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 QX: 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 SMS, LLC (https://www.qglobalsms.com/); IoT Labs, LLC (http://www.iotlabs.mx/); Global Money One Inc. (https://www.globalmoneyone.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 September 30, 2021 was $16,516,739, compared with $13,291,698 for the three months ended September 30, 2020. These numbers reflect an increase of 24.26% quarter over quarter on our consolidated revenues. Our total revenue reported for the nine months ended September 30, 2021 was $46,842,717, compared with $29,439,196 for the nine months ended September 30, 2020. These numbers reflect an increase of 59.12% year over year on our consolidated revenues 4 Table of Contents When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2021: Subsidiary Revenue Nine Months Ended September 30, 2021 Revenue Nine Months Ended September 30, 2020 Etelix.com USA, LLC $ 11,235,820 $ 10,705,409 SwissLink Carrier AG 3,474,215 3,917,085 QGlobal LLC 585,151 277,577 IoT Labs LLC 31,547,531 14,539,125 $ 46,842,717 $ 29,439,196 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 September 30, 2021 increased to $15,675,687, compared with $13,158,685 for the three months ended September 30, 2020. Our total cost of revenues for the nine months ended September 30, 2021 increased to $45,469,730, compared with $28,735,016 for the nine months ended September 30, 2020. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020: Subsidiary Cost of Revenue Nine Months Ended September 30, 2021 Cost of Revenue Nine Months Ended September 30, 2020 Etelix.com USA, LLC $ 10,819,472 $ 10,759,820 SwissLink Carrier AG 3,018,877 3,405,204 QGlobal LLC 486,296 190,407 IoT Labs LLC 31,145,085 14,379,585 $ 45,469,730 $ 28,735,016 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. Operating Expenses Operating expenses decreased to $957,195 for the three months ended September 30, 2021 from $958,787 for the three months ended September 30, 2020. Operating expenses increased to $3,664,473 for the nine months ended September 30, 2021 from $3,161,330 for the nine months ended September 30, 2020. The detail by major category for the nine months ended September 30, 2021 and 2020 is reflected in the table below. 5 Table of Contents Nine Months Ended September 30, 2021 2020 Salaries, Wages and Benefits $ 863,413 $ 845,258 Technology 198,143 34,016 Professional Fees 353,080 268,552 Legal & Regulatory 87,448 3,225 Bad debts — 92,875 Travel & Events 15,710 1,386 Public Cost 30,078 84,265 Advertising 705,175 926,279 Bank Services and Fees 85,885 75,463 Depreciation and Amortization 66,924 49,318 Office, Facility and Other 337,983 162,715 Sub Total 2,743,839 2,543,352 Stock-based compensation 920,634 617,978 Total Operating Expense $ 3,664,473 $ 3,161,330 The main reasons for the overall increase in operating expenses for the nine months ended September 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; (3) Other expenses associated to new interconnection deployments; and (3) Stock-based compensation. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020: Nine Months Ended September 30, 2021 2020 Difference iQSTEL $ 2,395,047 $ 2,242,336 $ 152,711 Etelix $ 266,894 $ 259,844 $ 7,050 SwissLink $ 587,154 $ 502,609 $ 84,545 ItsBchain $ 2,198 $ 52,684 $ (50,486) QGlobal $ 92,881 $ 52,608 $ 40,273 IoT Labs $ 187,773 $ 51,249 $ 136,524 Global Money One $ 132,526 — $ 132,526 $ 3,664,473 $ 3,161,330 503,143 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 Management Team and Board members compensation; (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 September 30, 2021 of $116,143 compared with a negative result of $825,774 for the three months ended September 30, 2020. 6 Table of Contents The Company showed negative Operating Income for the nine months ended September 30, 2021 of $2,291,486 compared with a negative result of $2,457,150 for the nine months ended September 30, 2020. Even when the company presents an operating loss, the numbers reflect a positive evolution process that places us close to the breakeven point in operations. Other Expenses/Other Income We had other income of $4,925 for the three months ended September 30, 2021, as compared with other expenses of $144,451 for the same period ended 2020. We had other expenses of $820,593 for the nine months ended September 30, 2021, as compared with other expenses of $1,044,813 for the same period ended 2020. The decrease in other expenses is a consequence of not having interest expenses and other expenses related to derivatives. Net Income We finished the three months ended September 30, 2021 with a net loss of $111,218, as compared to a loss of $970,225 during the three months ended September 30, 2020. We also finished the nine months ended September 30, 2021 with a loss of $3,112,079, as compared to a loss of $3,501,963 during the nine months ended September 30, 2020. The reasons for specific components are discussed above. Overall, these are the main concepts impacting the net result: (1) the Operating Expenses of the public entity of $2,395,047; (2) a loss in settlement of debt of $528,794; and (3) interest expenses of $648,889. It is important to remark the important reduction in interest expenses when comparing the amount corresponding to the nine months ended September 30, 2021 ($648,889) versus the amount corresponding to the same period of year 2020 ($2,368,107). Liquidity and Capital Resources As of September 30, 2021, we had total current assets of $5,202,360 and current liabilities of $3,916,317, resulting in a positive working capital of $1,286,043. 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 $437,488 in the cash position; the increase of $879,498 in account receivable from the sales of services; and a reduction of $3,995,622 in the liabilities (loans, convertible notes and derivatives). Our operating activities used $2,486,045 in the nine months ended September 30, 2021 as compared with $1,526,513 used in operating activities in the nine months ended September 30, 2020. Investing activities used $378,071 for the nine months ended September 30, 2021. Uses of funds on investing activities were for acquisition of subsidiary of $60,000; the purchase of property and equipment for value of $102,623 and Payment of loan receivable - related party of $215,674. Financing activities provided $3,314,313 in the nine months ended September 30, 2021 compared with $1,968,632 provided in the nine months ended September 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. 7 Table of Contents 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 nine month period ended September 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 nine months ended September 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 September 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 will adopt the new standard effective January 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. 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. 8 Table of Contents