iQSTEL Inc. Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. iQSTEL provides international wholesale telecommunications services, including voice and data services, through Etelix.com USA LLC and SwissLink Carrier AG.
On August 7, 2019, the Company completed its acquisition of a 51% interest in SwissLink Carrier AG for $500,000, consisting of $50,000 cash and 343,512 common shares. SwissLink was consolidated from the acquisition date.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $4.17 million, versus $3.79 million | $12.59 million, versus $9.68 million |
| Gross profit | $243,410, versus $262,482 | $587,259, versus $952,618 |
| Gross margin | 5.8%, versus 6.9% | 4.7%, versus 9.8% |
| Operating income (loss) | $(249,372), versus $66,598 | $(437,583), versus $298,009 |
| Net loss attributable to iQSTEL shareholders | $(3.53) million, versus $(503,595) | $(5.04) million, versus $(432,720) |
| Loss per share | $(0.22), versus $(0.03) | $(0.33), versus $(0.03) |
Revenue increased approximately 10% year over year in the third quarter and 30% for the nine-month period. Management attributed higher costs of revenue to increased traffic to African destinations, which it stated had materially higher average termination rates.
Operating expenses were $492,782 in the third quarter and $1.02 million for the nine-month period, compared with $195,884 and $654,609, respectively, in the prior-year periods. Higher salaries, professional fees, public-company costs, and advertising contributed to the increase. Management stated that the operating entities generated $139,686 of operating income for the nine months, excluding approximately $577,269 of public-company costs.
Other expense was $3.27 million in the third quarter and $4.59 million for the nine-month period. The principal items were interest expense of $1.79 million for the nine months and a $2.80 million loss from changes in the fair value of derivative liabilities. The derivative loss and debt-discount amortization are substantially non-cash, but reflect the Company’s convertible financing structure.
At September 30, 2019, cash was $210,274, current assets were $3.43 million, and current liabilities were $10.86 million, producing a working-capital deficit of $7.43 million. Total liabilities were $11.19 million, compared with total assets of $5.56 million, resulting in stockholders’ deficit of $5.63 million.
Convertible notes, net of discounts, totaled $888,621, including $882,216 classified as current. Derivative liabilities were $5.42 million. Loans payable totaled $276,464, including $1.83 million of loans payable to related parties reported separately. Cash used in operating activities was $1.33 million, cash provided by investing activities was $215,016, and cash provided by financing activities was $1.33 million. Cash paid for interest was $530,572.
Material changes versus the prior comparable period
- Revenue grew, but gross profit and gross margin declined because cost of revenue increased faster than revenue.
- The Company moved from operating income to operating loss in both the quarter and nine-month period.
- Net loss attributable to shareholders increased to $5.04 million for the nine months from $432,720 in the prior-year period.
- Interest expense increased to $1.79 million from $277,324, and derivative-liability expense increased to $2.80 million from $448,471.
- Cash increased to $210,274 from $4,570 at December 31, 2018, primarily because of financing proceeds, despite negative operating cash flow.
- Goodwill of $1.46 million and a noncontrolling-interest deficit of $880,952 were recorded following the SwissLink acquisition.
- Shares outstanding increased to 16,103,713 at September 30, 2019 from 15,022,650 at December 31, 2018, primarily from convertible-note issuances, debt conversion, and acquisition consideration.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that, if revenue continued growing at a similar rate, the Company believed it could reach approximately $17 million of revenue for 2019. This is management’s expectation rather than formal financial guidance.
The filing states that the Company does not have sufficient cash to operate at its current level for the next twelve months. Management expects to rely on increased sales, debt and/or equity financing, including a planned private offering, but stated that additional financing may be unavailable or available only on unfavorable terms.
The financial statements include a going-concern warning. Management identified limited cash, insufficient established revenue to cover operating costs, the accumulated deficit of $7.71 million, the nine-month net loss of $5.03 million, and negative operating cash flow as conditions raising substantial doubt about the Company’s ability to continue as a going concern for one year from issuance.
Customer concentration was significant: six customers represented 79% of revenue for the nine months ended September 30, 2019. Convertible notes contain variable conversion features and were accompanied by shares and warrants; the related derivative liabilities were measured using a Level 3 Black-Scholes model, making reported earnings sensitive to stock-price volatility and other valuation assumptions.
The Company reported no material pending legal proceedings and no off-balance-sheet arrangements. Subsequent to quarter-end, the Company received qualification for an offering of up to 4,000,000 common shares at a fixed price within a range of $1 to $3 per share.
Important facts for investors to verify
- Whether the Company can obtain sufficient financing to address the $7.43 million working-capital deficit and ongoing operating cash burn.
- The terms, maturity dates, conversion mechanics, potential dilution, and settlement requirements of the convertible notes, warrants, and $5.42 million derivative liabilities.
- The collectability of the $2.82 million accounts receivable balance and the absence of an allowance for doubtful accounts.
- The sustainability of revenue growth and whether higher-cost African traffic continues to compress gross margins.
- The operating performance, liabilities, and integration results of the 51%-owned SwissLink subsidiary, including the recorded $1.46 million goodwill balance.
- The effect of management compensation increases, related-party loans, and accrued management salaries on liquidity and governance.
- Whether the proposed 4,000,000-share offering is completed and the resulting dilution and use of proceeds.