iQSTEL Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Years Ended December 31, 2020 and 2019 Net Revenue Our net revenue for the year ended December 31, 2019 was $44,910,006 as compared with $18,031,548 for the year ended December 31, 2019. These numbers reflect an increase of 149% year over year on our consolidated Revenues. When looking at the numbers by subsidiary, we have the following breakout for the year ended December 31, 2020: Subsidiary Revenue Year Ended December 31, 2020 Etelix.com USA, LLC $ 14,033,528 SwissLink Carrier AG 5,432,022 QGlobal LLC 421,619 IoT Labs LLC 25,022,837 $ 44,910,006 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 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. When looking at the numbers by subsidiary, we have the following breakout for the year ended December 31, 2020: Subsidiary Cost of revenue Year Ended December 31, 2020 Etelix.com USA, LLC $ 14,062,553 SwissLink Carrier AG 4,656,865 QGlobal LLC 311,409 IoT Labs LLC 24,916,827 $ 43,947,654 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. Gross Margin 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. 14 Operating Expenses Operating expenses for the year ended December 31, 2020 were $4,174,367, as compared with $1,449,624 for the year ended December 31, 2019. The detail by major category is reflected in the table below. Years Ended December 31 2020 2019 Salaries, Wages and Benefits $ 1,208,709 $ 657,790 Technology 133,400 160,251 Professional Fees 374,821 346,567 Legal & Regulatory 121,229 58,126 Travel & Events 8,596 22,689 Public Cost 87,234 33,537 Allowance for doubtful accounts 183,414 - Depreciation and Amortization 68,602 41,737 Advertising 942,950 61.346 Bank Services and Fees 137,598 21,687 Office, Facility and Other 209,956 45,894 Subtotal 3,476,509 1,449,624 Stock-based compensation 697,858 - Total Operating Expense $ 4,174,367 $ 1,449,624 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, 2020 2019 Difference iQSTEL $ 2,623,555 $ 746,932 $ 1,876,623 Etelix 407,937 442,748 (34,811) SwissLink 815,130 259,944 555,186 ItsBchain 52,684 - 52,684 QGlobal 83,304 - 83,304 IoT Labs 191,757 - 191,757 $ 4,174,367 $ 1,449,624 $ 2,724,743 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. 15 Other Expenses 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 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. Net Loss 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. ‬ Liquidity and Capital Resources As of December 31, 2020 we had total current assets of $3,581,584, compared with current liabilities of $7,911,939, resulting in a working capital deficiency of $4,330,355 and a current ratio of approximately 0.45 to 1. This compares with the working capital deficiency of $7,707,148‬ and the current ratio of 0.31 to 1 at December 31, 2019.‬‬ 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. 2020 2019 Net cash used in operating activities $ (2,116,174) $ (1,244,027) Net cash provided by (used) in investing activities (91,211) 152,069 Net cash provided by financing activities 2,662,756 1,357,526 Effect of exchange rate changes on cash 27,442 365 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. 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. 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 80,000,000 common stocks. 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 twelve month period ended December 31, 2020. 16 Critical Accounting Policies 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 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, 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. Actual results may differ from these estimates under different assumptions or conditions. 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 We do not expect the adoption of these or other recently issued accounting pronouncements to have a significant impact on our results of operation, financial position or cash flow.