iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2023, filed August 14, 2023. iQSTEL is a technology company operating in 13 countries with 56 employees. Telecom services, including VoIP, SMS, IoT solutions, and fiber connectivity, generated all reported revenue. Fintech, blockchain, and electric-vehicle businesses remained developing or pre-revenue operations.
Financial Performance and Liquidity
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $32.825 million | $23.700 million | $57.491 million | $43.119 million |
| Gross profit | $0.784 million | $0.846 million | $2.001 million | $1.330 million |
| Gross margin | 2.39% | 3.57% | 3.48% | 3.09% |
| Operating loss | $(0.253) million | $(0.298) million | $(0.570) million | $(0.804) million |
| Net loss | $(0.162) million | $(0.285) million | $(0.320) million | $(0.810) million |
| Net loss attributable to iQSTEL shareholders | $(0.214) million | $(0.351) million | $(0.577) million | $(0.906) million |
| Operating cash flow | Not separately provided | Not separately provided | $(0.721) million | $(1.435) million |
- Revenue increased 38.5% year over year in Q2 and 33.3% for the first six months. IoT Labs was the largest contributor, with six-month revenue of $32.477 million.
- Six-month gross profit and gross margin improved, but Q2 gross profit declined despite higher revenue because cost of revenue increased faster than sales.
- Cash was $1.127 million at June 30, 2023, compared with $1.329 million at December 31, 2022. Current assets were $7.098 million and current liabilities were $6.912 million, producing positive working capital of $185,226 and an approximate current ratio of 1.03.
- Investing cash outflow was $279,086, primarily for $132,249 of property and equipment and $149,537 of advances to related parties. Financing cash inflow was $790,994, including loan proceeds, warrant exercises, and convertible-note proceeds.
- Total liabilities were $7.174 million and stockholders’ equity was $6.178 million at June 30, 2023. Current liabilities included $251,215 of loans payable, $243,759 of related-party loans, $253,476 of convertible-note liability, and $774,954 of derivative liabilities. Including non-current loans, reported loans and convertible obligations totaled approximately $1.1 million, excluding other liabilities and derivative liabilities.
- Accounts receivable was $4.945 million, representing a substantial portion of current assets. Twenty-three customers represented 87% of six-month revenue.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected increased commercial activity, operating synergies, and the full-period inclusion of Smartbiz Telecom and Whisl Telecom, which were acquired or consolidated during Q2 2022.
- Operating loss improved by $45,460 in Q2 and by $233,368 for the six-month period. Six-month operating expenses nevertheless increased 20.5% to $2.571 million, primarily because the acquired subsidiaries were consolidated for the full period.
- Six-month net loss improved by $489,722. The improvement included a $342,575 gain from the change in fair value of derivative liabilities, which is non-cash and subject to valuation assumptions.
- Cash usage declined year over year, but operations continued to consume cash. Cash declined by $202,619 during the first six months of 2023.
- Common shares outstanding increased from 161.596 million at December 31, 2022 to 164.657 million at June 30, 2023. The increase included 2.941 million shares issued for warrant exercises and 120,000 shares issued as director compensation.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast positive operating income for the year ending December 31, 2023 and stated that it intends to reduce iQSTEL general and administrative expenses to a maximum of $400,000 per quarter. The filing does not provide formal revenue or net-income guidance.
- The company disclosed substantial doubt about its ability to continue as a going concern because of recurring operating losses and insufficient established revenue to cover operating costs. Management expects it may need additional debt or equity financing, with no assurance that financing will be available on acceptable terms.
- Management identified ineffective disclosure controls and material weaknesses in internal control over financial reporting, including inadequate segregation of duties and risk assessment and insufficient written accounting and financial-reporting policies.
- The convertible note is due June 1, 2024, requires ten payments of $31,893.10 beginning July 16, 2023, and may become convertible following an event of default at a price equal to 75% of the lowest trading price during the preceding ten trading days.
- Derivative liabilities are Level 3 fair-value measurements based on a Black-Scholes model. The valuation is sensitive to stock price, volatility, interest rates, and remaining term. Warrants outstanding at June 30, 2023 totaled 25.434 million with a weighted-average exercise price of $0.14.
- Series B preferred stock carries a stated 24% annual dividend-in-kind rate on an $81 liquidation preference and may convert at 1,000 common shares per preferred share, subject to the designation terms.
- The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, no material subsequent events requiring disclosure, and no material impact from inflation during the period.
Important Facts for Investors to Verify
- Whether revenue growth can translate into sustained gross-margin expansion and positive operating and net income, given the very low margins.
- The company’s ability to fund operations and meet upcoming loan and convertible-note obligations without materially dilutive equity or warrant activity.
- The collectability and concentration of the $4.945 million accounts receivable balance and the dependence on 23 customers for 87% of six-month revenue.
- The potential dilution from 25.434 million outstanding warrants, convertible instruments, and Series B preferred stock.
- Whether management remediates the disclosed material weaknesses and ineffective disclosure controls.
- The assumptions and volatility underlying the $774,954 derivative-liability valuation and the effect of future revaluations on reported earnings.