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. (www.iqstel.com) is a technology company with a presence in 19 countries and 70 employees that is offering leading-edge services through its business divisions. Our Telecom Division, which represents the majority of current operations and which also represents the source for all of our revenues for the financial periods presented, offers VoIP, SMS, proprietary Internet of Things (IoT) solutions (www.iotsmartgas.com and www.iotsmarttank.com), and international fiber-optic connectivity through its subsidiaries: Etelix (www.etelix.com), SwissLink Carrier (www.swisslink-carrier.com), Smartbiz Telecom (www.smartbiztel.com), Whisl Telecom (www.whisl.com), IoT Labs (www.iotlabs.mx), and QGlobal SMS (www.qglobalsms.com). Our developing Fintech Business Line (www.globalmoneyone.com) (www.maxmo.vip) offers a complete Fintech ecosystem MasterCard Debit Card, US Bank Account (No SSN Needed), Mobile App/Wallet (Remittances, Mobile Top Up). Our Fintech subsidiary, Global Money One, is to provide immigrants access to reliable financial services that makes it easier to manage their money and stay connected with their families back home. Our developing BlockChain Platform Business Line (www.itsbchain.com) offers our proprietary Mobile Number Portability Application (MNPA) to serve the in-country portability needs through its subsidiary, itsBchain. Our developing Electric Vehicle (EV) Business Line (www.evoss.net) offers electric motorcycles for work and recreational use in the USA, Spain, Portugal, Panama, Colombia, and Venezuela. EVOSS is also working on the development of an EV Mid Speed Car to serve the niche of the 2nd car in the family. Our Artificial Intelligence (AI)-Enhanced Metaverse Division (information and content) (www.realityborder.com) is currently developing a groundbreaking white-label solution designed specifically for corporations, businesses, and the telecommunications industry. Delivering a full suite of immersive content services, creating a comprehensive virtual experience that can be accessed through the Web or our proprietary mobile apps. The features include up to four simultaneous video screens for versatile content presentation, various virtual halls such as the main hall, home hall, auditorium, exhibition space, shopping center, and meeting rooms. Stands for mobile application downloads, clickable gates for immediate purchasing, and direct communication tools are seamlessly integrated to foster collaboration, engagement, and interactivity. It goes beyond traditional virtual spaces by utilizing cutting-edge AI technology. This ensures video conferencing and real-time communication with other users within the Metaverse, offering our customers a collective and fully immersive experience that caters to diverse needs such as content acquisition, entertainment, and shared virtual experiences. It is a future-ready platform that encourages creativity, connectivity, and collaboration like never before. 4 Table of Contents Our metaverse leverages advanced AI to introduce Non-Player Characters (NPCs) that significantly enhance user engagement and functionality within virtual environments. These NPCs are not mere static elements; rather, they are powered by OpenAI's latest language models, enabling dynamic interaction with users. This AI-driven interaction allows NPCs to serve as sales and brand assistants, guiding users through immersive experiences that can extend to purchasing products from external websites. Furthermore, these intelligent agents can control access to gated spaces within the metaverse based on user interactions, showcasing a personalized approach to user experience. A key innovation in our AI implementation is the NPCs' ability to autonomously make decisions based on their understanding of user interactions. This is achieved through state-of-the-art natural language processing and understanding capabilities, which are supported in seven languages. Additionally, our NPCs utilize advanced text-to-speech and speech-to-text technologies to facilitate seamless communication with users across diverse linguistic backgrounds. The incorporation of "function call" features further enhances the NPCs' ability to perform complex tasks and interact meaningfully with the environment and the users. Our reference to our technology as "cutting-edge" is grounded in our commitment to continuous improvement and innovation. We consistently integrate the latest advancements in AI, particularly in the areas of chatbots, language understanding, and user interaction technologies. This ensures that our metaverse remains at the forefront of AI application in virtual spaces, offering an unparalleled user experience that goes beyond traditional virtual environments. We are currently in an advanced phase of development, with ongoing enhancements to AI functionalities and user interaction models. Our team is dedicated to exploring and implementing the latest AI technologies to ensure that our metaverse remains a leading example of innovation in virtual space technology. The information contained on our websites is not incorporated by reference into this prospectus 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 March 31, 2024 was $51,414,878, compared with $24,666,529 for the three months ended March 31, 2023. These numbers reflect an increase of 108% quarter over quarter on our consolidated revenues. When looking at the numbers by subsidiary, we have the following breakout for the three months ended March 31, 2024 compared to the three months ended March 31, 2023: Subsidiary Revenue Three Months Ended March 31, 2024 Revenue Three Months Ended March 31, 2023 Etelix.com USA, LLC $ 18,629,910 $ 4,348,986 SwissLink Carrier AG 974,734 1,275,285 QGlobal LLC 367,260 85,051 IoT Labs LLC 24,338,199 15,261,282 Whisl 923,328 304,686 Smartbiz 6,181,447 3,391,240 $ 51,414,878 $ 24,666,529 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 expanding the synergies among our subsidiaries. We expect that our revenue will continue to grow consistently over the coming quarters until reaching a projected total of +$250,000,000 by the end of 2024. 5 Table of Contents Cost of Revenues Our total cost of revenues for the three months ended March 31, 2024 increased to $50,035,852, compared with $23,449,793 for the three months ended March 31, 2023. When looking at the numbers by subsidiary, we have the following breakout for the three months ended March 31, 2024 compared to the three months ended March 31, 2023: Subsidiary Cost of Revenue Three Months Ended March 31, 2024 Cost of Revenue Three Months Ended March 31, 2023 Etelix.com USA, LLC $ 17,832,936 $ 3,764,473 SwissLink Carrier AG 770,168 1,103,857 QGlobal LLC 242,417 51,549 IoT Labs LLC 23,796,575 14,878,901 Whisl 1,129,010 567,719 Smartbiz 6,264,746 3,083,294 $ 50,035,852 $ 23,449,793 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 networks. The behavior in the costs shows a logical correlation with the behavior of the revenue commented on 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, was $1,379,026 for the three months ended March 31, 2024 compared to $1,216,736 for the three months ended March 31, 2023. This represents an increase of 13.34% in the gross margin quarter over quarter. We expect our gross margin will increase through the increment in the revenue associated with the SMS businesses offered by QGlobal SMS, whose margin is greater than 25%, compared to the margins of the wholesale voice business of 3% average. While our revenue associated with voice services grew 187% when comparing the three months ended on March 31, 2024 to the three months ended on March 31, 2023, the revenue of QGlobal SMS grew 332% in the same period. Operating Expenses Operating expenses increased to $1,562,478 for the three months ended March 31, 2024 from $1,534,266 for the three months ended March 31, 2023. The detail by major category is reflected in the table below. Three Months Ended March 31, 2024 2023 Salaries, Wages and Benefits $ 375,426 $ 459,130 Technology 221,463 124,215 Professional Fees 503,572 450,487 Legal and Regulatory 32,164 60,495 Travel and Events 35,736 24,361 Public Cost 71,930 10,445 Advertising 184,740 287,126 Bank Services and Fees 19,736 7,756 Depreciation and Amortization 35,161 34,060 Office, Facility and Other 49,962 62,978 Insurance 798 1,983 Bad debt expense 725 — Sub Total 1,531,413 1,523,036 Stock-based compensation 31,065 11,230 Total Operating Expenses $ 1,562,478 $ 1,534,266 6 Table of Contents When looking at the numbers by subsidiary, we have the following breakout for the three months ended March 31, 2024 compared to the three months ended March 31, 2023: Three Months Ended March 31, 2024 2023 Difference iQSTEL 657,410 664,552 (7,142 ) Etelix 68,176 105,286 (37,110 ) SwissLink 206,472 183,309 (23,163 ) ItsBchain 10,416 11,789 (1,373 ) QGlobal 109,012 63,875 45,137 IoT Labs 52,522 62,806 (10,284 ) Global Money One 250 43,449 (43,199 ) Whisl 240,048 154,440 85,608 Smartbiz 218,172 244,760 (26,588 ) 1,562,478 1,534,266 28,212 The most significant differences are: (1) the increase in Professional Fees; (2) the increases in technology expenses related to the deployment and upgrade of the Switching platform to allocate Smartbiz. This platform is currently used by SwissLink and Etelix; and (3) the increase in Public Cost. We are continually identifying operational synergies among all of our subsidiaries to be more cost efficient. We are currently making investments in the development of a unique voice switching platform that will allow us to reduce costs between fifty and sixty thousand dollars per quarter. Operating Income The Company showed negative Operating Income for the three months ended March 31, 2024 of $183,452 compared with a negative result of $317,530 for the three months ended March 31, 2023. Even though the Company showed negative Operating Income, the number shows a trend of significant improvement year over year. Our Telecom Division, which is the one generating revenue at the present time, generated positive Operating Income. The expenses of our Pre-revenue companies are set at the minimum required to finish the development of the product/services prior to market launch. Pre revenue companies Telecom Division ItsBchain Global Money One iQSTEL Consolidated Revenues $ 51,414,878 — — — $ 51,414,878 Cost of revenues 50,035,852 — — — 50,035,852 Gross profit 1,379,026 — — — 1,379,026 Operating expenses General and administration 894,402 10,416 250 657,410 1,562,478 Total operating expenses 894,402 10,416 250 657,410 1,562,478 Operating income/(loss) $ 484,624 (10,416 ) (250 ) (657,410 ) $ (183,452 ) The reason why there are practically no operating expenses associated with the Fintech project is because the product development has already been completed. The Company is working on the design of the marketing and sales strategy for the start of commercial activities. 7 Table of Contents Other Expenses/Other Income We had other expenses of $396,764 for the three months ended March 31, 2024, as compared with other income of $158,708 for the same period ended 2023. The other expenses in 2024 are largely due to $365,474 in Interest Expense associated with the financing for the acquisition of QXTEL, which allows us to drive the organic growth of the company. Our other income in 2023 was largely due to the positive change in fair value of derivative liabilities. Net Loss We finished the three months ended March 31, 2024 with a net loss of $580,216, as compared to a loss of $158,822 during the three months ended March 31, 2023. The net loss as of March 31, 2024 is highly impacted by interest expense incurred in the acquisition of QXTEL; however, the increase in the Company's value and the beneficial effects of this acquisition could be observed in the consolidated proformas that were presented in conjunction with the acquisition of QXTEL . QXTEL is expecting to add over eighty million dollars in annual revenues and net income around one million dollars per year. Liquidity and Capital Resources As of March 31, 2024, we had total current assets of $15,619,755 and current liabilities of $13,484,660, resulting in a positive working capital of $2,135,095 and a current ratio of approximately 1.16 to 1. This compares to working capital of $1,878,228 at December 31, 2023. The positive evolution of our working capital is an indicator that the company's capital resources allow us to cover operating costs more easily every day and finance organic growth. Our operating activities used $536,888 for the three months ended March 31, 2024 as compared with $197,163 provided in operating activities in the three months ended March 31, 2023. 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. Investing activities used $1,622,892 for the three months ended March 31, 2024 as compared with $142,947 for the three months ended March 31, 2023. Uses of funds in investing activities in 2024 consisted primarily of the first payment of $1,500,000 for the acquisition of QXTEL in January 2024. Uses of funds on investing activities in 2023 were primarily the acquisition of property and equipment and the issuance of a related party loan. 8 Table of Contents Financing activities provided $3,522,683 in the three months ended March 31, 2024 compared with $390,994 provided in the three months ended March 31, 2023. Our positive financing cash flow in 2024 was largely the result of the financing secured to complete the acquisition of QXTEL. Our positive financing cash flow in 2023 was largely the result of the net proceeds from the exercise of an option in the amount of $400,000. Our current financial condition has improved significantly. However, we intend to fund operations through increased sales and debt and/or equity financing arrangements, to strengthen our liquidity and capital resources. 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 three-month period ended March 31, 2024. 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 three months ended March 31, 2024; 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. 9 Table of Contents Off Balance Sheet Arrangements As of March 31, 2024, 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. 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.