iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL provides wholesale telecommunications services, including voice, SMS, data, VoIP, infrastructure connectivity, cloud communications, IoT, blockchain and payment solutions. The company operates primarily in the United States and Switzerland and reported results for the quarter and nine months ended September 30, 2022. The financial statements are unaudited and prepared under U.S. GAAP.
During 2022, iQSTEL acquired 51% interests in Whisl Telecom LLC and Smartbiz Telecom LLC. The acquisitions were consolidated beginning on their respective acquisition dates and contributed to revenue growth and higher goodwill.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 |
|---|---|---|---|---|
| Revenue | $21.94 million | $16.52 million | $65.06 million | $46.84 million |
| Gross profit | $1.31 million | $0.84 million | $2.65 million | $1.37 million |
| Gross margin | 6.0% | 5.1% | 4.1% | 2.9% |
| Operating income (loss) | $0.06 million | $(0.12) million | $(0.74) million | $(2.29) million |
| Net income (loss) | $0.03 million | $(0.11) million | $(0.78) million | $(3.11) million |
| Net loss attributable to iQSTEL stockholders | $(0.07) million | $(0.20) million | $(0.98) million | $(3.13) million |
Revenue increased 32.8% year over year in the third quarter and 38.9% for the nine-month period. Gross profit increased 56.3% in the quarter and 92.7% year to date, with the nine-month gross margin improving to 4.07% from 2.93%.
Third-quarter operating income was positive, compared with an operating loss in the prior-year quarter. The nine-month operating loss narrowed primarily because operating expenses declined by $274,376, including a substantial reduction in stock-based compensation. Net loss also improved materially as prior-year interest, derivative-related expenses and debt-settlement losses were not repeated.
- Cash at September 30, 2022 was $1.29 million, down from $3.33 million at December 31, 2021.
- Current assets were $6.14 million and current liabilities were $2.77 million, producing working capital of $3.37 million and a current ratio of approximately 2.2x.
- Accounts receivable increased to $3.92 million from $2.54 million at year-end 2021.
- Total assets increased to $12.22 million from $9.06 million, largely reflecting acquisition-related goodwill, which increased to $5.17 million from $1.54 million.
- Total liabilities were $3.02 million, including $194,794 of third-party loans and $221,637 of loans payable to related parties.
- Total stockholders’ equity was $9.20 million, compared with $6.42 million at December 31, 2021.
- There were no income tax payments during the nine months ended September 30, 2022.
Cash Flow, Debt and Liquidity
- Operating activities used $1.49 million in the first nine months of 2022, an improvement from $2.49 million used in the comparable 2021 period.
- Investing activities used $1.90 million, including $1.81 million for acquisitions and $86,491 for property and equipment.
- Financing activities provided $1.37 million, including $1.10 million from common stock issuance and $500,000 from issuance of a common stock purchase option, partially offset by $232,018 of loan repayments.
- Net cash decreased by $2.04 million during the nine months, leaving $1.29 million at September 30, 2022.
- Total loans payable declined from $434,745 at December 31, 2021 to $194,794 at September 30, 2022. The remaining third-party debt included a $93,204 current obligation and $101,590 due under a non-current COVID-19 loan.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by increased commercial activity and the Smartbiz and Whisl acquisitions. The acquired businesses contributed reported nine-month revenue of $3.71 million and $2.62 million, respectively.
- Gross margin improved because of better margins at Etelix, SwissLink and QGlobal and the relatively higher margins of Smartbiz and Whisl.
- General and administrative expenses decreased year over year despite higher salaries, professional fees, legal and regulatory costs, and expenses associated with the acquired businesses. Stock-based compensation fell to $92,130 from $920,634.
- Interest expense declined to $22,417 from $648,889 for the nine-month period, and the prior-year derivative liability gain and debt-settlement loss did not recur.
- Common shares outstanding increased to 151.83 million from 147.48 million at year-end 2021. The company also issued shares for cash, compensation, acquisitions, an asset acquisition and debt settlement.
Outlook, Commentary, Risks and Unusual Items
Management stated that it intends to fund operations through increased sales and additional debt or equity financing. The company reported that an S-1 offering statement had been qualified for the potential sale of up to 10 million common shares on a best-efforts basis, but there is no assurance that any minimum amount will be sold or that additional financing will be available on acceptable terms.
The filing includes a going-concern disclosure. iQSTEL has recurring operating losses and does not have an established revenue source sufficient to cover operating costs. Management stated that the company may experience a cash shortfall and require additional capital. Failure to obtain financing could materially adversely affect operations and stockholders.
- Ten customers represented 87% of nine-month revenue, creating significant customer-concentration risk.
- The company identified ineffective disclosure controls and material weaknesses in internal control over financial reporting, including inadequate segregation of duties and insufficient written accounting and reporting policies.
- Management cited economic conditions, regulatory changes, competition, interest rates, availability of capital and accounting requirements as risks to future results.
- The company had no material pending legal proceedings, no off-balance-sheet arrangements and no long-term leases or contracts beyond short-term facility leases.
- Subsequent to quarter-end, the company issued 3,790,597 common shares for the cashless exercise of warrants.
- A common stock purchase option provides for the potential issuance of 4.8 million shares at an exercise price of $2.00 per share.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth and the contribution, profitability and integration of the Smartbiz and Whisl acquisitions.
- Assess whether the company can improve its low gross margins and achieve sustained positive operating cash flow.
- Review the going-concern disclosure, available cash, working-capital needs and the likelihood and terms of future equity or debt financing.
- Evaluate customer concentration, particularly the dependence on ten customers representing 87% of revenue.
- Review the identified material weaknesses and any remediation progress regarding financial reporting controls.
- Assess potential dilution from issued shares, warrants, the 4.8 million-share purchase option and future capital raises.
- Reconcile acquisition consideration, goodwill of $5.17 million and related noncontrolling interests with the acquisition agreements and pro forma results.