 million | $0.51 million |
| Net loss | $0.16 million | $0.52 million |
| Net loss attributable to iQSTEL shareholders | $0.36 million | $0.55 million |
| Operating cash flow | $0.20 million provided | $0.45 million used |
| Cash at period end | $1.78 million | $4.23 million |
Revenue increased 27.0% year over year. Cost of revenue was $23.45 million, and operating expenses were $1.53 million. The company reported $158,708 of other income, including a $196,307 favorable change in the fair value of derivative liabilities. Basic and diluted loss per share was reported as approximately $0.00, based on 164.0 million weighted-average common shares.
At March 31, 2023, total assets were $12.89 million, current assets were $6.74 million, and total liabilities were $6.56 million. Current liabilities were $6.30 million, producing working capital of $435,936 and a current ratio of approximately 1.07 to 1. Debt consisted of $195,662 of loans payable, including $238,610 owed to related parties separately classified as current liabilities. Current derivative liabilities were $921,222.
Material Changes Versus the Prior Comparable Period
- Revenue rose $5.25 million, principally reflecting growth in IoT Labs, SwissLink, and newly reported Whisl and Smartbiz revenue, partially offset by lower Etelix revenue.
- Gross profit increased 151.4% to $1.22 million, and gross margin nearly doubled to 4.93%.
- Operating expenses increased 55.0% to $1.53 million, driven primarily by higher salaries and benefits, technology costs, professional fees, and advertising.
- Operating loss narrowed by $187,908, while net loss attributable to iQSTEL shareholders improved by $191,785.
- Operating cash flow improved from $447,652 used to $197,163 provided, largely due to changes in accounts receivable and accounts payable.
- Cash declined substantially from the prior-year period-end comparison, although cash increased $447,837 from December 31, 2022.
- The company issued 3,001,177 common shares during the quarter: 2,941,177 shares from warrant exercises for $400,000 and 60,000 shares for director compensation valued at $11,230. Shares outstanding increased to 164,596,688 from 161,595,511 at December 31, 2022.
Guidance, Outlook, Risks and Unusual Items
Management stated that it intends to reduce iQSTEL general and administrative expenses to a maximum of $400,000 per quarter. Management expects to fund operations through increased sales and debt and/or equity financing. The company received qualification for a best-efforts Form S-1 offering of up to 10 million common shares, but there is no assurance that any minimum amount will be sold or that additional financing will be available on acceptable terms.
The financial statements include a going-concern uncertainty. The company has recurring operating losses, lacks an established revenue source sufficient to cover operating costs, and may experience a cash shortfall requiring additional capital. Failure to obtain financing could materially adversely affect operations and shareholders.
Derivative liabilities are Level 3 fair-value measurements valued using a Black-Scholes model. Changes in assumptions may materially affect reported earnings. The company also has significant customer concentration: 12 customers represented 86% of revenue in Q1 2023, and 62% of revenue came from customers subject to prepayment terms.
Management concluded that disclosure controls and procedures were ineffective as of March 31, 2023. Identified material weaknesses included inadequate segregation of duties and risk assessment, and insufficient written accounting and financial reporting policies. No material legal proceedings or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether revenue growth and improved gross margin are sustainable, given the low 4.93% gross margin and concentration among 12 customers.
- The company’s ability to generate recurring positive operating cash flow without additional equity or debt financing.
- The terms, timing and potential dilution from the Form S-1 offering, outstanding warrants, options and Series B preferred stock.
- The impact of the $921,222 derivative liability and future fair-value changes on reported earnings.
- Management’s progress in remediating ineffective disclosure controls and identified internal-control weaknesses.
- Whether the company can overcome the going-concern uncertainty and achieve profitable operations.