Notes to Consolidated Financial Statements
NOTE 1 ORGANIZATION
KonaTel Inc., formerly known as Dala Petroleum Corp. (the Company, we, our, or Dala), also formerly known as Westcott Products Corporation, was incorporated as Light Tech, Inc. under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name Westcott Products Corporation was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation. On December 18, 2017, we acquired KonaTel, Inc, a Nevada sub S-Corporation (KonaTel Nevada), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly-owned subsidiary.
NOTE 2 TRANSACTIONS
June 2014 Merger
On June 2, 2014, the Company, its newly formed and wholly-owned subsidiary, Dala Acquisition Corp., a Nevada corporation (Merger Subsidiary), and Dala Petroleum Corp., a Nevada corporation (Dala Nevada), executed and delivered an Agreement and Plan of Merger (the Merger Agreement), whereby Merger Subsidiary merged with and into Dala Nevada, and Dala Nevada was the surviving company under the merger and became a wholly-owned subsidiary of then-named Westcott (the Merger) on the closing of the Merger. As a result of the Merger, Westcott issued 10,000,000 shares of its common stock in exchange for all of the outstanding shares of common stock of Dala Nevada , which shares were distributed to Dala Nevadas sole shareholder, Chisholm Partners II, LLC, a Louisiana limited liability company (Chisholm II), and was then distributed on a pro rata basis to its members.
As a condition precedent to the Merger, Westcott raised $2,025,000 from persons who were accredited investors in consideration of the sale of 2,025 shares of its Series A 6% Convertible Preferred Stock and 2,893,725 warrants at an offering price of $1,000 per unit. Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that was convertible at any time at the option of the holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested; and (ii) 1,429 warrants (issued for each share of Series A 6% Convertible Preferred Stock sold in each unit) to purchase common shares of the Company at an exercise price of $1.35 with a life of three years as of the Effective Date defined as the earliest date of the following to occur: (a) the initial registration statement required by the offering documents had been declared effective by the United States Securities and Exchange Commission (the SEC); (b) all of the underlying shares had been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144 and without volume or manner-of-sale restrictions; or (c) following the one year anniversary of June 3, 2014.
The Merger was accounted for as a reverse-merger and recapitalization of Dala.
Dala Nevada possessed rights to engage in oil and natural gas exploration and development in north central Kansas, with total acreage of approximately 80,000 acres (the Property). Since the time of the Merger, we have been operating as an early-stage oil exploration company focused on the Property, which has oil potential at depths of less than 6,000 feet. Since May 2015, the Company had previously temporarily suspended its exploration program due to the decline in the price of oil and difficult market conditions; however, the Company is presently evaluating potential options for the extension of terms of the expired leases comprising the Property and funding the development of the Property, either singly or as a joint venture or with a working interest, carried or fully funded; or an outright sale of its remaining leases and geologic and seismic data on the area.
May 2016 Transaction
The Company entered into a Partial Cancellation Agreement (the PCA) by and among its subsidiary, Dala Nevada, Chisholm II and certain members of Chisholm II (the Chisholm Members), through which Chisholm II (after receiving shares from certain of its Chisholm Members) returned a total of 8,567,800 shares of the Companys common stock to the Company for cancellation. In exchange for the return of these shares for cancellation, the Company assigned 55,000 acres of the Companys Property rights (approximately 68.75% of its total holdings) to Chisholm II.
Pursuant to terms of the PCA, on May 26, 2016, the 8,567,800 shares of common stock delivered by Chisholm II shareholders were cancelled on the books and records of the Company. Prior to that, the Company assigned 55,000 acres of its leased Property to Chisholm II.
On May 16, 2016, as approved by the Board of Directors of the Company as part of a settlement with the Preferred Shareholders, the Company filed an Amended and Restated Certificate of Designation of the Companys Series A 6% Convertible Preferred Stock (the COD), which (i) changed the conversion price of the preferred stock from $0.70 per share to $0.05 per share; and (ii) eliminated Section 7 Certain Adjustments of the COD.
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Pursuant to terms of the PCA, on July 28, 2016, the 1,030,000 shares of common stock delivered after the initial closing by Baldo Sanso (360,000 shares of common stock), Robert Sali (610,000 shares of common stock) and Chris Dabbs (60,000 shares of common stock) were cancelled on the books and records of the Company. The reduction was offset to additional paid-in capital.
July 2017 Transaction
On July 19, 2017, the Company entered into a Common Stock Purchase Agreement with M2 Equity Partners LLC, a Minnesota limited liability company (M2), whereby M2 has purchased 12,100,000 newly issued shares of the Companys common stock (the Common Stock) for an aggregate purchase price of $347,500 (the Purchase Price), pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and/or Rule 506(b) promulgated thereunder. Prior to the closing (the Closing) of the Common Stock Purchase Agreement, the Company had the following outstanding securities: (i) 2,926,486 shares of Common Stock; (ii) 2,008 shares of Series A 6% Convertible Preferred Stock (the Preferred Stock); and (iii) 1,928,571 warrants (the Warrants) to acquire 1,928,571 shares of Common Stock that were issued in connection with the issuance of its Preferred Stock. In connection with this purchase of Common Stock, certain of the Companys shareholders agreed to cancel an aggregate 1,584,200 shares of the Companys Common Stock for an aggregate amount of $15,842; and 2,008 shares of the Companys Preferred Stock and all outstanding Warrants for an aggregate amount of $53,841, with an additional sum of approximately $4,700 due to those shareholders who had agreed to cancel their respective shares of Preferred Stock and Warrants being reserved for the payment of miscellaneous expenses or other liabilities of the Company not provided for in the schedules and exhibits to the Common Stock Purchase Agreement, and any remainder of this sum was to be paid to these shareholders, pro rata, based upon the respective percentage that the aggregate amount being paid for the cancellation of the Preferred Stock and Warrants bore, if any, to these additional funds, following payment of any such miscellaneous expenses or other liabilities of the Company. $10,750 of the Purchase Price was held in the Trust Account of the Companys legal counsel to be expended on behalf of the Company or deposited into a new bank account to be opened by the Company, and these funds have been disbursed in payment of expenses or paid to the Company or those persons entitled to them.
As a result of the cancellation of the 1,584,200 shares of Common Stock, Preferred Stock and Warrants, immediately prior to or simultaneous with the Closing, the Company had 1,342,286 shares of Common Stock issued and outstanding (the Existing Shares) and no shares of Preferred Stock or Warrants issued and outstanding; and taking into account the share cancellation and the 12,100,000 share Common Stock purchase and issuance, the Company then had issued and outstanding (i) 13,442,286 shares of its Common Stock, consisting of (a) the 1,342,286 Existing Shares, and (b) the 12,100,000 shares purchased by M2; and (ii) no other securities (as defined in the Securities Act) issued or outstanding.
The Company used the remainder of the $347,500 to, among other items set forth in the schedules and exhibits to the Common Stock Purchase Agreement, pay or compromise all outstanding indebtedness and other liabilities of the Company, amounting to approximately $262,367, which included a payment of an aggregate of $10,000 ($5,000 to each) to our then two directors and executive officers, with the understanding that our then current assets would consist of approximately $10,750, our Property, consisting of our oil and gas lease assets that we then owned, along with other intangible assets, and following the payment of the indebtedness and other liabilities and financial obligations of the Company, there would be no liabilities of the Company at Closing.
M2 agreed to pay M2 Capital Advisors, Inc., a Minnesota corporation (M2 Capital), which is wholly-owned by Mark Savage, a founding member of M2, an Introduction Fee of $25,000 for introducing the Company to M2. These funds were divided between M2 Capital and Elev8 Marketing, a firm owned by Matthew Atkinson, who is also a founding member of M2 and M2s sole Manager, and were utilized to repay these entities for legal costs and miscellaneous expenses incurred by them in connection with the formation and funding of M2. Mr. Savage was appointed the President and Chief Financial Officer and a director at the Closing, and Mr. Atkinson was elected as the Secretary at the Closing.
The Closing of the Common Stock Purchase Agreement resulted in a change in control of the Company.
December 2017 Transaction
On November 15, 2017, Company entered into an Agreement and Plan of Merger with Mark Savage, our then President, a director (currently serving as a director) and a beneficial shareholder, Matthew Atkinson, our Secretary, a beneficial shareholder and the Manager of our then principal shareholder, M2, and M2 and our wholly-owned Nevada acquisition subsidiary, Dala Subsidiary Corp., on the one hand; and KonaTel Nevada and D. Sean McEwen, KonaTel Nevadas President and sole shareholder, on the other hand. The Merger was closed on December 18, 2017, and Articles of Merger were filed on that date with the Secretary of State of the State of Nevada whereby KonaTel Nevada was the surviving corporation and became our wholly-owned subsidiary. The Company issued 13,500,000 shares of our one mill ($0.001) par value common stock comprised of restricted securities as defined in SEC Rule 144 promulgated under the Securities Act, in exchange for all of the outstanding shares of common stock of KonaTel Nevada. Post-Merger, and except as discussed below about conditions to the Closing of the Merger, there were approximately 27,192,286 outstanding shares of our common stock, 13,500,000 shares of which are owned by Mr. McEwen; 12,100,000 shares of which were then owned by M2 (Messrs. Savage and Atkinson are members of M2 and collectively owned approximately 65.2% of M2, which equated to an indirect beneficial ownership of approximately 3,950,000 shares of our common stock each, and with Mr. Atkinson being the sole Manager of M2, he was then also the beneficial owner of all of M2s shares of our common stock; and 1,692,286 shares, which are owned by public shareholders. On April 24, 2018, the 12,100,000 shares of our common stock that were acquired
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by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests. See NOTE 18 below.
The Company entered into Shareholder Voting Agreement between the Company, Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen whereby Mr. McEwen was granted an irrevocable proxy coupled with an interest from each of the foregoing, together with the following rights, including a right of veto, for a period of two (2) years, on the following matters: (i) an increase in the compensation of any employee of the Company by more than $20,000 in any one calendar year and for these purposes, the term compensation includes any form of remuneration or monetary benefit; (ii) the issuance of stock, the creation of a new class of stock, the grant of options or warrants, modification of any shareholder, option holder or warrant holders rights, grants, conversion rights or the taking of any other action that directly or indirectly dilutes the outstanding securities of the Company, excepting the current private placement of common stock of the Company for an equity funding of $1,300,000 through the offer and sale of 6,500,000 shares of the Companys common stock solely to accredited investors; (iii) the issuance of debt in excess of $100,000 in the aggregate in any one calendar year; (iv) the approval of a plan of merger, reorganization or conversion; (v) the sale, transfer or other conveyance of assets of the Company having an aggregate value in excess of $100,000 in any one calendar year, other than in the ordinary course of the business; and (vi) the entry into a contract or other transaction having a total aggregate contractual liability for the Company in excess of $100,000 in any one calendar year.
The Company entered into a Lock-Up/Leak-Out Agreement by Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen respecting the resale of their respective shares of common stock beneficially owned or subsequently acquired in the Company covering an 18 month period commencing at the Closing of the Merger.
At the Effective Time, the Company changed its fiscal year from September 30 to a calendar year end of December 31 to coincide with the calendar fiscal year end of KonaTel Nevada; and the S Corporation Election of KonaTel Nevada was terminated. The parties agreed to make all necessary tax elections to achieve a direct tax accounting cut-off as of the date of the S Corporation Election termination for purposes of reporting the applicable short period S and C corporation tax returns, as applicable.
The Merger was accounted for as a reverse-merger and recapitalization of the Company. Accordingly, the 2016 legal capital of KonaTel Nevada was adjusted retroactively to reflect the December 31, 2016 legal capital of Dala.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared using the accrual basis of accounting.
The preparation of financial statements in conformity with accounting principles generally accepted 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 and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, and customer lists. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and Cash Equivalents include cash on hand and all short-term investments with maturities of three months or less.
Trade Accounts Receivable
The Company accounts for trade receivables based on amounts billed to customers. Past due receivables are determined based on contractual terms. The Company does not accrue interest and does not require collateral on any of its trade receivables.
Allowance for Doubtful Receivables
The allowance for doubtful receivables is determined by management based on customer credit history, specific customer circumstances and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. As of December 31, 2017, and December 31, 2016, management has determined that no allowance for doubtful receivables is necessary.
Inventory
Inventory consists primarily of the cost of cellular phones and cellular accessories. Inventory is reported at the lower of cost and net realizable value. Cost is determined by the first-in, first-out (FIFO) method.
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Due to the rapidly changing technology within the industry, inventory is evaluated on a regular basis to determine if any obsolescence exists. As of December 31, 2017, and December 31, 2016, the allowance for inventory obsolescence amounted to $10,083 and $19,243, respectively.
Property and Equipment
Property and equipment are recorded at cost, and are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements are amortized over the lesser of the lease term or estimated useful life, furniture and fixtures, equipment, and vehicles are depreciated over periods ranging from five to seven (5-7) years, and billing software is depreciated over three (3) years which represents the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred while major replacements and improvements are capitalized. When property and equipment are retired or sold, the cost and applicable accumulated depreciation are removed from the respective accounts and the related gain or loss is recognized.
The Company recognizes impairment losses for long-lived assets whenever changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Management has concluded that no impairment reserves are required as of December 31, 2017 and December 31, 2016.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired in connection with business acquisitions.
Goodwill is tested at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. The Company assesses goodwill for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. The annual impairment review is completed at the end of the year.
If the carrying amount of a reporting unit exceeds its fair value, the Company measures the possible goodwill impairment based upon an allocation of the estimate of fair value to the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets, based upon known facts and circumstances as if the acquisition occurred currently. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds the implied fair value of the goodwill. It was determined that Goodwill of $80,867 created through the reverse merger was fully impaired as of December 31, 2017.
Impairment losses of $80,867 are reflected in the Consolidated Statements of Operations.
Intangible assets consist of customer lists arising from acquisitions which are amortized on a straight line basis over three years, their estimated useful lives.
Customer Deposits
Before entering into a contract with a sub-reseller customer, the Company will require the customer to either secure a formal letter of credit with a bank, or require a certain level of cash collateral deposits from the customer. These collateral requirements are determined by management and may be adjusted upward or downward depending on the volume of business with the sub-reseller customer, or if managements assessment of credit risk for a sub-reseller customer would change.
The Company held $28,854 and $88,116 in collateral deposits from various sub-reseller customers at December 31, 2017, and December 31, 2016, respectively. Such amounts represent collateral received from the sub-resellers in order to contract with the Company. The related contracts have an option to terminate the contract within a period of less than one year, and accordingly, these collateral deposits are classified as current liabilities in the accompanying balance sheet.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, deposits received from customers for receivables and short-term loans the carrying amounts approximate fair value due to their short maturities.
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We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices, which are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Unproved oil and natural gas properties are accounted for and measured under Regulation S-X, Rule 4-10.
We currently measure and report at fair value other intangible assets (due to our impairment analysis) and derivative liabilities using ASC 820-10, Fair Value Measurement. The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
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Fair Value Measurements at December 31, 2017
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Quoted Prices
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In Active
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Significant
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Markets for
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Other
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Significant
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Identical
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Observable
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Unobservable
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Total
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Assets
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Inputs
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Inputs
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Carrying
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(Level 1)
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(Level 2)
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(Level 3)
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Value
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Description
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Unproved oil and natural gas properties
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$
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-
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$
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-
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$
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37,475
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$
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37,475
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Oil and Natural Gas Properties
The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs related to the exploration and development of oil and natural gas properties are initially capitalized into a single cost center (full cost pool). Such costs include land acquisition costs, a portion of employee salaries related to Property development, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. Internal salaries are capitalized based on employee time allocated to the acquisition of leaseholds and development of oil and natural gas properties. The Company did not capitalize interest for the period ended December 31, 2017, as it was not required.
Proceeds from Property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs.
The Company assesses all items classified as unproved Property on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such Property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and amortization. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
Capitalized costs associated with impaired properties and properties having proven reserves, estimated future development costs, and asset retirement costs under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 410-20-25 are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves. The costs of unproved properties are withheld from the depletion base until such time as they are developed, impaired, or abandoned.
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Under the full cost method of accounting, capitalized oil and natural gas Property costs less accumulated depletion, net of deferred income taxes, may not exceed a ceiling amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, which is tested on a quarterly basis, an impairment is recognized. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes. If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and result in a lower depreciation, depletion and amortization rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
During the period ended December 30, 2017, the Company incurred a total of $0 in oil and natural gas expenditures.
No impairment was realized for the year ended September 30, 2016, or the period ended September 30, 2017, or the period ended December 31, 2017.
On May 10, 2016, the Company entered into a Partial Cancellation Agreement (the PCA) by and among its subsidiary, Dala Petroleum Corp., a Nevada corporation (Dala NV), Chisholm II, and certain members of Chisholm II (the Chisholm Members) through which Chisholm II (after receiving shares from certain of Chisholm Members) returned a total of 8,567,800 shares of the Companys common stock to the Companys treasury for cancellation. In exchange for the return of these shares for cancellation, the Company returned 55,000 acres of the Companys Property rights, held in the form of oil and gas leases acquired from Chisholm II (approximately 68.75% of its total holdings), to Chisholm II.
Revenue Recognition
Revenue from the sale of the Companys products is recognized when goods are provided to the customer, title and risk of loss are transferred, pricing is fixed or determinable and collection is reasonably assured.
Revenue from the sale of the Companys cellular and telecommunication services is recognized when the services have been performed, evidence of an arrangement exists, the fee is fixed and determinable, and collection is probable. Revenue from these services is generally recognized monthly as the services are provided. Such revenue is recognized based on usage, which can vary from month-to-month or at a contractually committed amount, net of credits or other billing adjustments. Advance billings for future service in the form of monthly recurring charges are not recognized as revenue until the service is provided.
We recognize oil and natural gas revenues from our interests in producing wells when production is delivered to, and title has transferred to, the purchaser and to the extent the selling price is reasonably determinable.
We use the sales method of accounting for balancing of natural gas production and would recognize a liability if the existing proven reserves were not adequate to cover the current imbalance situation.
Cost of Revenue
Cost of Revenue includes the cost of communication services, equipment and accessories, shipping costs, and commissions of sub-agents.
Stock-based Compensation
The Company records stock based compensation in accordance with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This requires that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.
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Income Taxes
Beginning on December 18, 2018, the Effective Date of the KonaTel Nevada merger, KonaTel Nevada terminated its S Corporation status. For the short-tax year, there was no tax provision of federal or state taxes in the financial statements.
Prior to the merger, with the consent of its shareholders, KonaTel Nevada had elected under the Internal Revenue Code and for Pennsylvania tax purposes to be a S Corporation. In lieu of corporation income taxes, the shareholders of a S Corporation are taxed on their proportionate share of the Companys taxable income. Therefore, no provision for federal or state income tax is included in the financial statements. The Company evaluates tax positions taken and determines whether it is more-likely-than-not that the tax position will be sustained upon examination based on the technical merits of the position. Management has reviewed its tax positions regarding state nexus as well as its status as a pass-through entity and has determined there are no such positions that fail to meet the more-likely-than-not criterion.
Net Loss Per Share
The Company follows ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding.
During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. As the Company has incurred losses for the period ended December 31, 2017, the potentially dilutive shares totaling 0 are anti-dilutive and are thus not added into the loss per share calculations. Due to the anti-dilutive impact the weighted average dilutive shares outstanding for the period ended December 31, 2017, for basic and dilutive shares, are the same. For 2017, the weighted average common share equivalents were 14,210,094.
As per ASC 810-40-45-5b, the net loss per share for December 31, 2017 and 2016 is calculated based on the weighted average shares as determined through the reverse merger. The exchange ratio of 1,928.57 was determined in the merger exchange. For December 2017, and 2016, the weighted average common share equivalents were 14,210,094 and 13,692,286, respectively.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of receivables, cash, and cash equivalents.
All cash and cash equivalents and restricted cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDICs deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
The Company also has a concentration of risk with respect to trade receivables from sub-resellers. As of December 31, 2017 and 2016, the Company had a significant concentration of receivables due from two and three major customers, respectively (defined as customers whose receivable balances are greater than 10% of total accounts receivable). These customers represented approximately 78% of the total accounts receivable as of December 31, 2017, and approximately 70% of total accounts receivable as of December 31, 2016.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major sub-reseller customers. For the year ended December 31, 2017, the Company had two major sub-reseller customers which amounted to approximately 43% of total revenues. For the year ended December 31, 2016, the Company had two major customers which amounted to approximately 63% of total revenues.
Effect of Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU No. 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.
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In November 2014, the FASB issued ASU No. 2014-16,
Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity.
This update amends existing guidance with the objective to eliminate the use of different methods in practice with respect to the consideration of redemption features in relation to other features when determining whether the nature of a host contract is more akin to debt or equity and thereby reduce existing diversity under GAAP in accounting for hybrid financial instruments issued in the form of a share. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share.
The Company has evaluated all other recent accounting pronouncements and believes that none will have a significant effect on the Companys financial statement.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of December 31, 2017, and December 31, 2016:
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2017
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2016
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|
|
|
|
Leasehold Improvements
|
$
|
46,950
|
|
$
|
46,950
|
Furniture and Fixtures
|
|
87,201
|
|
|
81,355
|
Billing Software
|
|
217,163
|
|
|
217,163
|
Office Equipment
|
|
89,590
|
|
|
89,591
|
|
|
440,904
|
|
|
435,059
|
Less: Accumulated Depreciation and Amortization
|
|
(298,837)
|
|
|
(209,647)
|
|
$
|
142,067
|
|
$
|
225,412
|
Depreciation and amortization expense amounted to $89,190 and $97,664 for the years ended December 31, 2017, and 2016, respectively. Depreciation and amortization expense are included as a component of operating expenses in the accompanying statements of operations.
NOTE 5 INTANGIBLE ASSETS
Intangible Assets consist of customer lists that were acquired through acquisitions:
|
|
|
|
| |
|
2017
|
|
2016
|
|
|
|
|
|
|
Customer Lists
|
$
|
1,135,961
|
|
$
|
1,135,961
|
Less: Accumulated Amortization
|
|
(951,333)
|
|
|
(619,003)
|
|
$
|
184,628
|
|
$
|
516,958
|
Amortization expense amounted to $332,330 and $294,731 for the years ended December 31, 2017, and 2016, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Future amortization over the next year will be $184,628, which fully amortizes intangible assets.
NOTE 6 LINES OF CREDIT
The Company has three lines of credit with a bank which provide aggregate maximum borrowing availability of $1,050,000 as of December 31, 2017, and December 31, 2016. The lines of credit are payable on demand and bear interest at a variable rate with a floor set at 5.25%. Outstanding advances under these line of credit arrangements amounted to $153,141 and $219,168 as of December 31, 2017, and December 31, 2016. The lines of credit mature in April 2018. The maturity date has been verbally extended by the bank on a month-to-month basis.
The lines are secured by the general assets of the Company and aggregate amounts drawn under the line of credit may be limited to a borrowing base, as defined. The lines of credit, as of December 31, 2016, contained provisions which require the Company to maintain certain covenants including the maintenance of a debt service coverage ratio of 1.20X, as defined in the agreement.
This debt service coverage ratio covenant was removed and is no longer in effect. The revolving lines of credit are guaranteed by an officer of the Company.
46
NOTE 7 OPERATING LEASES
The Company leases property under non-cancelable operating leases with terms in excess of one year. The current property lease in excess of one year expires April 30, 2019. Future minimum lease payments over the next three years under the terms of these operating leases are as follows:
|
| |
Period Ended December 31,
|
|
|
2018
|
$
|
66,099
|
2019
|
|
38,558
|
The Company also leases an office space on a month-to-month basis. Total lease expense for the years ended December 31, 2017 and 2016 amounted to $156,618 and $124,638, respectively.
NOTE 8 AMOUNT DUE TO SHAREHOLDER
During 2017, certain of the Companys principal shareholders, D. Sean McEwen, Matthew Atkinson, and Mark Savage, advanced $191,500, $17,063 and $14,764, respectively. The amount advanced was used for working capital purposes and bears no interest and does not have a maturity date. Interest expense is imputed based on the applicable federal rate of 1.52%.
NOTE 9 RELATED PARTY TRANSACTIONS
Transactions with JBS Holdings Inc.
As of December 31, 2016, amounts payable to JBS Holdings Inc. amounted to $15,892. This amount was part of the liabilities assumed when an entity was acquired in 2014. A Company officer, J. William Riner, partly owns JBS Holding, Inc. This was fully paid as of September 2017.
Transactions with Shareholders
As of December 31, 2017, amounts due from advances to shareholders were $223,327. The details of the advances are noted in NOTE 8.
NOTE 10 RETIREMENT PLAN
The Company sponsors a 401(k) profit sharing plan for its employees, whereby participants may contribute through salary deductions as defined, not to exceed certain IRS limits. The plan also provides for an employer matching contribution and also discretionary employer contributions. The Company contributed $61,106 and $63,553 for the years ended December 31, 2017, and 2016, respectively.
NOTE 11 CONTINGENCIES AND COMMITMENTS
Litigation
From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. The Company tentatively reached a settlement agreement on litigation, which arose from an issue with a lawsuit with a business purchased by KonaTel Nevada.
Contract Contingency
The Company has the normal obligation for the completion of its cellular provider contracts in accordance with the appropriate standards of the industry and that may be provided in the contractual agreements.
Letters of Credit
The Company maintains irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount of $593,000. The letters of credit serve as collateral and security for various resale contracts the Company has with their suppliers. The letters of credit are unused as of December 31, 2017, and December 31, 2016.
Gross Receipts Filing
The Company has not filed the annual return required for gross receipts tax in New York for 2015 and 2016 and in Pennsylvania for 2016. The Company accrued $30,369 as of December 31, 2016. The Company accrued $44,598 as of December 31, 2017. The interest and penalties are not significant.
47
Going Concern
As the Company did not generate net income during the year ending December 31, 2017, and 2016, we have been dependent upon equity financing to support our operations. In addition to losses of $1,713,180 and $502,315 in 2017 and 2016, respectively, we have experienced negative cash flow from operations of $1,000,836 and $49,728 in 2017 and 2016. The accumulated deficit as of December 31, 2017, is $3,190,873.
We believe we have ameliorated any going concern issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017; receiving cash investments through the private placement of shares of our common stock; and the increase of revenues from the growth of our Virtual ETC program, all of which has contributed to an improvement in our working capital, resulting in a working capital surplus, without the use of additional lines of credit or borrowings. Additionally, we also have two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of up to 60 days on mobile phone purchases and a bank line of credit for purchases of select mobile phones.
NOTE 12 AMOUNT DUE TO SELLER
As of December 31, 2016, the Company owed $18,000 to a seller of an entity which was acquired in 2014. This was fully paid as of September 2017.
NOTE 13 SEGMENT REPORTING
The Company operates within three reportable segments. The Companys management evaluates performance and allocates resources based on the profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Because the Company is a service business with very few physical assets, Management does not use total assets by segment to make decisions regarding operations, and therefore the total assets disclosure by segment has not been included.
The Companys reportable segments consist of a Wholesale unit, a Retail unit, and Gas & Oil Operations. The Wholesale unit purchases bulk rate services at a discounted cost. The Wholesale unit then sells to providers that provide services to the end-user. The Retail unit provides these same services to the end-user.
The Wholesale unit had 24 customers for the years ended December 31, 2017, and 2016. The Retail Unit had an average lines/customers of 10,557 and 6,576 for the years ended December 31, 2017, and 2016, respectively. The Gross Profit per line for Wholesale was $1.86 and $2.25 for the years ended December 31, 2017, and 2016, respectively. The Gross Profit per line for Retail was $11.12 and $16.84 for the nine month periods ended December 31, 2017, and 2016, respectively.
The following table reflects the result of operations of the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
| |
|
Wholesale
|
|
Retail
|
|
Gas & Oil
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
6,809,051
|
|
$
|
4,668,672
|
|
$
|
-
|
|
$
|
11,477,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(627,698)
|
|
$
|
(1,085,482)
|
|
$
|
-
|
|
$
|
(1,713,180)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
154,442
|
|
$
|
267,078
|
|
$
|
-
|
|
$
|
421,520
|
Additions to property and equipment
|
$
|
-
|
|
$
|
5,845
|
|
$
|
-
|
|
$
|
5,845
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
6,075,797
|
|
$
|
3,665,982
|
|
$
|
-
|
|
$
|
9,741,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(252,475)
|
|
$
|
(249,840)
|
|
$
|
-
|
|
$
|
(502,315)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
197,227
|
|
$
|
195,168
|
|
$
|
-
|
|
$
|
392,395
|
Additions to property and equipment
|
$
|
-
|
|
$
|
21,727
|
|
$
|
-
|
|
$
|
21,727
|
NOTE 14 PREFERRED CONVERTIBLE STOCK AND WARRANTS
As discussed above in NOTE 2, in fiscal year 2014, the Company sold 2,025 units consisting of a total of 2,025 shares of Series A 6% Convertible Preferred Stock and 2,893,725 warrants at the price of $1,000 per unit. Proceeds received totaled $2,025,000 (with a net of offering costs of $1,990,000). The warrants were valued at $711,044 and this amount was separated from the value of the preferred stock. Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that was convertible at any time at the option of the holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested (subject to adjustment); and (ii) 1,429 warrants (issued for each share of Series A 6% Convertible Preferred Stock sold in each unit) to purchase common shares of the
48
Company at an exercise price of $1.35 for three years of the Effective Date, defined as the earliest date of the following to occur: (a) the initial registration statement required by the Offering Documents has been declared effective by the SEC; (b) all of the underlying shares have been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144 and without volume or manner-of-sale restrictions; or (c) following the one year anniversary of June 3, 2014. A total of 2,008 shares of Series A 6% Convertible Preferred Stock, exercisable into 2,868,571 shares of common stock, were issued and outstanding as of June 30, 2017. The 6% per annum dividends are cumulative and payable quarterly in cash or, at the Companys option, in shares of the Companys common stock. The Company discontinued paying the quarterly dividend as of July 1, 2015, and the amount owed thereunder had been accruing since that time until May 10, 2016, at which time all accrued dividends on 675 of the 2,025 shares were waived and cancelled by certain preferred shareholders. The cancelled dividends were accounted for by offsetting to additional paid-in capital.
As the Series A 6% Convertible Preferred Stock is contingently redeemable at a fixed price and such redemption would not be solely within the control of the Company, the preferred stock is classified outside of stockholders equity, as temporary equity between liabilities and stockholders equity on the Companys consolidated balance sheet.
The Series A 6% Convertible Preferred Stock has no voting rights.
On February 17, 2016, a supermajority of more than 67% of the shareholders of the Series A 6% Convertible Preferred Stock approved certain corporate transactions in an effort to settle certain violations of the Series A 6% Convertible Preferred Stock Certificate of Designation and other documents related to the sale of Series A 6% Convertible Preferred Stock in 2014. The transactions approved by a supermajority of the Series A 6% Convertible Preferred Shareholders are to be implemented by the Board of Directors at the Boards discretion. The approved transactions included the following: (i) the approval of a potential settlement agreement with Chisholm Partners II, LLC and certain members of Chisholm II; (ii) the approval of the amendment of the Certificate of Designation for the Series A 6% Convertible Preferred Stock modifying the Conversion Price to $0.05; (iii) the Removal of Section 7, Certain Adjustments in the Series A 6% Convertible Preferred Stock Certificate of Designation; (iv) the modification of the permitted indebtedness allowable under the Series A 6% Convertible Preferred Stock Certificate of Designation to $200,000; (v) the approval of promissory notes with related parties in an amount up to $60,000; (vi) the waiver of the right of redemption upon Triggering Events for the Companys violations of Section 10 of the Certificate of Designation; (vii) the waiver of the accrual of the late fee for unpaid dividends as of January 1, 2016; (viii) the waiver of the first right of refusal to purchase shares from other Series A 6% Convertible Preferred Shareholders; and (ix) waiver of the Most Favored Nation provision in the SPA for the Series A 6% Convertible Preferred Stock, among other things. None of the items approved by the shareholders have yet been effected by the Board.
Upon the occurrence of a triggering event, each holder shall have the right to require the Company to redeem all of the Series A 6% Convertible Preferred Stock in cash at the redemption amount which is the sum of (a) the greater of (i) 130% of the stated value, and (ii) the product of (y) the VWAP on the trading day immediately preceding the date of the triggering event and (z) the stated value divided by the then conversion price, (b) all accrued but unpaid dividends thereon, if any, and (c) all liquidated damages and other costs, expenses or amounts due in respect of the Series A 6% Convertible Preferred Stock.
On November 17, 2014, one of the Companys shareholders of Series A 6% Convertible Preferred Stock, Chienn Consulting Company, converted 17 shares of its Series A 6% Convertible Preferred Stock into 24,286 shares of the Companys common stock. As of September 30, 2017, there were no Convertible Preferred Shares outstanding.
Effective December 31, 2015, the valuation of the derivative from the warrants using the Black Sholes model was no longer a liability given the decrease in the Companys stock and the exercise price of the warrants.
Effective July 19, 2017, the remaining 2008 outstanding shares of Series A 6% Convertible Preferred Stock, along with all Warrants issued in connection with their sale in 2014, were cancelled. See the July 2017 Transaction in NOTE 2 above.
NOTE 15 SHAREHOLDERS EQUITY
Common Stock
On June 2, 2014, the Company issued 10,000,000 shares of its common stock to Chisholm II in exchange for oil and natural gas assets recorded at $1,898,947.
As discussed above, the Company completed a reverse merger with Dala Nevada, with Dala Nevada being the acquirer for financial reporting purposes. At the date of the Merger, the Company had 2,500,000 shares of common stock outstanding. The total amount of shares issued and outstanding post-Merger, as of December 31, 2014, was 12,500,000 shares of common stock.
On November 17, 2014, one of the Companys shareholders of Series A 6% Convertible Preferred Stock, Chienn Consulting Company, converted 17 shares of its Series A 6% Convertible Preferred Stock into 24,286 shares of the Companys common stock.
49
As part of the Partial Cancellation Agreement executed in May 2016 (see NOTE 2), 9,597,800 shares of common stock were returned to the Company and recorded in treasury and were returned to the authorized but unissued shares of the Company.
On July 19, 2017, the Company issued 12,100,000 shares of common stock to M2.
On July 25, 2017, the Company issued 250,000 shares of our common stock as compensation and for a general release. We issued 50,000 shares to Daniel Ryweck for his service on our board of directors, and 200,000 to our attorney Leonard W. Burningham, Esq. for certain of his legal services in the change of control involving M2 and pursuant to his Engagement Letter.
As discussed above, the Company completed a reverse merger with KonaTel Nevada, with KonaTel Nevada being the acquirer for financial reporting purposes. At the date of the Merger, the Company issued 13,500,000 shares of common stock to D. Sean McEwen, who was then the sole shareholder of KonaTel Nevada. At the date of the Merger, 12,100,000 shares of which were owned by M2 (Messrs. Mark Savage and Matthew Atkinson are members of M2 and collectively own approximately 65.2% of M2, which equated to an indirect beneficial ownership of approximately 3,950,000 shares of our common stock each, and with Mr. Atkinson being the sole Manager of M2, he was also the then beneficial owner of all of M2s shares of our common stock; and 1,692,286 shares, which are owned by public shareholders. On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests.
Also, see NOTE 2 above.
NOTE 16 INCOME TAX
For the fiscal year 2017 and 2016, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
Prior to the merger with KonaTel Nevada, and, with the consent of its sole shareholder, KonaTel Nevada had elected under the Internal Revenue Code and for Pennsylvania tax purposes to be an S Corporation. In lieu of corporation income taxes, the shareholders of an S Corporation are taxed on their proportionate share of the Companys taxable income. Therefore, no provision for federal or state income tax is included in the financial statements. The Company evaluates tax positions taken and determines whether it is more-likely-than-not that the tax position will be sustained upon examination based on the technical merits of the position. Management has reviewed its tax positions regarding state nexus as well as its status as a pass-through entity and has determined there are no such positions that fail to meet the more-likely-than-not criterion.
On November 30, 2017, the Company adopted ASU 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes (ASU 2015-17).
ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in the consolidated balance sheet. A reporting entity should apply the amendment prospectively or retrospectively. The adoption of ASU 2015-17 did not have a significant impact on its consolidated financial statements as the Company continues to provide a full valuation allowance against its net deferred tax assets.
The Companys tax expense differs from the expected tax expense for Federal income tax purposes (computed by applying the United States Federal tax rate of 34% to loss before taxes).
The tax effects of the temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.
The tax effect of significant components of the Companys deferred tax assets and liabilities at December 31, 2017 and 2016, respectively, are as follows:
|
|
|
|
| |
|
December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforward
|
$
|
262,244
|
|
$
|
319,520
|
Total gross deferred tax assets
|
|
262,244
|
|
|
319,520
|
Less: Deferred tax asset valuation allowance
|
|
(262,244)
|
|
|
(319,520)
|
Total net deferred tax assets
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation
|
|
826
|
|
|
-
|
Total deferred tax liabilities
|
|
826
|
|
|
-
|
|
|
|
|
|
|
Total net deferred taxes
|
$
|
(826)
|
|
$
|
-
|
50
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history of the Company, the net deferred tax assets for 2017 were fully offset by a 100% valuation allowance. The valuation allowance for the remaining net deferred tax assets was $260,117 and $319,520 as of December 31, 2017, and 2016, respectively.
On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax assets recorded on our balance sheet. Given that the deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the Companys financial position and net loss. However, if and when we become profitable, we will receive a reduced benefit from such deferred tax assets. Had this legislation passed prior to our September 30, 2017, fiscal year-end, the effect of the legislation would have been a reduction in deferred tax assets and the corresponding valuation allowance.
NOTE 17 BUSINESS COMBINATION
On December 18, 2017, the Company completed its Merger with KonaTel Nevada and its acquisition subsidiary. The Company issued 13,500,000 shares of its one mill ($0.001) par value common stock in exchange for all of the outstanding shares of common stock of KonaTel Nevada. See the December 17 Transaction in NOTE 2 above.
At the Effective Time of the Merger, the Company changed its fiscal year from September 30 to a calendar year end of December 31 to coincide with the calendar fiscal year end of KonaTel Nevada; and the S Corporation Election of KonaTel Nevada was terminated. The parties agreed to make all necessary tax elections to achieve a direct tax accounting cut-off as of the date of the S Corporation Election termination for purposes of reporting the applicable short period S and C corporation tax returns, as applicable.
The Merger was accounted for as a reverse-merger and recapitalization of the Company. As such, the prior period equity amounts have been retroactively restated to reflect instruments of the legal acquirer. The consideration given was $1,420, consisting of the fair value of the common stock in the Merger transaction.
The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date of KonaTel, Inc.
|
| |
Cash
|
$
|
7,405
|
Oil and natural gas properties
|
|
37,475
|
Current Liabilities
|
|
(124,327)
|
Total identifiable net assets
|
|
(79,447)
|
|
|
|
Goodwill
|
|
80,867
|
|
|
|
Total consideration
|
$
|
1,420
|
51
Pro-Forma Financial Information
The following unaudited pro forma data summarizes the results of operations for the year ended December 31, 2017, as if the Merger between the Company, its Merger Subsidiary and KonaTel Nevada had been completed on September 30, 2017. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Merger had taken place on September 30, 2017.
KONATEL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
For the Periods Ended SEPTEMBER 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dala Petroleum
Corp.
|
|
KonaTel
Nevada
|
|
Combined
Historical
|
|
Proforma
Adjustments
|
|
Combined
Proforma
|
|
Audited
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended
September 30, 2017
|
|
Twelve Months
Ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
-
|
|
$
|
12,502,186
|
|
$
|
12,502,186
|
|
$
|
-
|
|
$
|
12,502,186
|
Cost of Revenue
|
|
-
|
|
|
10,040,679
|
|
|
10,040,679
|
|
|
-
|
|
|
10,040,679
|
Gross Profit
|
|
-
|
|
|
2,461,507
|
|
|
2,461,507
|
|
|
-
|
|
|
2,461,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
126,853
|
|
|
4,015,641
|
|
|
4,142,494
|
|
|
-
|
|
|
4,142,494
|
Total costs and expenses
|
|
126,853
|
|
|
4,015,641
|
|
|
4,142,494
|
|
|
-
|
|
|
4,142,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of debt
|
|
4,912
|
|
|
-
|
|
|
4,912
|
|
|
-
|
|
|
4,912
|
Interest expense
|
|
(18,841)
|
|
|
(23,985)
|
|
|
(42,826)
|
|
|
-
|
|
|
(42,826)
|
Total non-operating expenses
|
|
(13,929)
|
|
|
(23,985)
|
|
|
(37,914)
|
|
|
-
|
|
|
(37,914)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(140,782)
|
|
|
(1,578,119)
|
|
|
(1,718,901)
|
|
|
-
|
|
|
(1,718,901)
|
Dividend on preferred stock
|
|
(62,758)
|
|
|
-
|
|
|
(62,758)
|
|
|
-
|
|
|
(62,758)
|
Net loss attributable to common stock
|
$
|
(203,540)
|
|
$
|
(1,578,119)
|
|
$
|
(1,781,659)
|
|
$
|
-
|
|
$
|
(1,781,659)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic and diluted
|
|
5,075,536
|
|
|
|
|
|
|
|
|
|
|
|
27,192,286
|
NOTE 18 SUBSEQUENT EVENTS
On February 12, 2018, which is subsequent to the date of this Transition Report, we issued 300,000 Incentive Stock Options to our newly appointed directors.
On March 8, 2018, we issued 4,750,000 shares of our common stock through a private placement at $0.20 per share for an aggregate of $950,000.
We settled the legal proceedings related to our November 1, 2014, acquisition of most of the assets of Coast to Coast Cellular, Inc. Approximately 10 months following this purchase, Coast to Coast filed for bankruptcy protection, and the bankruptcy Trustee for Coast to Coast filed legal proceedings in the United States Bankruptcy Court for the Western District of Pennsylvania on September 23, 2016, Case No. 15-70602-JAD, known as Eric E. Bononi as Trustee to Coast to Coast Cellular, Inc. v. KonaTel, Inc. et. al. The bankruptcy Trustee alleged that we acquired the assets of Coast to Coast for less than their fair market value in its November 2014, purchase, and was seeking damages against the owners of Coast to Coast, as well as from us. We, D. Sean McEwen, our Chairman, CEO, President and a director, as Guarantor, and the bankruptcy Trustee, executed and delivered a Settlement Agreement resolving these legal proceedings against us on or about December 22, 2017, which Settlement Agreement was approved by the Chief U.S. Bankruptcy Judge of the United States Bankruptcy Court for the Western District of Pennsylvania on March 22, 2018. Under the Settlement Agreement, we agreed pay the Trustee $80,000 over a period of six (6) months, which payments are personally guaranteed by Mr. McEwen, with each party unconditionally releasing the other party of any further liability and each party agreeing to pay their respective expenses involved in this proceeding. The Company determined and accrued for a $80,000 liability as of December 31, 2016.
On April 13, 2018, we issued 1,000,000 shares of our common stock through an additional private placement at $0.20 per share for an aggregate of $200,000, $100,000 in cash and $100,000 in payment of our note to this subscriber.
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On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests. This action was approved by the requisite members of M2 on April 9, 2018.
Effective February 7, 2018, we entered into an Agreement for the Purchase and Sale of Membership Interest dated as of February 5, 2018 (the PSMI), with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom, LLC, an Oklahoma limited liability company (IM Telecom), from its sole owner, Trevan Morrow (Mr. Morrow). The principal asset of IM Telecom is a Lifeline Program license (a Federal Communications Commission [the FCC] approved Compliance Plan), the transfer of ownership of which requires prior approval of the FCC. If the transfer of the beneficial ownership of the Lifeline Program license to us is not approved by the FCC prior to April 30, 2018, or a later date agreed upon by the parties, either party may terminate the PSMI. The parties continue to seek FCC approval of the transfer of the Lifeline Program License, and neither party has exercised its right to terminate the PSMI. No assurance can be given that the transfer of this license will be approved.
The Company has evaluated subsequent events through June 29, 2018, the date the financial statements were available to be issued.
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53