iQSTEL Inc. 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company operates primarily in telecommunications, including VoIP, SMS, IoT and international connectivity, with developing fintech, blockchain, electric-vehicle and AI/metaverse businesses. Operations span 19 countries and 70 employees; telecommunications generated all reported revenue for the periods presented.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 |
|---|---|---|---|---|
| Revenue | $39.76 million | $21.94 million | $97.25 million | $65.06 million |
| Gross profit | $1.03 million | $1.31 million | $3.03 million | $2.65 million |
| Gross margin | 2.6% | 6.0% | 3.1% | 4.1% |
| Operating income (loss) | $70,753 | $58,813 | $(499,495) | $(744,803) |
| Net income (loss) | $45,909 | $27,312 | $(274,557) | $(782,876) |
| Net loss attributable to iQSTEL stockholders | $(878,493) | $(68,863) | $(1.46 million) | $(975,013) |
- Operating expenses were $957,768 in the third quarter and $3.53 million for the nine-month period. Management reported sequential quarterly operating expenses of $1.53 million, $1.04 million and $957,768 during 2023.
- Cash provided by financing activities was $1.45 million for the nine months, including $1.15 million from warrant exercises, $250,000 of convertible-note proceeds and $150,000 of loan proceeds, partially offset by repayments.
- Net cash used in operating activities was $434,701, compared with $1.49 million in the prior-year period. Net cash used in investing activities was $340,583, primarily for related-party advances and property and equipment.
- Cash was $2.00 million at September 30, 2023, compared with $1.33 million at December 31, 2022. Current assets were $11.79 million and current liabilities were $9.91 million, producing reported working capital of $1.87 million.
- Total assets were $18.12 million and total liabilities were $10.16 million at September 30, 2023. Total stockholders’ equity was $7.96 million.
- Debt included $343,797 of loans payable, net of discount, $238,291 of related-party loans payable and $177,666 of current convertible-note liability. The convertible note is due June 1, 2024 and includes a conversion feature exercisable after an event of default.
- Accounts receivable increased to $7.64 million from $4.21 million at December 31, 2022. Eleven customers represented 87.8% of nine-month revenue.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 81.2%, while nine-month revenue increased 49.5%, primarily reflecting growth at Etelix, IoT Labs, Smartbiz, QGlobal and Whisl.
- Despite revenue growth, third-quarter gross profit declined 21.8% and gross margin fell to 2.6% from 6.0%, indicating that costs increased faster than revenue in the quarter.
- Nine-month gross profit increased 14.5%, but gross margin declined to 3.1% from 4.1% because cost of revenue grew substantially with service volume.
- Nine-month operating loss narrowed to $499,495 from $744,803. Third-quarter operating income improved to $70,753 from $58,813.
- Nine-month net loss improved primarily because of a $381,848 gain from the change in fair value of derivative liabilities. Derivative liabilities were eliminated by September 30, 2023 through warrant settlement and revaluation.
- Common shares outstanding increased to 170.23 million from 161.60 million at year-end 2022. The company also issued 10,080 Series B preferred shares as an $816,480 dividend to management, contributing to the loss attributable to common stockholders.
- The company issued 8.64 million common shares during the nine months, including 8.46 million shares from warrant exercises and 180,000 shares for director compensation. A further 1.84 million warrant shares were issued in October 2023 after receipt of a $250,000 subscription payment.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that it expects to fund operations through increased sales and additional debt or equity financing and plans to seek private-equity financing. The filing provides no quantified revenue or earnings guidance.
- The financial statements include a going-concern uncertainty. The company reports recurring operating losses, insufficient established revenue to cover operating costs and possible future cash shortfalls. Management may need additional capital, but states that financing may be unavailable or obtainable only on unfavorable terms.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023. Reported material weaknesses include inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies for U.S. GAAP and SEC requirements.
- Liquidity risk includes significant current obligations, related-party amounts due on demand, a convertible note due in 2024 and reliance on external financing. The filing states that no long-term leases, material pending legal proceedings or off-balance-sheet arrangements existed at the reporting date.
- Revenue concentration, customer credit risk, foreign-currency exposure, competition, regulatory changes, interest rates and access to capital are identified or implied risks. The filing states that inflation did not materially affect the nine-month results.
- The reported third-quarter and nine-month net income figures include income attributable to noncontrolling interests; results attributable to iQSTEL stockholders remained losses.
Important Facts for Investors to Verify
- Whether the company can sustain positive operating income and improve very low gross margins as revenue expands.
- The collectability and aging of the $7.64 million accounts-receivable balance and the concentration of revenue among 11 customers.
- Cash needs, debt maturities, convertible-note terms and the availability, terms and dilution impact of planned financing.
- Potential dilution from Series B preferred stock, warrant exercises and future equity issuance.
- Remediation of the disclosed material weaknesses in internal control and disclosure controls.
- The assumptions and valuation sensitivity underlying the prior derivative-liability gain and other unusual noncash items.