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Item 7. Management’s Discussion and Analysis

2021-04-15 compared with 2020-04-15 · 43 added, 40 removed, 53 unchanged (61% of the section changed)

3 unchanged sentences

These numbers reflect an increase of 149% year over year on our consolidated Revenues.

When looking at the numbers by subsidiary, Etelix’s revenue was $16,322,718 and SwissLink contributed $1,708,830.

The continued growth of our revenue year over year, during the last three years, is due to our focus on carrying traffic to higher revenue per minute destinations in Africa.

We have to remember that one of our main strategic lines of actions in the last years has been to strengthen the business relationship with our customers in Europe and leverage from there our growth in the African market, with half of the traffic terminated in Africa originating from Europe.

There is still room to grow and we have enough capacity in our telecommunication infrastructure to accommodate more than twice the traffic we handle at the present time.

When looking at the numbers by subsidiary, we have the following breakout for the year ended December 31, 2020:

December 31, 2020

Etelix.com USA, LLC

SwissLink Carrier AG

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.

If net revenues continue growing at a similar rates for the next twelve months, we believe that the company will reach a total consolidated revenue of approximately $60 million by December 31, 2021.

Cost of Sales

Cost of Revenue

Our total cost of sales for the year ended December 31, 2020 was $43,947,654 as compared with $17,250,623 for the year ended December 31, 2019.

The increase results from a higher volume of minutes of African destinations, which rates are on average 9 times higher compared to the average rates of the rest of the World.

This behavior in the costs shows a logical correlation with the behavior of the revenue commented above.

Our gross margin, which is simply the difference between our revenues and our cost of sales, discussed above, decreased from $1,192,406 in 2018 to $780,925 in 2019.

The Gross Margin over Revenues decreased from 8.66% to 4.33% from 2018 to 2019.

This lower gross margin is due to the inclusion of new destinations in our portfolio.

To develop a new market and to be able to obtain from it the expected margins, it is necessary to advance along several stages.

First, it is important to add some routes to the portfolio and capture a significant volume of traffic from the customers to those routes.

Once a critical mass of traffic has been reached, the company is in a better position to negotiate with vendors the price conditions and payment terms.

These are the two aspects that mainly determine the gross margins.

Having captured the desired volume to those new destinations, now we can move to the second stage to negotiate with our vendors better terms and conditions that will impact in a positive way the gross margins in every carried minute.

With this in mind, we expect an increase in the gross margin for the next twelve months as a result of having better termination costs.

When looking at the numbers by subsidiary, we have the following breakout for the year ended December 31, 2020:

Cost of revenue

December 31, 2020

Etelix.com USA, LLC

SwissLink Carrier AG

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 reached a higher volume of sales and every additional unit sold (minutes and SMS) has its corresponding termination cost.

Our gross margin, which is simply the difference between our revenues and our cost of sales, discussed above, increased from $780,925 in 2019 to $962,352 in 2020.

We expect an increase in the gross margin for the next twelve months as a result of having better termination costs.

Operating Expenses

5 unchanged sentences

Legal & Regulatory

Trade Insurance

Travel & Events

2 unchanged sentences

Bank Services and Fees

8,442‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Office, Facility and Other

12,681‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Stock-based compensation

Total Operating Expense

The main reasons for the overall increase in operating expenses in 2019 were:

(2) the Professional Fees comprised of legal, accounting and other consulting services includes in 2019 the costs associated to the due diligence and audit of SwissLink Carrier AG;

(2) Items such as Depreciation and Amortization, Travel & Events, Bank Services and Fees and Office, Facilities and Others now include those related to SwissLink.

In some of those items we are expecting to create synergies and reduce the overall costs.

The item Technology already reflects the savings resulting from the implementation of the new HostSBC switching platform.

The main reasons for the overall increase in operating expenses for the year ended December 31, 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.

This is compared with 2019 where operating expenses corresponded only to Etelix, a portion corresponding to SwissLink (this subsidiary is consolidated since August 15, 2019) and corporate costs of iQSTEL;

as shown in the table below.

Years Ended December 31,

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 a marketing program for the Reg A;

and (3) Stock-based compensation.

The item Technology already reflects the savings resulting from the implementation of the new switching platform.

No allowance for doubtful accounts were established due to additional controls already implemented within the commercial area and collection team.

Item 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 a marketing program for the Reg A.

All other items were stable from one year to the other, which allows us to affirm that the cost structure of the company is under control and supervision.

1 unchanged sentence

We had other expenses of $3,487,315 for the year ended December 31, 2020, as compared with other expenses of $4,774,039 for the year ended December 31, 2019.

Our other expenses in 2019 were mainly related to changes in the fair value of derivative liabilities and interest expense.

Fair value of derivative liabilities is connected to the convertible promissory notes issued by the company during years 2018 and 2019.

It has been the intention of the company to redeem these convertible promissory notes before their due date, so the increase of interest expenses is due to the redemption of those convertible notes.

Our other expenses in 2020 were mainly related to interest expense of $3,509,323, loss on the settlement of debt of $154,629 and other expenses of $117,562, offset mainly by a $255,614 change in fair value of derivative securities.

Our other expenses in 2019 were mainly related to interest expense of $2,653,996 and a $2,111,783 change in fair value of derivative securities.

We finished the year ended December 31, 2020 with a loss of $6,699,482 as compared to a loss of $5,442,738 during the year ended December 31, 2019.

The reasons for specific components are discussed above.

Overall, these are the main concepts impacting the net result:

(1) a loss in the change in fair value of derivative liabilities of $2,111,783;

and (2) an increase in interest expenses of $2,193,811‬ year over year, from $460,185 in year 2018 to $2,653,996 in year 2019.‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Liquidity and Capital Resources

1 unchanged sentence

This compares with the working capital deficiency of $7,707,148‬ and the current ratio of 0.31 to 1 at December 31, 2019.‬‬

This decrease in working capital is primarily the result of accounting derivative liabilities for the amount of $4,744,134 and the increase in the current portion of Convertible notes.‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Following is a table with summary data from the consolidated statement of cash flows for the year ended December 31, 2020 and 2019, as presented.

2 unchanged sentences

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net change in cash and cash equivalents

‬‬‬‬‬‬‬‬‬‬‬‬482,813‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

265,933‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

Our operating activities used $2,116,174 in the year ended December 31, 2020, as compared with $1,244,027 used in operating activities in the year ended December 31, 2019.

Our cash flow from operations varies depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable.

The main use in cash from operating activities is reflected in variation of the Accounts Payable of $571,974 between the compared years;

while the main source of cash in operating activities result from the Accounts Receivable for $522,360.

Investing activities provided $152,069 for the year ended December 31, 2019 due to the acquisition of subsidiary with the transaction of SwissLink Carrier AG of $239,516.

Uses of funds on investing activities were the purchase of fix assets for value of $32,007 and net payment of loans between related parties of $55,440.

Our negative operating cash flows in 2020 and 2019 is largely the result of our net loss for the years.

Investing activities used $91,211 for the year ended December 31, 2020, as compared with $152,069 provided by investing activities for the year ended December 31, 2019.

Our negative investing cash flow for 2020 is largely due to the acquisition of property and equipment of $90,192 and net payment of loans between related parties of $18,888.

Financing activities provided $2,662,756 for the year ended December 31, 2020, as compared with $1,357,526 provided for the year ended December 31, 2019.

Our positive financing cash flow in 2020 was largely the result of the net proceeds from loans of $1,239,620;

net proceeds from convertible notes of $1,420,000;

and proceed from the subscription of new common stock under our Regulation A offering $1,915,005;

offset by repayments on loans of $969,664 and repayments of convertible notes of $942,190.

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.

6 unchanged sentences

There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

Off Balance Sheet Arrangements

As of December 31, 2019, there were no off-balance sheet arrangements.

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 twelve month period ended December 31, 2020.

Critical Accounting Policies

1 unchanged sentence

Our accounting policies are discussed in detail in the footnotes to our financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2020;

however, we consider our critical accounting policies to be those related to allowance for doubtful accounts, valuation of assets and income taxes.

however, we consider our critical accounting policies to be those related to allowance for doubtful accounts, valuation of assets, significant estimates in the valuation of convertible debt and income taxes.

Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances.

1 unchanged sentence

See the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies.

Off Balance Sheet Arrangements

As of December 31, 2020, there were no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis