iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. provides wholesale telecommunications services, including voice, SMS, data, VoIP, connectivity, IoT, blockchain, and payment solutions. The unaudited filing covers the three and six months ended June 30, 2021, with comparative periods ended June 30, 2020. The company operates primarily in the United States and Switzerland and consolidates several subsidiaries, including IoT Labs and Global Money One.
Financial Highlights
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $16.1 million | $11.1 million | $30.3 million | $16.1 million |
| Gross profit | $44,565 | $732,308 | $531,935 | $571,167 |
| Gross margin | 0.3% | 6.6% | 1.8% | 3.5% |
| Operating loss | $(1.2) million | $(172,708) | $(2.2) million | $(1.6) million |
| Net income (loss) | $(1.1) million | $1.4 million | $(3.0) million | $(2.5) million |
| Net loss attributable to iQSTEL shareholders | $(987,376) | $1.3 million | $(2.9) million | $(2.6) million |
Second-quarter revenue increased 44.9% year over year. Six-month revenue increased 87.8%, driven primarily by IoT Labs revenue of $20.0 million compared with $6.4 million in the prior-year period. Revenue was highly concentrated: five customers represented 87% of six-month 2021 revenue.
Cost of revenue increased broadly in line with sales, resulting in materially lower gross margins. Operating expenses were $1.2 million in the second quarter and $2.7 million for the six-month period, including $1.2 million of stock-based compensation for the six months. No income tax expense was recorded.
Cash Flow, Liquidity, Debt, and Capitalization
- Cash and cash equivalents were $1.85 million at June 30, 2021, compared with $753,316 at December 31, 2020.
- Current assets were $5.56 million and current liabilities were $4.19 million, producing reported working capital of $1.38 million versus a $4.33 million working-capital deficit at year-end 2020.
- Operating activities used $2.09 million during the first six months, compared with $1.13 million used in the prior-year period.
- Investing activities used $152,864, including $60,000 for the acquisition of a subsidiary and $68,844 for property and equipment.
- Financing activities provided $3.35 million, including $3.59 million from common-stock issuance.
- Loans payable totaled $240,430, including $103,824 current and $136,606 non-current. Related-party loans totaled $1.13 million and were classified as current. Convertible notes and derivative liabilities were zero at June 30, 2021.
- Total liabilities were $4.48 million, compared with $8.35 million at December 31, 2020. Total stockholders’ equity was $3.46 million at June 30, 2021, compared with a deficit of $2.40 million at year-end 2020.
- Shares outstanding increased to 141.7 million from 118.1 million at December 31, 2020; weighted-average basic shares for the first six months were 128.8 million.
Material Changes and Unusual Items
- During the first six months, the company issued 45.8 million common shares: $3.59 million for cash, 2.23 million shares for debt settlement, 1.2 million shares for management compensation, 6.08 million shares for debt conversion, and additional shares for services and debt forbearance.
- A related-party loan of $807,103 was forgiven and recorded as additional paid-in capital.
- The company settled $1.52 million of loans with shares valued at $2.06 million and recorded a $539,863 loss on settlement.
- Debt principal and accrued interest of $422,295 were converted into 6.08 million common shares. The related $708,611 derivative liability was settled through additional paid-in capital.
- Derivative liabilities declined from $1.03 million at December 31, 2020 to zero, producing a $317,080 non-cash gain in the six-month period.
- Management converted 21 million common shares into 21,000 Series B preferred shares. Series B preferred shares carry a stated liquidation preference and a 24% dividend rate if declared under their designation.
Guidance, Outlook, Risks, and Contingencies
Management did not provide formal revenue or earnings guidance. It expects to fund operations through increased sales and additional debt or equity financing, but states that existing cash is insufficient to operate at the current level for the next twelve months. The company plans to raise capital through a Regulation A offering and potentially a private equity offering.
The financial statements include a going-concern warning. Management cites recurring operating losses, insufficient established revenue to cover operating costs, and the need for additional financing. The filing states that failure to obtain financing could materially adversely affect operations and shareholders.
The Regulation A offering was amended after quarter-end to permit an aggregate offering of up to 80 million common shares. The company reported that 59.8 million shares had been sold and planned to sell an additional 20.2 million shares. A subsequent supplement established an offering price of $0.50 per share. The offering is on a best-efforts basis with no assurance that the remaining shares will be sold.
COVID-19 had not caused a material adverse impact through June 30, 2021, but management warns that a prolonged outbreak could affect operations, collections, and service quality. Other risks include customer concentration, dependence on financing, competition, regulatory changes, foreign currency exposure, and potentially significant dilution.
Management concluded that disclosure controls and procedures were ineffective as of June 30, 2021. Reported 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 the company can generate sufficient gross margin and operating cash flow, given the sharp decline in gross margin and continued operating losses.
- Progress and final proceeds from the Regulation A offering, including the effect of additional share issuance on dilution.
- The company’s ability to obtain financing in light of the explicit going-concern warning and negative operating cash flow.
- The sustainability and collectability of IoT Labs revenue and the concentration of revenue among five customers.
- The terms, accrued dividends, liquidation preferences, conversion rights, and potential dilution associated with Series B preferred stock.
- Remediation of the disclosed ineffective controls and material weaknesses.
- The accuracy of the filing’s going-concern discussion, which refers to negative stockholders’ equity despite the June 30, 2021 balance sheet reporting positive consolidated equity.