iQSTEL Inc. — Form 10-Q Summary
Business Context and Reporting Period
iQSTEL provides wholesale international telecommunications services, including voice, data, and submarine fiber capacity, primarily through wholly owned subsidiary Etelix.com USA, LLC. The company also described plans to pursue retail telecommunications, MVNO, satellite, IoT, data center, blockchain payment, merger, acquisition, and strategic partnership opportunities.
This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. The consolidated statements include iQSTEL and Etelix.com USA, LLC. iQSTEL was classified as a smaller reporting company, and management stated that disclosure controls were effective as of June 30, 2019.
Financial Performance, Cash Flow, Debt, and Liquidity
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $4.25 million | $3.70 million | $8.42 million | $5.88 million |
| Gross profit | $(91,728) | $477,130 | $343,849 | $690,136 |
| Gross margin | Approximately (2.2%) | Approximately 12.9% | Approximately 4.1% | Approximately 11.7% |
| Operating income | $(433,281) | $142,381 | $(188,211) | $231,411 |
| Net income (loss) | $(484,241) | $51,834 | $(1.51 million) | $70,875 |
Cost of revenues was $4.35 million in the second quarter and $8.07 million for the first six months, up from $3.22 million and $5.19 million, respectively, in the comparable 2018 periods. Management attributed the increase primarily to higher volumes of African traffic, which it stated carried rates approximately nine times higher than average rates for the rest of the world.
Operating expenses were $341,553 in the second quarter and $532,060 for the six months, compared with $334,749 and $458,725 in the prior-year periods. Six-month expenses included $162,242 of salaries, wages and benefits; $94,847 of technology costs; $162,662 of professional fees; $50,000 of advertising; and $19,281 of depreciation and amortization.
Cash and cash equivalents were $80,486 at June 30, 2019, compared with $4,570 at December 31, 2018. Operating activities used $667,737 during the six months, while financing activities provided $743,653. Cash paid for interest was $208,557.
Current assets totaled $2.06 million versus current liabilities of $4.74 million, producing a working-capital deficit of $2.68 million, compared with a $1.88 million deficit at December 31, 2018. Total liabilities were $4.74 million, while stockholders’ deficit was $2.42 million.
At June 30, 2019, the company reported $106,191 of loans payable, $90,787 of related-party loans payable, $510,245 of net convertible notes, and $2.56 million of derivative liabilities. Convertible notes had $1.166 million of principal outstanding before discounts. The company issued $1.171 million of convertible notes during the six months, received $1.0485 million in cash, issued 376,931 shares, and granted warrants for 92,000 shares at an exercise price of $2.50 per share.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased approximately 43% to $8.42 million, while second-quarter revenue increased approximately 15% to $4.25 million.
- Gross margin deteriorated from approximately 11.7% to 4.1% for the six-month period and from approximately 12.9% to negative 2.2% for the second quarter.
- The company moved from operating income of $231,411 to an operating loss of $188,211 for the six months.
- The company moved from six-month net income of $70,875 to a net loss of $1.51 million. The loss included $776,162 of interest expense and a $547,671 net expense from changes in derivative liabilities.
- Management stated that approximately $365,868 of public-company costs contributed to the six-month operating loss; management reported six-month operating income of $146,910 for Etelix.com USA, LLC before those public-company costs.
- Derivative liabilities increased from $1.79 million at December 31, 2018 to $2.56 million at June 30, 2019. The filing also disclosed substantial non-cash derivative valuation activity and $541,894 of debt-discount amortization.
- Common shares outstanding increased from 15,022,650 at December 31, 2018 to 15,475,916 at June 30, 2019, with 15,627,364 shares outstanding as of August 8, 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that, if revenue growth continued at a similar rate, the company believed it could reach approximately $17 million of revenue by December 31, 2019. This is management’s expectation rather than formal guidance and is subject to execution and financing risks.
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 and additional debt or equity financing, including a planned private equity offering, but cautioned that financing may not be available on acceptable terms or at all.
Management concluded that substantial doubt exists about the company’s ability to continue as a going concern for at least one year from issuance of the financial statements. The company reported limited cash, recurring losses, a working-capital deficit, dependence on financing, and no established revenue source sufficient to cover operating costs.
Customer concentration is significant: eight customers represented 81% of revenue for the six months ended June 30, 2019, compared with fourteen customers representing 81% in the prior-year period. The company reported no allowance for doubtful accounts.
Subsequent to quarter-end, the company issued convertible notes totaling $555,750 in July 2019, with conversion prices generally based on a 50% discount to recent low trading prices. On August 7, 2019, it closed the purchase of a 51% interest and certain assets of SwissLink Carrier AG, issuing 187,500 shares for the equity interest and 510 shares for 51% of a SwissLink loan.
The filing reported no material pending legal proceedings, no off-balance-sheet arrangements, and no defaults upon senior securities. Risks identified by management include availability of capital, interest rates, competition, economic conditions, regulatory changes, and accounting requirements.
Key Facts Investors Should Verify
- Whether the company can obtain sufficient financing to address the $2.68 million working-capital deficit and fund operations for the next twelve months.
- The maturity, conversion terms, dilution potential, redemption provisions, and effective costs of the convertible notes and related warrants.
- The valuation assumptions and future volatility of the $2.56 million Level 3 derivative liability.
- Whether revenue growth can continue without further deterioration in gross margins, particularly given the increased concentration in higher-cost African traffic.
- The sustainability and collectability of the $1.60 million accounts receivable balance and the company’s dependence on a small number of customers.
- The financial impact, assets acquired, liabilities assumed, and integration results of the SwissLink transaction.
- The effect of executive employment agreements, increased management salaries, and potential three-year severance obligations.
- The filing’s stated revenue outlook of approximately $17 million for 2019 and the assumptions supporting that estimate.