IQST iQSTEL Inc (QX)

Item 1. Financial Statements

Our unaudited consolidated financial statements included in this Form 10-Q are as follows:

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the interim period ended June 30, 2019 are not necessarily indicative of the results that can be expected for the full year.

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 The accompanying notes are an integral part of these unaudited consolidated financial statements.   

iQSTEL INC

Consolidated Statements of Operations

( Unaudited )

The accompanying notes are an integral part of these unaudited consolidated financial statements.

iQSTEL INC

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

( Unaudited )

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

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iQSTEL INC

Consolidated Statements of Cash Flows

( Unaudited )

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

June 30, 2019

NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization and Operations

iQSTEL Inc. (“iQSTEL”, “we”, “us”, or the “Company”)  was incorporated under the laws of the State of Nevada on June 24, 2011 under the name of PureSnax International, Inc. and changed its name to iQSTEL Inc. on August 7, 2018.

Revenue Recognition

The Company recognizes revenue from the sale of products in accordance with ASC 606, “ Revenue from Contracts with Customers”.  The Company recognizes revenue only when all of the following criteria have been met:

 Identify the contract(s) with a customer   

 Identify the performance obligations in the contract   

 Determine the transaction price.   

 Allocate the transaction price to the performance obligations in the contract.   

 Recognize revenue when (or as) the entity satisfies a performance obligation.   

The Company recognizes revenue related to monthly usage charges and other recurring charges during the period in which the telecommunication services are rendered. Provided that persuasive evidence of a sales arrangement existed, and collection was reasonably assured. Persuasive evidence of a sales arrangement existed upon execution of a written interconnection agreement. The Company’s payment terms vary by clients.

Lease

The office lease meets the definition of a short-term lease because the lease term is 12 months or less. Consequently, consistent with Company’s accounting policy election, the Company does not recognize the right-of-use asset and the lease liability arising from this lease.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

NOTE 3 - GOING CONCERN

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company does not have significant cash, nor does it have an established source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. In addition, as of June 30, 2019, the Company had a net loss of $1,509,819. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its business plan and eventually attain profitable operations.

During the next year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and marketing expenses. The Company may experience a cash shortfall and be required to raise additional capital.

Historically, the Company has relied upon funds from its stockholders. Management may raise additional capital through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon its operations and its stockholders.

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Depreciation expense for the six months ended June 30, 2019 and 2018 amounted to $19,281 and $3,275, respectively.

During the six months ended June 30, 2019 and 2018, the Company borrowed $82,353, and $332,182, which includes original issue discount and financing cost of $17,953 and $0, respectively, and repaid the principal amount of $171,302 and $326,436 and interest expense of $88,551 and $148,406, respectively.  

During the six months ended June 30, 2019 and 2018, the Company recognized amortization of discount, included in interest expense, of $17,953 and $0, respectively.

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During the six months ended June 30, 2019 and 2018, the Company recognized amortization of discount, included in interest expense, of $523,941 and $0, respectively.

During the six months ended June 30, 2019 and 2018, the Company repaid notes of $221,901 and $0 and accrued interest including the prepayment penalty of $120,006 and $0, respectively.

Conversion

During the six months ended June 30, 2019, the Company converted notes with principal amounts of $5,000 into 76,335 shares of common stock. The corresponding derivative liability at the date of conversion of $181,326 was settled through additional paid in capital.

Promissory Notes - Issued in fiscal year 2018

During the year ended December 31, 2018, the Company issued a total of $213,750 in notes with the following terms:

 Terms ranging from 9 months to 12 months.   

 Annual interest rates ranging from of 10% to 12%.   

 Convertible at the option of the holders at issuance.   

 Conversion prices are typically based on the discounted (50% discount) lowest trading prices of the Company’s shares during various periods prior to conversion.   

Certain notes allow the Company to redeem the notes at rates ranging from 130% to 150% depending on the redemption date provided that no redemption is allowed after the 180th day. Likewise, the notes include financing costs totaling $12,250 and the Company received cash of $201,500.

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Promissory Notes - Issued in fiscal year 2019

During the six months ended June 30, 2019, the Company issued a total of $1,171,000 in notes with the following terms:

 Terms ranging from 6 months to 3 years.   

 Annual interest rates ranging from of 8% to 12%.   

 Convertible at the option of the holders at issuance or 180 days from issuance.   

 Conversion prices are typically based on the discounted (39% or 50% discount) lowest trading prices of the Company’s shares during various periods prior to conversion.   

The convertible notes were also provided with a total of 376,931 common shares and warrant to purchase up to 92,000 shares of common stock at exercise price of $2.5 per share for 3 years.

Certain notes allow the Company to redeem the notes at rates ranging from 117% to 150% depending on the redemption date provided that no redemption is allowed after the 180th day. Likewise, the notes include financing costs totaling $122,500 and the Company received cash of $1,048,500.

Derivative liabilities

The Company determined that the conversion option in the note and the exercise feature of the warrants met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock. The Company will bifurcate the embedded conversion option in the note once the note becomes convertible and account for it as a derivative liability.

The Company valued the conversion features using the Black Scholes valuation model. The fair value of the derivative liability for all the note that became convertible for the year ended December 31, 2018 amounted to $896,593. $201,500 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $695,093 was recognized as a “day 1” derivative loss.

The Company valued the conversion features of convertible notes and warrant using the Black Scholes valuation model. The fair value of the derivative liability for all the note and warrant that became convertible for the six months ended June 30, 2019 amounted to $2,583,990. $403,800 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $2,180,190 was recognized as a “day 1” derivative loss.

The following table summarizes information relating to outstanding and exercisable warrants as of June 30, 2019:

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NOTE 9 - DERIVATIVE LIABILITIES

The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

Fair Value Assumptions Used in Accounting for Derivative Liabilities.

ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of June 30, 2019. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model.

For the six months ended June 30, 2019, the estimated fair values of the liabilities measured on a recurring basis are as follows:

The following table summarizes the changes in the derivative liabilities during the six months ended June 30, 2019:

The aggregate loss on derivatives during the six months ended June 30, 2019 and 2018 was as follows;

NOTE 10 – SHAREHOLDERS’ EQUITY

The Company’s authorized capital consists of 2,000,000,000 shares of common stock with a par value of $0.001 per share.

As of June 30, 2019 and December 31, 2018, 15,475,916 and 15,022,650 shares of common stock were issued and outstanding, respectively.

During the six months ended June 30, 2019, $10,000 was contributed to the Company and the Company recorded it as additional paid in capital.

During the six months ended June 30, 2019, the Company repaid interest expense of $7,414.

Due from related parties

During the six months ended June 30, 2019, the Company loaned $10,000 to a related party and collected $10,000. As of June 30, 2019, the Company recorded accounts receivable from a related party of $10,701, included in due from related parties. As of June 30, 2019 and December 31, 2018, the Company had due from related parties of $288,908 and $278,207, respectively. The loans are unsecured, non-interest bearing and due on demand.

Due to related parties

During the six months ended June 30, 2019, the Company borrowed $46,438 from CEO of the Company and repaid $32,400. As of June 30, 2019 and December 31, 2018, the Company had due to related parties of $40,631 and $23,193, respectively. The loans are unsecured, non-interest bearing and due on demand.

Employment agreements

On June 25, 2018, the Company entered into Employment Agreements with the following persons: (i) Leandro Iglesias as President, CEO and Chairperson of the Company’s Board of Directors with an annual salary of $54,000; (ii) Juan Carlos Lopez Silva as Chief Commercial Officer with an annual salary of $54,000; and Alvaro Quintana Cardona as Chief Operating Officer and Chief Financial Officer with an annual salary of $30,000. The Employment Agreements have a term of 36 months, are renewable automatically for 24-month periods, unless the Company gives written notice at least 90 days prior to termination of the initial 36-month term. The Company shall have the right to terminate any of the employment agreements at any time without prior notice, but in that event, the Company shall pay these persons salaries and other benefits they are entitled to receive under their respective agreements for three years.

On May 2, 2019, the Company entered into Employment Agreements with the following persons: (i) Leandro Iglesias as President, CEO and Chairperson of the Company’s Board of Directors with an annual salary of $168,000 with an annual bonus of 3% of our net income; (ii) Juan Carlos Lopez Silva as Chief Commercial Officer with an annual salary of $120,000 with an annual bonus of 3% of our net income; and Alvaro Quintana Cardona as Chief Operating Officer and Chief Financial Officer with an annual salary of $144,000 with an annual bonus of 3% of our net income. The Employment Agreements have a term of 36 months, are renewable automatically for 24-month periods, unless the Company gives written notice at least 90 days prior to termination of the initial 36-month term. The Company shall have the right to terminate any of the employment agreements at any time without prior notice, but in that event, the Company shall pay these persons salaries and other benefits they are entitled to receive under their respective agreements for three years. The above executive officers agreed to two year non-compete and non-solicit restrictive covenants with the Company. If any of the executive officers are terminated for cause they shall forfeit any rights to severance.

During the six months ended June 30, 2019 and 2018, the Company recorded management fees of $118,000 and $0 and paid $62,200 and $0, respectively. As at June 30, 2019 and December 31, 2018, the Company accrued management salaries of $111,231 and $55,431, respectively.

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NOTE 12 – COMMITMENTS AND CONTINGENCIES

Leases and Long-term Contracts

The Company has not entered into any long-term leases, contracts or commitments.

Rent

The Company leases office space at $1,200 per month with one-year term, starting July 1, 2018 and ending June 30, 2019. For the six months ended June 30, 2019 and 2018, the Company incurred $7,200 and $6,158, respectively.

The Company leases facilities which the term is 12 months. For the six months ended June 30, 2019 and 2018, the Company incurred $13,000 and $0, respectively.