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 SeptemberJune 30, 20212022
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 | ||
(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 | 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, Inc. (“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-ownedwholly owned subsidiaries, KonaTel, Inc., a Nevada corporation (“KonaTel Nevada”), Apeiron Systems, Inc., a Nevada corporation doing business as “Apeiron” (“Apeiron”Apeiron Systems”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infiniti Mobile”).
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Quarterly Report completely, and it should be read and considered with all other reports filed by us with the United States Securities and Exchange Commission (the “SEC”) that are contained in the SEC Edgar Archives. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
2 |
KONATEL, INC.
FORM 10-Q
SeptemberJune 30, 20212022
INDEX
PART I - FINANCIAL STATEMENTS
SeptemberJune 30, 20212022
Table of Contents
3 |
KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and Cash Equivalents | $ | 1,358,722 | $ | 715,195 | $ | 2,430,966 | $ | 932,785 | ||||||||
Accounts Receivable, net | 994,059 | 434,801 | 1,421,026 | 1,274,687 | ||||||||||||
Inventory, Net | 107,986 | 17,786 | 1,007,206 | 566,839 | ||||||||||||
Prepaid Expenses | 16,022 | 2,365 | 10,124 | 79,467 | ||||||||||||
Other Current Asset | 164 | 194 | 164 | 164 | ||||||||||||
Total Current Assets | 2,476,953 | 1,170,341 | 4,869,486 | 2,853,942 | ||||||||||||
Property and Equipment, Net | 40,663 | 79,571 | 42,712 | 48,887 | ||||||||||||
Other Assets | ||||||||||||||||
Intangible Assets, Net | 1,033,497 | 1,517,163 | 845,377 | 807,775 | ||||||||||||
Other Assets | 154,296 | 172,065 | 120,970 | 154,297 | ||||||||||||
Investments | 10,000 | — | 10,000 | 10,000 | ||||||||||||
Total Other Assets | 1,197,793 | 1,689,228 | 976,347 | 972,072 | ||||||||||||
Total Assets | $ | 3,715,409 | $ | 2,939,140 | $ | 5,888,545 | $ | 3,874,901 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts Payable and Accrued Expenses | $ | 1,138,451 | $ | 1,042,567 | $ | 1,239,530 | $ | 930,449 | ||||||||
Note Payable - current portion | 1,312 | 94,339 | ||||||||||||||
Loans Payable, net of origination fees | 2,984,181 | — | ||||||||||||||
Right of Use Operating Lease Obligation - current | 66,882 | 66,323 | 60,452 | 50,672 | ||||||||||||
Deferred Revenue | — | 37,677 | ||||||||||||||
Total Current Liabilities | 1,206,645 | 1,240,906 | 4,284,163 | 981,121 | ||||||||||||
Long Term Liabilities | ||||||||||||||||
Right of Use Operating Lease Obligation - long term | 145,796 | 15,399 | 165,554 | 136,445 | ||||||||||||
Note Payable - long term | 150,000 | 150,000 | — | 150,000 | ||||||||||||
Total Long Term Liabilities | 295,796 | 165,399 | 165,554 | 286,445 | ||||||||||||
Total Liabilities | 1,502,441 | 1,406,305 | 4,449,717 | 1,267,566 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Common stock, $ | par value, shares authorized, outstanding and issued at September 30, 2021 and outstanding and issued at December 31, 202041,267 | 40,692 | ||||||||||||||
Common stock, $ | par value, shares authorized, outstanding and issued at June 30, 2022 and outstanding and issued at December 31, 202141,615 | 41,615 | ||||||||||||||
Additional Paid In Capital | 7,711,992 | 7,460,632 | 8,265,520 | 7,911,224 | ||||||||||||
Accumulated Deficit | (5,540,291 | ) | (5,968,489 | ) | (6,868,307 | ) | (5,345,504 | ) | ||||||||
Total Stockholders’ Equity | 2,212,968 | 1,532,835 | 1,438,828 | 2,607,335 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 3,715,409 | $ | 2,939,140 | $ | 5,888,545 | $ | 3,874,901 |
See accompanying notes to unaudited condensed consolidated financial statements.
4 |
KonaTel, Inc.
KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Revenue | $ | 3,612,861 | $ | 2,527,281 | $ | 8,919,573 | $ | 6,741,830 | $ | 5,123,097 | $ | 2,913,873 | $ | 9,350,954 | $ | 5,306,711 | ||||||||||||||||
Cost of Revenue | 1,988,624 | 1,625,481 | 4,946,786 | 4,196,528 | 4,680,530 | 1,476,485 | 7,261,127 | 2,958,162 | ||||||||||||||||||||||||
Gross Profit | 1,624,237 | 901,800 | 3,972,787 | 2,545,302 | 442,567 | 1,437,388 | 2,089,827 | 2,348,549 | ||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Payroll and Related Expenses | 636,329 | 505,236 | 1,817,200 | 1,403,315 | 1,238,979 | 588,328 | 2,371,294 | 1,180,871 | ||||||||||||||||||||||||
Operating and Maintenance | 461 | 89,300 | 1,211 | 384,049 | 717 | — | 1,359 | — | ||||||||||||||||||||||||
Bad Debt | — | 39 | 427 | 1,729 | 29,078 | — | 29,133 | — | ||||||||||||||||||||||||
Professional Services | 77,335 | 72,350 | 206,671 | 198,300 | 145,477 | 59,602 | 294,647 | 143,725 | ||||||||||||||||||||||||
Utilities and Facilities | 39,726 | 8,438 | 110,523 | 24,928 | 39,348 | 18,995 | 75,035 | 70,797 | ||||||||||||||||||||||||
Depreciation and Amortization | 213,552 | 246,090 | 640,657 | 763,358 | 2,059 | 213,552 | 6,176 | 427,105 | ||||||||||||||||||||||||
General and Administrative | 32,668 | 17,641 | 93,994 | 44,777 | 119,316 | 37,616 | 180,233 | 145,661 | ||||||||||||||||||||||||
Marketing and Advertising | 37,350 | 5,534 | 50,073 | 7,350 | 37,357 | 1,637 | 85,027 | 12,723 | ||||||||||||||||||||||||
Application Development Costs | 179,427 | — | 396,715 | — | 115,089 | 119,740 | 249,694 | 119,740 | ||||||||||||||||||||||||
Taxes and Insurance | 35,784 | 13,595 | 60,479 | 55,720 | 92,281 | 16,850 | 123,660 | 24,695 | ||||||||||||||||||||||||
Total Operating Expenses | 1,252,632 | 958,223 | 3,377,950 | 2,883,526 | 1,819,701 | 1,056,320 | 3,416,258 | 2,125,317 | ||||||||||||||||||||||||
Operating Income/(Loss) | 371,605 | (56,423 | ) | 594,837 | (338,224 | ) | (1,377,134 | ) | 381,068 | (1,326,431 | ) | 223,232 | ||||||||||||||||||||
Other Income and Expense | ||||||||||||||||||||||||||||||||
Other Income | — | 81,070 | — | 624,518 | ||||||||||||||||||||||||||||
Interest Expense | (2,573 | ) | (4,694 | ) | (12,328 | ) | (23,459 | ) | (47,146 | ) | (7,514 | ) | (71,176 | ) | (9,756 | ) | ||||||||||||||||
Other Expenses | (49,197 | ) | — | (154,310 | ) | — | (54,073 | ) | (32,469 | ) | (125,196 | ) | (105,113 | ) | ||||||||||||||||||
Total Other Income and Expenses | (51,770 | ) | 76,376 | (166,638 | ) | 601,059 | (101,219 | ) | (39,983 | ) | (196,372 | ) | (114,869 | ) | ||||||||||||||||||
Net Income | $ | 319,836 | $ | 19,953 | $ | 428,199 | $ | 262,835 | ||||||||||||||||||||||||
Net Income (Loss) | $ | (1,478,353 | ) | $ | 341,085 | $ | (1,522,803 | ) | $ | 108,363 | ||||||||||||||||||||||
Earnings per Share | ||||||||||||||||||||||||||||||||
Earnings (Loss) per Share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.01 | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | (0.04 | ) | $ | 0.01 | $ | (0.04 | ) | $ | 0.00 | ||||||||||||||
Diluted | $ | 0.01 | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | (0.04 | ) | $ | 0.01 | $ | (0.04 | ) | $ | 0.00 | ||||||||||||||
Weighted Average Outstanding Shares | ||||||||||||||||||||||||||||||||
Basic | 40,899,569 | 40,692,286 | 40,758,495 | 40,692,286 | 41,615,406 | 40,692,286 | 41,615,406 | 40,692,286 | ||||||||||||||||||||||||
Diluted | 43,565,835 | 44,092,286 | 43,434,761 | 44,092,286 | 41,615,406 | 44,217,286 | 41,615,406 | 44,217,286 |
See accompanying notes to unaudited condensed consolidated financial statements.
5 |
KonaTel, Inc.
KonaTel, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common Shares | Additional | Accumulated | ||||||||||||||||||
Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
Balances as of January 1, 2020 | 40,692,286 | $ | 40,692 | $ | 7,380,029 | $ | (5,896,977 | ) | $ | 1,523,744 | ||||||||||
Stock Based Compensation | — | — | 30,771 | — | 30,771 | |||||||||||||||
Dividends Paid to Apeiron Systems shareholders | — | — | — | (310,129 | ) | (310,129 | ) | |||||||||||||
Net Income | — | — | — | 262,835 | 262,835 | |||||||||||||||
Balances as of September 30, 2020 | 40,692,286 | $ | 40,692 | $ | 7,410,800 | $ | (5,944,271 | ) | $ | 1,507,221 | ||||||||||
Balances as of July 1, 2020 | 40,692,286 | $ | 40,692 | $ | 7,400,543 | $ | (5,964,224 | ) | $ | 1,477,011 | ||||||||||
Stock Based Compensation | — | — | 10,257 | — | 10,257 | |||||||||||||||
Net Income | — | — | — | 19,953 | 19,953 | |||||||||||||||
Balances as of September 30, 2020 | 40,692,286 | $ | 40,692 | $ | 7,410,800 | $ | (5,944,271 | ) | $ | 1,507,221 | ||||||||||
Balances as of January 1, 2021 | 40,692,286 | $ | 40,692 | $ | 7,460,632 | $ | (5,968,489 | ) | $ | 1,532,835 | ||||||||||
Exercised Stock Options | 575,000 | 575 | 109,425 | — | 110,000 | |||||||||||||||
Stock Based Compensation | — | — | 141,935 | — | 141,935 | |||||||||||||||
Net Income | — | — | — | 428,199 | 428,199 | |||||||||||||||
Balances as of September 30, 2021 | 41,267,286 | $ | 41,267 | $ | 7,711,992 | $ | (5,540,290 | ) | $ | 2,212,968 | ||||||||||
Balances as of July 1, 2021 | 40,692,286 | $ | 40,692 | $ | 7,539,690 | $ | (5,860,126 | ) | $ | 1,720,256 | ||||||||||
Exercised Stock Options | 575,000 | 575 | 109,425 | — | 110,000 | |||||||||||||||
Stock Based Compensation | — | — | 62,877 | — | 62,877 | |||||||||||||||
Net Income | — | — | — | 319,836 | 319,836 | |||||||||||||||
Balances as of September 30, 2021 | 41,267,286 | $ | 41,267 | $ | 7,711,992 | $ | (5,540,290 | ) | $ | 2,212,968 |
Common Shares | Additional | Accumulated | ||||||||||||||||||
Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
Balances as of January 1, 2021 | 40,692,286 | $ | 40,692 | $ | 7,460,632 | $ | (5,968,489 | ) | $ | 1,532,835 | ||||||||||
Stock Based Compensation | — | 0 | 79,058 | 0 | 79,058 | |||||||||||||||
Net Income | — | 0 | 0 | 108,363 | 108,363 | |||||||||||||||
Balances as of June 30, 2021 | 40,692,286 | $ | 40,692 | $ | 7,539,690 | $ | (5,860,126 | ) | 1,720,256 | |||||||||||
Balances as of April 1, 2021 | 40,692,286 | 40,692 | 7,491,976 | (6,201,211 | ) | 1,331,457 | ||||||||||||||
Stock Based Compensation | — | 0 | 47,714 | 0 | 47,714 | |||||||||||||||
Net Income | — | 0 | 0 | 341,085 | 341,085 | |||||||||||||||
Balances as of June 30, 2021 | 40,692,286 | 40,692 | 7,539,690 | (5,860,126 | ) | 1,720,256 |
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 | ||||||||||||||
Stock Based Compensation | — | 0 | 354,296 | 0 | 354,296 | |||||||||||||||
Net Loss | — | 0 | 0 | (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 | ||||||||||
Balances as of April 1, 2022 | 41,615,406 | 41,615 | 8,062,983 | $ | (5,389,954 | ) | 2,714,644 | |||||||||||||
Stock Based Compensation | — | 0 | 202,537 | 0 | 202,537 | |||||||||||||||
Net Loss | — | 0 | 0 | (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.
Common Shares
Additional Paid-in Capital
Accumulated Deficit
6 |
KonaTel, Inc.
KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net Income | $ | 428,199 | $ | 262,835 | ||||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Net Income (Loss) | $ | (1,522,803 | ) | $ | 108,363 | |||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation and Amortization | 640,657 | 658,760 | $ | 6,176 | $ | 427,105 | ||||||||||
Loan Origination Cost Amortization | 7,713 | — | ||||||||||||||
Bad Debt | 427 | 1,729 | 29,133 | 427 | ||||||||||||
Stock-based Compensation | 141,935 | 30,771 | 354,296 | 79,058 | ||||||||||||
Amount recorded as loan forgiveness on SBA Covid-19 Loans | — | (309,000 | ) | |||||||||||||
Change in Right of Use Asset | (118,085 | ) | (29,854 | ) | (37,602 | ) | (149,133 | ) | ||||||||
Change in Lease Liability | 130,956 | 29,683 | 38,888 | 159,690 | ||||||||||||
Changes in Operating Assets and Liabilities: | ||||||||||||||||
Accounts Receivable | (559,685 | ) | (109,713 | ) | (175,471 | ) | (309,304 | ) | ||||||||
Inventory | (90,200 | ) | (313 | ) | (440,367 | ) | (76,848 | ) | ||||||||
Prepaid Expenses | (13,657 | ) | 395 | 102,669 | 13,926 | |||||||||||
Accounts Payable and Accrued Expenses | 95,887 | (82,855 | ) | 309,081 | (65,528 | ) | ||||||||||
Deferred Revenue | (37,677 | ) | (15,326 | ) | — | (37,677 | ) | |||||||||
Customer Deposits | — | (31,087 | ) | |||||||||||||
Other Assets | 17,800 | 35,481 | ||||||||||||||
Net cash provided by operating activities | 636,557 | 441,506 | ||||||||||||||
Net cash provided by (used in) operating activities | (1,328,287 | ) | 150,079 | |||||||||||||
Cash Flows from Investing Activities | — | — | ||||||||||||||
Purchase of Assets | (10,000 | ) | (10,833 | ) | ||||||||||||
Net cash (used in) investing activities | (10,000 | ) | (10,833 | ) | — | — | ||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Repayment on Revolving Lines of Credit | — | (12,237 | ) | |||||||||||||
Cash received from Stock Options Exercised | 110,000 | — | ||||||||||||||
Proceeds from Federal SBA Covid-19 Loans | — | 459,000 | ||||||||||||||
Repayments of amounts due to Related Party | — | (87,165 | ) | |||||||||||||
Proceeds from short-term note payable | 3,150,000 | — | ||||||||||||||
Loan origination cost | (173,532 | ) | — | |||||||||||||
Repayments of amounts of Notes Payable | (93,030 | ) | (83,403 | ) | (150,000 | ) | (77,031 | ) | ||||||||
Dividends Paid to Apeiron shareholders | — | (310,129 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 16,970 | (33,934 | ) | 2,826,468 | (77,031 | ) | ||||||||||
Net Change in Cash | 643,527 | 396,739 | 1,498,181 | 73,048 | ||||||||||||
Cash - Beginning of Year | 715,195 | 191,474 | 932,785 | 715,195 | ||||||||||||
Cash - End of Period | $ | 1,358,722 | $ | 588,213 | $ | 2,430,966 | $ | 788,243 | ||||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||||||
Cash paid for interest | $ | 4,041 | $ | 17,651 | $ | 3,099 | $ | 3,133 | ||||||||
Cash paid for taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Right of use assets obtained in exchange for new operating lease liabilities | $ | 199,245 | $ | 112,819 | $ | 71,304 | $ | 199,245 |
See accompanying notes to unaudited condensed consolidated financial statements.
7 |
KonaTel, Inc.
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.
KonaTel Inc., a Delaware corporation, formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada subchapter S-Corporation (“KonaTel Nevada”), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly-ownedwholly owned subsidiary.
On December 31, 2018, we acquired Apeiron Systems, Inc., a Nevada corporation d/b/a (www.apeiron.io) (“Apeiron Systems” or “Apeiron” (“Apeiron” or “Apeiron Systems”), which is also our wholly-ownedwholly owned subsidiary. Apeiron was organized in 2013 and is an international Hosted Services CPaaS (“hosted services Communications Platform as a Service”Service (“CPaaS”) provider that designed, built, owns and operates its national private core network, supporting a suite of business communications services, all accessible via proprietary Applications Programming Interfaces (“APIs”). As ana Federal Communications Commissions (“FCC”) licensed Internet Telephony Service Provider (“ITSP”), Apeiron also holds a Federal Communications Commission (“FCC”)an FCC numbering authority license. Some of Apeiron’s Hosted Serviceshosted services include Voice over IP (“VoIP”), cellular and Over-The-Top (“OTT”) telephony, SMS/MMS messaging and broadcast services, numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording and other services through local, toll-free and international phone numbers. Supported by its national redundant network, Apeiron also provides public and private IP network services, including MPLS (MultiprotocolMultiprotocol Label Switching)Switching (“MPLS”), Dedicated Internet and LTE Wireless WAN solutions. Apeiron’s Cloud Servicescloud services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”), and Internet of Things (“IOT”IoT”) data and device management. Apeiron primarily distributes its services nationally through its website, its sales staff, independent sales agents and Independent Sales Organizations (“ISOs”).
On January 31, 2019,February 5, 2018, we acquiredentered into a purchase agreement to acquire IM Telecom, LLC, an Oklahoma limited liability company d/b/a “Infiniti Mobile”(www.infinitimobile.com), doing business as Infiniti Mobile (“IM Telecom” or “Infiniti Mobile”), which became. On October 23, 2018, the FCC approved our wholly-owned subsidiary. Infiniti Mobileacquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom operates as a wholly owned subsidiary of KonaTel. It is an FCC licensed Eligible Telecommunications Carrier (“ETC”) and is one of 22twenty-two (22) original FCC licensed wireless cellular resellers to hold an FCC approved Lifeline Compliance Plan since 2012, of which approximately twelve (12) license holders remain active today. The FCC has not approved (granted) a new wireless reseller Lifeline Compliance Plan since 2012. As a licensed ETC, IM Telecom is currently authorized to distribute Lifeline subsidized mobile voice/data service in nine (9) states. In addition to Lifeline, IM Telecom is also an FCC licensed Affordable Connectivity Program (“ACP”) provider, authorized to distribute ACP subsidized high-speed mobile data service in the United States. Under the FCC’sforty-eight (48) contiguous states plus Washington D.C. and Puerto Rico. Lifeline is an FCC program Infiniti Mobile is authorized to provide governmentthat provides subsidized, fixed or mobile telecommunications services to eligible low-income American households, currentlyAmericans. ACP is an FCC program that provides subsidized high-speed wireless data services to low-income Americans. IM Telecom distributes Lifeline and ACP services under its Infiniti Mobile brand name through its website, sales staff, retail location and ISOs. IM Telecom also offers non-Lifeline and non-ACP services throughout the United States.
Apeiron Systems is headquartered in Los Angeles, California. It also has some management staff in Plano, Texas, customer service and software engineering resources staffed in Johnstown, Pennsylvania and software engineering services staffed in Europe and Asia. IM Telecom is headquartered in Plano, Texas, and operates a retail operation in Tulsa, Oklahoma.
We are headquartered in Plano, Texas. Apeiron Systems has fourteen (14) full-time employees; IM Telecom has thirteen (13) full-time employees and four (4) part-time employees; and we have four (4) full-time employees.
Principal Products or Services and their Markets
Our principal products and services, across our two wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for low-income Americans. Except for our ETC Lifeline services distributed in up to nine states.(9) states and our ACP services distributed in the forty-eight (48) contiguous states, Washington D.C. and Puerto Rico, our Apeiron Systems’ products and services are available worldwide and subject to U.S., international and local/national regulations.
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We generate revenue from two (2) primary sources, Hosted Services and Mobile Services:
· | Our Hosted Services include a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. |
· | Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated. |
Basis of Presentation
Interim Financial Statements
The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2020.2021.
The accompanying financial statements have been prepared using the accrual basis of accounting.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates in these financial statements include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, and stock-based compensation, and estimated life of customer lists.compensation. Actual results could differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements include the Company and three wholly-ownedwholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany transactions are eliminated.
Basic income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options.
Treasury Stock Method Calculation | ||
Total Shares Outstanding | 41,267,286 | |
Potential Incremental Shares: | ||
Average Exercise Price | $ | |
Current Market Price | $ | 0.90 |
Shares eligible for Purchase | 3,575,000 | |
Average Price Received | $ | 808,861 |
Shares at Market Price | 898,734 | |
Incremental Shares under Treasury Stock Method | 2,676,266 |
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Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic and Diluted
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Net income | $ | 319,836 | $ | 19,953 | $ | 428,199 | $ | 262,835 | ||||||||||||||||||||||||
Net Income (Loss) | $ | (1,478,353 | ) | $ | 341,085 | $ | (1,522,803 | ) | $ | 108,363 | ||||||||||||||||||||||
Weighted average shares outstanding during period on which basic earnings per share is calculated | 40,899,569 | 40,692,286 | 40,758,495 | 40,692,286 | 41,615,406 | 40,692,286 | 41,615,406 | 40,692,286 | ||||||||||||||||||||||||
Effect of dilutive shares | ||||||||||||||||||||||||||||||||
Incremental shares under stock option grants | 2,676,266 | 3,400,000 | 2,676,266 | 3,400,000 | ||||||||||||||||||||||||||||
Weighted average shares outstanding during period on which diluted earnings per share is calculated | 43,565,835 | 44,092,286 | 43,434,761 | 44,092,286 | ||||||||||||||||||||||||||||
Incremental shares under stock-based compensation | 2,538,352 | 2,538,352 | ||||||||||||||||||||||||||||||
Weighted average shares outstanding during period on which diluted earnings per share would be calculated | 41,615,406 | 43,230,638 | 41,615,406 | 43,230,638 | ||||||||||||||||||||||||||||
Earnings per share attributable to common stockholders | ||||||||||||||||||||||||||||||||
Basic earnings per share | $ | 0.01 | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | (0.04 | ) | $ | 0.01 | $ | (0.04 | ) | $ | 0.00 | ||||||||||||||
Diluted earnings per share | $ | 0.01 | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | (0.04 | ) | $ | 0.01 | $ | (0.04 | ) | $ | 0.00 |
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents.
All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
Trade Account Receivables
Sales Revenue
The Company has a concentration of risk with respect to trade receivables from customers and other cellular providers. As of SeptemberJune 30, 2021,2022, 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) customersone (1) customer in the amountsamount of $111,672 and $639,4291,308,193, or 11.2392.1% and 64.33% of total accounts receivable, respectively.. It should be noted that the largest customer is the FCC. As of December 31, 2020,2021, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $194,509783,431, or 52.463.9%, and $52,843194,647, or 14.215.9%, respectively..
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with majorlarge customers and cellular partners.the government. For the ninethree months ended SeptemberJune 30, 2022, the Company had two (2) customers that accounted for $910,574 or 17.8% and $3,310,128 or 64.6% of revenue, respectively. For the three-month period ended June 30, 2021, the Company had two (2) customers that accounted for $3,297,984944,509 or 3732.4% and $2,818,4651,071,386 or 31.636.8% of revenue, respectively. For the nine-month periodsix months ended SeptemberJune 30, 2020,2022, the Company had one (1) customertwo (2) customers that accounted for $2,332,7161,826,412, or 34.619.5%, and $5,741,697 or 61.4% of revenue.revenue, respectively. For the six-month period ended June 30, 2021, the Company had two (2) customers that accounted for $1,774,644 or 33.4% and $1,664,735 or 31.4% of revenue, respectively.
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
NOTE 2 – INVENTORY
Inventory primarily consists of sim cards and cell phones, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the first-in, first-out (FIFO) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and on a quarterly basis inventory is reviewed for obsolescence and counted for accuracy with distributors. At June 30, 2022, and December 31, 2021, the Company had inventory of $1,007,206 and $566,839, respectively.
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NOTE 23 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of SeptemberJune 30, 2021,2022, and December 31, 2020: 2021:
Property and Equipment - Schedule of Property and Equipment
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Leasehold Improvements Leasehold Improvements | $ | 46,950 | $ | 46,950 | ||||||||||||
Lease Improvements Lease Improvements | $ | 46,950 | $ | 46,950 | ||||||||||||
Furniture and Fixtures Furniture and Fixtures | 102,946 | 102,946 | 102,946 | 102,946 | ||||||||||||
Billing Software Billing Software | 217,163 | 217,163 | ||||||||||||||
Billing Software | 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 | (420,948 | ) | (382,040 | ) | (418,899 | ) | (412,724 | ) | ||||||||
Property and equipment, net | $ | 40,663 | $ | 79,571 | $ | 42,712 | $ | 48,887 |
Depreciation related to Property and Equipment amounted to $12,9692,059 and $7,21612,969 for the three-month periods ended SeptemberJune 30, 2021,2022, and 2020,2021, respectively. For the nine-monthsix-month periods ended SeptemberJune 30, 2022, and 2021, and 2020,depreciation was $38,9076,176 and $21,64925,938, respectively.. Depreciation and amortization expenses are included as a component of operating expenses in the accompanying statements of operations.
NOTE 34 – 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 3.29% and 5.34%. 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 three (3) non-cancelable leases. As of SeptemberJune 30, 2021,2022, the Company had one (1) propertytwo (2) properties with a lease term in excess ofmore than one (1) year. ThisThese lease liability expiresliabilities expire June 1, 2025, and March 31, 2026. The Company has two (2)one (1) current lease liabilities. Theseliability. This lease liabilities expire December 1, 2021, andliability expired May 15, 2022, respectively.2022. In January 2021, the Company entered into a new, five (5) year lease for its corporate headquarters located in Plano, TX. In June 2022, the Company entered into a three (3) year lease for its new U.S. based national call center operation in Atmore, AL.
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
2021 | $ | 27,937 | |||||
2022 | $ | 58,547 | $ | 40,986 | |||
2023 | $ | 45,578 | $ | 71,026 | |||
2024 | $ | 46,596 | $ | 72,044 | |||
2025 | $ | 47,615 | $ | 58,218 | |||
2026 | $ | 11,968 | $ | 11,968 | |||
Total | $ | 238,241 | $ | 254,242 | |||
Less Interest | $ | 19,396 | $ | 28,236 | |||
Present value of minimum lease payments | $ | 218,845 | $ | 226,006 | |||
Current Maturities | $ | 66,882 | |||||
Less Current Maturities | $ | 60,452 | |||||
Long Term Maturities | $ | 145,796 | $ | 165,554 |
The Company also leases two (2) office/retail spaces on a month-to-month basis. Total lease expense for the three months ended SeptemberJune 30, 2021,2022, and 2020,2021, was $6,2177,217 and $7,2163,967, respectively. Total lease expense for the ninesix months ended SeptemberJune 30, 2021,2022, and 2020,2021, amounted to $18,65213,435 and $21,6498,185, respectively,respectively. Lease expense for these leases.the 2022 is for the remaining six months of the year.
NOTE 45 – INTANGIBLE ASSETS
Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions.
Intangible Assets with indefinite useful life consist of a Lifeline License granted by the FCC.
The Lifeline License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The Lifeline License was acquired through an acquisition. The fair market value of the License as of SeptemberJune 30, 2021,2022, was $634,251.
September 30, 2021 | December 31, 2020 | |||||||
Customer List | $ | 1,135,962 | $ | 1,135,962 | ||||
Software | 2,407,001 | 2,407,001 | ||||||
ETC License | 634,251 | 634,251 | ||||||
Less: Amortization | (3,342,379 | ) | (2,740,629 | ) | ||||
Net Amortizable Intangibles | 834,835 | 1,436,585 | ||||||
Right of Use Assets - net | 198,662 | 80,578 | ||||||
Intangible Assets net | $ | 1,033,497 | $ | 1,517,163 |
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June 30, 2022 | December 31, 2021 | |||||||
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 | ) | ||||
Net Amortizable Intangibles | 634,251 | 634,251 | ||||||
Right of Use Assets - net | 211,126 | 173,524 | ||||||
Intangible Assets net | $ | 845,377 | $ | 807,775 |
Amortization expensesexpense amounted to $0, and $200,583 for the three months ended SeptemberJune 30, 2022, and 2021, and 2020, was $200,583.respectively. Amortization expense amounted to $0, and $601,750401,167 for the ninesix months ended SeptemberJune 30, 2021,2022, and 2020,2021, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations.
Remaining amortization expense is expected to be as follows:
Intangible Assets - Schedule of Intangible Assets Future Amortization Expense
Current intangible assets, with the exception ofexcept for the Lifeline License, will bewere fully amortized as of December 31, 2021.
NOTE 56 – NOTES PAYABLE
In 2020, the Company was granted a $150,000 Economic Injury Disaster Loan (“EIDL”) from the SBA. The term of the loan is thirty (30) years, at an interest rate of 3.75% on advanced funds. Installment payments were to begin twelve (12) months following the loan date but were deferred through September of 2022. As of June 30, 2022, the outstanding balance was paid in full and there are no further obligations due the SBA.
On September 30, 2020, IM TelecomJune 14, 2022, the Company and its wholly owned subsidiary companies entered into a promissory note agreementNote Purchase Agreement and related Guarantee and Security Agreement with CCUR Holdings, Inc. (as collateral agent), and Symbolic Logic, Inc., whereby the Company pledged its assets to repaysecure $3,150,000 in debt financing. The term is for a Federal Universal Service Fund overpaymentperiod of twelve (12) months, at an interest rate of 15%, with two successive six-month optional extensions. As a condition of securing the loan, the Company paid a 3% origination fee, and other legal and closing expenses, in the amount of $153,284, resulting in a net loan balance of $67,1052,984,181. The termloan costs of $153,284 and the net loan balance of $2,984,181 are to be amortized over a 12-month period. Proceeds of the note was twelve (12) monthsloan were used to retire the $150,000 SBA “EIDL” Loan and interest accrued at a ratewill be used in an ongoing capacity to support the acceleration of 12.75% per annum. This promissory note, including accrued interest, was paid in full in August 2021.our mobile services growth strategy.
NOTE 67 – 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 SeptemberJune 30, 2021,2022, there are no ongoing legal proceedings.
Contract Contingency
The Company has the normal obligation for the completion of its cellular provider contracts in accordance with the appropriate standards of the industry and that may be provided in the contractual agreements.
Tax Audits
In June of 2021, the Company received an audit determination and assessment from the State of Pennsylvania in respect of an audit ofrelated to sales and use tax liability for the audit period of January 1, 2016, through September 30, 2019. The assessment is in the amount of $111,650115,000, including interest and penalties.penalties calculated on sales made inside and outside Pennsylvania. The Company appealed this assessment in August 2021 and at the request of the state, has provided additional information to support its appeal. The Company believesCompany’s position is that Pennsylvania has no sales tax authority to levy and collect sales tax on sales made outside Pennsylvania. The company recorded an expected liability of $7,000, based on previous taxpayer outcomesknown sales inside Pennsylvania. The State of Pennsylvania rejected an appeal by the Company. The company remains in discussions with the State of Pennsylvania that it will be successful on appeal onand is working towards a minimum of 93%plan to pay the full amount of the assessment amount. A potential liability, inunder the amountpossibility of $7,000 has been recorded.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 SeptemberJune 30, 2021.
2022.
NOTE 78 – SEGMENT REPORTING
The Company operates within two (2) reportable segments. The Company’s management evaluates performance and allocates resources based on operational needs and results.the profit or loss from operations. Because the Company is a recurring revenue service business with very few physical assets, management does not use total assets by segment to make decisions regarding operations, and therefore, the total assets disclosure by segment has not been included. Previously, the Company reported four (4)
The reportable segments including Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC. The Company has made the decision to consolidate and align its segment reporting by the typeconsist of service offering and believes this reporting will provide for a more accurate view of its lines of operation. Reportable segments now include Hosted Services and Mobile Services.
Hosted Services – This segment includes a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free, and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, Software-Defined Wide Area Networking (SD-WAN),SD-WAN and IOTIoT data and device management. These Hosted Services are marketed nationally through Apeiron’s website, its own sales staff, independent sales agents, ISOs and SCOs.ISOs.
Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and IOTIoT mobile data services fromthrough our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IOTIoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers, and accessories. Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service by IM Telecom under its Infiniti Mobile brand to low-income American households that qualify for the FCC’s Lifeline voice service program and the FCC’s temporary Emergency Broadband Benefit (“EBB”)ACP mobile data program as part of the federal government’s temporary COVID relief efforts, distributed by IM Telecom under its Infiniti Mobile brand.program. Even though government programs like Lifeline have existed for many years (since the Telecommunications Act of 1984),since 1985, these programs, along with newer programs like the temporary EBBACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced, or eliminated.
The following table reflects the result of operations of the Company’s reportable segments:
Segment Reporting - Schedule of Segment Reporting Information
Hosted Services | Mobile Services | Total | Hosted Services | Mobile Services | Total | |||||||||||||||||||
For the nine months period ended September 30, 2021 | ||||||||||||||||||||||||
For the six months period ended June 30, 2022 | ||||||||||||||||||||||||
Revenue | $ | 4,380,547 | $ | 4,539,026 | $ | 8,919,573 | $ | 2,842,594 | $ | 6,508,360 | $ | 9,350,954 | ||||||||||||
Gross Margin | $ | 1,600,069 | $ | 2,372,718 | $ | 3,972,787 | ||||||||||||||||||
Gross Profit | $ | 890,493 | $ | 1,199,334 | $ | 2,089,827 | ||||||||||||||||||
Depreciation and amortization | $ | 619,472 | $ | 21,185 | $ | 640,657 | $ | 1,877 | $ | 4,299 | $ | 6,176 | ||||||||||||
Additions to property and equipment | — | — | — | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Gross Margin % | 36.5 | % | 52.3 | % | 44.5 | % | 31.3 | % | 18.4 | % | 22.3 | % |
For the three months period ended September 30, 2021 | ||||||||||||||||||||||||
For the three months period ended June 30, 2022 | ||||||||||||||||||||||||
Revenue | $ | 1,588,035 | $ | 2,024,826 | $ | 3,612,861 | $ | 1,428,936 | $ | 3,694,161 | $ | 5,123,097 | ||||||||||||
Gross Margin | $ | 559,785 | $ | 1,064,452 | $ | 1,624,237 | ||||||||||||||||||
Gross Profit | $ | 456,076 | $ | (13,509 | ) | $ | 442,567 | |||||||||||||||||
Depreciation and amortization | $ | 206,490 | $ | 7,062 | $ | 213,552 | $ | 574 | $ | 1,485 | $ | 2,059 | ||||||||||||
Additions to property and equipment | — | — | — | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Gross Margin % | 35.3 | % | 52.6 | % | 45.0 | % | 31.9 | % | -0.4 | % | 8.6 | % |
For the nine months period ended September 30, 2020 | ||||||||||||||||||||||||
For the six months period ended June 30, 2021 | ||||||||||||||||||||||||
Revenue | $ | 3,723,640 | $ | 3,018,190 | $ | 6,741,830 | $ | 2,792,512 | $ | 2,514,199 | $ | 5,306,711 | ||||||||||||
Gross Margin | $ | 1,359,141 | $ | 1,186,161 | $ | 2,545,302 | ||||||||||||||||||
Gross Profit | $ | 1,040,283 | $ | 1,308,266 | $ | 2,348,549 | ||||||||||||||||||
Depreciation and amortization | $ | 645,898 | $ | 117,460 | $ | 763,358 | $ | 224,752 | $ | 202,353 | $ | 427,105 | ||||||||||||
Additions to property and equipment | — | — | — | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Gross Margin % | 36.5 | % | 39.3 | % | 37.8 | % | 37.3 | % | 52.0 | % | 44.3 | % |
For the three months period ended September 30, 2020 | ||||||||||||
Revenue | $ | 1,533,989 | $ | 993,292 | $ | 2,527,281 | ||||||
Gross Margin | $ | 596,249 | $ | 305,551 | $ | 901,800 | ||||||
Depreciation and amortization | $ | 220,159 | $ | 25,931 | $ | 246,090 | ||||||
Additions to property and equipment | — | — | — | |||||||||
Gross Margin % | 38.9 | % | 30.8 | % | 35.7 | % |
For the three months period ended June 30, 2021 | ||||||||||||
Revenue | $ | 1,440,407 | $ | 1,473,466 | $ | 2,913,873 | ||||||
Gross Profit | $ | 554,241 | $ | 883,147 | $ | 1,437,388 | ||||||
Depreciation and amortization | $ | 207,067 | $ | 6,485 | $ | 213,552 | ||||||
Additions to property and equipment | $ | 0 | $ | 0 | $ | 0 | ||||||
Gross Margin % | 38.5 | % | 59.9 | % | 49.3 | % |
NOTE 89 – STOCKHOLDERS’ EQUITY
Common Stock
The Company has not issued 575,000 shares of common stock through SeptemberJune 30, 2021. All shares were issued as result of three (3) holders of incentive stock options delivering Notices of Exercise and required exercise payments regarding certain granted and vested incentive stock options. No common stock was issued during2022, nor for the year ended December 31, 2020.2021.
Stock Compensation
The Company offers 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 SeptemberJune 30, 20212022, and 2020,2021, the Company recorded options expense of $62,877354,296 and $10,257 respectively. For the nine months ended September 30, 2021, and 2020, the Company recorded options expense of $141,935 and $30,77179,058, respectively. The option expense not taken as of SeptemberJune 30, 2021,2022, is $ , with a weighted average term of years.
Executive Vice President
The
Through June 30, 2022, the Company granted option valuationoptions issued to two (2) employees, each vesting on the four ( ) year anniversary dates of the respective grants. A total of incentive stock options were issued to two (2) independent Board members, fully vested as of September 30, 2021, waseach grant date, at exercise prices based on 110% of the fair market value of our common stock on the date of grant, and incentive stock options were issued to an independent consultant to the Company, fully vested, as of the date of grant. All option values were computed using the Black-Scholes-Merton pricing model, usingwith a term of -years, an average stockinterest-free rate of % and an average exercise price of $, a strike price of $0.874, an expected term of five () years, volatility of % and a risk-free discount rate of %.
Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | Aggregate Intrinsic Value | No. Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | Aggregate Intrinsic Value | |||||||||||||||||||
Options Outstanding – December 31, 2020 | 3,800,000 | $ | 0.21 | $ | 2,622,000 | |||||||||||||||||||||
Options Outstanding – December 31, 2021 | 4,260,000 | $ | 0.37 | $ | 5,862,938 | |||||||||||||||||||||
Granted | 485,000 | 0.56 | 4.62 | 164,900 | 850,000 | 1.09 | 4.63 | |||||||||||||||||||
Exercised | 575,000 | 0 | — | — | — | — | — | — | ||||||||||||||||||
Forfeited | 198,116 | — | — | — | — | — | — | — | ||||||||||||||||||
Options Outstanding – September 30, 2021 | 3,511,884 | $ | 0.22 | 2.89 | $ | 2,786,900 | ||||||||||||||||||||
Options Outstanding – June 30, 2022 | 5,110,000 | $ | 0.52 | 2.30 | $ | 4,683,759 | ||||||||||||||||||||
Exercisable and Vested, September 30, 2021 | 2,979,884 | $ | 0.23 | $ | 1,966,522 | |||||||||||||||||||||
Exercisable and Vested, June 30, 2022 | 3,070,000 | $ | 0.29 | $ | 2,526,518 |
NOTE 910 – SUBSEQUENT EVENTS
Below are events that have occurred since SeptemberJune 30, 2021:2022:
On October 23, 2021,Additional Office Leases
To support our expanding Mobile Services segment, the Company’s subsidiary, IM Telecom entered into d/b/a national master distribution agreement with Community Outreach Partnerships, LLC (“COP”). Under the agreement and utilizing IM Telecom’s Infiniti Mobile, brand name, COP shall recruitexecuted a three (3) year office lease agreement out of its Tulsa, Oklahoma location, commencing August 1, 2022. This new location will primarily serve as a warehouse, staff office, and manage a national networkadds additional space for inventory management, equipment provisioning and distribution of independent sales agentsequipment to distribute Lifeline and/or EBB eligible cellular voice, SMS (texting) and mobile data services to low-income households. COP shall distribute these services within those states authorized by IM Telecom. COP shall be compensated based upon certain customer acquisition and retention criteria.our various channels throughout the U.S.
On October 25, 2021,The Company also entered an eight (8) year lease agreement, located in Johnstown, Pennsylvania, for its Apeiron Systems subsidiary. The office will provide additional space to primarily house Apeiron customer service, equipment provisioning, software development and accounting personnel in support of our Hosted Services market segment.
In July 2022, IM Telecom entered into d/b/a national master distribution agreement with Royal Marketing Group (“Royal”). Under the agreement and utilizing IM Telecom’s Infiniti Mobile, brand name, Royal shall recruit and manage ain support of our Mobile Services segment, opened its new national network of independent sales agents to distribute Lifeline and/or EBB eligible cellular voice, SMS (texting) and mobile data services to low-income households. Royal shall distribute these services within those states authorized by IM Telecom. Royal shall be compensated based upon certain customer acquisition and retention criteria.service center in Atmore, Alabama.
Subsequent Event
DirectorIncentive Stock Option Grants
The Company granted a quarterly director OctoberJuly 28, 2021,2022, at an exercise price of $ , fully vested. The exercise price was based upon 110% of the fair market value or closing public trading price of the Company’s common stock on the date of grant.
On Friday, November 5, 2021,The Company also granted a quarterly director share Incentive Stock Option to Robert Beaty, an independent director, on August 12, 2022, at an exercise price of $ , fully vested. The exercise price was based upon 110% of the below referenced Infrastructure Bill was passed infair market value or closing public trading price of the HouseCompany’s common stock on the date of Representativesgrant.
14 |
Notice of Stock Option Exercise
Paul LaPier, a former employee of the Company, has elected to exercise and is now expectedpurchase shares, originally granted on October 24, 2019, under the 2018 Incentive Stock Option Plan, at a purchase price of $ or an aggregate of $ . Payment for this option exercise cleared the Company’s bank on August 10, 2022; however, the shares underlying this incentive stock option, which have not yet been issued, are contemplated to be signed into law by President Biden.issued directly following the filing of this Quarterly Report.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under “Trends and Uncertainties,” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview of Current and Planned Business Operations
Our Hosted Services are provided by our wholly- owned subsidiary, Apeiron Systems, a CPaaS provider that designed, built, owns, and operates a national network, supporting a suite of business communications services all accessible via its proprietary Applications Programming Interfaces (“APIs”). Some of Apeiron’s Hosted Services include SIP/VoIP and cellular telephony, SMS/MMS messaging and numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording, and other functions 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 ethernet, broadband, and LTE wireless WAN solutions. Apeiron’s network services enable private WAN networking, Internet access, public cloud connectivity and Low Power Wide Area (“LPWA”) network solutions for both mobile & local IoT connectivity. Apeiron’s Cloud Services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”), and IoT data processing as well as device and sensor management.
Apeiron continues to expand its agent sales channel outreach, agent sales software platform, and invest in new product development to drive revenue diversification and higher margin services. In addition to new product development and existing channel development, Apeiron continues to enhance its billing system capabilities. Apeiron’s expanding billing system can enable distribution channels to increase new product sales and take advantage of Apeiron’s customizable white label billing solutions across its product lines.
We believe we are moving towards an increasingly wireless/mobile future, so Apeiron continues to evolve its network, cloud infrastructure, and Hosted Services platforms to capitalize on new and emerging technology trends, including IoT deployments and the inevitable migration to 5G technology across national cellular networks. Apeiron’s response to these trends can be seen in its product development cycles and network development efforts, which continue to strategically position Apeiron in the market.
Our Mobile Services include retail and wholesale cellular voice/text/data services delivered using the three major domestic wireless networks. A wireless communications service reseller typically does not own the wireless network infrastructure over which customer services are provided. Mobile voice/text/data and mobile data solutions are generally sold as post-paid or pre-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 ispursue market opportunities for the distribution of cellular voice serviceour current products and mobile data service to low-income American households that qualify for the FCC’s Lifeline program and the FCC’s temporary EBB program. Our Lifeline mobile services are provided by our wholly- owned subsidiary, IM Telecom, marketed under its brand name Infiniti Mobile. IM Telecom operates under an FCC approved Compliance Plan and FCC wireless ETC designation across nine (9) states, including California, Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont, and Wisconsin.
IM Telecom was approved to participate in the FCC’s temporary EBB program on April 6, 2021, and to distribute EBB eligible mobile data services within the states it was then authorized as a Lifeline ETC. Subsequently, on September 1, 2021, the FCC approved IM Telecom’s application to expand its EBB authorized distribution territory (not Lifeline) to include the remaining thirty-nine (39) contiguous states, as well as the District of Columbia and Puerto Rico.
There is pending legislation before the U.S. Congress within the Infrastructure Bill (H.R.3684 - Infrastructure Investment and Jobs Act, further described in Title V Broadband Affordabilityour “Principal Products or Services and starting in Section 60501), to offer subsidized mobile data service under a new program, following the expirationtheir Markets” summary on page 8 of the EBB program, with new rules that is expected to be called the Affordable Connectivity Benefit (“ACB”) program; and the ACB program would be subject to interpretation and administration by the FCC and its administration company, USAC. On Friday, November 5, 2021, the above referenced Infrastructure Bill was passed in the House of Representatives and is now expected to be signed into law by President Biden.
IM Telecom, operating under its brand name Infiniti Mobile, distributes cellular voice and mobile data services through its storefront in Tulsa, Oklahoma, a current group of independent field agents, two (2) new master agent relationships described above in Note 9 – Subsequent Events, of our Condensed Consolidated Financial Statements accompanying this Quarterly Report, and through its Infiniti Mobile website (www.infinitimobile.com). With IM Telecom’s recent approval on June 3, 2021,Report. In addition, we continue to expand its Lifelinepursue expanded market distribution into California, we anticipate California distribution will commence in the fourth quarter of 2021.
In 2017, before it acquired IM Telecom, the Company successfully distributed California Lifeline service under a Virtual ETC (“VETC”) distribution agreement with another ETC. Under that agreement, the Company provided marketing, field distribution, agent management, device (equipment) sourcing and configuration, and compliance assurance with FCC and California regulations for the approval and distributionopportunities, development of new Lifeline service.
At its peak,products and services, the Company distributed over 10,000addition of new lines of Lifelinebusiness and accretive acquisition opportunities that may enhance or expand our current product and service per month in California. The Company ceased California VETC Lifeline distribution shortly after it acquired IM Telecom in early 2018, while it waited for the California Public Utilities Commission to approve IM Telecom’s California Lifeline distribution application.
The FCC’s Universal Service Administrative Company (“USAC”) website (https://www.usac.org/lifeline/resources/program-data/) currently indicates there are 3,630,292 Lifeline eligible households in California, of which 1,242,787 currently receive service, leaving an estimated 2,387,505 unserved Lifeline eligible households in the State of California.
The Company’s previous California VETC Lifeline management team is the same management team now operating IM Telecom. The Company expects that IM Telecom’s management team will be successful in the distribution of applicable Lifeline, EBB, and/or ACB (if it becomes law) services in California.offerings.
Results of Operations
Due to the accelerating expansion of our Mobile Services customer base, Management has chosen, initially disclosed in our first quarter 2022 quarterly report (Form 10-Q), to accelerate growth within this segment, at least through the end of this year. This growth has been driven by expansion of our distribution channels, including field agents and internet sales, along with increased government subsidies and new wireless voice/data services for eligible low-income families. As a result, the Company recognized increases in Mobile Services revenue and direct costs during the quarter ending June 30, 2022. Since the Company may not capitalize customer acquisition costs over the average life of a customer, we recognize the full incremental cost of each new Mobile Service customer at the start of service, which is typically recovered within 120 days after activation. During this period of intentional accelerated growth, initially disclosed in our first quarter 2022 quarterly report (Form 10-Q), Management foresees a temporary reduction of gross profit as we expand our Mobile Services base.
Comparison of the quarterthree months ended SeptemberJune 30, 2021,2022, to the quarterthree months ended SeptemberJune 30, 20202021
For the quarterthree months ended SeptemberJune 30, 2021,2022, we had $3,612,861$5,123,097 in revenues from operations compared to the quarter ended September 30, 2020, where we had $2,527,281 in revenue from operations. The cost of revenue for the quarter ended September 30, 2021, was $1,988,624 compared to $1,625,481 for the quarter ended September 30, 2020. We had a gross profit of $1,624,237 for the quarter ended September 30, 2021, and $901,800 for the quarter ended September 30, 2020.
For quarter ended September 30, 2021, our gross profit margin was 44.9% compared to 35.7%$2,913,873 for the three months ended SeptemberJune 30, 2020.2021, for a total revenue increase of $2,209,224. This increase in revenue was directly related to the growth in our Mobile Services segment. Mobile Services expansion continued under the Lifeline and ACP program. The revenues were derived as a result of delivering high-speed mobile data service to low-income consumers.
For the quartersthree months ended SeptemberJune 30, 2022, our cost of revenue was $4,680,530 compared to $1,476,485 in the three months ended June 30, 2021, for a cost of revenue increase of $3,204,045. Our cost of revenue increase was primarily the result of increased network, handset and 2020, respectively,sales compensation costs related to distributing additional services.
For the three months ended June 30, 2022, we had gross profit of $442,567 compared to $1,437,388 in the three months ended June 30, 2021, for a gross profit decrease of $994,821. This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.
For the three months ended June 30, 2022, total operating expenses were $1,252,632 and $958,223,$1,819,701 compared to $1,056,320 in the three months ended June 30, 2021, for an increase of $294,409.$763,381. This increase was due primarily a resultto additions in payroll and related expenses resulting from the hiring of infrastructure expansion consisting of primarily payroll, professional services, handset costs,operations management and application development costs tocustomer support sales channel growth.positions in both our subsidiaries, Apeiron Systems and IM Telecom.
For the quarterthree months ended SeptemberJune 30, 2021, non-operating expenses were interest expense of $2,573 and2022, other non-operating expenses of $49,197 consisting primarily of stock option expenses,income (expense) was $(101,219) compared to other income of $81,070 and interest expense of $4,694 for$(39,983) in the quarter ended SeptemberJune 30, 2020.2021.
For the quarterthree months ended SeptemberJune 30, 2021,2022, we had a net incomeloss of $319,835. For the quarter ended September 30, 2020, we had$1,478,353 compared to net income of $19,953.
In comparing our Condensed Consolidated Statements of Operations between$341,085 in the three-month periodsthree months ended SeptemberJune 30, 2021, and 2020, respectively, the Company continued diversifying and expanding its service offerings. Revenues for both Hosted Services and Mobile Services were up from the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020. Hosted Services revenue increased by 3.5%, while Mobile Services revenue increased by 103.9%. Gross profit margin overall was 45%2021. The loss for the three months ended SeptemberJune 30, 2021, compared to 35.7% for the three months ended September 30, 2020. Hosted Services gross profit margin2022, was 35.3% compared to 38.9% for the three months ended September 30, 2021, and 2020, respectively.impacted by an acceleration of growth in our Mobile Services gross profit margin was 52.6% compared to 30.8% forsegment that increased our customer acquisition costs and may not be amortized over the three months ended September 30, 2021, and 2020, respectively.
Comparisonlife of the nine months ended September 30, 2021, tocustomer, but must be recorded in full at the nine months ended September 30, 2020
For the nine months ended September 30, 2021, we had $8,919,573 in revenues from operations compared to the nine months ended September 30, 2020, where we had $6,741,830 in revenue from operations. The costtime of revenue for the nine months ended September 30, 2021, was $4,946,786 compared to $4,196,528 for the nine months ended September 30, 2020. We had a gross profit of $3,972,787 for the nine months ended September 30, 2021, and $2,545,302 for the nine months ended September 30, 2020.customer activation.
For
Comparison of the ninesix months ended SeptemberJune 30, 2021, our gross profit margin was 44.5% compared2022, to 37.7% for the ninesix months ended SeptemberJune 30, 2020. The increase was primarily due to enhanced COGS measures as well as Infiniti Mobile’s expansion of the EBB program into new states.2021
For the ninesix months ended SeptemberJune 30, 2022, we had $9,350,954 in revenues from operations compared to $5,306,711 for the six months ended June 30, 2021, and 2020, respectively,for a total operating expenses were $3,377,950 and $2,883,526, for anrevenue increase of $494,424.$4,044,243. This increase in revenue was primarily a result of infrastructure expansion, primarily payroll, professional services, handset costs, and application development costsdirectly related to support sales channel growth.
For the nine months ended September 30, 2021, non-operating expenses were interest expense of $12,329 and other non-operating expenses of $154,310 consisting primarily of stock option expenses, compared to other income (PPP loan forgiveness and settlement income) of $624,518 and interest expense of $23,459 for the nine months ended September 30, 2020.
For the nine months ended September 30, 2021, we had a net income of $428,199. For the nine months ended September 30, 2020, we had net income of $262,835.
In comparinggrowth in both our Condensed Consolidated Statements of Operations between the nine-month periods ended September 30, 2021, and 2020, respectively, the Company continued diversifying and expanding its service offerings, including participating in the temporary EBB program. Revenues for both Hosted Services and Mobile Services segments. Mobile Services expansion continued under the Lifeline and ACP program. The revenues were upderived as a result of delivering high-speed mobile data service to low-income consumers.
For the six months ended June 30, 2022, our cost of revenue was $7,261,127 compared to $2,958,162 for the ninesix months ended SeptemberJune 30, 2021, asfor a cost of revenue increase of $4,302,965. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.
For the six months ended June 30, 2022, we had gross profit of $2,089,827 compared to $2,348,549 for the ninesix months ended September 30, 2020. Hosted Services revenue increased by 17.6%, while Mobile Services revenue increased by 50.4%. Gross profit margin was 44.5% overall for the nine months ended SeptemberJune 30, 2021, compared to 37.8% for the nine months ended September 30, 2020. Hosted Servicesa gross profit margin was 36.5% compareddecrease of $258,722. This decline is directly related to 36.5% for the nine months ended September 30, 2021, and 2020, respectively. Mobile Services gross profit margin was 52.3% comparedup-front costs incurred by accelerating growth to 39.3% for the nine months ended September 30, 2021, and 2020, respectively.
Marketing and Advertising expense increased due mostly to an increase in Mobile Services sales activity and an enhancement ofacquire new customers within our Mobile Services website. Utilitiessegment.
For the six months ended June 30, 2022, total operating expenses were $3,416,258 compared to $2,125,317 for the six months ended June 30, 2021, for an increase of $1,290,941. This increase was due primarily to additions in payroll and Facilities expenserelated expenses resulting from the hiring of operations management and customer support positions in both our subsidiaries, Apeiron Systems and IM Telecom.
For the six months ended June 30, 2022, other income (expense) was $(196,372) compared to $(114,869) for the six months ended June 30, 2021.
For the six months ended June 30, 2022, we had a net loss of $1,522,803 compared to net income of $108,363 for the six months ended June 30, 2021. The loss for the six months ended June 30, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased due mostly toour customer acquisition costs and may not be amortized over the executionlife of a new headquarters office leasethe customer but must be recorded in Plano, TX, combined with a change in rent expense recognition rules. General and Administrative costs increased due mostly to costs related to new hires and increased travel. In 2020, we categorized Hosted Services’ software development costs within Operating and Maintenance; then in 2021, we began categorizing software development costs into a new category, “Application Development Costs.”full at the time of customer activation.
Liquidity and Capital Resources
As of SeptemberJune 30, 2021,2022, we had $1,358,722$2,430,966 in cash and cash equivalents on hand.
In comparing liquidity between the nine-monthsix-month periods ending SeptemberJune 30, 2022, and June 30, 2021, and September 30, 2020, cash assets increased by 131%208.4%. This increase was due largelyprimarily attributable to expanded revenues fromshort-term debt financing secured in the EBB program and increased cash-flow performance.quarter. Liabilities and total overall debt showed a 2.4% decreaseincreased by 221.1% in the nine-monthsix-month period ended SeptemberJune 30, 2021,2022, when compared to SeptemberJune 30, 2020. Going forward, growth in new services as well as2021. This change was primarily the introductionresult of the ACB program is expectedshort-term loan received during the quarter. As we scale capabilities alongside our growth strategy in our Mobile Services customer base, we expect it to provide additional liquidity for our business.long-term liquidity.
Overall, theOur current ratio (current assets divided by our current liabilities) increaseddecreased to 2.051.14 as of SeptemberJune 30, 2021,2022, compared to December 31, 2020,1.51 as of .94.June 30, 2021. Working capital increased 117.7%by 5.8%.
Cash Flow from Operations
During the ninesix months ended SeptemberJune 30, 2022, cash flow used in operating activities was $1,328,287, and for the six months ended June 30, 2021, cash flow provided by operating activities was $636,557, and for the nine months ended September 30, 2020, cash flow provided by operating activities was $441,506.$150,079.
Cash Flows from Investing Activities
During the ninesix months ended SeptemberJune 30, 2022, and 2021, $10,000 ofno cash flow was used in investing activities for the purchase of a percentage ownership in another telecommunications company. For the nine months ended September 30, 2020, cash flow used in investing activities was $10,833 for the purchase of assets.activities.
Cash Flows from Financing Activities
During the ninesix months ended SeptemberJune 30, 2021,2022, net cash flow provided by financing activities was $16,970$2,826,468, due to securing short-term debt financing for net cash received from exercises of stock options after repayments of amounts of notes payable of $93,030.the business. For the ninesix months ended SeptemberJune 30, 2020,2021, net cash flow used in financing activities was $33,934, comprised of proceeds from Federal SBA Covid-19 loans ($459,000),$77,031, for repayments of revolving lines of credit, ($12,237), repayments of amounts due to a related party, ($87,165), and a one-time dividend paid to former Apeiron shareholders of ($310,129) as part of the acquisition of Apeiron Systems.
notes payable.
Going Concern
For the ninesix months ended SeptemberJune 30, 2021,2022, the Company generated a net loss of $1,522,803, compared to net income of $428,199. Forfor the threesix months ended SeptemberJune 30, 2021, net income was $319,835.of $108,363. The Company has sustained itself throughsourced short-term financing during the operations of the business, indicated by net cash from operations of $636,557 for the nine months ended September 30, 2021.2nd quarter to help facilitate its growing Mobile Services segment and support higher customer acquisition costs (sales). The accumulated deficit as of SeptemberJune 30, 2021,2022, is $5,540,291.$6,868,307.
The Company has amelioratedcontinued to ameliorate any substantial going concern doubt issues by generating additional cash flow from operationsin the first quarter of 2022, the year ended 2021 and the year ended 2020, and through diversification of product offeringssecuring financing in June, 2022. As the Company continues its growth strategy and revenue growth ofincreases its subsidiaries, Apeiron Systems and IM Telecom. We have continuedMobile Services customer base, additional operating capital may be required to use additional cash flow to retire debt, while also adding resources to enable further revenue growth. Our working capital continues to improve withoutsupport the use of lines of credit, borrowings or additional cash investments beyond our long term, low interest SBA EIDL loan proceeds from June 20, 2020.
We continue to diversify sources of revenue andrelated increase margins through cost controls and a shift to higher margin product offerings. Prior to acquiring Apeiron Systems and IM Telecom, we derived nearly 100% of our revenue from cellular (voice) sales. With continued aggressive management and sales channel development we anticipate no future going concern issues.in customer acquisition costs (sales).
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the nine-monththree-month period ended SeptemberJune 30, 2021.2022.
Critical Accounting Policies
Earnings Per Share
We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. As of SeptemberJune 30, 2021, and September 30, 2020,2022, there are 2,676,266 and 3,400,000 respectively,2,205,473 potentially dilutive common shares.shares derived from stock options, and as of June 30, 2021, there are 2,538,352 potentially dilutive common shares derived from stock options.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents.
All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
The Company has a concentration of risk with respect to trade receivables from customers otherand cellular providers, and the FCC.providers. As of SeptemberJune 30, 2021,2022, 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) customersone (1) customer in the amountsamount of $111,672 and $639,429,$1,308,193, or 11.23% and 64.33% of total accounts receivable, respectively.92.1%. It should be noted that the largest customer is the FCC. As of December 31, 2020,2021, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $194,509,$783,431, or 52.4%63.9%, and $52,843,$194,647, or 14.2%, respectively.15.9%.
Concentration of Major CustomersCustomer
A significant amount of the revenue is derived from contracts with major customers and cellular partners and the federal government.partners. For the nine-monthsix months ended June 30, 2022, the Company had two (2) customers that accounted for $5,741,697 or 61.4% and $1,826,412 or 19.5% of revenue, respectively. For the six-month period ended SeptemberJune 30, 2021, the Company had two (2) customers that accounted for $3,297,984$1,774,644, or 37%33.4% and $2,818,465$1,664,735 or 31.6% of total revenue, respectively. For the nine-month period ended September 30, 2020, the Company had one (1) customer that accounted for $2,332,716 or 34.6%31.37%, of revenue.
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
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 SeptemberJune 30, 2021,2022, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2021.2022.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2021,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required; however, see Item 1A. Risk Factors, Part I, commencing on page 10,nine (9) of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2020,2021, filed with the SEC on April 6, 2021,14, 2022, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.
Our business operations could be impacted by the current world health crisis. The following risk factor regarding the COVID-19 pandemic was one of the risk factors included in the Company’s 10-K Annual Report for the year ended December 31, 2020:2021:
On January 30, 2020, the World Health Organization declared the coronavirus (the ‘COVID-19’) outbreak a “Public Health Emergency of International Concern,” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be on us, to date and as a result of actions taken by management to mitigate a material impact to our financial statements or our operational results, we are not currently experiencing a material impact to our financial statements or our results of operations; however, a pandemic typically results in social distancing, travel bans and quarantines, which may result in limited access to our facilities, customers, management, support staff and professional advisors. These, in turn, may not only impact our operations, financial condition and demand for our services, but our overall ability to react timely to mitigate the impact of this event. Given our small staff, if a key member of our team were disabled by COVID-19, it could have a material negative impact on our business. Also, it may substantially hamper our efforts to provide our investors with timely information and to comply with our filing obligations under the Exchange Act with the SEC. If this pandemic were to last a prolonged period of time, we could see a decline in revenue due to the closure of customer businesses, which could then impact our ability pay our short-term debts. Our concentration of revenue from a small group of Apeiron Systems’ customers makes it reasonably possible that we are vulnerable to the risk of a long-term severe impact. Our dependence on certain suppliers to provide equipment to be distributed or sold to our customers could also be impacted if inventory shortages occur due to import or export restrictions resulting from the pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued 575,000 shares of common stock during the quarter ended September 30, 2021. All of these shares were issued as result of three (3) holders of vested incentive stock options granted in 2017 delivering Notices of ExerciseSee NOTE 9-Stockholders’ Equity and required exercise payments (75,000 of these shares were issued in a “cashless” exercise) regarding certain vested incentive stock options. 500,000 of these shares were issued pursuant to the Company’s S-8 Registration Statement that was filed with the SEC on August 25, 2021, at an exercise price of $0.22 per share; and 75.000 of these shares were issued pursuant to Section 4(a)(2) of the Securities Act, prior to the filing of the S-8 Registration Statement, in exchange for 98,116 additional vested incentive stock options. No common stock was issued during the year ended December 31, 2020.
Also, see NOTE 9-Subsequent10-Subsequent Events, of our Condensed Consolidated Financial Statements included in this Quarterly Report respecting the grant of certain additional incentive stock options during and subsequent to the quarter ended SeptemberJune 30, 2021.2022, and the Notice of Exercise and payment of an Incentive Stock Option Grant, and the expected time of issuance of the shares underlying such option.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
Earlier(i) Additionally, earlier today, the Company disseminated a press release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press release inis being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only. This press release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.
(ii) On August 15, 2022, the Company corrected the Incentive Stock Option Agreement of D. Sean McEwen that was granted to him on December 18, 2017, as an exchange of his shares of KonaTel, a Nevada corporation (“KonaTel Nevada”), for common shares and an option to acquire common shares of the Company under a merger whereby the Company acquired KonaTel Nevada from Mr. McEwen, its sole shareholder, to exclude the “incentive” and “employee” provisions, among other related provisions, with all terms of the grant and exercise dates and term of the stock options granted therein remaining unchanged. Our CFO (Brian Riffle) has determined that the revisions will have no material adverse impact on our prior or current financial statements. This action will require the withdrawal of the 1,500,000 shares underlying the initially issued Incentive Stock Option Agreement granted to Mr. McEwen from the unexercised incentive stock options registered on Form S-8 of the SEC on August 25, 2021, under our 2018 Stock Option Plan (the “Plan”), and results in the shares of our common stock underlying the corrected Stock Option Agreement being “restricted securities” if and when exercised by Mr. McEwen. It does not change, the strike price, vesting or the number of shares of Mr. McEwen’s option or the number of shares reserved for issuance under our Plan. This action was approved on the referenced date in good faith by the Board of Directors on a reasonable factual basis and related documentation presented to them by legal counsel for the Company prior to such approval. Mr. McEwen, the Chairman of the Board of Directors, abstained from voting on this matter. See Exhibit 10.1 in Part II, Item 6, for a copy of the corrected Stock Option Agreement.
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. | ||
4 | Filed herewith. | |||
10.1 | D. Sean McEwen Corrected Stock Option Agreement | Filed herewith. | ||
14 | Code of Ethics | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
99 | Earnings Press Release dated | 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:
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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: | /s/ D. Sean McEwen | ||
D. Sean McEwen | ||||
Chairman |
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: | /s/ D. Sean McEwen | ||
D. Sean McEwen | ||||
Chairman |
Date: | By: | /s/ Brian R. Riffle | ||
Brian R. Riffle | ||||
Chief Financial Officer |
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