See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company
KonaTel Nevada (as defined below) was organized under
the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business
of a full-service MVNO (“Mobile Virtual Network Operator”) provider that delivered cellular products and services to individual
and business customers in various retail and wholesale markets. It is currently inactive.
KonaTel Inc., a Delaware corporation, formerly known
as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), 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 (“Westcott”).
On December 18, 2017, we acquired KonaTel, Inc, a Nevada subchapter S-Corporation (“KonaTel Nevada”), in a merger with our
acquisition subsidiary under which KonaTel Nevada became our wholly owned subsidiary.
Apeiron Systems is headquartered
in Johnstown, Pennsylvania, where it has customer service and software engineering resources staffed. Additional development resources
are staffed out of Los Angeles, CA, as well as in Europe and Asia.
IM Telecom is headquartered
in Plano, Texas, and has a warehouse operation in Tulsa, Oklahoma, and a customer service center in Atmore, Alabama.
We are headquartered in Plano,
Texas. Apeiron Systems has nine (9) full-time employees; IM Telecom has twenty-one (21) full-time employees and two (2) part-time employees;
and we have four (4) full-time employees.
Principal Products
or Services and their Markets
Our principal products and services, across our two
(2) active wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale
and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for
low-income Americans. Except for our ETC Lifeline services distributed in up to ten (10) states and our ACP services distributed in the
fifty (50) states, as well as Washington D.C. and Puerto Rico, our Apeiron Systems’ products and services are available worldwide
and subject to U.S., international and local/national regulations.
We generate revenue from
two (2) primary sources, Hosted Services and Mobile Services:
|
· |
Our Hosted Services include a suite of hosted CPaaS services within Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management, of which IoT provides device connectivity via wireless 4G/5G. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. |
|
· |
Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated. |
Basis of Presentation
Interim Financial Statements
The accompanying unaudited condensed interim financial
statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities
and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements
furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for
a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the
full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company
for the year ended December 31, 2022.
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. Estimates in these financial statements include
the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, and
stock-based compensation. Actual results could differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements include
the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany
transactions are eliminated.
Net Income (Loss) Per Share
Basic income (loss) per share of common stock attributable
to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares
of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock
underlying outstanding stock-based awards using the treasury stock method or the if-converted method, as applicable, are included when
calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. The
dilutive common shares for the three months ended March 31, 2023, and 2022, are not included in the computation of diluted earnings per
share because to do so would be anti-dilutive. As of March 31, 2023, and 2022, there were 1,050,144 and 2,194,079 dilutive shares.
The following table reconciles the shares outstanding
and net income used in the computations of both basic and diluted earnings per share of common stockholders:
Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic
and Diluted
|
|
|
|
|
|
|
|
|
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Numerator | |
| | |
| |
Net Income (Loss) | |
$ | (914,697 | ) | |
$ | (44,449 | ) |
| |
| | | |
| | |
Denominator | |
| | | |
| | |
Weighted-average common shares outstanding | |
| 42,375,917 | | |
| 41,615,406 | |
Dilutive impact of stock options | |
| | | |
| | |
Weighted-average common shares outstanding, diluted | |
| 42,375,917 | | |
| 41,615,406 | |
| |
| | | |
| | |
Net income per common share | |
| | | |
| | |
Basic | |
$ | (0.02 | ) | |
$ | (0.00 | ) |
Diluted | |
$ | (0.02 | ) | |
$ | (0.00 | ) |
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 are held at high credit
financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to
time, the deposit levels may exceed FDIC coverage levels.
Trade Account Receivables
Sales Revenue
The Company has a concentration of risk with respect
to trade receivables from customers and cellular providers. As of March 31, 2023, the Company had a significant concentration of receivables
(defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amount of
$738,706, or 61.4%, and $223,604, or 18.6%. It should be noted that the largest customer is the FCC. As of December 31, 2022, the Company
had a significant concentration of receivables from two (2) customers in the amounts of $859,334, or 57.0%, and $255,136, or 16.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from
contracts with major customers. For the three months ended March 31, 2023, the Company had two (2) customers that accounted for $2,258,114
or 56.0% and $717,577 or 17.8% of revenue, respectively. For the three months ended March 31, 2022, the Company had two (2) customers
that accounted for $2,431,569 or 57.5% of revenue and $915,837 or 21.7% of the revenue, respectively.
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements
and believes that none will have a significant effect on the Company’s financial statements.
NOTE 2 – INVENTORY
Inventory primarily consists of sim cards and cell
phones, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the
first-in, first-out (“FIFO”) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and is
reviewed for obsolescence and counted for accuracy with distributors. At March 31, 2023, and December 31, 2022, the Company had inventory
of $690,868 and $526,337, respectively.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as
of March 31, 2023, and December 31, 2022:
Property
and Equipment - Schedule of Property and Equipment
| |
March 31, 2023 | | |
December 31, 2022 | |
Lease Improvements Lease Improvements | |
$ | 46,950 | | |
$ | 46,950 | |
Furniture and Fixtures Furniture and Fixtures | |
| 102,946 | | |
| 102,946 | |
Billing Software | |
| 217,163 | | |
| 217,163 | |
Office Equipment Office Equipment | |
| 94,552 | | |
| 94,552 | |
| |
| 461,611 | | |
| 461,611 | |
Less: Accumulated Depreciation | |
| (428,163 | ) | |
| (425,075 | ) |
Property and equipment, net | |
$ | 33,448 | | |
$ | 36,536 | |
Depreciation related to Property and Equipment amounted
to $3,088 and $4,117 for the three months ended March 31, 2023, and 2022, respectively. Depreciation and amortization expenses are included
as a component of operating expenses in the accompanying statements of operations.
NOTE 4 – RIGHT-OF-USE ASSETS
Minimum
Maximum
Right-of-Use Assets consist of assets accounted for
under ASC 842. The assets are recorded at present value using implied interest rates between 4.75% and 7.50%. Right-of-Use Assets are
recorded on the balance sheet as intangible assets.
The Company has Right-of-Use Assets through leases
of property under non-cancelable leases. As of March 31, 2023, the Company had four (4) properties with lease terms in excess of one (1)
year. Of these four (4) leases, two (2) leases expire in 2025, one (1) lease expires in 2026, and one (1) lease expires in 2030. Lease
payables as of March 31, 2023, is $547,957.
Future lease liability payments under the terms of
these leases are as follows:
Right-of-Use Assets
- Schedule of Future Minimum Lease Payments for Operating Leases
|
|
|
|
|
2023 | |
$ | 115,459 | |
2024 | |
| 155,324 | |
2025 | |
| 129,543 | |
2026 | |
| 65,967 | |
2027 | |
| 54,000 | |
Thereafter | |
| 144,000 | |
Total | |
| 664,293 | |
Less Interest | |
| 116,336 | |
Present value of minimum lease payments | |
| 547,957 | |
Less Current Maturities | |
| 120,658 | |
Long Term Maturities | |
$ | 427,299 | |
The weighted average term of the Right-to-Use leases
is 66.3 months recorded with a weighted average discount of 6.78%. Total lease expense for the three months ended March 31, 2023, and
2022, was $43,275 and $30,897, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible Assets with definite useful life consist
of licenses, customer lists and software that were acquired through acquisitions:
Intangible Assets - Schedule of Acquired Finite Lived Intangible Assets
| |
March 31, 2023 | | |
December 31, 2022 | |
Customer List | |
$ | 1,135,962 | | |
$ | 1,135,962 | |
Software | |
| 2,407,001 | | |
| 2,407,001 | |
ETC License | |
| 634,251 | | |
| 634,251 | |
Less: Amortization | |
| (3,542,963 | ) | |
| (3,542,963 | ) |
Intangible Assets, net | |
$ | 634,251 | | |
$ | 634,251 | |
Amortization expense amounted to $0, and $0 for the
three months ended March 31, 2023, and 2022, respectively. Amortization expense is included as a component of operating expenses in the
accompanying statements of operations. With the exception of the license granted by the FCC, all intangible assets are fully amortized
as of March 31, 2023.
Intangible Assets with indefinite useful life consist
of the Lifeline license granted by the FCC. The license, because of the nature of the asset and the limitation on the number of granted
Lifeline licenses by the FCC, will not be amortized. The license was acquired through an acquisition. The fair market value of the license
as of March 31, 2023, and December 31, 2022, was $634,251.
NOTE 6 – NOTES PAYABLE
On June 14, 2022, the Company and its wholly owned
subsidiary companies entered into a Note Purchase Agreement and related Guarantee and Security Agreement with CCUR Holdings, Inc. (“CCUR”),
as collateral agent, and Symbolic Logic, Inc., whereby the Company pledged its assets to secure $3,150,000 in debt financing (the “CCUR
Loan”). The term is for a period of twelve (12) months, at an interest rate of 15%, with two (2) successive six-month optional extensions.
As a condition of securing the CCUR Loan, the Company paid a 3% origination fee, and other legal and closing expenses to the lender, in
the amount of $153,284, resulting in a net loan balance of $2,984,181. The loan costs of $153,284 and the net loan balance of $2,984,181
are to be amortized over a 12-month period. The Company incurred an additional $20,248 in legal expense related to the closing, which
amount will be amortized over a 12-month period. Proceeds of the loan will be used in an ongoing capacity to support the acceleration
of our mobile services growth strategy.
NOTE 7 – 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. As of March 31, 2023, there are no ongoing legal proceedings.
Contract Contingencies
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.
Tax Audits
In June of 2021, the Company received an audit determination
and assessment from the State of Pennsylvania related to sales and use tax for the audit period of January 1, 2016, through September
30, 2019. The assessment is in the amount of $115,000, including interest and penalties calculated on sales made inside and outside Pennsylvania.
The Company has recorded the full amount of this assessment. The Company appealed the assessment in August 2021, and at the request of
the state, provided additional information to support its appeal. The Company’s position is that Pennsylvania has no sales tax authority
to levy and collect sales tax on sales made outside of Pennsylvania. The Company initially recorded an expected liability of $7,000, based
on known sales inside Pennsylvania. The State of Pennsylvania rejected an appeal by the Company. The Company remains in discussions with
the State of Pennsylvania and is working towards a plan to pay the full amount of the liability, under the possibility of an extended
payout period. The Company believes this is the best course of action, as following the final payoff of the liability, the Company can
re-open an appeal with the state for a refund of the liability.
Letters of Credit
The Company had no outstanding letters of credit as
of March 31, 2023.
NOTE 8 – SEGMENT REPORTING
The Company operates within two (2) reportable segments.
The Company’s management evaluates performance and allocates resources based on the profit or loss from operations. Because the
Company is a recurring revenue 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 reportable segments consist of Hosted Services
and Mobile Services. Mobile Services reporting will now consist of our post-paid and pre-paid cellular business.
Hosted Services – Our Hosted Services
include a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call
Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private
IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally,
Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed
nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs.
Mobile Services – Our Mobile Services
include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and
IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless
carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure
over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional
post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include,
but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution
of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to
low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile
data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the
ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated.
The following table reflects the result of operations of the Company’s
reportable segments:
Segment Reporting - Schedule of Segment
Reporting Information
| |
Hosted Services | | |
Mobile Services | | |
Total | |
For the three months period ended March 31, 2023 | |
| | | |
| | | |
| | |
Revenue | |
$ | 1,232,930 | | |
$ | 2,798,789 | | |
$ | 4,031,719 | |
Gross Profit | |
$ | 347,481 | | |
$ | 654,398 | | |
$ | 1,001,879 | |
Depreciation and amortization | |
$ | 2,986 | | |
$ | 102 | | |
$ | 3,088 | |
Additions to property and equipment | |
$ | — | | |
$ | — | | |
$ | — | |
For the three months period ended March 31, 2022 | |
| | | |
| | | |
| | |
Revenue | |
$ | 1,434,555 | | |
$ | 2,793,301 | | |
$ | 4,227,856 | |
Gross Profit | |
$ | 455,314 | | |
$ | 1,191,947 | | |
$ | 1,647,261 | |
Depreciation and amortization | |
$ | 3,841 | | |
$ | 276 | | |
$ | 4,117 | |
Additions to property and equipment | |
$ | — | | |
$ | — | | |
$ | — | |
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock
On February 9, 2023, Robert Beaty, an independent
Board member, conveyed to the Company 44,686 shares of the Company’s common stock at a price of $0.7385, in an exempt transaction
pursuant to Section 16b-3(e), and in full payment of the exercise of 100,000 incentive stock options granted to him in 2018 at a price
of $0.033 per share, which was 110% of the fair market value of our common stock on the date of such grant; these shares were originally
acquired by him through an unrelated private transaction in 2020.
Non-Compensatory Stock Option Grant
Chief Executive Officer
On March 16,
2023, D. Sean McEwen, the Chairman and CEO of the Company, exercised his first tranche of 187,500 equity stock options for 187,500 shares
of common stock at a price of $0.22 per share, which shares were issued on March 20, 2023.
Stock Compensation
The Company offers incentive stock option equity grants
to directors and key employees. Options vest in tranches and typically expire in five (5) years. For the three months ended March 31,
2023, and 2022, the Company recorded options expense of $142,599 and $151,759, respectively. The option expense not taken as of March
31, 2023, is $1,412,615, with a weighted average term of 3.69 years.
Jeffrey Pearl, an independent Board member, was granted 25,000 quarterly
incentive stock options on January 30, 2023, at an exercise price of $0.880, fully vested, which was 110% of the fair market value of
our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock
price of $0.800, a strike price of $0.880, a term of five (5) years, volatility of 180.71%, and a rate-free discount of 3.68%.
Robert Beaty, an independent Board member, was granted 25,000 quarterly
incentive stock options on February 13, 2023, at an exercise price of $0.814, fully vested, which was 110% of the fair market value of
our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock
price of $0.740, a strike price of $0.814, a term of five (5) years, volatility of 180.09%, and a rate-free discount of 3.93%.
The following table represents stock option activity
as of and for the three months ended March 31, 2023:
Stockholders’ Equity - Schedule of
Share-Based Compensation, Stock Option Activity
| |
Number of | | |
Weighted Average | | |
Weighted Average | | |
Aggregate |
| |
Shares | | |
Exercise Price | | |
Remaining Life | | |
Intrinsic Value |
| |
| | |
| | |
| | |
|
Options Outstanding – December 31, 2022 | |
| 4,405,000 | | |
$ | 0.59 | | |
| 3.22 | | |
$ | 2,260,138 |
Granted | |
| 50,000 | | |
| 0.85 | | |
| | | |
| |
Exercised | |
| (287,500 | ) | |
| 0.26 | | |
| | | |
| 127,025 |
Forfeited | |
| — | | |
| | | |
| | | |
| — |
Options Outstanding – March 31, 2023 | |
| 4,167,500 | | |
$ | 0.62 | | |
| 3.69 | | |
$ | 410,388 |
| |
| | | |
| | | |
| | | |
| |
Exercisable and Vested, March 31, 2023 | |
| 1,050,144 | | |
$ | 0.45 | | |
| 2.08 | | |
$ | 279,114 |
NOTE 10 – SUBSEQUENT EVENTS
Below are events that have occurred since March 31,
2023:
Incentive Stock Option Grants
Subsequent Event
Jeffrey Pearl, an independent Board member, was granted
25,000 quarterly incentive stock options on April 28, 2023, at an exercise price of $0.781, fully vested, which was 110% of the fair market
value of our common stock on the date of such grant.
Robert Beaty,
an independent Board member, was granted 25,000 quarterly incentive stock options on May 12, 2023, at an exercise price of $0.871, fully
vested, which was 110% of the fair market value of our common stock on the date of such grant.
Assignment of Agreement to Acquire Wireless Carrier
On April 6,
2023, we assigned our rights to acquire a wireless carrier to Insight Mobile, Inc., a Delaware corporation (respectively, the “Assignment
Agreement” and “Insight Mobile”), which Assignment Agreement shall be held in escrow by counsel for Insight Mobile pending
satisfaction of all conditions to the closing of the Assignment Agreement. Additional information about this assignment is contained
in the 8-K Current Report of the Company dated April 6, 2023, and filed with the SEC on April 17, 2023, which is available by Hyperlink
in Part II-Other Information, in Item 6 hereof.
Loan Extension
On April 28, 2023, the Company provided notice
to CCUR of its election to extend the “First Extension Option,” under the CCUR Loan
by an additional six (6) months. As part of the condition to extend, the Company paid $47,250
to CCUR, which is equal to one and a half percent (1.5%) of the outstanding principal amount of the CCUR Loan.