iQSTEL Inc: Form 10-K for the period ended Dec 31, 2022

Company Description

iQSTEL Inc. (the “Company”) (OTC Pink: IQST) (www.iqstel.com (http://www.iqstel.com)) is a technology company offering a wide array of services to global telecommunications and technology industries with presence in 13 countries.

The Company has an extensive portfolio of products and services for its clients such as: SMS, VoIP, 4G & 5G international infrastructure connectivity, Cloud-PBX, OmniChannel Marketing, IoT services, blockchain and payment solutions. These services are grouped within four business divisions: Telecom, Fintech, Electric vehicles and Metaverse

The company operates its business through its wholly-owned subsidiary Etelix.com USA, LLC (“Etelix”) (www.etelix.com (http://www.etelix.com)); and its majority-owned subsidiaries SwissLink Carrier AG (www.swisslink-carrier.com (http://www.swisslink-carrier.com)), QGlobal SMS (https://www.qglobalsms.com/), Smart Gas (http://iotsmartgas.com/) and ItsBChain (http://itsbchain.com/), Whisl Telecom LLC (www.whisl.com (http://www.whisl.com)), and Smartbiz Telecom LLC (www.smartbiztel.com (http://www.smartbiztel.com)). The information contained on our websites is not incorporated by reference into this Annual Report, and such information should not be considered to be part of this Annual Report.

History

iQSTEL, formerly known as PureSnax International, Inc., was incorporated under the laws of the State of Nevada on June 24, 2011. PureSnax was previously a wellness brand focused on bringing healthy snacks and foods to consumers. On March 8, 2017, PureSnax exited a previous License Agreement with a Canadian snack food Licensor. From March of 2017 until its acquisition of Etelix.com USA, LLC, PureSnax was working to develop its own brand and its own products for manufacture, distribution, sales and marketing of various products within the health foods and snacks industry and to pursue related business opportunities. PureSnax acquired Etelix.com USA, LLC on June 25, 2018. The company left the healthy snacks and foods business to focus on the Telecommunications Business.

On August 30, 2018, PureSnax changed its name to “iQSTEL Inc.” and received a new CUSIP number: 46265G107, as well as a new trading symbol “IQST” in order to better resemble its new name. iQSTEL also changed the Standard Industrial Classification (SIC Code) to 4813, Telephone Communications, Except Radiotelephone.

On April 1, 2019, the Company entered into a Company Purchase Agreement (the “Purchase Agreement”) by and between the Company and the Ralf Kohler (the “Seller”), which agreement provides for the purchase of 51% of the equity and certain assets of SwissLink Carrier AG (“SwissLink”) (www.swisslink-carrier.com (http://www.swisslink-carrier.com)), a Swiss corporation, by the Company.

On February 10, 2020, the Company entered into a Company Acquisition Agreement (the “Agreement”) with Jesus Vega regarding the acquisition of 51% of the shares in QGlobal, LLC (“QGlobal”). QGlobal is a company with the capacity to provide Short Messages (SMS), A2P and P2P messaging services.

On February 21, 2020, the Company entered into a Company Acquisition Agreement (the “Agreement”) with Miguel Scavo regarding the acquisition of 75% of the shares in ItsBchain, LLC (“ItsBchain”) a company specialized in the development of Blockchain applications for telecommunications.

On April 15, 2020, the Company entered into a Company Acquisition Agreement (the “Agreement”) with Francisco Bunt regarding the acquisition of 51% of the shares in loT Labs, LLC (“loT Labs”). The loT Labs’ principal business activity is the sale of SMS between USA and Mexico.

On November 12, 2020, the Company entered into partnership Agreement (the “Agreement”) with PAYMENT VIRTUAL MOBILE SOLUTIONS, LLC (PayVMS), a Delaware Corporation regarding the incorporation of Global Money One Inc, in which iQSTEL owns 75% of the shares and PayVMS owns the remaining 25%. Global Money One is a Fintech company with a complete infrastructure to provide top-up services, international remittances and prepaid debit cards.

On October 1, 2021, the Company entered into an agreement with Jesus Vega regarding the acquisition of the remaining 49% of the shares in QGlobal, LLC (“QGlobal”). By means of this transaction iQSTEL increased its ownership in QGlobal to 100%.

On May 13, 2022, the Company entered into a Company Acquisition Agreement regarding the acquisition of 51% of the shares in Whisl telecom LLC (“Whisl”).

On June 1, 2022, the Company entered into a Company Acquisition Agreement regarding the acquisition of 51% of the shares in Smartbiz Telecom LLC (“Smartbiz”).

Operating Subsidiaries

iQSTEL's mission is to serve basic human needs in today's modern world by making the necessary tools accessible regardless of race, ethnicity, religion, socioeconomic status, or identity. iQSTEL recognizes that in today’s modern world, the pursuit of the human hierarchy of needs (physiological, safety, relationship, esteem, and self-actualization) is marginalized without access to ubiquitous communications, the freedom of virtual banking, clean affordable mobility and information and content. iQSTEL has 4 Business Divisions delivering accessibly to the necessary tools in today's pursuit of basic human needs: 1) Telecommunications (communications). 2) Fintech (financial freedom). 3) Electric Vehicles (mobility). 4) Metaverse. (Information and content). The company continues to grow and expand its suite of products and services both organically and through mergers and acquisitions (M&A).

Our telecommunication business currently represents 100% of our revenues, while our other business lines are in a pre-revenue stage.

Telecom Subsidiaries for voice services:

Etelix.com USA LLC, a wholly owned subsidiary of iQSTEL Inc., is US based international telecom carrier founded in 2008 that provides telecom and technology solutions worldwide, with commercial presence in North America, Latin America, and Europe. Etelix provides International Long-Distance voice services for Telecommunications Operators (ILD Wholesale), and Submarine Fiber Optic Network capacity for internet (4G and 5G).

Etelix is interconnected to the most important players in the industry, with a very strong focus on Asian and Latin-American markets, among which it is worth mentioning: China Telecom, PCCW, Hutchinson Telecom, Vodafone India, KDDI, Airtel, Reliance, Viettel, TATA Communications, Flow Jamaica (Cable and Wireless Caribbean), Cable and Wireless Panama, Millicom (TIGO), Telefonica de España (Movistar), Telecom Italia (TIM), Portugal Telecom (MEU), Optimus (NOS), Belgacom (BICS), Deutsche Telekom, iBasis, Orbitel and Entel.

An important milestone in the evolution of Etelix was in 2013, when the company become part of a consortium of major carriers for the upgrade of the Maya-1 submarine cable systems that runs from Hollywood, Florida to the city of Tolu in Colombia. This consortium is led by Orange Telecom and Orbitel, where Etelix participates with 10 Gbps of capacity. The bulk of this contract was sold to Millicom (Tigo Costa Rica). This capacity considerably enhanced Tigo’s ability to deploy world-class 4G services to its customers in Costa Rica.

SwissLink Carrier AG is a 51% owned subsidiary of iQSTEL Inc. SwissLink Carrier AG is a Switzerland based international Telecommunications Carrier founded in 2015 providing international VoIP connectivity worldwide, with commercial presence in Europe, CIS and Latin America. SwissLink Carrier AG is a Swiss licensed Operator. The acquisition of Swisslink strengthened the Company’s presence in Europe putting us in a very competitive position to capture traffic to Asian and African countries. Africa continues to be the market with the higher contribution to margin and Asia concentrate one third of the termination traffic in the industry. Estimations show that more than 50% of the traffic terminating in Africa is originated from customers in Europe; while the corresponding percentage of traffic terminated in Asia is close to 40%. Based on these numbers the goal to expand the participation in the Asian and African traffic goes through establishing a strong presence in Europe.

Whisl Telecom LLC. Is a 51% owned subsidiary of iQSTEL Inc., acquired in May 2022. Whisl Telecom is an US based Company that provides high quality services and “out of the box” solutions to its customers. Whisl predominantly serves the Carrier-to-Carrier Global industry but also has network infrastructure to provide services to the retail end users (endpoints). Whisl Telecom is one of the few US carriers to have a significant Tier1 capacity (true capacity with high calls per second, CPS) to terminate calls with the highest quality.

With the acquisition of Whisl Telecom, iQSTEL incorporated to its telecom portfolio the following services: (1) US/Canada Inbound/Origination. (2) US/Canada DIDs. (3) US/Canada Toll Free Numbers. (4) Global DIDs and (5) Global Toll-Free Numbers.

Smartbiz Telecom LLC. Is a 51% owned subsidiary of iQSTEL Inc. acquired in June 2022. Smartbiz is an US based Company that provides international voice termination to niche markets. With this acquisition iQSTEL is expanding its telecommunication services offer to markets the company was not serving before.

With the combination of the technology capabilities of these four subsidiaries, iQSTEL has put together a complete portfolio of services for carriers and end user. These services include:

• International Voice Termination for carriers.
• US/Canada Inbound / Origination.
• Global DIDs.
• Global Toll-Free Numbers.
• PBX (Private Branch Exchange) for small businesses.
• SIP Trunking.

The voice services represented in year 2022 42.50% of the total revenue of the company ($39,614,081 out of the total $93,203,532) while in year 2021 voice services represented 31.11% of the total revenue ($20,127,139 out from a total of $64,702,018).

Gross Margin in the voice services increased from 4.72% in year 2021 to 5.81% in year 2022. This is the result of the incorporation to our portfolio of product with higher gross margins. We expect this gross margin to increase in year 2023.

All our subsidiaries carried 2.7 billion minutes of voice during year 2022, compared to 670 million in year 2021. This represents an increase of 268% year over year.

Telecom Subsidiaries for SMS services:

QGlobal SMS LLC is a 100% owned subsidiary of iQSTEL Inc. QGlobal SMS is a USA based company founded in 2020 specialized in international and domestic SMS termination. QGlobal SMS has commercial presence in Europe, USA and Latin America, with robust international interconnection with Tier-1 SMS Aggregators, guarantying to its customers high quality and low termination rates, in over more than 100 countries.

IoT Labs LLC is a 51% owned subsidiary of iQSTEL Inc. IoT Labs is a SMS service provider based in Austin, TX. Specialized in the SMS traffic exchange between US and Mexico.

The Company has entered into the SMS business in 2020 through the acquisition of QGlobal and IoT Labs. Both companies specialize in international and domestic SMS termination, with emphasis on the Applications to Person (A2P), Person to Person (P2P) and OmniChannel Marketing Services for several markets: Wholesale Carrier, Government, Corporate, Enterprise, Small and Medium Companies.

The Global A2P SMS Market is expected to grow at a CAGR of 4.1% to account for US$ 101 billion in 2030, according to Transparency Market Research. This market has experienced significant growth and adoption rate in the past few years and is expected to experience notable growth and adoption in years to come.

Our SMS services represented in year 2022 57.50% of the total revenue, while it was 68.89% in year 2021. Gross margin in the SMS business decreases in 2022 to 0.40% from 0.54% in year 2021. But it is important to remark that the gross margin of the products deployed by QGlobal SMS was 21%, being the main objective in the SMS segment to increase the sales of those services due to its huge gross margins.

Both companies, IoT Labs and QGlobal carried 8.5 billion SMS and short codes in year 2022 compared to 7.1 billion in year 2021. This represents an increment of 1.4 billion SMS year over year or 19.72%.

IoT Labs is also responsible for the development of our award-winning Internet of Things devices SmartGas and SmartTank. The SmartGas device is perfectly focused on retail households using traditional LP gas tanks, while the SmartTank device is more oriented for industrial purposes. The Company’s product is a sensor and control chip that can be mounted on gas tanks in less than one minute, that converts the gas tank into an IoT connected device through the Company’s proprietary web portal and phone apps, allowing for constant monitoring, alerting, and refilling through the Company’s gas partners. An important milestone to highlight is that the company has received the patent for the invention and development of these devices. We continue working closely with BASF Corporation to adapt the SmartTank device to their specifications. project that has suffered some delays due to limited inventories and the slowness of the global distribution chains of microchips. However, since the end of 2022 we have expanded the list of certified suppliers and at this time we have a minimum inventory of parts, pieces and finished products to start the marketing process of both devices.

New businesses subsidiaries:

ItsBchain LLC is a 75% owned subsidiary of iQSTEL Inc. ItsBchain is a blockchain technology developer and solution provider, with a strong focus on the telecom sector. The company has focused on the development of solutions aimed at using the blockchain ledger and smart contracts to enable more efficiency, quickness in execution and fraud-prevention in the telco industry. Specifically, the company has developed a solution that will enable users and carriers to transfer mobile phone numbers with just a few clicks, allowing users and carriers the ability to transfer retail users from one mobile carrier to another instantly.

The Company has done research covering 35 countries where number portability is mandatory by law. Those 35 countries have a total of 3.3 billion population and 4.0 billion of phone lines that can be ported from one carrier to another. It is estimated that an average of 5% of the total phone lines are ported every year.

Number portability is executed and supervised by a third independent party, who act as a data-base administrator and has the responsibility to guarantee all transactions requested by the customers will be completed and his/her phone number will be ported from Carrier A to Carrier B. In the countries under our analysis there are 11 different data-base administrators.

In terms of dollar value, the number portability market in the countries under our analysis is estimated over $86 million per year. This is based in the actual cost carriers and/or customers have to pay to get the lines ported. Revenues of the Data Base Administrators comes from a monthly fee charged to all participant carriers, plus a fee for every transaction completed over the platform. The monthly fee and the transactions fee vary from country to country.

Our objective is to offer the market conformed by data-based administrators a solution a much more cost effective solution; which will not only reduce the operating cost, but that will also make the transactions to complete faster without any additional CAPEX.

Our mobile number portability solution is now being tested prior to its commercial release in June 2023.

Global Money One Inc. Is a 75% owned subsidiary of iQSTEL Inc. The company offers a complete Fintech ecosystem including a MasterCard Debit Card, US Bank Account (No SSN Needed), and a Mobile App/Wallet to manage Remittances and Mobile Top Up. Our focus is to provide immigrants access to reliable financial services that make it easier to manage their money and stay connected with their families back home.

All available services can be managed through our mobile App “GlobalMoneyOne” available for IOS and Android. A first non-commercial release of the Fintech suite was done in June 2022. Since that date all services have been tested including the known-your-customer (KYC) process for the issuance of debits cards, the settlement process with the issuer bank, the intermediary entities handling the remittances, and the intermediaries and cellular operators for the Top Up, as well as the proper training of our customer care agents.

According to a World Bank Migration and Development brief, remittances to low- and middle-income countries reached $626 billion in 2022. The brief also stated the remittances to Latin America and the Caribbean are estimated to have grown 9.3% in 2022 to $142 billion; with increments of 45% for Nicaragua, 20% for Guatemala, 15% for Mexico, and 9% for Colombia. Stronger employment of migrants from Latin America in the United States contributed to remittance flows. As a share of GDP, remittances exceed 20% in El Salvador, Honduras, Jamaica, and Haiti.

The Electric Vehicle division (TuVolten) consist in an initiative to offer clean and affordable mobility through Electric Motorcycles, and Electric Mid Speed Cars. TuVolten is going to offer theirs EV Motorcycles and EV Cars in Spain, Portugal, USA, and some countries of Latin America. As recently announced, all previous electric motorcycle designs and tests have come together in a new electric motorcycle now rolling off the factory for the final validation tests under the European Union Standards E-Mark certification process. Once this certification is obtained, we will begin manufacturing the first units for sale to the public.

The Metaverse initiative, consist in a platform to offer our telecommunication carrier clients a white label solution enabling them to interact with their customers (end users, and enterprises) through the metaverse. The iQSTEL white label metaverse solution developed in partnership with GOTMY will be tailored to provide telecom carriers with a distinctive and immersive customer experience. In line with GOTMY’s mission to offer universally accessible experiential spaces, the iQSTEL solution for telecom carriers is intended to accommodate all mobile phone users, not just those with high-end VR headsets.

Regulations

Telecommunications services are subject to extensive government regulation in the United States of America. Any violations of the regulations may subject us to enforcement actions, including interest and penalties. The FCC has jurisdiction over all telecommunications common carriers to the extent they provide interstate or international communications services, including the use of local networks to originate or terminate such services.

Regulation of Telecom by the Federal Communications Commission

Telecommunication License

Anyone seeking to conduct telecommunications business where the telecommunication services will transpire between the United States of America and an international destination must obtain a license from the Federal Communications Commission (FCC). This particular license is named a Section 214 license, after the section in the Communications Act of 1934.

Etelix.com USA, LLC was authorized by the Federal Communications Commission to provide facility-based services in accordance with section 63.18(e)(1) of the Commission’s rules; and also to provide resale services in accordance with section 63.18(e)(2) under license number ITC-214-20090625-00303.

Since Etelix has no other network infrastructure outside the United States of America, no other licenses are required for us to operate as an international carrier service provider.

Universal Service and Other Regulatory Fees and Charges

In 1997, the FCC issued an order, referred to as the Universal Service Order, which requires all telecommunications carriers providing interstate telecommunications services to contribute to universal service support programs administered by the FCC (known as the Universal Service Fund). These periodic contributions are currently assessed based on a percentage of each contributor’s interstate and international end user telecommunications revenues reported to the FCC. Etelix also contributed to several other regulatory funds and programs, most notably Telecommunications Relay Service and FCC Regulatory Fees (collectively, the Other Funds). Due to the manner in which these contributions are calculated, we cannot be assured that we fully recover from our customers all of our contributions.

In addition, based on the nature of our current business, we receive certain exemptions from federal Universal Service Fund contributions. Changes in our business could eliminate our ability to qualify for some or all of these exemptions. Changes in regulation may also have an impact on the availability of some or all of these exemptions. If even some of these exemptions become unavailable, they could materially increase our federal Universal Service Fund or Other Funds’ contributions and have a material adverse effect on the cost of our operations and, therefore, on our ability to continue to operate profitably, and to develop and grow our business. We cannot be certain of the stability of the contribution factors for the Other Funds. Significant increases in the contribution factor for the Other Funds in general and the Telecommunications Relay Service Fund in particular can impact our profitability. Whether these contribution factors will be stable in the future is unknown, but it is possible that we will be subject to significant increases.

Money Transmitter and Payment Instrument Laws and Regulations

The consumer payment services offerings, prepaid debit cards, remittances, Top Up, are industries heavily regulated. Accordingly, we, and the products and services that we offer in consumer payment services, are subject to a variety of federal and state laws and regulations, including:

• Banking laws and regulations;
• Money transmitter and payment instrument laws and regulations;
• Anti-money laundering laws;-
• Privacy and data security laws and regulations;-
• Consumer protection laws and regulations;
• Unclaimed property laws; and
• Card association and network organization rules.

Employees

iQSTEL, including all subsidiaries, has 56 employees as of December 31, 2022.

Risks Relating to Business and Financial Condition

Our business, operating results or financial condition could be materially adversely affected by any of the following risks.

Risk Factors Related to the Business of the Company

Because our auditor has issued a going concern opinion regarding our company, there is a risk associated with an investment in our company.

We have continually operated at a loss with an accumulated deficit of $24,504,395 as of December 31, 2022. 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 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. We do not have any formal commitments or arrangements for the advancement or loan of funds. The Company has been qualified for a public offering of 10,000,000 shares of our common stock under a Form S-1. This offering is being conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be sold. For these reasons, our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern. As a result, there is a risk that you could lose the entire amount of your investment in our company.

Our telecommunications line of business is highly sensitive to declining prices, which may adversely affect our revenues and margins.

The telecommunications industry is characterized by intense price competition, which has resulted in declines in both our average per-minute price realizations and our average per-minute termination costs.

A reduction of our prices to compete with any other offers in the market will not always guarantee an increase in the traffic, which may result in a reduction of revenue. If these trends in pricing continue or accelerate, it could have a material adverse effect on the revenues generated by our telecommunications businesses and/or our gross margins. The continued growth of Over-The-Top calling and messaging services, such as WhatsApp, Skype and Viber have adversely affected the use of traditional phone communications. We expect this IP-based service, which offers voice communications for free to continue to increase, which may result in increased substitution on our service offerings.

The termination of our carrier agreements or our inability to enter into new carrier agreements in the future could materially and adversely affect our ability to compete, which could reduce our revenues and profits.

We rely upon our carrier agreements in order to provide our telecommunications services to our customers. These carrier agreements are, in most cases for finite terms and, therefore, there can be no guarantee that these agreements will be renewed at all or on favorable terms to us. Our ability to compete would be adversely affected if our carrier agreements were terminated or we were unable to enter into carrier agreements in the future to provide our telecommunications services to our customers, which could result in a reduction of our revenues and profits.

Our customers could experience financial difficulties, which could adversely affect our revenues and profitability if we experience difficulties in collecting our receivables.

As a provider of international long-distance services, we depend upon sales of transmission and termination of traffic to other long-distance providers and the collection of receivables from these customers. The wholesale telecommunications market continues to feature many smaller, less financially stable companies. If weakness in the telecommunications industry or the global economy reduces our ability to collect our accounts receivable from our major customers our profitability may be substantially reduced. While our most significant customers, from a revenue perspective, vary from quarter to quarter, our twelve largest customers (2.97% of our total customer base) collectively accounted for 88% of total consolidated revenues in fiscal year 2022. However, this concentration of revenues does not increase our exposure to non-payment by our larger customers, since 57% of our revenue is prepaid.

Natural disasters, terrorist acts, acts of war, pandemics, cyber-attacks or other breaches of network or information technology security may cause equipment failures or disrupt our operations.

Our inability to operate our telecommunications networks because of the events listed above, even for a limited period, may result in loss of revenue, significant expenses, which could have a material adverse effect on our results of operations and financial condition.

We could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure and related systems. To be successful, we need to continue to have available a high capacity, reliable and secure network for our and our customers’ use. As any other company, we face the risk of a security breach, whether through cyber-attacks, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure and related systems. There is a risk of a security breach or disruption of the systems we operate, including possible unauthorized access to our proprietary or classified information. We are also subject to breaches of our network resulting in unauthorized utilization of our services, which subject us to the costs of providing those services, which are likely not recoverable. The secure maintenance and transmission of our information is a critical element of our operations. Our information technology and other systems that maintain and transmit customer information may be compromised by a malicious third-party penetration of our network security, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third-party service provider or business partner. As a result, our or our customers’ information may be lost, disclosed, accessed or taken without the customers’ consent, or our services may be used without payment.

Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber-attacks and intrusions. We may be unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures. Certain of our business units have been the subject of attempted and successful cyber-attacks in the past. We have researched the situations and do not believe any material internal or customer information has been compromised.

We operate a global business that exposes us to currency, economic and regulatory risks.

Our revenue comes primarily from sales outside the U.S. and our growth strategy is largely focused on emerging markets. Our success delivering solutions and competing in international markets is subject to our ability to manage various risks and difficulties, including, but not limited to:

• our ability to effectively staff, provide technical support and manage operations in multiple countries;
• fluctuations in currency exchange rates;
• timely collecting of accounts receivable from customers located outside of the U.S.;
• trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions;
• compliance with the U.S. Foreign Corrupt Practices Act, and other anti-bribery laws and regulations;
• variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of intellectual property and contract rights; and
• compliance with export regulations, tariffs and other regulatory barriers.

Tax Risks

We are subject to tax and regulatory audits which could result in the imposition of liabilities that may or may not have been reserved. We are subject to audits by taxing and regulatory authorities with respect to certain of our income and operations. These audits can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of liabilities, interest and penalties if our positions are not accepted by the auditing entity.

We may be unable to achieve some, all or any of the benefits that we expect to achieve from our plan to expand our operations.

In the future we may require additional financing for capital requirements and growth initiatives. Accordingly, we will depend on our ability to generate cash flows from operations and to borrow funds and issue securities in the capital markets to maintain and expand our business. We may need to incur debt on terms and at interest rates that may not be as favorable. If additional financing is not available when required or is not available on acceptable terms, we may be unable to operate our business as planned or at all, fund our expansion, successfully promote our business, develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations

Risks Relating to Our Securities

If a market for our common stock does not develop, stockholders may be unable to sell their shares.

Our common stock is quoted under the symbol “IQST” on the OTCQX operated by OTC Markets Group, Inc., an electronic inter-dealer quotation medium for equity securities. Even though we currently have an active trading market, there can be no assurance that it will be sustained.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control.

Our stock price is subject to a number of factors, including:

• Technological innovations or new products and services by us or our competitors;
• Government regulation of our products and services;
• The establishment of partnerships with other telecom companies;
• Intellectual property disputes;
• Additions or departures of key personnel;
• Sales of our common stock;
• Our ability to integrate operations, technology, products and services;
• Our ability to execute our business plan;
• Operating results below or exceeding expectations;
• Whether we achieve profits or not;
• Loss or addition of any strategic relationship;
• Industry developments;
• Economic and other external factors; and
• Period-to-period fluctuations in our financial results.

Our stock price may fluctuate widely as a result of any of the above. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

Because we are subject to the “Penny Stock” rules, the level of trading activity in our stock may be reduced.

The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules which may increase the difficulty Purchasers may experience in attempting to liquidate such securities.

We do not expect to pay dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will occur only if our stock price appreciates.

Provisions in the Nevada Revised Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.

Members of our board of directors and our officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances, pursuant to provisions in the Nevada Revised Statutes and our Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. Accordingly, you may be unable to prevail in a legal action against our directors or officers even if they have breached their fiduciary duty of care. In addition, our Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely affect prevailing market prices for our common stock.

The extent to which the coronavirus ("COVID-19") outbreak impacts our business, results of operations and financial condition will depend on future developments, which cannot be predicted.

The COVID-19 pandemic has caused and may continue to cause us to modify our business practices (including employee travel and employee work locations), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.

The COVID-19 pandemic and mitigation measures have caused, and may continue to cause, adverse impacts on global supply chains and economic conditions. These impacts could affect the development, deployment and maintenance, and the demand for our products and services, particularly the IoT SmartGas and SmartTank devices.

The extent to which the COVID-19 pandemic impacts our business, results of operations, cash flows and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning other strains of the virus and the actions to contain its impact.

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:

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:

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.

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.

Operating Expenses by subsidiary are as follow:

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.

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.

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.

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.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report, being December 31, 2022. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this annual report.

Management’s Annual Report on Internal Control over Financing Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2022, our internal control over financial reporting was not effective. Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending December 31, 2023: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Inherent Limitations

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the three month period ended December 31, 2022, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting..