Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
Audited Financial Statements:
|
F-1
|
Report of Independent Registered Public Accounting Firm;
|
F-2
|
Consolidated Balance Sheets as of December 31, 2019 and 2018;
|
F-3
|
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018;
|
F-4
|
Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2019 and 2018;
|
F-5
|
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018; and
|
F-6
|
Notes to Consolidated Financial Statements.
|
21
Boyle CPA, LLC
|
Certified Public Accountants & Consultants
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of iQSTEL Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of iQSTEL Inc.(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholder’s equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to fraud or error. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
As discussed in Note 3 to the consolidated financial statements, the Company’s working capital deficiency and lack of an established source of revenues raises substantial doubt about its ability to continue as a going concern for one year from the issuance of these consolidated financial statements. Management’s plans are also described in Note 3. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Boyle CPA, LLC
We have served as the Company’s auditor since 2017
Bayville, NJ
April 15, 2020
361 Hopedale Drive SE
|
|
P (732) 822-4427
|
Bayville, NJ 08721
|
|
F (732) 510-0665
|
F-1
iQSTEL INC
Consolidated Balance Sheets
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
270,503
|
$
|
4,570
|
Accounts receivable, net
|
|
2,759,164
|
|
1,825,854
|
Due from related parties
|
|
316,860
|
|
258,020
|
Prepaid and other current assets
|
|
91,970
|
|
17,503
|
Total Current Assets
|
|
3,438,497
|
|
2,105,947
|
|
|
|
|
|
Property and equipment, net
|
|
287,970
|
|
285,107
|
Goodwill
|
|
1,455,960
|
|
-
|
Deferred tax assets
|
|
420,519
|
|
-
|
TOTAL ASSETS
|
$
|
5,602,946
|
$
|
2,391,054
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
|
2,291,921
|
|
1,390,130
|
Due to related parties
|
|
34,631
|
|
23,193
|
Loans payable
|
|
89,671
|
|
194,557
|
Loans payable - related parties
|
|
1,885,708
|
|
90,787
|
Current portion of convertible notes - net of discount of $597,653 and $158,696
|
|
1,251,096
|
|
63,205
|
Other current liabilities
|
|
848,484
|
|
436,762
|
Derivative liabilities
|
|
4,744,134
|
|
1,790,067
|
Total Current Liabilities
|
|
11,145,645
|
|
3,988,701
|
|
|
|
|
|
Convertible notes - net of discount of $48,558 and $0
|
|
11,442
|
|
-
|
Loan payable
|
|
178,021
|
|
-
|
Employee benefits, non-current
|
|
38,253
|
|
-
|
TOTAL LIABILITIES
|
|
11,373,361
|
|
3,988,701
|
|
|
|
|
|
Shareholders' Deficit
|
|
|
|
|
Common stock: 100,000,000 authorized; $0.001 par value; 18,008,591 and 15,022,650 shares issued and outstanding, respectively
|
|
18,008
|
|
15,023
|
Additional paid in capital
|
|
3,240,528
|
|
1,054,718
|
Accumulated deficit
|
|
(8,125,257)
|
|
(2,667,388)
|
Accumulated other comprehensive income
|
|
(181)
|
|
-
|
Deficit Attributed to Shareholders of iQSTEL Inc.
|
|
(4,866,902)
|
|
(1,597,647)
|
Deficit Attributable to Noncontrolling interests
|
|
(903,513)
|
|
-
|
Total Shareholders' Deficit
|
|
(5,770,415)
|
|
(1,597,647)
|
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
|
$
|
5,602,946
|
$
|
2,391,054
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
iQSTEL INC
Consolidated Statements of Operations
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Revenues
|
$
|
18,031,548
|
$
|
13,775,361
|
Cost of goods sold
|
|
17,250,623
|
|
12,582,955
|
Gross profit
|
|
780,925
|
|
1,192,406
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
General and administration
|
|
1,449,624
|
|
1,220,301
|
Total operating expenses
|
|
1,449,624
|
|
1,220,301
|
|
|
|
|
|
Operating loss
|
|
(668,699)
|
|
(27,895)
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
Other income
|
|
2,631
|
|
11,642
|
Other expenses
|
|
(10,891)
|
|
(41,498)
|
Interest expense
|
|
(2,653,996)
|
|
(460,185)
|
Change in fair value of derivative liabilities
|
|
(2,111,783)
|
|
(1,588,567)
|
Gain on settlement of debt
|
|
-
|
|
2,342
|
Total other expense
|
|
(4,774,039)
|
|
(2,076,266)
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
(5,442,738)
|
|
(2,104,161)
|
Income taxes
|
|
-
|
|
-
|
Net loss
|
|
(5,442,738)
|
|
(2,104,161)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
15,131
|
|
-
|
Net Loss Attributed to Shareholders of iQSTEL Inc.
|
$
|
(5,457,869)
|
$
|
(2,104,161)
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
Net loss
|
$
|
(5,442,738)
|
$
|
(2,104,161)
|
Foreign currency adjustment
|
|
(354)
|
|
-
|
Total Comprehensive loss
|
$
|
(5,443,092)
|
$
|
(2,104,161)
|
Less: Comprehensive income attributable to noncontrolling interests
|
|
14,958
|
|
-
|
Net Comprehensive Loss Attributed to Shareholders of iQSTEL Inc.
|
$
|
(5,458,050)
|
$
|
(2,104,161)
|
|
|
|
|
|
Basic and dilutive loss per common share
|
$
|
(0.35)
|
$
|
(0.15)
|
Weighted average number of common shares outstanding
|
|
15,684,477
|
|
13,721,304
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
iQSTEL INC
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the years ended December 31, 2019 and 2018
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid in
Capital
|
|
Subscription
Receivable
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
|
Non
Control
Interest
|
|
Total
Shareholders'
Deficit
|
Balance –
December 31,
2017
|
11,085,965
|
$
|
11,086
|
$
|
737,429
|
$
|
-
|
$
|
(563,227)
|
$
|
-
|
$
|
185,288
|
$
|
-
|
$
|
185,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued
|
2,665,910
|
|
2,666
|
|
132,134
|
|
-
|
|
-
|
|
-
|
|
134,800
|
|
-
|
|
134,800
|
Debt forgiveness
|
-
|
|
-
|
|
45,200
|
|
-
|
|
-
|
|
-
|
|
45,200
|
|
-
|
|
45,200
|
Recapitalization
|
1,175,724
|
|
1,176
|
|
(77,450)
|
|
(8,750)
|
|
-
|
|
-
|
|
-85,024
|
|
-
|
|
(85,024)
|
Subscription
received
|
-
|
|
-
|
|
-
|
|
8,750
|
|
-
|
|
-
|
|
8,750
|
|
-
|
|
8,750
|
Common stock
issued for services
|
95,051
|
|
95
|
|
187,405
|
|
-
|
|
-
|
|
-
|
|
187,500
|
|
-
|
|
187,500
|
Capital
contribution
|
-
|
|
-
|
|
30,000
|
|
-
|
|
-
|
|
-
|
|
30,000
|
|
-
|
|
30,000
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(2,104,161)
|
|
-
|
|
(2,104,161)
|
|
-
|
|
(2,104,161)
|
Balance –
December 31,
2018
|
15,022,650
|
$
|
15,023
|
$
|
1,054,718
|
$
|
-
|
$
|
(2,667,388)
|
$
|
-
|
$
|
(1,597,647)
|
$
|
-
|
$
|
(1,597,647)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
acquisition
|
343,512
|
|
344
|
|
449,656
|
|
-
|
|
-
|
|
-
|
|
450,000
|
|
(918,471)
|
|
(468,471)
|
Capital
Contribution
|
-
|
|
-
|
|
10,000
|
|
-
|
|
-
|
|
-
|
|
10,000
|
|
-
|
|
10,000
|
Common stock
issued in
conjunction with
convertible notes
|
661,216
|
|
661
|
|
817,238
|
|
-
|
|
-
|
|
-
|
|
817,899
|
|
-
|
|
817,899
|
Common stock
issued for
conversion of debt
|
1,169,723
|
|
1,169
|
|
32,581
|
|
-
|
|
-
|
|
-
|
|
33,750
|
|
-
|
|
33,750
|
Common stock
issued for
exercised cashless
warrant
|
811,490
|
|
811
|
|
(811)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Debt forgiveness
|
-
|
|
-
|
|
406,080
|
|
-
|
|
-
|
|
-
|
|
406,080
|
|
-
|
|
406,080
|
Resolution of
derivative
liabilities
|
-
|
|
-
|
|
471,066
|
|
-
|
|
-
|
|
-
|
|
471,066
|
|
-
|
|
471,066
|
Foreign currency
translation
adjustments
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(181)
|
|
(181)
|
|
(173)
|
|
(354)
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(5,457,869)
|
|
-
|
|
(5,457,869)
|
|
15,131
|
|
(5,442,738)
|
Balance –
December 31,
2019
|
18,008,591
|
$
|
18,008
|
$
|
3,240,528
|
$
|
-
|
$
|
(8,125,257)
|
$
|
(181)
|
$
|
(4,866,902)
|
$
|
(903,513)
|
$
|
(5,770,415)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
iQSTEL INC
Consolidated Statements of Cash Flows
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net loss
|
$
|
(5,442,738)
|
$
|
(2,104,161)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Stock based compensation
|
|
-
|
|
187,500
|
Allowance for doubtful accounts
|
|
-
|
|
313,414
|
Depreciation and amortization
|
|
41,737
|
|
20,350
|
Amortization of debt discount
|
|
1,939,687
|
|
55,054
|
Change in fair value of derivative liabilities
|
|
2,111,783
|
|
1,588,567
|
Gain on settlement of debt
|
|
-
|
|
(2,342)
|
Prepayment and Default penalty
|
|
-
|
|
8,151
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
522,360
|
|
(1,039,735)
|
Other current assets
|
|
27,075
|
|
115,073
|
Due from related party
|
|
-
|
|
(258,020)
|
Accounts payable
|
|
(571,974)
|
|
585,417
|
Other current liabilities
|
|
128,043
|
|
174,181
|
Deferred tax asset
|
|
-
|
|
-
|
Inter-co
|
|
-
|
|
-
|
Net cash used in operating activities
|
|
(1,244,027)
|
|
(356,551)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Acquisition of subsidiary
|
|
239,516
|
|
-
|
Purchase of fixed assets
|
|
(32,007)
|
|
(426)
|
Payment of loan receivable - related party
|
|
(129,387)
|
|
-
|
Collection from loan receivable - related party
|
|
73,947
|
|
-
|
Net cash provided by (used in) investing activities
|
|
152,069
|
|
(426)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Bank overdraft
|
|
(82)
|
|
82
|
Proceeds from loans payable
|
|
424,960
|
|
796,864
|
Repayments of loans payable
|
|
(527,239)
|
|
(830,265)
|
Proceeds from loans payable - related parties
|
|
46,438
|
|
800
|
Repayment of loans payable - related parties
|
|
(38,400)
|
|
(850)
|
Contribution
|
|
10,000
|
|
30,000
|
Due to related parties
|
|
-
|
|
(3,400)
|
Common stock issued
|
|
-
|
|
134,800
|
Subscription receivable
|
|
-
|
|
8,750
|
Proceeds from convertible notes
|
|
2,266,250
|
|
201,500
|
Repayment of convertible notes
|
|
(824,401)
|
|
-
|
Net cash provided by financing activities
|
|
1,357,526
|
|
338,281
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
365
|
|
-
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
265,933
|
|
(18,696)
|
Cash and cash equivalents, beginning of period
|
|
4,570
|
|
23,266
|
Cash and cash equivalents, end of period
|
$
|
270,503
|
$
|
4,570
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
Cash paid for interest
|
$
|
678,663
|
$
|
392,074
|
Cash paid for taxes
|
$
|
-
|
$
|
-
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
Derivative liabilities recognized as debt discount
|
$
|
1,313,350
|
$
|
201,500
|
Related party debt forgiveness
|
$
|
-
|
$
|
45,200
|
Common stock issued in conjunction with convertible notes
|
$
|
817,900
|
$
|
-
|
Common stock issued for conversion of debt
|
$
|
33,750
|
$
|
-
|
Common stock issued for cashless warrant exercised
|
$
|
39,760
|
$
|
-
|
Resolution of derivative liabilities
|
$
|
430,495
|
$
|
-
|
Debt forgiveness
|
$
|
406,080
|
$
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
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 B-Maven Inc. The Company changed its name to PureSnax International, Inc. on September 18, 2015; and more recently it changed its name to iQSTEL Inc. on August 7, 2018.
The Company has been engaged in the business of telecommunication services as a wholesale carrier of voice and data for other telecom companies around the World with more than 200 active interconnection agreements with mobile companies, fix line companies and other wholesale carriers.
Stock split. Effective May 9, 2018, we effected a 1 for 19,152 reverse stock split of our issued and outstanding common stock (the “Reverse Stock Split”). All references to shares of our common stock in this report on Form 10-K refers to the number of shares of common stock after giving effect to the Reverse Stock Split (unless otherwise indicated).
Membership Interest Purchase Agreements and Reorganization
On June 25, 2018 (the “Effective Date”), iQSTEL entered into a membership purchase agreement with Etelix.com USA, LLC (“Etelix”) and became a 100% subsidiary of iQSTEL.
Pursuant to the terms of the membership interest purchase agreement, iQSTEL issued 13,751,875 shares of its unregistered common stock to the members of Etelix in exchange for their memberships interests in Etelix and as a result of the Purchase Agreements, Etelix became a wholly owned subsidiary of iQSTEL.
The Company entered into certain ancillary agreements (the “Ancillary Agreements”) noted in the Purchase Agreement, consisting of three Conversion Agreements the Company executed with Carmen Cabell, Patrick Gosselin and Mark Engler. The Conversion Agreements converted a portion of the Series A Preferred Stock held by these shareholders into shares of the Company’s common stock, and canceled the balance of the Series A Preferred Stock held by these shareholders. Following the execution of the Conversion Agreements, Mr. Gosselin owned 250,032 shares of common stock and no shares of preferred stock in the Company; Mr. Cabell owned 250,080 shares of common stock and no shares of preferred stock in the Company; and Mr. Engler owned 250,032 shares of common stock and no shares of preferred stock in the Company.
Recapitalization
For financial accounting purposes, this transaction was treated as a reverse acquisition by Etelix, and resulted in a recapitalization with Etelix being the accounting acquirer and iQSTEL as the acquired company. The consummation of this reverse acquisition resulted in a change of control. Accordingly, the historical financial statements prior to the acquisition are those of the accounting acquirer, Etelix and have been prepared to give retroactive effect to the reverse acquisition completed on June 25, 2018, and represent the operations of Etelix. The consolidated financial statements after the acquisition date, June 25, 2018 include the balance sheets of both companies at historical cost, the historical results of Etelix and the results of the Company from the acquisition date. All share and per share information in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the recapitalization.
Acquisition
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), a Swiss corporation, by the Company.
The consideration for the acquisition consists of $500,000 USD, payable as follows:
F-6
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
$50,000 USD shall be paid in cash upon execution of the Purchase Agreement; and
The balance of $450,000 USD shall be paid at Closing in the form of 187,500 shares of common stock in the Company based upon an agreed upon price of $2.40 per share. Additional shares may be payable at Closing, if the Company’s stock is valued at less than $2.40 per share, to account for the full $450,000 USD.
On August 7, 2019, having completed all conditions under the Purchase Agreement, the Company closed the transaction with Seller, and paid $50,000 and issued a total of 343,512 shares of common stock at $1.31 per share to the Seller for the 51% equity interest and certain assets in SwissLink, including 51% of the loan in SwissLink.
The payment for the acquisition of SwissLink Carrier AG, was agreed to be done with $50,000 in cash and the balance of $450,000 in common shares of iQSTEL with an initial price per share of $2.40; giving us a number of 187,500 shares ($450,000 / 2.40 $ per shares = 187,500 shares) to be issue; but the purchase agreement included a clause to adjust the number of shares to be ultimately issued if the price of the shares was less than $2.40 at the closing date. Since at the closing date the price of the shares was $1.31 the total shares to be issued to the Seller should be 343,512, and this was the total shares finally issue to the Seller.
SwissLink Carrier AG is a provider of international telephone traffic around the globe, which trades international VoIP (voice over IP) telephone minutes through its Software Management platform named VAMP.
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States. The Company’s fiscal year end is December 31.
Consolidation Policy
For December 31, 2018, the consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Etelix.com USA, LLC and SwissLink Carrier AG. All significant intercompany balances and transactions have been eliminated in consolidation. Prior to June 25, 2018, the financial statements presented are those of Etelix.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from these good faith estimates and judgments.
Business Combinations
In accordance with ASC 805-10, “Business Combinations”, the Company accounts for all business combinations using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining non-controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, and non-controlling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or non-controlling interests made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is re-measured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and the existing book value. Results of operations of the acquired entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets.
F-7
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation and Re-measurement
The Company translates its foreign operations to U.S. dollar in accordance with ASC 830, “Foreign Currency Matters”.
The Company’s and Etelix’s functional currency and reporting currency is the U.S. dollar, SwissLink’s functional currency is the Swiss Franc (“CHF”).
The Company’s subsidiaries, whose functional currency is not the U.S. dollar, translate their records into U.S. dollar as follows:
Assets and liabilities at the rate of exchange in effect at the balance sheet date
Equities at historical rate
Revenue and expense items at the average rate of exchange prevailing during the period
Adjustments arising from such translations are included in accumulated other comprehensive income in shareholders’ equity.
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Spot CHF: USD exchange rate
|
$
|
1.0333
|
$
|
N/A
|
Average CHF: USD exchange rate
|
$
|
1.0122
|
$
|
N/A
|
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.
Accounts Receivable and Allowance for Uncollectible Accounts
Substantially all of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company reviews its allowance for doubtful accounts daily, past due balances over 60 days and a specified amount are reviewed individually for collectability. Account balances are charged off after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2019 and 2018, the Company had $0 and $313,414, respectively, in valuation allowance for doubtful accounts for the Company’s accounts receivable.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value.
F-8
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed Assets
Fixed assets, consisting of telecommuting equipment and software, is recorded at cost reduced by accumulated depreciation and amortization. Depreciation and amortization expense is recognized over the assets’ estimated useful lives of 3 years for computers and laptops, 5 years for telecommunications equipment and switches; and 5 years for software using the straight-line method. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Impairment of tangible and intangible assets
Tangible and intangible assets (excluding goodwill) are assessed at each reporting date for indications that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset's recoverable amount. The asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs of disposal and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or a group of assets exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the group of assets.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Goodwill
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.
Retirement Benefit Costs
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Company’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
F-9
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognized in full in the period in which they occur. They are recognized outside the income statement and are presented in other comprehensive income. Past service cost is recognized immediately in the income statement in the period in which it occurs.
The retirement benefit obligation recognized in the balance sheet represents the present value of the defined obligation as adjusted for unrecognized past service cost, and as reduced by the fair value of the scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
Net Income (Loss) Per Share of Common Stock
The Company has adopted ASC 260, ”Earnings per Share” which requires presentation of basic earnings per share on the face of the statements of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation. In the accompanying financial statements, basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants unless the result would be antidilutive. There were no potentially dilutive shares of common stock outstanding for the years ended December 31, 2019 and 2018.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents and related party payables that it will likely incur in the near future. The Company places its cash and cash equivalents with financial institutions of high creditworthiness. At times, its cash and cash equivalents with a particular financial institution may exceed any applicable government insurance limits.
During the year ended December 31, 2019 and 2018, 8 customers represented 70% of our revenues and 7 customers represented 71% of our revenues, respectively.
Financial Instruments
The Company follows ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
F-10
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The carrying values of our financial instruments, including, cash and cash equivalents; accounts receivable; prepaid expenses; accounts payable and other payable and due to related parties approximate their fair values due to the short-term maturities of these financial instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due to related party’s due to their related party nature.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company used a Black Scholes valuation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets, liabilities, the carry forward of operating losses and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.
Related Parties
The Company follows ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions (see Note 12).
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.
F-11
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Cost of revenue
Costs of revenue represent direct charges from vendors that the Company incurs to deliver services to its customers. These costs primarily consist of usage charges for calls terminated in vendor’s network.
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 consolidated 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 has a working capital deficiency and it does not 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 December 31, 2019, the Company had a net loss of $5,442,738. 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 consolidated 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.
F-12
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 4 - ACQUISTION
On April 1, 2019, iQSTEL Inc. (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), a Swiss corporation, by the Company for a consideration of $500,000.
On August 7, 2019, having completed all conditions under the Purchase Agreement, the Company closed the transaction with Seller, and paid $50,000 and issued a total of 343,512 shares of common stock at $1.31 per share to the Seller for the 51% equity interest and certain assets in SwissLink, including 51% of the loan in SwissLink.
The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:
|
|
August 7,
|
Fair Value of Consideration:
|
|
2019
|
Cash
|
$
|
50,000
|
343,512 shares of common stock at $1.31 per share
|
|
450,000
|
Total Purchase Price
|
$
|
500,000
|
Swisslink has been included in our consolidated results of operations since their respective acquisition dates.
The following table summarizes the identifiable assets and liabilities assumed upon acquisition of SwissLink and the calculation of goodwill:
Total purchase price
|
$
|
500,000
|
Cash
|
|
289,516
|
Accounts receivable, net
|
|
1,462,786
|
Other current assets
|
|
101,629
|
Deferred tax assets
|
|
418,932
|
Property and equipment, net
|
|
12,070
|
Total identifiable assets
|
|
2,284,933
|
Accounts payable
|
|
(1,479,949)
|
Other current liabilities
|
|
(84,591)
|
Long term loans
|
|
(156,441)
|
Long term loans – related party
|
|
(2,199,907)
|
Employee benefits
|
|
(238,476)
|
Total liabilities assumed
|
|
(4,159,364)
|
Net assets
|
|
(1,874,431)
|
Non-controlling interest
|
|
918,471
|
Total net assets
|
|
(955,960)
|
Goodwill
|
$
|
1,455,960
|
F-13
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 5 – PREPAID AND OTHER CURRENT ASSETS
Other prepaid and other current assets at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Advance payment to suppliers
|
$
|
6,600
|
$
|
11,310
|
Other receivable
|
|
78,936
|
|
500
|
Prepaid expenses
|
|
5,834
|
|
5,093
|
Tax receivable
|
|
600
|
|
600
|
|
$
|
91,970
|
$
|
17,503
|
NOTE 6 – FIXED ASSETS, NET
Fixed assets, net at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Telecommunication equipment
|
$
|
249,169
|
$
|
245,686
|
Telecommunication software
|
|
436,124
|
|
400,903
|
Other equipment
|
|
8,497
|
|
-
|
Total fixed assets
|
|
693,790
|
|
646,589
|
Accumulated depreciation and amortization
|
|
(405,820)
|
|
(361,482)
|
Total Fixed assets
|
$
|
287,970
|
$
|
285,107
|
Depreciation expense for the year ended December 31, 2019 and 2018 amounted to $41,737 and $20,350, respectively.
F-14
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 7 –LOANS PAYABLE
Loans payable at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
|
Interest
|
|
|
2019
|
|
2018
|
|
Term
|
|
rate
|
Complete Business Solutions_3
|
$
|
-
|
$
|
80,994
|
|
Note was issued on April 13, 2018 and due on March 9, 2019
|
|
33.30%
|
Green Capital Funding_2
|
|
-
|
|
89
|
|
Note was issued on October 1, 2018 and due on February 27, 2019
|
|
31.50%
|
Unique Funding Solutions_2
|
|
2,000
|
|
9,000
|
|
Note was issued on October 12, 2018 and due on January 17, 2019
|
|
28.60%
|
Green Note Capital Partner
|
|
-
|
|
18,278
|
|
Note was issued on October 22, 2018 and due on February 22, 2019
|
|
28.60%
|
Queen Funding LLC
|
|
-
|
|
17,083
|
|
Note was issued on November 29, 2018 and due on March 13, 2019
|
|
31.50%
|
Green Capital Funding_3
|
|
-
|
|
69,113
|
|
Note was issued on December 20, 2018 and due on May 15, 2019
|
|
31.50%
|
YES LENDER LLC
|
|
25,500
|
|
-
|
|
October 17, 2019 and due on March 31, 2020
|
|
30%
|
Complete Business Solutions_8
|
|
52,171
|
|
-
|
|
December 24, 2010 and due on June 09, 2020
|
|
26.00%
|
Nicolas Arvelo
|
|
5,000
|
|
-
|
|
Note was issued on November 20, 2019 and due on May 20, 2020
|
|
12.00%
|
Martin Mendoza Diaz
|
|
5,000
|
|
-
|
|
Note was issued on November 20, 2019 and due on May 20, 2020
|
|
12.00%
|
Martus
|
|
99,399
|
|
-
|
|
Note is due on January 3, 2022
|
|
5.00%
|
Swisspeers AG
|
|
78,623
|
|
-
|
|
Note is due on October 4, 2022
|
|
7.00%
|
Total
|
|
267,693
|
|
194,557
|
|
|
|
|
Less: Current portion of loans payable
|
|
89,671
|
|
194,557
|
|
|
|
|
Long-term loans payable
|
$
|
178,022
|
$
|
-
|
|
|
|
|
Loans payable related parties at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
|
Interest
|
|
|
2019
|
|
2018
|
|
Term
|
|
rate
|
Alonso Van Der Biest
|
$
|
80,200
|
$
|
80,200
|
|
Note was issued on June 12, 2015 and due on June 11, 2019
|
|
16.50%
|
Alvaro Quintana
|
|
10,587
|
|
10,587
|
|
Note was issue on September 30, 2016 and due on September 29, 2019
|
|
0%
|
49% of Shareholder of Swisslink
|
|
1,588,261
|
|
-
|
|
Note is due on demand
|
|
0%
|
49% of Shareholder of Swisslink
|
|
206,660
|
|
-
|
|
Note is due on demand
|
|
5%
|
Total
|
|
1,885,708
|
|
90,787
|
|
|
|
|
Less: Current portion of loans payable
|
|
1,885,708
|
|
90,787
|
|
|
|
|
Long-term loans payable
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2019 and 2018, the Company borrowed from third parties $424,960 and $796,864 and repaid the principal amount of $527,239 and $830,265, respectively.
During the year ended December 31, 2019 and 2018, the Company recorded interest expense of $207,660 and $392,075, respectively.
F-15
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 8 – OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Accrued liabilities
|
$
|
2,700
|
$
|
361,779
|
Credit card
|
|
4,987
|
|
14,647
|
Accrued interest
|
|
365,345
|
|
4,905
|
Salary payable - management
|
|
268,231
|
|
55,431
|
Employee benefit
|
|
192,288
|
|
-
|
Other current liabilities
|
|
14,933
|
|
-
|
|
$
|
848,484
|
$
|
436,762
|
|
|
|
|
|
NOTE 9 - CONVERTIBLE LOANS
At December 31, 2019 and 2018, convertible loans consisted of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Promissory notes – Issued in fiscal year 2018, with variable conversion features
|
$
|
-
|
$
|
221901
|
Promissory notes – Issued in fiscal year 2019, with variable conversion features
|
|
1,908,750
|
|
-
|
Total convertible notes payable
|
|
1,908,750
|
|
221,901
|
Less: Unamortized debt discount
|
|
(646,211)
|
|
(158,696)
|
Total convertible notes
|
|
1,262,539
|
|
63,205
|
|
|
|
|
|
Less: current portion of convertible notes
|
|
1,251,097
|
|
63,205
|
Long-term convertible notes
|
$
|
11,442
|
$
|
-
|
During the year ended December 31, 2019 and 2018, the Company recorded interest expense of $506,649 and $4,906 and recognized amortization of discount, included in interest expense, of $1,921,734 and $55,054, respectively.
Notes in Default
Certain convertible notes held by the company were in default. During the period ended December 31, 2019, the Company did not maintain the covenant requiring the Company to be current with all financial filings. As a result of the breach, the company recorded a penalty of $8,151 as principal amount.
Conversion
During the year ended December 31, 2019, the Company converted notes with principal amounts and accrued interest of $33,750 into 1,169,723 shares of common stock. The corresponding derivative liability at the date of conversion of $430,495 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 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.
F-16
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 9 - CONVERTIBLE LOANS (CONTINUED)
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 to $12,250 and the Company received cash of $201,500.
Promissory Notes - Issued in fiscal year 2019
During the year ended December 31, 2019, the Company issued a total of $2,544,250 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 0% 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 661,216 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 110% to 150% depending on the redemption date provided that no redemption is allowed after the 180th day. Likewise, the notes include original issue discount and financing costs totaling $278,000 and the Company received cash of $2,266,250.
Derivative liabilities
The Company determined that the conversion option in the note 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 and warrants that became convertible for the year ended December 31, 2019 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 year ended December 31, 2019 amounted to $4,916,471. $1,313,350 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $3,603,121 was recognized as a “day 1” derivative loss.
F-17
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 9 - CONVERTIBLE LOANS (CONTINUED)
Warrants
A summary of activity during the year ended December 31, 2019 follows:
|
Warrants Outstanding
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
Outstanding, December 31, 2018
|
-
|
$
|
-
|
Granted
|
92,000
|
|
3
|
Reset
|
1,115,038
|
|
-
|
Cashless Exercised
|
(839,695)
|
|
-
|
Forfeited/canceled
|
-
|
|
-
|
Outstanding, December 31, 2019
|
367,343
|
$
|
0.48
|
|
|
|
|
The reset feature of warrants associated with the convertible note was effective at the time that a separate convertible note with lower exercise price was issued. As a result of the reset features for warrant, the warrants increased by 1,115,038 and the total warrants exercisable into 1,145,038 shares of common stock at $0.0655 per share. We accounted for the issuance of the warrants as liability and recognize the derivative liability (Note 10).
The following table summarizes information relating to outstanding and exercisable warrants as of December 31, 2019:
Warrants Outstanding
|
|
Warrants Exercisable
|
Number of
Shares
|
|
Weighted Average
Remaining
Contractual life
(in years)
|
|
Weighted
Average
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
367,343
|
|
4.05
|
$
|
0.48
|
|
367,343
|
$
|
0.48
|
The intrinsic value of the warrants as of December 31, 2019 is $0.
NOTE 10 – DERIVATIVE LIABILITY
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 December 31, 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 year ended December 31, 2019 and 2018, the estimated fair values of the liabilities measured on a recurring basis are as follows:
F-18
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 10 – DERIVATIVE LIABILITY (CONTINUED)
|
|
Year Ended
|
|
Year Ended
|
|
|
December31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Expected term
|
|
0.03 - 5.00 years
|
|
0.37 - 1.00 years
|
Expected average volatility
|
|
4% - 639%
|
|
405% - 528%
|
Expected dividend yield
|
|
-
|
|
-
|
Risk-free interest rate
|
|
1.44% - 2.57%
|
|
2.24 - 2.71%
|
The following table summarizes the changes in the derivative liabilities during the year ended December 31, 2019 and 2018:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
|
Balance - December 31, 2017
|
$
|
-
|
|
|
|
Addition of new derivatives recognized as debt discounts
|
|
201,500
|
Addition of new derivatives recognized as loss on derivatives
|
|
695,093
|
Gain on change in fair value of the derivative
|
|
893,474
|
Balance - December 31, 2018
|
$
|
1,790,067
|
|
|
|
Addition of new derivatives recognized as debt discounts
|
|
1,313,350
|
Addition of new derivatives recognized as loss on derivatives
|
|
3,603,121
|
Settled on issuance of common stock
|
|
(471,066)
|
Gain on change in fair value of the derivative
|
|
(1,491,338)
|
Balance - December 31, 2019
|
$
|
4,744,134
|
|
|
|
The following table summarizes the change in fair value of derivative liability included in the income statement for the year ended December 31, 2019 and 2018, respectively.
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Addition of new derivatives recognized as loss on derivatives
|
$
|
3,603,121
|
$
|
695,093
|
(Gain) loss on change in fair value of the derivative
|
|
(1,491,338)
|
|
893,474
|
|
$
|
2,111,783
|
$
|
1,588,567
|
|
|
|
|
|
NOTE 11 – SHAREHOLDERS’ EQUITY
The Company’s authorized capital consists of 100,000,000 shares of common stock with a par value of $0.001 per share as of December 31, 2019 and 2018.
On August 7, 2018, our board of directors and a majority of our shareholders approved an amendment to our Articles of Incorporation for the purpose of decreasing our authorized common stock to 100,000,000 shares, par value $0.001 per share, and cancelling our authorized preferred stock.
Common Stock
On June 25, 2018, pursuant to the Membership Interest Purchase Agreement (see Note 1), the Company issued 13,751,875 shares of common stock to the members of Etelix.com USA LLC in exchange for the Etelix.com USA LLC membership interest. As a result of the reverse acquisition accounting, these shares issued to the former members of Etelix.com USA LLC are treated as being outstanding from the date of issuance of the Etelix.com USA LLC membership.
F-19
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 11 – SHAREHOLDERS’ EQUITY (CONTINUED)
During the year ended December 31, 2019, the Company issued 2,985,941 shares of common stock as follows;
661,216 shares in conjunction with convertible notes.
811,490 shares for cashless exercised warrant
1,169,723 shares for conversion of debt of $33,750 (see Note 9)
343,512 shares for acquisition of SwissLink
During the year ended December 31, 2018, the Company issued 95,051 shares as follows,
75,000 shares valued at $150,000 for the legal services related to the acquisition of Etelix USA LLC.
20,051 shares valued at $37,500 for the consulting services.
As of December 31, 2019 and 2018, 18,008,591 and 15,022,650 shares of common stock were issued and outstanding, respectively.
NOTE 12 – PROVISION FOR INCOME TAXES
The Company provides for income taxes under ASC 740, “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax basis of assets and liabilities and the tax rates in effect when these differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
The components of the Company’s deferred tax asset and reconciliation of income taxes computed at the statutory rate to the income tax amount recorded as of December 31, 2019 and 2018, are as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Net Operating loss carryforward
|
$
|
4,378,894
|
$
|
1,078,821
|
Effective tax rate
|
|
21%
|
|
21%
|
Deferred tax asset
|
|
919,568
|
|
226,552
|
Effect of change in the statutory rate
|
|
-
|
|
-
|
Less: valuation allowance
|
|
(919,568)
|
|
(226,552)
|
Net deferred tax asset
|
$
|
-
|
$
|
-
|
As of December 31, 2019, the Company has approximately $4,379,000 of net operating losses (“NOL”) generated to December 31, 2019 carried forward to offset taxable income in future years which expire commencing in fiscal 2037. NOLs generated in tax years prior to December 31, 2017, can be carryforward for twenty years, whereas NOLs generated after December 31, 2017 can be carryforward indefinitely. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets relating to NOLs for every period because it is more likely than not that all of the deferred tax assets will not be realized.
Utilization of the NOL carry forwards may be subject to an annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of the NOL carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
F-20
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 12 – PROVISION FOR INCOME TAXES (CONTINUED)
Tax returns for the years ended 2012 through 2019 are subject to review by the tax authorities.
NOTE 13 - RELATED PARTY TRANSACTIONS
Due from related party
During the year ended December 31, 2019, the Company loaned $129,387 to a related party and collected $73,947.
As of December 31, 2019 and 2018, the Company had due from related parties of $316,860 and $258,020, respectively. The loans are unsecured, non-interest bearing and due on demand.
Due to related parties
During the year ended December 31, 2019 and 2018, the Company borrowed $46,438 and $800 from CEO of the Company and repaid $38,400 and $850, respectively.
As of December 31, 2019 and 2018, the Company had due to related parties of $34,631 and $23,193, respectively. The loans are unsecured, non-interest bearing and due on demand.
Debt forgiveness
During the year ended December 31, 2019 and 2018, the Company recorded debt forgiveness of $406,080 and $45,200 as additional paid in capital.
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 year ended December 31, 2019 and 2018, the Company recorded management fees of $334,000 and $69,000 and paid $126,200 and $13,569, respectively. As at December 31, 2019 and 2018, the Company recorded and accrued management salaries of $268.231 and $55,431, respectively.
F-21
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 14 – 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 year ended December 31, 2019 and 2018, the Company incurred $7,200 and $6,158, respectively.
The Company leases facilities which the term is 12 months. For the year ended December 31, 2019, the Company incurred $19,900.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to December 31, 2019 and through the date that these financials were made available, the Company had the following subsequent events:
On January 15, 2020, we entered into a Securities Purchase Agreement (“SPA”) with M2B Funding Corp. a Florida Corporation (“Purchaser”), pursuant to which we issued and sold to the Purchaser a series of convertible promissory notes, in the aggregate principal amount of $366,667 (the “Notes”) executed in several tranches as follow: January 15 $13,889; January 21 $33,333; January 28 $22,222; January 30 $28,000; February 04 $33,333; February 12 $94,444; February 14 $16,667; February 19 $27,778; February 24 $44,444 and February 25 $55,556.
The maturity dates for the Notes are twelve months after the issuance dates and the Notes bear interest at the rate of 12% per annum. All principal and accrued interest on the Notes are convertible into shares of our common stock at the election of the Purchaser at any time at a conversion price equal to 40% multiplied by the lowest Trading Price (representing a 60% Discount) for the Common Stock during the (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
We have the right to prepay the Notes at any time prior to 180 days following the closing date, which prepayment must include all outstanding principal, accrued and unpaid interest and other amounts as indicated in the Notes.
The Notes contains customary default events which, if triggered and not timely cured, will result in default interest and penalties.
On February 11, 2020, we entered into an amendment (the “Amendment”) to the Note with Purchaser. Purchaser agreed to waive all existing events of default under the Note with respect to the reservation of shares under the Note in exchange for (i) the reservation of 5,000,000 shares of common stock under the note pursuant to an irrevocable instruction agreement with our transfer agent, (ii) an additional reservation of 5,000,000 shares of our common stock on or before February 25, 2020, (iii) an additional reservation of 5,000,000 shares of our common stock on or before March 17, 2020, and (iv) cash payments of $100,000 on or before March 6, 2020 and subsequent payments of no less than $50,000 on or before the 6th of each month thereafter until the Note is satisfied in its entirety.
On March 02, 2020, we entered into a Securities Purchase Agreement (“SPA”) with M2B Funding Corp. a Florida Corporation (“Purchaser”), pursuant to which we issued and sold to the Purchaser a convertible promissory note, executed on March 02, 2020 in the principal amount of $233,333 (the “Note”).
The maturity date for the Note is March 02, 2021; and the Note bears interest at the rate of 12% per annum. All principal and accrued interest on the Note is convertible into shares of our common stock at the election of the Purchaser at any time at a conversion price equal to 40% multiplied by the lowest Trading Price (representing a 60% Discount) for the Common Stock during the (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date
We have the right to prepay the Note at any time prior to 180 days following the closing date, which prepayment must include all outstanding principal, accrued and unpaid interest and other amounts as indicated in the Note.
The Note contains customary default events which, if triggered and not timely cured, will result in default interest and penalties.
F-22
iQSTEL INC
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
On March 05, 2020, we entered into a Securities Purchase Agreement (“SPA”) with M2B Funding Corp. a Florida Corporation (“Purchaser”), pursuant to which we issued and sold to the Purchaser a convertible promissory note, executed on March 05, 2020 in the principal amount of $211,111 (the “Note”).
The maturity date for the Note is March 05, 2021; and the Note bears interest at the rate of 12% per annum. All principal and accrued interest on the Note is convertible into shares of our common stock at the election of the Purchaser at any time at a conversion price equal to 40% multiplied by the lowest Trading Price (representing a 60% Discount) for the Common Stock during the (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date
We have the right to prepay the Note at any time prior to 180 days following the closing date, which prepayment must include all outstanding principal, accrued and unpaid interest and other amounts as indicated in the Note.
The Note contains customary default events which, if triggered and not timely cured, will result in default interest and penalties.
F-23