iQSTEL Inc 10-Q

Item 1. Financial Statements iQSTEL INC Consolidated Balance Sheets (Unaudited) June 30, December 31, 2020 2019 ASSETS Current Assets Cash and cash equivalents $ 779,553 $ 270,503 Accounts receivable, net 2,706,733 2,759,164 Due from related parties 287,884 316,860 Prepaid and other current assets 79,132 91,970 Total Current Assets 3,853,302 3,438,497 Property and equipment, net 351,411 287,970 Intangible asset 21,875 - Goodwill 1,537,742 1,455,960 Deferred tax assets 429,757 420,519 TOTAL ASSETS $ 6,194,087 $ 5,602,946 LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable 2,280,050 2,291,921 Due to related parties 154,616 34,631 Loans payable - net of discount of $9,702 and $0 1,205,288 89,671 Loans payable - related parties 1,925,141 1,885,708 Current portion of convertible notes - net of discount of $457,454 and $597,654 1,115,852 1,251,096 Other current liabilities 675,225 848,484 Derivative liabilities 1,159,797 4,744,134 Total Current Liabilities 8,515,969 11,145,645 Convertible notes - net of discount of $2,929 and $48,558 2,071 11,442 Loans payable 270,611 178,021 Employee benefits, non-current 150,949 38,253 TOTAL LIABILITIES 8,939,600 11,373,361 Stockholders' Deficit Preferred stock: 1,200,000 authorized; $0.0001 par value - no shares issued and outstanding - - Common stock: 300,000,000 authorized; $0.001 par value 68,295,300 and 18,008,591 shares issued and outstanding, respectively 68,295 18,008 Additional paid in capital 8,686,103 3,240,528 Accumulated deficit (10,729,728) (8,125,257) Accumulated other comprehensive income (17,311) (181) Deficit attributed to stockholders of iQSTEL Inc. (1,992,641) (4,866,902) Deficit attributable to noncontrolling interests (752,872) (903,513) Total stockholders' Deficit (2,745,513) (5,770,415) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 6,194,087 $ 5,602,946 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 iQSTEL INC Consolidated Statements of Operations ( Unaudited ) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues $ 11,130,086 $ 4,253,359 $ 16,147,498 $ 8,416,562 Cost of revenue 10,397,778 4,345,087 15,576,331 8,072,713 Gross profit 732,308 (91,728) 571,167 343,849 Operating expenses General and administration 905,016 341,553 2,202,543 532,060 Total operating expenses 905,016 341,553 2,202,543 532,060 Operating loss (172,708) (433,281) (1,631,376) (188,211) Other income (expense) Other income 8,815 - 24,732 2,600 Other expenses (3,002) (233) (8,057) (375) Interest expense (653,141) (511,125) (1,454,515) (776,162) Change in fair value of derivative liabilities 1,914,271 460,398 254,248 (547,671) Gain on settlement of debt 283,230 - 283,230 - Total other income (expense) 1,550,173 (50,960) (900,362) (1,321,608) Net Income (loss) before provision for income taxes 1,377,465 (484,241) (2,531,738) (1,509,819) Income taxes - - - - Net income (loss) 1,377,465 (484,241) (2,531,738) (1,509,819) Less: Net income attributable to noncontrolling interests 91,446 - 72,733 - Net income (loss) attributed to stockholders of iQSTEL Inc. $ 1,286,019 $ (484,241) $ (2,604,471) $ (1,509,819) Comprehensive income (loss) Net income (loss) $ 1,377,465 $ (484,241) $ (2,531,738) $ (1,509,819) Foreign currency adjustment (30,310) - (33,588) - Total comprehensive income (loss) 1,347,155 $ (484,241) $ (2,565,326) $ (1,509,819) Less: Comprehensive income attributable to noncontrolling interests 76,594 - 56,275 - Net comprehensive income (loss) attributed to stockholders of iQSTEL Inc. $ 1,270,561 $ (484,241) $ (2,621,601) $ (1,509,819) Basic income (loss) per common share $ 0.02 $ (0.03) $ (0.06) $ (0.1) Diluted loss per common share $ (0.01) $ (0.03) $ (0.06) $ (0.1) Weighted average number of common shares outstanding - Basic 57,019,993 15,357,689 43,928,994 15,199,517 Weighted average number of common shares outstanding - Diluted 68,551,209 15,357,689 43,928,994 15,199,517 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 iQSTEL INC Consolidated Statements of Changes in Stockholders’ Equity (Deficit) For the Three and Six Months Ended June 30, 2020 and 2019 ( Unaudited ) Common Stock Additional Accumulated Non Total Paid in Accumulated Comprehensive Controlling Shareholders' Shares Amount Capital Deficit Loss Total Interest Deficit Balance - December 31, 2019 18,008,591 $ 18,008 $ 3,240,528 $ (8,125,257) $ (181) $ (4,866,902) $ (903,513) $ (5,770,415) Common stock issued for settlement of debt 4,308,510 4,309 198,191 - - 202,500 - 202,500 Common stock issued for services 4,173,000 4,173 445,861 - - 450,034 - 450,034 Common stock issued for forbearance of debt 50,000 50 2,850 - - 2,900 - 2,900 Common stock issued for conversion of debt 17,208,350 17,208 256,760 - - 273,968 - 273,968 Common stock issued for exercised cashless warrant 2,235,697 2,235 (2,235) - - - - - Common stock to be issued for acquisition of Itsbchain LLC - - 50,000 - - 50,000 - 50,000 Resolution of derivative liabilities - - 2,567,348 - - 2,567,348 - 2,567,348 Foreign currency translation adjustments - - - - (1,672) (1,672) (1,606) (3,278) Net loss - - - (3,890,490) - (3,890,490) (18,713) (3,909,203) Balance - March 31, 2020 45,984,148 $ 45,983 $ 6,759,303 $ (12,015,747) $ (1,853) $ (5,212,314) $ (923,832) $ (6,136,146) Common stock issued for cash 4,500,000 4,500 355,500 - - 360,000 - 360,000 Common stock issued for conversion of debt 16,613,263 16,614 410,918 - - 427,532 - 427,532 Common stock issued for exercised cashless warrant 997,889 998 (998) - - - - - Common stock issued for settlement of debt 200,000 200 67,140 - - 67,340 - 67,340 Resolution of derivative liabilities - - 1,094,240 - - 1,094,240 - 1,094,240 Acquisition of loT Labs - - - - - - 94,366 94,366 Foreign currency translation adjustments - - - - (15,458) (15,458) (14,852) (30,310) Net income - - - 1,286,019 - 1,286,019 91,446 1,377,465 Balance - June 30, 2020 68,295,300 $ 68,295 $ 8,686,103 $ (10,729,728) $ (17,311) $ (1,992,641) $ (752,872) $ (2,745,513) Common Stock Additional Total Paid in Accumulated Stockholders' Shares Amount Capital Deficit Total Balance - December 31, 2018 15,022,650 $ 15,023 $ 1,054,718 $ (2,667,388) $ (1,597,647) Common stock issued in conjunction with convertible notes 254,074 254 249,746 - 250,000 Capital contribution - - 10,000 - 10,000 Net loss - - - (1,025,578) (1,025,578) Balance - March 31, 2019 15,276,724 $ 15,277 $ 1,314,464 $ (3,692,966) $ (2,363,225) Common stock issued for conversion of debt 76,335 76 4,924 - 5,000 Resolution of derivative liabilities - - 181,326 - 181,326 Common stock issued in conjunction with convertible notes 122,857 123 244,577 - 244,700 Net loss - - - (484,241) (484,241) Balance - June 30, 2019 15,475,916 $ 15,476 $ 1,745,291 $ (4,177,207) $ (2,416,440) The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 iQSTEL INC Consolidated Statements of Cash Flows ( Unaudited ) Six Months Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,531,738) $ (1,509,819) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 500,034 - Write-off of due from related party 43,375 - Depreciation and amortization 31,140 19,281 Amortization of debt discount 725,650 541,894 Change in fair value of derivative liabilities (254,248) 547,671 Gain on settlement of debt (283,230) - Prepayment and default penalty 239,271 - Changes in operating assets and liabilities: Accounts receivable 71,727 228,929 Accounts receivable - related party - (10,701) Other current assets 14,930 (91,576) Accounts payable (30,404) (351,267) Other current liabilities 347,186 (42,149) Net cash used in operating activities (1,126,307) (667,737) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiary, net of cash acquired 75,781 - Purchase of property and equipment (58,832) - Payment of loan receivable - related party (14,787) (10,000) Collection from due from related parties - related party 388 10,000 Net cash provided by (used in) investing activities 2,550 - CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft - (82) Proceeds from loans payable 731,560 64,400 Repayments of loans payable (247,855) (171,302) Proceeds from loans payable - related parties 182 46,438 Repayment of loans payable - related parties (197) (32,400) Contribution - 10,000 Common stock issued 360,000 - Proceeds from convertible notes 1,260,000 1,048,500 Repayment of convertible notes (477,190) (221,901) Net cash provided by financing activities 1,626,500 743,653 Effect of exchange rate changes on cash 6,307 - Net change in cash and cash equivalents 509,050 75,916 Cash and cash equivalents, beginning of period 270,503 4,570 Cash and cash equivalents, end of period $ 779,553 $ 80,486 Supplemental cash flow information Cash paid for interest $ 353,517 $ 208,557 Cash paid for taxes $ - $ - Non-cash transactions: Derivative liabilities recognized as debt discount $ 331,499 $ 403,800 Common stock issued in conjunction with convertible notes $ - $ 494,700 Common stock issued for conversion of debt $ 701,500 $ 5,000 Common stock issued for cashless warrant exercised $ 3,233 $ - Resolution of derivative liabilities $ 3,661,588 $ - Common stock issued for settlement of debt $ 269,840 $ - Amounts due for acquisition of IOT Labs $ 120,000 $ - Common stock issued for forbearance of debt $ 2,900 $ - Replacement of convertible notes to note payable $ 700,000 $ - The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 1 -ORGANIZATION AND DESCRIPTION OF BUSINESS Organization and Operations iQSTEL Inc. (“iQSTEL”, “we”, “us”, or the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011 under the name of PureSnax International, Inc. and changed its name to iQSTEL Inc. on August 7, 2018. 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 June 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 August 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 June 30, 2020 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 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 June 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. June 30, December 31, 2020 2019 Spot CHF: USD exchange rate $ 1.0560 $ 1.0333 Average CHF: USD exchange rate $ 1.0379 $ 1.0122 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 June 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 six months ended June 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 six months ended June 30, 2020, twelve customers represented 83% of our consolidated revenues. During the six months ended June 30, 2019, eight customers represented 81% of our consolidated revenues. 9 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 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 $2,531,738 for the six months ended June 30, 2020 and has negative working capital as of June 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 June 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, 2020 Fair Value of Consideration: Cash $ 180,000 Total Purchase Price $ 180,000 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 price $ 180,000 Cash 135,781 Other current assets 953 Property and equipment 34,075 Intangible asset 21,875 Total identifiable assets 192,684 Accounts payable (100) Total liabilities assumed (100) Net assets 192,584 Non-controlling interest 94,366 Total net assets 98,218 Goodwill $ 81,782 11 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 4 - ACQUISITION Unaudited combined proforma results of operations for the six months ended June 30, 2020 and 2019 as though the Company acquired loT Labs on January 1, 2019, are set forth below: Six Months Ended June 30, 2020 2019 Revenues $ 27,021,660 $ 18,326,320 Cost of revenues 26,259,694 17,807,759 Gross profit 761,966 518,561 Operating expenses 2,253,079 563,347 Operating loss (1,491,113) (44,786) Other expense (900,362) (1,321,608) Net Loss $ (2,391,475) $ (1,366,394) NOTE 5 – PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets at June 30, 2020 and December 31, 2019 consist of the following: June 30, December 31, 2020 2019 Advance payment to suppliers $ 6,600 $ 6,600 Other receivable 50,824 78,936 Prepaid expenses 21,108 5,834 Tax receivable 600 600 $ 79,132 $ 91,970 NOTE 6 – PROPERTY AND EQUIPMENT Property and equipment at June 30, 2020 and December 31, 2019 consist of the following: June 30, December 31, 2020 2019 Telecommunication equipment $ 258,246 $ 249,169 Telecommunication software 496,822 436,124 Other equipment 42,758 8,497 Total property and equipment 797,826 693,790 Accumulated depreciation and amortization (446,415) (405,820) Total property and equipment $ 351,411 $ 287,970 Depreciation expense for the six months ended June 30, 2020 and 2019 amounted to $31,140 and $19,281, respectively. 12 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 7 –LOANS PAYABLE Loans payable at June 30, 2020 and December 31, 2019 consist of the following: June 30, December 31, Interest 2020 2019 Term rate Unique Funding Solutions_2 $ 2,000 $ 2,000 Note was issued on October 12, 2018 and due on January 17, 2019 28.60% YES LENDER LLC - 25,500 October 17, 2019 and due on March 31, 2020 30.00% Complete Business Solutions_8 9,170 52,170 December 24, 2010 and due on August 20, 2020 26.00% Nicolas Arvelo 5,000 5,000 Note was issued on November 20, 2019 and due on November 20, 2020 12.00% Martin Mendoza Diaz 5,000 5,000 Note was issued on November 20, 2019 and due on November 20, 2020 12.00% Martus 101,582 99,399 Note was issued on October 23, 2018 and due on January 3, 2022 5.00% Swisspeers AG 63,429 78,623 Note was issued on April 8, 2019 and due on October 4, 2022 7.00% Apollo Management Group, Inc 63,158 - Note was issued on March 18, 2020 and due on August 18, 2020 12.00% Apollo Management Group, Inc 2 68,421 - Note was issued on March 25, 2020 and due on August 25, 2020 12.00% Apollo Management Group, Inc 3 66,316 - Note was issued on April 1, 2020 and due on October 1, 2021 12.00% Apollo Management Group, Inc 4 73,684 - Note was issued on April 2, 2020 and due on October 2, 2021 12.00% Apollo Management Group, Inc 5 36,842 - Note was issued on April 7, 2020 and due on October 7, 2021 12.00% Apollo Management Group, Inc 6 84,211 - Note was issued on April 15, 2020 and due on October 15, 2021 12.00% Apollo Management Group, Inc 7 77,095 - Note was issued on April 20, 2020 and due on May 20, 2021 12.00% Labrys Fund 700,000 - Note was issued on June 26, 2020 and due on April 1, 2021 12.00% YES LENDER LLC 2 24,093 - Note was issued on January 8, 2020 and due on August 12, 2020 29.00% Darlene Covi19 105,600 - Note was issued on April 1, 2020 and due on March 31, 2025 0.00% Total 1,485,601 267,692 Less: Unamortized debt discount (9,702) - Total loans payable 1,475,899 267,692 Less: Current portion of loans payable (1,205,288) (89,671) Long-term loans payable $ 270,611 $ 178,021 Loans payable to related parties at June 30, 2020 and December 31, 2019 consist of the following: June 30, December 31, 2020 2019 Alonso Van Der Biest $ 80,200 $ 80,200 Alvaro Quintana 10,587 10,587 49% of Shareholder of Swisslink 1,623,154 1,588,261 49% of Shareholder of Swisslink 211,200 206,660 Total 1,925,141 1,885,708 Less: Current portion of loans payable 1,925,141 1,885,708 Long-term loans payable $ - $ - 13 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 7 –LOANS PAYABLE (CONTINUED) During the six months ended June 30, 2020 and 2019, the Company borrowed amounts from third parties totaling $760,139 and $82,353, which includes original issue discount and financing costs of $28,579 and $17,953, respectively, and repaid the principal amount of $247,855 and $171,302, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded interest expense of $85,172 and $90,096 and recognized amortization of discount, included in interest expense, of $18,877 and $17,953, respectively. NOTE 8 – OTHER CURRENT LIABILITIES Other current liabilities at June 30, 2020 and December 31, 2019 consist of the following: June 30, December 31, 2020 2019 Accrued liabilities $ 14,284 $ 2,700 Credit card liabilities - 4,987 Accrued interest 276,921 365,345 Salary payable - management 255,431 268,231 Employee benefits 106,648 192,288 Other current liabilities 21,941 14,933 $ 675,225 $ 848,484 NOTE 9 - CONVERTIBLE NOTES At June 30, 2020 and December 31, 2019, convertible notes consist of the following: June 30, December 31, 2020 2019 Promissory notes – Issued in fiscal year 2019, with variable conversion features $ 142,750 $ 1,908,750 Promissory notes – Issued in fiscal year 2020, with variable conversion features 1,435,556 - Total convertible notes payable 1,578,306 1,908,750 Less: Unamortized debt discount (460,383) (646,212) Total convertible notes 1,117,923 1,262,538 Less: current portion of convertible notes 1,115,852 1,251,096 Long-term convertible notes $ 2,071 $ 11,442 During the six months ended June 30, 2020 and 2019, the Company recorded interest expense of $643,693 and $144,172 and recognized amortization of discount, included in interest expense, of $706,773 and $523,941, respectively. During the six months ended June 30, 2020 and 2019, the Company repaid notes of $477,190 and $221,901 and accrued interest including prepayment penalty of $138,415 and $120,006. Conversion During the six months ended June 30, 2020, the Company converted notes with principal amounts of $616,118 and accrued interest of $85,383 into 33,821,613 shares of common stock. The corresponding derivative liability at the date of conversion of $3,661,588 was settled through additional paid in capital. 14 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 9 - CONVERTIBLE NOTES (CONTINUED) Settlement 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 June 10, 2020, the Company settled a convertible note with accrued interest of $64,230 with a total of 650,000 share issuances. As of June 30, 2020, the Company issued 200,000 shares and shall issue 225,000 shares each in July and August 2020. As a result, the Company recognized a loss on settlement of debt of $3,110. 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 six months ended June 30, 2020, the Company issued a total of $1,449,444 in notes with the following terms: · Terms 12 months. · Annual interest rates 5% or 12%. · Convertible at the option of the holders 180 days from issuance. · Conversion prices are typically based on the discounted (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. Notes allow the Company to redeem the notes at 125% provided that no redemption is allowed after the 180th day. Likewise, the notes include original issue discount and financing costs totaling $189,444 and the Company received cash of $1,260,000. Certain convertible notes were also provided with a total of 4,500,000 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 six months ended June 30, 2020, amounted to $426,390. $331,499 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $94,891 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. 15 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 9 - CONVERTIBLE NOTES (CONTINUED) Warrants A summary of activity during the six months ended June 30, 2020 follows: Warrants Outstanding Weighted Average Shares Exercise Price Outstanding, December 31, 2019 367,343 $ 0.48 Granted 4,500,000 - Reset 10,813,001 0.012 Cashless Exercised (7,013,677) - Forfeited/canceled - - Outstanding, June 30, 2020 8,666,667 $ 0.006 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 June 30, 2020: Warrants Outstanding Warrants Exercisable Number of Shares Weighted Average Remaining Contractual life (in years) Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price 8,666,667 0.79 $ 0.006 8,666,667 $ 0.006 The intrinsic value of the warrants as of June 30, 2020 is $667,600. 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 June 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. 16 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 10 - DERIVATIVE LIABILITIES (CONTINUED) The estimated fair values of the liabilities measured on a recurring basis are as follows: Six Months Ended Year Ended June 30, December31, 2020 2019 Expected term 0.06 - 6.00 years 0.03 - 5.00 years Expected average volatility 139% - 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 six months ended June 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 331,499 Addition of new derivatives recognized as loss on derivatives 94,891 Settled on issuance of common stock (3,661,588) Change in fair value of the derivative (349,139) Balance - June 30, 2020 $ 1,159,797 The aggregate (gain) loss on derivatives during the six months ended June 30, 2020 and 2019 was as follows: Six Months Ended June 30, 2020 2019 Addition of new derivatives recognized as loss on derivatives $ 94,891 $ 2,180,190 Change in fair value of derivatives (349,139) (1,632,519) $ (254,248) $ 547,671 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. During the six months ended June 30, 2020, the Company issued 50,286,709 shares of common stock, valued at fair market value on issuance as follows; · 4,500,000 shares issued for cash of $360,000 · 4,508,510 shares issued for settlement of debt of $269,840 · 4,173,000 shares issued for services valued at $450,034 · 50,000 shares issued for forbearance of debt of $2,900 · 33,821,613 shares issued for conversion of debt of $701,500 · 3,233,586 shares issued for cashless exercised warrant As of June 30, 2020 and December 31, 2019, 68,295,300 and 18,008,591 shares of common stock were issued and outstanding, respectively. 17 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 12 - RELATED PARTY TRANSACTIONS Due from related party During the six months ended June 30, 2020, the Company loaned $14,787 to related parties who are a shareholder and a former director, collected $388 and wrote off amounts totaling $43,375. As of June 30, 2020 and December 31, 2019, the Company had due from related parties of $287,884 and $316,860, respectively. The amounts are unsecured, non-interest bearing and due on demand. Due to related parties During the six months ended June 30, 2020, the Company borrowed $182 from the CFO of the Company and repaid $197 to the CEO and CFO. As of June 30, 2020, the Company owed $120,000 to Francisco Bunt who owns 49% of loT Labs (Note 4). As of June 30, 2020 and December 31, 2019, the Company had amounts due to related parties of $154,616 and $34,631, respectively. The amounts 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. 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; · 2,000,000 shares of common stock valued at $300,000 · Additional 173,000 shares in order to apply the anti-dilution protection, valued at $10,034 · Forgiveness of amounts due to the Company totaling $43,375 · Cash payment of $15,000. We also appointed Mr. Brito as an advisor to our Board of Directors and agreed to pay him $5,000 per month for such services. 18 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED) On March 16, 2020, our Board of Directors adopted a Director Compensation Plan that applies to members of our Board of Directors. Below are the features of the plan: · All Directors shall receive reimbursement for reasonable travel expenses incurred to attend Board and committee meetings. · All Directors shall be compensated $3,000 monthly for their service as Directors. · In lieu of the cash compensation set forth above, each Director may elect to receive shares of the Corporation's Common Stock equal to the total cash compensation divided by the average market value of the Company's Common Stock during the last 10 trading days and applying a discount of 10%. · Directors Alvaro Cardona and Leandro Iglesias shall each receive 1,000,000 shares of the Company’s Common Stock, valued at $70,000 each, for their service as members of the Board of Directors for the period from June 2018 to December 2019. During the six months ended June 30, 2020 and 2019, the Company recorded management fees of $252,000 and $118,000 and paid $62,300 and $62,200, respectively. During the six months ended June 30, 2020, the Company settled accrued salary – management of $202,500 and issued 4,308,510 shares. As at June 30, 2020 and December 31, 2019, the Company accrued management salaries of $255,431 and $268,231, respectively. NOTE 13 – COMMITMENTS AND CONTIGENCIES Leases and Long-term Contracts The Company has not entered into any long-term leases, contracts or commitments. Lease The Company leases facilities which the term is 12 months. For the six months ended June 30, 2020 and 2019, the Company incurred $16,100 and $0, respectively. 19 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 14 – EARNING PER SHARE Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options, unvested restricted shares, and outstanding warrants that are computed using the treasury stock method. Antidilutive stock awards consist of stock options that would have been antidilutive in the application of the treasury stock method. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Numerator: Net Income (Loss) $ 1,377,465 $ (484,241) $ (2,531,738) $ (1,509,819) Change in fair value of derivatives (1,914,271) - - - Interest on convertible debt 111,518 - - - Net Loss - diluted $ (425,288) $ (484,241) $ (2,531,738) $ (1,509,819) Denominator: Weighted average common shares outstanding 57,019,993 15,357,689 43,928,994 15,199,517 Effect of dilutive shares 11,531,215 - - - Diluted 68,551,208 15,357,689 43,928,994 15,199,517 Net income per common share: Basic $ 0.02 $ (0.03) $ (0.06) $ (0.1) Diluted $ (0.01) $ (0.03) $ (0.06) $ (0.1) For the six months ended June 30, 2020 and three and six months ended June 30, 2019, the convertible instruments are anti-dilutive and therefore, have been excluded from earnings (loss) per share. NOTE 15 – SEGMENT At June 30, 2020, the Company operates in one industry segment, telecommunication services, and two geographic segments, USA and Switzerland, where current assets and equipment are located . Operating Activities The following table shows operating activities information by geographic segment for the three and six months ended June 30, 2020 and 2019: Three months Ended June 30, 2020 USA Switzerland Elimination Total Revenues $ 9,947,837 $ 1,183,087 $ (838) $ 11,130,086 Cost of revenue 9,387,289 1,011,327 (838) 10,397,778 Gross profit 560,548 171,760 - 732,308 Operating expenses General and administration 741,967 163,049 - 905,016 Operating income (loss) (181,419) 8,711 - (172,708) Other income (expense) 1,547,495 2,678 - 1,550,173 Net income $ 1,366,076 $ 11,389 $ - $ 1,377,465 20 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 15 – SEGMENT (CONTINUED) Three months Ended June 30, 2019 USA Switzerland Elimination Total Revenues $ 4,253,359 $ - $ - $ 4,253,359 Cost of revenue 4,345,087 - - 4,345,087 Gross profit (91,728) - - (91,728) Operating expenses General and administration 341,553 - - 341,553 Operating income (loss) (433,281) - - (433,281) Other income (expense) (50,960) - - (50,960) Net income $ (484,241) $ - $ - $ (484,241) Six months Ended June 30, 2020 USA Switzerland Elimination Total Revenues $ 13,768,370 $ 2,381,204 $ (2,076) $ 16,147,498 Cost of revenue 13,508,472 2,069,935 (2,076) 15,576,331 Gross profit 259,898 311,269 - 571,167 Operating expenses General and administration 1,874,059 328,484 - 2,202,543 Operating income (loss) (1,614,161) (17,215) - (1,631,376) Other income (expense) (890,776) (9,586) - (900,362) Net income $ (2,504,937) $ (26,801) $ - $ (2,531,738) Six months Ended June 30, 2019 USA Switzerland Elimination Total Revenues $ 8,416,562 $ - $ - $ 8,416,562 Cost of revenue 8,072,713 - - 8,072,713 Gross profit 343,849 - - 343,849 Operating expenses General and administration 532,060 - - 532,060 Operating income (loss) (188,211) - - (188,211) Other income (expense) (1,321,608) - - (1,321,608) Net income $ (1,509,819) $ - $ - $ (1,509,819) As of August 7, 2019, having completed all conditions under the Purchase Agreement, the Company acquired SwissLink located in Switzerland. 21 iQSTEL INC Notes to the Unaudited Consolidated Financial Statements June 30, 2020 NOTE 15 – SEGMENT (CONTINUED) Asset Information The following table shows asset information by geographic segment at June 30, 2020 and December 31, 2019: June 30, 2020 USA Switzerland Elimination Total Assets Current assets $ 3,410,729 $ 1,270,688 $ (828,115) $ 3,853,302 Non-current assets $ 3,497,963 $ 512,337 $ (1,669,515) $ 2,340,785 Liabilities Current liabilities $ 6,422,646 $ 2,921,438 $ (828,115) $ 8,515,969 Non-current liabilities $ 2,071 $ 421,560 $ - $ 423,631 December 31, 2019 USA Switzerland Elimination Total Assets Current assets $ 3,073,654 $ 1,174,856 $ (810,013) $ 3,438,497 Non-current assets $ 3,146,894 $ 456,070 $ (1,438,515) $ 2,164,449 Liabilities Current liabilities $ 9,041,421 $ 2,914,237 $ (810,013) $ 11,145,645 Non-current liabilities $ 11,442 $ 216,274 $ - $ 227,716 NOTE 15 - SUBSEQUENT EVENTS Subsequent to June 30, 2020 and through the date that these financials were made available, the Company had the following subsequent events: On July 14, 2020, we entered into a Subscription Agreement with Alpha Capital Anstalt (“Purchaser”), pursuant to which we issued and sold to the Purchaser 2,000,000 shares of our common stock (the “Shares”) for total proceeds of $160,000. The Shares were sold at $0.08 per share, after applying a 20% discount to the purchase price of $0.10 per share. The Shares were offered and sold pursuant to qualified offering circular on Form 1-A (File No. 024-10950) and related supplement, in each case filed with the Securities and Exchange Commission. A copy of the form of Subscription Agreement used in the offer and sale is attached as Exhibit 13.1 to the Form 1-A/A filed with the SEC on June 3, 2019. Also on July 14, 2020, we entered into a Securities Purchase Agreement (“SPA”) with Purchaser for the sale of a convertible promissory note, executed on July 15, 2019, in the principal amount of $200,000 (the “Note”). We received $160,000 after paying a $40,000 original issue discount on the Note. The Note bears interest at 5% per annum and matures one year from the date of issuance. After 180 days from issuance, the Note may be converted by purchaser into shares of our common stock at a conversion price of the lesser of (i) $0.025 or (ii) 40% of the lowest trading price of our common stock in the 20 days preceding the issuance date of the Note. As additional consideration for the Note, we issued to Purchaser a warrant (the “Warrant”) to purchase 2,000,000 shares of common stock at an exercise price of $0.02 per share (subject to adjustment as set forth in the Warrant) expiring six months from the date of issuance. On July 01, 2020, we entered into a 60-day term bridge loan with Apollo Management Group for the principal amount of $73,684.21 bearing interest at the rate of Twelve (12%) percent per annum, commencing on the date such Loan is funded until the date the Loan is paid in full. On July 22, 2020, we entered into an Exchange Agreement with Jefferson Street Capital LLC, whereby we agreed to exchange a February 22, 2019 Common Stock Purchase Warrant and June 27, 2019 Convertible Promissory Note in the principal amount of $35,000 into a total of 650,000 shares of our common stock. 22