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, 2022 and 2021 Net Revenue Our net revenue for the year ended December 31, 2022 was $93,203,532 as compared with $64,702,018 for the year ended December 31, 2021. 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, 2022 and 2021: Subsidiary Revenue Year Ended December 31, 2022 Revenue Year Ended December 31, 2021 Etelix.com USA, LLC 22,301,110 15,445,161 SwissLink Carrier AG 4,705,031 4,681,978 QGlobal LLC 350,050 666,887 IoT Labs LLC 53,239,401 43,907,992 Whisl 4,318,762 - Smartbiz 8,289,178 - 93,203,532 64,702,018 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 $105 million by December 31, 2023. Cost of Revenue Our total cost of sales for the year ended December 31, 2022 was $91,412,016 as compared with $63,168,303 for the year ended December 31, 2021. 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, 2022 Cost of revenue Year Ended December 31, 2021 Etelix.com USA, LLC 23,360,923 15,080,687 SwissLink Carrier AG 3,949,751 3,986,334 QGlobal LLC 243,493 563,528 IoT Labs LLC 52,842,202 43,537,754 Whisl 2,760,807 - Smartbiz 8,254,840 - 91,412,016 63,168,303 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 our vendor’s networks. 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. 15 Table of Contents Gross Margin Our gross margin, which is simply the difference between our revenues and our cost of sales, discussed above, increased from $1,533,715 in 2021 to $1,791,516 in 2022; represented an increase of 17% year over year Operating Expenses Operating expenses for the year ended December 31, 2022 were $4,983,176, as compared with $4,517,632 for the year ended December 31, 2021. The detail by major category is reflected in the table below. Years Ended December 31 2022 2021 Salaries, Wages and Benefits $ 1,662,192 $ 1,160,021 Technology 291,348 218,053 Professional Fees 901,082 441,490 Legal and Regulatory 511,598 106,001 Travel & Events 93,769 23,117 Public Cost 31,750 42,674 Allowance for Doubtful Accounts 34,376 - Depreciation and Amortization 120,117 91,474 Advertising 617,559 977,334 Bank Services and Fees 37,950 117,886 Office, Facility and Other 324,167 392,117 Commissions Financial Expenses 239,550 - Insurances 10,118 - Subtotal 4,875,576 3,570,167 Stock-based compensation 107,600 947,464 Total Operating Expenses $ 4,983,176 $ 4,517,631 Operating Expenses by subsidiary are as follow: Years Ended December 31, 2022 2021 Difference iQSTEL $ 1,762,904 $ 2,906,114 $ (1,143,210 ) Etelix 472,291 339,354 132,937 SwissLink 767,069 784,052 (16,983 ) ItsBchain 22,693 2,396 20,297 QGlobal 202,933 106,803 96,130 Global Money One 157,382 175,324 (17,942 ) IoT Labs 264,091 203,588 60,503 Whisl 821,979 - 821,979 Smartbiz 511,834 - 511,834 $ 4,983,176 $ 4,517,631 $ 465,545 The increment in the overall Operating Expenses is due to the new additions of Whisl and Smartbiz, totaling $1,333,813. This was partially offset by the $868,298 reduction in Operating Expenses by the remaining companies most significantly by iQSTEL, whose expenses were reduced by $1,143,210. 16 Table of Contents Other Expenses We had other expenses of $2,674,101 for the year ended December 31, 2022, as compared with other expenses of $880,085 for the year ended December 31, 2021. The increase in Other Expenses in 2022 compared to 2021 is due to the Change in fair value of derivative liabilities of $(2,650,369) for the year ended December 31, 2022 from a positive $317,080 for the year ended December 31, 2021. Net Loss We finished the year ended December 31, 2022 with a loss of $5,865,761 as compared to a loss of $3,864,001 during the year ended December 31, 2021. The amount of year 2022 is highly impacted by the $(2,650,369) change in fair value of the derivative liabilities . Liquidity and Capital Resources As of December 31, 2022 we had total current assets of $6,436,590, compared with current liabilities of $6,451,679, resulting in a negative working capital of $15,089 and a current ratio of approximately 0.99 to 1. Following is a table with summary data from the consolidated statement of cash flows for the year ended December 31, 2022 and 2021, as presented. 2022 2021 Net cash used in operating activities $ (1,765,060 ) $ (3,152,181 ) Net cash used in investing activities (2,001,506 ) (511,348 ) Net cash provided by financing activities 1,767,982 6,250,980 Effect of exchange rate changes on cash (6,840 ) (5,954 ) Net change in cash and cash equivalents $ (2,005,424) $ 2,581,497 Our operating activities used $1,765,060 in the year ended December 31, 2022, as compared with $3,152,181 used in operating activities in the year ended December 31, 2021. 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 2022 and 2021 is largely the result of our net loss for the years. Investing activities used $2,001,506 for the year ended December 31, 2022, as compared with $511,348 used in investing activities for the year ended December 31, 2021. Our negative investing cash flow for 2022 is largely due to the acquisition of Whisl and Smartbiz of $1,889,132 and the purchase of $112,074 of equipment. Financing activities provided $1,767,982 for the year ended December 31, 2022, as compared to $6,250,980 provided for the year ended December 31, 2021. Our positive financing cash flow in 2022 was largely the result of the $1,100,000 from the issuance of new common stock, $400,000 from the exercise of stock options and $500,000 from the issuance of common stock purchase options. 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 Form S-1 for the sale of up to 10,000,000 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. 17 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 twelve-month period ended December 31, 2022. 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, 2022; however, we consider our critical accounting policies to be those related to the allowance for doubtful accounts, valuation of assets, significant estimates in the valuation of financial instruments 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, 2022, 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.