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, 2021 and 2020 Net Revenue Our net revenue for the year ended December 31, 2021 was $64,702,018 as compared with $44,910,006 for the year ended December 31, 2020. These numbers reflect an increase of 44% year over year on our consolidated Revenues. When looking at the numbers by subsidiary, we have the following breakout for the years ended December 31, 2021 and 2020: Subsidiary Revenue Year Ended December 31, 2021 Revenue Year Ended December 31, 2020 Etelix.com USA, LLC 15,445,161 14,033,528 SwissLink Carrier AG 4,681,978 5,432,022 QGlobal LLC 666,887 421,619 IoT Labs LLC 43,907,992 25,022,837 64,702,018 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 rate for the next twelve months, we believe that the company will reach a total consolidated revenue of approximately $90 million by December 31, 2022. Cost of Revenue Our total cost of sales for the year ended December 31, 2021 was $63,168,303 as compared with $43,947,654 for the year ended December 31, 2020. When looking at the numbers by subsidiary, we have the following breakout for the years ended December 31, 2021 and 2020: Subsidiary Cost of revenue Year Ended December 31, 2021 Cost of revenue Year Ended December 31, 2020 Etelix.com USA, LLC 15,080,687 14,062,553 SwissLink Carrier AG 3,986,334 4,656,865 QGlobal LLC 563,528 311,409 IoT Labs LLC 43,537,754 24,916,827 63,168,303 43,947,654 12 Table of Contents 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 $962,352 in 2020 to $1,533,715 in 2021. We expect an increase in the gross margin for the next twelve months as a result of having better termination costs. Operating Expenses Operating expenses for the year ended December 31, 2021 were $4,517,632, as compared with $4,174,367 for the year ended December 31, 2020. The detail by major category is reflected in the table below. Years Ended December 31 2021 2020 Salaries, Wages and Benefits $ 1,160,021 $ 1,208,709 Technology 218,053 133,400 Professional Fees 441,490 374,821 Legal and Regulatory 106,001 121,229 Travel & Events 23,117 8,596 Public Cost 42,674 87,234 Allowance for doubtful accounts — 183,414 Depreciation and Amortization 91,474 68,602 Advertising 977,334 942,950 Bank Services and Fees 117,886 137,598 Office, Facility and Other 392,117 209,956 Subtotal 3,570,167 3,476,509 Stock-based compensation 947,464 697,858 Total Operating Expenses $ 4,517,631 $ 4,174,367 Operating Expenses by subsidiary are as follow: Years Ended December 31, 2021 2020 Difference iQSTEL $ 2,906,114 $ 2,623,555 $ 282,560 Etelix 339,354 407,937 -68,583 SwissLink 784,052 815,130 -31,078 ItsBchain 2,396 52,684 -50,288 QGlobal 106,803 83,304 23,499 Global Money One 175,324 — 175,324 IoT Labs 203,588 191,757 11,831 $ 4,517,631 $ 4,174,367 $ 343,265 13 Table of Contents The most significant difference is generated by iQSTEL which is basically due to the Stock-based compensation. This item includes compensation to Management, Directors and other professional service providers. No allowance for doubtful accounts were established due to additional controls already implemented within the commercial area and collection team. 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 Regulation A offering. 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. Other Expenses We had other expenses of $880,085 for the year ended December 31, 2021, as compared with other expenses of $3,487,315 for the year ended December 31, 2020. The reduction in Other Expenses in 2021 compared to 2020 is due to the significant reduction in the interest expense of $3,509,323 for the year ended December 31, 2020 to $675,481 for the year ended December 31, 2021. Net Loss We finished the year ended December 31, 2021 with a loss of $3,864,001 as compared to a loss of $6,699,482 during the year ended December 31, 2020. This represents an improvement in our financial results year over year, due to an increment in the Gross Revenue and a significant reduction of the Interest Expenses. Liquidity and Capital Resources As of December 31, 2021 we had total current assets of $6,566,524, compared with current liabilities of $2,363,015, resulting in a positive working capital of $4,203,509 and a current ratio of approximately 2.78 to 1. This compares with the working capital deficiency of $4,330,355 and the current ratio of 0.45 to 1 at December 31, 2020. Following is a table with summary data from the consolidated statement of cash flows for the year ended December 31, 2021 and 2020, as presented. 2021 2020 Net cash used in operating activities $ (3,152,181 ) $ (2,116,174 ) Net cash used in investing activities (511,348 ) (91,211 ) Net cash provided by financing activities 6,250,980 2,662,756 Effect of exchange rate changes on cash (5,954 ) 27,442 Net change in cash and cash equivalents $ 2,581,497 $ 482,813 14 Table of Contents Our operating activities used $3,152,181 in the year ended December 31, 2021, as compared with $2,116,174 used in operating activities in the year ended December 31, 2020. 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 2021 and 2020 is largely the result of our net loss for the years. Investing activities used $511,348 for the year ended December 31, 2021, as compared with $91,211 used in investing activities for the year ended December 31, 2020. Our negative investing cash flow for 2021 is largely due to the acquisition of property, equipment, and intangible assets of $230,900 and an increase of loans to related parties of $220,674. Financing activities provided $6,250,980 for the year ended December 31, 2021, as compared with $2,662,756 provided for the year ended December 31, 2020. Our positive financing cash flow in 2021 was largely the result of the $6,336,250 net proceeds from the subscription of new common stock under our Regulation A offering. 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, 2021. 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, 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 Annual Report for a complete discussion of our significant accounting policies. Off Balance Sheet Arrangements As of December 31, 2021, 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. 15 Table of Contents