iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL provides wholesale telecommunications services, including voice, SMS, data, VoIP, 4G/5G connectivity, cloud-PBX, IoT, blockchain and payment solutions. The company operates through subsidiaries in the United States and Switzerland and reported one operating industry segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods.
Financial Highlights
| Metric | Three Months Ended Sept. 30, 2021 | Three Months Ended Sept. 30, 2020 | Nine Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2020 |
|---|---|---|---|---|
| Revenue | $16.5 million | $13.3 million | $46.8 million | $29.4 million |
| Gross profit | $841,052 | $133,013 | $1.4 million | $704,180 |
| Gross margin | 5.1% | 1.0% | 2.9% | 2.4% |
| Operating loss | $(116,143) | $(825,774) | $(2.3) million | $(2.5) million |
| Net loss | $(111,218) | $(970,225) | $(3.1) million | $(3.5) million |
| Net loss attributable to iQSTEL stockholders | $(198,954) | $(944,001) | $(3.1) million | $(3.5) million |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(2.5) million | $(1.5) million |
Quarterly revenue increased 24.3%, while nine-month revenue increased 59.1%. Management attributed growth to expanded commercial and operating activity and acquisitions, particularly IoT Labs, which generated $31.5 million of nine-month revenue versus $14.5 million in the prior-year period.
Operating expenses were $957,195 in the quarter and $3.7 million for the nine-month period. Nine-month expenses increased primarily because of technology development, IoT certification, interconnection deployments and stock-based compensation. Interest expense declined to $648,889 from $2.4 million in the prior-year nine-month period.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $1.2 million at September 30, 2021, compared with $753,316 at December 31, 2020.
- Current assets were $5.2 million and current liabilities were $3.9 million, producing positive working capital of $1.3 million, versus a $4.3 million working-capital deficit at year-end 2020.
- Operating activities used $2.5 million; investing activities used $378,071; and financing activities provided $3.3 million during the first nine months.
- Financing cash flow was supported primarily by $3.6 million from common-stock issuance.
- Loans payable totaled $228,935, including $102,911 current and $126,024 non-current. Related-party loans payable totaled $1.1 million.
- Convertible notes and derivative liabilities were reduced to zero by September 30, 2021. Debt conversions, settlements and related transactions included issuance of common stock.
- The company stated that it did not have sufficient cash to operate at its current level for the next twelve months and may require additional debt or equity financing.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, but cost of revenue remained high at 97.9% of revenue for the nine-month period.
- Gross profit more than doubled for the nine-month period, although the company remained unprofitable.
- Quarterly operating loss narrowed from $825,774 to $116,143; the nine-month operating loss narrowed by approximately $166,000.
- Net losses improved year over year, partly due to materially lower interest expense and the absence of comparable derivative-related expense.
- Accounts receivable increased to $3.4 million from $2.5 million, while due from related parties increased to $421,586 from $221,790.
- Common shares outstanding increased to 141.7 million from 118.1 million at December 31, 2020. During the nine months, the company issued 45.9 million shares for cash, debt settlements, debt conversions, compensation, services and debt forbearance.
- The company issued 21,000 Series B preferred shares in exchange for 21.0 million common shares. Series B shares carry a stated 24% dividend rate if declared and a $81-per-share liquidation preference.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects to fund operations through increased sales and additional debt or equity financing, but states that financing may not be available on acceptable terms or at all.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern because of recurring operating losses and insufficient established revenues to cover operating costs.
- The Regulation A offering permits the sale of up to 20.2 million common shares on a best-efforts basis, with no assurance that any minimum amount will be sold.
- Customer concentration is significant: six customers represented 87% of nine-month revenue in 2021.
- COVID-19 had no material adverse effect identified at September 30, 2021, but a prolonged outbreak could affect operations, collections and service delivery.
- Disclosure controls and procedures were deemed ineffective. Reported material weaknesses included inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies.
- Unusual items included a $528,794 loss on debt settlement, $317,080 income from the change in derivative fair value, $807,103 of related-party debt forgiveness recorded in additional paid-in capital, and significant stock-based compensation.
- Subsequent to quarter-end, the company agreed to acquire the remaining 49% of QGlobal SMS for $100,000 payable in iQSTEL shares, subject to business transfer conditions.
- The filing states that there were no material pending legal proceedings and no off-balance-sheet arrangements.
Investor Verification Priorities
- Verify the sustainability and quality of IoT Labs-related revenue growth and the company’s ability to improve very thin gross margins.
- Review the going-concern disclosure and assess whether operating cash burn can be funded without continued equity or debt issuance.
- Examine dilution risks from common-stock issuances, preferred-stock conversion rights and future financing needs.
- Assess customer concentration and collectability of the $3.4 million accounts receivable balance.
- Review related-party loans, receivables, compensation and debt forgiveness for governance and liquidity implications.
- Confirm remediation progress for the disclosed material weaknesses in internal controls.
- Evaluate the terms and funding impact of the QGlobal SMS acquisition and any subsequent share issuance.