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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/14/22 KonaTel, Inc. 10-Q 9/30/22 56:3.4M EDGARSources LLC/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 580K
2: EX-4 Instrument Defining the Rights of Security Holders HTML 26K
-- exhibit4
3: EX-10 Material Contract -- exhibit102 HTML 15K
7: EX-99 Miscellaneous Exhibit -- exhibit99 HTML 91K
4: EX-31 Certification -- §302 - SOA'02 -- exhibit311 HTML 20K
5: EX-31 Certification -- §302 - SOA'02 -- exhibit312 HTML 20K
6: EX-32 Certification -- §906 - SOA'02 -- exhibit32 HTML 18K
13: R1 Cover HTML 64K
14: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 116K
15: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 25K
(Parenthetical)
16: R4 Condensed Consolidated Statements of Operations HTML 111K
(Unaudited)
17: R5 Condensed Consolidated Statements of Stockholders' HTML 55K
Equity (Unaudited)
18: R6 Condensed Consolidated Statements of Cash Flows HTML 96K
(Unaudited)
19: R7 Summary of Significant Accounting Policies HTML 68K
20: R8 Inventory HTML 20K
21: R9 Property and Equipment HTML 33K
22: R10 Right-Of-Use Assets HTML 31K
23: R11 Intangible Assets HTML 30K
24: R12 Notes Payable HTML 28K
25: R13 Contingencies and Commitments HTML 24K
26: R14 Segment Reporting HTML 58K
27: R15 Stockholders? Equity HTML 51K
28: R16 Subsequent Events HTML 25K
29: R17 Summary of Significant Accounting Policies HTML 69K
(Policies)
30: R18 Summary of Significant Accounting Policies HTML 37K
(Tables)
31: R19 Property and Equipment (Tables) HTML 30K
32: R20 Right-Of-Use Assets (Tables) HTML 27K
33: R21 Intangible Assets (Tables) HTML 27K
34: R22 Segment Reporting (Tables) HTML 51K
35: R23 Stockholders? Equity (Tables) HTML 35K
36: R24 Summary of Significant Accounting Policies HTML 54K
-Schedule of Earnings Per Share, Basic and Diluted
(Details)
37: R25 Summary of Significant Accounting Policies HTML 45K
(Details Narrative)
38: R26 Inventory (Details Narrative) HTML 19K
39: R27 Property and Equipment - Schedule of Property and HTML 34K
Equipment (Details)
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Lease Payments for Operating Leases (Details)
42: R30 Right-Of-Use Assets (Details Narrative) HTML 25K
43: R31 Intangible Assets - Schedule of Acquired Finite HTML 31K
Lived Intangible Assets (Details)
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Information (Details)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
i x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended i September 30, 2022
i o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File No. i 001-10171
(Exact name of the issuer as specified in its charter)
| i Delaware | i 80-0973608 | |
| (State or Other Jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
i 500 N. Central Expressway, i Ste. 202
(Address of Principal Executive Offices)
(Registrant Telephone Number)
The Registrant does not have any securities registered pursuant to Section 12(b) of the Exchange Act.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). i Yes x No o
Indicate by check mark whether the Registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| i Non-accelerated filer x | Smaller reporting company i x |
| Emerging Growth company i o |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o i No x
Our website is www.konatel.com.
Our common stock is quoted on the OTC Markets Group, LLC (the “OTC Markets”) in its “OTCQB Tier” under the symbol “KTEL.”
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:
| Common Capital Voting Stock, $0.001 par value per share | shares | |
| Class | Outstanding as of September 30, 2022 |
References
In this Quarterly Report, references to “KonaTel, Inc.,” “KonaTel,” the “Company,” “we,” “our,” “us” and words of similar import, refer to KonaTel, Inc., a Delaware corporation, formerly named “Dala Petroleum Corp.,” which is the Registrant; and our wholly owned subsidiaries, KonaTel, Inc., a Nevada corporation (“KonaTel Nevada”), Apeiron Systems, Inc., a Nevada corporation doing business as “Apeiron” (“Apeiron Systems”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infiniti Mobile”).
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Quarterly Report completely, and it should be read and considered with all other reports filed by us with the United States Securities and Exchange Commission (the “SEC”) that are contained in the SEC Edgar Archives. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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KONATEL, INC.
FORM 10-Q
INDEX
| Page No. | |
| PART I – FINANCIAL INFORMATION | |
| Item 1. Financial Statements & Footnotes | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 |
| Item 4. Controls and Procedures | 18 |
| PART II – OTHER INFORMATION | |
| Item 1. Legal Proceedings | 18 |
| Item 1A. Risk Factors | 18 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
| Item 3. Defaults Upon Senior Securities | 19 |
| Item 4. Mine Safety Disclosures | 20 |
| Item 5. Other Information | 20 |
| Item 6. Exhibits | 21 |
| SIGNATURES | 22 |
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KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | i 2,243,195 | $ | i 932,785 | ||||
| Accounts Receivable, net | i 1,503,055 | i 1,274,687 | ||||||
| Inventory, Net | i 297,393 | i 566,839 | ||||||
| Prepaid Expenses | i 7,443 | i 79,467 | ||||||
| Other Current Asset | i 164 | i 164 | ||||||
| Total Current Assets | i 4,051,250 | i 2,853,942 | ||||||
| Property and Equipment, Net | i 39,624 | i 48,887 | ||||||
| Other Assets | ||||||||
| Intangible Assets, Net | i 1,224,790 | i 807,775 | ||||||
| Other Assets | i 127,864 | i 154,297 | ||||||
| Investments | i 10,000 | i 10,000 | ||||||
| Total Other Assets | i 1,362,654 | i 972,072 | ||||||
| Total Assets | $ | i 5,453,528 | $ | i 3,874,901 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | i 1,445,975 | $ | i 930,449 | ||||
| Loans Payable, net of origination fees | i 3,027,564 | — | ||||||
| Right of Use Operating Lease Obligation - current | i 115,653 | i 50,672 | ||||||
| Total Current Liabilities | i 4,589,192 | i 981,121 | ||||||
| Long Term Liabilities | ||||||||
| Right of Use Operating Lease Obligation - long term | i 495,385 | i 136,445 | ||||||
| Note Payable - long term | — | i 150,000 | ||||||
| Total Long Term Liabilities | i 495,385 | i 286,445 | ||||||
| Total Liabilities | i 5,084,577 | i 1,267,566 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at September 30, 2022 and outstanding and issued at December 31, 2021 | i 42,215 | i 41,615 | ||||||
| Additional Paid In Capital | i 8,540,557 | i 7,911,224 | ||||||
| Accumulated Deficit | ( i 8,213,821 | ) | ( i 5,345,504 | ) | ||||
| Total Stockholders’ Equity | i 368,951 | i 2,607,335 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | i 5,453,528 | $ | i 3,874,901 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | i 5,880,333 | $ | i 3,612,861 | $ | i 15,231,288 | $ | i 8,919,573 | ||||||||
| Cost of Revenue | i 4,969,251 | i 1,988,624 | i 12,230,378 | i 4,946,786 | ||||||||||||
| Gross Profit | i 911,082 | i 1,624,237 | i 3,000,910 | i 3,972,787 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Payroll and Related Expenses | i 1,348,152 | i 636,329 | i 3,719,446 | i 1,817,200 | ||||||||||||
| Operating and Maintenance | i 5,321 | i 461 | i 6,681 | i 1,211 | ||||||||||||
| Bad Debt | — | — | i 29,133 | i 427 | ||||||||||||
| Professional Services | i 381,340 | i 77,335 | i 675,987 | i 206,671 | ||||||||||||
| Utilities and Facilities | i 60,083 | i 39,726 | i 135,118 | i 110,523 | ||||||||||||
| Depreciation and Amortization | i 3,088 | i 213,552 | i 9,264 | i 640,657 | ||||||||||||
| General and Administrative | i 71,545 | i 32,668 | i 251,778 | i 93,994 | ||||||||||||
| Marketing and Advertising | i 15,542 | i 37,350 | i 100,570 | i 50,073 | ||||||||||||
| Application Development Costs | i 142,237 | i 179,427 | i 391,930 | i 396,715 | ||||||||||||
| Taxes and Insurance | i 26,729 | i 35,784 | i 150,389 | i 60,479 | ||||||||||||
| Total Operating Expenses | i 2,054,037 | i 1,252,632 | i 5,470,296 | i 3,377,950 | ||||||||||||
| Operating Income/(Loss) | ( i 1,142,955 | ) | i 371,605 | ( i 2,469,386 | ) | i 594,837 | ||||||||||
| Other Income and Expense | ||||||||||||||||
| Interest Expense | ( i 161,977 | ) | ( i 2,573 | ) | ( i 233,153 | ) | ( i 12,328 | ) | ||||||||
| Other Expenses | ( i 40,582 | ) | ( i 49,197 | ) | ( i 165,778 | ) | ( i 154,310 | ) | ||||||||
| Total Other Income and Expenses | ( i 202,559 | ) | ( i 51,770 | ) | ( i 398,931 | ) | ( i 166,638 | ) | ||||||||
| Net Income (Loss) | $ | ( i 1,345,514 | ) | $ | i 319,836 | $ | ( i 2,868,317 | ) | $ | i 428,199 | ||||||
| Earnings (Loss) per Share | ||||||||||||||||
| Basic | $ | ( i 0.03 | ) | $ | i 0.01 | $ | ( i 0.07 | ) | $ | i 0.01 | ||||||
| Diluted | $ | ( i 0.03 | ) | $ | i 0.01 | $ | ( i 0.07 | ) | $ | i 0.01 | ||||||
| Weighted Average Outstanding Shares | ||||||||||||||||
| Basic | i 41,912,145 | i 40,899,569 | i 41,715,406 | i 40,758,495 | ||||||||||||
| Diluted | i 41,912,145 | i 43,565,835 | i 41,715,406 | i 43,434,761 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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KonaTel, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2021 | i 40,692,286 | $ | i 40,692 | $ | i 7,460,632 | $ | ( i 5,968,489 | ) | $ | i 1,532,835 | ||||||||||
| Exercised Stock Options | i 575,000 | i 575 | i 109,425 | — | i 110,000 | |||||||||||||||
| Stock Based Compensation | — | i — | i 141,935 | i — | i 141,935 | |||||||||||||||
| Net Income | — | i — | i — | i 428,199 | i 428,199 | |||||||||||||||
| Balances as of September 30, 2021 | i 41,267,286 | $ | i 41,267 | $ | i 7,711,992 | $ | ( i 5,540,290 | ) | $ | i 2,212,968 | ||||||||||
| Balances as of July 1, 2021 | i 40,692,286 | $ | i 40,692 | $ | i 7,539,690 | $ | ( i 5,860,126 | ) | i 1,720,256 | |||||||||||
| Exercised Stock Options | i 575,000 | i 575 | i 109,425 | — | i 110,000 | |||||||||||||||
| Stock Based Compensation | — | i — | i 62,877 | i — | i 62,877 | |||||||||||||||
| Net Income | — | i — | i — | i 319,836 | i 319,836 | |||||||||||||||
| Balances as of September 30, 2021 | i 41,267,286 | $ | i 41,267 | i 7,711,992 | $ | ( i 5,540,290 | ) | $ | i 2,212,968 | |||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2022 | i 41,615,406 | $ | i 41,615 | $ | i 7,911,224 | $ | ( i 5,345,504 | ) | $ | i 2,607,335 | ||||||||||
| Exercised Stock Options | i 600,000 | i 600 | i 89,400 | i 90,000 | ||||||||||||||||
| Stock Based Compensation | — | i — | i 539,933 | i — | i 539,933 | |||||||||||||||
| Net Loss | — | i — | i — | ( i 2,868,317 | ) | ( i 2,868,317 | ) | |||||||||||||
| Balances as of September 30, 2022 | i 42,215,406 | $ | i 42,215 | $ | i 8,540,557 | $ | ( i 8,213,821 | ) | $ | i 368,951 | ||||||||||
| Balances as of July 1, 2022 | i 41,615,406 | $ | i 41,615 | $ | i 8,265,520 | $ | ( i 6,868,307 | ) | $ | i 1,438,828 | ||||||||||
| Exercised Stock Options | i 600,000 | i 600 | i 89,400 | i 90,000 | ||||||||||||||||
| Stock Based Compensation | — | i — | i 185,637 | i — | i 185,637 | |||||||||||||||
| Net Loss | — | i — | i — | ( i 1,345,514 | ) | ( i 1,345,514 | ) | |||||||||||||
| Balances as of September 30, 2022 | i 42,215,406 | $ | i 42,215 | $ | i 8,540,557 | $ | ( i 8,213,821 | ) | $ | i 368,951 | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (Loss) | $ | ( i 2,868,317 | ) | $ | i 428,199 | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and Amortization | i 9,264 | i 640,657 | ||||||
| Loan Origination Cost Amortization | i 51,095 | — | ||||||
| Bad Debt | i 29,133 | i 427 | ||||||
| Stock-based Compensation | i 539,933 | i 141,935 | ||||||
| Change in Right of Use Asset | ( i 417,014 | ) | ( i 118,085 | ) | ||||
| Change in Lease Liability | i 423,920 | i 130,956 | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( i 257,500 | ) | ( i 559,685 | ) | ||||
| Inventory | i 269,445 | ( i 90,200 | ) | |||||
| Prepaid Expenses | i 98,456 | ( i 13,657 | ) | |||||
| Accounts Payable and Accrued Expenses | i 515,527 | i 95,887 | ||||||
| Deferred Revenue | — | ( i 37,677 | ) | |||||
| Other Assets | — | i 17,800 | ||||||
| Net cash provided by (used in) operating activities | ( i 1,606,058 | ) | i 636,557 | |||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of Assets | — | ( i 10,000 | ) | |||||
| Net cash (used in) investing activities | — | ( i 10,000 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term note payable | i 3,150,000 | — | ||||||
| Loan origination cost | ( i 173,532 | ) | — | |||||
| Repayments of amounts of Notes Payable | ( i 150,000 | ) | ( i 93,030 | ) | ||||
| Cash received from Stock Options Exercised | i 90,000 | i 110,000 | ||||||
| Net cash provided by (used in) financing activities | i 2,916,468 | i 16,970 | ||||||
| Net Change in Cash | i 1,310,410 | i 643,527 | ||||||
| Cash - Beginning of Year | i 932,785 | i 715,195 | ||||||
| Cash - End of Period | $ | i 2,243,195 | $ | i 1,358,722 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | i 3,099 | $ | i 4,041 | ||||
| Cash paid for taxes | $ | — | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Right of use assets obtained in exchange for new operating lease liabilities | $ | i 472,974 | $ | i 199,245 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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KonaTel, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
i
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.
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.
On December 31, 2018, we acquired Apeiron Systems, Inc. (www.apeiron.io) (“Apeiron Systems” or “Apeiron”), which is also our wholly owned subsidiary. Apeiron was organized in 2013 and is an international hosted services Communications Platform as a Service (“CPaaS”) provider that designed, built, owns and operates its national private core network, supporting a suite of business communications services, all accessible via proprietary Applications Programming Interfaces (“APIs”). As a Federal Communications Commissions (“FCC”) licensed Internet Telephony Service Provider (“ITSP”), Apeiron also holds an FCC numbering authority license. Some of Apeiron’s hosted services include Voice over IP (“VoIP”), cellular and Over-The-Top (“OTT”) telephony, SMS/MMS messaging and broadcast services, numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording and other services through local, toll-free and international phone numbers. Supported by its national redundant network, Apeiron also provides public and private IP network services, including Multiprotocol Label Switching (“MPLS”), Dedicated Internet and LTE Wireless WAN solutions. Apeiron’s cloud services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”) and Internet of Things (“IoT”) data and device management. Apeiron primarily distributes its services nationally through its website, its sales staff, independent sales agents and Independent Sales Organizations (“ISOs”).
On February 5, 2018, we entered into a purchase agreement to acquire IM Telecom, LLC, an Oklahoma limited liability company (www.infinitimobile.com), doing business as Infiniti Mobile (“IM Telecom” or “Infiniti Mobile”). On October 23, 2018, the FCC approved our acquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom operates as a wholly owned subsidiary of KonaTel. It is an FCC licensed Eligible Telecommunications Carrier (“ETC”) and is one of twenty-two (22) original FCC licensed wireless cellular resellers to hold an FCC approved Lifeline Compliance Plan since 2012, of which approximately twelve (12) license holders remain active today. The FCC has not approved (granted) a new wireless reseller Lifeline Compliance Plan since 2012. As a licensed ETC, IM Telecom is currently authorized to distribute Lifeline subsidized mobile voice/data service in nine (9) states. In addition to Lifeline, IM Telecom is also an FCC licensed Affordable Connectivity Program (“ACP”) provider, authorized to distribute ACP subsidized high-speed mobile data service in the forty-eight (48) contiguous states plus Washington D.C. and Puerto Rico. Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income Americans. ACP is an FCC program that provides subsidized high-speed wireless data services to low-income Americans. IM Telecom distributes Lifeline and ACP services under its Infiniti Mobile brand name through its website, sales staff, retail location and ISOs. IM Telecom also offers non-Lifeline and non-ACP services throughout the United States.
Apeiron Systems is headquartered in Los Angeles, California. It also has some management staff in Plano, Texas, customer service and software engineering resources staffed in Johnstown, Pennsylvania and software engineering services staffed in Europe and Asia. IM Telecom is headquartered in Plano, Texas, and operates a retail operation in Tulsa, Oklahoma.
We are headquartered in Plano, Texas. Apeiron Systems has fourteen (14) full-time employees; IM Telecom has twenty-three (23) 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 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 nine (9) states and our ACP services distributed in the forty-eight (48) contiguous states, 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.
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We generate revenue from two (2) primary sources, Hosted Services and Mobile 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. |
| · | 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. |
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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, 2021.
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.
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Basis of Consolidation
The condensed consolidated financial statements include the Company and three wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany transactions are eliminated.
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Basic income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options. The dilutive common shares derived from stock options are and , for the three and nine months ended September 30, 2022, respectively, are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.
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Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic and Diluted
Three Months Ended September 30, | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Income (Loss) | $ | ( i 1,345,514 | ) | $ | i 319,836 | $ | ( i 2,868,317 | ) | $ | i 428,199 | ||||||
| Weighted average shares outstanding during period on which basic earnings per share is calculated | i 41,912,145 | i 40,899,569 | i 41,715,406 | i 40,758,495 | ||||||||||||
| Effect of dilutive shares | ||||||||||||||||
| Incremental shares under stock-based compensation | i 2,676,266 | i 2,676,266 | ||||||||||||||
| Weighted average shares outstanding during period on which diluted earnings per share was calculated | i 41,912,145 | i 43,565,835 | i 41,715,406 | i 43,434,761 | ||||||||||||
| Earnings per share attributable to common stockholders | ||||||||||||||||
| Basic earnings per share | $ | ( i 0.03 | ) | $ | i 0.01 | $ | ( i 0.07 | ) | $ | i 0.01 | ||||||
| Diluted earnings per share | $ | ( i 0.03 | ) | $ | i 0.01 | $ | ( i 0.07 | ) | $ | i 0.01 | ||||||
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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.
The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of September 30, 2022, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from one (1) customer in the amount of $ i 1,305,264, or i 86.8%. It should be noted that the largest customer is the FCC. As of December 31, 2021, the Company had a significant concentration of receivables from two (2) customers in the amounts of $ i 783,431, or i 63.9%, and $ i 194,647, or i 15.9%.
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Concentration of Major Customer
A significant amount of the revenue is derived from large customers and the government. For the three months ended September 30, 2022, the Company had two (2) customers that accounted for $ i 826,901 or i 14.1% and $ i 4,173,492 or i 71.0% of revenue, respectively. For the three-month period ended September 30, 2021, the Company had two (2) customers that accounted for $ i 1,037,717 or i 28.7% and $ i 1,637,712 or i 45.3% of revenue, respectively. For the nine months ended September 30, 2022, the Company had two (2) customers that accounted for $ i 9,915,189 or i 65.1% and $ i 2,639,730 or i 17.3% of revenue, respectively. For the nine-month period ended September 30, 2021, the Company had two (2) customers that accounted for $ i 3,297,984 or i 37.0% and $ i 2,818,465 or i 31.6% of revenue, respectively.
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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.
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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 on a quarterly basis inventory is reviewed for obsolescence and counted for accuracy with distributors. At September 30, 2022, and December 31, 2021, the Company had inventory of $ i 297,393 and $ i 566,839, respectively.
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NOTE 3 – PROPERTY AND EQUIPMENT
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Property and equipment consist of the following major classifications as of September 30, 2022, and December 31, 2021:
Property and Equipment - Schedule of Property and Equipment
| September 30, 2022 | December 31, 2021 | |||||||
| Lease Improvements Lease Improvements | $ | i 46,950 | $ | i 46,950 | ||||
| Furniture and Fixtures Furniture and Fixtures | i 102,946 | i 102,946 | ||||||
| Billing Software | i 217,163 | i 217,163 | ||||||
| Office Equipment Office Equipment | i 94,552 | i 94,552 | ||||||
| i 461,611 | i 461,611 | |||||||
| Less: Accumulated Depreciation | ( i 421,987 | ) | ( i 412,724 | ) | ||||
| Property and equipment, net | $ | i 39,624 | $ | i 48,887 | ||||
Depreciation related to Property and Equipment amounted to $ i 3,088 and $ i 12,969 for the three-month periods ended September 30, 2022, and 2021, respectively. For the nine-month periods ended September 30, 2022, and 2021, depreciation was $ i 9,264 and $ i 38,907. Depreciation and amortization expenses are included as a component of operating expenses in the accompanying statements of operations.
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Right-of-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between i 4.75% and i 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 four (4) non-cancelable leases. As of September 30, 2022, i the Company had four (4) properties with a lease term more than one (1) year. These lease liabilities expire June 1, 2025, July 31, 2025, March 31, 2026, and September 2, 2030. The Company has no current lease liabilities. In January 2021, the Company entered a new five (5) year lease for its corporate headquarters located in Plano, TX. In June 2022, the Company entered a three (3) year lease for its new U.S. based national call center operation in Atmore, AL. In August 2022, the Company entered a three (3) year lease in Tulsa, OK, to support its distribution channel. In September 2022, the Company entered an eight (8) year lease in its Johnstown, PA location.
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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
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The Company had (2) office/retail spaces on a month-to-month basis during Q3 2022, now supplanted under new lease obligations. Total lease expense for the three months ended September 30, 2022, and 2021, was $ i 2,073 and $ i 6,217, respectively. Total lease expense for the nine months ended September 30, 2022, and 2021, amounted to $ i 15,508 and $ i 18,652, respectively. Lease expense for 2022 is for the remaining three months of the year.
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Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions. Intangible Assets with indefinite useful life consist of a Lifeline License granted by the FCC.
The Lifeline License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The Lifeline License was acquired through an acquisition. The fair market value of the License as of September 30, 2022, was $ i 634,251.
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| September 30, 2022 | December 31, 2021 | |||||||
| Customer List | $ | i 1,135,962 | $ | i 1,135,962 | ||||
| Software | i 2,407,001 | i 2,407,001 | ||||||
| ETC License | i 634,251 | i 634,251 | ||||||
| Less: Amortization | ( i 3,542,963 | ) | ( i 3,542,963 | ) | ||||
| Net Amortizable Intangibles | i 634,251 | i 634,251 | ||||||
| Right of Use Assets - net | i 590,539 | i 173,524 | ||||||
| Intangible Assets - net | $ | i 1,224,790 | $ | i 807,775 | ||||
Amortization expense amounted to $ i 0, and $ i 200,583 for the three months ended September 30, 2022, and 2021, respectively. Amortization expense amounted to $ i 0, and $ i 601,750 for the nine months ended September 30, 2022, and 2021, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Current intangible assets, except for the Lifeline License, were fully amortized as of December 31, 2021.
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In 2020, the Company was granted a $ i 150,000 Economic Injury Disaster Loan (“EIDL”) from the SBA. The term of the loan was thirty ( i 30) years, at an interest rate of i 3.75% on advanced funds. Installment payments were to begin twelve (12) months following the loan date but were deferred through September of 2022. As of June 30, 2022, the outstanding balance was paid in full and there are no further obligations due the SBA.
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. (as collateral agent), and Symbolic Logic, Inc., whereby the Company pledged its assets to secure $ i 3,150,000 in debt financing. The term is for a period of twelve ( i 12) months, at an interest rate of i 15%, with two successive six-month optional extensions. As a condition of securing the loan, the Company paid a 3% origination fee, and other legal and closing expenses, in the amount of $ i 153,284, resulting in a net loan balance of $ i 2,984,181. The loan costs of $ i 153,284 and the net loan balance of $ i 2,984,181 are to be amortized over a 12-month period. Proceeds of the loan were used to retire the $ i 150,000 SBA “EIDL” Loan and will be used in an ongoing capacity to support the acceleration of our mobile services growth strategy.
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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 September 30, 2022, there are no ongoing legal proceedings.
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.
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 $ i 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 $ i 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 September 30, 2022.
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The Company operates within two ( i 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.
Hosted Services – This segment includes 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 through Apeiron’s website, its own sales staff, independent sales agents, and ISOs.
Mobile Services – This segment includes 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 cellular voice service and mobile data service by IM Telecom under its Infiniti Mobile brand to low-income American households that qualify for the FCC’s Lifeline voice service program and 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.
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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 nine months period ended September 30, 2022 | ||||||||||||
| Revenue | $ | i 4,199,365 | $ | i 11,031,923 | $ | i 15,231,288 | ||||||
| Gross Profit | $ | i 1,372,019 | $ | i 1,628,891 | $ | i 3,000,910 | ||||||
| Depreciation and amortization | $ | i 8,958 | $ | i 306 | $ | i 9,264 | ||||||
| Additions to property and equipment | $ | i — | $ | i — | $ | i — | ||||||
| For the three months period ended September 30, 2022 | ||||||||||||
| Revenue | $ | i 1,328,333 | $ | i 4,552,000 | $ | i 5,880,333 | ||||||
| Gross Profit | $ | i 453,087 | $ | i 457,995 | $ | i 911,082 | ||||||
| Depreciation and amortization | $ | i 2,986 | $ | i 102 | $ | i 3,088 | ||||||
| Additions to property and equipment | $ | i — | $ | i — | $ | i — |
| For the nine months period ended September 30, 2021 | ||||||||||||
| Revenue | $ | i 4,380,547 | $ | i 4,539,026 | $ | i 8,919,573 | ||||||
| Gross Profit | $ | i 1,600,069 | $ | i 2,372,718 | $ | i 3,972,787 | ||||||
| Depreciation and amortization | $ | i 619,472 | $ | i 21,185 | $ | i 640,657 | ||||||
| Additions to property and equipment | $ | i — | $ | i — | $ | i — |
| For the three months period ended September 30, 2021 | ||||||||||||
| Revenue | $ | i 1,588,035 | $ | i 2,024,826 | $ | i 3,612,861 | ||||||
| Gross Profit | $ | i 559,785 | $ | i 1,064,452 | $ | i 1,624,237 | ||||||
| Depreciation and amortization | $ | i 206,490 | $ | i 7,062 | $ | i 213,552 | ||||||
| Additions to property and equipment | $ | i — | $ | i — | $ | i — |
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Common Stock
The Company issued shares of its common stock during the quarter ended September 30, 2022, to two (2) former employees who exercised their respective incentive stock options to acquire shares of our common stock that had been registered with the SEC pursuant to an S-8 Registration Statement filed with the SEC on August 25, 2021, i in consideration of the sum of $90,000, or $45,000 for each 300,000 share tranche; these shares were issued under the Company’s 2018 Stock Option Plan; and shares were issued under the 2018 Stock Option Plan during the year ended December 31, 2021, i in a cashless exchange of 76,880 shares underlying a 500,000 share incentive stock option grant made on December 18, 2017.
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 September 30, 2022, and 2021, the Company recorded options expense of $ i 185,637 and $ i 62,877, respectively. For the nine months ended September 30, 2022, and 2021, the Company recorded options expense of $ i 539,933 and $ i 141,935, respectively. The option expense not taken as of September 30, 2022, is $, with a weighted average term of years.
Through September 30, 2022, the Company granted options. There was a total of incentive stock options issued to two (2) employees, each vesting on the four () year anniversary dates of their respective grants. A total of incentive stock options were issued to two (2) independent Board members, fully vested as of each grant date, at exercise prices based on 110% of the fair market value of our common stock on the date of grant, and incentive stock options were issued to an independent consultant to the Company, fully vested, as of the date of grant. All option values were computed using the Black-Scholes-Merton pricing model, with a term of five () years, an average interest-free rate of %, an average volatility rate of %, and an average exercise price of $.
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Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity
| No. Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | Aggregate Intrinsic Value | |||||||
| Options Outstanding – December 31, 2021 | i 4,260,000 | $ | i 0.37 | $ | i 5,862,938 | |||||
| Granted | i 900,000 | i 1.13 | i 4.41 | |||||||
| Exercised | i 600,000 | — | — | — | ||||||
| Forfeited | i 70,000 | — | — | — | ||||||
| Options Outstanding – September 30, 2022 | i 4,490,000 | $ | i 0.53 | i 2.54 | $ | i 3,351,936 | ||||
| Exercisable and Vested, September 30, 2022 | i 1,936,189 | $ | i 0.36 | $ | i 1,789,202 | |||||
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Below are events that have occurred since September 30, 2022:
Incentive Stock Option Grants
The Company granted a quarterly director share incentive stock option to Jeffrey Pearl, an independent director, on October 28, 2022, at an exercise price of $, fully vested. The exercise price was based upon 110% of the fair market value or the closing public trading price of the Company’s common stock on the date of grant.
The Company also granted a quarterly director share incentive stock option to Robert Beaty, an independent director, on November 12, 2022, at an exercise price of $, fully vested. The exercise price was based upon 110% of the fair market value or the closing public trading price of the Company’s common stock on the date of grant.
Effective October 14, 2022, and pursuant to a Letter Agreement of that date and the consent of the Board of Directors of the Company dated October 12, 2022, the Company cancelled incentive stock options exercisable at $per share that had been granted under the Company’s “Revised Form of Employee Incentive Stock Option Agreement” (see Exhibit 4.1 in Part II. Item 6 hereof) effective May 19, 2022, to a consultant who had provided the Company invaluable services and advice over the prior four (4) years, in consideration of the sum of $ i 50,000. The Letter Agreement is Exhibit 10.2 to this Quarterly Report in Part II, Item 6, hereof.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under “Trends and Uncertainties,” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview of Current and Planned Business Operations
We continue to pursue market opportunities for the distribution of our current products and services described in our “Principal Products or Services and their Markets” summary on page 8 of this Quarterly Report. In addition, we continue to pursue expanded market distribution opportunities, development of new products and services, the addition of new lines of business and accretive acquisition opportunities that may enhance or expand our current product and service offerings.
Results of Operations
As previously discussed in our second quarter, 2022 quarterly report (Form 10-Q), due to growth opportunities within our Mobile Services market segment, through our wholly owned subsidiary, Infiniti Mobile, Management accelerated Mobile Services growth in the second and third quarters of this year.
We continue to expand our distribution channels, including field agents and internet sales. As a result, the Company recognized increases in Mobile Services revenue and direct costs during the quarter ending September 30, 2022. Since the Company may not capitalize customer acquisition costs over the average life of a customer, we recognize the full incremental cost of each new Mobile Service customer at the start of service, which is typically recovered within 120 days after activation.
During this period of Mobile Services growth, Management foresaw and previously disclosed a temporary reduction of Mobile Services gross profit; however, as we follow a managed/stepped approach to growth, starting in the fourth quarter 2022, Management will marginally reduce Mobile Services growth to allow gross profit to accelerate.
In addition to growth within our Mobile Services segment, we also continue to develop our Hosted Services market segment through our wholly owned subsidiary, Apeiron Systems. As a result of an increase in cloud communications sales opportunities, we are experiencing an increase in overall SMS & MMS messaging, voice usage (origination & termination of domestic and international traffic), and LTE data volume across our national CPaaS cloud network. Additionally, Apeiron recently executed a new three-year agreement (extension) with one of its largest customers. Apeiron’s national cloud communications platform supports this customers’ network, which provides inmate communications services to prisons across the United States. This new agreement runs until September 2025 and includes monthly minimum revenue commitments at twice the previous commitment, totaling a minimum commitment of at least $7.2 million over the full term of the contract.
Comparison of the three months ended September 30, 2022, to the three months ended September 30, 2021
For the three months ended September 30, 2022, we had $5,880,333 in revenues from operations compared to $3,612,861 for the three months ended September 30, 2021, for a total revenue increase of $2,267,472. This increase in revenue was directly related to the growth in our Mobile Services segment. Mobile Services expansion continued under the Lifeline and ACP program. The revenues were derived as a result of delivering high-speed mobile data service to low-income consumers.
For the three months ended September 30, 2022, our cost of revenue was $4,969,251 compared to $1,988,624 in the three months ended September 30, 2021, for a cost of revenue increase of $2,980,627. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.
For the three months ended September 30, 2022, we had gross profit of $911,082 compared to $1,624,237 in the three months ended September 30, 2021, for a gross profit decrease of $713,155. This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.
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For the three months ended September 30, 2022, total operating expenses were $2,054,037 compared to $1,252,632 in the three months ended September 30, 2021, for an increase of $801,405. This increase was due primarily to additions in payroll and related expenses resulting from the hiring of operations management and customer support positions in both of our subsidiaries, Apeiron Systems and IM Telecom.
For the three months ended September 30, 2022, other income (expense) was $(202,559) compared to $(51,770) in the quarter ended September 30, 2021.
For the three months ended September 30, 2022, we had a net loss of $1,345,514 compared to net income of $319,836 in the three months ended September 30, 2021. The loss for the three months ended September 30, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased our customer acquisition costs. Customer acquisition costs may not be amortized over the life of the customer, but must be recorded in full at the time of customer activation.
Comparison of the nine months ended September 30, 2022, to the nine months ended September 30, 2021
For the nine months ended September 30, 2022, we had $15,231,288 in revenues from operations compared to $8,919,573 for the nine months ended September 30, 2021, for a total revenue increase of $6,311,715. This increase in revenue was directly related to the growth in both our Hosted Services and Mobile Services segments. Mobile Services expansion continued under the Lifeline and ACP programs. The revenues were derived as a result of delivering high-speed mobile data service to low-income consumers.
For the nine months ended September 30, 2022, our cost of revenue was $12,230,378 compared to $4,946,786 for the nine months ended September 30, 2021, for a cost of revenue increase of $7,283,592. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.
For the nine months ended September 30, 2022, we had a gross profit of $3,000,910 compared to $3,972,787 for the nine months ended September 30, 2021, for a gross profit decrease of $971,877. This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.
For the nine months ended September 30, 2022, total operating expenses were $5,470,296 compared to $3,377,950 for the nine months ended September 30, 2021, for an increase of $2,092,346. This increase was due primarily to additions in payroll and related expenses resulting from the hiring of operations management and customer support positions in both of our subsidiaries, Apeiron Systems and IM Telecom.
For the nine months ended September 30, 2022, other income (expense) was $(398,931) compared to $(166,638) for the nine months ended September 30, 2021.
For the nine months ended September 30, 2022, we had a net loss of $2,868,317 compared to net income of $428,199 for the nine months ended September 30, 2021. The loss for the nine months ended September 30, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased our customer acquisition costs and may not be amortized over the life of the customer but must be recorded in full at the time of customer activation.
Liquidity and Capital Resources
As of September 30, 2022, we had $2,243,195 in cash and cash equivalents on hand.
In comparing liquidity between the nine-month periods ending September 30, 2022, and September 30, 2021, cash increased by 65.1%. This increase was primarily attributable to short-term debt financing secured in Q2 2022. Liabilities and total overall debt increased by 238.4% in the nine-month period ended September 30, 2022, when compared to September 30, 2021. This change was primarily the result of the short-term loan received in Q2 2022. As we scale capabilities alongside our growth strategy in our Mobile Services customer base, we expect it to provide long-term liquidity.
Our current ratio (current assets divided by our current liabilities) decreased to .88 as of September 30, 2022, compared to 2.05 as of September 30, 2021. Working capital decreased by 142.3%.
Cash Flow from Operations
During the nine months ended September 30, 2022, cash flow used in operating activities was $1,606,058, and for the nine months ended September 30, 2021, cash flow provided by operating activities was $636,557.
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Cash Flows from Investing Activities
During the nine months ended September 30, 2022, no cash flow was used in investing activities. During the nine months ended September 30, 2021, $10,000 cash flow was used in investing activities.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022, net cash flow provided by financing activities was $2,916,468, due to securing short-term debt financing for the business. For the nine months ended September 30, 2021, net cash flow used in financing activities was $16,970, for net cash received from exercises of stock options after repayments of notes payable.
Going Concern
For the nine months ended September 30, 2022, the Company generated a net loss of $2,868,317, compared to net income for the nine months ended September 30, 2021, of $428,199. The Company sourced short-term financing during the second quarter to help facilitate its growing Mobile Services segment and support higher customer acquisition costs (sales). The accumulated deficit as of September 30, 2022, is $8,213,821.
The Company has continued to ameliorate any substantial going concern doubt by generating additional cash flow in the first quarter of 2022, the year ended 2021, and the year ended 2020, and through securing financing in June 2022. As the Company continues its growth strategy and increases its Mobile Services customer base, additional operating capital may be required to support the related increase in customer acquisition costs (sales).
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the three-month period ended September 30, 2022.
Critical Accounting Policies
Earnings Per Share
We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2022, there are 4,490,000 potentially dilutive common shares derived from stock options, and as of September 30, 2021, there are 2,676,266 potentially dilutive common shares derived from stock options.
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.
The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of September 30, 2022, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from one (1) customer in the amount of $1,305,264, or 86.8%. It should be noted that the largest customer is the FCC. As of December 31, 2021, the Company had a significant concentration of receivables from two (2) customers in the amounts of $783,431, or 63.9%, and $194,647, or 15.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the nine months ended September 30, 2022, the Company had two (2) customers that accounted for $9,915,189 or 65.1% and $2,639,730 or 17.3% of revenue, respectively. For the nine-month period ended September 30, 2021, the Company had two (2) customers that accounted for $3,297,984, or 37.0% and $2,818,465 or 31.6%, of revenue.
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not required.
Item 4. Controls and Procedures.
Management’s Quarterly Report on Internal Control Over Financial Reporting
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that material information relating to us is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of September 30, 2022, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
None.
Not required; however, see Item 1A. Risk Factors, Part I, commencing on page nine (9) of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2021, filed with the SEC on April 14, 2022, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.
The following risk factor supplements the “Risk Factor” on cybersecurity contained in our referenced Annual Report and titled: “Our reliance on information management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service providers experience a security breach.”
We face risks relating to cyberattack.
Our business operations are dependent upon secure information technology systems and telecommunications networks. Breaches of these systems and networks through cyberattack or other unauthorized access may have numerous negative effects on our business, including lost sales and damage to customer relationships; disruptions on our operations; reputational harm and negative publicity; lost trust from our customers, partners and employees; lawsuits resulting from the compromise of sensitive customer or employee information; costs of mitigation; and remediation and security enhancement expenses.
The following risk factor supplements the Risk Factor titled “Our business operations could be impacted by the current world health crisis” that is also contained in our Annual Report.
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The COVID-19 pandemic presents ongoing risks to our business.
In response to the COVID-19 pandemic, governments and other authorities around the world implemented significant measures intended to control the spread of the virus. While many of these restrictions have been lifted as the rates of COVID-19 infection have decreased or stabilized and as various vaccines have become more widely available, a resurgence of COVID-19 and the impact of variants of the virus that causes COVID-19 may result in the reinstatement of social distancing measures; business closures; restrictions on operations; and quarantines and travel bans. In addition, any government mandates that require COVID-19 vaccination or other employee behaviors may result in employee attrition at the Company or its suppliers or customers and may create difficulties in satisfying future employment and supply requirements.
In addition to the risk factors identified in our Annual Report as supplemented above, the following risks are material to the Company’s future operations. These additional risk factors should be read in conjunction with the Risk Factor disclosure contained in our Annual Report.
The Russian invasion of Ukraine may disrupt global telecommunications networks.
While we do not have any direct exposure to Russia, Belarus or Ukraine through our operations, employee base, investments or sourcing of goods and services, third party companies with whom we do business may use Ukraine-based software developers. These relationships may be affected by the global geopolitical disruptions caused by the Russian invasion of Ukraine in February, 2022. We also face the risk that the invasion and ongoing war may result in disruptions to national and international telecommunications networks, either through cyberattacks by state actors or others, physical damage to the networks themselves or due to interruptions in the supply chain for the materials and services necessary to maintain them. The likelihood and the potential size and scope of any such damage or disruptions is difficult to predict. However, they may have significant negative effects on the Company’s future business and results of operations.
Rising inflation may negatively affect our operating results.
During 2021 and 2022, global economic conditions have deteriorated, with significantly increased inflation and the risks of further inflation and recession in 2023 and beyond. These unfavorable economic conditions may lead to decreased demand for our products or services in the future, especially by our lower-income customers, which would have a negative effect on our business and results of operations. In particular, inflation could affect the price of equipment for the services provided in our Lifeline Program. The ongoing Russian invasion of Ukraine and related sanctions on Russia may also lead to higher prices for commodities used in the production of telephones and other technologies used in the global telecommunications industry, which may result in decreased demand for our products and services. To the extent that we are unable to increase the prices of our goods and services in response to increased costs, our operating margins will be compressed.
Supply chain disruptions could adversely affect our business.
Supply chain dislocations resulting from global geopolitical and public health issues such as the Russian invasion of Ukraine, the COVID-19 pandemic and other causes may have a material adverse impact on our business and results of operations. Such disruptions may increase our costs of doing business, including through significant increases in the price of our products and their components and materials and the related costs of shipment, including equipment used in the Lifeline Program. Supply chain disruptions may also adversely affect our access to suppliers, manufacturers, customers and vendors and may impair our ability to perform contracted services. Delays in our ability to meet our obligations as a result of supply chain issues may negatively affect our reputation, our relationships with customers and our ability to deliver products and services.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See NOTE 9-Stockholders’ Equity and NOTE 10-Subsequent Events, of our Condensed Consolidated Financial Statements included in this Quarterly Report respecting the grant of certain additional incentive stock options during and subsequent to the quarter ended September 30, 2022, and the exercise and payment of two (2) incentive stock option grants.
The incentive stock options were issued in reliance on the exemption from registration under the Securities Act provided in Section 4(a)(2) thereof and applicable state law registration exemptions. The underlying shares were registered with the SEC pursuant to an S-8 Registration Statement filed with the SEC on August 25, 2021.
Item 3. Defaults upon Senior Securities
None; not applicable.
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Item 4. Mine Safety Disclosure
Not applicable.
(i) Additionally, earlier today, the Company disseminated a press release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press release is being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only. This press release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.
(ii) On August 15, 2022, the Company corrected the Incentive Stock Option Agreement of D. Sean McEwen that was granted to him on December 18, 2017, as an exchange of his shares of KonaTel, a Nevada corporation (“KonaTel Nevada”), for common shares and an option to acquire common shares of the Company under the merger whereby the Company acquired KonaTel Nevada from Mr. McEwen, its sole shareholder, to exclude the “incentive” and “employee” provisions, among other related provisions, with all terms of the grant and exercise dates and term of the stock options granted therein remaining unchanged. Our CFO (Brian Riffle) has determined that the revisions will have no material adverse impact on our prior or current financial statements. This action required the withdrawal of the 1,500,000 shares underlying the initially issued Incentive Stock Option Agreement granted to Mr. McEwen from the unexercised incentive stock options registered on Form S-8 of the SEC on August 25, 2021, under our 2018 Stock Option Plan (the “Plan”), and results in the shares of our common stock underlying the corrected Incentive Stock Option Agreement being “restricted securities” if and when exercised by Mr. McEwen. Our S-8 Registration Statement was amended to reflect this action on August 22, 2022. It does not change the strike price, vesting or the number of shares of Mr. McEwen’s option or the number of shares reserved for issuance under our Plan. This action was approved on the referenced date in good faith by the Board of Directors on a reasonable factual basis and related documentation presented to them by legal counsel for the Company prior to such approval. Mr. McEwen, the Chairman of the Board of Directors, abstained from voting on this matter. See Exhibit 10.1 in Part II, Item 6, for reference to a copy of the corrected Stock Option Agreement.
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Exhibit Number |
Description of Exhibit | Filing | ||
| 3(i) | Amended and Restated Certificate of Incorporation | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 3(ii) | Amended and Restated Bylaws | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 4.0 | Description of the Company’s Securities. | Filed herewith. | ||
| 4.1 | Revised Form of Employee Incentive Stock Option Agreement | Filed with the Form S-8 filed on July 7, 2022, and incorporated herein by reference. | ||
| 10.1 | D. Sean McEwen Corrected Stock Option Agreement | Filed with the 10-Q for the quarter ended June 30, 2022, on August 15, 2022. | ||
| 10.2 | Letter Agreement | Filed herewith. | ||
| 14 | Code of Ethics | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 99 | Earnings Press Release dated November 14, 2022 | Filed herewith. | ||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
| 104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL. |
Exhibits incorporated by reference:
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KonaTel, Inc. | ||||
| Date: | November 14, 2022 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: | November 14, 2022 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO |
| Date: | November 14, 2022 | By: | /s/ Brian R. Riffle | |
| Brian R. Riffle | ||||
| Chief Financial Officer |
22
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 9/2/30 | ||||
| 3/31/26 | ||||
| 7/31/25 | ||||
| 6/1/25 | ||||
| Filed on: | 11/14/22 | |||
| 11/12/22 | ||||
| 10/28/22 | 4 | |||
| 10/14/22 | ||||
| 10/12/22 | ||||
| For Period end: | 9/30/22 | |||
| 8/22/22 | S-8 POS | |||
| 8/15/22 | 10-Q, 4 | |||
| 7/7/22 | S-8 | |||
| 7/1/22 | ||||
| 6/30/22 | 10-Q | |||
| 6/14/22 | 8-K | |||
| 5/19/22 | ||||
| 4/14/22 | 10-K | |||
| 1/1/22 | 3, 8-K | |||
| 12/31/21 | 10-K, NT 10-K | |||
| 9/30/21 | 10-Q | |||
| 8/25/21 | S-8 | |||
| 7/1/21 | ||||
| 1/1/21 | 8-K | |||
| 9/30/19 | 10-Q, NT 10-Q | |||
| 1/31/19 | 8-K | |||
| 12/31/18 | 10-K, 3, 8-K, 8-K/A, D, NT 10-K | |||
| 10/23/18 | ||||
| 2/5/18 | ||||
| 12/20/17 | 8-K/A | |||
| 12/18/17 | 3, 4 | |||
| 1/1/16 | ||||
| 10/14/14 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/15/22 KonaTel, Inc. 10-Q 6/30/22 56:3.2M EDGARSources LLC/FA 7/07/22 KonaTel, Inc. S-8 7/07/22 7:244K Burningham Leonard W/FA 4/14/22 KonaTel, Inc. 10-K 12/31/21 63:4.2M EDGARSources LLC/FA 12/20/17 KonaTel, Inc. 8-K/A:1,2,311/15/17 14:1M Action Edgar Fil… Svc/FA |