iQSTEL Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018, compared with fiscal 2017. The requested “2017 Q4” period does not match the filing, which is an annual report for fiscal 2018. The financial statements primarily reflect Etelix.com USA, LLC, the accounting acquirer, following the June 25, 2018 reverse acquisition.
Business Context
iQSTEL, formerly PureSnax International, exited the health-food business and acquired Etelix, a wholly owned international telecommunications subsidiary. Etelix provides wholesale international long-distance voice services, submarine fiber capacity, and related telecom services through more than 200 carrier interconnections. The company operates under an FCC Section 214 license and has commercial operations in North America, Latin America, Europe, Asia, and Africa.
Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $9.621 million | $7.319 million | +32.8% |
| Gross profit | $870,926 | $1.015 million | -14.2% |
| Gross margin | 9.1% | 13.9% | Down approximately 4.8 percentage points |
| Operating income | $82,225 | $317,057 | -74.1% |
| Operating margin | 0.9% | 4.3% | Declined |
| Net income (loss) | $(291,915) | $217,997 | Turned to loss |
| Interest expense | $327,092 | $77,855 | Substantial increase |
| Net cash used in operations | $(335,638) | $(179,627) | Higher cash use |
| Cash at year-end | $25,355 | $61,262 | Declined |
Revenue growth was driven primarily by higher traffic to African destinations. Africa contributed approximately 42% of fiscal 2018 revenue versus 2% in fiscal 2017, while African traffic increased from approximately 1.8 million to nearly 8 million minutes. Cost of sales increased to $8.750 million from $6.304 million, reflecting the higher cost of African routes. Management expects improved margins as traffic volume supports better vendor pricing.
Operating expenses increased to $788,701 from $697,896, principally because of approximately $150,000 of nonrecurring legal expenses related to the Etelix acquisition. The company also reported $47,048 of other expenses in 2018.
At June 30, 2018, current assets were $2.142 million and current liabilities were $1.852 million, producing working capital of $290,170 and a current ratio of approximately 1.16 to 1. Cash was only $25,355. Loans payable totaled $233,704, all classified as current, and related-party long-term loans totaled $90,787. The company borrowed $928,892 and repaid $809,161 during fiscal 2018.
Material Changes and Unusual Items
- On June 25, 2018, the company issued 13,751,875 common shares to acquire Etelix. The transaction was accounted for as a reverse acquisition and resulted in a change of control.
- The company issued 75,000 shares valued at $150,000 for acquisition-related legal services.
- Common shares outstanding increased to 15,002,599 at June 30, 2018 from 11,085,965 at June 30, 2017, on a retrospectively adjusted basis.
- The company completed a 1-for-19,152 reverse stock split effective May 9, 2018.
- Interest expense increased by $249,237, materially contributing to the swing from net income to net loss.
- The company adopted ASC 606 revenue recognition guidance effective July 1, 2017 and reported no material impact.
Outlook, Risks, and Contingencies
Management projected revenue of approximately $12.5 million by June 30, 2019 if recent growth continued. It also planned expansion into retail international calling, satellite communications, mobile virtual network operations, Internet of Things solutions, data centers, and a blockchain-based payment settlement platform targeted for design beginning in the first quarter of 2019. These plans are forward-looking and are not guaranteed.
The auditor reported substantial doubt about the company’s ability to continue as a going concern for one year from issuance of the financial statements. Management stated that existing cash was insufficient to operate at the current level for the next twelve months and that additional debt or equity financing would be required. There is no assurance that financing will be available on acceptable terms.
- Telecom pricing pressure, declining traditional international voice usage, and competition from over-the-top applications may reduce revenue and margins.
- Revenue and credit exposure are concentrated: three customers represented 40% of fiscal 2018 revenue, and the sixteen largest customers represented 59.76% of the fiscal 2017 customer base’s revenue.
- The company relies on carrier agreements that may not be renewed on favorable terms.
- International operations create currency, collection, regulatory, political, economic, and compliance risks.
- Telecommunications operations face network outages, cyberattacks, unauthorized service usage, and data-security risks.
- The company disclosed ineffective disclosure controls and ineffective internal control over financial reporting, citing inadequate segregation of duties, risk assessment, and written accounting policies. Remediation depends substantially on obtaining additional financing.
- Two post-year-end convertible notes issued in July and August 2018, with aggregate principal of $75,000, were reported as currently in default. A further $30,000 convertible note was issued in October 2018 and was also reported as in default.
- The company had no current legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Reconcile the reverse-acquisition accounting and confirm which historical results represent Etelix versus the former PureSnax entity.
- Review the going-concern qualification, available cash, debt maturities, interest rates, defaults, and the company’s ability to obtain financing.
- Verify customer concentration, accounts-receivable collectability, and the absence of an allowance for doubtful accounts at June 30, 2018.
- Assess whether African-route growth can produce the projected margin improvement despite declining telecom prices and high vendor costs.
- Confirm the status and potential dilution of the post-year-end convertible notes and subsequent equity issuances.
- Review the disclosed material weaknesses in internal control and whether management remediated them after fiscal year-end.
- Consider the limited OTC Pink trading market, penny-stock restrictions, share-price volatility, and the absence of expected dividends.