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 September 30, 20182019

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)

13601 Preston Road, # E816

Dallas, Texas 75240

(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.

YesxNoo

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  YesxNoo

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 definitiondefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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.x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox

Our website iswww.konatel.com.

Our common stock is quoted on the OTC Markets Group, Inc. (“OTC Markets”) “OTC Pink Tier” under the symbol “KTEL.”

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’sRegistrant’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:

Explanatory NoteReferences

On December 18, 2017 (the “Effective Time”), we completed an Agreement and Plan of Merger between our newly formed and wholly-owned acquisition subsidiary, and KonaTel, Inc., a Nevada corporation (respectively, “KonaTel Nevada” and the “KonaTel Nevada Merger Agreement”), whereby at the Effective Time, KonaTel Nevada was the surviving corporation and became our wholly-owned subsidiary (the “KonaTel Nevada Merger”).  Following the KonaTel Nevada Merger, our primary business operations have been those conducted by KonaTel Nevada.  Additional information about the KonaTel Nevada Merger is contained in our 8-KA-1 and our 8-KA-2 Current Reports dated November 15, 2017, and respectively filed with the Securities and Exchange Commission (the “SEC”) on December 20, 2017, and April 17, 2018, and is incorporated herein by reference.  These Current Reports can be viewed by Hyperlink in Part II, Item 6, of this Quarterly Report.  Under the KonaTel Merger Agreement, we changed our fiscal year end from September 30, 2017, to a calendar year end; accordingly, we filed a 10-K Transition Report for the period from October 1, 2017, to the year ended December 31, 2017, with the SEC on June 29, 2018, which 10-K Transition Report can also be accessed by Hyperlink in Part II, Item 6.

Cautionary Statements

We have a limited public float of our outstanding common stock, and there has been no established trading market in our common stock during the past four years.  See the caption “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II, Item 5 of our 10-K Transition Report.  These factors may result in uncertainty and volatility in the trading price of our common stock that may not have any relation to our current or future prospects.  On or about September 29, 2017, our Application for continued quotation of our common stock on the OTC Markets Group OTCQB Tier (respectively, the “OTC Markets” and the “OTCQB Tier”) was not approved because of our limited public float and the high concentration of the ownership in our common stock in one entity at that time, among other potential reasons. With the December 18, 2017, closing of the KonaTel Nevada Merger, the percentage of a majority of the ownership of our common stock in a limited number of holders has increased, with an aggregate of 26,749,000 shares (includes 1,199,000 shares underlying vested options that can be exercised within 60 days of the date of this Quarterly Report) being deemed to be beneficially owned by D. Sean McEwen, our Chairman, CEO, President and a director, 13,500,000 shares of direct ownership and 749,000 shares underlying personally owned vested options, and 12,225,000 shares (includes 250,000 shares underlying vested options owned by others) of indirect ownership under a Shareholder Voting Agreement executed and delivered at the Effective Time of the KonaTel Nevada Merger.  Based on the present number of outstanding shares of our common stock of 34,141,286 shares, which includes all 1,199,000 shares underlying vested options that can be exercised within 60 days of the date of this Quarterly Report, Mr. McEwen is currently the beneficial owner of approximately 78.3% of our outstanding shares.  See the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 of our 10-K Transition Report for additional information on these computations.  No further Application could have been made by us to the OTC Markets for further consideration of quotations of our common stock on the OCTQB Tier until on or about September 30, 2018, and no determination by management has been made as to whether any such Application will be filed in the near future.  Our common stock is currently quoted on the OTC Markets OTC Pink Tier (the “OTC Pink Tier”) under the trading symbol “KTEL.”

FORWARD LOOKING STATEMENTS

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“Dala Petroleum Corp.,” which is the Registrant,Registrant; and our wholly-owned subsidiary,subsidiaries, KonaTel, Nevada.Inc., a Nevada corporation (“KonaTel Nevada”), Apeiron Systems, Inc., a Nevada corporation doing business as “Apeiron” (“Apeiron”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infinite Mobile”).

Forward-Looking Statements

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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 SEC.United States Securities and Exchange Commission (the “SEC”) that are contained in the SEC Edgar Archives. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

KONATEL, INC.

FORM 10-Q

SEPTEMBER 30, 20182019

INDEX

PART I - FINANCIAL STATEMENTS

SeptemberSEPTEMBER 30, 20182019

Table of Contents

KonaTel, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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KonaTel, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KONATEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

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KonaTel, Inc.

Consolidated Statements of Cash Flow

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

6See accompanying notes to unaudited condensed consolidated financial statements.

KONATEL, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)(Unaudited)

NOTE 1 – ORGANIZATION

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 “Dala”)“us” and words of similar import), and 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 doing business as “Apeiron” (“Apeiron”), which became our wholly-owned subsidiary on December 31, 2018. Apeiron 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 holds a Federal Communications Commission (“FCC”) numbering authority license. Some of Apeiron’s 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, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infiniti Mobile”), which became our wholly-owned subsidiary on that date. 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.

NOTE 2 – TRANSACTIONS

The following are significant transactions that impact the operations of the Company:

Apeiron Acquisition

June 2014 Merger

On June 2, 2014,December 31, 2018, the Company its newly formed and wholly-owned subsidiary, Dala Acquisition Corp., a Nevada corporation (“Merger Subsidiary”), and Dala Petroleum Corp., a Nevada corporation (“Dala Nevada”), executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”), whereby Merger Subsidiary merged with and into Dala Nevada, and Dala Nevada was the surviving company under the merger andpurchased Apeiron, which became a wholly-owned subsidiarysubsidiary. The total purchase price was $2,450,000. The purchase included the issuance of then-named Westcott (the “Merger”) on the closing7,000,000 shares of the Merger. As a result of the Merger, Westcott issued 10,000,000 shares of itsCompany’s common stock in exchange for all of the outstanding common shares of Apeiron common stock of Dala Nevada, which shares were distributed to Dala Nevada’s sole shareholder, Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”),stock. The purchase price was derived and were then distributed on a pro rata basis to its members.

As a condition precedent to the Merger, Westcott raised $2,025,000 from persons who were “accredited investors” in consideration of the sale of 2,025 shares of its Series A 6% Convertible Preferred Stock and 2,893,725 warrants at an offering price of $1,000 per unit. Each $1,000 unit consisted of (i) one share of Series A 6% Convertible Preferred Stock that was convertible at any time at the option of the holder into common stock at the conversion price of $0.70 per common share based on the total dollar amount invested; and (ii) 1,429 warrants (issued for each share of Series A 6% Convertible Preferred Stock sold in each unit) to purchase common sharesfair market value of the Company7,000,000 shares at an exercisethe December 31, 2018, common stock price of $1.35$0.35 per share. The acquisition provides the Company with a lifeexpansion and diversification within the telecommunications industry. Apeiron brings CPaaS and business networking services to the Company that have significant business in the wireless telecommunications industry. The combination allows the Company to share customers and provide bundled service integrations.

Infiniti Mobile Acquisition

On January 31, 2019, the Company completed the acquisition of Infiniti Mobile. The purchase price was $752,366 and included $100 in cash, advances to Infiniti Mobile for the period from the sales agreement dated February 5, 2018, until January 31, 2019, in the amount of $465,056, USAC over-payment settlement of $168,277 and accounts receivables due to the Company in the amount of $152,764.

The transaction was accounted for under the purchase method. The purchase price allocation to assets and liabilities assumed in the transaction was:

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the three yearsand nine months ended September 30, 2019, and 2018 respectively, as of the “Effective Date” defined as the earliest date of the following to occur: (a) the initial registration statement required by the offering documentsif Infiniti Mobile and Apeiron had been declared effective byacquired on January 1, 2018:

NOTE 3 – 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”); (b) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the underlying shares had been sold pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 withoutinformation 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 requirementopinion of management, necessary for a fair statement of the results for the Company tointerim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in complianceconjunction with the “current public information” required under SEC Rule 144 and without volume or manner-of-sale restrictions included therein; or (c) following the one year anniversary of June 3, 2014.

The Merger was accounted for as a reverse-merger and recapitalization of Dala.

Dala Nevada previously possessed rights to engage in oil and natural gas exploration and development in north central Kansas, with total acreage of approximately 80,000 acres (the “Property”).  Since the time of the Merger (until the closing of the KonaTel Nevada Merger), we had been operating as an early-stage oil exploration company focused on the Property, which had oil potential at depths of less than 6,000 feet. In May, 2015, the Company temporarily suspended its exploration program due to the decline in the price of oil and difficult market conditions and its current Property interest are nominal; however, the Company is evaluating potential options for the sale of its remaining Property leases and geologic and seismic data on the area in which the Property is located.

May 2016 Transaction

The Company entered into a Partial Cancellation Agreement (the “PCA”) by and among its subsidiary, Dala Nevada, Chisholm II and certain members of Chisholm II (the “Chisholm Members”), through which Chisholm II (after receiving shares from these Chisholm Members) returned a total of 8,567,800 shares of the Company’s common stock to the Company for cancellation.  In exchange for the return of these shares for cancellation, the Company assigned 55,000 acres of the Company’s then owned Property rights (approximately 68.75% of its total holdings) to Chisholm II.

Pursuant to terms of the PCA, on May 26, 2016, the 8,567,800 shares of common stock delivered by Chisholm Members were cancelled on the books and records of the Company. Prior to that, the Company assigned 55,000 acres of its then leased Property to Chisholm II.

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On May 16, 2016, as approved by the Board of Directors of the Company as part of a settlement with its Preferred shareholders, the Company filed an Amended and Restated Certificate of Designation of the Company’s Series A 6% Convertible Preferred Stock (the “COD”), which (i) changed the conversion price of its outstanding preferred stock from $0.70 per share to $0.05 per share; and (ii) eliminated Section 7 “Certain Adjustments” of the COD.

Pursuant to terms of the PCA, on July 28, 2016, the 1,030,000 shares of common stock delivered after the initial closing by Baldo Sanso (360,000 shares of common stock), Robert Sali (610,000 shares of common stock) and Chris Dabbs (60,000 shares of common stock) were cancelled on the books and records of the Company. The reduction was offset to additional paid-in capital.

July 2017 Transaction

On July 19, 2017, the Company entered into a Common Stock Purchase Agreement with M2 Equity Partners LLC, a Minnesota limited liability company (“M2”), whereby M2 has purchased 12,100,000 newly issued shares of the Company’s common stock (the “Common Stock”) for an aggregate purchase price of $347,500 (the “Purchase Price”).  The purchase was made in a transaction that was deemed to be exempt from the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of thereof and/or Rule 506(b) promulgated thereunder.  Prior to the closing (the “Closing”) of the Common Stock Purchase Agreement, the following securities of the Company were outstanding: (i) 2,926,486 shares of Common Stock; (ii) 2,008 shares of Series A 6% Convertible Preferred Stock (the “Preferred Stock”); and (iii) 1,928,571 warrants (the “Warrants”) to acquire 1,928,571 shares of Common Stock that were issued in connection with the issuance of the Preferred Stock. In connection with this purchase of Common Stock, certain of the Company’s shareholders agreed to cancel an aggregate 1,584,200 shares of the Company’s Common Stock for an aggregate amount of $15,842; and all 2,008 shares of the Company’s Preferred Stock and all outstanding Warrants for an aggregate amount of $53,841, with an additional sum of approximately $4,700 due to those shareholders who had agreed to cancel their respective shares of Preferred Stock and Warrants being reserved for the payment of miscellaneous expenses or other liabilities of the Company not provided for in the schedules and exhibits to the Common Stock Purchase Agreement. Any amount remaining from this sum was to be paid to these shareholders, pro rata, based upon the respective percentage that the aggregate amount being paid for the cancellation of the Preferred Stock and Warrants bore, if any, to these additional funds, following payment of any such miscellaneous expenses or other liabilities of the Company. $10,750 of the Purchase Price was held in the Trust Account of the Company’s legal counsel, to be expended on behalf of the Company or deposited into a new bank account to be opened by the Company, and these funds have been disbursed in payment of expenses or paid to the Company or those persons entitled to them.

As a result of the cancellation of the 1,584,200 shares of Common Stock, Preferred Stock and Warrants, immediately prior to or simultaneous with the Closing, the Company had 1,342,286 shares of Common Stock issued and outstanding (the “Existing Shares”) and no shares of Preferred Stock or Warrants issued and outstanding; and taking into account the share cancellation and the 12,100,000 share Common Stock purchase and issuance, the Company then had issued and outstanding (i) 13,442,286 shares of its Common Stock, consisting of (a) the 1,342,286 Existing Shares, and (b) the 12,100,000 shares purchased by M2; and (ii) no other securities (as defined in the Securities Act) issued or outstanding.

The Company used the remainder of the $347,500 to, among other items set forth in the schedules and exhibits to the Common Stock Purchase Agreement, pay or compromise all outstanding indebtedness and other liabilities of the Company, amounting to approximately $262,367, which included a payment of an aggregate of $10,000 ($5,000 to each) to our then two directors and executive officers, with the understanding that our then current assets would consist of approximately $10,750, our remaining Property, consisting of our oil and gas lease assets that we then owned, along with other intangible assets, and following the payment of the indebtedness and other liabilities andaudited financial obligations of the Company, there would be no liabilities of the Company at Closing.

M2 agreed to pay M2 Capital Advisors, Inc., a Minnesota corporation (“M2 Capital”), which is wholly-owned by Mark Savage, a founding member of M2, an Introduction Fee of $25,000 for introducing the Company to M2. These funds were divided between M2 Capital and Elev8 Marketing, a firm owned by Matthew Atkinson, who is also a founding member of M2 and M2’s sole Manager, and were utilized to repay these entities for legal costs and miscellaneous expenses incurred by them in connection with the formation and funding of M2.  Mr. Savage was appointed the President and Chief Financial Officer and a director at the Closing, and is presently a director of the Company; and Mr. Atkinson was elected as the Secretary at the Closing, and presently serves in that capacity with the Company.

The Closing of the Common Stock Purchase Agreement resulted in a change in control of the Company.

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December 2017 Transaction

On November 15, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement” and the “Merger”) with Mark Savage, our then President, a director (currently serving as a director) and a beneficial shareholder, Matthew Atkinson, our Secretary, a beneficial shareholder and the Manager of our then principal shareholder, M2, and M2 and our wholly-owned Nevada acquisition subsidiary, Dala Subsidiary Corp., on the one hand; and KonaTel Nevada and D. Sean McEwen, KonaTel Nevada’s President and sole shareholder, on the other hand. The Merger was closed on December 18, 2017, and Articles of Merger were filed on that date with the Secretary of State of the State of Nevada whereby KonaTel Nevada was the surviving corporation and became our wholly-owned subsidiary. The Company issued 13,500,000 shares of our one mill ($0.001) par value common stock comprised of “restricted securities” as defined in SEC Rule 144 promulgated under the Securities Act, in exchange for all of the outstanding shares of common stock of KonaTel Nevada. Post-Merger, and except as discussed below about conditions to the closing of the Merger, there were approximately 27,192,286 outstanding shares of our common stock, 13,500,000 shares of which were owned by Mr. McEwen; 12,100,000 shares of which were then owned by M2 (Messrs. Savage and Atkinson are members of M2 and collectively owned approximately 65.2% of M2, which equated to an indirect beneficial ownership of approximately 3,950,000 shares of our common stock each, and with Mr. Atkinson being the sole Manager of M2, he was also considered to be the beneficial owner of all of M2’s shares of our common stock; and 1,692,286 shares, which were owned by public shareholders.  On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests.

As a  condition to the KonaTel Nevada Merger, the Company entered into Shareholder Voting Agreement between Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen whereby Mr. McEwen was granted an irrevocable proxy coupled with an interest from each of the foregoing, together with the following rights, including a right of veto, for a period of two (2) years, on the following matters: (i) an increase in the compensation of any employee of the Company by more than $20,000 in any one calendar year and for these purposes, the term compensation includes any form of remuneration or monetary benefit; (ii) the issuance of stock, the creation of a new class of stock, the grant of options or warrants, modification of any shareholder, option holder or warrant holder’s rights, grants, conversion rights or the taking of any other action that directly or indirectly dilutes the outstanding securities of the Company, excepting the current private placement of common stockstatements of the Company for an equity funding of $1,300,000 through the offer and sale of 6,500,000 shares of the Company’s common stock solely to “accredited investors”; (iii) the issuance of debt in excess of $100,000 in the aggregate in any one calendar year; (iv) the approval of a plan of merger, reorganization or conversion; (v) the sale, transfer or other conveyance of assets of the Company having an aggregate value in excess of $100,000 in any one calendar year other than in the ordinary course of the business; and (vi) the entry into a contract or other transaction having a total aggregate contractual liability for the Company in excess of $100,000 in any one calendar year.

The Company also entered into a Lock-Up/Leak-Out Agreement with Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen respecting the resale of their respective shares of common stock beneficially owned or subsequently acquired in the Company covering an 18 month period commencing at the closing of the Merger.

At the Effective Time of the Merger, the Company changed its fiscal year from September 30 to a calendar year end ofended December 31, to coincide with the calendar fiscal year end of KonaTel Nevada; and the “S Corporation Election” of KonaTel Nevada was terminated. The parties agreed to make all necessary tax elections to achieve a direct tax accounting cut-off as of the date of the S Corporation Election termination for purposes of reporting the applicable short period S and C corporation tax returns, as applicable.

The Merger was accounted for as a reverse-merger and recapitalization of the Company. Accordingly, the 2016 legal capital of KonaTel Nevada was adjusted retroactively to reflect the December 31, 2016, legal capital of Dala.

July 2018 Transaction

On August 9, 2018, the Company entered into an Asset Purchase Agreement with Telecon Wireless Resources, Inc., a New York corporation (the “Telecon Wireless”); and KonaTel, Inc., a Nevada corporation and our wholly-owned subsidiary (“KonaTel Nevada”), whereby KonaTel Nevada sold Telecon Wireless various assets, including furniture, fixtures, equipment, account receivable and customer lists, among other assets, which were utilized in the Company’s wireless services and telecommunications operations conducted under the name “Telecon Wireless” in its retail store located in Johnstown, New York, for a purchase price of approximately $406,000.  Telecon Wireless was formed by the previous General Manager of these operations at this location, William Sullivan, who has personally guaranteed the obligations of Telecon Wireless under the Asset Purchase Agreement. These assets were sold “as is, where is,” with a “Cut-Off Date” of July 31, 2018.

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NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared using the accrual basis of accounting.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, software, licenses, and customer lists. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents include cash on hand and all short-term investments with maturitiesBasis of three months or less.

Trade Accounts Receivable

The Company accounts for trade receivables based on amounts billed to customers. Past due receivables are determined based on contractual terms. The Company does not accrue interest and does not require collateral on any of its trade receivables.

Allowance for Doubtful Receivables

The allowance for doubtful receivables is determined by management based on customer credit history, specific customer circumstances and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. As of September 30, 2018, and December 31, 2017, management has determined that no allowance for doubtful receivables is necessary.

Notes Receivable

The Company entered into an Assets Sale Agreement with Telecon Wireless Resources, Inc, with an effective date of July 31, 2018.  As part of the Agreement, the Company agreed to hold a one-year note of $100,000 to be paid in 12 payments of $8,333.  As of September 30, 2018, the outstanding amount, including principal and interest was $91,667.  The Note in the Agreement did not reference an interest rate.  The note is being recorded with an implied interest rate of 5.00%.

Inventory

Inventory consists primarily of the cost of cellular phones and cellular accessories. Inventory is reported at the lower of cost and net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method.

Due to the rapidly changing technology within the industry, inventory is evaluated on a regular basis to determine if any obsolescence exists.  As of September 30, 2018, and December 31, 2017, the allowance for inventory obsolescence amounted to $807 and $10,083, respectively.

Property and Equipment

Property and equipment are recorded at cost, and are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements are amortized over the lesser of the lease term or estimated useful life, furniture and fixtures, equipment, and vehicles are depreciated over periods ranging from five to seven (5-7) years, and billing software is depreciated over three (3) years which represents the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred while major replacements and improvements are capitalized. When property and equipment are retired or sold, the cost and applicable accumulated depreciation are removed from the respective accounts and the related gain or loss is recognized.

The Company recognizes impairment losses for long-lived assets whenever changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Management has concluded that no impairment reserves are required as of September 30, 2018 and December 31, 2017.

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Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets acquired in connection with business acquisitions. Goodwill is tested at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. The Company assesses goodwill for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. The annual impairment review is completed at the end of the year.

If the carrying amount of a reporting unit exceeds its fair value, the Company measures the possible goodwill impairment based upon an allocation of the estimate of fair value  to the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets, based upon known facts and circumstances as if the acquisition occurred currently. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds the implied fair value of the goodwill. It was determined that Goodwill of $80,867 created through the reverse merger was fully impaired as of December 31, 2017.

Intangible assets consist of customer lists arising from acquisitions which are amortized on a straight line basis over three years, their estimated useful lives.Consolidation

Other Assets

Other Assets represent items classified long-term assets in accordance withThe condensed consolidated financial statements include the Statement of Financial Accounting Standards ASC 210-10-45.  ThroughCompany and three (3) wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron and Infiniti Mobile. The condensed consolidated financial statements for the nine-month period ended September 30, 2018,2019, include the Company had made payments on behalf of IM Telecom, LLC in the amount of $333,316.  These amounts were paid as part of a Purchase and Sale of Membership Interest, which was effective as of February 7, 2018.  See additional information in Note 11 – Contingenciesits three (3) wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron and Commitments, Escrowed Contract and Part II – Other Information, Item 5.

Customer Deposits

Before entering into a contract with a sub-reseller customer,Infiniti Mobile (February through September). The condensed consolidated balance sheet for year ended December 31, 2018, includes the Company will requireand the customer to either secure a formal letterwholly-owned corporate subsidiaries, KonaTel Nevada and Apeiron. The condensed consolidated statements of credit with a bank, or require a certain level ofoperations, cash collateral deposits from the customer. These collateral requirements are determined by managementflows, and may be adjusted upward or downward depending on the volume of business with the sub-reseller customer, or if management’s assessment of credit risk for a sub-reseller customer would change.

The Company held $28,854 in collateral deposits from various sub-reseller customers at September 30, 2018 and December 31, 2017. Such amounts represent collateral received from the sub-resellers in order to contract with the Company. The related contracts have an option to terminate the contract within a period of less than one year, and accordingly, these collateral deposits are classified as current liabilities in the accompanying balance sheet.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accountingstockholders’ equity (deficit) for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Fair Market Value of Assets

The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, deposits received from customers for receivables and short-term loans the carrying amounts approximate fair value due to their short maturities.

We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices, which are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Unproved oil and natural gas properties are accounted for and measured under Regulation S-X, Rule 4-10.

We currently measure and report at fair value other intangible assets (due to our impairment analysis) and derivative liabilities using ASC 820-10, Fair Value Measurement.  The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:

Oil and Natural Gas Properties

The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs related to the exploration and development of oil and natural gas properties are initially capitalized into a single cost center (“full cost pool”). Such costs include land acquisition costs, a portion of employee salaries related to Property development, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities. Internal salaries are capitalized based on employee time allocated to the acquisition of leaseholds and development of oil and natural gas properties. The Company did not capitalize interest for thenine-month period ended September 30, 2018, as it was not required.

Proceeds from Property sales will generally be credited toinclude the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costsCompany and the proved reserves attributablewholly owned corporate subsidiary, KonaTel Nevada. All significant intercompany transactions are eliminated.

Going Concern

As the Company did not generate net income during the nine-month periods ended September 30, 2019, and 2018, the Company has been dependent upon equity financing to these costs.support its operations. The Company incurred losses of $1,077,822 and $1,255,609 for the nine-month periods ended September 30, 2019, and 2018, respectively. The Company has had significant improvement in providing cash from the operations. Net cash provided by operating activities was $32,282 and used in operating activities was ($1,302,189) for the nine-months ended September 30, 2019, and 2018, respectively. The accumulated deficit as of September 30, 2019, is $5,429,895.

The Company assesses all items classified as unproved Property on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration ofhas ameliorated any substantial doubt issues by generating additional cash flow since the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such Property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and amortization.  The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.

Capitalized costs associated with impaired properties and properties having proven reserves, estimated future development costs, and asset retirement costs under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 410-20-25 are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves.  The costs of unproved properties are withheld from the depletion base until such time as they are developed, impaired, or abandoned.

Under the full cost method of accounting, capitalized oil and natural gas Property costs less accumulated depletion, net of deferred income taxes, may not exceed a ceiling amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and natural gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, which is tested on a quarterly basis, an impairment is recognized. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month, less estimated future expenditures to be incurred in developing and producing the proved reserves (assuming the continuation of existing economic conditions), less any applicable future taxes.  If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and result in a lower depreciation, depletion and amortization rate in future periods.  A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.

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During the period ended September 30, 2018, and December 31, 2017, the Company incurred a total of $0 in oil and natural gas expenditures.

During the nine months ended September 30, 2018, we reduced the ceiling under the full cost method through amortization expense of $33,464.

No impairment was realized for the period ending September 30, 2018, or the year ended December 31, 2017.

Other long term assets consist of security deposits to vendors.  The Company has reviewed the other long term assets for impairment and determined that no impairment need realized for the period ending September 30, 2018, or the year ended December 31, 2017.

Revenue Recognition

Services revenues are generated from cellular and telecommunication services.  The revenue is derived from wholesale and retail services.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have adopted this update. We do not believe this guidance will impact the recognitioncompletion of our primary source of revenue from our wholesale and retail customers. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Cost of Revenue

Cost of Revenue includes the cost of communication services, equipment and accessories, shipping costs, and commissions of sub-agents.

Stock-based Compensation

The Company records stock based compensation in accordancemerger with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This requires that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.

Income Taxes

BeginningKonaTel Nevada on December 18, 2018,2017, including: the Effective Dateacquisition of Apeiron and Infiniti Mobile; receiving cash investments through the KonaTel Nevada Merger, KonaTel Nevada terminated its S Corporation status.  Forprivate placement of shares of our common stock; and revenues from the short-tax year, there was no tax provisiongrowth of federalour Virtual ETC program, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or state taxes inborrowings. Additionally, the financial statements.  AsCompany also has two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of September 30, 2018, becauseup to 60 days on mobile phone purchases and a bank line of a net loss, there was no tax expense provisioncredit for purchases of federal or state taxes in the financial statements.select mobile phones.

The sale of the Company’s New York retail operations to Telecon Wireless resulted in both a capital gain and an ordinary gain.  The gains on the sale would be taxed at the corporate income tax rate of 21%.  The gain of $318,257, with a tax effect of $66,834, is included in the net loss carryforward. Because of this, there was no tax expense provision of federal or state taxes in the financial statements.

Prior to the closing of Merger, with the consent of its shareholders, KonaTel Nevada had elected under the Internal Revenue Code and for Pennsylvania tax purposes to be an S Corporation. In lieu of corporation income taxes, the shareholders of a S Corporation are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision for federal or state income tax is included in the financial statements. The Company evaluates tax positions taken and determines whether it is more-likely-than-not that the tax position will be sustained upon examination based on the technical merits of the position. Management has reviewed its tax positions regarding state nexus as well as its status as a pass-through entity and has determined there are no such positions that fail to meet the more-likely-than-not criterion.

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Net Loss Per Share

The Company follows ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2019, and December 31, 2018, there are 4,575,000 and 4,325,000 potentially dilutive common shares, respectively. The dilutive common shares are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of receivables, cash and cash equivalents.

All cash and cash equivalents and restricted cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.

The Company also has a concentration of risk with respect to trade receivables from sub-resellers.customers and cellular providers. As of September 30, 2018, and December 31, 2017,2019, the Company had ano significant concentration of receivables due from three and two major customers, respectively (defined as customers whose receivable balances are greater than 10% of total accounts receivable)receivables). These customers represented approximately 87% of the total accounts receivable as of September 30, 2018, and approximately 78% of total accounts receivable asAs of December 31, 2017.2018, the Company had a significant concentration of receivables due from two customers in the amounts of $441,934,or 42.7%.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major sub-reseller customers.customers and cellular providers. For the nine-month period ended September 30, 2018, and 2017,2019, the Company had twoone customer that accounted for $1,810,875, or 25.0% and three, respectively, major sub-reseller customers which amounted to approximately 51% and 87%one cellular provider that accounted for $2,028,814, or 28.0%, respectively, of the total revenues.revenue. For the yearthree-month period ended December 31, 2017,September 30, 2019, the Company had two major sub-reseller customers which amounted to approximately 43%one customer that accounted for $634,668, or 27.0% and one cellular provider that accounted for $612,092, or 26.1% of total revenues.

Segment Reporting

The Company operates within four reportable segments.  The Company’s management evaluates performance and allocates resources based on the profit or loss from operations.   Because the Company is a service business with very few physical assets, Management does not use total assets by segment to make decisions regarding operations, and therefore the total assets disclosure by segment has not been included.revenue.

The reportable segments consist of a Wholesale unit, a Retail unit, a Virtual ETC unit, and Gas & Oil Operations.  The Wholesale unit purchases bulk rate services at a discounted unit and provides services to retail providers.  The Retail and Virtual ETC units provide services to the end user through the use of agents and direct selling to the customer.  The Gas & Oil Operations consist of leaseholds of property for the purpose of exploration and development of oil and natural gas properties.

Effect of Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The Company has determined that this pronouncement has very little impact on the financial statements.  The Company has determined that the cumulative effect transition method would be applied.

In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity. This update amends existing guidance with the objective to eliminate the use of different methods in practice with respect to the consideration of redemption features in relation to other features when determining whether the nature of a host contract is more akin to debt or equity and thereby reduce existing diversity under GAAP in accounting for hybrid financial instruments issued in the form of a share.  The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share.

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On February 25, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016- 02,2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Early application is permitted. The Company has determined that adoption of the standard will begin January 1, 2019. The Company currently has four equipment operating leases and one Property lease; and the Property lease expires in April 2019.2020. The Company has determined that this pronouncement has very littlewill not have a material impact on the financial statements.statements (see NOTE 5).

The Company has evaluated all other recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statement.

Emerging Growth Company

The Company is an emerging growth company and 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 Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”).

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications as of September 30, 2018,2019, and December 31, 2017:2018:

Depreciation and amortization expense amounted to $21,649 and $66,829$21,649 for the nine monthnine-month periods ended September 30, 2019, and 2018 and 2017,$7,217 and $7,216 for the three-month periods ended September 30, 2019, and 2018, respectively. Depreciation and amortization expense are included as a component of operating expenses in the accompanying statements of operations.

NOTE 5 – RIGHT-TO-USE ASSETS

Right-to-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between 5.29% and 5.34%.

Depreciation amounted to $54,421 for the nine-month period and $18,140 for the three-month period ended September 30, 2019. Depreciation expense is included as a component of operating expenses in the accompanying statements of operations.

NOTE 56 – INTANGIBLE ASSETS

Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions:

Amortization expense amounted to $151,059$677,280 and $283,990$151,059 for the nine monthnine-month periods ended September 30, 2019, and 2018 and 2017,$225,761 and $20,903 for the three-month periods ended September 30, 2019, and 2018, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Future amortization overAmortization expense is expected to be as follows:

Intangible Assets with indefinite useful life consist of a license granted by the next yearFCC:

The License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be $33,569, which fully amortizes intangible assets.amortized. The License was acquired through an acquisition. The fair market value of the License as of September 30, 2019, was $624,255.

NOTE 67 – LINES OF CREDIT

The Company has threetwo lines of credit with a bank which provide aggregate maximum borrowing availability of $1,050,000 as of September 30, 2018,2019, and December 31, 2017.2018. The lines of credit are payable on demand and bear interest at a variable rate with a floor set at 5.25%rate ranges from 7.5% to 8.0%. Outstanding advances under these line of credit arrangements amounted to $153,141$35,683 and $103,379 as of September 30, 2018,2019, and December 31, 2017.2018, respectively. The lines of credit matured in April 2018. The maturity date has been verbally extended by the bankmature on a month-to-month basis.January 5, 2020, and February 14, 2020.

The lines are secured by the general assets of the Company and aggregate amounts drawn under the linelines of credit may be limited to a borrowing base, as defined. The revolving lines of credit are guaranteed by an officer of the Company.

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NOTE 78 – OPERATING LEASES

The Company has right-to-use assets through leases of property under three non-cancelable operating leases with terms in excess of one year. The current property lease in excess of one year expiresliabilities expire April 30, 2019.2020, September 1, 2020, and December 1, 2021. Future minimum lease liability payments over the next three years under the terms of these operating leases are as follows:

The Company also leases antwo office spacespaces on a month-to-month basis. Total lease expense for the nine monthsnine-month periods ended September 30, 2018,2019, and 20172018 amounted to $52,592 and $110,023 and $112,203,$15,392 and $33,677 for the three-month periods ended September 30, 2019, and 2018, respectively.

NOTE 89 – AMOUNT DUE TO SHAREHOLDERSTOCKHOLDER

During 2018, Gary Stevens advanced the Company $100,000. The amount was used for working capital purposes.  The note consisted of a $5,000 loan fee, plus an annual interest rate of 8.00%.  This amount was paid in April, 2018.

During 2017, certain of the Company’s principal shareholders, D. Sean McEwen, Matthew Atkinson, and Mark Savage, advanced the Company $191,500, $17,063 and $14,764, respectively. The amounts advanced were used for working capital purposes and bear no interest and do not have a maturity date.  Interest expense is imputed based on the applicable federal rate of 1.52%.  Amounts due to Matthew Atkinson and Mark Savage were fully paid on March 8, 2018.  D. Sean McEwen received $41,500 on March 8, 2018, and $10,000 each on June 25, 2018, July 25, 2018, August 25, 2018, and September 25, 2018, as partial payments.  As of September 30, 2018, D. Sean McEwen is owed $110,000.

NOTE 9 – RELATED PARTY TRANSACTIONS

Transactions with Shareholders

As of September 30, 2019, and December 31, 2018, amounts due fromthe Company’s principal shareholder, D. Sean McEwen was owed $4,344 and $91,152, respectively, for advances to shareholders were $110,000.used for working capital under a note. The detailsnote bears a 10% per annum interest rate. The note matures on November 30, 2019.

During 2019, Joshua Ploude, CEO of the advances are set forth in NOTE 8.

NOTE 10 – RETIREMENT PLAN

The Company sponsors a 401(k) profit sharing plan for its employees, whereby participants may contribute through salary deductions as defined, not to exceed certain IRS limits. The plan also provides for an employer matching contribution and also discretionary employer contributions. As of November 3, 2017,Apeiron, advanced the Company no longer provided$200,000. The amount was used to provide a vendor security deposit. The note bears a 10% per annum interest rate until May 1, 2019, at which time, will increase to 12% per annum. The note had an employer match.original maturity date of July 10, 2019. The Company contributed $27,684 for the period ended September 30, 2017.loan has been extended without a defined maturity end date.

NOTE 1110 – CONTINGENCIES AND COMMITMENTS

Litigation

From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of September 30, 2018,2019, there are no legal proceedings.proceedings, except the following:

On August 28, 2018, we filed a claim in AAA Arbitration against a former employee, Saul Glosser. In August 2019, the Company won an arbitration award (ratified by the court) from Mr. Glosser in the amount of $362,871 ($357,914 plus arbitrator compensation of

$4,957). The award has been deemed final as Mr. Glosser has not preserved any outstanding issues for review. At this time collectability is yet to be determined, and therefore the award is not currently reflected in the balance sheet.

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.

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Escrowed Contract

Effective February 7, 2018, the Company entered into an Agreement for the Purchase and Sale of Membership Interest dated as of February 5, 2018 (the “PSMI”), with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom, LLC, an Oklahoma limited liability company (“IM Telecom”), from its sole owner, Trevan Morrow (“Mr. Morrow”).  The principal asset of IM Telecom is a “Lifeline Program” license (a Federal Communications Commission [the “FCC”] approved Compliance Plan), the transfer of ownership of which requires prior approval of the FCC.  The PSMI provided that if the transfer of the beneficial ownership of the Lifeline Program license to us was not approved by the FCC prior to April 30, 2018, or a later date agreed upon by the parties, either party may terminate the PSMI; and the parties had agreed to continue the PSMI, with the FCC subsequently publishing notice of the approval of the transfer of the ownership of the Lifeline Program license to the Company on October 23, 2018.  The parties are in the process of finalizing the closing of the PSMI, anticipated to be concluded by year end 2018.

Letters of Credit

The Company maintains irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount of $593,000.$63,000. The letters of credit serve as collateral and security for various resale contracts the Company has with their suppliers. The letters of credit are unused as of September 30, 2018,2019, and December 31, 2017.

Going Concern

As the Company did not generate net income during the nine month periods ending September 30, 2018, and 2017, we have been dependent upon equity financing to support our operations.  In addition to losses of $1,255,609 and $1,236,954 for the nine month periods ending September 30, 2018, and 2017, respectively, we have experienced negative cash flow from operations of $1,293,856 and $350,522 in 2018, and 2017. The accumulated deficit as of September 30, 2018, is $4,446,482.

We believe we have ameliorated any “going concern” issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017; receiving cash investments through the private placement of shares of our common stock; and revenues from the growth of our Virtual ETC program, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings.  Additionally, we also have two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of up to 60 days on mobile phone purchases and a bank line of credit for purchases of select mobile phones.

As a result of the sale of a component of the retail operations to Telecon Wireless, our irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount was reduced to $275,000 from $593,000, as noted in NOTE 11.2018. The letters of credit serve as collateral and security for various resale contractsare not considered in the financial statements.

Regulatory Determinations

On May 17, 2019, Infiniti Mobile was notified by the United States Administrative Company (“USAC”) of an over-payment of Universal Service Fund reimbursements in the amount of $168,677. On July 25, 2019, the Company entered into a Letter of Acknowledgement with the FCC and requested a 24-month payment plan regarding the repayment of the over-payment amounts. The FCC decision regarding the payment plan request is pending and is expected before December 31, 2019. As required by the Letter of Acknowledgement requirements, Infiniti Mobile has made a good faith down payment in the amount of 10% of the total over-payment and continues to make regular monthly payments of 1/24th of the outstanding balance pending payment plan approval. The over-payment amount was recorded as a current acquisition expense.

The Company entered into a Settlement Agreement with their suppliers.the former owner of Infiniti Mobile regarding this matter, effective September 4, 2019, which was the date of delivery of the fully executed Settlement Agreement that was dated August 22, 2019, and filed with the SEC on September 4, 2019. Under the Settlement Agreement, and as part of the previous owner’s obligations to indemnify and hold the Company harmless from any liability arising from the breach of any representations and warranties in the initial Purchase and Sale Agreement dated February 5, 2019 (the “PSMI”), and filed with the SEC on February 6, 2019, which included this liability, the vested $0.20 per share 500,000 share incentive stock option grant that was awarded to the previous owner at the closing of the PSMI was cancelled and deemed null and void, and the previous owner was released from any liability for the $168,677 over-payment. All of the other terms and conditions of the PSMI remain in full force and effect, including the continuing indemnification provisions regarding all other representations and warranties.

NOTE 1211 – SEGMENT REPORTING

The Company operates within four reportable segments. The Company’s management evaluates performance and allocates resources based on the profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  Because the Company is a service business with very few physical assets, Managementmanagement 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 Company’s reportable segments consist of Hosted Services, Mobile Services, Lifeline ETC (“Eligible Communications Carrier”), and Lifeline VETC (“Virtual Eligible Communications Carrier”).

Hosted Services – This segment includes a Wholesale unit,suite of hosted CPaaS (“Communications Platform as a Retail unit, a Virtual ETC unit,Service”) services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”), ML (“Machine Learning”), mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and Gas & Oil Operations.  The Wholesale unit purchases bulk ratenumerous API driven services.  Apeiron developed, owns and supports its services at a discounted cost.  The Wholesale unit then sells to providers that providethrough its dedicated national telecommunications network. Apeiron provides telecommunications services to application developers, call centers and small and medium size businesses. Apeiron markets these services through the end-user.  The Retail unit provides these sameApeiron website, independent sales agents, ISOs (Independent Sales Organizations) and Social Media Optimization (“SCO”).

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or “Internet of Things”) services. KonaTel consolidated its wholesale and retail services with Apeiron’s hosted CPaaS services, providing Apeiron with an expanded portfolio of mobile services to bundle with its existing services. Apeiron’s 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 end-user.wireless network infrastructure over which services are provided to its customers.  Apeiron’s 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. Apeiron primarily markets its mobile services through independent sales agents and ISOs via the “Apeiron” brand.  These agents and ISOs generally market to small and medium sized businesses throughout the United States.  This type of marketing is also considered B2B (“Business to Business”) sales.

The Wholesale unit had 17Lifeline ETC – This segment operates under its own FCC approved Compliance Plan and 18 customers forFCC wireless ETC designation in eight states which currently include Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont and Wisconsin.  IM Telecom, operating under its Infiniti Mobile brand, currently markets its Lifeline service through its Internet presence, its storefront in Tulsa, Oklahoma and through ISOs that specialize in the periods ended September 30, 2018,distribution of Lifeline services.  These ISOs typically support teams of field agents who market directly to Lifeline eligible individuals requesting Lifeline service.  We provide phones and 2017, respectively. The Retail Unit had an average lines/customerswireless voice/text/data service to Lifeline eligible individuals requesting Lifeline service. In some states and depending on government requirements, we may only provide voice/text service with no mobile data.

Lifeline VETC – This segment operates under the license of 7.606another ETC.  We currently market our Lifeline VETC sales through ISOs that specialize in the distribution of Lifeline services.  These ISOs typically support teams of field agents who market directly to Lifeline eligible individuals requesting Lifeline service. We provide phones and 7,208 for the periods ended September 30, 2018,wireless voice/text/data service to Lifeline eligible individuals requesting Lifeline service. In some states and 2017, respectively. The Gross Profit per line for Wholesale was $3.19 and $2.46 for the nine month periods ended September 30, 2018, and 2017, respectively. The Gross Profit per line for Retail was $20.58 and $24.36 for the nine month periods ended September 30, 2018, and 2017, respectively.  The Virtual ETC unit had average lines/phones of 17,871 and 3,132 for the nine month periods ended September 30, 2018, and 2017, respectively.  The Gross profit per Virtual ETC line was ($1.51) and $.31 for the nine month periods ended September 30, 2018, and 2017, respectively.depending upon government requirements, we may only provide voice/text service with no mobile data.

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The following table reflects the result of operations of the Company’s reportable segments: