iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. provides global wholesale telecommunications services, including voice, SMS, data, VoIP, connectivity, cloud-PBX, IoT, blockchain and payment solutions. The company operates primarily through subsidiaries in the United States and Switzerland and reports one telecommunications industry segment. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $19.42 million | $14.20 million | Up 36.8% |
| Gross profit | $484,060 | $487,370 | Down $3,310 |
| Gross margin | 2.5% | 3.4% | Lower |
| Operating expenses | $989,498 | $1.50 million | Down 33.9% |
| Operating loss | $505,438 | $1.01 million | Improved $505,303 |
| Net loss | $524,731 | $1.88 million | Improved $1.35 million |
| Net loss attributable to iQSTEL stockholders | $554,970 | $1.94 million | Improved $1.39 million |
| Net loss per share | $0.00 | $0.02 | Not meaningful because of rounding |
| Net cash used in operating activities | $447,652 | $1.04 million | Improved $594,540 |
Revenue growth was driven principally by IoT Labs, which generated $12.37 million versus $9.25 million, and Etelix, which generated $5.91 million versus $3.56 million. Four customers represented 86% of revenue in both periods, indicating significant customer concentration.
Cost of revenue increased to $18.94 million from $13.71 million, broadly tracking higher telecommunications volume. Gross profit was essentially flat, resulting in lower gross margin. Operating expense improvement primarily reflected a $717,457 reduction in stock-based compensation, partly offset by higher salaries and professional fees.
At March 31, 2022, cash was $4.23 million, accounts receivable were $2.60 million, and total current assets were $7.37 million. Current liabilities were $2.65 million, producing working capital of $4.72 million and a reported current ratio of approximately 2.78 to 1. Total assets were $9.85 million and total liabilities were $2.91 million.
Total loans payable were $207,928, including $99,488 current and $108,440 non-current. Related-party loans payable totaled $236,581 and were due on demand. Financing activities provided $1.37 million, including $1.10 million from common stock issuance and a $500,000 deposit related to a stock option, partially offset by debt repayments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 36.8%, but gross profit remained nearly unchanged because cost of revenue rose at a similar rate.
- Operating expenses declined 33.9%, mainly because of substantially lower stock-based compensation.
- Interest expense fell to $14,888 from $630,025, and the prior-period derivative-liability and debt-settlement items did not recur.
- Operating cash use declined to $447,652 from $1.04 million, although operations remained cash-flow negative.
- Common shares outstanding increased to 149,537,358 at March 31, 2022 from 147,477,358 at December 31, 2021. The company issued 2.0 million shares for $1.0 million in cash and 60,000 shares for compensation valued at $41,139.
- Stockholders’ equity increased to $6.94 million from $6.42 million at year-end 2021, despite the quarterly loss, primarily reflecting equity issuances and other equity activity.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that growth is expected to come from increased sales, strengthened commercial and operating activities, and acquisitions, with a longer-term objective of achieving positive net income.
Management disclosed substantial doubt about the company’s ability to continue as a going concern because of recurring operating losses and the lack of an established revenue base sufficient to cover operating costs. The company may require additional capital through equity offerings or private loans, but stated that financing may not be available on acceptable terms or at all. Its Regulation A offering permits the sale of up to 80 million common shares on a best-efforts basis without a guaranteed minimum.
Subsequent to quarter-end, the company agreed to acquire 51% of Smartbiz Telecom LLC for $1.8 million, consisting of $800,000 in cash and $1.0 million in common stock. It also entered into an option agreement for 4.8 million common shares at an exercise price of $2.00 per share, supported by a $500,000 option payment. In May 2022, it agreed to acquire 51% of Whisl Telecom LLC for $1.8 million, consisting of $1.25 million in cash and $550,000 in restricted common stock.
Other important risks include customer concentration, foreign-currency exposure, competition, regulatory and economic changes, dependence on external financing, and potential dilution from equity issuances and convertible preferred stock. Management reported that disclosure controls and procedures were ineffective as of March 31, 2022, citing inadequate segregation of duties, ineffective risk assessment, and insufficient written accounting and reporting policies. No material legal proceedings or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Confirm the sustainability and profitability of the reported revenue growth, particularly the contribution and margins of IoT Labs and the company’s four largest customers.
- Assess the going-concern uncertainty and the company’s ability to fund negative operating cash flow and planned acquisitions.
- Verify the terms, funding sources and closing status of the Smartbiz and Whisl Telecom acquisitions and the 4.8 million-share option.
- Review potential dilution from common-stock issuances, Series B preferred stock conversion rights and future financing.
- Evaluate the effectiveness remediation plan for the disclosed material weaknesses in internal control over financial reporting.
- Reconcile related-party balances, including $399,571 due from related parties and $236,581 of related-party loans payable due on demand.
- Note that the interim results are unaudited and may not be indicative of full-year performance.