iQSTEL Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Overview iQSTEL Inc. (the “Company”) (OTC Pink: IQST) is a leading-edge 21st Century Enhanced Telecommunications Service Provider offering a wide range of cloud-based enhanced services to the Tier-1 and Tier-2 carriers, enterprise market, as well as the retail market. iQSTEL offers international and domestic VoIP services, SMS exchange for A2P and P2P, Internet of Things (IoT) applications, 4G & 5G international infrastructure connectivity, as well as blockchain-based payment and phone number mobility platforms to international and domestic Tier-1 carrier for VoIP, SMS, and Data. Our principal place of business is located at 300 Aragon Avenue, Suite 375 Coral Gables, FL 33134. General information about us can be found at www.iqstel.com. The information contained on or connected to our website is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered part of this or any other report filed with the SEC. Results of Operations Revenues Our total revenue reported for the three months ended June 30, 2020 was $11,130,086, compared with $4,253,359 for the three months ended June 30, 2019. These numbers reflect an increase of 161.68% quarter over quarter on our consolidated revenues. Our total revenue reported for the six months ended June 30, 2020 was $16,147,498, compared with $8,416,562 for the six months ended June 30, 2019. When looking at the numbers by subsidiary, we have the following breakout for the six months ended June 30, 2020: Subsidiary Revenue Six Months Ended June 30, 2020 Etelix.com USA, LLC $ 7,221,344 Swisslink Carrier AG 2,381,204 QGlobal LLC 163,546 IoT Labs LLC 6,381,404 $ 16,147,498 The continued growth of our revenue is the result of the development of our business strategy, which includes the strengthening of our commercial and operating activities and new acquisitions. Cost of Revenues Our total cost of revenues for the three months ended June 30, 2020 increased to $10,397,778, compared with $4,345,087 for the three months ended June 30, 2019. Our total cost of revenues for the six months ended June 30, 2020 increased to $15,576,331, compared with $8,072,713 for the six months ended June 30, 2019. 23 Our cost of revenues consists of direct charges from vendors that the Company incurs to deliver services to its customers. These costs primarily consist of usage charges for calls and SMS terminated in vendor’s network. The behavior in the costs shows a logical correlation with the behavior of the revenue commented above. We have reac-hed a higher volume of sales and every additional unit sold (minutes and SMS) has its corresponding termination cost. Operating Expenses Operating expenses increased to $905,016 for the three months ended June 30, 2020 from $341,553 for the three months ended June 30, 2019. Operating expenses increased to $2,202,543 for the six months ended June 30, 2020 from $532,060 for the six months ended June 30, 2019. The detail by major category for the six months ended June 30, 2020 and 2019 is reflected in the table below. Six Months Ended June 30, 2020 2019 Salaries, Wages and Benefits $ 562,427 $ 162,242 Technology 28,100 94,847 Professional Fees 214,853 162,662 Legal & Regulatory 3,224 - Bad debts 76,375 - Travel & Events 1,341 3,375 Public Cost 49,732 19,432 Advertising 583,079 50,000 Bank Services and Fees 35,926 - Depreciation and Amortization 31,140 19,281 Office, Facility and Other 116,312 20,221 Sub Total 1,702,509 532,060 Stock-based compensation 500,034 - Total Operating Expense $ 2,202,543 $ 532,060 The main reasons for the overall increase in operating expenses for the six months ended June 30, 2020 compared to the same period of 2019 is that in 2020 we are reflecting the costs corresponding to 5 operating subsidiaries (Etelix.com, Swisslink, ItsBchain, QGlobal and IoT Labs) plus the corporate costs corresponding to iQSTEL itself; while in 2019 operating expenses corresponded only to one subsidiary and corporate costs of iQSTEL; as shown in the table below. Six Months Ended June 30, 2020 2019 Difference iQSTEL $ 1,587,992 $ 315,638 $ 1,272,354 Etelix 184,100 216,422 -32,322 Swisslink 328,483 - 328,483 ItsBchain 52,684 - 52,684 QGlobal 29,952 - 29,952 IoT Labs 19,332 - 19,332 $ 2,202,543 $ 532,060 $ 1,670,483 The most significant difference is generated by iQSTEL which is due to the following: (1) the Salaries, Wages and Benefits as a result of the new employment agreements with the Management Team members valid from May 2019, where the aggregated monthly salaries varied from $11,500 to $36,000, and the implementation starting on January 2020 of a compensation for Board Members of 3,000 monthly; (2) Advertising corresponds to the third-party consultancy for the design and implementation of a Social Media communication strategy oriented to build and enhance our companies and brand image; and (3) Stock-based compensation. Operating Income The Company showed negative Operating Income for the three months ended June 30, 2020 of $172,708 compared with a negative result of $433,281 for the three months ended June 30, 2019; which is a positive variation quarter over quarter. The Company showed negative Operating Income for the six months ended June 30, 2020 of $1,627,117 compared with a negative result of $188,211 for the six months ended June 30, 2019. 24 The increase of the numbers for the six month period above is primarily due to the costs associated with the operation of the public entity (iQSTEL, Inc.) estimated in the amount of $1,587,992. When looking at the results of our operating subsidiaries, we notice a very good performance of each of them, particularly in the three months ended in June 30, 2020. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues Etelix $ 3,402,049 $ 4,253,359 $ 7,221,344 $ 8,416,562 Swisslink 1,183,088 - 2,381,204 - ItsBChain - - - - QGlobal 163,546 - 163,546 - IoT Labs 6,381,403 - 6,381,404 - Total Revenue $ 11,130,086 $ 4,253,359 $ 16,147,498 $ 8,416,562 Cost of revenue Etelix $ 3,096,146 $ 4,345,087 $ 7,217,330 $ 8,072,713 Swisslink 1,012,566 - 2,069,935 - ItsBChain - - - - QGlobal 102,231 - 102,231 - IoT Labs 6,186,835 - 6,186,835 - Total Cost of Revenue $ 10,397,778 $ 4,345,087 $ 15,576,331 $ 8,072,713 Gross profit $ 732,308 $ (91,728) $ 571,167 $ 343,849 Operating Expenses Etelix $ 85,889 $ 127,957 $ 184,100 $ 216,422 Swisslink 163,049 - 328,483 - ItsBChain - - 52,684 - QGlobal 25,602 - 29,952 - IoT Labs 19,332 - 19,332 - Total Operating Expenses $ 293,872 $ 127,957 $ 614,551 $ 216,422 Operating Income (Loss) $ 438,436 $ (219,685) $ (43,384) $ 127,427 Other Expenses/Other Income We had other income of $1,550,173 for the three months ended June 30, 2020, as compared with other expenses of $50,960 for the same period ended 2019. We had other expenses of $900,362 for the six months ended June 30, 2020, as compared with other expenses of $1,321,608 for the same period ended 2019. The decrease in other expenses is a result of the positive change in fair value of derivative liabilities, and the gain on settlement of debts of $283,230. Net Income We finished the three months ended June 30, 2020 with a net income of $1,377,465, as compared to a loss of $484,241 during the three months ended June 30, 2019. We finished the six months ended June 30, 2020 with a loss of $2,531,738, as compared to a loss of $1,509,819 during the six months ended June 30, 2019. The reasons for specific components are discussed above. Overall, these are the main concepts impacting the net result: (1) an increment in interest expenses of $678,353 year over year to total $1,454,515; and (2) the Operating Expenses of the public entity of $1,587,992. Liquidity and Capital Resources As of June 30, 2020, we had total current assets of $3,853,302 and current liabilities of $8,515,969, resulting in a working capital deficit of $4,662,667‬. This compares with the working capital deficit of $7,707,148‬ at December 31, 2019. This decrease in working capital deficit, as discussed in more detail below, is primarily the result of the increase of $509,050 in the cash position and a reduction of $3,584,337 in the derivative liabilities.‬ ‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬ 25 Our operating activities used $1,126,307 in the six months ended June 30, 2020 as compared with $667,737 used in operating activities in the six months ended June 30, 2019. Investing activities provided $2,550 for the six months ended June 30, 2020. Uses of funds on investing activities were the purchase of property and equipment for value of $58,832 and net payment of loans between related parties of $14,399. Main source of funds in the Investing activities was resulting from the acquisition of subsidiary IoT Labs of $75,781. Financing activities provided $1,626,500 in the six months ended June 30, 2020 compared with $743,653 provided in the six months ended June 30, 2019. Our positive financing cash flow in 2020 was largely the result of the net proceeds from loans $483,690, net proceeds from convertible notes $782,810; and proceed from the subscription of new common stocks under our Regulation A offering $360,000. Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. The Company has received the qualification of an Offering Statement under Regulation A for the sale of up to 24,000,000 common shares. This offering is being conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be sold. We also plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all. Inflation Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the six month period ended June 30, 2020. Critical Accounting Polices In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 2 of our audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission. Off Balance Sheet Arrangements As of June 30, 2020, there were no off-balance sheet arrangements. Recent Accounting Pronouncements The recent accounting pronouncements that are material to our financial statements are disclosed in Note 2 of our consolidated audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission and in Note 2 of our unaudited consolidated financial statements included herein. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.