iQSTEL Inc 10-Q for FY2020 Q3
iQSTEL Inc (IQST)
About this 10-Q
iQSTEL Inc filed this 10-Q on November 13, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.29M
- up 218.6% from $4.17M a year earlier
- Net loss
- $944K
- compared with a net loss of $3.53M a year earlier
TABLE OF CONTENTS Page PART I – FINANCIAL INFORMATION Item 1:Financial Statements3Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations26Item 3:Quantitative and Qualitative Disclosures About Market Risk29Item 4:Controls and Procedures29 PART II – OTHER INFORMATION Item 1:Legal Proceedings 30Item 1A:Risk Factors30Item 2:Unregistered Sales of Equity Securities and Use of Proceeds30Item 3:Defaults Upon Senior Securities30Item 4:Mine Safety Disclosures30Item 5:Other Information30Item 6:Exhibits31 2 Item 1. Financial Statements iQSTEL INC Consolidated Balance Sheets (Unaudited) September 30, December 31, 2020 2019 ASSETS Current Assets Cash and cash equivalents647,334270,503 Accounts receivable, net1,961,6082,759,164 Due from related parties290,284316,860 Prepaid and other current assets69,42791,970Total Current Assets2,968,6533,438,497 Property and equipment, net354,466287,970Intangible asset21,875-Goodwill1,537,7421,455,960Deferred tax assets441,519420,519 TOTAL ASSETS 5,324,255 5,602,946 LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable1,802,9252,291,921 Due to related parties94,61634,631 Loans payable - net of discount of $474 and $01,369,58089,671 Loans payable - related parties1,975,3421,885,708 Current portion of convertible notes - net of discount of $416,316 and $597,6541,279,0111,251,096 Other current liabilities761,212848,484 Derivative liabilities658,2034,744,134Total Current Liabilities7,940,88911,145,645 Convertible notes - net of discount of $2,556 and $48,5582,44411,442 Loans payable269,112178,021 Employee benefits, non-current155,08038,253TOTAL LIABILITIES8,367,52511,373,361 Stockholders' Deficit Preferred stock: 1,200,000 authorized; $0.001 par value - no shares issued and outstanding-- Common stock: 300,000,000 authorized; $0.001 par valueThe accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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.
[The Company has been engaged in the business of telecommunication services as a wholesale carrier of voice, SMS and data for other telecom companies around the World with more than 150 active interconnection agreements with mobile companies, fix line companies and other wholesale carriers. Acquisition On April 15, 2020, we 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 Short Messages (SMS) between USA and Mexico. COVID-19 A novel strain of coronavirus (COVID-19) was first identified in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served. The Company has instituted some and may take additional temporary precautionary measures intended to help ensure the well-being of its employees and minimize business disruption. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s results of operations and financial position at September 30, 2020. The full extent of the future impacts of COVID-19 on the Company’s operations is uncertain. A prolonged outbreak could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of the Company to collect accounts receivable and the ability of the Company to continue to provide high quality services to its clients. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of November 13 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited interim financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2020 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on April 15, 2020. Consolidation Policy The consolidated financial statements of the Company include the accounts of the Company and its owned subsidiaries, Etelix.com USA, LLC, SwissLink Carrier AG, ITSBCHAIN, LLC, QGLOBAL SMS, LLC and loT Labs, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. 8 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“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. Foreign Currency Translation and Re-measurement The Company translates its foreign operations to U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The Company’s, Etelix’s, ITSBCHAIN, LLC’s, QGLOBAL SMS, LLC’s and loT Labs LLC’s functional currency and reporting currency is the U.S. dollar, SwissLink’s functional currency is the Swiss Franc (“CHF”). SwissLink translates their records into U.S. dollars 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 stockholders’ equity. September 30, December 31, 2020 2019Spot CHF: USD exchange rate1.0849 1.0333Average CHF: USD exchange rate1.0528 1.0122All values are in US Dollars. 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 September 30, 2020 and December 31, 2019, the Company had no valuation allowance for doubtful accounts for the Company’s accounts receivable and recorded no bad debt expense for the nine months ended September 30, 2020 and 2019. 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; however, management believes that there is no unusual risk present, as the Company places its cash with financial institutions which management considers being of high quality. During the nine months ended September 30, 2020, fourteen customers represented 80% of our consolidated revenues. During the nine months ended September 30, 2019, six customers represented 79% of our consolidated revenues. 39% of the revenue comes from customers under prepayment conditions which means there is no credit or bad debt risk on that portion of the customers portfolio. 9 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition The Company recognizes revenue from telecommunication services in accordance with ASC 606, “Revenue from Contracts with Customers.” 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. Management considers persuasive evidence of a sales arrangement to be a written interconnection agreement. The Company’s payment terms vary by clients. Lease The Company leases office space for corporate and network monitoring activities and to house telecommunications equipment. In accordance with ASC 842, “Leases”, we determine if an arrangement is a lease at inception. 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. 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. 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. 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, the Company incurred a net loss of $3,501,963 for the nine months ended September 30, 2020 and has negative working capital as of September 30, 2020. 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. 10 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 3 - GOING CONCERN (Continued) 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. NOTE 4 - ACQUISITION On April 15, 2020, we entered into a Company Acquisition Agreement (the “Agreement”) with Francisco Bunt regarding the acquisition of 51% of the shares in loT Labs. The Company’s principal business activity is the sale of Short Messages (SMS) between USA and Mexico. We have agreed to pay a total of $180,000 for the 51% interest in the Company. The consideration shall occur with an installment of $60,000 on the date of the execution of the Agreement, followed by a second payment of $60,000 at closing and a final payment of $60,000 that is set to occur 60 days following the closing date. Under the Agreement, Mr. Bunt has the right to request that any of the aforementioned payments be made in shares of our common stock, which the parties have agreed to value at $2.00 per share. The shares are subject to adjustment after 180 days and up to 360 days after issuance if our stock trades at less than $2.00 per share. The Agreement provides for a right of return to Mr. Bunt of the shares in the Company if we fail to make timely payments. 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: April 15, 2020Fair Value of Consideration: Cash180,000Total Purchase Price180,000All values are in US Dollars. loT Labs has been included in our consolidated results of operations since the acquisition date. The following table summarizes the identifiable assets acquired and liabilities assumed upon acquisition of IoT Labs and the calculation of goodwill: Total purchase price180,000Cash135,781Other current assets953Property and equipment34,075Intangible asset21,875Total identifiable assets192,684Accounts payable(100)Total liabilities assumed(100)Net assets192,584Non-controlling interest94,366Total net assets98,218Goodwill81,782All values are in US Dollars. 11 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 4 – ACQUISITION (Continued) Unaudited combined proforma results of operations for the nine months ended September 30, 2020 and 2019 as though the Company acquired loT Labs on January 1, 2019, are set forth below: Nine Months Ended September 30, 2020 2019Revenues 40,313,358 32,007,532Cost of revenues 39,418,379 31,354,143Gross profit 894,979 653,389 Operating expenses 3,211,867 40,313,358Operating loss (2,316,888) 39,418,379 Other expense (1,044,813) (4,590,259)Net Loss (3,361,701) (5,004,853)All values are in US Dollars. NOTE 5 – PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets at September 30, 2020 and December 31, 2019 consist of the following: September 30, December 31, 2020 2019Advance payment to suppliers 6,600 6,600Other receivable 61,006 78,936Prepaid expenses 1,221 5,834Tax receivable 600 600 69,427 91,970All values are in US Dollars. NOTE 6 – PROPERTY AND EQUIPMENT Property and equipment at September 30, 2020 and December 31, 2019 consist of the following: September 30, December 31, 2020 2019Telecommunication equipment 258,790 249,169Telecommunication software 514,652 436,124Other equipment 46,371 8,497Total property and equipment 819,813 693,790Accumulated depreciation and amortization (465,347) (405,820)Total property and equipment 354,466 287,970All values are in US Dollars. Depreciation expense for the nine months ended September 30, 2020 and 2019 amounted to $49,318 and $26,473, respectively. 12 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 7 –LOANS PAYABLE Loans payable at September 30, 2020 and December 31, 2019 consist of the following: September 30, December 31, Interest 2020 2019 Term rateUnique Funding Solutions_22,000 2,000 Note was issued on October 12, 2018 and due on January 17, 201928.6%YES LENDER LLC- 25,500 October 17, 2019 and due on March 31, 202030.0%Complete Business Solutions_8- 52,170 December 24, 2010 and due on June 09, 202026.0%Nicolas Arvelo5,000 5,000 Note was issued on November 20, 2019 and due on November 20, 202012.0%Martin Mendoza Diaz5,000 5,000 Note was issued on November 20, 2019 and due on November 20, 202012.0%Martus104,363 99,399 Note was issued on October 23, 2018 and due on January 3, 20225.0%Swisspeers AG56,259 78,623 Note was issued on April 8, 2019 and due on October 4, 20227.0%Apollo Management Group, Inc63,158 - Note was issued on March 18, 2020 and due on December 15, 202012.0%Apollo Management Group, Inc 268,421 - Note was issued on March 25, 2020 and due on December 15, 202012.0%Apollo Management Group, Inc 366,316 - Note was issued on April 1, 2020 and due on October 1, 202112.0%Apollo Management Group, Inc 473,684 - Note was issued on April 2, 2020 and due on October 2, 202112.0%Apollo Management Group, Inc 536,842 - Note was issued on April 7, 2020 and due on October 7, 202112.0%Apollo Management Group, Inc 684,211 - Note was issued on April 15, 2020 and due on October 15, 202112.0%Apollo Management Group, Inc 777,095 - Note was issued on April 20, 2020 and due on December 15, 202012.0%Apollo Management Group, Inc 1121,961 - Note was issued on July 1, 2020 and due on December 15, 202012.0%Apollo Management Group, Inc 1221,053 - Note was issued on August 7, 2020 and due on December 15, 202012.0%Labrys Fund490,000 - Note was issued on June 26, 2020 and due on April 1, 202112.0%M2B Funding Corp300,000 - Note was issued on September 1, 2020 and due on September 1, 202112.0%YES LENDER LLC 355,313 - Note was issued on August 3, 2020 and due on January 12, 202126.0%Darlene Covi19108,490 - Note was issued on April 1, 2020 and due on March 31, 20250.0%Total1,639,166 267,692 Less: Unamortized debt discount(474) - Total loans payable1,638,692 267,692 Less: Current portion of loans payable(1,369,580) (89,671) Long-term loans payable269,112 178,021 All values are in US Dollars. 13 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 7 –LOANS PAYABLE (Continued) Loans payable to related parties at September 30, 2020 and December 31, 2019 consist of the following: September 30, December 31, 2020 2019Alonso Van Der Biest 80,200 80,200Alvaro Quintana 10,587 10,58749% of Shareholder of SwissLink 1,667,575 1,588,26149% of Shareholder of SwissLink 216,980 206,660Total 1,975,342 1,885,708Less: Current portion of loans payable 1,975,342 1,885,708Long-term loans payable - -All values are in US Dollars. During the nine months ended September 30, 2020 and 2019, the Company borrowed amounts from third parties totaling $933,280 and $446,824, which includes original issue discount and financing costs of $34,316 and $17,953, respectively, and repaid the principal amount of $607,447 and $534,651, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded interest expense of $180,843 and $154,507 and recognized amortization of discount, included in interest expense, of $33,842 and $17,953, respectively. NOTE 8 – OTHER CURRENT LIABILITIES Other current liabilities at September 30, 2020 and December 31, 2019 consist of the following: September 30, December 31, 2020 2019Accrued liabilities 10,938 2,700Credit card liabilities - 4,987Accrued interest 271,560 365,345Salary payable - management 352,131 268,231Employee benefits 111,355 192,288Other current liabilities 15,228 14,933 761,212 848,484All values are in US Dollars. NOTE 9 - CONVERTIBLE NOTES At September 30, 2020 and December 31, 2019, convertible notes consist of the following: September 30, December 31, 2020 2019Promissory notes – Issued in fiscal year 2019, with variable conversion features 5,000 1,908,750Promissory notes – Issued in fiscal year 2020, with variable conversion features 1,695,327 -Total convertible notes payable 1,700,327 1,908,750Less: Unamortized debt discount (418,872) (646,212)Total convertible notes 1,281,455 1,262,538 Less: current portion of convertible notes 1,279,011 1,251,096Long-term convertible notes 2,444 11,442All values are in US Dollars. During the nine months ended September 30, 2020 and 2019, the Company recorded interest expense of $689,996 and $349,027 and recognized amortization of discount, included in interest expense, of $1,463,426 and $1,255,815, respectively. During the nine months ended September 30, 2020 and 2019, the Company repaid notes of $492,190 and $660,401 and accrued interest including prepayment penalty of $552,631 and $295,000. 14 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 9 - CONVERTIBLE NOTES (Continued) Conversion During the nine months ended September 30, 2020, the Company converted notes with principal amounts of $681,118 and accrued interest of $86,313 into 35,813,477 shares of common stock. The corresponding derivative liability at the date of conversion of $3,742,060 was settled through additional paid in capital. Settlement On June 10, 2020, the Company settled a convertible note with accrued interest of $64,230 with a total of 650,000 share issuances. The Company issued 200,000 shares in June, 225,000 shares in July and 503,571 shares in August, which included 278,571 true-up shares. As a result, the Company recognized a loss on settlement of debt of $24,699. On June 26, 2020, the Company issued a loan payable of $700,000 to Labrys Fund to settle the previously-outstanding convertible notes with accrued interest of $986,340. As a result, the Company recognized a gain on settlement of debt of $286,340 (Note 7). On July 22, 2020, the Company settled a convertible note with accrued interest of $ 64,363 and an original common stock purchase warrant to purchase 20,000 shares of common stock with a total of 650,000 share issuances. During the period ended September 30, 2020, the Company issued 1,038,375 shares which included 388,375 true-up shares. As a result, the Company recognized a loss on settlement of debt of $9,886. On September 1, 2020, the Company entered into a Multipurpose agreement and issued a new note which a principal balance of $1,045,327 to replace the 15 notes issued from January 2020 to May 2020 which an aggregate principal amount was $985,556 and an aggregate accrued interest was $59,771. The Company also issued another promissory note of $300,000 (Note 7). As a result, the Company recognized a loss on settlement of debt of $300,000. 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. Promissory Notes - Issued in fiscal year 2020 During the nine months ended September 30, 2020, the Company issued a total of $2,708,771 in notes with the following terms: ·Terms 12 months. ·Annual interest rates 5% or 12%. ·Convertible at the option of the holders 90 or 180 days from issuance. ·Conversion prices are typically based on the discounted (25% or 60% discount) lowest trading prices of the Company’s shares during 30 trading day periods prior to conversion. Certain note has a capped conversion price of $0.025. 15 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 9 - CONVERTIBLE NOTES (Continued) Notes allow the Company to redeem the notes at a range from 120% to 125% provided that no redemption is allowed after the 180^th^ or 185^th^ day. Likewise, the notes include original issue discount and financing costs totaling $229,444 and the Company received cash of $1,420,000. Certain convertible notes were also provided with a total of 6,500,000 warrants. Derivative liabilities The Company determined that the conversion option in the notes met the definition of liabilities in accordance with ASC Topic No. 815 - 40, “Derivatives and Hedging - Contracts in Entity’s Own Stock.” The Company will bifurcate the embedded conversion options in the notes once the notes become convertible and account for them as derivative liabilities. The Company valued the conversion features of convertible notes and warrants using the Black Scholes valuation model. The fair value of the derivative liability for all the note and warrants that became convertible for the nine months ended September 30, 2020, amounted to $2,047,278. $1,006,642 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $1,040,636 was recognized as a “day 1” derivative loss. The fair value of the derivative liability for all the notes and warrants 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. Warrants A summary of activity during the nine months ended September 30, 2020 follows: Warrants Outstanding Weighted Average Shares Exercise PriceOutstanding, December 31, 2019 367,343 0.480Granted 6,500,000 -Reset 10,813,001 0.012Cashless Exercised (4,097,010) -Forfeited/canceled (7,083,334) -Outstanding, September 30, 2020 6,500,000 0.024All values are in US Dollars. The reset feature of warrants associated with the convertible notes was effective at the time that a separate convertible note with lower exercise price was issued. As a result of the reset features for warrants, the warrants increased by 10,813,001 at $0.0012 per share. We accounted for the issuance of the warrants as a liability and recognized the derivative liability. The following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2020: Warrants Outstanding Warrants ExercisableNumber of Shares Weighted Average Remaining Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Contractual life (in years) 6,500,000 5.70 0.024 6,500,000 0.024All values are in US Dollars. The intrinsic value of the warrants as of September 30, 2020 is $303,250. 16 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 10 - DERIVATIVE LIABILITIES The Company analyzed the conversion options for derivative accounting consideration under ASC 815, “Derivatives and Hedging,” and determined that the instrument should be classified as a liability since the conversion options become 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 September 30, 2020 and 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. The estimated fair values of the liabilities measured on a recurring basis are as follows: Nine Months Ended Year Ended September 30, December31, 2020 2019Expected term 0.02 - 6.00 years 0.03 - 5.00 yearsExpected average volatility 74% - 550% 4% - 639%Expected dividend yield - -Risk-free interest rate 0.05% - 2.56% 1.44% - 2.57% The following table summarizes the changes in the derivative liabilities during the nine months ended September 30, 2020: **Fair Value Measurements Using Significant Observable Inputs (Level 3)**Balance - December 31, 2019 4,744,134 Addition of new derivatives recognized as debt discounts 1,006,642Addition of new derivatives recognized as loss on derivatives 1,040,636Settled on issuance of common stock (3,742,060)Change in fair value of the derivative (2,391,149)Balance - September 30, 2020 658,203All values are in US Dollars. The aggregate (gain) loss on derivatives during the nine months ended September 30, 2020 and 2019 was as follows: Nine Months Ended September 30, 2020 2019Addition of new derivatives recognized as loss on derivatives 1,040,636 3,062,299(Gain) loss on change in fair value of the derivative (2,391,149) (260,593) (1,350,513) 2,801,706All values are in US Dollars. 17 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements September 30, 2020 NOTE 11 – STOCKHOLDERS’ EQUITY]()
The Company’s authorized capital consists of 300,000,000 shares of common stock with a par value of $0.001 per share.
NOTE 12 - RELATED PARTY TRANSACTIONS
On March 3, 2020, Oscar Brito resigned as a member of our Board of Directors. There was no known disagreement with Mr. Brito on any matter relating to our operations, policies or practices. The Company provided the severance package as follows;
As of August 7, 2019,having completed all conditions under the Purchase Agreement, the Company acquired SwissLink located in Switzerland.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
[Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Overview iQSTEL Inc. (the “Company”) (OTC Pink: IQST) is a leading-edge 21st Century Enhanced Telecommunications Service Provider offering a wide range of cloud-based enhanced services to the Tier-1 and Tier-2 carriers, enterprise market, as well as the retail market. iQSTEL offers international and domestic VoIP services, SMS exchange for A2P and P2P, Internet of Things (IoT) applications, 4G & 5G international infrastructure connectivity, as well as blockchain-based payment and phone number mobility platforms to international and domestic Tier-1 carrier for VoIP, SMS, and Data. Our principal place of business is located at 300 Aragon Avenue, Suite 375 Coral Gables, FL 33134. General information about us can be found at www.iqstel.com. The information contained on or connected to our website is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered part of this or any other report filed with the SEC. Results of Operations Revenues Our total revenue reported for the three months ended September 30, 2020 was $13,291,698, compared with $4,172,547 for the three months ended September 30, 2019. These numbers reflect an increase of 218.55% quarter over quarter on our consolidated revenues. Our total revenue reported for the nine months ended September 30, 2020 was $29,439,196, compared with $12,589,109 for the nine months ended September 30, 2019. When looking at the numbers by subsidiary, we have the following breakout for the nine months ended September 30, 2020: Subsidiary Revenue Nine Months Ended September 30, 2020Etelix.com USA, LLC10,705,409SwissLink Carrier AG3,917,085QGlobal LLC277,577IoT Labs LLC14,539,125 29,439,196All values are in US Dollars. 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. 24 Cost of Revenues Our total cost of revenues for the three months ended September 30, 2020 increased to $13,158,685, compared with $3,929,137 for the three months ended September 30, 2019. Our total cost of revenues for the nine months ended September 30, 2020 increased to $28,735,016, compared with $12,001,850 for the nine months ended September 30, 2019. Our cost of revenues consists of direct charges from vendors that the Company incurs to deliver services to its customers. These costs primarily consist of usage charges for calls and SMS terminated in vendor’s network. 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. Operating Expenses Operating expenses increased to $958,787 for the three months ended September 30, 2020 from $492,782 for the three months ended September 30, 2019. Operating expenses increased to $3,161,330 for the nine months ended September 30, 2020 from $1,024,842 for the nine months ended September 30, 2019. The detail by major category for the nine months ended September 30, 2020 and 2019 is reflected in the table below. Nine Months Ended September 30, 2020 2019Salaries, Wages and Benefits845,258393,966Technology34,016138,326Professional Fees268,552328,604Legal & Regulatory3,225-Bad debts92,875-Travel & Events1,38612,884Public Cost84,26527,521Advertising926,27950,000Bank Services and Fees75,46315,035Depreciation and Amortization49,31826,473Office, Facility and Other162,71532,033 Sub Total2,543,3521,024,842 Stock-based compensation617,978-Total Operating Expense3,161,3301,024,842All values are in US Dollars. The main reasons for the overall increase in operating expenses for the nine months ended September 30, 2020 compared to the same period of 2019 is that in 2020 we are reflecting the costs corresponding to 5 operating subsidiaries (Etelix.com, SwissLink, ItsBchain, QGlobal and IoT Labs) plus the corporate costs corresponding to iQSTEL itself; while in 2019 operating expenses corresponded only to Etelix, a portion corresponding to SwissLink (this subsidiary is consolidated since August 15, 2019) and corporate costs of iQSTEL; as shown in the table below. Nine Months Ended September 30, 2020 2019 DifferenceiQSTEL2,242,336577,2691,665,067Etelix259,844334,937(75,093)SwissLink502,609112,636389,973ItsBchain52,684-52,684QGlobal52,608-52,608IoT Labs51,249-51,249 3,161,330 1,024,842 2,136,488All values are in US Dollars. The most significant difference is generated by iQSTEL which is due to the following: (1) the Salaries, Wages and Benefits as a result of the new employment agreements with the Management Team members valid from May 2019, where the aggregated monthly salaries varied from $11,500 to $36,000, and the implementation starting on January 2020 of a compensation for Board Members of 3,000 monthly; (2) Advertising corresponds to the third-party consultancy for the design and implementation of a Social Media communication strategy oriented to build and enhance our companies and brand image; and (3) Stock-based compensation. 25 Operating Income The Company showed negative Operating Income for the three months ended September 30, 2020 of $825,774 compared with a negative result of $249,372 for the three months ended September 30, 2019. The Company showed negative Operating Income for the nine months ended September 30, 2020 of $2,457,150 compared with a negative result of $437,583 for the nine months ended September 30, 2019. The increase of the numbers for the nine month period above is primarily due to the costs associated with the operation of the public entity (iQSTEL, Inc.) estimated in the amount of $2,242,336. Other Expenses/Other Income We had other expenses of $144,451 for the three months ended September 30, 2020, as compared with other expenses of $3,268,651 for the same period ended 2019. We had other expenses of $1,044,813 for the nine months ended September 30, 2020, as compared with other expenses of $4,590,259 for the same period ended 2019. The decrease in other expenses is a result of the positive change in fair value of derivative liabilities. Net Income We finished the three months ended September 30, 2020 with a net loss of $970,225, as compared to a loss of $3,517,171 during the three months ended September 30, 2019. We finished the nine months ended September 30, 2020 with a loss of $3,501,963, as compared to a loss of $5,026,990 during the nine months ended September 30, 2019. The reasons for specific components are discussed above. Overall, these are the main concepts impacting the net result: (1) an increment in interest expenses of $582,478 year over year to total $2,368,107; and (2) the Operating Expenses of the public entity of $2,242,336. Liquidity and Capital Resources As of September 30, 2020, we had total current assets of $2,968,653 and current liabilities of $7,940,889, resulting in a working capital deficit of $4,972,236. This compares with the working capital deficit of $7,707,148 at December 31, 2019. This decrease in working capital deficit, as discussed in more detail below, is primarily the result of the increase of $376,831 in the cash position and a reduction of $4,085,931 in the derivative liabilities. Our operating activities used $1,526,513 in the nine months ended September 30, 2020 as compared with $1,331,051 used in operating activities in the nine months ended September 30, 2019. Investing activities used $79,324 for the nine months ended September 30, 2020. Uses of funds on investing activities were the purchase of property and equipment for value of $78,306 and net payment of loans between related parties of $17,187. Financing activities provided $1,968,632 in the nine months ended September 30, 2020 compared with $1,327,978 provided in the nine months ended September 30, 2019. Our positive financing cash flow in 2020 was largely the result of the net proceeds from loans $325,833, net proceeds from convertible notes $927,810; and proceed from the subscription of new common stocks under our Regulation A offering $715,004. 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 Regulation A for the sale of up to 24,000,000 common shares. 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 nine month period ended September 30, 2020. 26 Critical Accounting Polices In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that 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 critical accounting policies are disclosed in Note 2 of our audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission. Off Balance Sheet Arrangements As of September 30, 2020, there were no off-balance sheet arrangements. Recent Accounting Pronouncements The recent accounting pronouncements that are material to our financial statements are disclosed in Note 2 of our consolidated audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission and in Note 2 of our unaudited consolidated financial statements included herein. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K. Item 4. Controls and Procedures Disclosure Controls and Procedures - Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were ineffective as of September 30, 2020. 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 believe that our financial statements presented in this quarterly report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein. 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 Control over Financial Reporting - There were no changes in our internal control over financial reporting during the three month period ended September 30, 2020, 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. 27 PART II – OTHER INFORMATION Item 1. Legal Proceedings We are not a party to any material pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us. Item 1A: Risk Factors See Risk Factors contained in our Form 10-K filed with the SEC on April 15, 2020. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933. During the nine months ended September 30, 2019, we issued: ·8,937,500 shares issued for cash of $715,004 ·6,275,456 shares issued for settlement of debt of $365,678 ·5,867,600 shares issued for services valued at $567,978 ·50,000 shares issued for forbearance of debt of $2,900 ·35,813,477 shares issued for conversion of debt of $767,431 ·3,233,586 shares issued for cashless exercised warrant These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock. Item 3. Defaults upon Senior Securities None Item 4. Mine Safety Disclosures N/A Item 5. Other Information None 28 Item 6. Exhibits Exhibit Number Description of Exhibit 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101** The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Extensible Business Reporting Language (XBRL). **Provided herewith 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 13, 2020 on its behalf by the undersigned thereunto duly authorized. IQSTEL INC. /s/Leandro IglesiasLeandro IglesiasPrincipal Executive Officer /s/ Alvaro Quintana CardonaAlvaro Quintana CardonaPrincipal Financial and Accounting Officer 30]()