UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2023
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. 001-10171
KonaTel, Inc.
(Exact name of the issuer as specified in its charter)
| Delaware | 80-0973608 | |
| (State or Other Jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
500 N. Central Expressway, Ste. 202
Plano, Texas 75074
(Address of Principal Executive Offices)
214-323-8410
(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.
Yes x No o
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). 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 |
| Non-accelerated filer x | Smaller reporting company x |
| Emerging Growth company 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 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.”
| 1 |
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 |
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” (“IM Telecom” or “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, including the “Risk Factors” enumerated in “Part I, Item IA. Risk Factors” of our 10-K Annual Report for the year ended December 31, 2022 which commence on page ten (10) thereof. A copy of this “Annual Report” is attached hereto by Hyperlink in Part II-Other Information, in Item 6 hereof. 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.
| 2 |
KONATEL, INC.
FORM 10-Q
March 31,June 30, 2023
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 | 16 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. Controls and Procedures | 19 |
| PART II – OTHER INFORMATION | |
| Item 1. Legal Proceedings | |
| Item 1A. Risk Factors | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. Defaults Upon Senior Securities | |
| Item 4. Mine Safety Disclosures | |
| Item 5. Other Information | 20 |
| Item 6. Exhibits | |
| SIGNATURES |
PART I - FINANCIAL STATEMENTS
March 31,June 30, 2023
Table of Contents
| 3 |
KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2023 | December 31, 2022 | June 30, 2023 | December 31, 2022 | |||||||||||||
| Assets | ||||||||||||||||
| Current Assets | ||||||||||||||||
| Cash and Cash Equivalents | $ | 1,596,048 | $ | 2,055,634 | $ | 1,134,773 | 2,055,634 | |||||||||
| Accounts Receivable, net | 1,202,255 | 1,510,118 | ||||||||||||||
| Accounts Receivable, Net | 1,438,342 | 1,510,118 | ||||||||||||||
| Inventory, Net | 690,868 | 526,337 | 792,985 | 526,337 | ||||||||||||
| Prepaid Expenses | 35,170 | 61,241 | 9,098 | 61,241 | ||||||||||||
| Other Current Assets | 164 | 164 | — | 164 | ||||||||||||
| Total Current Assets | 3,524,505 | 4,153,494 | 3,375,198 | 4,153,494 | ||||||||||||
| Property and Equipment, Net | 33,448 | 36,536 | 30,360 | 36,536 | ||||||||||||
| Other Assets | ||||||||||||||||
| Intangible Assets, Net | 634,251 | 634,251 | 634,251 | 634,251 | ||||||||||||
| Right of Use Asset | 519,894 | 553,686 | 486,042 | 553,686 | ||||||||||||
| Other Assets | 74,542 | 73,883 | 74,543 | 73,883 | ||||||||||||
| Total Other Assets | 1,228,687 | 1,261,820 | 1,194,836 | 1,261,820 | ||||||||||||
| Total Assets | $ | 4,786,640 | $ | 5,451,850 | $ | 4,600,394 | $ | 5,451,850 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Accounts Payable and Accrued Expenses | $ | 1,399,838 | $ | 1,348,931 | $ | 1,815,560 | $ | 1,348,931 | ||||||||
| Loans Payable, net of loan fees | 3,114,330 | 3,070,947 | ||||||||||||||
| Right of Use Operating Lease Obligation - current | 120,658 | 118,382 | ||||||||||||||
| Loans Payable, Net of Loan Fees | 3,583,213 | 3,070,947 | ||||||||||||||
| Right of Use Operating Lease Obligation - Current | 122,972 | 118,382 | ||||||||||||||
| Total Current Liabilities | 4,634,826 | 4,538,260 | 5,521,745 | 4,538,260 | ||||||||||||
| Long Term Liabilities | ||||||||||||||||
| Right of Use Operating Lease Obligation - long term | 427,299 | 458,227 | ||||||||||||||
| Right of Use Operating Lease Obligation - Long Term | 395,634 | 458,227 | ||||||||||||||
| Total Long Term Liabilities | 427,299 | 458,227 | 395,634 | 458,227 | ||||||||||||
| Total Liabilities | 5,062,125 | 4,996,487 | 5,917,379 | 4,996,487 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Commitments and Contingencies | ||||||||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at March 31, 2023 and outstanding and issued at December 31, 2022 | 42,483 | 42,240 | ||||||||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at June 30, 2023 and outstanding and issued at December 31, 2022 | 42,670 | 42,240 | ||||||||||||||
| Additional Paid In Capital | 8,894,593 | 8,710,987 | 9,075,626 | 8,710,987 | ||||||||||||
| Accumulated Deficit | (9,212,561 | ) | (8,297,864 | ) | (10,435,281 | ) | (8,297,864 | ) | ||||||||
| Total Stockholders’ Equity | (275,485 | ) | 455,363 | (1,316,985 | ) | 455,363 | ||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 4,786,640 | $ | 5,451,850 | $ | 4,600,394 | $ | 5,451,850 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue | $ | 4,031,719 | $ | 4,227,856 | $ | 4,601,426 | $ | 5,123,097 | $ | 8,633,145 | $ | 9,350,954 | ||||||||||||
| Cost of Revenue | 3,029,840 | 2,580,595 | 3,827,374 | 4,680,530 | 6,857,214 | 7,261,127 | ||||||||||||||||||
| Gross Profit | 1,001,879 | 1,647,261 | 774,052 | 442,567 | 1,775,931 | 2,089,827 | ||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Payroll and Related Expenses | 1,139,546 | 1,132,313 | 1,107,303 | 1,238,979 | 2,246,849 | 2,371,294 | ||||||||||||||||||
| Operating and Maintenance | 1,700 | 642 | 1,621 | 717 | 3,321 | 1,359 | ||||||||||||||||||
| Bad Debt | 14 | 55 | — | 29,078 | 14 | 29,133 | ||||||||||||||||||
| Professional and Other Expenses | 300,498 | 149,170 | 204,023 | 145,477 | 463,418 | 294,647 | ||||||||||||||||||
| Utilities and Facilities | 57,045 | 35,687 | 52,030 | 39,348 | 109,075 | 75,035 | ||||||||||||||||||
| Depreciation and Amortization | 3,088 | 4,117 | 3,088 | 2,059 | 6,176 | 6,176 | ||||||||||||||||||
| General and Administrative | 40,234 | 60,918 | 43,259 | 119,316 | 83,492 | 180,233 | ||||||||||||||||||
| Marketing and Advertising | 37,517 | 47,670 | 46,490 | 37,357 | 84,008 | 85,027 | ||||||||||||||||||
| Application Development Costs | 143,529 | 134,605 | 299,629 | 115,089 | 443,158 | 249,694 | ||||||||||||||||||
| Taxes and Insurance | 31,903 | 31,379 | 16,907 | 92,281 | 33,163 | 123,660 | ||||||||||||||||||
| Total Operating Expenses | 1,755,074 | 1,596,556 | 1,774,350 | 1,819,701 | 3,472,674 | 3,416,258 | ||||||||||||||||||
| Operating Income/(Loss) | (753,195 | ) | 50,705 | (1,000,298 | ) | (1,377,134 | ) | (1,696,743 | ) | (1,326,431 | ) | |||||||||||||
| Other Income and Expense | ||||||||||||||||||||||||
| Interest Expense | (161,502 | ) | (24,030 | ) | (179,630 | ) | (47,146 | ) | (341,132 | ) | (71,176 | ) | ||||||||||||
| Other Income/(Expense), net | — | (71,124 | ) | (42,792 | ) | (54,073 | ) | (99,542 | ) | (125,196 | ) | |||||||||||||
| Total Other Income and Expenses | (161,502 | ) | (95,154 | ) | (222,422 | ) | (101,219 | ) | (440,674 | ) | (196,372 | ) | ||||||||||||
| Net Income (Loss) | $ | (914,697 | ) | $ | (44,449 | ) | ||||||||||||||||||
| Net Loss | $ | (1,222,720 | ) | $ | (1,478,353 | ) | $ | (2,137,417 | ) | $ | (1,522,803 | ) | ||||||||||||
| Earnings (Loss) per Share | ||||||||||||||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.04 | ) | ||||||
| Diluted | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.04 | ) | ||||||
| Weighted Average Outstanding Shares | ||||||||||||||||||||||||
| Basic | 42,375,917 | 41,615,406 | 42,520,720 | 41,615,406 | 42,539,672 | 41,615,406 | ||||||||||||||||||
| Diluted | 42,375,917 | 41,615,406 | 42,520,720 | 41,615,406 | 42,539,672 | 41,615,406 | ||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
KonaTel, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| Common Shares | Additional | Accumulated | Common Shares | Additional | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | Shares | Amount | Paid-in Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balances as of January 1, 2023 | 42,240,406 | $ | 42,240 | $ | 8,710,987 | $ | (8,297,864 | ) | $ | 455,363 | 42,240,406 | $ | 42,240 | $ | 8,710,987 | $ | (8,297,864 | ) | $ | 455,363 | ||||||||||||||||||||
| Exercised Stock Options | 242,814 | 243 | 41,007 | — | 41,250 | 430,314 | 430 | 82,070 | — | 82,500 | ||||||||||||||||||||||||||||||
| Stock Based Compensation | — | — | 142,599 | — | 142,599 | — | — | 282,569 | — | 282,569 | ||||||||||||||||||||||||||||||
| Net Loss | — | — | — | (914,697 | ) | (914,697 | ) | — | — | — | (2,137,417 | ) | (2,137,417 | ) | ||||||||||||||||||||||||||
| Balances as of March 31, 2023 | 42,483,220 | $ | 42,483 | $ | 8,894,593 | $ | (9,212,561 | ) | $ | (275,485 | ) | |||||||||||||||||||||||||||||
| Balances as of June 30, 2023 | 42,670,720 | $ | 42,670 | $ | 9,075,626 | $ | (10,435,281 | ) | $ | (1,316,985 | ) | |||||||||||||||||||||||||||||
| Common Shares | Additional | Accumulated | Common Shares | Additional | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | Shares | Amount | Paid-in Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balances as of January 1, 2022 | 41,615,406 | $ | 41,615 | $ | 7,911,224 | $ | (5,345,504 | ) | $ | 2,607,335 | ||||||||||||||||||||||||||||||
| Balances as of April 1, 2023 | 42,483,220 | $ | 42,483 | $ | 8,894,593 | $ | (9,212,561 | ) | $ | (275,485 | ) | |||||||||||||||||||||||||||||
| Exercised Stock Options | — | — | — | — | — | 187,500 | 187 | 41,063 | — | 41,250 | ||||||||||||||||||||||||||||||
| Stock Based Compensation | — | — | 151,759 | — | 151,759 | — | — | 139,970 | — | 139,970 | ||||||||||||||||||||||||||||||
| Net Loss | — | — | — | (44,449 | ) | (44,449 | ) | — | — | — | (1,222,720 | ) | (1,222,720 | ) | ||||||||||||||||||||||||||
| Balances as of March 31, 2022 | 41,615,406 | $ | 41,615 | $ | 8,062,983 | $ | (5,389,953 | ) | $ | 2,714,645 | ||||||||||||||||||||||||||||||
| Balances as of June 30, 2023 | 42,670,720 | $ | 42,670 | $ | 9,075,626 | $ | (10,435,281 | ) | $ | (1,316,985 | ) | |||||||||||||||||||||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2022 | 41,615,406 | $ | 41,615 | $ | 7,911,224 | $ | (5,345,504 | ) | $ | 2,607,335 | ||||||||||
| Exercised Stock Options | — | — | — | — | — | |||||||||||||||
| Stock Based Compensation | — | — | 354,296 | — | 354,296 | |||||||||||||||
| Net Loss | — | — | — | (1,522,803 | ) | (1,522,803 | ) | |||||||||||||
| Balances as of June 30, 2022 | 41,615,406 | $ | 41,615 | $ | 8,265,520 | $ | (6,868,307 | ) | $ | 1,438,828 | ||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of April 1, 2022 | 41,615,406 | $ | 41,615 | $ | 8,062,983 | $ | (5,389,954 | ) | $ | 2,714,644 | ||||||||||
| Exercised Stock Options | — | — | — | — | — | |||||||||||||||
| Stock Based Compensation | — | — | 202,537 | — | 202,537 | |||||||||||||||
| Net Loss | — | — | — | (1,478,353 | ) | (1,478,353 | ) | |||||||||||||
| Balances as of June 30, 2022 | 41,615,406 | $ | 41,615 | $ | 8,265,520 | $ | (6,868,307 | ) | $ | 1,438,828 | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
statements
Common Shares
Additional Paid-in Capital
Accumulated Deficit
| 6 |
KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||
| Net Income (Loss) | $ | (914,697 | ) | $ | (44,449 | ) | $ | (2,137,417 | ) | $ | (1,522,803 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
| Depreciation and Amortization | 3,088 | 4,117 | 6,176 | 6,176 | ||||||||||||
| Loan Origination Cost Amortization | 43,383 | — | 89,516 | 7,713 | ||||||||||||
| Bad Debt | 14 | 55 | 14 | 29,133 | ||||||||||||
| Stock-based Compensation | 142,599 | 151,759 | 282,569 | 354,296 | ||||||||||||
| Non-Compensatory Stock Options Exercised | 41,250 | — | ||||||||||||||
| Change in Right of Use Asset | 33,792 | 22,604 | 67,644 | (37,602 | ) | |||||||||||
| Change in Lease Liability | (28,650 | ) | (22,979 | ) | (58,003 | ) | 38,888 | |||||||||
| Changes in Operating Assets and Liabilities: | ||||||||||||||||
| Accounts Receivable | 307,848 | 292,520 | 71,762 | (175,471 | ) | |||||||||||
| Inventory | (164,531 | ) | (67,810 | ) | (266,648 | ) | (440,367 | ) | ||||||||
| Prepaid Expenses | 25,412 | 46,328 | 51,647 | 102,669 | ||||||||||||
| Accounts Payable and Accrued Expenses | 50,906 | 137,939 | 466,629 | 309,081 | ||||||||||||
| Net cash provided by (used in) operating activities | (500,836 | ) | 520,084 | |||||||||||||
| Net cash used in operating activities | (1,384,861 | ) | (1,328,287 | ) | ||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||||
| Net cash (used in) investing activities | — | — | — | — | ||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||||
| Cash received from Stock Options Exercised | 41,250 | — | ||||||||||||||
| Net cash provided by (used in) financing activities | 41,250 | — | ||||||||||||||
| Proceeds from Short-Term Note Payable | 500,000 | 3,150,000 | ||||||||||||||
| Loan Origination Cost | (77,250 | ) | (173,532 | ) | ||||||||||||
| Repayments of Amounts of Notes Payable | — | (150,000 | ) | |||||||||||||
| Cash Received from Stock Options Exercised | 41,250 | — | ||||||||||||||
| Net cash provided by financing activities | 464,000 | 2,826,468 | ||||||||||||||
| Net Change in Cash | (459,586 | ) | 520,084 | (920,861 | ) | 1,498,181 | ||||||||||
| Cash - Beginning of Year | 2,055,634 | 932,785 | 2,055,634 | 932,785 | ||||||||||||
| Cash - End of Period | $ | 1,596,048 | $ | 1,452,869 | $ | 1,134,773 | $ | 2,430,966 | ||||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||||||
| Cash paid for interest | $ | 118,125 | $ | 5,121 | $ | 133,500 | $ | 3,099 | ||||||||
| Cash paid for taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
KonaTel, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company
KonaTel Nevada (as defined below) was organized under the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business of a full-service MVNO (“Mobile Virtual Network Operator”) provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. It is currently inactive.
KonaTel Inc., a Delaware corporation, formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). During 1990, we ceased our then current operations. On March 11, 2000, our Board of Directors began the process of re-entering the development stage, and on June 2, 2014, we completed a merger with Dala Petroleum Corp., a Nevada corporation (respectively, “Dala Nevada” and the “Dala Merger”). We operated as an early-stage oil exploration company focused on our leased acreage acquired by Dala Nevada until 2016, at which time we assigned substantially all of our leased acreage to the former owner of Dala Nevada, and our remaining oil and gas leasehold interests, comprising leases covering approximately 7,489 and 403 acres, more or less, expired in 2017 and 2018, respectively.
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.subsidiary, and we succeeded to its operations; and we changed our name to “KonaTel, Inc.” on February 5, 2018.
Apeiron Systems is headquartered in Johnstown, Pennsylvania, where it has customer service and software engineering resources staffed. Additional development resources are staffed out of Los Angeles, CA, as well as in Europe and Asia.
IM Telecom is headquartered in Plano, Texas, and has a warehouse operation in Tulsa, Oklahoma, and a customer service center in Atmore, Alabama.
We are headquartered in Plano, Texas. Apeiron Systems has nine (9) full-time employees; IM Telecom has twenty-one (21) full-time employees and two (2) part-time employees; and we have four (4) full-time employees.
Principal Products or Services and their Markets
Our principal products and services, across our two (2) active wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for low-income Americans. Except for our ETC Lifeline services distributed in up to ten (10)eleven (11) states and our ACP services distributed in the fifty (50) states, as well as Washington D.C. and Puerto Rico, our Apeiron Systems’ products and services are available worldwide and subject to U.S., international and local/national regulations.
We generate revenue from two (2) primary sources, Hosted Services and Mobile Services:
| · | Our Hosted Services include a suite of hosted CPaaS services within Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management, of which IoT provides device connectivity via wireless 4G/5G. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. |
| 8 |
| · | Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated. |
Basis of Presentation
Interim Financial Statements
The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2022.
The accompanying financial statements have been prepared using the accrual basis of accounting.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates in these financial statements include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, and stock-based compensation. Actual results could differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany transactions are eliminated.
Basic income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. The dilutive common shares for the three and six months ended March 31,June 30, 2023, and 2022, are not included in the computation of diluted earnings per share because to do so would be anti-dilutive. As of March 31,June 30, 2023, and 2022, there were and dilutive shares.
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Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic and Diluted
| Three Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Numerator | ||||||||
| Net Loss | $ | (1,222,720 | ) | (1,478,353 | ) | |||
| Denominator | ||||||||
| Weighted-average common shares outstanding, basic | 42,520,720 | 41,615,406 | ||||||
| Dilutive impact of stock options | ||||||||
| Weighted-average common shares outstanding, diluted | 42,520,720 | 41,615,406 | ||||||
| Net income per common share | ||||||||
| Basic | $ | (0.03 | ) | (0.04 | ) | |||
| Diluted | $ | (0.03 | ) | (0.04 | ) | |||
| Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net Income (Loss) | $ | (914,697 | ) | $ | (44,449 | ) | ||||||||||
| Net Loss | $ | (2,137,417 | ) | (1,522,803 | ) | |||||||||||
| Denominator | ||||||||||||||||
| Weighted-average common shares outstanding | 42,375,917 | 41,615,406 | ||||||||||||||
| Weighted-average common shares outstanding, basic | 42,539,672 | 41,615,406 | ||||||||||||||
| Dilutive impact of stock options | ||||||||||||||||
| Weighted-average common shares outstanding, diluted | 42,375,917 | 41,615,406 | 42,539,672 | 41,615,406 | ||||||||||||
| Net income per common share | ||||||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.05 | ) | (0.04 | ) | |||||
| Diluted | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.05 | ) | (0.04 | ) | |||||
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents.
Trade Account Receivables
Sales Revenue
All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
Trade Account Receivables
Sales Revenue
The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of March 31,June 30, 2023, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amount of $738,706942,772, or 61.465.7%, and $223,604273,982, or 18.619.1%. It should be noted that the largest customer is the FCC.Federal Communication Commission (the “FCC”). As of December 31, 2022, the Company had a significant concentration of receivables from two (2) customers in the amounts of $859,334, or 57.0%, and $255,136, or 16.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers. For the three months ended March 31,June 30, 2023, the Company had two (2) customers that accounted for $2,258,1142,614,769 or 56.056.8% and $717,577745,485 or 17.816.2% of revenue, respectively. For the three months ended March 31,June 30, 2022, the Company had two (2) customers that accounted for $2,431,5693,310,128 or 57.564.6% of revenue and $915,837910,574 or 21.717.8% of the revenue, respectively. For the six months ended June 30, 2023, the Company had two (2) customers that accounted for $4,872,883 or 56.4% and $1,463,062 or 16.9% of revenue, respectively. For the six months ended June 30, 2022, the Company had two (2) customers that accounted for $5,741,697 or 61.4% of revenue and $1,826,412 or 19.5% of the 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.
NOTE 2 – INVENTORY
Inventory primarily consists of sim cards and cell phones, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the first-in, first-out (“FIFO”) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and is reviewed for obsolescence and counted for accuracy with distributors. At March 31,June 30, 2023, and December 31, 2022, the Company had inventory of $690,868792,985 and $526,337, respectively.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of March 31,June 30, 2023, and December 31, 2022:
Property and Equipment - Schedule of Property and Equipment
| March 31, 2023 | December 31, 2022 | June 30, 2023 | December 31, 2022 | |||||||||||||
| Lease Improvements Lease Improvements | $ | 46,950 | $ | 46,950 | $ | 46,950 | $ | 46,950 | ||||||||
| Furniture and Fixtures Furniture and Fixtures | 102,946 | 102,946 | 102,946 | 102,946 | ||||||||||||
| Billing Software | 217,163 | 217,163 | 217,163 | 217,163 | ||||||||||||
| Office Equipment Office Equipment | 94,552 | 94,552 | 94,552 | 94,552 | ||||||||||||
| 461,611 | 461,611 | 461,611 | 461,611 | |||||||||||||
| Less: Accumulated Depreciation | (428,163 | ) | (425,075 | ) | (431,251 | ) | (425,075 | ) | ||||||||
| Property and equipment, net | $ | 33,448 | $ | 36,536 | $ | 30,360 | $ | 36,536 | ||||||||
Depreciation related to Property and Equipment amounted to $3,088 and $4,1172,059 for the three months ended March 31,June 30, 2023, and 2022, respectively. Depreciation related to Property and Equipment amounted to $6,176 and $6,176 for the six months ended June 30, 2023, and 2022, respectively. Depreciation and amortization expenses are included as a component of operating expenses in the accompanying statements of operations.
NOTE 4 – RIGHT-OF-USE ASSETS
Minimum
Maximum
Right-of-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between 4.75% and 7.50%. Right-of-Use Assets are recorded on the balance sheet as intangible assets.
The Company has Right-of-Use Assets through leases of property under non-cancelable leases. As of March 31,June 30, 2023, the Company had four (4) properties with lease terms in excess of one (1) year. Of these four (4) leases, two (2) leases expire in 2025, one (1) lease expires in 2026, and one (1) lease expires in 2030. Lease payables as of March 31,June 30, 2023, is $547,957518,606.
Future lease liability payments under the terms of these leases are as follows:
Right-of-Use Assets - Schedule of Future Minimum Lease Payments for Operating Leases
| 2023 | $ | 115,459 | $ | 77,072 | ||||
| 2024 | 155,324 | 155,324 | ||||||
| 2025 | 129,543 | 129,543 | ||||||
| 2026 | 65,967 | 65,967 | ||||||
| 2027 | 54,000 | 54,000 | ||||||
| Thereafter | 144,000 | 144,000 | ||||||
| Total | 664,293 | 625,906 | ||||||
| Less Interest | 116,336 | 107,300 | ||||||
| Present value of minimum lease payments | 547,957 | 518,606 | ||||||
| Less Current Maturities | 120,658 | 122,972 | ||||||
| Long Term Maturities | $ | 427,299 | $ | 395,634 | ||||
The weighted average term of the Right-to-Use leases is 66.364.2 months recorded with a weighted average discount of 6.786.81%. Total lease expense for the three months ended March 31,June 30, 2023, and 2022, was $43,27542,803 and $30,89728,818, respectively. Total lease expense for the six months ended June 30, 2023, and 2022, was $86,078 and $59,597, respectively.
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NOTE 5 – INTANGIBLE ASSETS
Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions:
Intangible Assets - Schedule of Acquired Finite Lived Intangible Assets
| March 31, 2023 | December 31, 2022 | |||||||
| Customer List | $ | 1,135,962 | $ | 1,135,962 | ||||
| Software | 2,407,001 | 2,407,001 | ||||||
| ETC License | 634,251 | 634,251 | ||||||
| Less: Amortization | (3,542,963 | ) | (3,542,963 | ) | ||||
| Intangible Assets, net | $ | 634,251 | $ | 634,251 | ||||
Amortization expense amounted to $0, and $0 for the three months ended March 31, 2023, and 2022, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. With the exception of the license granted by the FCC, all intangible assets are fully amortized as of March 31, 2023.
acquisitions. Intangible Assets with indefinite useful life consist of the Lifeline license granted by the FCC. The license, because of the nature of the asset and the limitation on the number of granted Lifeline licenses by the FCC, will not be amortized. The license was acquired through an acquisition. The fair market value of the license as of March 31,June 30, 2023, and December 31, 2022, was $634,251.
| June 30, 2023 | December 31, 2022 | |||||||
| Customer List | $ | 1,135,962 | $ | 1,135,962 | ||||
| Software | 2,407,001 | 2,407,001 | ||||||
| ETC License | 634,251 | 634,251 | ||||||
| Less: Amortization | (3,542,963 | ) | (3,542,963 | ) | ||||
| Intangible Assets, net | $ | 634,251 | $ | 634,251 | ||||
Amortization expense amounted to $0, and $0 for the three months ended June 30, 2023, and 2022, respectively. Amortization expense amounted to $0, and $0 for the six months ended June 30, 2023, and 2022, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. With the exception of the license granted by the FCC, all intangible assets are fully amortized as of June 30, 2023.
The reclassification in the Balance Sheet for Right of Use Assets has been made in this filing to conform to both the current and future reported presentation.
NOTE 6 – NOTES PAYABLE
On June 14, 2022, the Companywe and its wholly ownedour wholly-owned subsidiary companies, Apeiron Systems and IM Telecom, entered into a Note Purchase Agreement (the “NPA”) with CCUR Holdings, Inc., a Delaware corporation (respectively, “CCUR” and the “CCUR Loan”), as “Collateral Agent”; and CCUR and Symbolic Logic, Inc., a Delaware corporation (“Symbolic”), as “Purchasers,” along with a related Guarantee and Security Agreement (the “GSA”) with CCUR Holdings, Inc. (“CCUR”), as collateral agent, and Symbolic Logic, Inc.,the Collateral Agent, whereby the Company and its subsidiary companies pledged itsall of their assets to secure $3,150,000 (the “Principal Amount”) in debt financing (the “CCUR Loan”). The term is for a period of twelve (12) months,payable in one (1) year (could not be repaid prior to nine (9) months), together with interest at an interestthe rate of 15%15% per annum (the “Interest Rate”), with two (2) successive six-monthsix (6) month optional extensions.
On April 28, 2023, the Company provided notice to CCUR of its election to utilize the “First Extension Option” by an additional six (6) months. As apart of the condition of securing the CCUR Loan,to extend, the Company paid $47,250 to CCUR, which is equal to one and a 3% origination fee,half percent (1.5%) of the outstanding principal amount of the CCUR Loan. A summary of these agreements, along with copies of the NPA and other legalGSA are contained in the 8-K Current Report of the Company dated June 14, 2022, and closing expensesfiled with the SEC on June 21, 2022, which can be accessed by Hyperlink in Part II, Item 6 hereof.
On June 1, 2023, we entered into a “First Amendment to the lender,NPA” with CCUR and Symbolic. The purpose for the amendment was to add further growth capital to the Company in the form of “Delayed Draw Notes” in an aggregate principal amount of $153,284up to $2,000,000; and in consideration therefor, we provided additional collateral for the NPA by the assignment of our Purchase of Contract Rights Agreement between us and Insight Mobile (the “Tempo Assignment Agreement”) under a Collateral Assignment of Acquisition Documents (the “Collateral Assignment of Acquisition Documents”), resultingthe terms of which are summarized below, with all summaries being subject to the referenced Exhibits that are attached hereto in a net loan balancePart II, Item 6 hereof. A copy of the initial Assignment Agreement is contained in the 8-K Current Report of the Company dated April 6, 2023, and filed with the SEC on April 17, 2023, which can be accessed by Hyperlink in Part II, Item 6 hereof.
On June 1, 2023, the Company exercised the first draw under the First Amendment to the NPA of $2,984,181500,000. The loan costsAs part of the First Amendment to NPA, the Company paid $153,28415,000 to CCUR, which is equal to one and a half percent (1.5%) of the initial delayed draw, and the net loan balance of $2,984,181 are to be amortized over a 12-month period. The Company incurred an additional $20,248initial interest rate established in legal expense related to the closing, which amount will be amortized over a 12-month period. Proceeds of the loan will be used in an ongoing capacity to support the acceleration of our mobile services growth strategy.NPA was increased by three percent (3%).
NOTE 7 – CONTINGENCIES AND COMMITMENTS
Litigation
From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of March 31,June 30, 2023, there are no ongoing legal proceedings.
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Contract Contingencies
The Company has the normal obligation for the completion of its cellular provider contracts in accordance with the appropriate standards of the industry and that may be provided in the contractual agreements.
Tax Audits
In June of 2021, the Company received an audit determination and assessment from the State of Pennsylvania related to sales and use tax for the audit period of January 1, 2016, through September 30, 2019. The assessment is in the amount of $115,000, including interest and penalties calculated on sales made inside and outside Pennsylvania. The Company has recorded the full amount of this assessment. The Company appealed the assessment in August 2021, and at the request of the state, provided additional information to support its appeal. The Company’s position is that Pennsylvania has no sales tax authority to levy and collect sales tax on sales made outside of Pennsylvania. The Company initially recorded an expected liability of $7,000, based on known sales inside Pennsylvania. The State of Pennsylvania rejected an appeal by the Company. The Company remains in discussions with the State of Pennsylvania and is working towards a plan to pay the full amount of the liability, under the possibility of an extended payout period. The Company believes this is the best course of action, as following the final payoff of the liability, the Company can re-open an appeal with the state for a refund of the liability.
Letters of Credit
The Company had no outstanding letters of credit as of March 31,June 30, 2023.
NOTE 8 – SEGMENT REPORTING
The Company operates within two (2) reportable segments. The Company’s management evaluates performance and allocates resources based on the profit or loss from operations. Because the Company is a recurring revenue service business with very few physical assets, management does not use total assets by segment to make decisions regarding operations, and therefore, the total assets disclosure by segment has not been included.
The reportable segments consist of Hosted Services and Mobile Services. Mobile Services reporting will now consist of our post-paid and pre-paid cellular business.
Hosted Services – Our Hosted Services include a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs.
Mobile Services – Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated.
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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 | Hosted Services | Mobile Services | Total | |||||||||||||||||||
| For the three months period ended March 31, 2023 | ||||||||||||||||||||||||
| For the six months period ended June 30, 2023 | ||||||||||||||||||||||||
| Revenue | $ | 1,232,930 | $ | 2,798,789 | $ | 4,031,719 | $ | 2,483,918 | $ | 6,149,227 | $ | 8,633,145 | ||||||||||||
| Gross Profit | $ | 347,481 | $ | 654,398 | $ | 1,001,879 | $ | 708,155 | $ | 1,067,776 | $ | 1,775,931 | ||||||||||||
| Depreciation and amortization | $ | 2,986 | $ | 102 | $ | 3,088 | $ | 1,777 | $ | 4,399 | $ | 6,176 | ||||||||||||
| Additions to property and equipment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| For the three months period ended March 31, 2022 | ||||||||||||||||||||||||
| For the three months period ended June 30, 2023 | ||||||||||||||||||||||||
| Revenue | $ | 1,434,555 | $ | 2,793,301 | $ | 4,227,856 | $ | 1,250,987 | $ | 3,350,439 | $ | 4,601,426 | ||||||||||||
| Gross Profit | $ | 455,314 | $ | 1,191,947 | $ | 1,647,261 | $ | 360,674 | $ | 413,378 | $ | 774,052 | ||||||||||||
| Depreciation and amortization | $ | 3,841 | $ | 276 | $ | 4,117 | $ | 840 | $ | 2,248 | $ | 3,088 | ||||||||||||
| Additions to property and equipment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| For the six months period ended June 30, 2022 | ||||||||||||
| Revenue | $ | 2,842,594 | $ | 6,508,360 | $ | 9,350,954 | ||||||
| Gross Profit | $ | 890,493 | $ | 1,199,334 | $ | 2,089,827 | ||||||
| Depreciation and amortization | $ | 1,877 | $ | 4,299 | $ | 6,176 | ||||||
| Additions to property and equipment | $ | — | $ | — | $ | — |
| For the three months period ended June 30, 2022 | ||||||||||||
| Revenue | $ | 1,428,936 | $ | 3,694,161 | $ | 5,123,097 | ||||||
| Gross Profit | $ | 456,076 | $ | (13,509 | ) | $ | 442,567 | |||||
| Depreciation and amortization | $ | 574 | $ | 1,485 | $ | 2,059 | ||||||
| Additions to property and equipment | $ | — | $ | — | $ | — |
NOTE 9 – STOCKHOLDERS’ EQUITY
CommonIndependent Directors’ Incentive Stock Options
On February 9,June 1, 2023 Robert Beaty, an independentthe Board member, conveyedof Directors unanimously voted to the Company shares of the Company’s common stock at a price of $, in an exempt transaction pursuant to Section 16b-3(e), and in full payment of the exercise of suspend incentive stock options grantedavailable to him in 2018 at a price of $ per share, which was 110% of the fair market value of our common stock on the date of such grant; these shares were originally acquired by him through an unrelated private transaction in 2020.two (2) independent directors, effective June 1, 2023.
Non-Compensatory Stock Option Grant
Chief Executive Officer
On March 16,June 13, 2023, D. Sean McEwen, the Chairman and CEO of the Company, exercised his firstsecond tranche of equity stock options for shares of common stock at a price of $ per share, which shares were issued on March 20,June 18, 2023.
Stock Compensation
The Company offers incentive stock option equity grants to directors and key employees. Options vest in tranches and typically expire in five (5) years. For the threesix months ended March 31,June 30, 2023, and 2022, the Company recorded options expense of $142,599282,569 and $151,759354,296, respectively. For the three months ended June 30, 2023, and 2022, the Company recorded options expense of $139,970 and $202,537, respectively. The option expense not taken as of March 31,June 30, 2023, is $, with a weighted average term of years.
Jeffrey Pearl, an independent Board member, was granted quarterly incentive stock options on January 30,April 28, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock price of $, a strike price of $0.8800.781, a term of five () years, volatility of %, and a rate-free discount of %.
Robert Beaty, an independent Board member, was granted quarterly incentive stock options on February 13,May 12, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock price of $, a strike price of $0.8140.792, a term of five () years, volatility of %, and a rate-free discount of %.
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Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity
| Number of | Weighted Average | Weighted Average | Aggregate | Number of | Weighted Average | Weighted Average | Aggregate | ||||||||||||||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | Shares | Exercise Price | Remaining Life | Intrinsic Value | ||||||||||||||||||||||||
| Options Outstanding – December 31, 2022 | 4,405,000 | $ | 0.59 | $ | 2,260,138 | 4,405,000 | $ | 0.59 | $ | 2,260,138 | |||||||||||||||||||||
| Granted | 50,000 | 0.85 | 100,000 | 0.82 | |||||||||||||||||||||||||||
| Exercised | (287,500 | ) | 0.26 | 127,025 | (475,000 | ) | 0.51 | 240,838 | |||||||||||||||||||||||
| Forfeited | — | — | — | — | |||||||||||||||||||||||||||
| Options Outstanding – March 31, 2023 | 4,167,500 | $ | 0.62 | 3.69 | $ | 410,388 | |||||||||||||||||||||||||
| Options Outstanding – June 30, 2023 | 4,030,000 | $ | 0.64 | 3.69 | $ | 752,863 | |||||||||||||||||||||||||
| Exercisable and Vested, March 31, 2023 | 1,050,144 | $ | 0.45 | $ | 279,114 | ||||||||||||||||||||||||||
| Exercisable and Vested, June 30, 2023 | 803,480 | $ | 0.48 | $ | 282,727 | ||||||||||||||||||||||||||
NOTE 10 – SUBSEQUENT EVENTS
Below are events that have occurred since March 31,June 30, 2023:
Subsequent Events
Incentive Stock Option Grants
Subsequent Event
Jeffrey Pearl,John Shadek Esq., an independent Board member,legal advisor, was granted quarterly incentive stock options on April 28,July 17, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant.
Robert Beaty, an independent Board member, was granted quarterly incentive stock options on May 12, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant.
15
Assignment of Agreement to Acquire Wireless Carrier
On April 6, 2023, we assigned our rights to acquire a wireless carrier to Insight Mobile, Inc., a Delaware corporation (respectively, the “Assignment Agreement” and “Insight Mobile”), which Assignment Agreement shall be held in escrow by counsel for Insight Mobile pending satisfaction of all conditions to the closing of the Assignment Agreement. Additional information about this assignment is contained in the 8-K Current Report of the Company dated April 6, 2023, and filed with the SEC on April 17, 2023, which is available by Hyperlink in Part II-Other Information, in Item 6 hereof.
Loan Extension
On April 28, 2023, the Company provided notice to CCUR of its election to extend the “First Extension Option,” under the CCUR Loan by an additional six (6) months. As part of the condition to extend, the Company paid $47,250 to CCUR, which is equal to one and a half percent (1.5%) of the outstanding principal amount of the CCUR Loan.
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 at the forepart of this Quarterly Report under the caption “Forward-Looking Statements” 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 commencing on page eight (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 filings during 2022 (including our 10-K Annual Report for the year ended December 31, 2022 [see Part II-Other Information, Item 6 below, for a Hyperlink to this Annual Report]), we began to accelerate growth opportunities within our Mobile Services market segment through our wholly owned subsidiary, IM Telecom. In Q4 2022, activity slowed as we repositioned distribution channels to higher profit territories. Through March 31,June 30, 2023, we have seen increasing activations and ARPU (“Average Revenue Per User”) within these channels.
The Company continues to expand its wireless network coverage, within its state licensed areas. This requires a process of authorization from each state public utility commission. As a result, the Company has broadened its capabilities to sell inside these licensed areas, furthering our sales growth initiatives.
The Company recognized increases in Mobile Services direct costs during the quarter ended March 31,June 30, 2023, driving down gross profit, as a result of the increase in activity. 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.
Comparison of the three months ended March 31,June 30, 2023, to the three months ended March 31,June 30, 2022
For the three months ended March 31,June 30, 2023, we had $4,031,719$4,601,426 in revenues from operations compared to $4,227,856$5,123,097 for the three months ended March 31,June 30, 2022, for a total revenue decrease of $196,137.($521,672). This decrease in revenue was primarily related to a larger volume of lower ARPU online activations received during Q2 2022. Activations have continued to increase in Q2 2023 as we relocate distribution partners to higher margin areas within our Mobile Services segment. These revenues were primarily gained as a result of delivering high-speed mobile data service to low-income consumers.
For the three months ended June 30, 2023, our cost of revenue was $3,827,374 compared to $4,680,530 in the three months ended June 30, 2022, for a cost of revenue decrease of ($853,156). Our cost of revenue decrease was due to lower network, sales compensation and device costs. Some of these improvements were driven as a result of wireless network cost efficiencies, increased sourcing options, lower device costs from mobile and tablet vendors and reduced delivery costs from upgraded device distribution management.
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For the three months ended June 30, 2023, we had gross profit of $774,052 compared to $442,567 in the three months ended June 30, 2022, for a gross profit increase of $331,484. This increase is directly related to adding higher ARPU activations in our Mobile Services segment, in addition to having lower sales acquisition costs to acquire these new customers.
For the three months ended June 30, 2023, total operating expenses were $1,774,350 compared to $1,819,701 in the three months ended June 30, 2022, for a decrease of ($45,351). This decrease was primarily due to lower administrative expenses. Although administrative expenses were lower for the three months ended June 30, 2023, we incurred higher legal costs associated with the expansion of service coverage in our existing ETC footprint to broaden our wireless subscriber coverage range.
For the three months ended June 30, 2023, other income (expense) was $(222,422) compared to $(101,219) in the quarter ended June 30, 2022. This increase is due to interest on our CCUR Loan.
For the three months ended June 30, 2023, we had a net loss of ($1,222,720) compared to net loss of ($1,478,353) in the three months ended June 30, 2022. The loss for the three months ended June 30, 2023 was impacted by increased customer acquisition costs related to higher activations within our Mobile Services segment. Customer acquisition costs may not be amortized over the life of the customer, and are recorded in full at the time of customer activation. In Q2 2022, the business was experiencing hyper-growth with lower ARPU activations. As growth continues in 2023, the focus has remained towards subscriber activations in states that yield significantly higher ARPU and greater sustainability for growth.
Comparison of the six months ended June 30, 2023, to the six months ended June 30, 2022
For the six months ended June 30, 2023, we had $8,633,145 in revenues from operations compared to $9,350,954 for the six months ended June 30, 2022, for a total revenue decrease of ($717,810). This decrease in revenue was partially related to higher per activation reimbursements received in Q1 2022 under the Emergency Broadband Benefit Program (“EBB”), prior to conversion under the ACP supported program. Activations have continued to increase in Q1Q2 2023 as we relocate distribution partners to higher margin positionsstates, increase the number of distribution partners, and increase the number of ETC states within our Mobile Services segment. These revenues were primarily derived as a result of delivering high-speed mobile data service to low-income consumers.
For the threesix months ended March 31,June 30, 2023, our cost of revenue was $3,029,840$6,857,214 compared to $2,580,595$7,261,127 in the threesix months ended March 31,June 30, 2022, for a cost of revenue increasedecrease of $449,245.($403,913). Our cost of revenue increasedecrease was primarily thedue to lower sales compensation and device costs. Efficiencies were provided as a result of increased network, handsetbetter sourcing options from mobile and sales compensationtablet vendors, and reduced delivery costs related to distributing additional services.from upgraded device distribution management.
For the threesix months ended March 31,June 30, 2023, we had gross profit of $1,001,879$1,775,931 compared to $1,647,261$2,089,827 in the threesix months ended March 31,June 30, 2022, for a gross profit decrease of ($645,382)313,897). This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.
For the threesix months ended March 31,June 30, 2023, total operating expenses were $1,755,074$3,472,674 compared to $1,596,556$3,416,258 in the threesix months ended March 31,June 30, 2022, for an increase of $158,517.$56,416. This increase was primarily due primarily to professional serviceshigher legal costs as we expanded licensing within new markets for IM Telecom.associated with the expansion of service coverage in our existing ETC footprint to broaden our wireless subscriber coverage range.
For the threesix months ended March 31,June 30, 2023, other income (expense) was $(161,502)$(440,674) compared to $(95,154)$(196,372) in the quartersix months ended March 31,June 30, 2022. This increase is due to interest on our CCUR Loan.
For the threesix months ended March 31,June 30, 2023, we had a net loss of ($914,697)2,137,417) compared to net loss of ($44,449)1,522,803) in the threesix months ended March 31,June 30, 2022. The loss for the threesix months ended March 31,June 30, 2023, was impacted by lower revenue and increased customer acquisition costs directly related to higher activations within our Mobile Services segment.segment, in addition to increased interest expense related to our CCUR loan. Customer acquisition costs may not be amortized over the life of the customer, and are recorded in full at the time of customer activation.
Liquidity and Capital Resources
As of March 31,June 30, 2023, we had $1,596,048$1,134,773 in cash and cash equivalents on hand.
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In comparing liquidity between the three-monthsix-month periods ending March 31,June 30, 2023, and March 31,June 30, 2022, cash increaseddecreased by 9.9%(53.3%). This increase was primarilydecrease is attributable to short-term debt financing securedthe accelerated expansion of our Mobile Services segment and the CCUR Loan.associated up-front costs required for growth. Liabilities and total overall debt increased by 266.2%33.0% in the three-monthsix-month period ended March 31,June 30, 2023, when compared to March 31,June 30, 2022. This change was primarily the result of the short-term loan$3,650,000 debt financing from CCUR, comprised of $3,150,000 received in the CCUR Loan. As we scale capabilities alongside our growth strategyJune 2022 and $500,000 received in our Mobile Services customer base, we expect it to provide long-term liquidity.June 2023.
Our current ratio (current assets divided by our current liabilities) decreased to .76.61 as of March 31,June 30, 2023, compared to 2.811.14 as of March 31,June 30, 2022. Working capital decreased by 155.6%466.7%.
Cash Flow from Operations
During the threesix months ended March 31,June 30, 2023, cash flow provided by (used in)used in operating activities was ($500,836)1,384,861).
Cash Flows from Investing Activities
During the threesix months ended March 31,June 30, 2023, no cash flow was provided by (used in) investing activities.
Cash Flows from Financing Activities
During the threesix months ended March 31,June 30, 2023, cash flow provided by (used in) financing activities was $41,250,$464,000, consisting of cash receivedproceeds from the exercise of stock options.a short-term note payable.
Going Concern
For the threesix months ended March 31,June 30, 2023, the Company generated a net loss of ($914,697)2,137,417), compared to a net loss for the threesix months ended March 31,June 30, 2022, of ($44,449)1,522,803). The Company sourced short-term financing in June 2022 of $3,150,000. In June 2023, the Company agreed to additional financing with CCUR, up to an additional $2,000,000 in delayed draw allocations. As of June 2023, the Company has received an initial delayed draw in the amount of $500,000 to help facilitate its growing Mobile Services segment and support higher customer acquisition costs (sales). The accumulated deficit as of March 31,June 30, 2023, is ($9,212,561)10,435,281).
We received $3,150,000 in capital financing during the year ended December 31, 2022, to help grow the Mobile Services base in IM Telecom. Our business gained additional distribution channelsIn Q4 2022, following a high-growth period, management slowed the acceleration, realized positive cash flow and profit as a result, and atshifted distribution channels towards its peak more than tripledhighest profit areas. In 2023, the Company repositioned distributors to our subscriber base. Highhighest profit states, re-enabled growth phases require immediate expense recognition,channels and as a result, management expected net operating losses during this high growth phase. Following this initial high-growth phase, management slowed the acceleration, andstarted to realize an increase in our business had an immediate (and expected) return to positive cash flow and recorded net operating profit of $301,135 in Q4 2022. In Q4 2022, management shifted our distribution channels towards the highest profit areas, and has seen Average Revenue Per User (“ARPU”) increase as a result.. Management also gainedhas procured additional equipmenthandset and tablet suppliers, and has been able to leverage terms on device purchases moving from prepayments up to thirty (30) days. We expect terms to become more favorable and offer greater use of our cash resources in 2023.payment terms.
We are one of only a few businesses to hold a national ETC license, which provides us with additive reimbursement rates within the states we operate. In July, 2023, we added an additional license for the state of Pennsylvania, and expanded our wireless service coverage areas within the existing licensed footprint. We will continue to target and expand into new ETC licensed areas, and expect increasing returns as a result. Management believes as we expand state licensing under our ETC designation, this activity will only continue to increase the value of our ETC license within the marketplace and afford us additional financing capabilities for growth.
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the three-monththree and six month period ending March 31,June 30, 2023.
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. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
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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 March 31,June 30, 2023, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amount of $738,706,$942,772, or 61.4%65.7%, and $223,604,$273,982, or 18.6%19.1%. It should be noted that theour largest customer is the FCC. As of December 31, 2022, the Companywe had a significant concentration of receivables from two (2) customers in the amounts of $859,334, or 57.0%, and $255,136, or 16.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers. For the three months ended March 31,June 30, 2023, the Company had two (2) customers that accounted for $2,258,114$2,614,769 or 56.0%56.8% and $717,577$745,485 or 17.8%16.2% of revenue, respectively. For the three months ended March 31,June 30, 2022, the Company had two (2) customers that accounted for $2,431,569$3,310,128 or 57.5%64.6% of revenue and $915,837$910,574 or 21.7%17.8% of the revenue, respectively. For the six months ended June 30, 2023, the Company had two (2) customers that accounted for $4,872,883 or 56.4% and $1,463,062 or 16.9% of revenue, respectively. For the six months ended June 30, 2022, the Company had two (2) customers that accounted for $5,741,697 or 61.4% of revenue and $1,826,412 or 19.5% of the revenue, respectively.
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
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 March 31,June 30, 2023, 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 March 31,June 30, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31,June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required; however, see Part I, Item 1A. Risk Factors, commencing on page ten (10) of our Annual Report for the year ended December 31, 2022, filed with the SEC on April 17, 2023, for a list of Risk Factors, which Annual Report can be accessed by Hyperlink in Part II-Other Information, in Item 6 hereof.
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 exercise of certain non-compensatory stock options and certain incentive stock options and the grant of certain additional incentive stock options during and subsequent to the quarter ended March 31,June 30, 2023. The $41,250 exercise price of the non-compensatory stock options was paid by crediting that sum against accrued compensation of $160,000 owed to the optionee, D. Sean McEwen, our Chairman and CEO.
The shares of common stock issued on the exercise of the non-compensatory stock option and the issuance of the referenced incentive stock options were exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof and applicable state law registration exemptions. The underlying and/or exercised shares ofthat may be issued under the incentive stock options were registered with the SEC pursuant to an S-8 Registration Statement filed with the SEC on August 25, 2021.2021, and as subsequently amended.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
Today, the Company disseminated a press releasePress Release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press releasePress Release is being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only. This press releasePress Release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.
On June 1, 2023, the Board of Directors unanimously voted to reduce independent directors’ fees. These measures follow the consistent efforts of management to secure cost savings throughout the business.
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Item 6. Exhibits
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. | ||
| 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 August 14, 2023 | Filed herewith. | ||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended | |||
| 104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL. |
Exhibits incorporated by reference:
SIGNATURES
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: | By: | |||
| 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: | By: | |||
| D. Sean McEwen | ||||
| Chairman and CEO |
| Date: | By: | |||
| Brian R. Riffle | ||||
| Chief Financial Officer |
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