iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
iQSTEL Inc. provides global telecommunications and technology services, including wholesale voice, SMS, data, VoIP, 4G/5G connectivity, Cloud-PBX, IoT, blockchain, and payment solutions. The company operates primarily in the United States and Switzerland and reported results for the three and six months ended June 30, 2022. The interim financial statements are unaudited.
During the quarter, iQSTEL acquired 51% of Whisl Telecom LLC and 51% of Smartbiz Telecom LLC. The acquisitions expanded the telecommunications business but also generated approximately $3.63 million of goodwill.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $23.7 million | $16.1 million | $43.1 million | $30.3 million |
| Gross profit | $846,274 | $44,565 | $1.33 million | $531,935 |
| Gross margin | 3.6% | 0.3% | 3.1% | 1.8% |
| Operating loss | $(298,178) | $(1.16) million | $(803,616) | $(2.18) million |
| Net loss | $(285,457) | $(1.12) million | $(810,188) | $(3.00) million |
| Net loss attributable to iQSTEL shareholders | $(351,180) | $(987,376) | $(906,150) | $(2.93) million |
- Second-quarter revenue increased 46.9% year over year; six-month revenue increased 42.2%.
- Six-month gross margin improved to 3.09% from 1.75%, although margins remained low because telecommunications termination costs substantially offset revenue.
- Six-month operating expenses declined 21.2% to $2.13 million, primarily because stock-based compensation decreased to $71,630 from $886,096.
- Interest expense declined substantially to $18,724 for the six months, compared with $642,087 in total interest expense reported in the prior-year statement of operations.
- Eight customers represented 87% of six-month revenue, indicating significant customer concentration.
Cash Flow, Liquidity, Debt, and Capitalization
| Balance Sheet Metric | June 30, 2022 | December 31, 2021 |
|---|---|---|
| Cash | $1.65 million | $3.33 million |
| Current assets | $6.82 million | $6.57 million |
| Current liabilities | $3.61 million | $2.36 million |
| Working capital | $3.21 million | $4.20 million |
| Total liabilities | $3.86 million | $2.64 million |
| Total stockholders’ equity | $9.04 million | $6.42 million |
| Common shares outstanding | 151.6 million | 147.5 million |
- Operating activities used $1.44 million in the first six months of 2022, compared with $2.09 million used in the prior-year period.
- Investing activities used $1.61 million, including $1.56 million for acquisitions and $47,223 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.
- Cash declined by $1.69 million during the first six months, ending at $1.65 million.
- Total loans payable were $201,025, including $96,185 classified as current and $104,840 classified as non-current. Related-party loans payable were an additional $228,727 and were due on demand.
- Accounts receivable increased to $4.30 million from $2.54 million at year-end, while accounts payable increased to $2.52 million from $1.47 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher sales volumes and the inclusion of Smartbiz and Whisl revenue following their acquisitions.
- Gross profit and gross margin improved substantially, but the company remained loss-making at both the operating and net-income levels.
- Operating losses narrowed by $1.37 million for the six-month period, primarily due to lower corporate costs and stock-based compensation.
- The prior-year period included materially higher interest expense, debt discount amortization, derivative-liability gains, and debt-settlement items; these unusual financing-related items were substantially reduced or absent in 2022.
- Goodwill increased from $1.54 million to $5.17 million as a result of the acquisitions.
- Working capital decreased by approximately $992,000, and cash decreased by approximately $1.69 million, largely because of acquisition-related spending and continuing operating cash usage.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific numerical revenue, earnings, or cash-flow guidance. Management stated that it intends to fund operations through increased sales and additional debt and/or equity financing. The company has a Regulation A offering for up to 80 million common shares, with 12.5 million shares available at the time of filing, but the offering is on a best-efforts basis and may not raise a minimum amount.
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern because of recurring operating losses and the absence of an established revenue base sufficient to cover operating costs. Additional capital may be required.
- Liquidity risk: The company used $1.44 million of operating cash in the first half of 2022 and ended the period with $1.65 million of cash. There is no assurance that future debt or equity financing will be available on acceptable terms.
- Customer concentration: Eight customers generated 87% of six-month revenue.
- Acquisition risk: The acquired businesses contributed substantial goodwill relative to identifiable net assets, creating potential impairment risk if expected operating results are not achieved.
- Internal controls: Management concluded that disclosure controls and procedures were ineffective as of June 30, 2022. Reported material weaknesses included inadequate segregation of duties, ineffective risk assessment, and insufficient written accounting and financial-reporting policies.
- Equity dilution: The company issued 4.08 million common shares during the first six months and entered into an option agreement for 4.8 million additional shares at a $2.00 exercise price, with an initial exercise date of September 30, 2022.
- Contingencies and legal matters: The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and no material subsequent events through the financial statement issuance date.
Important Facts for Investors to Verify
- Whether the company can generate positive operating cash flow and reduce its dependence on external financing.
- The revenue contribution, profitability, and integration progress of Whisl and Smartbiz.
- The collectability and customer concentration of the $4.30 million accounts receivable balance.
- The recoverability of the $5.17 million goodwill balance and the assumptions supporting the acquisitions.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- The terms, potential dilution, and actual proceeds from the Regulation A offering and the 4.8 million-share purchase option.
- The rights and potential future dilution associated with the outstanding Series B preferred stock, including its liquidation preference and stated dividend terms.