iQSTEL Inc - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

[   ]

[   ]  Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to__________

Commission File Number: 000-55984

iQSTEL Inc.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [   ] Yes [X] No

Securities registered pursuant to Section 12(b) of the Act: None

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 16,166,291 common shares as of November 06, 2019

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

iQSTEL INC

Consolidated Balance Sheets

(Unaudited)

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iQSTEL INC

Consolidated Statements of Net Loss and Comprehensive Loss

(Unaudited)

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

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iQSTEL INC

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(Unaudited)

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

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iQSTEL INC

Consolidated Statements of Cash Flows

(Unaudited)

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

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization and Operations

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 150 active interconnection agreements with mobile companies, fix line companies and other wholesale carriers.

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:

$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

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, 2019 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2019 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, 2018 filed with the SEC on April 10, 2019.

Consolidation Policy

For September 30, 2019, 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.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

The preparation of 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.

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, 2019 the Company had no valuation allowance for doubtful accounts for the Company’s accounts receivable and recorded no bad debt expense.

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.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

Revenue Recognition

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

Identify the contract(s) with a customer  

Identify the performance obligations in the contract  

Determine the transaction price.  

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

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

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

Lease

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

Reclassifications

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

Recent Accounting Pronouncements

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

NOTE 3 - GOING CONCERN

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company does not have significant cash, nor does it have an established source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. In addition, as of September 30, 2019, the Company had an accumulated deficit of $7,710,046, and a net loss of $5,026,990 and a net cash used in operating activities of $1,331,051 for the nine months ended September 30, 2019. 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.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

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 - ACQUISTION

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:

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:

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 5 – PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets at September 30, 2019 and December 31, 2018 consist of the following:

NOTE 6 – FIXED ASSETS, NET

Fixed assets, net at September 30, 2019 and December 31, 2018 consist of the following:

Depreciation expense for the nine months ended September 30, 2019 and 2018 amounted to $26,473 and $21,724, respectively.

NOTE 7 –LOANS PAYABLE

Loans payable at September 30, 2019 and December 31, 2018 consist of the following:

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 7 –LOANS PAYABLE (CONTINUED)

During the nine months ended September 30, 2019 and 2018, the Company borrowed $446,824, and $535,071, which includes original issue discount and financing cost of $17,953 and $0, respectively, and repaid the principal amount of $534,651 and $554,682 and interest expense of $154,507 and $262,724, respectively.

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

NOTE 8 – OTHER CURRENT LIABILITIES

Other current liabilities at September 30, 2019 and December 31, 2018 consist of the following:

As of September 30, 2019, other liability consists of long-term employee benefit of $147,890.

NOTE 9 - CONVERTIBLE LOANS

At September 30, 2019 and December 31, 2018, convertible loans consisted of the following:

During the nine months ended September 30, 2019 and 2018, the Company recognized amortization of discount, included in interest expense, of $1,255,815 and $13,447, respectively.

During the nine months ended September 30, 2019 and 2018, the Company repaid notes of $660,401 and $0 and accrued interest including the prepayment penalty of $295,00 and $0, respectively.

Conversion

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

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 9 - CONVERTIBLE LOANS

Promissory Notes - Issued in fiscal year 2018

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

Terms ranging from 9 months to 12 months.  

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

Convertible at the option of the holders at issuance.  

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

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

Promissory Notes - Issued in fiscal year 2019

During the nine months ended September 30, 2019, the Company issued a total of $2,294,250 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 50% discount) lowest trading prices of the Company’s shares during various periods prior to conversion.  

The convertible notes were also provided with a total of 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 $236,000 and the Company received cash of $2,058,250.

Derivative liabilities

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

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

The Company valued the conversion features of convertible notes and warrant using the Black Scholes valuation model. The fair value of the derivative liability for all the note and warrant that became convertible for the nine months ended September 30, 2019 amounted to $4,067,649. $1,005,350 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $3,062,299 was recognized as a “day 1” derivative loss.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 9 - CONVERTIBLE LOANS (CONTINUED)

Warrants

A summary of activity during the nine months ended September 30, 2019 follows:

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

NOTE 10 - DERIVATIVE LIABILITIES

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

Fair Value Assumptions Used in Accounting for Derivative Liabilities.

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

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

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

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 10 - DERIVATIVE LIABILITIES (CONTINUED)

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

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

NOTE 11 – SHAREHOLDERS’ EQUITY

During the nine months ended September 30, 2019, the Company issued 1,081,063 shares of common stock as follows;

661,216 shares in conjunction with convertible notes.  

76,335 shares for conversion of debt of $5,000 (see Note 9)  

343,512 shares for acquisition of SwissLink 

As of September 30, 2019 and December 31, 2018, 16,103,713 and 15,022,650 shares of common stock were issued and outstanding, respectively.

During the nine months ended September 30, 2019, $10,000 was contributed to the Company and a shareholder loan of $406,080 was forgiven and the Company recorded them as additional paid in capital.

NOTE 12 - RELATED PARTY TRANSACTIONS

Loans payable – related parties

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)

During the nine months ended September 30, 2019, the Company repaid interest expense of $9,900.

Due from related parties

During the nine months ended September 30, 2019, the Company loaned $24,500 to a related party. As of September 30, 2019 and December 31, 2018, the Company had due from related parties of $285,920 and $258,020, respectively. The loans are unsecured, non-interest bearing and due on demand.

Due to related parties

During the nine months ended September 30, 2019, the Company borrowed $46,438 from CEO of the Company and repaid $38,400. As of September 30, 2019 and December 31, 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.

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 nine months ended September 30, 2019 and 2018, the Company recorded management fees of $226,000 and $34,500 and paid $116,200 and $4,500, respectively. As at September 30, 2019 and December 31, 2018, the Company accrued management salaries of $165,231 and $55,431, respectively.

NOTE 13 – 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 nine months ended September 30, 2019 and 2018, the Company incurred $10,800 and $6,158, respectively.

The Company leases facilities which the term is 12 months. For the nine months ended September 30, 2019 and 2018, the Company incurred $17,600 and $0, respectively.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

September 30, 2019

NOTE 14 - SUBSEQUENT EVENTS

Subsequent to September 30, 2019 and through the date that these financials were made available, the Company had the following subsequent events:

On November 12, 2019 Company received the qualification of its Tier 2 Offering Statement for the sale of 4,000,000 common stocks, which will be sold at a fixed price, which will be within a range of $3 to $1 per share, established at qualification for the duration of the offering pursuant to Rule 253(b).

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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

We are a technology company offering a wide array of services to the telecommunications and internet industry. We currently offer, through our wholly owned subsidiaries, Etelix.com USA LLC and SwissLink Carrier AG, international long-distance voice services for telecommunications operators (ILD Wholesale), and submarine fiber optic network capacity for Internet (4G and 5G).

Etelix.com USA LLC is based in the city of Miami, Florida; founded in 2008 and holder of an International Telecommunications Carrier 214-license issued by the Federal Telecommunications Commission (FCC).

Swisslink Carrier AG is a Swiss Telecom Operator offering International Long Distance voice services for telecom companies such as PSTNs, Mobile Operators, MVNOs and Long Distance Operators, focused in the European traffic.

In addition to pursuing the growth and development of the business of our subsidiaries, we plan to expand our services to the retail market offering international long-distance voice communications to corporate, small business and individuals (ILD retail), supported in part on our current infrastructure.

We are also exploring opportunities in new business areas and markets, such as satellite communications; mobile services under the figure of a Mobile Virtual Network Operator (MVNO); Internet of Things (IoT) solutions and Data Centers. We expect that these new ventures will be developed either through mergers or acquisitions, or through strategic partnerships.

In addition, we are allocating resources to develop a Blockchain Payment Solution to facilitate the settlement of exchanged traffic among international carriers based on smart contracts.

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, 2019 was $4,172,547, compared with $3,794,359 for the three months ended September 30, 2018. Our total revenue reported for the nine months ended September 30, 2019 was $12,589,109, compared with $9,675,194 for the nine months ended September 30, 2018.

These numbers reflect an increase of 130.12% month over month primarily from the continuity of our commercial strategy put in place since the beginning of year 2018.

If net revenues continue growing at a similar rates for the next three months, we believe that the company will reach a total revenue of approximately $17 million by December 31, 2019.

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Cost of Revenues

Our total cost of revenues for the three months ended September 30, 2019 increased to $3,929,137, compared with $3,531,877 for the three months ended September 30, 2018. Our total cost of revenues for the nine months ended September 30, 2019 increased to $12,001,850, compared with $8,722,576 for the nine months ended September 30, 2018.

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 terminated in vendor’s network.

The increase results from a higher volume of minutes of African destinations, which rates are on average 9 times higher compared to the average rates of the rest of the World. This behavior in the costs shows a logical correlation with the behavior of the revenue commented above.

Operating Expenses

Operating expenses increased to $492,782 for the three months ended September 30, 2019 from $195,884 for the three months ended September 30, 2018. Operating expenses increased to $1,024,842 for the nine months ended September 30, 2019 from $654,609 for the nine months ended September 30, 2018. The detail by major category for the nine month ended September 30, 2019 and 2018 is reflected in the table below.

The main reasons for the overall increase in operating expenses in 2019 were: (1) the Salaries, Wages and Benefits of $245,077; (2) Public cost of $27,521; (3) Professional Fees of $67,452 and (4) Advertising and Promotion of $50,000.

The increment in Salaries, Wages and Benefits is the result of the adjustment done in the employment agreements of Leandro Iglesias, Alvaro Quintana and Juan Carlos Lopez starting on May 2, 2019. Year salaries were adjusted to Leandro Iglesias and Juan Carlos Lopez from $54,000 to $168,000 and $120,000 respectively; and to Alvaro Quintana from $30,000 to $144,000.

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Professional fess correspond to audit, accounting, legal and technology professional services as detailed below.

Legal and Consulting expenses for the nine months period ended September 30, 2019 includes all legal services related to the process of the acquisition of SwissLink Carrier AG of . This includes a complete due diligence of the acquired party and the preparation of all transaction documents and public filings.

Item Public Cost corresponds to all expenses and fees related to the EDGAR agent for all filings; Transfer Agent and Dynamic Web Content Services related to our stock made available in our Web site.

Item Advertising corresponds to the third-party consultancy that will be responsible for the design and implementation of a Social Media communication strategy oriented to build and enhance our companies and brand’s image. This consultancy is planned to begin once the Offering Statement be qualified by the Securities and Exchange Commission.

All other items were stable from one year to the other, which allows us to affirm that the cost structure of the company is under control and supervision.

Operating Income

The Company showed negative Operating Income for the three months ended September 30, 2019 of $249,372 compared with a positive result of $66,598 for the three months ended September 30, 2018. The Company showed negative Operating Income for the nine months ended September 30, 2019 of $437,583 compared with a positive result of $298,009 for the nine months ended September 30, 2018.

The increase of the numbers for the nine month period above is primarily due to the costs associated to the operation of the public entity (iQSTEL, Inc.) estimated in the amount of $577,269. When we look at the results of our operating entities Etelix.com USA, LLC and SwissLink Carrier AG, the Operating Income for the nine months ended September 30, 2019 is $139,686.

It is important to remark that iQSTEL is in its first year of operations since the acquisition of Etelix.com USA, LLC; and during this period the company has incurred in high costs related to its reorganization, the preparation of the offering statement and due diligence activities related to the execution of the merge and acquisitions strategy.

Other Expenses/Other Income

We had other expenses of $3,268,651 for the three months ended September 30, 2019, as compared with other expenses of $570,193 for the same period ended 2018. We had other expenses of $4,590,259 for the nine months ended September 30, 2019, as compared with other expenses of $730,729 for the same period ended 2018. The increase in other expenses is a result of the change in fair value of derivative liabilities of $2,353,235,671, and the increase of interest expenses to $1,785,629 for the nine months ended September 30, 2019 compared to $277,324 for the same period ended 2018.

Net Loss

We finished the three months ended September 30, 2019 with a loss of $3,532,839, as compared to a loss of $503,595 during the three months ended September 30, 2018. We finished the nine months ended September 30, 2019 with a loss of $5,042,658, as compared to loss of $432,720 during the nine months ended September 30, 2018.

The reasons for specific components are discussed above. Overall, these are the main concepts impacting the net result: (1) a loss in the change in fair value of derivative liabilities of $2,353,235; (2) an increment in interest expenses of $1,508,305 year over year and (3) the Operating Expenses of the public entity of $577,269.

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Liquidity and Capital Resources

As of September 30, 2019, we had total current assets of $3,425,780 and current liabilities of $10,855,360, resulting in a working capital deficit of $7,429,580. This compares with the working capital deficit of $1,882,754 at December 31, 2018. This increase in working capital deficit, as discussed in more detail below, is primarily the result of the increment in the derivative liabilities.

Our operating activities used $1,331,051 in the nine months ended September 30, 2019 as compared with $227,062 used in operating activities in the nine months ended September 30, 2018.

Investing activities provided $215,016 in the nine months ended September 30, 2019 compared with and use of fundos of $426 in the nine months ended September 30, 2018.

Financing activities provided $1,327,978 in the nine months ended September 30, 2019 compared with $222,289 provided in the nine months ended September 30, 2018. Our positive financing cash flow in 2019 was largely the result of the proceeds from loans, capital contributions and proceeds from convertible notes.

Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We 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 three month period ended September 30, 2019.

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, 2019, 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.

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Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of September 30, 2019.

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, 2019, 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.

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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 10, 2019.

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.

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

Item 6. Exhibits

**Provided herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 18, 2019 on its behalf by the undersigned thereunto duly authorized.

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