iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2019, filed May 15, 2019. iQSTEL provides wholesale international telecommunications services through wholly owned subsidiary Etelix.com USA, LLC, including international voice, data and submarine fiber capacity. The company reported more than 150 active interconnection agreements and is exploring retail telecommunications, MVNO, IoT, satellite, data center and blockchain payment opportunities.
Financial Results and Position
- Revenue: $4.16 million, versus $2.18 million in Q1 2018, an increase of approximately 91%.
- Gross profit: $435,577, versus $213,006. Gross margin improved to 10.46% from 9.77%.
- Operating income: $245,070, versus $89,030. Operating expenses were $190,507, up from $123,976, but declined to 4.58% of revenue from 5.69%.
- Net loss: $1.03 million, or $0.07 per share, versus net income of $19,041 in Q1 2018. The loss primarily reflected a $1.01 million change in fair value of derivative liabilities and $265,037 of interest expense.
- Cash flow: Operating activities used $321,149, compared with $66,866 used in Q1 2018. Financing activities provided $387,663, including $586,000 of convertible-note proceeds, partially offset by debt repayments.
- Cash and liquidity: Cash was $71,084 at March 31, 2019, compared with $4,570 at December 31, 2018. Current assets were $2.24 million versus current liabilities of $4.88 million, producing a working-capital deficit of $2.64 million.
- Debt and derivative liabilities: Convertible notes, net of discount, were $151,596; loans payable were $99,415; related-party loans were $90,787; and derivative liabilities were $3.08 million, up from $1.79 million at year-end.
- Capital structure: Common shares outstanding increased to 15,276,724 from 15,022,650 at December 31, 2018. Stockholders’ deficit was $2.36 million, compared with $1.60 million at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue nearly doubled, driven primarily by increased traffic to higher-revenue African destinations, particularly traffic originating from Europe.
- Gross profit and operating income increased substantially, although cost of revenues also rose in line with higher traffic volumes.
- The company moved from modest net income to a significant net loss because of derivative-liability accounting losses and substantially higher interest expense.
- Convertible-note activity increased materially. During the quarter, the company issued $650,500 of convertible notes, received $586,000 in cash after financing costs, issued 254,074 common shares and granted warrants for 62,000 shares at a $2.50 exercise price.
- Derivative liabilities increased by approximately $1.29 million during the quarter. The filing reports a $1.53 million initial derivative loss, partially offset by a $522,623 fair-value gain.
- Accounts payable declined to $1.08 million from $1.39 million, while cash increased primarily through financing rather than operations.
Guidance, Outlook, Risks and Unusual Items
- Management stated that, if revenue continues growing at a similar rate, it believes 2019 revenue could reach approximately $17 million. This is a forward-looking estimate and is not assured.
- Management stated that the company does not have sufficient cash to operate at its current level for the next twelve months and expects to rely on increased sales and additional debt or equity financing.
- The financial statements include a going-concern warning. Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern for one year from issuance of the financial statements.
- Revenue concentration is significant: six customers represented 83% of Q1 2019 revenue, compared with nineteen customers representing 83% in Q1 2018.
- Convertible notes contain variable conversion features generally based on discounted historical trading prices. The company accounts for related conversion and warrant features as Level 3 derivative liabilities using a Black-Scholes model, with estimated volatility ranging from 364% to 491%.
- The company may need additional financing, and failure to obtain funding could impair its business plan. Financing may also create substantial dilution or additional derivative liabilities.
- Subsequent to quarter-end, the company entered into an agreement to acquire 51% of SwissLink Carrier AG and certain assets, subject to board approval, due diligence and other closing conditions. The company also issued a $53,000 convertible note on April 11, 2019.
- On May 2, 2019, the company entered into new executive employment agreements with materially higher annual salaries and potential bonuses. Certain termination provisions could require payment of compensation for three years.
- Management reported effective disclosure controls as of March 31, 2019, no material changes in internal control over financial reporting, no material pending legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the company can secure sufficient financing to address its working-capital deficit and stated going-concern uncertainty.
- The terms, conversion prices and potential dilution associated with the convertible notes, warrants and derivative liabilities.
- Whether African-route revenue growth and the approximately $17 million 2019 revenue outlook are sustainable.
- Customer concentration, collectability of the $1.85 million accounts receivable balance and the absence of an allowance for doubtful accounts.
- Status, financing and closing conditions of the proposed SwissLink acquisition.
- Future executive compensation obligations and related-party balances and transactions.