iQSTEL Inc. Form 10-K Summary
Business Context and Reporting Period
The filing reports fiscal-year results for the year ended December 31, 2018, with comparative results for 2017. Although the request identifies 2018 Q4, this is an annual Form 10-K rather than a standalone quarterly filing.
iQSTEL, formerly PureSnax International, acquired Etelix.com USA, LLC on June 25, 2018 and shifted its primary business from health foods to telecommunications. Etelix provides international long-distance wholesale voice services and submarine fiber-optic capacity for data carriers and internet service providers. The transaction was accounted for as a reverse acquisition, with Etelix treated as the accounting acquirer. The company changed its name to iQSTEL Inc. and began trading under IQST in August 2018.
Financial Results and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $13.775 million | $7.515 million | +83.3% |
| Cost of sales | $12.583 million | $6.897 million | +82.4% |
| Gross profit | $1.192 million | $618,049 | +92.9% |
| Gross margin | 8.66% | 8.22% | +44 basis points |
| Operating expenses | $1.220 million | $692,053 | +76.3% |
| Operating loss | $27,895 | $74,004 | Improved |
| Net loss | $2.104 million | $355,706 | Worsened by $1.748 million |
| Loss per share | $0.15 | $0.03 | Worsened |
| Cash flow from operations | $(356,551) | $(267,827) | Higher use of cash |
| Cash at year-end | $4,570 | $23,266 | Down $18,696 |
Revenue growth was primarily attributed to higher traffic to African destinations. Africa generated approximately 68% of 2018 revenue compared with 7% in 2017, while African traffic increased from approximately 2.9 million to 16.8 million minutes. Seven customers, representing approximately 4.75% of the customer base, accounted for 71% of 2018 revenue.
The net loss included a $1.589 million loss related to changes in the fair value of derivative liabilities, a $313,414 allowance for doubtful accounts, approximately $219,407 of additional interest expense compared with 2017, and $238,806 of merger-related legal, accounting and consulting costs. The filing indicates that the derivative-related expense was substantially non-cash.
Balance Sheet, Debt and Liquidity
| Item at December 31, 2018 | Amount |
|---|---|
| Total assets | $2.391 million |
| Current assets | $2.106 million |
| Accounts receivable, net | $1.826 million |
| Total liabilities | $3.989 million |
| Current liabilities | $3.898 million |
| Derivative liabilities | $1.790 million |
| Loans payable | $194,557 current and $90,787 long-term related-party debt |
| Convertible notes, net of discount | $63,205 |
| Stockholders’ deficit | $(1.598) million |
| Working capital | $(1.792) million |
| Current ratio | Approximately 0.54 to 1 |
Operating activities used $356,551 of cash, while financing activities provided $338,281, resulting in a net decrease in cash of $18,696. Management stated that existing cash was insufficient to operate at the current level for the following twelve months and that additional debt or equity financing would be required.
Material Changes Compared with 2017
- The company completed the Etelix acquisition and changed its principal business from health foods to telecommunications.
- Revenue increased 83.3%, driven largely by African traffic and higher-revenue destinations.
- Gross margin improved modestly from 8.22% to 8.66%, but remained low.
- Operating expenses increased due primarily to merger-related professional fees, a $313,414 doubtful-account allowance and higher technology costs.
- Net loss increased substantially because of derivative-liability remeasurement, higher interest expense and merger-related costs.
- Current liabilities increased from $1.239 million to $3.898 million, largely because of newly recognized derivative liabilities.
- Stockholders’ equity declined from $185,288 to a deficit of $1.598 million.
- Common shares outstanding increased from 11,085,965 at December 31, 2017 to 15,022,650 at December 31, 2018, with 15,276,724 shares outstanding as of April 5, 2019.
Guidance, Outlook, Risks and Unusual Items
Management estimated that revenue could reach approximately $17 million by December 31, 2019 if recent growth continued. It also expected improved gross margins from greater African traffic volumes and improved vendor pricing. A new telecommunications voice-exchange platform was expected to be implemented in the first half of 2019, with management estimating potential operating-cost reductions of approximately 9%.
The company planned to expand into retail international long-distance services, mobile virtual network operations, satellite communications, Internet of Things solutions, data centers and blockchain-based payment settlement. The proposed blockchain payment solution remained in the planning and proof-of-concept stage, and management acknowledged that it lacked all required in-house blockchain expertise and could not assure successful development or customer adoption.
The independent auditor expressed substantial doubt about the company’s ability to continue as a going concern for one year from issuance of the financial statements. The company reported only $4,570 of cash, an accumulated deficit of $2.667 million, negative working capital and no committed financing arrangement. The company expected to seek private equity, debt or other financing, but stated that financing might not be available on acceptable terms or at all.
Other significant risks include intense telecommunications price competition, substitution by over-the-top applications, dependence on carrier agreements, customer and accounts-receivable concentration, international operating and currency risks, regulatory and FCC compliance, cyberattacks and network interruptions, and potential dilution from convertible notes. Several 2018 convertible notes had conversion prices based on discounts to recent trading prices and created derivative liabilities.
Subsequent events included additional convertible notes issued from January through March 2019, including a March 2019 note with a principal amount of up to $1.120 million and an initial tranche of $282,000. On April 1, 2019, the company entered into an agreement to acquire 51% of SwissLink Carrier AG for $500,000, subject to due diligence and other closing conditions. The filing also states that internal controls over financial reporting were ineffective and that material weaknesses remained unremediated.
Most Important Facts for Investors to Verify
- Whether the company can obtain sufficient financing to address its going-concern uncertainty and negative working capital.
- The collectability and aging of the $1.826 million accounts receivable balance, including exposure to the seven customers generating 71% of revenue.
- The terms, maturity, conversion mechanics and potential dilution associated with convertible notes and the $1.790 million derivative liability.
- Whether African traffic growth and the projected $17 million 2019 revenue target are sustainable amid declining international voice prices.
- The closing status, financing requirements and operating results of the proposed SwissLink acquisition.
- Whether management’s planned remediation of ineffective disclosure and financial-reporting controls has been completed.
- The company’s limited and volatile OTC Pink trading market, concentration of ownership and lack of expected dividend payments.