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.
KonaTel Inc., 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 sub 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., a Nevada corporation d/b/a “Apeiron” (“Apeiron Systems”), which is also our wholly-owned subsidiary. Apeiron
Systems was organized in 2013 and is an international Hosted Services CPaaS (“Communications Platform as a Service”) provider
that designed, built, owns and operates its private core network, supporting a suite of real-time business communications services and
Applications Programming Interfaces (“APIs”). As an Internet Telephony Service Provider (“ITSP”), Apeiron Systems
holds a Federal Communications Commission (the “FCC”) numbering authority license. Some of Apeiron Systems’ Hosted Services
include SIP/VoIP services, SMS/MMS processing, BOT integration, NLP (“Natural Language Processing”), ML (“Machine Learning”),
number services including mobile, toll free and DID landline numbers, SMS to Email services, Database Dip services, SD-WAN, voice termination,
and numerous API driven services including voice, messaging, and network management.
On January 31, 2019, we acquired IM Telecom, LLC,
an Oklahoma limited liability company, d/b/a “Infiniti Mobile” (“IM Telecom”), which became our wholly-owned subsidiary.
Infiniti Mobile is an FCC licensed ETC (“Eligible Telecommunications Carrier”) and is one of 22 FCC licensed carriers to hold
an FCC approved Lifeline Compliance Plan in the United States. Under the Lifeline program, Infiniti Mobile is currently authorized to
provide government subsidized mobile telecommunications services to eligible low-income Americans currently in eight states.
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, 2020.
The accompanying financial statements have been prepared
using the accrual basis of accounting.
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements
include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment,
stock-based compensation, and customer lists. Actual results could differ from those estimates.
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.
Net Income/(Loss) Per Share
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
income/(loss) per common share calculations are determined by dividing net income/(loss) 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 for the quarter ended March 31, 2021, are not included in the computation of diluted
earnings per share, because to do so would be anti-dilutive.
The following table reconciles the shares outstanding
and net income (loss) used in the computations of both basic and diluted earnings per share of common stockholders:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
(232,722
|
)
|
|
$
|
100,833
|
|
Weighted average shares outstanding during period on which basic earnings per share is calculated
|
|
|
40,692,286
|
|
|
|
40,692,286
|
|
Effect of dilutive shares
|
|
|
|
|
|
|
|
|
Incremental shares under stock-based compensation
|
|
|
—
|
|
|
|
3,400,000
|
|
Weighted average shares outstanding during period on which diluted earnings per share is calculated
|
|
|
40,692,286
|
|
|
|
44,092,286
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
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.
The Company has a concentration of risk with respect
to trade receivables from customers and other cellular providers. As of March 31, 2021, 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
amounts of $107,918 and $198,884, or 22.13% and 40.78% of total accounts receivable, respectively. As of December 31, 2020, 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 amounts of $194,509, or 52.4%, and $52,843, or 14.2%, respectively.
Concentration of Major Customer
A significant amount of the revenue is derived from
contracts with major customers and cellular partners. For the three months ended March 31, 2021, the Company had one (1) customer that
accounted for $830,134 or 34.7% of revenue. For the three-month period ended March 31, 2020, the Company had one (1) customer that accounted
for $555,826, or 28.4%, of revenue.
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 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as
of March 31, 2021, and December 31, 2020 :
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Leasehold Improvements
|
|
$
|
46,950
|
|
|
$
|
46,950
|
|
Furniture and Fixtures
|
|
|
102,946
|
|
|
|
102,946
|
|
Billing Software
|
|
|
217,163
|
|
|
|
217,163
|
|
Office Equipment
|
|
|
94,552
|
|
|
|
94,552
|
|
|
|
|
461,611
|
|
|
|
461,611
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
(395,009
|
)
|
|
|
(382,040
|
)
|
Property and equipment, net
|
|
$
|
66,602
|
|
|
$
|
79,571
|
|
Depreciation and amortization related to Property
and Equipment amounted to $12,969 and $7,216 for the three-month periods ended March 31, 2021, and 2020, respectively. Depreciation and
amortization expense are included as a component of operating expenses in the accompanying statements of operations.
NOTE 3 – RIGHT-OF-USE ASSETS
Right-of-Use Assets consist of assets accounted for
under ASC 842. The assets are recorded at present value using implied interest rates between 3.29% and 5.34%.
The Company has Right-of-Use Assets through
leases of property under three (3) non-cancelable leases. As of March 31, 2021, the Company had two (2) properties with lease terms
in excess of one (1) year. These lease liabilities expire May 15, 2022 and March 31, 2026, respectively. The current lease liability
expires December 1, 2021. In January 2021, the Company entered into a new, five (5) year lease for its corporate headquarters
located in Plano, TX.
Future lease liability payments under the terms of
these leases are as follows:
2021
|
|
|
$
|
83,810
|
|
2022
|
|
|
$
|
58,547
|
|
2023
|
|
|
$
|
45,578
|
|
2024
|
|
|
$
|
46,596
|
|
2025
|
|
|
$
|
47,615
|
|
2026
|
|
|
$
|
11,968
|
|
Total
|
|
|
$
|
294,114
|
|
Less Interest
|
|
|
$
|
30,621
|
|
Present value of minimum lease payments
|
|
|
$
|
263,493
|
|
Current Maturities
|
|
|
$
|
98,501
|
|
Long Term Maturities
|
|
|
$
|
164,992
|
|
The Company also leases three (3) office/retail spaces
on a month-to-month basis. Total lease expense for the three months ended March 31, 2021, and 2020, amounted to $10,653 and $20,619, respectively,
for these leases.
NOTE 4 – INTANGIBLE ASSETS
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 March 31, 2021, was $634,252.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Customer Lists
|
|
$
|
1,135,962
|
|
|
$
|
1,135,962
|
|
Software
|
|
|
2,407,001
|
|
|
|
2,407,001
|
|
ETC License
|
|
|
634,251
|
|
|
|
634,251
|
|
Less: Amortization
|
|
|
(2,941,214
|
)
|
|
|
(2,740,629
|
)
|
Net Amortizable Intangibles
|
|
|
1,236,000
|
|
|
|
1,436,585
|
|
Right of Use Assets – net
|
|
|
237,001
|
|
|
|
80,578
|
|
Intangible Assets net
|
|
$
|
1,473,001
|
|
|
$
|
1,517,163
|
|
Amortization expense amounted to $200,583 for the
three months ended March 31, 2021, and 2020, respectively. Amortization expense is included as a component of operating expenses in the
accompanying statements of operations.
Amortization expense is expected to be as follows:
2021
|
|
|
$
|
802,333
|
|
2022
|
|
|
$
|
433,669
|
|
NOTE 5 – NOTES PAYABLE
In June 2020, the Company received a Small Business
Administration (“SBA”) Emergency Injury Disaster Loan (“EIDL”) in the amount of $150,000. The maturity date of
the 30-year note is June 2050. Interest will accrue at a rate of 3.75% per annum. Payments will begin in June 2021.
The Company also received three (3) separate SBA Payroll
Protection Loans in the amounts of $186,300, $101,800 and $20,900, for a total of $309,000. Each loan includes an interest rate of 1%
and a maturity date of April 14, 2022. On March 8, 2021, the Company was informed that the payroll protection loans in the amounts of
$101,800 and $20,900 had been forgiven by the SBA. An application of forgiveness for the loan in the amount of $186,300 was submitted
to the SBA on April 21, 2021. All loan proceeds have been recorded as forgiven and have been recorded as Other Income in 2020.
In conjunction with the Notes Payable, the Company
received $10,000 in an SBA Emergency Injury Disaster Grant. This amount was recorded as Other Income.
On September 30, 2020, IM Telecom entered into a promissory
note agreement to repay a Federal Universal Service Fund overpayment in the amount of $67,105. The term of the note is twelve (12) months
and interest will accrue at a rate of 12.75% per annum. As of March 31, 2021, the balance of this note was $37,340. The Company anticipates
that this note will be paid in full by August 31, 2021.
NOTE 6 – 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, 2021, 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.
Letters of Credit
The Company had no outstanding letters of credit as
of March 31, 2021.
NOTE 7 – 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. Previously, the Company had
reported four (4) segments of Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC. The Company has made the decision to consolidate
and align its segment reporting by the type of service offering and believes that this reporting will provide for a more accurate view
of its lines of operation.
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 – This segment includes
a suite of hosted CPaaS services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”),
ML, mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, wireless data services, voice termination
and numerous API driven services. Apeiron Systems developed, owns, and supports its hosted service platform through its dedicated
national telecommunications network. Apeiron Systems provides telecommunications services to application developers, call centers and
small and medium size businesses. Apeiron Systems markets these services through the Apeiron Systems website, independent sales agents,
ISOs and SCOs.
Mobile Services –
This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or “Internet of Things”)
services. Mobile voice/text/data and 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 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 as mobile services are the resale
of cellular services to low-income consumers that qualify for the federal Lifeline program. This portion of mobile services is operated
by IM Telecom, operating under its Infiniti Mobile brand.
The following table reflects the result of operations
of the Company’s reportable segments:
|
|
Hosted Services
|
|
|
Mobile Services
|
|
|
Total
|
|
For the three-month period ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,225,866
|
|
|
$
|
1,166,972
|
|
|
$
|
2,392,838
|
|
Gross Margin
|
|
$
|
455,936
|
|
|
$
|
455,225
|
|
|
$
|
911,161
|
|
Depreciation and amortization
|
|
$
|
216,160
|
|
|
$
|
15,576
|
|
|
$
|
231,736
|
|
Additions to property and equipment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross Margin %
|
|
|
37.2
|
%
|
|
|
39.0
|
%
|
|
|
38.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
929,437
|
|
|
$
|
1,027,918
|
|
|
$
|
1,957,355
|
|
Gross Margin
|
|
$
|
347,051
|
|
|
$
|
418,127
|
|
|
$
|
765,178
|
|
Depreciation and amortization
|
|
$
|
235,442
|
|
|
$
|
34,858
|
|
|
$
|
270,300
|
|
Additions to property and equipment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross Margin %
|
|
|
37.3
|
%
|
|
|
40.7
|
%
|
|
|
39.1
|
%
|
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
The Company has not issued any common stock through
March 31, 2021, nor for the year ended December 31, 2020.
Stock Compensation
The Company offers stock option equity awards to directors
and key employees. Options vest in tranches and expire in five (5) years. For the three months ended March 31, 2021, and 2020, the Company
recorded vested options expense of $31,344 and $10,257, respectively. The option expense not taken as of March 31, 2021, is $21,087, with
a weighted average term of 2.2 years.
The following table represents stock option activity
as of and for the three months ended March 31, 2021:
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life
|
|
Aggregate
Intrinsic Value
|
Options Outstanding – December 31, 2020
|
|
3,800,000
|
|
$
|
.21
|
|
|
3.6
|
|
$
|
—
|
Granted
|
|
50,000
|
|
|
.42
|
|
|
4.9
|
|
|
—
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Forfeited
|
|
175,000
|
|
|
—
|
|
|
—
|
|
|
—
|
Options Outstanding – March 31, 2021
|
|
3,675,000
|
|
$
|
0.21
|
|
|
4.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and Vested, March 31, 2021
|
|
3,475,000
|
|
$
|
0.21
|
|
|
2.2
|
|
$
|
—
|
NOTE 9 – SUBSEQUENT EVENTS
Below are events that have occurred since March 31,
2021:
SBA Payroll Protection Program
In April, 2021, the Company made application to the
SBA to forgive the PPP loan made to the Company in the amount of $186,300 and is awaiting a determination.
Small Business Administration (“SBA”) Emergency Injury Disaster
Loan (“EIDL”) Expansion
As a result of an SBA announcement that EIDL loan
maximums had been extended, in April 2021, the Company requested an increase in the loan amount originally received in June, 2020, of
$150,000, to a total of $500,000, or additional loan proceeds of $350,000. To date, the Company has not received a loan increase decision
from the SBA.
Emergency Broadband Benefit Program (“EBB”)
On December 27, 2020, the Consolidated Appropriations
Act, 2021 (the “Act”), became law and established an Emergency Broadband Connectivity Fund of $3.2 billion in the United States
Treasury to help low-income Americans afford Internet service during the COVID-19 pandemic. The Act directed the FCC to use the fund to
establish an EBB under which eligible low-income households may receive a discount off the cost of broadband service and certain connected
devices, and participating providers will receive a reimbursement for such discounts. On April 6, 2021, IM Telecom, d/b/a Infiniti Mobile,
made application to participate in the EBB program. We anticipate that for the length of this program, reimbursement revenues of IM Telecom
will increase by approximately 70% over current month over month revenues. The FCC has announced that the EBB will launch on May 12, 2021.
Incentive Stock Option Grants
The Company granted two (2) quarterly director 25,000
share Incentive Stock Options, one to Jeffrey Pearl on April 28, 2021, at an exercise price of $0.597, fully vested; and one to Robert
Beaty on May 12, 2021, at an exercise price of $0.66, fully vested. The exercise prices were based upon 110% of the fair market value
or closing public trading price of the Company’s common stock on these respective dates.
The Company also granted an aggregate of 135,000 Incentive
Stock Options to three (3) employees on May 17, 2021, at an exercise price of $0.73 per shares, which was the fair market value or closing
public trading price of the Company’s common stock on May 17, 2021. These grants respectively vest one-third for each year of service,
commencing on May 17, 2022.