iQSTEL Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended September 30, 2018, filed November 16, 2018. iQSTEL provides international wholesale telecommunications services through wholly owned subsidiary Etelix.com USA, LLC, including international voice, data, and submarine fiber capacity. Management also describes planned expansion into retail telecommunications, MVNO, IoT, satellite communications, data centers, and blockchain payment solutions.
The company changed its name from PureSnax International, Inc. to iQSTEL Inc. on August 7, 2018. It reported 15,022,650 common shares outstanding as of November 15, 2018.
Financial Highlights
| Metric | Q3 2018 | Q3 2017 |
|---|---|---|
| Revenue | $3,794,359 | $1,899,910 |
| Cost of goods sold | $3,531,877 | $1,834,938 |
| Gross profit | $262,482 | $64,972 |
| Gross margin | 6.9% | 3.4% |
| Operating expenses | $195,884 | $197,947 |
| Operating income (loss) | $66,599 | $(132,975) |
| Other expense | $570,193 | $89,795 |
| Net loss | $(503,595) | $(222,770) |
| Basic and diluted loss per share | $(0.03) | $(0.02) |
| Cash flow from operating activities | $(88,655) | $(127,135) |
Revenue increased approximately 99.7%, while gross profit increased approximately 304%. Despite positive operating income, the company incurred a substantial net loss primarily because of derivative-related expense and interest expense. The filing does not provide a clear adjusted or non-GAAP profitability measure.
At September 30, 2018, cash was $18,067, accounts receivable were $2,135,111, and total assets were $2,436,911. Current liabilities were $2,285,280 versus current assets of $2,153,178, resulting in a $132,102 working-capital deficit. The company had no allowance for doubtful accounts despite its significant receivables balance.
Current loans payable were $208,347, long-term related-party loans were $91,587, convertible notes had a carrying value of $13,447 after a $61,553 discount, and derivative liabilities were $520,721. Total liabilities were $2,376,867, compared with stockholders’ equity of only $60,044.
Financing activities provided $81,793, including loan proceeds, capital contributions, subscription proceeds, and $72,250 of cash received from convertible notes. Investing activities used $426. Cash decreased from $25,355 to $18,067 during the quarter.
Material Changes Versus Prior Comparable Period
- Revenue nearly doubled, increasing from $1.90 million to $3.79 million.
- Gross margin improved from approximately 3.4% to 6.9%, and the company moved from an operating loss to operating income.
- Operating expenses were essentially unchanged, declining slightly from $197,947 to $195,884. Salaries decreased, while technology and professional-fee costs increased.
- Net loss more than doubled because other expense increased to $570,193 from $89,795.
- Interest expense increased to $119,755 from $96,921.
- The company recorded a $448,471 change in the fair value of derivative liabilities. This included a $516,568 initial derivative loss, partly offset by a $68,097 fair-value gain.
- Accounts receivable increased by approximately $199,744 from June 30, 2018, while cash declined by $7,288.
- Total liabilities increased from $1,942,876 at June 30, 2018 to $2,376,867 at September 30, 2018, primarily reflecting derivative liabilities and other current liabilities.
- The company issued 11,718 shares valued at $25,000 for consulting services and received $7,500 for 350,000 subscribed shares.
Guidance, Outlook, Risks, and Unusual Items
Management expects revenue and gross profit to increase as Etelix develops its business and traffic volumes grow. It expects cost of revenue to rise with traffic but at a proportionally lower rate than revenue. No quantified revenue, margin, earnings, or cash-flow guidance is provided.
Management states that the company does not have sufficient cash to operate at its current level for the next twelve months. The company expects to rely on increased sales and additional debt or equity financing, including a planned private equity offering, but acknowledges that financing may not be available on acceptable terms or at all.
The financial statements include a going-concern disclosure. Management states that the company lacks significant cash and an established revenue source sufficient to cover operating costs, and that these conditions raise substantial doubt about its ability to continue as a going concern for one year from issuance of the financial statements.
The convertible notes issued during the quarter carry 10% annual interest and conversion prices generally based on a 50% discount to specified low trading prices. The notes were stated to be in default as of September 30, 2018. A further $30,000 convertible note issued October 1, 2018 was also stated to be in default.
The derivative liabilities are Level 3 measurements valued using a Black-Scholes model with estimated volatility of 450% to 526%. Changes in assumptions could materially affect reported earnings and liabilities. Four customers accounted for 64% of quarterly revenue, creating material customer-concentration risk.
Related-party obligations included $91,587 of long-term loans and $23,193 payable on demand. Employment agreements with senior executives generally run for 36 months and may require payment of remaining compensation upon termination by the company. The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Investor Verification Checklist
- Verify the collectability, aging, and customer concentration of the $2.14 million accounts receivable balance.
- Review the company’s ability to refinance or repay current loans, convertible notes, and other short-term obligations.
- Examine the terms, default status, dilution potential, and valuation methodology of the convertible notes and related derivative liabilities.
- Assess the going-concern disclosure and whether subsequent financing was obtained after September 30, 2018.
- Reconcile the reported working-capital figures and the balance-sheet classifications, including the apparent difference between the balance-sheet other-current-liabilities amount and the Note 7 detail.
- Evaluate whether the improved gross profit can continue after considering vendor costs, customer concentration, and the company’s limited cash balance.
- Confirm the share count and potential dilution from discounted conversion features and outstanding subscriptions.