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

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iQSTEL INC

Consolidated Statements of Operations

(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)

For the Three Months Ended March 31, 2019 and 2018

(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

March 31, 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.

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 March 31, 2019 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 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 March 31, 2019, the consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Etelix.com USA, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. Prior to June 25, 2018, the financial statements presented are those of Etelix.

Use of Estimates

The preparation of 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.

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 March 31, 2019 the Company had no valuation allowance for doubtful accounts for the Company’s accounts receivable and recorded no bad debt expense.

Concentrations of Credit Risk

The Company’s financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents and related party payables that it will likely incur in the near future. The Company places its cash and cash equivalents with financial institutions of high creditworthiness. At times, its cash and cash equivalents with a particular financial institution may exceed any applicable government insurance limits.

During the three months ended March 31, 2019 and 2018, six customers represented 83% of our revenues and nineteen customers represented 83% of our revenues, respectively.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 March 31, 2019, the Company had a net loss of $1,025,578. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

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

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

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 4 – PREPAID AND OTHER CURRENT ASSETS

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

NOTE 5 – FIXED ASSETS, NET

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

Depreciation expense for the three months ended March 31, 2019 and 2018 amounted to $12,557 and $18,861, respectively.

NOTE 6 –LOANS PAYABLE

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

During the three months ended March 31, 2019 and 2018, the Company borrowed $0 and $133,000, respectively, and repaid the principal amount of $95,142 and $121,416 and interest expense of $44,600 and $57,054, respectively.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 7 – OTHER CURRENT LIABILITIES

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

NOTE 8 - CONVERTIBLE LOANS

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

During the three months ended March 31, 2019 and 2018, the Company recognized amortization of discount, included in interest expense, of $151,542 and $0, respectively.

During the three months ended March 31, 2019, the Company repaid notes of $113,151 and accrued interest of $60,200.

Promissory Notes - Issued in fiscal year 2018

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

Terms ranging from 9 months to 12 months.  

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

Convertible at the option of the holders at issuance.  

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

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

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 8 - CONVERTIBLE LOANS (CONTINUED)

Promissory Notes - Issued in fiscal year 2019

During the three months ended March 31, 2019, the Company issued a total of $650,500 in notes with the following terms:

Terms ranging from 6 months to 12 months.  

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 254,074 common shares and warrant to purchase up to 62,000 shares of common stock at exercise price of $2.5 per share for 3 years.

Certain notes allow the Company to redeem the notes at rates ranging from 117% to 150% depending on the redemption date provided that no redemption is allowed after the 180th day. Likewise, the notes include financing costs totaling $64,500 and the Company received cash of $586,000.

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 three months ended March 31, 2019 amounted to $1,816,692. $286,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $1,530,692 was recognized as a “day 1” derivative loss.

Warrants

A summary of activity during the three months ended March 31, 2019 follows:

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 8 - CONVERTIBLE LOANS (CONTINUED)

The following table summarizes information relating to outstanding and exercisable warrants as of March 31, 2019:

NOTE 9 - DERIVATIVE LIABILITIES

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

Fair Value Assumptions Used in Accounting for Derivative Liabilities.

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

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of March 31, 2019. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model.

For the three months ended March 31, 2019, the estimated fair values of the liabilities measured on a recurring basis are as follows:

The following table summarizes the changes in the derivative liabilities during the three months ended March 31, 2019:

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 9 - DERIVATIVE LIABILITIES (CONTINUED)

The aggregate loss on derivatives during the three months ended March 31, 2019 and 2018 was as follows;

NOTE 10 – SHAREHOLDERS’ EQUITY

During the three months ended March 31, 2019, the Company issued 254,074 shares in conjunction with convertible notes.

As of March 31, 2019 and December 31, 2018, 15,276,724 and 15,022,650 shares of common stock were issued and outstanding, respectively.

NOTE 11 - RELATED PARTY TRANSACTIONS

Loans payable – related parties

During the three months ended March 31, 2019, the Company repaid interest expense of $3,816.

Due to related parties

During the three months ended March 31, 2019, the Company borrowed $21,438 from CEO of the Company and repaid $21,400. As of March 31, 2019 and December 31, 2018, the Company had due to related parties of $23,231 and $23,193, respectively. The loans are unsecured, non-interest bearing and due on demand.

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iQSTEL INC

Notes to the Unaudited Consolidated Financial Statements

March 31, 2019

NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)

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.

During the three months ended March 31, 2019 and 2018, the Company record management fees of $34,500 and $0 and paid $13,700 and $0, respectively. As at March 31, 2019 and December 31, 2018, the Company accrued management salaries of $76,231 and $55,431, respectively.

NOTE 12 – COMMITMENTS AND CONTIGENCIES

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 a one year term, starting July 1, 2018 and ending June 30, 2019. For the three months ended March 31, 2019 and 2018, the Company incurred $3,600 and $3,600, respectively.

NOTE 13 - SUBSEQUENT EVENTS

Subsequent to March 31, 2019 and through the date that these financials were made available, the Company had the following subsequent events:

On April 1, 2019, the Company entered into a Company Purchase Agreement (the “Purchase Agreement”) with Ralf Kohler (the “Seller”), which agreement provides for the Company’s purchase of 51% of the equity and certain assets of SwissLink Carrier AG (“SwissLink”), a Swiss corporation. The Purchase Agreement is subject to closing conditions, which are presently unfulfilled, which include: (1) The Company’s board of directors approving the transaction; (2) Satisfactory due diligence of SwissLink by the Company and (3) SwissLink has prepared financial statements according to Regulation S-X.

On April 11, 2019, the Company issued a convertible note in the principal amount of $53,000. The convertible note has a term of twelve months, accrues interest at 12% annually and the balance outstanding thereunder is convertible into the Company’s common stock at a price equal to 39% multiplied by the lowest trading price during the previous twenty days ending on the latest complete trading day prior to the conversion date.

On May 02, 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.

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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 subsidiary, Etelix.com USA LLC, 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).

In addition to pursuing the growth and development of the business of our subsidiary, Etelix.com USA LLC, 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 March 31, 2019 was $4,163,203, compared with $2,180,165 for the three months ended March 31, 2018.

These numbers reflect an increase of 90.96% month over month primarily from the growth in traffic carried to higher revenue per minute destinations in Africa as a result of the straightening of our commercial position in the African market, which comes from the excellent commercial activities deployed by our office in Spain. One of our main strategic lines of actions for 2018 and 2019 has been to strengthen the business relationship with our customers in Europe and leverage from there our growth in the African market, with half of the traffic terminated in Africa originating from Europe.

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This new revenue stream form the African routes has been generated by an increase from 1% in year 2017 to 10% in year 2018 of the total traffic managed in our switches, confirming all our previous analysis regarding the potential contribution to the revenues the African market represents. There is still room to grow and we have enough capacity in our telecommunication infrastructure to accommodate more than twice the traffic we handle at the present time.

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

Cost of Revenues

Our total cost of revenues for the three months ended March 31, 2019 increased to $3,727,626, compared with $1,967,159 for the three months ended March 31, 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 $190,507 for the three months ended March 31, 2019 from $123,976 for the three months ended March 31, 2018. The detail by major category is reflected in the table below.

The main reasons for the overall increase in operating expenses in 2019 were: (1) the Professional Fees composed by legal, accounting and other consulting services of $31,377; (2) Legal and Regulatory Expenses of $17,570; and (3) Other expenses in the amount of $28,843 which includes $25,000 on Advertising and Promotion.

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 positive Operating Income for the three months ended March 31, 2019 of $245,070 compared with $89,030 for the three months ended March 31, 2018. These numbers reflect an increase of 175.27% primarily due to an increase of the Gross Margin over Revenues from 9.77% for the three months ended March 31, 2018 to 10.46% in the same period of 2019.

Even though the Operating Expenses increases in absolute value when comparing the three months ended March 31, 2019 to the same period of 2018, those Operating Expenses experimented a reduction in terms of a percentage of Revenue from 5.69% as of March 31, 2018 to 4.58% for the same period of 2019.

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Other Expenses/Other Income

We had other expenses of $1,270,648 for the three months ended March 31, 2019, as compared with other expenses of $69,989 for the same period ended 2018. The increase in other expenses is a result of the change in fair value of derivative liabilities of $1,008,069, and the increase of interest expenses to $265,037 for the three months ended March 31, 2019 compared to $57,054 for the same period ended 2018.

Net Loss

We finished the three months ended March 31, 2019 with a loss of $1,025,578, as compared to a net income of $19,041 during the three months ended March 31, 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 $1,008,069 and (2) an increment in interest expenses of $207,983 year over year.

Liquidity and Capital Resources

As of March 31, 2019, we had total current assets of $2,244,272 and current liabilities of $4,880,047, resulting in a working capital deficit of $2,635,775. This compares with the working capital deficit of $1,597,647 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 $321,149 in the three months ended March 31, 2019 as compared with $66,866 used in operating activities in the three months ended March 31, 2018.

Financing activities provided $387,663 in the three months ended March 31, 2019 compared with $71,384 provided in the three months ended March 31, 2018. Our positive financing cash flow in 2018 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 March 31, 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 March 31, 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.

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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 effective as of March 31, 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 March 31, 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.

During the three months ended March 31, 2019, we issued 254,074 common shares in conjunction with convertible notes.

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

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Item 6. Exhibits

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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 May 15, 2019 on its behalf by the undersigned thereunto duly authorized.

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