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 20 countries and over 100 employees that is offering leading-edge services through its four 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), QGlobal SMS (www.qglobalsms.com), and QXTEL Limited (www.qxtel.com). Also under the Telecom Division, 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 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 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 developing 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 June 30, 2024 was $78,635,764, compared with $32,824,829 for the three months ended June 30, 2023. These numbers reflect an increase of 139.56% quarter over quarter on our consolidated revenues. Our total revenue reported for the six months ended June 30, 2024 was $130,050,642, compared with $57,491,358 for the six months ended June 30, 2023; an increase of 126.21%. When looking at the numbers by subsidiary, we have the following breakout for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023: Revenue for the Three Months Ended June Revenue for the Six Months Ended June Subsidiary 2024 2023 2024 2023 Etelix.com USA, LLC $ 14,381,303 $ 10,692,139 $ 33,011,213 $ 15,041,124 SwissLink Carrier AG 901,198 1,273,004 1,875,932 2,548,289 QGlobal LLC 422,982 211,258 790,242 296,309 IoT Labs LLC 24,448,290 17,215,267 48,786,489 32,476,549 Smartbiz Telecom 6,210,123 2,935,867 12,391,570 6,327,107 Whisl Telecom 800,003 497,294 1,723,331 801,980 QXTEL Limited 31,471,866 — 31,471,866 — $ 78,635,764 $ 32,824,829 $ 130,050,642 $ 57,491,358 The increase in revenue is due to an increment in the commercial efforts and the result of commercial synergies amongst all companies. The organic growth during the three-months ended June 30, 2024 was 60% of the total revenue for that period, while the newly acquired company QXTEL Limited contributed with 40% of the total revenue. 5 Table of Contents When looking at the figures for the six months ended June 30, 2024, the organic growth was 76%, while QXTEL Limited contributed 24%. We consider organic growth the revenues reported by our existing subsidiaries; including Etelix, SwissLink, QGlobal, IoT Labs, Smartbiz and Whisl. 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 Revenue Our total cost of revenue for the three months ended June 30, 2024 increased to $76,472,140, compared with $32,040,363 for the three months ended June 30, 2023. Our total cost of revenue for the six months ended June 30, 2024 increased to $126,507,992, compared with $55,490,156 for the six months ended June 30, 2023. When looking at the numbers by subsidiary, we have the following breakout for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023: Cost of Revenue for the Three Months Ended June Cost of Revenue for the Six Months Ended June Subsidiary 2024 2023 2024 2023 Etelix.com USA, LLC $ 14,089,625 $ 10,019,546 $ 31,922,561 $ 13,784,019 SwissLink Carrier AG 829,267 1,055,418 1,599,435 2,159,275 QGlobal LLC 299,915 142,330 542,332 193,879 IoT Labs LLC 24,230,045 17,211,748 48,026,620 32,090,649 Smartbiz Telecom 6,074,427 3,125,835 12,339,173 6,209,129 Whisl Telecom 526,551 485,486 1,655,561 1,053,205 QXTEL Limited 30,422,311 — 30,422,311 — $ 76,472,140 $ 32,040,363 $ 126,507,992 $ 55,490,156 Our cost of revenue 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 The Consolidated Gross Margin for the three months ended June 30, 2024 was 2.75%, which compared to 2.39% for the three months ended June 30, 2023 represents an increase in our consolidated Gross Margin of 15.13%. The Consolidated Gross Margin for the six months ended June 30, 2024 was 2.72%, which compared to 3.48% for the six months ended June 30, 2023. The decrease in the Gross Margin is due to the decrease in the margins of voice services, which is an expected trend in the industry. To offset this trend, the Company has implemented a plan to modify the composition of the product portfolio by increasing SMS businesses that have increasing margins. As an example, we can indicate that for the six months ended on June 30, 2024, the contribution to the margin of the SMS business with respect to the total was 24% compared to only 8% for the same period in 2023. With the incorporation of QXTEL and the increase in the QGlobal SMS business, the gross margin of our SMS services portfolio increased by 297% when comparing the figures of June 2024 vs. June 2023. Operating Expenses Operating expenses, consisting entirely of general and administrative expenses, increased to $2,505,727 for the three months ended June 30, 2024 from $1,037,184 for the three months ended June 30, 2023. Operating expenses, consisting entirely of general and administrative expenses, increased to $4,068,205 for the six months ended June 30, 2024 from $2,571,450 for the six months ended June 30, 2023. The detail by major category for the six months ended June 30, 2024 and 2023 is reflected in the table below. 6 Table of Contents Six Months Ended June 30, 2024 2023 Salaries, Wages and Benefits $ 1,143,692 $ 881,830 Technology 542,140 185,975 Professional Fees 1,064,047 586,726 Legal & Regulatory 151,639 110,179 Travel & Events 97,489 102,356 Public Cost 85,378 18,083 Advertising 501,997 405,537 Bank Services and Fees 121,566 25,709 Depreciation and Amortization 68,939 68,488 Office, Facility and Other 190,132 160,010 Insurances 21,720 8,427 Bad debt expense 1,801 — Sub Total 3,990,540 2,553,320 Stock-based compensation 77,665 18,130 Total Operating Expense $ 4,068,205 $ 2,571,450 When looking at the numbers by subsidiary, we have the following breakout for the six months ended June 30, 2024 compared to the six months ended June 30, 2023: Six Months Ended June 30, 2024 2023 Difference iQSTEL $ 1,420,141 $ 1,027,793 $ 392,348 Etelix 182,516 207,309 -24,793 Swisslink 443,546 375,008 68,538 ItsBchain 14,384 22,019 -7,635 QGlobal 262,845 119,035 143,810 IoT Labs 134,718 115,013 19,705 Global Money One 400 60,799 -60,399 Smartbiz Telecom 461,282 316,129 145,153 Whisl Telecom 482,470 328,345 154,125 QXTEL Limited 665,903 — 665,903 $ 4,068,205 $ 2,571,450 $ 1,496,755 During the three months ended June 30, 2024 we were consolidating QXTEL from April 1 to June 30. This new subsidiary was not present before the mentioned period which explains 44% of the total $1,496,755 expense increase in the total consolidated figures for 2024 compared to the same period in 2023. Operating Income The Company had an operating loss for the three months ended June 30, 2024 of $342,103 compared with an operating loss of $252,718 for the three months ended June 30, 2023. The Company had an operating loss for the six months ended June 30, 2024 of $525,555 compared with an operating loss of $570,248 for the six months ended June 30, 2023. 7 Table of Contents Our Telecom Division, the division presently generating revenue, has operating income when presented separately from the rest of our Company. 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. When comparing the tables below, we can see a tremendous evolution of our telecom division comparing the revenues, gross profit and operating income for the three and six months ended June 30, 2024 versus the same periods of year 2023. As we have indicated on several occasions, our strategy is to strengthen our telecommunications division so that it can serve as a lever for the development of new lines of business. Telecom Division Pre-revenue companies iQSTEL Consolidated Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Revenues 78,635,764 130,050,642 — — — — 78,635,764 130,050,642 Cost of revenue 76,472,140 126,507,992 — — — — 76,472,140 126,507,992 Gross profit 2,163,624 3,542,650 — — — — 2,163,624 3,542,650 Operating expenses General and administration 1,738,878 2,633,280 4,118 14,784 762,731 1,420,141 2,505,727 4,068,205 Total Operating Expenses 1,738,878 2,633,280 4,118 14,784 762,731 1,420,141 2,505,727 4,068,205 Operating income/(loss) 424,746 909,370 (4,118 ) (14,784 ) (762,731 ) (1,420,141 ) (342,103 ) (525.555 ) Telecom Division Pre-revenue companies iQSTEL Consolidated Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Revenues 32,824,829 57,491,358 — — — — 32,824,829 57,491,358 Cost of revenue 32,040,363 55,490,156 — — — — 32,040,363 55,490,156 Gross profit 784,466 2,001,202 — — — — 784,466 2,001,202 Operating expenses General and administration 646,362 1,460,839 27,580 82,818 363,240 1,027,793 1,037,182 2,571,450 Total Operating Expenses 646,362 1,460,839 27,580 82,818 363,240 1,027,793 1,037,182 2,571,450 Operating income/(loss) 138,104 540,363 (27,580 ) (82,818 ) (363,240 ) (1,027,793 ) (252,716 ) (570,248 ) 8 Table of Contents Other Expenses/Other Income We had other expenses of $1,556,509 for the three months ended June 30, 2024, as compared with other income of $91,074 for the same period ended 2023. We had other expenses of $1,953,273 for the six months ended June 30, 2024, as compared with other income of $249,782 for the same period ended 2023. The increase in other expenses is mainly due to the change in the fair value of derivative liabilities, and the interest expenses incurred. Both concept are related to the financing structure put in place for the acquisition of QXTEL Limited, which has had a positive impact in the revenues and operating income of the Telecom Division, and also a positive impact in our balance sheet. Net Loss We finished the three months ended June 30, 2024 with a loss of $1,963,887, as compared to a loss of $161,644 during the three months ended June 30, 2023. We finished the six months ended June 30, 2024 with a loss of $2,544,103, as compared to a loss of $320,466 during the six months ended June 30, 2023. The net results of the periods reported are highly impacted by the expenses in the holding entity (iQSTEL), which has a high component of interest and other financial expenses related to the funds borrowed for the acquisition of QXTEL Limited. Liquidity and Capital Resources As of June 30, 2024, we had total current assets of $17,220,260 and current liabilities of $22,200,638, resulting in a negative working capital of $4,980,378. This negative working capital is driven largely by the $3,555,006 of current convertible notes, derivative liabilities of $976,187 and contingent liability for the acquisition of QXTEL of $1,000,000. Our operating activities used $3,151,688 in the six months ended June 30, 2024 as compared with $721,400 used in operating activities in the six months ended June 30, 2023. Our negative operating cash flow for both periods is a result of our net loss and changes in operating assets and liabilities. Investing activities used $2,720,197 for the six months ended June 30, 2024 compared to $279,086 used during the same period of year 2023. For the six months ended June 30, 2024 the use of funds in investing activities consisted primarily of the acquisition of QXTEL Limited. Financing activities provided $5,306,444 in the six months ended June 30, 2024 compared with $790,994 provided in the six months ended June 30, 2023. Our positive financing cash flow in 2024 is mainly the result of proceeds from loans, and proceeds from convertible notes. We intend to fund operations through increased sales and debt and/or equity financing arrangements to strengthen our liquidity and capital resources. We also plan to seek additional financing in public and 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 six-month period ended June 30, 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. 9 Table of Contents 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 six months ended June 30, 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. Off Balance Sheet Arrangements As of June 30, 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.