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) (www.iqstel.com) is a technology company offering a wide array of services to global telecommunications and technology industries with presence in 13 countries. The Company has an extensive portfolio of products and services for its clients such as: SMS, VoIP, 4G & 5G international infrastructure connectivity, Cloud-PBX, OmniChannel Marketing, IoT services, blockchain and payment solutions. These services are grouped within three business divisions: Telecom, Technology and Fintech. The company operates its business through its wholly-owned subsidiary Etelix.com USA, LLC (“Etelix”) (www.etelix.com); and its majority-owned subsidiaries SwissLink Carrier AG ( www.swisslink-carrier.com ), QGlobal SMA (https://www.qglobalsms.com/), Smart Gas (http://iotsmartgas.com/) and ItsBChain (http://itsbchain.com/). The information contained on our websites 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, 2021 was $16,128,367, compared with $11,130,086 for the three months ended June 30, 2020. These numbers reflect an increase of 44.91% quarter over quarter on our consolidated revenues. Our total revenue reported for the six months ended June 30, 2021 was $30,325,978, compared with $16,147,498 for the six months ended June 30, 2020. When looking at the numbers by subsidiary, we have the following breakout for the six months ended June 30, 2021 compared to the six months ended June 30, 2020: 4 Table of Contents Subsidiary Revenue Six Months Ended June 30, 2021 Revenue Six Months Ended June 30, 2020 Etelix.com USA, LLC $ 7,481,915 $ 7,221,345 SwissLink Carrier AG 2,284,985 2,381,204 QGlobal LLC 502,431 163,546 IoT Labs LLC 20,056,647 6,381,403 $ 30,325,978 $ 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, 2021 increased to $16,083,802, compared with $10,397,778 for the three months ended June 30, 2020. Our total cost of revenues for the six months ended June 30, 2021 increased to $29,794,043, compared with $15,576,331 for the six months ended June 30, 2020. When looking at the numbers by subsidiary, we have the following breakout for the six months ended June 30, 2021 compared to the six months ended June 30, 2020: Subsidiary Cost of Revenue Six Months Ended June 30, 2021 Cost of Revenue Six Months Ended June 30, 2020 Etelix.com USA, LLC $ 7,338,609 $ 7,217,330 SwissLink Carrier AG 2,029,483 2,069,935 QGlobal LLC 419,810 102,231 IoT Labs LLC 20,006,141 6,186,835 $ 29,794,043 $ 15,576,331 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. 5 Table of Contents Operating Expenses Operating expenses increased to $1,209,167 for the three months ended June 30, 2021 from $905,016 for the three months ended June 30, 2020. Operating expenses increased to $2,707,278 for the six months ended June 30, 2021 from $2,202,543 for the six months ended June 30, 2020. The detail by major category for the six months ended June 30, 2021 and 2020 is reflected in the table below. Six Months Ended June 30, 2021 2020 Salaries, Wages and Benefits $ 560,618 $ 562,427 Technology 216,428 28,100 Professional Fees 232,216 214,853 Legal & Regulatory 50,627 3,224 Bad debts — 76,375 Travel & Events 5,430 1,341 Public Cost 24,331 49,732 Advertising 487,825 583,079 Bank Services and Fees 58,309 35,926 Depreciation and Amortization 42,421 31,140 Office, Facility and Other 142,977 116,312 Sub Total 1,821,182 1,702,509 Stock-based compensation 886,096 500,034 Total Operating Expense $ 2,707,278 $ 2,202,543 The main reasons for the overall increase in operating expenses for the six months ended June 30, 2021 compared to the same period of 2020 is due to the following: (1) Technology as a result of the development of the blockchain solutions, the IoT devices, and the fintech platform; (2) Legal & Regulatory expenses due to the IoT devices certification process; and (3) Stock-based compensation. Six Months Ended June 30, 2021 2020 Difference iQSTEL $ 1,993,964 $ 1,587,992 $ 405,972 Etelix 162,674 184,100 (21,426 ) Swisslink 368,537 328,483 40,054 ItsBchain 1,450 52,684 (51,234 ) QGlobal 56,138 29,952 26,186 IoT Labs 70,142 19,332 50,810 Global Money One 54,373 — 54,373 $ 2,707,278 $ 2,202,543 $ 504,735 6 Table of Contents Operating Income The Company showed negative Operating Income for the three months ended June 30, 2021 of $1,164,602 compared with a negative result of $172,708 for the three months ended June 30, 2020. The Company showed negative Operating Income for the six months ended June 30, 2021 of $2,175,343 compared with a negative result of $1,631,376 for the six months ended June 30, 2020. 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.) that increases in $405,972 year over year. Other Expenses/Other Income We had other income of $42,230 for the three months ended June 30, 2021, as compared with other income of $1,550,173 for the same period ended 2020. We had other expenses of $825,518 for the six months ended June 30, 2021, as compared with other expenses of $900,362 for the same period ended 2020. The decrease in other expenses is mainly due to the reduction in the interest expenses. Net Income We finished the three months ended June 30, 2021 with a loss of $1,122,372, as compared to a net income of $1,377,465 during the three months ended June 30, 2020. We finished the six months ended June 30, 2021 with a loss of $3,000,861, as compared to a loss of $2,531,738 during the six months ended June 30, 2020. The reasons for specific components are discussed above. Overall, these are the main concepts impacting the net result: (1) a reduction in the gross profit during the three months ended June 30, 2021; and (2) the increase of the Operating Expenses of the public entity. Liquidity and Capital Resources As of June 30, 2021, we had total current assets of $5,563,449 and current liabilities of $4,187,907, resulting in a positive working capital of $1,375,542. This compares with the working capital deficit of $4,330,355 at December 31, 2020. This increase in working capital, as discussed in more detail below, is primarily the result of the increase of $1,096,154 in the cash position and a reduction of $3,433,224 in the liabilities (loans, convertible notes and derivatives). Our operating activities used $2,093,398 in the six months ended June 30, 2021 as compared with $1,126,307 used in operating activities in the six months ended June 30, 2020. Investing activities used $152,864 for the six months ended June 30, 2021. Uses of funds on investing activities were the purchase of property and equipment for value of $68,844 and net payment of loans between related parties of $24,220, and acquisition of subsidiary of $60,000. 7 Table of Contents Financing activities provided $3,353,854 in the six months ended June 30, 2021 compared with $1,626,500 provided in the six months ended June 30, 2020. Our positive financing cash flow in 2021 was largely the result of the proceed from the subscription of new common stocks under our Regulation A offering of $3,586,250. The working capital and the cash position of the company has improved significantly; but 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 20,200,000 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, 2021. Critical Accounting Polices 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 Quarterly Report on Form 10-Q for the six months ended June 30, 2021; 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 Quarterly Report for a complete discussion of our significant accounting policies. Off Balance Sheet Arrangements As of June 30, 2021, there were no off-balance sheet arrangements. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We adopted the new standard effective January 1, 2021 and did not have a material impact on our consolidated financial statements. 8 Table of Contents In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements. 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.