iQSTEL Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This quarterly report contains forward-looking statements. Forward-looking statements are projections of events, revenues, income, future economic performance or management’s plans and objectives for our future operations. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” and the risks set out below, any of which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation: • the uncertainty of profitability based upon our history of losses; • legislative or regulatory changes concerning telecommunications; • risks related to failure to obtain adequate financing on a timely basis and on acceptable terms; • risks related to our operations and uncertainties related to our business plan and business strategy; • changes in economic conditions; • uncertainty with respect to intellectual property rights, protecting those rights and claims of infringement of other’s intellectual property; • competition; and • cybersecurity concerns. This list is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully, including those contained in our Annual Report on Form 10-K under “Risk Factors” for the year ended December 31, 2023, and readers should not place undue reliance on our forward-looking statements. Forward looking statements are made based on management’s beliefs, estimates and opinions on the date the statements are made, and we undertake no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. Overview iQSTEL Inc. (www.iqstel.com) is a technology company with a presence in 20 countries and over 100 employees that offers leading-edge services through its four business divisions in the telecommunications, electric vehicle (EV), fintech, and AI-enhanced metaverse industries. Our presence is global, with offices in Miami, Venezuela, Argentina, UK, Switzerland, Turkey, and Dubai, we target diverse and high-growth markets. We maintain more than 400 high value network interconnections around the world, delivering international voice, SMS, and connectivity services that form the core of our business. The company’s strategy focuses on leveraging synergies between its 11 subsidiaries to drive innovation and capture emerging opportunities. 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). 4 Table of Contents 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. Our developing 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. 5 Table of Contents Results of Operations Revenues Our total revenue reported for the three months ended September 30, 2024 was $54,249,614, compared with $39,757,203 for the three months ended September 30, 2023. These numbers reflect an increase of 36.45% quarter over quarter on our consolidated revenues. Our total revenue reported for the nine months ended September 30, 2024 was $184,346,412, compared with $97,248,561 for the nine months ended September 30, 2023. These numbers reflect an increase of 89.56% year over year on our consolidated revenues. When looking at the numbers by subsidiary, we have the following breakout for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023: Revenue for the Three Months Ended September Revenue for the Nine Months Ended September Subsidiary 2024 2023 2024 2023 Etelix.com USA, LLC $ 9,781,863 $ 10,344,008 $ 43,124,776 $ 25,635,273 SwissLink Carrier AG 1,048,201 1,498,054 3,157,073 4,179,569 QGlobal LLC 290,256 462,331 1,119,332 780,934 IoT Labs LLC 21,738,854 20,802,592 70,525,343 53,279,140 Smartbiz Telecom 4,145,464 6,915,218 17,321,777 14,102,902 Whisl Telecom 648,316 866,406 3,558,314 3,400,087 QXTEL Limited 17,202,173 — 48,676,228 — Inter-company sales (605,513 ) (1,131,406 ) (3,136,431 ) (4,129,344 ) $ 54,249,614 $ 39,757,203 $ 184,346,412 $ 97,248,561 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 the synergies among all our subsidiaries. Cost of Revenues Our total cost of revenues for the three months ended September 30, 2024 increased to $52,229,695, compared with $38,728,682 for the three months ended September 30, 2023. Our total cost of revenues for the nine months ended September 30, 2024 increased to $178,737,687, compared with $94,218,838 for the nine months ended September 30, 2023. When looking at the numbers by subsidiary, we have the following breakout for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023: Cost of Revenue for the Three Months Ended September Cost of Revenue for the Nine Months Ended September Subsidiary 2024 2023 2024 2023 Etelix.com USA, LLC $ 9,628,110 $ 10,224,778 $ 42,690,403 $ 25,364,275 SwissLink Carrier AG 822,313 1,266,475 2,542,555 3,568,774 QGlobal LLC 236,530 306,745 817,913 516,018 IoT Labs LLC 21,352,526 20,575,212 69,379,146 52,665,861 Smartbiz Telecom 3,894,823 6,697,793 16,622,745 13,435,881 Whisl Telecom 502,365 789,056 2,992,459 2,797,373 QXTEL Limited 16,165,752 — 46,596,108 — Inter-company sales (372,724 ) (1,131,377 ) (2,903,642 ) (4,129,344 ) $ 52,229,695 $ 38,728,682 $ 178,737,687 $ 94,218,838 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. 6 Table of Contents 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 Profit The gross profit for the three months ended September 30, 2024 increased to $2,019,919 from $1,028,521 for the same period of year 2023. For the nine months ended September 30, 2024 the gross profit increased to $5,608,725 from $3,029,723 for the same period of year 2023. It is important to remark on the evolution of the Gross Profit expressed as a percentage of Revenue. It went up to 3.72% for the three months ended September 2024 from 2.58% for the same period of 2023, but also from 2.75% for the three months ended June 30, 2024. Operating Expenses Operating expenses increased to $2,076,472 for the three months ended September 30, 2024 from $957,768 for the three months ended September 30, 2023. Operating expenses increased to $6,144,677 for the nine months ended September 30, 2024 from $3,529,218 for the nine months ended September 30, 2023. The details by major category for the nine months ended September 30, 2024 and 2023 is reflected in the table below: Nine Months Ended September 30, 2024 2023 Salaries, Wages and Benefits $ 2,351,471 $ 1,218,946 Technology 879,182 273,786 Professional Fees 1,072,816 821,780 Legal and Regulatory 180,221 168,908 Bad Debt Expense 1,801 1,344 Travel and Events 167,757 119,845 Public Cost 93,646 28,526 Advertising 659,784 535,193 Insurances 41,576 10,543 Bank Services and Fees 127,594 44,136 Financial Costs 43,772 — Depreciation and Amortization 104,061 103,246 Office, Facility and Other 311,511 172,020 Sub Total 6,035,192 3,498,273 Stock-based compensation 109,485 30,945 Total Operating Expense $ 6,144,677 $ 3,529,218 The main reasons for the overall increase in operating expenses for the nine months ended September 30, 2024 compared to the same period of 2023 is due to the increase in salaries, wages and benefits; technology; the professional fees; office, facilities and other. 7 Table of Contents As it can be seen in the table below, where operating expenses are shown by subsidiary, 56% of the total increase in operating expenses is due to the inclusion of QXTEL, which was not part of the group of companies in year 2023. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023: Nine Months Ended September 30, 2024 2023 Difference iQSTEL $ 2,024,621 $ 1,346,415 $ 678,206 Etelix 297,124 256,616 40,508 Swisslink 701,427 562,310 139,117 ItsBchain 14,582 28,945 -14,363 QGlobal 405,275 184,698 220,577 IoT Labs 190,179 112,033 78,146 Global Money One 550 47,759 -47,209 Smartbiz Telecom 684,061 526,079 157,982 Whisl Telecom 645,639 464,363 181,276 QXTEL Limited 1,414,008 — 1,414,008 Inter-company eliminations (232,789 ) — -232,789 $ 6,144,677 $ 3,529,218 $ 2,615,459 Operating Income The Company had an operating loss of $56,553 for the three months ended September 30, 2024 compared with operating income of $70,753 for the three months ended September 30, 2023. The Company had an operating loss of $535,952 for the nine months ended September 30, 2024 compared with an operating loss of $499,495 for the nine months ended September 30, 2023 Our Telecom Division, the division presently generating revenue, has positive 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 nine months ended September 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 September 30, 2024 Nine Months Ended September 30, 2024 Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Revenues 54,249,614 184,346,412 — — — — 54,249,614 184,346,412 Cost of revenue 52,229,695 178,737,687 — — — — 52,229,695 178,737,687 Gross profit 2,019,919 5,608,725 — — — — 2,019,919 5,608,725 Operating expenses General and administration 1,471,644 4,104,924 348 15,132 604,480 2,024,621 2,076,472 6,144,677 Total Operating Expenses 1,471,644 4,104,924 348 15,132 604,480 2,024,621 2,076,472 6,144,677 Operating income/(loss) 548,274 1,503,801 (348 ) (15,132 ) (604,480 ) (2,024,621 ) (56,553 ) (535,952 ) 8 Table of Contents Telecom Division Pre-revenue companies iQSTEL Consolidated Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Revenues 39,757,203 97,248,561 — — — — 39,757,203 97,248,561 Cost of revenue 38,728,682 94,218,838 — — — — 38,728,682 94,218,838 Gross profit 1,028,521 3,029,723 — — — — 1,028,521 3,029,723 Operating expenses General and administration 645,260 2,106,099 (6,114 ) 76,704 318,622 1,346,415 957,768 3,529,218 Total Operating Expenses 645,260 2,106,099 (6,114 ) 76,704 318,622 1,346,415 957,768 3,529,218 Operating income/(loss) 383,261 923,625 6,114 (76,704 ) (318,622 ) (1,346,415 ) 70,753 (499,495 ) Other Expenses/Other Income We had other expenses of $2,646,275 for the nine months ended September 30, 2024, as compared with other income of $224,938 for the same period ended 2023. The difference between the compared periods is primarily in due to a change in fair value of derivative liabilities of $(1,063,789); and Interest Expense of $(1,533,820). Net Income/Loss The Company finished the three months ended September 30, 2024 with a net loss of $773,004, as compared to a net income $45,909 during the three months ended September 30, 2023. The Company finished the nine months ended September 30, 2024 with a loss of $3,317,107, as compared to a loss of $274,557 during the nine months ended September 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 September 30, 2024, we had total current assets of $19,664,986 and current liabilities of $24,066,234, resulting in a negative working capital of $4,401,248. This compares with a positive working capital of $1,878,228 at December 31, 2023. Our operating activities used $2,526,651 in the nine months ended September 30, 2024 as compared with $434,701 used in operating activities in the nine months ended September 30, 2023. Investing activities used $2,950,367 for the nine months ended September 30, 2024 as compared with $340,583 used in investing activities in the nine months ended September 30, 2023. Use of funds in investing activities were primarily for the acquisition of subsidiary (QXTEL) for $2,730,121. Financing activities provided $6,239,489 in the nine months ended September 30, 2024 compared with $1,454,756 provided in the nine months ended September 30, 2023. Our positive financing cash flow in 2024 was largely the result of the proceeds from convertible notes of $3,997,500, funds used in the acquisition of QXTEL. 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 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. 9 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 nine-month period ended September 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. Our accounting policies are discussed in detail in the footnotes to our Annual Report on Form 10-K for the year ended December 31, 2023 and in the footnotes to our financial statements included in this Quarterly Report on Form 10-Q for the nine months ended September 30, 2024. We consider our critical accounting policies to be those related to warrant accounting and complex debt instruments, 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, 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.