iQSTEL Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this Annual Report constitute forward-looking statements. See " Forward-Looking Statements" immediately prior to Item 1 of Part I of this report for factors relating to these statements and "Risk Factors" in Item 1A of Part I of this report for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity or prospects. Results of Operations for the Years Ended December 31, 2024 and 2023 Net Revenue Our net revenue for the year ended December 31, 2024 was $283,220,442 as compared with $144,502,351 for the year ended December 31, 2023. These numbers reflect an increase of 96% 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, 2024 and 2023: Subsidiary Revenue Year Ended December 31, 2024 Revenue Year Ended December 31, 2023 Etelix.com USA, LLC $ 69,833,265 $ 44,026,288 SwissLink Carrier AG 8,317,281 5,250,141 QGlobal LLC 1,539,434 1,228,865 IoT Labs LLC 94,170,000 75,574,912 Whisl 2,826,276 1,855,816 Smartbiz 20,499,830 16,566,329 QXTEL 86,034,356 — $ 283,220,442 $ 144,502,351 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. In fact, 38% of the increase was organic grow, while the remaining 62% was due to the acquisition of QXTEL Inc. Cost of Revenue Our total cost of revenue for the year ended December 31, 2024 was $274,948,693 as compared with $139,830,338 for the year ended December 31, 2023. 30 Table of Contents When looking at the numbers by subsidiary, we have the following breakout for the years ended December 31, 2024 and 2023: Subsidiary Cost of revenue Year Ended December 31, 2024 Cost of revenue Year Ended December 31, 2023 Etelix.com USA, LLC $ 69,334,112 $ 41,505,472 SwissLink Carrier AG 7,663,815 4,359,141 QGlobal LLC 1,144,324 832,282 IoT Labs LLC 92,196,261 74,662,656 Whisl 2,130,645 2,033,529 Smartbiz 19,572,904 16,437,258 QXTEL 82,906,632 — $ 274,948,693 $ 139,830,338 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 vendors’ 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 revenue 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, increased from $4,672,013 in 2023 to $8,271,749 in 2024, which is an increase of 77.05% year-over-year. Operating Expenses Operating expenses for the year ended December 31, 2024 were $9,105,813, as compared with $4,987,516 for the year ended December 31, 2023. The detail by major category is reflected in the table below. Years Ended December 31, 2024 2023 Salaries, Wages and Benefits $ 2,963,714 $ 1,560,366 Technology 1,192,185 328,710 Professional Fees 1,110,773 1,283,351 Legal and Regulatory 328,500 256,537 Travel & Events 234,295 136,051 Public Cost 102,773 36,349 Bad Debt Expense 1,991 8,815 Depreciation and Amortization 499,535 128,737 Advertising 968,206 595,298 Bank Services and Fees 211,591 77,292 Office, Facility and Other 529,892 309,376 Sales Commissions 675,605 211,830 Insurance 63,534 11,914 Subtotal 8,882,594 4,944,626 Stock-based compensation 223,219 42,890 Total Operating Expenses $ 9,105,813 $ 4,987,516 31 Table of Contents Operating Expenses by subsidiary are as follows: Years Ended December 31, 2024 2023 Difference IQSTEL $ 2,881,662 $ 1,692,056 $ 1,189,606 Etelix 428,603 322,932 105,671 SwissLink 974,233 723,712 250,521 ItsBchain 14,788 41,955 -27,167 QGlobal 552,388 253,160 299,228 Global Money One 762 55,710 -54,948 IoT Labs 246,254 172,709 73,545 Whisl 800,922 614,617 186,305 Smartbiz 978,760 1,110,665 -131,905 QXTEL 2,227,441 - 2,227,441 Total Operating Expenses $ 9,105,813 $ 4,987,516 $ 4,118,297 There is a significant increase of 82.57% in Operating Expenses for 2024 when compared with 2023; however, more than half of that increase (54%) is due to the inclusion of QXTEL in the consolidated financial statements in the year 2024. Another 29% of that increase is due to an increment in IQSTEL's operating expenses concentrated in the categories of Salaries, Wages and Benefits ($442,003 higher than in 2023), Advertising ($372,908 higher than in 2023) and Stock-based compensation ($180,329 higher than in 2023) Finally, the third largest expense item contributing to the increase of Operating Expanses is related to technology. Other Income (Expenses) We had other expenses of $3,951,942 for the year ended December 31, 2024, as compared with other income of $96,067 for the year ended December 31, 2023. The increase in Other Expenses in 2024 compared to 2023 is due to (1) the negative change in fair value of derivative liabilities of $1,393,046 for the year ended December 31, 2024 from a positive value of $381,848 for the year ended December 31, 2023; (2) the increase of interest expenses to $2,159,425 in 2024 from $94,908 in 2023 and (3) a loss on settlement of debt of $482,085 in 2024. Net Loss We finished the year ended December 31, 2024 with a loss of $5,180,036 as compared to a loss of $219,436 during the year ended December 31, 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. Our Telecom Division, the division presently generating revenue, has positive operating income when presented separately from the rest of our Company. 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, such as Fintech and Cybersecurity. Our telecom division revenues have increased by 96% from $144,502,351 in 2023 to $283,220,442 in 2024. Additionally, its gross profit has risen by 77%, going from $4,672,013 to $8,271,749; operating income has grown by 40% from $1,474,218 to $2,063,148; and net income has increased by 33%, rising from $1,290,646 to $1,710,241. These double-digit growth figures demonstrate the strong performance of our telecommunications division. 32 Table of Contents Telecom Division Pre-revenue companies iQSTEL Consolidated Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2024 Year Ended December 31, 2023 Revenues 283,220,442 144,502,351 — — — — 283,220,442 144,502,351 Cost of revenue 274,948,693 139,830,338 — — — — 274,948,693 139,830,338 Gross profit 8,271,749 4,672,013 — — — — 8,271,749 4,672,013 Operating expenses General and administration 6,208,601 3,197,795 15,550 97,665 2,881,662 1,692,056 9,105,813 4,987,516 Total operating expenses 6,208,601 3,197,795 15,550 97,665 2,881,662 1,692,056 9,105,813 4,987,516 Operating income/(loss) 2,063,148 1,474,218 (15,550 ) (97,665 ) (2,881,662 ) (1,692,056 ) (834,064 ) (315,503 ) Other income (expense) 41,123 (183,572 ) (120 ) (100 ) (3,992,945 ) 279,740 (3,951,942 ) 96,067 Net income (loss) before income taxes 2,104,271 1,290,646 (15,670 ) (97,765 ) (6,874,607 ) (1,412,316 ) (4,786,006 ) (219,436 ) Income taxes (394,030 ) — — — — — (394,030 ) — Net income (loss) 1,710,241 1,290,646 (15,670 ) (97,765 ) (6,874,607 ) (1,412,316 ) (5,180,036 ) (219,436 ) Depreciation and amortization 499,535 128,737 — — — — 499,535 128,737 Interest expense 41,611 — — — 2,117,814 94,908 2,159,425 94,908 Change in fair value of derivative liabilities — — — — 1,393,046 (381,848 ) 1,393,046 (381,848 ) Loss on settlement of debt — — — — 482,085 — 482,085 — Stock-based compensation — — — — 223,219 42,890 223,219 42,890 Income taxes 394,030 — — — — — 394,030 — Adjusted EBITDA 2,645,417 1,419,383 (15,670 ) (97,765 ) (2,658,452 ) (1,656,366 ) (28,705 ) (334,749 ) In evaluating our financial performance, we utilize Adjusted EBITDA as a supplemental measure to provide insights into the profitability of our core operations. (Please see Adjusted EBITDA, which is reconciled to the Net Income in the table above.) Adjusted EBITDA excludes, in addition to non-operational expenses like interest expenses, taxes, depreciation and amortization; items that we believe are not indicative of our operating performance, such as: • Change in Fair Value of Derivative Liabilities: These adjustments reflect unrealized gains or losses that are non-operational and subject to market volatility. • Loss on Settlement of Debt: This represents non-recurring expenses associated with specific financing activities and does not impact ongoing business operations. • Stock-Based Compensation: As a non-cash expense, this adjustment eliminates variability caused by equity-based incentives. We believe Adjusted EBITDA offers a clearer view of the cash-generating potential of our business, excluding non-recurring, non-cash, and non-operational impacts. 33 Table of Contents Based on the analysis of our Adjusted EBITDA our Telecom Division is a high-performing division that generates strong operational profits. Adjusted EBITDA has increased 86% from $1,419,383 as of December 31, 2023 to $2,645,417 as of December 31, 2024. Consolidated figures show a slightly negative Adjusted EBITDA; while this isn’t ideal, in our opinion it implies the Company is close to breaking even and might achieve positive Adjusted EBITDA with small improvements in efficiency or revenue growth. We are in a transitional period, scaling operations and investing heavily in growth initiatives with the execution of our M&A plan. Management has also identified areas for cost-cutting and operational improvements and has acted in that direction. Liquidity and Capital Resources As of December 31, 2024 we had total current assets of $63,015,046, compared with total current liabilities of $63,821,196, resulting in a negative working capital of $ 806,150 and a current ratio of approximately 0.99 to 1. The negative working capital is due largely to loans payable of $2,455,641. Following is a table with summary data from the consolidated statements of cash flows for the years ended December 31, 2024 and 2023, as presented. 2024 2023 Net cash used in operating activities $ (2,930,306 ) $ (1,483,801 ) Net cash used in investing activities (3,162,971 ) (332,550 ) Net cash provided by financing activities 7,240,966 1,833,965 Effect of exchange rate changes on cash — 15,665 Net change in cash $ 1,147,689 $ 33,279 Our operating activities used $2,930,306 in the year ended December 31, 2024, as compared with $1,483,801 used in operating activities in the year ended December 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 $3,162,971 for the year ended December 31, 2024, as compared with $332,550 used in investing activities for the year ended December 31, 2023. The cash used in investing activities is largely due to the acquisition of QXTEL, where the Company invested $2,955,121, and the purchase of $151,620 of property and equipment. Financing activities provided $7,240,966 for the year ended December 31, 2024, as compared to $1,833,965 provided for the year ended December 31, 2023. The cash provided in 2024 was largely from loans, convertible debt and warrant exercises, offset by repayments on loans. We have financed our operations through private placements, convertible notes, and unsecured debt, and we have also issued debt in our company secured by all of our assets. 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. We have not attained profitable operations and even though the company maintains a cash position very close to one third year's operating expenses, we are dependent upon obtaining financing or generating revenue from operations to continue operations for the next twelve months. Our future is dependent upon our ability to obtain financing or upon future profitable operations. We reserve the right to seek additional funds through private placements of our common stock and/or through debt financing. Our ability to raise additional financing is unknown. Aside from cash exercises as set forth under an outstanding option that expires on July 14, 2025, we do not have any formal commitments or arrangements for the advancement or loan of funds. 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. 34 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, 2024. 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, 2024; 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, 2024, there were no off-balance sheet arrangements. Recently Issued Accounting Pronouncements In November 2024, the FASB issued ASU 2024-03 final standard on Income Statement: Disaggregation of Income Statement Expenses, which requires disaggregated disclosure of income statement expenses for public business entities. The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. This guidance will be effective for us on January 1, 2027. The Company is currently evaluating the impact of adopting ASU 2024-03. The Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.