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”) (OTCQB: 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. 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 (www.qglobalsms.com/), Smart Gas (www.iotsmartgas.com/) and ItsBChain (www.itsbchain.com/), Smartbiz Telecom (www.smartbiztel.com) and Whisl Telecom (www.whisl.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, 2022 was $21,936,634, compared with $16,516,739 for the three months ended September 30, 2021. These numbers reflect an increase of 32.81% quarter over quarter on our consolidated revenues. Our total revenue reported for the nine months ended September 30, 2022 was $65,055,661, compared with $46,842,717 for the nine months ended September 30, 2021. These numbers reflect an increase of 38.88% 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, 2022 compared to the nine months ended September 30, 2021: Subsidiary Revenue Nine Months Ended September 30, 2022 Revenue Nine Months Ended September 30, 2021 Etelix.com USA, LLC $ 17,510,601 $ 11,271,992 SwissLink Carrier AG 3,554,591 3,474,215 QGlobal LLC 317,594 585,151 IoT Labs LLC 39,733,761 31,547,531 Smartbiz Telecom 3,712,432 — Whisl Telecom 2,624,573 — Sub-total $ 67,453,552 $ 46,878,889 Inter-company sales (2,397,891 ) (36,172 ) $ 65,055,661 $ 46,842,717 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, 2022 increased to $20,621,674, compared with $15,675,687 for the three months ended September 30, 2021. Our total cost of revenues for the nine months ended September 30, 2022 increased to $62,410,367, compared with $45,469,730 for the nine months ended September 30, 2021. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021: Subsidiary Cost of Revenue Nine Months Ended September 30, 2022 Cost of Revenue Nine Months Ended September 30, 2021 Etelix.com USA, LLC $ 16,818,292 $ 10,855,644 SwissLink Carrier AG 2,969,719 3,018,877 QGlobal LLC 236,402 486,296 IoT Labs LLC 39,356,735 31,145,085 Smartbiz Telecom 3,330,051 — Whisl Telecom 2,097,059 — Sub-total $ 64,808,258 $ 45,505,902 Inter-company sales (2,397,891 ) (36,172 ) $ 62,410,367 $ 45,469,730 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 Gross Profit The gross profit for the three months ended September 30, 2022 increased to $1,314,960 from $841,052 for the same period of year 2021. For the nine months ended September 30, 2022 the gross profit increased to $2,645,294 from $1,372,987 for the same period of year 2021. When we analyze the numbers expressed in percentages, the gross profit for the nine months ended September 30, 2022 was 4.07%, which compared to 2.93% for the nine months ended September 30, 2021, an increase in the consolidated gross profit of 38.91%. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021: Subsidiary Gross Margin Nine Months Ended September 30, 2022 Gross Margin Nine Months Ended September 30, 2021 Etelix.com USA, LLC % 3.95 % 3.69 SwissLink Carrier AG 16.45 13.11 QGlobal LLC 25.56 16.89 IoT Labs LLC 0.95 1.28 Smartbiz Telecom 10.30 — Whisl Telecom 20.10 — % 4.07 % 2.93 The increase of our consolidated gross margin is the result of the improvement of the gross margin of Etelix, SwissLink and QGlobal; combined with the relatively high gross margin of our most recent acquisitions Smartbiz and Whisl. Operating Expenses Operating expenses increased to $1,256,147 for the three months ended September 30, 2022 from $957,195 for the three months ended September 30, 2021. Operating expenses decreased to $3,390,097 for the nine months ended September 30, 2022 from $3,664,473 for the nine months ended September 30, 2021. The detail by major category for the nine months ended September 30, 2022 and 2021 is reflected in the table below. Nine Months Ended September 30, 2022 2021 Salaries, Wages and Benefits $ 1,239,271 $ 863,413 Technology 188,950 198,143 Professional Fees 475,143 353,080 Legal and Regulatory 199,768 87,448 Bad Debt Expense 26,299 — Travel and Events 55,281 15,710 Public Cost 24,122 30,078 Advertising 486,153 705,175 Insurances 7,328 — Bank Services and Fees 27,109 85,885 Financial Expenses 134,608 — Depreciation and Amortization 91,221 66,924 Penalties and Settlements 110,767 — Office, Facility and Other 231,947 337,983 Sub Total 3,297,967 2,743,839 Stock-based compensation 92,130 920,634 Total Operating Expense $ 3,390,097 $ 3,664,473 6 Table of Contents The main reasons for the overall decrease in operating expenses for the nine months ended September 30, 2022 compared to the same period of 2021 is due to the significant decrease in Stock-based compensation. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021: Nine Months Ended September 30, 2022 2021 Difference iQSTEL $ 1,382,701 2,395,047 -1,012,346 Etelix 326,432 266,894 59,538 SwissLink 597,810 587,154 10,656 ItsBchain 12,653 2,198 10,455 QGlobal 133,532 92,881 40,651 IoT Labs 185,736 187,773 -2,037 Global Money One 109,627 132,526 -22,899 Smartbiz Telecom 246,268 — 246,268 Whisl Telecom 395,338 — 395,338 $ 3,390,097 3,664,473 -274,376 The most significant difference is generated by iQSTEL which is due to the reduction in Stock-based compensation. Operating Income The Company showed positive Operating Income for the three months ended September 30, 2022 of $58,813 compared with a negative result of $116,143 for the three months ended September 30, 2021. The Company showed negative Operating Income for the nine months ended September 30, 2022 of $744,803 compared with a negative result of $2,291,486 for the nine months ended September 30, 2021. Despite the operating loss incurred during the nine months ended September 30, 2022, the numbers compared with the same period of year 2021 reflect a positive evolution process as shown by the positive operating income during the three months ended September 30, 2022. Other Expenses/Other Income We had other expenses of $38,073 for the nine months ended September 30, 2022, as compared with other expenses of $820,593 for the same period ended 2021. The decrease in other expenses is a consequence of a significant reduction in interest expenses and other expenses related to derivatives. Net Income We finished the three months ended September 30, 2022 with a net income of $27,312, as compared to a loss of $111,218 during the three months ended September 30, 2021. We also finished the nine months ended September 30, 2022 with a loss of $782,876, as compared to a loss of $3,112,079 during the nine months ended September 30, 2021. The decreased loss for the nine-month period above is primarily due to a $1,012,346 year over year reduction in the costs associated with the operation of the public entity (iQSTEL, Inc.). 7 Table of Contents Liquidity and Capital Resources As of September 30, 2022, we had total current assets of $6,141,182 and current liabilities of $2,769,981, resulting in a positive working capital of $3,371,201. This compares with the working capital of $4,203,509 at December 31, 2021. This decrease in working capital, as discussed in more detail below, is primarily the result of the decrease of $2,039,832 in the cash position due to the funds used in the acquisitions of Smartbiz and Whisl. Our operating activities used $1,488,901 in the nine months ended September 30, 2022 as compared with $2,486,045 used in operating activities in the nine months ended September 30, 2021. Investing activities used $1,901,223 for the nine months ended September 30, 2022. Uses of funds in investing activities were primarily for the acquisition of subsidiaries of $1,814,132 and the purchase of property and equipment for $86,491. Financing activities provided $1,367,982 in the nine months ended September 30, 2022 compared with $3,314,313 provided in the nine months ended September 30, 2021. Our positive financing cash flow in 2022 was largely the result of the proceeds from common stock issued of $1,100,000 and the common stock purchase option of $500,000. Our current financial condition has improved significantly with a positive working capital of $3,371,201 and a cash position of $ 1,294,981 as of September 30, 2022. However, we intend to fund operations through increased sales and debt and/or equity financing arrangements to strengthen our liquidity and capital resources. The Company has received the qualification of a S-1 Offering Statement for the sale of up to 10,000,000 common stocks. This offering will be conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be sold from the available shares. 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 nine-month period ended September 30, 2022. 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, 2022; however, we consider our critical accounting policies to be those related to allowance for doubtful accounts, valuation of long-lived assets, 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, 2022, there were no off-balance sheet arrangements. Recent Accounting Pronouncements We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operation, financial position, or cash flow. 8 Table of Contents 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.