KonaTel, Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from

Commission File No. 001-10171

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes x No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes x No

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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). x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Our website is KonaTel.com.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

On June 30, 2019, the last business day of the Registrant’s most recently completed second quarter, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was $1,896,343, based upon 12,942,286 shares of the Registrant’s common stock being currently owned by such persons, and based upon the closing price of the common stock of the Registrant on the OTC Markets Group Inc. (“OTC Markets”) “OTC Pink Tier” (“KTEL”) of $0.15 per share on June 28, 2019.

As of December 31, 2019, March 31, 2020, and May 11, 2020, the Registrant had 40,692,286 shares of its common stock, $0.001 par value, issued and outstanding.

FORWARD LOOKING STATEMENTS

In this Annual Report, references to “KonaTel, Inc.,” “KonaTel,” the “Company,” “we,” “our,” “us” and words of similar import, refer to KonaTel, Inc., a Delaware corporation, formerly named Dala Petroleum Corp., which is the Registrant, and our wholly-owned subsidiaries, KonaTel, Inc., a Nevada corporation (“KonaTel Nevada”), Apeiron Systems, Inc., a Nevada corporation (“Apeiron Systems”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (sometimes called “IM Telecom”).

This Annual 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 Annual Report. We cannot assure you that the forward-looking statements in this Annual 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 Annual 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”). 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.

CAUTIONARY STATEMENT

Summaries of all agreements or other documents referenced herein and attached hereto by Hyperlink in Part IV, Item 15, or otherwise, do not purport to be all inclusive of the terms, conditions and other provisions of such agreements or documents, and accordingly, all such summaries are modified in their entirety to the referenced and attached respective agreement or document in Part IV, Item 15.

TABLE OF CONTENTS

PART I

ITEM 1.  BUSINESS

Corporate History and Business Development

We were 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.   At that time, all of our prior operations were conducted through Lee Building Products and T. A. Kilgore & Company, which owned and operated a home center in League City, Texas, about 30 miles southeast of downtown Houston, Texas. During 1990, we ceased these operations, and the secured lenders took possession our assets.

We changed our name to “Dala Petroleum Corp.” on August 29, 2014; and then to “KonaTel, Inc.” on February 5, 2018, following the closing of two respective mergers that are discussed below.

On March 11, 2000, our Board of Directors began the process of re-entering the development stage, and on June 2, 2014, we and our newly formed and wholly-owned acquisition subsidiary, Dala Acquisition Corp., a Nevada corporation (“Dala Acquisition”), and Dala Petroleum Corp., a Nevada corporation (“Dala Nevada”), completed an Agreement and Plan of Merger (the “Dala Merger Agreement”) under which Dala Nevada became our wholly-owned subsidiary on the closing of the merger (the “Dala Merger”). Dala Nevada was wholly-owned by Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”). Approximately $2,225,000 was raised in connection with the closing of the Dala Merger for planned development of the 300 oil and gas leases acquired in north central Kansas under the Dala Merger, with the total leased acreage amounting to approximately 80,000 acres, more or less. Following the Dala Merger, we operated as an early-stage oil exploration company focused on our leased acreage, until 2016, when we entered into a Partial Cancellation Agreement (the “PCA”) whereby Chisholm II and certain members of Chisholm II returned a total of 8,567,800 shares of the 10,000,000 shares of common stock exchanged under the Dala Merger to us for cancellation in exchange for our assignment of approximately 55,000 acres, more or less, of our leased acreage or approximately 68.75% of our total holdings, to Chisholm II. All of our remaining oil and gas leasehold interests, comprising leases covering approximately 7,489 and 403 acres, more or less, expired in 2017 and 2018, respectively.

On July 20, 2017, pursuant to a Common Stock Purchase Agreement dated July 19, 2017, M2 Equity Partners, LLC, a privately-held Minnesota limited liability company (“M2”), acquired 12,100,000 shares of our common stock in consideration of the sum of $367,500, which resulted in a change in control of our Company. For additional information about the closing of this Common Stock Purchase Agreement, see our 8-K Current Report dated July 19, 2017, and filed with the SEC on July 20, 2017, which is accessible by Hyperlink in Part IV, Item 15 hereof.

On November 13, 2017, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which removed all of our designated series of preferred stock our Certificate of Incorporation, while reserving our 50,000,000 authorized and unissued one mill ($0.01) par value shares of preferred stock for future issuance as the Board of Directors may designate and approve. All outstanding series of designated preferred stock had been cancelled or converted prior to the filing of this Amended and Restated Certificate of Incorporation. A copy of our Amended and Restated Certificate of Incorporation is incorporated by reference as an Exhibit to this Annual Report. See Part IV, Item 15, Exhibit 3(i).

Effective December 18, 2017, we, our President and sole director, Mark Savage, and our Secretary, Matthew Atkinson, and our newly formed and wholly-owned acquisition subsidiary, completed an Agreement and Plan of Merger (the “KonaTel Merger Agreement”) with KonaTel, Inc., a Nevada corporation (the “KonaTel Nevada”), under which KonaTel Nevada became our wholly-owned subsidiary on the closing of the merger (the “KonaTel Nevada Merger”), and we succeeded to the business operations of KonaTel Nevada.  We issued 13,500,000 shares of our common stock in exchange for all of the outstanding shares of common stock of KonaTel Nevada to D. Sean McEwen, its sole shareholder and our current Chairman, President, CEO and a director. Copies of all filed documents regarding the KonaTel Merger can be viewed in our 8-K Current Report dated November 15, 2017, and filed with the SEC November 17, 2017, the 8-KA-1 Current Report of the same date, filed with the SEC on December 20, 2017, and the 8-KA-2 Current Report of the same date, filed with the SEC on April 17, 2018, which are all accessible by Hyperlink in Part IV, Item 15 hereof. The Shareholder Voting Agreement and the Lock-Up/Leak-Out Agreement executed by the parties at closing and referenced therein have expired by their terms.

Following the KonaTel Nevada Merger, our primary operations have been those carried on by KonaTel Nevada, which are described below under the heading “Business.” We also changed our fiscal year from September 30 of each year to a calendar year end to coincide with the calendar year end of KonaTel Nevada. For additional information in this respect, see our 10-KT Transition Report for the year ended December 31, 2017, and filed with the SEC on June 29, 2018, which is accessible by Hyperlink in Part IV, Item 15 hereof.

On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests. This action was approved by the requisite members of M2 on April 9, 2018.

Effective February 7, 2018, we entered into an Agreement for the Purchase and Sale of Membership Interest dated as of February 5, 2018 (the “PSMI”), with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom, from its sole owner, Trevan Morrow (“Mr. Morrow”).  The principal asset of IM Telecom was a “Lifeline Program” license (a Federal Communications Commission [the “FCC”] approved Compliance Plan), the transfer of ownership of which required prior approval of the FCC.  Following the FCC approval of the transfer of ownership of IM Telecom to us on October 23, 2018, the PSMI, as amended, was completed, effective on or about January 31, 2019. At the closing, we also engaged Mr. Morrow as an independent consultant for ninety (90) days in consideration of $100 and granted him an incentive stock option to purchase 500,000 shares of our common stock at an exercise price of $0.20 per share, also effective January 31, 2019, vesting on May 1, 2019 and expiring on January 31, 2022. For additional information on the PSMI, as amended, and related matters, see our 8-K Current Report dated February 7, 2018, filed with the SEC on February 12, 2018; our 8-KA-1 Current Report of the same date, filed with the SEC on January 14, 2019; and our 8-KA-2 Current Report of the same date, filed with the SEC on February 6, 2019, which are all accessible by Hyperlink in Part IV, Item 15 hereof. Subsequently, the 500,000 share incentive stock option granted to Mr. Morrow was cancelled under a Settlement Agreement and Release between us, Mr. Morrow and his spouse, effective September 4, 2019, in consideration of our release of these parties of their obligation for an over payment of $168,677 to IM Telecom by Universal Service Administrative Company (USAC) of the FCC under the indemnification provisions of the PSMI. The indemnification provisions remain with respect to all other representations and warranties contained therein. See our 8-K Current Report dated September 4, 2019, filed with the SEC on September 6, 2019, also Hyperlinked in Part IV, Item 15, and a copy of the Settlement Agreement and Release is filed as an Exhibit to this Annual Report in Part IV, Item 15.

We increased the number of members of our Board of Directors to five (5) members, effective February 12, 2018, and we appointed three (3) new directors to our Board of Directors on that date. See our 8-K Current Report dated February 7, 2018, and filed with the SEC on February 12, 2018, in Part IV, Item 15 hereof. The number of our current Board members is now set at four (4) members.

During 2018, we sold 6,500,000 shares of our common stock comprised of “restricted securities” to “accredited investors” under the private placement shares contemplated in connection with the closing of the KonaTel Nevada Merger for aggregate gross proceeds of $1,300,000, $100,000 of which was paid by the settlement of an advance in this amount. See the heading “Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities” of the caption “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II, Item 5 hereof.

On August 9, 2018, we entered into an Asset Purchase Agreement (the “Telecon Agreement”) with Telecon Wireless Resources, Inc., a New York corporation (the “Buyer”); and our wholly-owned subsidiary, KonaTel Nevada (the “Seller”), whereby we sold various assets, including furniture, fixtures, equipment, account receivable and a customer list, among other assets and liabilities (the “Acquired Assets”).  The Agreement had an effective date of July 31, 2018 (the “Effective Date” and the “Cut-Off Date”). These Acquired Assets were previously utilized by us in our wireless services and telecommunications operations conducted under the name “Telecon Wireless” in our retail store located in Johnstown, New York.  The purchase price of the Acquired Assets was approximately $406,000. See our 8-K Current Report dated August 9, 2018, and filed with the SEC on August 15, 2018, in Part IV, Item 15 hereof.

On August 28, 2018, we filed a claim in AAA Arbitration against a former employee, Saul Glosser, and Mr. Glosser filed a counterclaim against us. Both matters were consolidated in KonaTel, Inc. vs. Saul Glosser, Case No. 01-18-0003-2772, with the American Arbitration Association (International Center for Dispute Resolution). In August, 2019, the Company won an arbitration award (ratified by the court) from Mr. Glosser in the amount of $357,914, together with arbitrator’s compensation of $4,957, for a total award of $362,871; and Mr. Glosser’s counterclaim was found to be without merit.   The Company and Mr. Glosser entered into a Settlement Agreement and Mutual Release on February 24, 2020, pursuant to which this matter was fully settled, resolving all claims, and Mr. Glosser paid the Company $300,000. A copy of the Settlement Agreement and Mutual Release is filed as an Exhibit to this Annual Report in Part IV, Item 15.

Effective December 31, 2018, we and our newly formed and wholly-owned acquisition subsidiary, and Apeiron Systems, completed an Agreement and Plan of Merger (the “Apeiron Systems Merger Agreement”) under which Apeiron Systems became our wholly-owned subsidiary on the closing of the merger (the “Apeiron Systems Merger”).  We issued 7,000,000 shares of our common stock in exchange for all of the outstanding shares of common stock of Apeiron Systems, to Apeiron Systems two shareholders, Joshua Ploude (6,300,000 shares) and Vyacheslav Yanson (700,000 shares), pro rata, in accordance with their respective equity interests in Apeiron Systems. Closing conditions to the Apeiron Systems Merger Agreement included, among other conditions that: (i) the Apeiron Systems shareholders have a $1.00 per share “Guaranteed Value” on the KonaTel shares they received under the Apeiron Systems Merger if the KonaTel shares do not trade at or above $1.00 for ten (10) consecutive days during the period commencing on December 31, 2020, and ending December 31, 2021, on the applicable trading market for our common stock during that period, and subject to such shares being continuously owned of record by the Apeiron Systems shareholders, as outlined in Section 5.10 of the Apeiron Systems Merger Agreement; (ii) there would be a “Net Working Capital” computation that was intended to provide sufficient cash resources to operate Apeiron Systems for a period of not less than ninety (90) days, with the understanding that any overage of the estimate shall be paid to the Apeiron Systems shareholders and any deficit shall be paid by the Apeiron Systems shareholders to us; (iii) we would execute Employment Agreements with Messrs. Ploude and Yanson (see the heading “Significant Employees” of Part IIII, Item 12); and that Messrs. Ploude and Yanson would execute and deliver a Shareholder Voting Agreement and a two year Lock-Up/Leak-Out Agreement governing the resale of their respective shares of KonaTel (see the headings “Apeiron Systems Merger Shareholders Voting Agreement” and “Apeiron Systems Merger Lock-Up/Leak-Out Agreement” of Part III, Item 12, hereof, for a summary of these executed and delivered agreements). See our 8-K Current Report dated December 31, 2018, and filed with the SEC on December 31, 2018, in Part IV, Item 15 hereof. Effective March 31, 2020, we entered into a Working Capital Settlement Agreement with Messrs. Ploude and Yanson regarding the final Net Working Capital adjustments under the Apeiron Systems Merger Agreement. A copy of the Working Capital Settlement Agreement is filed as an Exhibit to this Annual Report in Part IV, Item 15.

Effective January 31, 2019, we changed our auditors, following prior advice from them that they were intending to decline to stand for re-election as they were anticipating no longer providing audit reports for publicly-held companies. See our 8-K Current Report dated February 19, 2019 and filed with the SEC on January 19, 2019.

Effective October 15, 2019 (though executed October 17, 2019), the Company and Charles L. Schneider, Jr., the CEO of our wholly-owned subsidiary, KonaTel Nevada, and the President and CEO of our wholly-owned subsidiary, Infiniti Mobile, executed and delivered a Severance Agreement and Release (the “Severance Agreement”). In connection with the execution and delivery of the Severance Agreement, the parties also executed and delivered the following additional agreements: (i) various assignments to Mr. Schneider regarding the Company’s reseller agreement with Standup Wireless; (ii) an Amended Incentive Stock Option Agreement; and (iii) an Independent Contractor Agreement.

Pursuant to the Severance Agreement, Mr. Schneider’s Employment Agreement with the Company dated July 1, 2016, was terminated. The Company agreed to pay Mr. Schneider’s salary ($16,666.66 per month) and benefits through December 31, 2019; allowed him to retain his laptop, monitors, keyboard/mouse and printer; and assigned him certain Company contract rights as a reseller of Lifeline services for StandUp Wireless, another Lifeline provider, which he agreed to assume. The Company had determined that it was no longer interested in acting as a distributor of Lifeline services for StandUp Wireless and intended to focus its efforts on distributing Lifeline service under its own FCC Lifeline license. Additionally, the parties agreed that 500,000 of the 1,500,000 Incentive Stock Options held by Mr. Schneider had vested; that the remaining 1,000,000 Incentive Stock Options that he had been granted were void; and the Amended Incentive Stock Option Agreement was revised to include a customary “cashless” exercise feature for the 500,000 vested options. A Lock-Up/Leak-Out Agreement (the “LULO Agreement”) was also executed and delivered by the Company and Mr. Schneider. Pursuant to the Independent Contractor Agreement (the “ICA”) entered into with the Company, Mr. Schneider has agreed to assist the Company in having its wholly-owned subsidiary, Infiniti Mobile, being granted its request for Eligible Telecommunications Carrier (“ETC”) status from the California Public Utilities Commission (“CPUC”) to distribute Lifeline cellular phone service within the State of California. In the event that the Company is successful in this process, Mr. Schneider will be granted a one (1) year Warrant with a customary “cashless” exercise feature to purchase 250,000 shares of the Company’s common stock at an exercise price to be determined on the date of any such approval. The ICA has a term of one (1) year, and may be extended by the parties yearly. The LULO Agreement is applicable to any shares that may be acquired under any such Warrant, with the eighteen (18) month term commencing on the exercise of any such Warrant that may be issued. Mr. Schneider has more than thirty (30) year experience in the telecommunications industry and services to us should be invaluable to the Company in this process. A copy the Settlement Agreement is filed as an Exhibit to this Annual Report in Part IV, Item 15. 

On April 14, 2020, our operating subsidiaries made loan applications to participate in the Small Business Administration’s (the “SBA”) Paycheck Protection Program created under the Cares Act as a result of the COVID-19 pandemic. On April 15, 2020, the loan applications of Apeiron Systems, IM Telecom and KonaTel Nevada were approved and loan proceeds in the amounts of $101,800, $20,900 and $186,300, respectively, were received. We intend to follow all prescribed loan forgiveness guidelines provided by our local bank and the SBA by using these loan proceeds to fund employee payroll through the 60-day period ending on June 15, 2020.

BUSINESS

KonaTel Nevada 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 cellular provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. Through its sales network, it provided these services nationwide. In furtherance of its proposed business, on November 1, 2014, it acquired most of the assets of Coast to Coast Cellular, Inc. (“Coast to Coast”), including inventories, property, plant and equipment and customer list valued at approximately $950,000 net of liabilities in the approximate amount of $415,000; and on November 1, 2016, it acquired the assets of CS Agency LLC (“CS Agency”), consisting of contract rights related to the cellular industry, in consideration of assuming liabilities of CS Agency in the approximate amount of $300,000. With the completion of the KonaTel Nevada Merger, we succeeded to the current and intended business operations of KonaTel Nevada.

On December 31, 2018, we acquired Apeiron Systems (www.apeiron.io), which now operates as a wholly owned subsidiary of KonaTel. Apeiron Systems was established in 2015 as a software-based Communications Platform as a Service (“CPaaS”) telecommunications carrier. Apeiron Systems provides a wide variety of wholesale and retail telecommunications products/services including text and messaging services (“SMS/MMS”), voice termination, toll free numbers, database dip services and least cost routing services, all supported by a redundant national network integrated with numerous international telecom carriers and most U.S. rate centers. Apeiron Systems’ services are provided through a web-based management portal and a corresponding library of APIs (Applications Program Interface). KonaTel’s CPaaS service, the “Orion” system, which provides SMS to Email services, KonaTel’s toll-free number service and KonaTel’s B2B (business to business) wholesale/retail cellular services will merge into Apeiron Systems’ suite of services and be marketed under the Apeiron Systems brand.

On February 5, 2018, we entered into a purchase agreement to acquire IM Telecom, d/b/a “Infiniti Mobile” (www.infinitimobile.com). On October 23, 2018, the FCC approved our acquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom now operates as a wholly owned subsidiary of KonaTel. IM Telecom is an Eligible Telecommunications Carrier (“ETC”) and is one of fifteen (15) carriers that hold an FCC approved Lifeline Compliance Plan. The FCC has not approved (granted) a new Lifeline Compliance Plan since 2012. Lifeline is an FCC program that provides subsidized, fixed or mobile, telecommunications services to low-income Americans. We primarily distribute our Lifeline products and services through ISOs (“Independent Sales Organizations”).

Apeiron Systems, headquartered in Los Angeles, California, also has some customer service and software engineering resources staffed in Johnstown, Pennsylvania, and part of its software engineering services are staffed in Kiev, Ukraine. IM Telecom is headquartered in Dallas, Texas, and operates a Lifeline retail operation in Tulsa, Oklahoma. KonaTel is headquartered in Dallas, Texas, shared with IM Telecom’s offices. Apeiron Systems has nine (9) full-time employees; IM Telecom has four (4) full-time employees and two (2) part-time employees; and KonaTel has three (3) 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 services, wholesale voice terminations services, and our ETC and Virtual Eligible Telecommunications Carrier (“VETC”) Lifeline services. Except for our ETC Lifeline services distributed in up to eight (8) states and our VETC Lifeline services distributed in up to twenty (20) states, our Apeiron Systems’ products and services are available nationwide and subject to U.S., international and local/national regulations, most Apeiron Systems’ services are available worldwide

The following are our principal revenue streams:

Distribution Methods of the Products or Services

We primarily distribute our Lifeline services through ISOs and resellers (“Agents”). Agents are recruited and contractually retained to market these services via various means such as tradeshows, our website, word of mouth from other agents and cold calling. Wholesale mobile services are marketed and distributed via our direct employees. Wholesale mobile customers are solicited and obtained also via tradeshows, our website, word of mouth within the industry and cold calling. We primarily distribute our B2B cellular services through Agents. We market some CPaaS services through Agents and through SCO efforts.

Sources and Availability of Raw Materials and the Names of Principal Suppliers

Wholesale cellular services are sourced either directly from the carrier or from wholesalers that sit between us (Apeiron Systems and IM Telecom) and the carrier. Carriers include Verizon, T-Mobile, Sprint and AT&T. Wholesalers include Prepaid Wireless Group (“PWG”), Sprint and Telispire.

Resellers and Mobile Virtual Network Operator (“MVNOs”) like us typically do not own the wireless infrastructure over which services are provided. We purchase services from the following sources:

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts

Our wholly owned subsidiary, IM Telecom, is one of twelve (12) active Lifeline carriers in the U.S. that holds an FCC approved Lifeline Compliance Plan. This Compliance Plan allows IM Telecom, subject to state approval, to expand into additional states to provide Lifeline services.

We have been approved by the United States Patent and Trademark Office for the trademark “Lifeline+” and now need to demonstrate use of this trademark to finalize the Trademark.

Competition

The telecommunications industry is highly competitive. Our primary cellular competitors include other resellers and national carriers, such as AT&T, Verizon, Sprint and T-Mobile. These national cellular carriers are facility-based, are significantly larger than us and enjoy trade name and trademark public recognition, as well as greater resources, scale and competitive advantages, among other substantial factors, as compared to us. In addition, our cellular competitors also include numerous smaller regional carriers, existing MVNOs and ETCs, such as Metro PCS (“Metro”), Cricket Wireless, LLC. (“Cricket”), TracFone Wireless, Inc. (“TracFone”) and Assurance Wireless, many of which offer or plan to offer Lifeline services, and no-contract postpaid and prepaid service plans. Our CPaaS competitors include, but are not limited to, Twilio, Plivo, Bandwidth, Thinq, VoIP Innovations, Telnyx, Coredial, Vonage/Nexmo, CLX Comm, Genband Kandy, Tropo, Telestax, 2600Hz, and Signal Wire. Competitive factors within the telecommunications industry include pricing, market saturation, service and product offerings, customer experience, network investment and quality, development and deployment of technologies, and regulatory changes. Some competitors have shown a willingness to use aggressive pricing as a source of differentiation. Other competitors have sought to add ancillary services, like mobile video, to enhance their offerings. Taken together, the competitive factors we face continue to put pressure on margins as companies compete to retain their current customer base and continue to add new developments, many proprietary or patented, and customers.

Need for any Governmental Approval of Principal Products or Services

On October 23, 2018, the FCC approved our acquisition of IM Telecom. Lifeline was created under President Ronald Reagan as part of the 1984 Telecommunications Act. Prior to President Obama taking office, the Lifeline program began to allow cell phones, and there was some initial duplication of service in the early days of Lifeline cell phone deployment. Approximately fifteen (15) current ETCs hold an FCC approved Lifeline Compliance Plan.  The FCC has not approved any new Lifeline Compliance Plans since 2012, so Lifeline is a tightly controlled market. We anticipate that approximately one-third of our future gross revenues may come from Lifeline services.

Existing and Probable Government Regulation to Our Current and Intended Business

The FCC has a number of complex requirements and proceedings that affect our operations and that could increase our costs or diminish our revenues. For example, the FCC has rules regarding provision of 911 and E-911 services, porting telephone numbers, roaming, disabilities access, privacy and cyber security, consumer protection, and the universal service and Lifeline programs, including eligibility, reimbursement and program requirements. Many of these and other issues are being considered in ongoing proceedings, and we cannot predict whether or how such actions will affect our business, financial condition or results of operations. Our ability to provide services and generate revenues could be harmed by adverse regulatory action or changes to existing laws and regulations. In addition, regulation of companies that offer competing services can impact our business indirectly.

Smaller Reporting Company

We are subject to the reporting requirements of Section 13 of the Exchange Act, and we are subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.”  That designation will relieve us of some of the informational requirements of Regulation S-K.

Emerging Growth Company

We are also an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act.”  As long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not an “emerging growth company,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; and exemptions from the requirements of holding an annual nonbinding advisory vote on executive compensation and seeking nonbinding shareholder approval of any golden parachute payments not previously approved.  We are also only required to file audited consolidated financial statements for the previous two fiscal years in our Exchange Act filings, along with reviewed interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis and Results of Operation.”

We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”  We can remain an “emerging growth company” until the fifth anniversary of a registered public offering.  We would also cease to be an “emerging growth company” prior to such time if we have total annual gross revenues of $1 billion or more, and when we become a “large accelerated filer,” have a public float of $700 million or more or we issue more than $1 billion of non-convertible debt over a three-year period.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Sarbanes/Oxley Act

We are also subject to the Sarbanes-Oxley Act of 2002.  The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence.  It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act could substantially increase our legal and accounting costs.

Exchange Act Reporting Requirements

Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to our shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders.

We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and are required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.

Number of Total Employees and Number of Full-Time Employees

Across our companies, we have a total of 18 employees: (16) full-time employees and two (2) part-time employees.

Subsidiaries

We have three (3) wholly owned operating subsidiaries: KonaTel, Inc., a Nevada corporation; IM Telecom, LLC (d/b/a Infiniti Mobile) an Oklahoma limited liability company; and Apeiron Systems, Inc., a Nevada corporation.

Additional Information

You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may also find all the reports or registration statements that we have previously filed electronically with the SEC at its Internet site at www.sec.gov.

ITEM 1A.  RISK FACTORS

RISK FACTORS

As we are a “smaller reporting company” as defined by Section 12b-2 of the Exchange Act, we are not required to provide the information under this Item or in our annual or quarterly reports filed with the SEC; however, we believe this information may be of value to our shareholders or potential investors in our Company for this filing. These risk factors should be considered in light of the caption “Forward-Looking Statements” at the forepart of this Annual Report. We reserve the right not to provide risk factors in our future filings. Our primary risk factors and other considerations include:

Risks Related to the Company

We have a limited operating history and cannot ensure the long-term successful operation of our business or the execution of our business plan.

We have a limited operating history, having commenced our business operations in November of 2014, and our wireless marketing technology and solutions are an evolving business offering. As a result, investors have a limited track record by which to evaluate our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to successfully accomplish and fund our current endeavors, which would materially impact our ability to implement our business plan, including:

Our business strategy may be unsuccessful, and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish these tasks, our business will be harmed, and we may fail.

We have experienced minimal net income since our inception, and have incurred substantial losses, and there is no assurance that we will not continue to experience losses in our business. As a result, we may be unable to continue as a “going concern.”

We reported gross revenues of approximately $9,173,520, cost of revenues of approximately $6,303,053, operating and other expenses of approximately $4,515,662 and a net loss of approximately $1,645,195 for the year ended December 31, 2019; and gross revenues of approximately $9,415,139, cost of revenues of approximately $7,570,350, operating and other expenses of approximately $3,294,524 and a net loss of approximately $1,449,735 for the year ended December 31, 2018. If we cannot eliminate our losses and achieve profitability, our business may fail.

The Company did not generate net income during the years ended December 31, 2019, and 2018, and we have been dependent upon equity financing to support our operations. In addition to losses of $1,645,195 and $1,449,735 in 2019 and 2018, respectively, we have experienced positive cash flow of $176,678 and negative cash flow from operations of $1,011,453, respectively, during these years. Our accumulated deficit as of December 31, 2019, was $5,896,977.

We believe we have ameliorated any “going concern” issues by generating additional cash flow since the completion of the KonaTel Nevada Merger on December 18, 2017; the acquisition of Apeiron Systems on December 31, 2018; receiving cash investments through the private placement of shares of our common stock; and significantly reduced costs from the termination of our Virtual ETC program, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings.

The United States Government’s dissolution or reduction of the Lifeline Program or the elimination of “resellers” of these services would have a substantial adverse effect on our current and planned business operations.

A national carrier (Verizon, AT&T, T-Mobile or Sprint) could dissolve, reduce or restrict any wholesale program, agent program or reseller program.  This includes both voice and data IoT, which would adversely affect our business.

We, like all voice and data resellers, are dependent on the FCC licensed national carriers to provide services that can be resold for a profit.  The wireless carriers own/control their respective network (towers) and provide the wireless service.  Resellers do not own their own network and are dependent on the national carriers to provide a reseller program.  These carriers could eliminate a reseller program or reduce the profit margins making any applicable program unprofitable.  They could also implement market restorations reducing markets we could sell into, which would have a direct adverse effect on our current and future prospects. Similarly, one of these national carriers could reduce their own retail pricing, with no corresponding reduction in their wholesale pricing, which could create a situation where a reseller is unable to make enough profit to sustain operations.  This has happened in the past with Verizon until Verizon’s wholesale (reseller) division finally reduced wholesale prices.

A wireless reseller could gain a significant price advantage over other wireless resellers by entering into a special national carrier pricing agreement not available to other resellers.

Any special national carrier pricing agreement that was not available to us would allow that particular reseller to “undercut” all other resellers.  This scenario could also apply to a national wireless carrier acquiring a reseller then allowing that reseller to operate with special wholesale pricing not available to other resellers.  This scenario has happened in the past with Cricket Communications, Inc. and Ultra Mobile, resellers that were acquired by a national carrier. Any such event could have a substantial adverse impact on our business and revenues.

The increase in the number of resellers of services and products that we provide by any national carrier could saturate the markets and market segments of our targeted customers, which could affect our business adversely.

Market saturation could occur when a national carrier allows too many resellers into the market and margins drop so low the reseller business model is unsustainable, and our business may suffer and fail.

A decrease in the number of wholesale voice from aggregators of these services could cause a substantial reduction in our business and customers.

We purchase the majority of our mobile data service (“IoT”) directly from national carriers, and purchase some of our wholesale voice and mobile data from wholesale aggregators or MVNEs like Telispire.  If one of these aggregators vacated the market, such action could strand many resellers of these services, like us, and could substantially reduce our current and anticipated revenues from our IoT or cellular service.

Adequate funds for our current and intended operations may not be available, requiring us to raise additional financing or curtail our current and planned operations significantly.

We will likely be required to raise additional funding through public or private debt or equity financings. Any additional equity financings may be dilutive to our shareholders and may be completed at a discount to the then-current market price of our common stock, which common stock currently trades in an illiquid market on the OTC Pink Tier. Debt financing, if available, would likely involve restrictive covenants on our operations or pertaining to future debt or equity financing arrangements. Nevertheless, we may not successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us. If adequate funds are not available, our plans to operate our business may be adversely affected, and we could be required to curtail our activities significantly and/or cease operations.

We will be unable to implement our business plan if we cannot raise sufficient capital and may be required to pay higher prices for capital based on the current illiquid market for our common stock, among other factors.

We anticipate that we will need additional capital to implement our business plan, and if we cannot attract sufficient capital from customary sources, we may be required to pay a higher price for capital.

We will need to obtain additional capital to implement our business plan and meet our financial obligations as they become due. We may not be able to raise the additional capital needed or may be required to pay a higher price for any required capital. Factors affecting the availability and price of capital may include the following:

We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital. If we are unable to obtain any required capital for an extended period of time, we may be forced to discontinue or curtail our business operations and we may fail.

We expect that there will be significant consolidation in our industry. Our failure or inability to lead that consolidation would have a severe adverse impact on our access to financing, customers, technologies and human resources.

Our industry is currently composed of a small number of substantial entities, and a relatively large number of small businesses, no single one of which is dominant, or which provides integrated solutions and product offerings incorporating much of the available technology. Accordingly, we believe that substantial consolidation of the smaller companies may occur in our industry in the near future as has occurred with many larger participants. If we do not play a positive role in that consolidation, either as a leader or as a participant whose capabilities and offerings are merged into a larger entity, we may be left out of this process, with product and service offerings of limited value compared with those of our competitors. Moreover, even if we lead the consolidation process, the market may not validate the decisions we make in that process and our business will suffer and may fail.

Our success depends on our product and service technologies achieving and maintaining widespread acceptance in our targeted markets.

Our success will depend to a large extent on broad market acceptance of our telecommunications solutions among our current and prospective customers. Our prospective customers may be unwilling to use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity with our technologies, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of our technologies by prospective customers will depend primarily on the following factors:

Because we do not have long-term purchase commitments from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have an adverse effect on our business and future prospects.

Our business is characterized by short-term purchase orders and contracts that do not require that purchases be made. This makes forecasting our sales difficult. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements, or otherwise, could have a material adverse effect on our business, financial condition and results of operations. We have experienced such challenges in the past and may experience such challenges in the future.

Most of our contracts are terminable by our customers with limited notice and without penalty payments, and early terminations could have a material adverse effect on our business, operating results and financial condition.

Most of our contracts are terminable by our customers following limited notice and without early termination payments or liquidated damages due from them. In addition, each stage of a project often represents a separate contractual commitment, at the end of which the customer may elect to delay or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a material contract or materially reduce the scope of any large project. The delay, cancellation or significant reduction in the scope of a large project or a number of projects could have a material adverse effect on our business, operating results and financial condition.

Our industry is characterized by frequent technological change. If we are unable to adapt our products and services and develop new products and services to keep up with these rapid changes, we will not be able to obtain or maintain market share and our business may fail.

The market for our products and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition and frequent new product and service introductions. If we fail to develop new products and services or modify or improve our existing products and services in response to these changes in technology, customer demands or industry standards, our products and services could become less competitive or obsolete.

We must respond to changing technology and industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products and services or enhancing existing products and services in a timely and cost-effective manner. Furthermore, even if we successfully adapt our products and services, these new technologies or enhancements may not achieve market acceptance.

A portion of our business involves the use of software technologies that we have developed or licensed. Industries involving the ownership and licensing of software-based intellectual property are characterized by frequent intellectual property litigation, and we could face claims of infringement by others in the industry. Such claims are costly and add uncertainty to our operational results.

A portion of our business involves our ownership and/or licensing of software. This market space is characterized by frequent intellectual property claims and litigation. We could be subject to claims of infringement of third-party intellectual property rights resulting in significant expense and the potential loss of our own intellectual property rights. From time to time, third parties may assert copyright, trademark, patent or other intellectual property rights to technologies that are important to our business.

Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. If any such litigation resulted in an adverse ruling, we could be required to:

Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our products and services.

Our business may be adversely affected by malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our products or products that impact our business. These applications may attempt to interfere with our ability to communicate with our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative experience that our customers may associate with our products and services. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The ability to provide customers with a superior interactive marketing technology experience is critical to our success. If our efforts to combat these malicious applications fail, or if our products and services have actual or perceived vulnerabilities, there may be claims based on such failures and our reputation may be harmed, which would damage our business and financial condition and our ability to continue our business.

We compete with other companies that have substantially greater resources, and we are at a distinct competitive disadvantage in our chosen industry.

The market for our products and service solution technologies is generally highly competitive, and we expect competition to increase in the future. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we have. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than us.

We expect competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. Successful new product and service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services, cause intense price competition or make our products and services obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer, and we may fail. Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could also adversely affect our business and financial condition.

Our future success depends on key personnel and our ability to attract and retain additional personnel.

Our success is dependent upon attracting and maintaining key personnel, including our founder, D. Sean McEwen, and various key executive employees, including, Joshua Ploude and Vyacheslav “Slava” Yanson from whom we acquired Apeiron Systems and serve as CEO and CTO respectively, of Apeiron Systems, Paul LaPier Vice President of Finance of KonaTel and Nicholas Metherd Vice President of IM Telecom. Further, if we fail to retain our key personnel or to attract, retain and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected. Our future success depends significantly on the continued service of our key technical, sales and senior management personnel and their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other employers who offer competitive or superior compensation packages.

Unpredictability in financing markets could impair our ability to grow our business through acquisitions.

We anticipate that opportunities to acquire similar businesses will materially depend on the availability of financing alternatives with acceptable terms. As a result, poor credit and other market conditions or uncertainty in financial markets could materially limit our ability to grow through acquisitions since such conditions and uncertainty make obtaining financing more difficult.

Our reliance on information management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service provider experiences a security breach.

Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure, in addition to denial of service attacks and corruption of our data. Further, we rely on the information security internal controls maintained by our outsourced service provider. Breaches of our information management system could also adversely affect our business reputation. Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably report results.

Because our technology, products, platforms and services are complex and are deployed in and across complex environments, they may have errors or defects that could seriously harm our business.

Our technology, proprietary platforms, products and services are highly complex and are designed to operate in and across data centers, large and complex networks and other elements of the digital media workflow that we do not own or control. On an ongoing basis, we need to perform proactive maintenance services on our platform and related software services to correct errors and defects. In the future, there may be additional errors and defects in our software that may adversely affect our services. We may not have in place adequate reporting, tracking and monitoring and quality assurance procedures to ensure that we can detect errors in our software in a timely manner. If we are unable to efficiently and cost-effectively correct errors or other problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers and our business may fail.

We may have insufficient network or server capacity for our current and planned business, which could result in interruptions in our services and the loss of revenues resulting in a negative impact on our business.

Our operations are dependent, in part, upon network capacity provided by our telecommunications network and third-party telecommunications networks; data center services provider owned and leased infrastructure and capacity; server capacity located at the data center services provider partner or partners; and our own infrastructure and equipment. Collectively, this infrastructure, equipment and capacity must be sufficiently robust to handle all of our customers’ wireless requirements, particularly in the event of unexpected surges in high-definition video traffic and network services incidents. We may not be adequately prepared for unexpected increases in bandwidth and related infrastructure demands from our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes, outages or such service providers going out of business. Any failure of these service providers or our own infrastructure to provide the capacity we require due to financial or other reasons may result in a reduction in or the interruption of service to our customers, leading to an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses, which could result in the cessation of all or part of our business operations.

We do not have sufficient capital to engage in material research and development, which may harm our long-term growth.

In light of our limited resources in general, we have made no material investments in research and development. This conserves capital in the short term. In the long term, as a result of our failure to invest in research and development, our technologies and product offerings may not keep pace with the market, and we may lose any existing competitive advantage. Over the long term, this may harm our revenue growth and our ability to become profitable.

Our business operations are susceptible to interruptions caused by events beyond our control.

Our business operations are susceptible to interruptions caused by events beyond our control. We are vulnerable to the following potential problems, among others:

The occurrence of any of the foregoing could result in claims for consequential and other damages, significant repair and recovery expenses and extensive customer losses and otherwise have a material adverse effect on our business, financial condition and results of operations.

Our business operations could be impacted by the current world health crisis.

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 affect 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.

General global market and economic conditions may have an adverse impact on our operating performance and results of operations.

Our business has been and could continue to be affected by general economic and market conditions. Weakness in the United States and worldwide economy could have a negative effect on our operating results. Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet and corresponding decrease in traffic delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers on which we rely for equipment, field services, servers, bandwidth, co-location and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our business operations or revenues. Flat or worsening economic conditions may harm our operating results and financial condition.

The markets in which we operate are rapidly emerging, and we may be unable to compete successfully against existing or future competitors to our business.

The markets in which we operate are becoming increasingly competitive. Our current competitors generally include those that offer similar products and services. These competitors, including future new competitors who may emerge, may be able to develop comparable or superior solution capabilities, platforms, services, products and/or a series of services that provide a similar or more robust set of features and functionality than the technologies, products and services we offer. If this occurs, we may be unable to grow as necessary to make our business profitable.

Regardless of whether we have superior products, many of these current and potential future competitors have a longer operating history in their current respective business areas and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Existing and potential competitors with an extended operating history, even if not directly related to our business, have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations to a company that may be perceived as unproven or in the early stage of its development. In addition, our existing and potential future competitors may be able to use their extensive resources:

If we are unable to compete effectively in our various markets, or if competitive pressures place downward pressure on the prices at which we offer our products and services, our business, financial condition and results of operations may suffer and our business may fail.

Compliance with the reporting requirements of federal securities laws can be expensive.

We are a public “reporting company” in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, rules and regulations, including compliance obligations under the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited and reviewed financial statements in reports filed with the SEC, along with required communications with our shareholders, are substantial. We have incurred and expect to continue to incur costs associated with becoming and continuing as a public company, including, but not limited to, legal, accounting, filing and other related costs and expenses. Failure to comply with the applicable securities laws could result in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business and financial condition, the value of our common stock and the ability of our shareholders to resell their common stock.

We do not intend to pay dividends on our common stock for the foreseeable future.

All future revenues are anticipated to be utilized for research, development and the furtherance of our business plan and our technologies, products, services and platform, and accordingly, it is highly unlikely that you will receive any dividends from us in the near future, if ever.

We do not intend to provide guidance about future events in the foreseeable future.

Our Board of Directors anticipates adopting a policy that will preclude us from providing guidance about matters that may happen in the foreseeable future, though any such policy will not prohibit our responsibilities to provide forward-looking information to our shareholders and to the public in our Exchange Act filings with the SEC, including our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” required in a number of SEC reports and registration statements.

Risks Related to Our Common Stock

Our common stock trades only in an illiquid trading market.

Quotations for our common stock are contained in the OTC Markets OTC Pink Tier under the trading symbol “KTEL.” This lower categorized market tier may have an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock. It may also result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock, regardless of whether we are successful in our current and planned business operations.

There is not now and there may not ever be an active market for our shares of common stock.

In general, there has been a minimal trading volume in our common stock. The small trading volume will likely make it difficult for shareholders to sell their shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.

Additionally, if we do not timely file our reports required to be filed with the SEC under the Exchange Act, broker-dealers may not be able or willing to trade our common stock, and the OTC Markets will post adverse warnings on its website about such failures, which, unless such failures are corrected by us, could have an additional adverse impact on the viability of any market that may develop for our common stock. Other adverse warnings of the OTC Markets under their current and future policies could similarly have an adverse effect on any market for our common stock, and there is no assurance that we will be able to satisfy comments or concerns of the OTC Markets, if any are expressed.

If an active market for our common stock develops, there is a significant risk that the Company’s common stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control, including, but not limited to:

Our common stock is subject to the “penny stock” rules of the SEC, which may make it more difficult for shareholders to sell our common stock.

The SEC has adopted Rule 15g-9, which established the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and that the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and may cause a decline in the market value of its stock.

Because of increased regulatory efforts of governmental and quasi-governmental agencies regarding the trading of securities in the over-the-counter market where the Company’s shares of common stock are presently quoted, the cost and expense of depositing and inducing a broker-dealer to effect sales of these shares is very costly, which can be in excess of value of the shares sought to be sold, and often includes requirements of legal opinions of both the selling shareholder’s counsel and the broker-dealer’s counsel, both at the expense of the selling shareholder.

Currently, broker-dealers require legal opinions of shareholders of almost all over-the-counter stocks to deposit and sell these shares, and all of these legal opinions are required to be paid for by the shareholder; and often, two legal opinions are required, one from the shareholder’s legal counsel and one from the broker-dealer’s legal counsel. This policy has been required of mostly all low priced over-the-counter shares, regardless of whether the shares have been registered with the SEC, or whether there is no legend on the stock certificate representing the shares and always if the shares are designated as “restricted securities.” Larger, national broker-dealers will generally not even trade these securities. The high cost of these types of legal opinions is often more than the value of the shares sought to be sold, and the process can take two to three weeks or more. Accordingly, shareholders with limited shares of low priced stocks will be unable to economically sell their shares, regardless of whether an “established trading market” for the shares exists, and if they could sell their shares, the required selling process will inhibit their ability to sell the shares when they desire to sell their shares.

Because we became public by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.

Because we became public through a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. Moreover, no assurance can be given that brokerage firms will want to conduct capital raises on our behalf, presently or in the future.

Our investors’ ownership in the Company may be diluted in the future.

In the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests of our present shareholders. We expect to need to issue a substantial number of shares of our common stock or other securities convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, raising additional capital in the future to fund our operations and other business purposes. We currently offer incentive stock options for our officers, directors and certain significant employees and may extend this policy to others. Additional shares of common stock issued by us in the future will dilute an investor’s investment in the Company.

Directors, executive officers, principal shareholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that our shareholders do not consider to be in their best interests.

As of the date of this Annual Report, D. Sean McEwen, our Chairman and Chief Executive Officer, beneficially owns approximately 49.9% of our issued and outstanding shares of common voting stock by reason of his personal holdings and the irrevocable proxies granted to him under the Apeiron Systems Merger Agreement Shareholder Voting Agreement. This percentage also includes certain vested Incentive Stock Options that can be exercised within 60 days of the date of this Annual Report, all of which options are described under the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part IV, Item 11, below, and a portion of which are reflected in Mr. McEwen’s beneficial ownership of shares of our common stock under the caption “Security Ownership of Certain Beneficial Owners and Management” in Part III, Item 12 hereof. As a result, personal ownership and various other provisions of this Shareholder Voting Agreement, Mr. McEwen may have the ability to control the election of our board of directors, the outcome of issues requiring approval by our shareholders and other corporate actions until December 31, 2020, when this Shareholder Voting Agreement expires, and beyond. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company that may be favored by other shareholders; and could prevent transactions in which shareholders might otherwise recover a premium for their shares over current market prices. This concentration of ownership and influence in management and board decision making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock, whether by making a tender offer or attempting to obtain control of our Company.  For a more detailed discussion of the provisions of the Shareholder Voting Agreement, see the heading “Apeiron Systems Merger Shareholder Voting Agreement” of the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results in a timely manner or detect fraud. Consequently, investors could lose confidence in our financial reporting, and this may adversely affect any trading price of our common stock that may then exist.

We must maintain effective internal controls to provide reliable financial reports and to detect and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as would be possible with an effective control system in place. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist and may in the future discover areas of our internal controls that need improvement.

We have been assessing our internal controls to identify areas that need improvement and we are continually in the process of evaluating our internal controls. Failure to implement changes to our internal controls that we may deem to be ineffective or any others that we may identify as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence could have a substantial negative affect on the trading price of our common stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2:  PROPERTIES

We do not own any property.

Through our wholly-owned subsidiary, KonaTel Nevada, we have a lease on the following property:

Our Dallas, Texas and Principal Executive Offices, consisting of approximately 3,000 square feet and located at 13601 Preston, Road, # E816, Dallas, Texas 75240, under a lease that commenced on January 1, 2019, and expires on December 31, 2020, at a monthly rent of $3,941 for 2019 and $4,062 for 2020.

Through our wholly-owned subsidiary, IM Telecom, we have a lease on the following property:

Our Tulsa, Oklahoma retail storefront and office consisting of approximately 1,100 square feet and located at 3401 East Admiral Place, Tulsa, Oklahoma 74115, under lease that commenced February 1, 2019, and expires on December 31, 2021, at monthly rent of $950 for 2019 and $1,000 for 2020 and 2021.

Through our wholly-owned subsidiary, Apeiron Systems, we have leases on the following properties:

Our Los Angeles, California office is subleased from M2M consisting of approximately 1,800 feet located at 5301 Beethoven St, #170, Los Angeles, CA 90066 and expires March 1, 2020, at a monthly rent of $3,846.

Our Johnstown, Pennsylvania office consisting of approximately 1,500 square feet and located at 112 Lindberg Ave, Johnstown, Pennsylvania 15905, under a lease that commenced on April 15, 2019 and on a month to month term, at a monthly rent of $1,073.

ITEM 3:  LEGAL PROCEEDINGS

We are not party to any material legal proceeding.

ITEM 4:  MINE SAFETY DISCLOSURES

None; not applicable.

PART II

ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the OTC Pink Tier of the OTC Markets under the symbol “KTEL.” No assurance can be given that any market for our common stock will develop or be maintained.

For any market that develops for our common stock, the sale of shares of our common stock comprised of “restricted securities” pursuant to Rule 144 of the SEC, any other available exemption from registration under the Securities Act or by registration under the Securities Act by members of management or others, including any person to whom any such securities may be issued in the future, may have a substantial adverse impact on any such public market.  For information regarding the requirements of resales under Rule 144, see the heading “Rule 144” of this Item below.

On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests. This action was approved by the requisite members of M2 on April 9, 2018. The KonaTel Merger Shareholder Voting Agreement and the KonaTel Merger Lock-Up/Leak-Out Agreement that previously applied to these shares have expired by their respective terms.

The common stock that can be acquired under vested and unvested Incentive Stock Options that we have granted may also have an impact on any public trading market in our common stock. See the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part II, Item 11, for a description of all of our outstanding Incentive Stock Options. An aggregate of 7,000,000 shares of our common stock owned respectively by Messrs. Ploude and Yanson are subject to resale under a Lock-Up/Leak-Out Agreement. See the headings “Lock-Up/Leak-Out Agreement” and “Apeiron Systems Merger Lock-Up/Leak-Out Agreement” of the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof. The expiration of this Lock-Up/Leak-Out Agreement on December 31, 2020, could also have an adverse affect on any public market that evolves in our common stock.

Also, see the heading “Risk Related to Our Common Stock” of the caption “Risk Factors” in Part I, Item 1A herein.

The following table sets forth, for the periods indicated over the last two (2) years, the high and low closing bid quotations, as reported by the OTC Markets, and represents prices between dealers, does not include retail markups, markdowns or commissions, and may not represent actual transactions:

These prices were obtained from OTC Markets and do not necessarily reflect actual transactions, retail markups, mark downs or commissions.

Rule 144

The following is a summary of the current requirements of Rule 144:

Holders

We currently have 577 shareholders of record, not including an indeterminate number of shareholders who may hold their shares in “street name.”

Dividends

We have not declared any cash dividends with respect to our common stock, and do not intend to declare dividends in the foreseeable future. All future revenues are anticipated to be utilized for research, development and the furtherance of our business plan and our technologies, products, services and platform, and accordingly, it is highly unlikely that you will receive any dividends from us in the near future, if ever.

There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

13,500,000 Shares-D. Sean McEwen-KonaTel Merger (December 18, 2017).

3,850,000 Incentive Stock Option Agreement grants under the KonaTel Merger (December 18, 2017).

300,000 Incentive Stock Option Agreement grants to newly appointed directors (February 12, 2018).

4,750,000 Shares-Private Placement at $0.20 per share for an aggregate of $950,000 (Effective March 8, 2018).

1,000,000 Shares-Private Placement at $0.20 per share for an aggregate of $200,000, $100,000 in cash and $100,000 in settlement of an advance in that amount from this subscriber (Effective April 13, 2018).

750,000 Shares-Private Placement at $0.20 per share for an aggregate of $150,000 (Effective November 19, 2018).

7,000,000 Shares-Apeiron Systems Merger (Messrs. Ploude [6,300,000 shares] and Yanson [700,000 shares]) (Effective December 31, 2018.

100,000 Incentive Stock Option Agreement grant to newly appointed director (October 28, 2018).

500,000 Incentive Stock Option Agreement grant to Trevan Morrow (January 31, 2019), which were cancelled under the Morrow Settlement Agreement filed as an Exhibit in Part IV, Item 15.

These securities were offered and sold pursuant to an exemption from registration under the Securities Act provided in Section 4(a)(2) thereof, and/or pursuant to Rule 506(b) of Regulation D promulgated by the SEC under the Securities Act.

Use of Proceeds of Registered Securities

None; not applicable.

Purchases of Equity Securities by Us and Affiliated Purchasers

None; not applicable.

ITEM 6:  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

When used in this Annual 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 Annual 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 also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.

Overview of Current and Planned Business Operations

We are a cellular reseller of wholesale priced minutes, text and data, including traditional post-paid cellular services, primarily operating on mobile networks of major communications companies like Verizon and AT&T; and we are a Sprint authorized agent of cellular services and products that principally include business to business and business to customer products and services, mostly B2B Mobile Service and Internet of Things or wireless data. During the coming year, we plan to devote additional sales resources to IoT, and we have direct wholesale data agreements with Verizon and AT&T to provide us with our required wireless services. We also presently provide Lifeline Program service through a virtual eligible telecommunications carrier with a Lifeline Program license; and we own an eligible telecommunications carrier (ETC), IM Telecom. We primarily distribute all of our products and services through independent field agents.

Comparison of the Year Ended December 31, 2019, to the Year ended December 31, 2018

Results of Operations

For the year ended December 31, 2019, we had $9,173,520 in revenues from operations compared to the year ended December 31, 2018, where we had $9,415,139 in revenue from operations. The cost of revenue for the year ended December 31, 2019, was $6,303,053, compared to $7,570,350 for the year ended December 31, 2018. We had a gross profit of $2,870,467 for the year ended December 31, 2019, and $1,844,789 for the year ended December 31, 2018.

For the year ended December 31, 2019, and the year ended December 31, 2018, total operating expenses were $4,515,662 and $3,294,524, respectively, for an increase of $1,221,138 in 2019.

For the year ended December 31, 2019, non-operating expenses were $55,270 compared to $38,945 for the year ended December 31, 2018. Other income and gain on sale of assets were $17,061 for the year ended December 31, 2019, compared to $327,480 for the year ended December 31, 2018.

For the year ended December 31, 2019, and the year ended December 31, 2018, we had a net loss from operations of $1,584,904 and $1,161,200, respectively.

In comparing our Statements of Operations between the years ended December 31, 2019, and 2018, we had declining revenue and increased expenses. The decrease of revenue was caused by the selling of our Johnstown NY operations, which has become our customer. The expense increase was due to the acquisitions of Apeiron Systems and IM Telecom and the selling of Johnstown NY operations and expense reduction measures involving staffing. The sale of the Johnstown NY operations resulted in a gain on sale of assets of $318,257 in 2018.

Liquidity and Capital Resources

As of December 31, 2019, we have $ 191,474 in cash and cash equivalents on hand.

We anticipate future losses in the development of our business.  The ability to continue as a business is dependent upon our generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next (6) six months with existing cash on hand and issuance of equity securities.  There is no assurance funds will continue to be available through these methods of financing operations until the Company begin generating satisfactory revenue from operations.

In comparing liquidity between the years ending December 31, 2019, and 2018, cash and short-term assets decreased by 51.8%. The decrease was caused through continuing focus on products that are paid in advance, which has resulted in a decrease in accounts receivable of 64.7%. Liabilities and total overall debt showed a 0.03% decrease in 2019 when compared to 2018. Stockholder debt had a net increase with an advance from a shareholder and payments made on the advances. The revolving lines of credit were decreased through payments in 2019. Going forward, equity investment and growth of new services is expected to provide the liquidity for our business.

Liquidity was also strained by the acquisitions and increased costs caused through the diversification of services. The expense increase that helped cause the negative liquidity is discussed above in the comparison of our Statement of Operations for the years ended December 31, 2019, and 2018.

Overall, the current ratio (current assets divided by our current liabilities) was .36 and .70 as of December 31, 2019, and 2018, respectively. Working capital decreased by 107.9%.

Cash Flow from Operations

During the year ended December 31, 2019, and the year ended December 31, 2018, cash flow provided by (used in) operating activities was $176,678 and $(1,011,453), respectively.  Cash flows provided by (used in) operating activities were primarily attributable to the Company’s net loss of $1,584,904 and $1,161,200 for the years ended December 31, 2019, and 2018, respectively.

Cash Flows from Investing Activities

During the year ended December 31, 2019, and the year ended December 31, 2018, cash flow provided by (used in) investing activities was $58,603 and ($144,251), respectively. The cash used in investing activities during 2019 were created through cash received through acquisitions and cash provided through the sale of assets.

Cash Flows from Financing Activities

During the year ended December 31, 2019, and the year ended December 31, 2018, cash flow provided by (used in) financing activities was ($100,317) and $1,118,064, respectively. The funds provided by financing were comprised of payment on operating lease liabilities, $69,380 for 2019 and $0 for 2018; repayments of a revolving line of credit, $91,142 for 2019 and $49,761 for 2018; advances made by a shareholder of $200,000 in 2019 and $100,000 in 2018; repayments to related parties of $139,795 for 2019 and $132,175 for 2018; and proceeds from issuance of common stock and contributions of $0 for 2019 and $1,200,000 for 2018.

Going Concern

As the Company did not generate net income during the years ended December 31, 2019, and 2018, the Company has been dependent upon equity financing to support its operations. In addition to losses of $1,584,904 and $1,161,200 for the years ended December 31, 2019, and 2018, respectively, the Company has experienced cash provided by (used in) $176,678 and $(1,011,453), respectively. The accumulated deficit as of December 31, 2019, is $5,896,977.  

The Company has ameliorated any substantial doubt issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017; the acquisition of Apeiron Systems; receiving cash investments through the private placement of shares of our common stock; and revenues from the growth of our Virtual ETC program, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings.

As a result of the sale of assets to Telecon Wireless, the Company’s irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount was reduced to $213,000 from $263,000. The letters of credit serve as collateral and security for various resale contracts the Company has with their suppliers.

Off-Balance Sheet Arrangements

The Company entered into an off-balance sheet arrangement as a result of the purchase of Apeiron Systems. The former Apeiron Systems stockholders have a $1.00 “Guaranteed Value” if the Company’s common stock trading price does not reach or exceed $1.00 per share over a ten (10) consecutive day period between December 31, 2020, and ending on December 31, 2021. If the share price is not reached, the Company shall issue to the Apeiron Systems stockholders for each such share of the Company’s common stock that is equal to the number of “Qualifying Shares” multiplied by the difference between the Guaranteed Value and the highest “Calculated Value” achieved during the “Valuation Period.” See Section 5.10 of the Apeiron Systems Merger Agreement that was filed as an Exhibit to the Company’s 8-K Current Report dated December 31, 2018, and filed with the SEC on December 31, 2018, and which is accessible by Hyperlink in Part IV, Item 15.

Critical Accounting Policies and Estimates

Use of Estimates

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. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the website and property and equipment, valuation of warrant and beneficial conversion feature debt discounts, valuation of share-based payments and the valuation allowance on deferred tax assets.

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments and Fair Value Measurements

We measure their financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses escrow liability and short-term loans the carrying amounts approximate fair value due to their short maturities.

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

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

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

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

Leases

In February 2016, the FASB updated the accounting guidance related to leases. The most significant change in the updated accounting guidance requires lessees to recognize lease assets and liabilities on the balance sheet for all operating leases with the exception of short-term leases. The standard also expands the disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. For a lessee, the recognition, measurement and presentation of expenses and cash flows arising from a lease did not significantly change from previous guidance. We adopted the updated guidance on January 1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the updated guidance. In addition, as permitted under the transition guidance within the new standard, prior scoping and classification conclusions were carried forward for leases existing as of the adoption date.

Upon adoption, we recorded $151,471 for operating lease assets and liabilities, which includes the impact of fair value adjustments, prepaid and deferred rent.

Revenue Recognition

We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services. We account for these revenues under Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” (Topic 606), which we adopted on January 1, 2018, using the modified retrospective approach. This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard U.S. GAAP. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service.. Revenue from these services is generally recognized monthly as the services are provided. Such revenue is recognized based on usage, which can vary from month to month or at a contractually committed amount, net of credits or other billing adjustments. Advance billings for future service in the form of monthly recurring charges are not recognized as revenue until the service is provided.

Stock-Based Compensation

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

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

Income Taxes

We account for income taxes in accordance with FASB ASC 740, “Income Taxes”.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary differences are expected to be recovered or settled.

The effect of a change in tax rules on deferred tax assets and liabilities is recognized in operations in the year of change. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.

Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return.  We had no liability for uncertain tax positions as of December 31, 2019, and 2018. Interest and penalties, if any, related to unrecognized tax benefits would be recognized as interest expense. We do not have any accrued interest or penalties associated with unrecognized tax benefits, nor was any significant interest expense recognized during the years ended December 31, 2019, and 2018.

On December 22, 2018, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%.  In addition to applying the new lower corporate tax rate in 2019 and thereafter to any taxable income we may have, the legislation affects the way we can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax assets recorded on our balance sheet.  Given that the deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the Company’s financial position and net loss. However, if and when we become profitable, we will receive a reduced benefit from such deferred tax assets. Had this legislation passed prior to our December 31, 2019, fiscal year-end, the effect of the legislation would have been a reduction in deferred tax assets and the corresponding valuation allowance.

Loss Per Share

We follow ASC Topic 260 to account for the loss per share. Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.  As the Company has incurred losses for the years ended December 31, 2019, and 2018, dilutive loss per share is the same as loss per share.

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 305 of SEC Regulation S-K provides that certain registrants are required to categorize market risk sensitive instruments into instruments entered into for trading purposes and instruments entered into for purposes other than trading purposes. Within both the trading and other than trading portfolios, separate quantitative information shall be presented, to the extent material, for each market risk exposure category (i.e., interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market risks, such as equity price risk). These requirements are not applicable to smaller reporting companies under subsection (e) thereof.

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ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

KONATEL, INC.

FINANCIAL STATEMENTS

December 31, 2019, and 2018

TABLE OF CONTENTS

KONATEL, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

KONATEL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 

The accompanying notes are an integral part of these consolidated financial statements.

KONATEL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

The accompanying notes are an integral part of these consolidated financial statements.

KonaTel, Inc.

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these consolidated financial statements.

KONATEL, INC.

Notes to Consolidated Financial Statements

 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview of Company

KonaTel Nevada (as defined below) was organized under the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business of a full-service MVNO (Mobile Virtual Network Operator) provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets.

KonaTel Inc., formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada sub S-Corporation (“KonaTel Nevada”), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly-owned subsidiary.

On December 31, 2018, we acquired Apeiron Systems, Inc., a Nevada corporation d/b/a “Apeiron” (“Apeiron Systems”), which is also our wholly-owned subsidiary. Apeiron Systems was organized in 2013 and is an international hosted services CPaaS (“Communications Platform as a Service”) provider that designed, built, owns and operates its private core network, supporting a suite of real-time business communications services and Applications Programming Interfaces (“APIs”). As an Internet Telephony Service Provider (“ITSP”), Apeiron Systems holds a Federal Communications Commission (FCC) numbering authority license. Some of Apeiron Systems’ hosted services include SIP/VoIP services, SMS/MMS processing, BOT integration, NLP (“Natural Language Processing”), ML (“Machine Learning”), number services including mobile, toll free and DID landline numbers, SMS to Email services, Database Dip services, SD-WAN, voice termination, and numerous API driven services including voice, messaging, and network management.

On January 31, 2019, we acquired IM Telecom, an Oklahoma limited liability company, d/b/a Infiniti Mobile, (“Infiniti Mobile”) which became our wholly-owned subsidiary. Infiniti Mobile is an FCC licensed ETC (“Eligible Telecommunications Carrier”) and is one of 22 FCC licensed carriers to hold an FCC approved Lifeline Compliance Plan in the United States. Under the Lifeline program, Infiniti Mobile is currently authorized to provide government subsidized mobile telecommunications services to eligible low-income Americans currently in eight (8) states.

Basis of Presentation

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

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

Basis of Consolidation

The consolidated financial statements for the year ended December 31, 2019, include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and Infiniti Mobile (February through December). The consolidated balance sheet as of December 31, 2018, includes the Company and the wholly-owned corporate subsidiaries, KonaTel Nevada and Apeiron Systems. The consolidated statements of operations, cash flows, and stockholders’ equity (deficit) for the year ended December 31, 2018, include the Company and the wholly-owned corporate subsidiary, KonaTel Nevada. Aperion Systems was acquired on December 31, 2018. All significant intercompany transactions are eliminated.

Cash and Cash Equivalents

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

Trade Accounts Receivable

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

Allowance for Doubtful Receivables

The allowance for doubtful receivables is determined by management based on customer credit history, specific customer circumstances and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. As of December 31, 2019, and 2018, management has determined that no allowance for doubtful receivables is necessary.

Note Receivable

The Company entered into an Assets Sale Agreement with Telecon Wireless Resources, Inc. (the “Telecon Wireless Agreement”), with an effective date of July 31, 2018. As part of the Agreement, the Company agreed to hold a one (1) year note of $100,000 to be paid in 12 payments of $8,333. As of December 31, 2019, the receivable was paid in full. The note in the Telecon Wireless Agreement did not reference an interest rate. The note was being recorded with an implied interest rate of 5.00%.

Inventory

Inventory consists primarily of the cost of cellular phones and cellular accessories. Inventory is reported at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method. Due to the sale of the assets in July 2018, inventory is minimal as of December 31, 2019.

Due to the rapidly changing technology within the industry, inventory is evaluated on a regular basis to determine if any obsolescence exists. As of December 31, 2019, and 2018, the allowance for inventory obsolescence was $0.

Property and Equipment

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

The Company recognizes impairment losses for long-lived assets whenever changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Management has concluded that no impairment reserves are required as of December 31, 2019, and 2018.

Intangible Assets – Long-Lived Assets

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

Intangible assets consist of customer lists, licenses and software arising from acquisitions which are amortized on a straight-line basis over three (3) years, their estimated useful lives.

Other Intangibles

The Company accounts for other intangibles in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During 2019, KonaTel, through the acquisition of IM Telecom, recorded, at fair market value, a FCC License in the amount of $634,251. Other Intangible Assets are not amortized. As of December 31, 2019, there is no impairment of the value of the license.

Other Assets

Other Assets represent items classified as long-term assets in accordance with the Statement of Financial Accounting Standards ASC 210-10-45. Other Assets include vendor deposits and security deposits that the Company is required to maintain.

Customer Deposits

Before entering into a contract with a sub-reseller customer, the Company requires the customer to either secure a formal letter of credit with a bank or require a certain level of cash collateral deposits from the customer. These collateral requirements are determined by management and may be adjusted upward or downward depending on the volume of business with the sub-reseller customer, or if management’s assessment of credit risk for a sub-reseller customer would change.

The Company held $18,745 and $28,854 in collateral deposits from various sub-reseller customers at December 31, 2019, and 2018, respectively. Such amounts represent collateral received from the sub-resellers in order to contract with the Company. The related contracts have an option to terminate within a period of less than one (1) year, and accordingly, these collateral deposits are classified as current liabilities in the accompanying balance sheet.

Fair Market Value of Assets

The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, deposits received from customers for receivables and short-term loans the carrying amounts approximate fair value due to their short maturities. Long-term assets purchased through acquisitions are valued at the Fair Market Value of the asset at the time of acquisition. The Fair Market Value is based on observable inputs on assets in active market- places for fixed assets, and estimations and assumptions developed by us for Other Intangibles.

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

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

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

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

Leases

In February 2016, the FASB updated the accounting guidance related to leases. The most significant change in the updated accounting guidance requires lessees to recognize lease assets and liabilities on the balance sheet for all operating leases with the exception of short-term leases. The standard also expands the disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. For a lessee, the recognition, measurement and presentation of expenses and cash flows arising from a lease did not significantly change from previous guidance. We adopted the updated guidance on January 1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the updated guidance. In addition, as permitted under the transition guidance within the new standard, prior scoping and classification conclusions were carried forward for leases existing as of the adoption date. See NOTE 4.

Upon adoption, we recorded $151,471 for operating lease assets and liabilities, which includes the impact of fair value adjustments, prepaid and deferred rent.

Revenue Recognition

Services revenues are generated from cellular and telecommunication services. The revenue is derived from wholesale and retail services. Telecommunications and mobile telecommunication services include network platforms, voice, data, and text services. The Company recognizes revenue as telecommunications and mobile services are provided in service revenue. Telecommunications and mobile services are billed and paid on a monthly basis. Services are billed and paid on a monthly basis. These bills include an amount for the monthly recurring charge and a usage charge.

We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services. We account for these revenues under Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” (Topic 606), which we adopted on January 1, 2018, using the modified retrospective approach. This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard U.S. GAAP. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Deferred Revenue

Services for cellular and telecommunication services have a monthly recurring charge that is billed in advance. This charge covers a 30 or 31- day period. This charge is deferred for the period in which it was received and recorded as revenue at the conclusion of the 30 to 31-day period. Costs, mainly from outside providers, associated with the deferred revenue are recognized in the same period as revenue is recognized.

Cost of Revenue

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

Advertising

Costs for advertising products and services, as well as other promotional and sponsorship costs, are charged to Selling, general and administrative expense in the periods in which they are incurred.

Stock-based Compensation

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

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

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In 2019, KonaTel issued stock-based options to key employees of the company. Implementation of the aforementioned standard had no effect on the issuance of the 2019 options.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The benefits of uncertain tax positions are recorded in the Company’s Consolidated Financial Statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. The Company records interest and penalties related to unrecognized tax benefits in interest expense in the Company’s Consolidated Statements of Operations.

Net Loss Per Share

Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. As of December 31, 2019, there are 3,800,000 potentially dilutive common shares. As of December 31, 2018, there were 4,250,000 potentially dilutive common shares. The dilutive common shares are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

Concentrations of Credit Risk

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

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

The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of December 31, 2019, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from three (3) customers in the amounts of $89,078, or 24.4%, $77,662, or 21.3% and $48,475, or 13.3%. As of December 31, 2018, the Company had a significant concentration of receivables from one (1) customer in the amount of $496,252 or 45.3%. These receivables represented 59% and 45% of the total receivables for the years ended December 31, 2019, and 2018, respectively.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major customers and cellular providers. For the year ended December 31, 2019, the Company had one (1) cellular provider that accounted for $3,728,456, or 39.6% and one (1) customer that accounted for $2,200,761, or 23.4%, of the revenue. For the year ended December 31, 2018, the Company had one (1) cellular provider that accounted for $4,679,647, or 49.7%, of the revenue. The loss of a major customer would create a very negative impact on the company, which would require the company to make significant changes to reduce expenses.  

Segment Reporting

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

The reportable segments consist of Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC.

Effect of Recent Accounting Pronouncements

In February 2016, the FASB updated the accounting guidance “Accounting Standards Update (ASU) No. 2016- 02, Leases (Topic 842),” related to leases. The most significant change in the updated accounting guidance requires lessees to recognize lease assets and liabilities on the balance sheet for all operating leases with the exception of short-term leases. The standard also expands the disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. For a lessee, the recognition, measurement and presentation of expenses and cash flows arising from a lease did not significantly change from previous guidance. We adopted the updated guidance on January 1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the updated guidance. In addition, as permitted under the transition guidance within the new standard, prior scoping and classification conclusions were carried forward for leases existing as of the adoption date.

Upon adoption, we recorded $151,471 for operating lease assets and liabilities, which includes the impact of fair value adjustments, prepaid and deferred rent. The Company currently has four equipment operating leases and one Property lease; and the Property lease expires in April 2020. The Company has determined that this pronouncement will not have a material impact on the financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

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

Emerging Growth Company

The Company is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

NOTE 2 – SIGNIFICANT TRANSACTIONS

August 2018 Transaction

On August 9, 2018, the Company entered into an Asset Purchase Agreement with Telecon Wireless Resources, Inc., a New York corporation (the “Telecon Wireless”); and KonaTel Nevada, our wholly-owned subsidiary, whereby KonaTel Nevada sold to Telecon Wireless various assets, including furniture, fixtures, equipment, account receivable and customer lists, among other assets, which were utilized in the Company’s wireless services and telecommunications operations conducted under the name “Telecon Wireless” in its retail store located in Johnstown, New York, for a purchase price of approximately $406,017, which included $266,043 in cash, a note receivable of $100,000 and a debt of $39,974.

December 2018 Transaction – Apeiron Systems Acquisition

Dated and effective as of December 31, 2018, the Company and its newly formed acquisition subsidiary entered into an Agreement and Plan of Merger with Apeiron Systems (the “Apeiron Systems Merger Agreement”). The Company exchanged 7,000,000 shares of its common stock for all of the outstanding securities of Apeiron Systems. Apeiron Systems became a wholly-owned subsidiary (the “Apeiron Systems Merger”).  In connection with the closing of the Apeiron Systems Merger, the Company entered into (i) Employment Agreements; and (ii) a Lock-Up/Leak-Out Agreement, which govern the resale of the Company’s shares each Apeiron Systems shareholder received. Additionally, a Shareholder Voting Agreement with a two (2) year term between us, D. Sean McEwen, our President and Chairman of the Board of Directors and the Apeiron Systems shareholders, was executed and delivered by these parties as a condition of the closing.

The Apeiron Systems shareholders also have a $1.00 “Guaranteed Value” of the “KonaTel Shares” they received under the Apeiron Systems Merger Agreement, which indicates, subject to certain enumerated conditions, that in the event that the KonaTel common stock does not reach an average closing price equal to or exceeding $1.00 per share over any period of ten consecutive Trading Days during the period commencing on December 31, 2020, and ending on December 31, 2021, as quoted by the applicable Trading Market on which the KonaTel shares of common stock are listed or quoted for trading, KonaTel shall issue to the Apeiron Systems shareholders for each such share of the KonaTel shares of common stock continuously owned and held of record in the respective names of the Apeiron Systems shareholders during the Valuation Period the number of shares of KonaTel common stock that is equal to the number of Qualifying Shares multiplied by the difference between the Guaranteed Value and the highest Calculated Value achieved during the Valuation Period.

There was also a “Net Working Capital” computation that was intended to provide sufficient cash resources to operate Apeiron Systems for a period of not less than ninety (90) days, with the understanding that at the end of such ninety (90) period, the parties will review and re-compute the “New Working Capital” computation, with the further understanding that any overage of the estimate shall be paid to the Apeiron Systems shareholders and any deficit shall be paid by the Apeiron Systems shareholders to us. As of this date, the parties have made this re-computation. See NOTE 12.

The total purchase price was $2,450,000. The purchase included the issuance of 7,000,000 shares of the Company’s common stock in exchange for all the outstanding common shares of Apeiron Systems common stock. The purchase price was derived and based on the fair market value of the 7,000,000 shares at the December 31, 2018, common stock price of $.35 per share. The acquisition provides the Company with expansion and diversification within the telecommunications industry. Apeiron Systems brings business networking and telecommunications to the Company that has significant business in the wireless telecommunications industry. The combination allows the Company to share customers and provide complete and vertical integrations to the customers.

Acquisitions and mergers are/were a major factor towards the diversification of services provided by the Company. These mergers created a move from a lower margin product mix that relied on quantity to a more profitable higher margin product mix in a less competitive marketplace. The newly acquired products and services provide a framework for future growth and improvement.

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

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the years ended December 31, 2018:

January 2019 Transaction – IM Telecom Acquisition

Effective February 7, 2018, we entered into an Agreement for the Purchase and Sale of Membership Interest (the “PMSI”) dated as of February 5, 2018, with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom from its sole owner, Trevan Morrow.  The principal asset of IM Telecom was a “Lifeline Program” license (a Federal Communications Commission [the “FCC”] approved Compliance Plan), the transfer of ownership of required prior approval of the FCC.  Following the FCC approval of the transfer of the Lifeline Program license to us on October 23, 2018, the PSMI was completed on January 31, 2019.  At the closing, we also engaged Mr. Morrow as an independent consultant for ninety (90) days in consideration of $100 and granted him an incentive stock option to purchase 500,000 shares of our common stock at an exercise price of $0.20 per share. The incentive stock option to purchase 500,000 shares to Mr. Morrow was cancelled as discussed in NOTE 8.

The purchase price of $617,920 consisted of payments of debt and accounts payable made by the company on behalf of IM Telecom from the PMSI effective date of February 7, 2018, until January 31, 2019, the closing date. The purchase price allocation included the FCC license valued at $634,252, cash of $14,318, accounts receivable of $123,959, prepaid other assets of $2,400, furniture and equipment of $1,309. As part of the transaction, the Company also agreed to assume accounts payable of $24,271.

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

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the years ended December 31, 2019, and 2018, as if IM Telecom and Apeiron Systems had been acquired on January 1, 2018:

NOTE 3 – PROPERTY AND EQUIPMENT

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

Depreciation and amortization amounted to $30,642 and $27,967 for the years ended December 31, 2019, and 2018, respectively. Depreciation and amortization expense are included as a component of operating expenses in the accompanying statements of operations.

NOTE 4 – RIGHT-OF-USE ASSETS

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

Depreciation amounted to $72,888 for the year ended December 31, 2019. Depreciation expense is included as a component of operating expenses in the accompanying statements of operations.

The Company has right-of-use assets through leases of property under three non-cancelable leases with terms in excess of one (1) year. The current lease liabilities expire September 1, 2020, January 1, 2021, and December 1, 2021. Lease payables as of December 31, 2019 are $82,090. Future lease liability payments under the terms of these leases are as follows:

The weighted average term of the right-to-use leases is 14.5 months recorded with a weighted average discount of 2.84%.

The Company also leases two office spaces on a month-to-month basis. Total lease expense for the year ended December 31, 2019, and 2018 amounted to $67,889 and $142,248, respectively.

NOTE 5 – INTANGIBLE ASSETS

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

Amortization expense amounted to $886,256 and $100,707 for the years ended December 31, 2019 and 2018, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Amortization expense is expected to be as follows:

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

The 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 License was acquired through an acquisition. The fair market value of the License as of December 31, 2019, was $634,252.

NOTE 6 – LINES OF CREDIT

The Company has two lines of credit with a bank which provide aggregate maximum borrowing availability of $1,050,000 as of December 31, 2019, and 2018, respectively. The lines of credit are payable on demand and bear interest at a variable rate with rate ranges from 7.5% to 8.0%. Outstanding advances under these lines of credit arrangements amounted to $12,237 as of December 31, 2019, and $103,379 as of December 31, 2018. The lines of credit matured and were paid in full on January 5, 2020, and February 14, 2020.

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

NOTE 7 – AMOUNT DUE TO STOCKHOLDER

As of January 1, 2018, D. Sean McEwen was owed $191,500. This advance matured and final payment was received in October 2019.

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

During 2019, Joshua Ploude, CEO of Apeiron Systems, advanced the Company $200,000. The amount was used to provide a vendor security deposit. The note bears a 10% per annum interest rate until May 1, 2019, at which time, will increase to 12% per annum. The note had an original maturity date of July 10, 2019. The loan has been extended without a defined maturity end date. The amount due as of December 31, 2019, was $151,356.

The total amount of repayment for the years ended December 31, 2019, and 2018, to stockholders was $147,251 and $132,175, respectively.

NOTE 8 – 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 December 31, 2019, there are no legal proceedings, except the following:

On August 28, 2018, we filed a claim in AAA Arbitration against a former employee, Saul Glosser. In August 2019, the Company won an arbitration award (ratified by the court) from Mr. Glosser in the amount of $362,871 ($357,914 plus arbitrator compensation of $4,957). The award has been deemed final as Mr. Glosser has not preserved any outstanding issues for review. This matter has been settled. See NOTE 11.

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.

Regulatory Determination

On May 17, 2019, IM Telecom was notified by the United States Administrative Company (“USAC”) of an over-payment of Universal Service Fund reimbursements in the amount of $168,277. On July 25, 2019, the Company entered into a Letter of Acknowledgement with the FCC and requested a 24-month payment plan regarding the repayment of the over-payment amounts. The FCC decision regarding the payment plan request is pending and is expected before June 30, 2020. As required by the Letter of Acknowledgement requirements, IM Telecom has made a good faith down payment in the amount of 10% of the total over-payment and continues to make regular monthly payments of 1/24th of the outstanding balance pending payment plan approval. The over-payment amount was recorded as a current acquisition expense.

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

Letters of Credit

The Company maintains irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount of $225,000. The letters of credit serve as collateral and security for various resale contracts the Company has with their suppliers. The letters of credit are unused as of December 31, 2019 and 2018. The letters of credit are not considered in the financial statements.

Going Concern

As the Company did not generate net income during the years ended December 31, 2019, and 2018, the Company has been dependent upon equity financing to support its operations. In addition to losses of $1,584,904 and $1,161,200 for the years ended December 31, 2019, and 2018, respectively, the Company has experienced cash provided by (used in) operations of $176,678 and $(1,011,453), respectively. The accumulated deficit as of December 31, 2019, is $5,896,977.

 The Company has ameliorated any substantial doubt issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017; the acquisition of Apeiron Systems and IM Telecom; receiving cash investments through the private placement of shares of our common stock; and revenues from the growth of IM Telecom, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings.

Our overall goal was to increase profit margins through cost controls and selection of high margin product offerings. From 2018 to 2019 our profit margins increased from 19.6% to 31.3% respectively. Our net operations (pre-depreciation & amortization expenses) improved 49% from 2018 to 2019. While operating expenses were up by 13% we continue to streamline customer offerings to drive costs down over an extended period of time. We continue to be confident that with aggressive management and business development that we will continue to eliminate any going concern issues.

NOTE 9 – SEGMENT REPORTING

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

The reportable segments consist of Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC.

Hosted Services – This segment includes a suite of hosted CPaaS services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”), ML, mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and numerous API driven services.  Apeiron Systems developed, owns and supports its services through its dedicated national telecommunications network. Apeiron Systems provides telecommunications services to application developers, call centers and small and medium size businesses. Apeiron Systems markets these services through the Apeiron Systems website, independent sales agents, ISOs and SCOs.

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or “Internet of Things”) services. KonaTel consolidated its wholesale and retail services with Apeiron Systems’ hosted CPaaS services, providing Apeiron Systems with an expanded portfolio of mobile services to bundle with its existing services. Apeiron Systems’ mobile voice/text/data and mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers.  A wireless communications service reseller does not own the wireless network infrastructure over which services are provided to its customers.  Apeiron Systems’ mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided which can include, but is not limited to, phones, tablets, modems, routers and accessories. Apeiron Systems primarily markets its mobile services through independent sales agents and ISOs via the “Apeiron” brand.  These agents and ISOs generally market to small and medium sized businesses throughout the United States.  This type of marketing is also considered B2B (“Business to Business”) sales.

Lifeline ETC – This segment operates under its own FCC approved Compliance Plan and FCC wireless ETC designation in eight (8) states which currently include Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont and Wisconsin.  IM Telecom, operating under its Infiniti Mobile brand, currently markets its Lifeline service through its Internet presence, its storefront in Tulsa, Oklahoma and through ISOs that specialize in the distribution of Lifeline services.  These ISOs typically support teams of field agents who market directly to Lifeline eligible individuals requesting Lifeline service.  We provide phones and wireless voice/text/data service to Lifeline eligible individuals requesting Lifeline service. In some states and depending on government requirements, we may only provide voice/text service with no mobile data.

Lifeline VETC – This segment operates under the license of another ETC.  We currently market our Lifeline VETC sales through ISOs that specialize in the distribution of Lifeline services.  These ISOs typically support teams of field agents who market directly to Lifeline eligible individuals requesting Lifeline service. We provide phones and wireless voice/text/data service to Lifeline eligible individuals requesting Lifeline service. In some states and depending upon government requirements, we may only provide voice/text service with no mobile data.

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

NOTE 10 – STOCKHOLDERS’ EQUITY

Common Stock

On March 8, 2018, the Company issued 4,750,000 shares of our common stock in a private placement to “accredited investors” at $0.20 per share for an aggregate amount of $950,000. On April 16, 2018, the Company issued 1,000,000 shares of our common stock in a private placement to “accredited investors” at $0.20 per share for an aggregate amount of $200,000. On December 18, 2018, it issued 750,000 shares of our common stock in a private placement to “accredited investors” at $0.20 per share for an aggregate amount of $150,000.

Stock Compensation

The Company offers stock option equity awards to directors and key employees. Options vested in tranches and expire in five (5) years. During the year ended December 31, 2019, and 2018, the Company recorded vested options expense of $338,333 and $602,163, respectively. The option expense not taken as of December 31, 2019, is $940,496, with a weighted average term of 3.0 years.

The stock option valuation as of December 31, 2019 was computer using the Black-Scholes-Merton pricing model using a stock price of $.15.2, a strike price of $.15, an expected term of five (5) years, volatility of 246.81% and a risk-free discount rate of 1.59%. The stock option valuation as of December 31, 2018 was computed using the Black-Scholes-Merton pricing model using a stock price of $.30, a strike price of $.22, an expected term of five (5) years, volatility of 331.63% and a risk-free discount rate of 2.70%. The option expense not taken as of December 31, 2018 is $602,163 with a weighted average term of 3.9 years.

The estimated grant-fair value of stock option grants was calculated using the Black-Scholes-Merton option-pricing model using the following assumptions:

The following table represents stock option activity as of and for the year ended December 31, 2018:

In 2018, 400,000 share options were granted to four (4) members of the Board of Directors. Each member was granted 100,000 shares each.

The following table represents stock option activity as of and for the year ended December 31, 2019:

In 2019, 1,100,000 share options were granted. 500,000 share options were granted as part of the acquisition of IM Telecom. 600,000 share options were granted to key employees. During the year, 1,550,000 share options were forfeited. The forfeited options were 1,000,000 from a key employee, 500,000 from the IM Telecom acquisition amendment, and 50,000 from a board member who had resigned prior to their vesting.

NOTE 11 – INCOME TAX

For the years ending December 31, 2019, and 2018, there were no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.

The tax effect of significant components of the Company’s deferred tax assets and liabilities at December 31, 2019 and 2018, respectively, are as follows:

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Because of the historical earnings history of the Company, the net deferred tax assets for 2019 and 2018 were fully offset by a 100% valuation allowance. The total NOL as of December 31, 2019, is $2,192,257.

On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%.  In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax assets recorded on our balance sheet.  Given that the deferred tax assets are offset by a full valuation allowance, these changes did not have an impact on the Company’s financial position and net loss. However, if and when the Company becomes profitable, the Company will receive a reduced benefit from such deferred tax assets.

NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date of this filing, and with the exception of the following, no material subsequent events have occurred:

COVID-19 Pandemic

In March, 2020, the Company took measures to continue operations through stay-at-home orders related to the COVID-19 pandemic. To date, the Company has seen no significant revenue or service delivery impacts as telecommunications services are considered essential under COVID-19 Declaration of National Emergency. The Company and its subsidiaries have benefitted from the CARES Act Paycheck Protection Program and per program guidelines, we intend to use the proceeds from these loans to satisfy future payroll liabilities.

Glosser Arbitration Settlement

On August 28, 2018, we filed a claim in AAA Arbitration against a former employee, Saul Glosser, and Mr. Glosser filed a counterclaim against us. Both matters were consolidated in KonaTel, Inc. vs. Saul Glosser, Case No. 01-18-0003-2772, with the American Arbitration Association (International Center for Dispute Resolution).

In August, 2019, the Company won an arbitration award (ratified by the court) from Mr. Glosser in the amount of $357,914, together with arbitrator’s compensation of $4,957, for a total award of $362,871; and Mr. Glosser’s counterclaim was found to be without merit. The Company and Mr. Glosser entered into a Settlement Agreement and Mutual Release on February 24, 2020, pursuant to which this matter was fully settled, resolving all claims, and Mr. Glosser paid the Company $300,000.

Apeiron Systems Working Capital Settlement

On December 31, 2018, KonaTel and the shareholders of Apeiron Systems, Inc. entered into an Agreement and Plan of Merger. Section 2.2 Estimated Net Working Capital and Section 2.3 Final Settlement of that agreement provided for a method to calculate and reconcile any surplus or deficit in net working capital amounts as of December 31, 2018. On November 22, 2019, KonaTel, Apeiron Systems and the Apeiron Systems’ shareholders reached an agreement on the final surplus net working capital amount of $310,129.57 owed by Apeiron Systems to the Apeiron Systems shareholders under the Apeiron Systems Merger Agreement. The net working capital amount was deemed to be payable by Apeiron Systems to the Apeiron Systems shareholders pro rata: 90% or $279,116.91 to Joshua Ploude and 10% or $31,012.96 to Vyacheslav Yanson.

On February 14, 2020, KonaTel, on behalf of Apeiron Systems, made a partial payment of $5,000 towards the surplus net working capital balance of $31,012.96 Apeiron owed to Mr. Yanson. On March 5, 2020, KonaTel, on behalf of Apeiron Systems, paid Yanson $26,012.96, representing the final payment of the surplus net working capital balance owed to Yanson. On March 8, 2020, KonaTel, on behalf of Apeiron Systems, paid Mr. Ploude $225,000. The remaining surplus net working capital balance of $54,116.61 will be paid to Mr. Ploude on or before December 31, 2020.

Euler Hermes/Sky Phone Settlement

Between March and July 2019 IM Telecom, LLC purchased wireless handsets from Sky Phone, LLC in the amount of $192,293.34. Subsequently, a dispute arose between the parties regarding the amount of the debt, a lack of sufficient transaction documentation and problems with some of the handsets. On or about December 2019 the debt was transferred to Euler Hermes North America Insurance Company. On April 22, 2020, the parties entered into an agreement to settle the matter whereby IM Telecom agreed to pay $80,000 in monthly payments of $4,000 over 20 months. The first payment was made on May 20, 2020.

TAG Mobile Bankruptcy Settlement

On or about January 4, 2018, KonaTel received a $50,000 payment from its customer, TAG Mobile, for previous telecommunications services it provided to TAG Mobile.  On October 5, 2017 (the “Petition Date”), creditors of TAG Mobile filed an involuntary petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”).  On January 30, 2018 (the “Relief Date”), the court entered an Order for Relief in an Involuntary Case, and on February 2, 2018, the court converted TAG’s bankruptcy case to a case under Chapter 11 of the Bankruptcy Code.

Subsequently, the bankruptcy trustee and the court determined the $50,000 payment received by KonaTel fell between the Petition Date and the Relief Date and was ordered returned.  On January 20, 2020, KonaTel and the bankruptcy trustee entered into a settlement agreement whereby KonaTel would return of $15,000 of the $50,000 payment.  Per the January 20, 2020, settlement agreement, KonaTel paid a total of $15,000 on or before April 24, 2020.  The matter was resolved and subsequently dismissed by the court on April 30, 2020.

SBA Paycheck Protection Program

On April 14, 2020 the operating companies of KonTel made loan applications to participate in the Small Business Administration’s Paycheck Protection Program created as a result of the COVID-19 pandemic. On April 15, 2020, the loan applications of Apeiron Systems, IM Telecom and KonaTel Nevada were approved and loan proceeds in the amounts of $101,800, $20,900 and $186,300, respectively, was received. KonaTel intends to follow all prescribed loan forgiveness guidelines provided by our local bank and the SBA by using these loan proceeds to fund employee payrolls through the 60-day period ending on June 15, 2020.

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ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

During our two (2) most recent fiscal years, no independent accountant who was previously engaged as the principal accountant to audit our financial statements, or an independent accountant who was previously engaged to audit a significant subsidiary and on whom the principal accountant expressed reliance in its report, has resigned (or indicated it has declined to stand for re-election after the completion of the current audit) or was dismissed.

ITEM 9A:  CONTROLS AND PROCEDURES

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of the CEO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal controls over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records which in reasonable detail accurately and fairly reflect the transactions and disposition of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In evaluating the effectiveness of our internal control over financial reporting as of December 31, 2019, management used the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the criteria established by COSO, management (with the participation of the CEO and the CFO) determined that the internal controls over financial reporting are effective as of December 31, 2019, and that there are no material weaknesses in the Company’s internal controls over financial reporting as of such date.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report is not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to satisfy these requirements by providing the management’s report only.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the last fiscal quarter of our fiscal year ended December 31, 2019.

Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

ITEM 9B:  OTHER INFORMATION

None.

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PART III

ITEM 10:  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Identification of Directors and Executive Officers

Our executive officers and directors and their respective ages, positions and biographical information are set forth below.

* Messrs. Atkinson, Savage and Addington resigned their respective director/officer positions subsequent to December 31, 2019, however, prior to the date of the filing of this Annual Report. 

Background and Business Experience

D. Sean McEwen

Mr. McEwen is 58 years of age and founded KonaTel Nevada in 2014, a wireless data and voice service reseller, and currently focuses his efforts exclusively on our current and planned business operations. From 2011 to 2013, Mr. McEwen consulted with multiple international Mobile virtual network operators (“MVNOs”) in the U.S., Peru, Croatia and China. From 2010 to 2011, he served as a founding board member of One Fund, a NYSE listed (NYSE: ONEF) exchange traded fund. One Fund pioneered the “ETF of ETFs” concept, and in 2011, came to the attention of Russell Investments, known for their stock indices (i.e., the Russell 2000). Russell Investments purchased One Fund in 2011. In 2008, Mr. McEwen became a member of the venture/angel investment group, Sierra Angels (www.sierraangels.com) serving on several high-tech due diligence committees and participating in early stage funding transactions. In early 1983, after departing college prior to graduation, he co-founded Online Data Corp. Through a series of acquisitions/mergers, this company was eventually renamed “TriTech Software Systems” (www.tritech.com) “TriTech”. From 1983 to 1990, it developed custom strategic software applications for numerous businesses, including E. F. Hutton Life Insurance, Travel Lodge Hotels, Foodmaker (Jack in the Box restaurants), AT&T, UCSD’s Scripps Institute of Oceanography and Visa’s Plus Systems national ATM network.

In 1991, TriTech transformed from a custom software development firm to an enterprise software development and systems integration company specializing in mission critical public safety (e.g., police, fire, and EMS) telecom software solutions. TriTech’s flagship product, VisiCAD, was the world’s first 9-1-1 emergency dispatching system based on Microsoft technology with integrated GPS based tracking and predictive routing technology. In 1995, TriTech won the Microsoft Most Innovative Windows Application award competing against all Windows applications worldwide. In 1998, while Mr. McEwen was CEO, TriTech was named to the Inc. 500 as the 344^th fastest growing privately held company in the United States. The following year, Bill Gates cited TriTech and VisiCAD in his book Business at the Speed of Thought as an example of a mission critical Windows based telecom system utilizing GPS.

Mr. McEwen served as Vice President of TriTech from 1983 to 1988, President from 1988 to 1996, Chairman/CEO from 1996 to 2000, and finally as a member of the Board of Directors, until controlling interest was sold to Westview Capital Partners in 2006. In 2017, TriTech celebrated 34 years of continuous operation and today, with over 700 employees and over 1000 mission critical software installations across five countries, is the largest public safety software company in the world.

Brian R. Riffle

Mr. Riffle is 60 years of age and the founder of CFO Strategies LLC of Johnstown, Pennsylvania (“CFO Strategies”), an accounting firm and consulting firm, which he founded in May 2008. CFO Strategies has thirteen (13) employees; approximately 180 small business clients and approximately 650 tax clients. It provides consulting, CFO, accounting, bookkeeping, payroll and tax services, including: CFO for businesses; entire accounting department for businesses; temporary staffing for businesses; complete payroll processing; CFO consulting and small business start-up services; and prepares taxes for corporations, small businesses, non-profits and individuals. Mr. Riffle is the Managing Partner and has extensive experience in various industries, including: Chief Financial Officer, healthcare industry; telecommunications, security, manufacturing and non-profit industries experience; Chief Executive Officer in the financial services industry and healthcare; Assistant

Controller in the retail industry; Consultant in non-profit, healthcare and event management arenas; governmental treasurer and board member for over thirty (30) years; and as a college instructor at Mount Aloysius College since 1994. He is also a Certified Public Accountant (May 1987).

Robert Beaty

Mr. Beaty is 50 years old and currently the President of AGS Construction Inc., a premier reconstruction company in Denver Metropolitan area. Previously, he was the founder and CEO of Impact Telecom, a leader in the telecommunications market, which focused on delivering flexible and effective solutions to carriers, businesses and homes. Impact Telecom is comprised of a family of brands all dedicated to innovation, affordability and execution.

Mr. Beaty brings twenty-three (23) years of experience in telecommunications and managing wholesale and commercial customer bases. Prior to starting Impact Telecom in 2005, he served as the Senior Vice President of Sales for ICG Communications. He helped guide ICG through bankruptcy and was a valued member of the senior executive team tasked with growing and managing the customer base.

He earned a B.A. in Psychology from the University of Kansas and his M.B.A. in Business Administration from Webster University.

Paul LaPier

Mr. LaPier is 61 years of age and has over twenty (20) years of telecommunications experience working for Fortune 500 companies and small/medium startup companies with annual revenues ranging from $1 million to $23 billion. During this time, Mr. LaPier has held various telecommunications related positions in the areas of finance, accounting, taxation, billing and regulatory (government) compliance. Immediately prior to joining KonaTel in 2018, he served as Finance Manager-Regulatory Fees/Taxes for British Telecom Americas, Inc., from July, 2016, to November, 2018; and has served as our Vice President of Finance since joining us in November, 2018.

Prior to British Telecom, Mr. LaPier served for over four years as CFO, then President, of US Connect, LLC, a regional wireless Lifeline carrier, from May, 2012, to July, 2016. While at US Connect, Mr. LaPier oversaw all company operations and the activation/management of over fifty (50) thousand lines of Lifeline service. Previously, Mr. LaPier served as Financial Controller of dPi Teleconnect, a regional prepaid wireline provider. While at dPi, he lead the creation of the financial and reporting platform for dPi Mobile, which later became the Lifeline carrier TAG Mobile.

Mr. LaPier has held other telecommunications related management positions across several regional and national telecommunications carriers, including Director of Taxes & Regulatory Reporting at Sage Telecom, a regional CLEC (Competitive Local Exchange Carrier). While at Sage, his responsibilities included overseeing all tax compliance, end user billing for 200,000 customers and regulatory compliance across 12 states. At VarTec Telecom and Excel Telecommunications, both national providers of long-distance service across 48 states, Mr. LaPier served as Director of Taxes & Regulatory Reporting. He has also served as a telecommunications and technology tax consultant for Price Waterhouse Coopers.

Mr. LaPier holds a Bachelor of Business Administration in Accounting from The University of Texas at Austin.

Jeffrey Pearl

Mr. Pearl is 56 years of age and brings more than thirty (30) years of Telecommunications/Cloud Service Provider experience to our Board of Directors. Jeffrey has experience in both the startup environment as well as working inside of some of the larger incumbent players, both privately held as well as publicly traded companies. This experience will assist us in building out our go to market strategy, focusing both on direct sales as well as the alternative channels of distribution. His extensive sales and marketing experience, knowledge of the marketplace and personal connections in the industry are valuable to us at this stage and throughout our evolution.

Jeffrey currently is involved in running three companies:

He is currently CEO and Co-founder of OTG Consulting, which was founded May 2016. OTG Consulting is a Sales Agency formed by a group of industry leaders in order to fill a gap in the marketplace. The group assists executives of SMB and Enterprise businesses as they make the move to cloud-based services. OTG Consulting works with most Carriers and service providers delivering solutions for voice and data Communications, Internet, hosting, managed services and other cloud offerings.

He also consults under PearlCom, a consulting practice Focusing on telecom companies and Service Providers which was founded in January 2016. PearlCom offers strategic advice, providing direction on sales management, technology implementation, product pricing and Positioning, bringing his 30 plus years of experience to the table, accelerating timelines and creating efficiencies.

Jeffrey also co-founded Secure View, where he is Chief Revenue Officer and Partner, which was founded in December 2016. Secure View is focused on delivering “best in class” unified IP-based security solutions.  Its systems are designed to be more accessible and simpler to use allowing customers to feel that their security needs are 100% covered providing peace of mind allowing them to focus elsewhere in their business. Secure View offers the experience, knowledge and technical understanding coupled with relationships with the players/partners needed to move security systems to the cloud.

Prior to starting and running these three companies, Jeffrey worked at Broadsoft (recently acquired by Cisco) July 2013 to May 2016, where he successfully ran North America Carrier Sales. In this role he cultivated strong relationships with C-Level executives within the major Telcos and Service Providers utilizing BroadSoft in the US. Under his guidance, his organization also pursued new relationships with startups and providers not utilizing BroadSoft. After successfully fulfilling those duties, Jeffrey was next tasked with starting an entirely new division: Channel Acceleration, focusing on some of the largest customers in and outside the US. In this role, Jeffrey and his teams engaged with executives and sales organizations to productively assist in accelerating their efforts around “Go to Market” strategies, sales training and sales assistance in the area of Hosted VoIP and SIP Trunking services. Prior to Broadsoft Jeffrey successfully started, operated and sold two VoIP companies.

Significant Employees

We have three (3) significant employees who are not executive officers of the Company, and who are expected to make a substantial contribution to the Company’s business, Nicholas Metherd as Vice President of IM Telecom, Joshua Ploude as CEO of Apeiron Systems and Vyacheslav “Slava” Yanson as CTO of Apeiron Systems. All three (3) of these employees have Employment Agreements with our respective wholly-owned subsidiaries.

Nick Metherd

Nicholas Metherd, 36, Vice President for IM Telecom, has over fifteen (15) years of telecommunications operational management experience.  Mr. Metherd worked at T-Mobile as a Call Center Manager where he was responsible for managing over ninety (90) agents, responding to 2.3M customer inquiries per year.  He has also held operational management roles at TAG Mobile, a Lifeline Eligible Telecommunications Carrier and at RealPage (NASDAQ: RP), an American multinational corporation that provides property management software solutions for the multifamily, commercial, single-family and vacation housing industries.  While serving as VP of Operations for TAG Mobile, Mr. Metherd oversaw the operation of over 160 customer service staff in three countries, FCC compliance requirements, vendor relations, IT Development, Logistics, Sales support, and over 400,000 cellular lines of service. His experience includes Project Management Office leadership, customer service management, information technology, business optimization, data analysis, and leadership development. For IM Telecom, Mr. Metherd is responsible for executing operational support of new IM Telecom products such as Lifeline+, expansion into new states, revenue assurance and financial modeling.

Joshua Ploude

Mr. Ploude is 43 years old.  Effective December 31, 2018, Apeiron Systems and Mr. Ploude executed and delivered a 36-month Employment Agreement under which Mr. Ploude will be the Chief Executive Officer of Apeiron Systems, with the attendant duties and responsibilities outlined in his Employment Agreement, at a monthly salary of $16,667.  The Employment Agreement has customary provisions regarding trade secrets; a one (1) year covenant not to compete; confidentiality; Apeiron Systems continued ownership of intellectual property; a duty to cooperate; free, fully-paid licensing to Apeiron Systems of inventions created by Mr. Ploude that he provides or incorporates into any Employer product or system during his employment with Apeiron Systems; and an assignment of Mr. Ploude’s interest in all relevant intellectual property utilized by Apeiron Systems, among other terms and conditions.

Mr. Ploude is the President and CEO and Co-Founder of Apeiron Systems, and since 2013, he has been responsible for defining the product vision and operational strategy for Apeiron Systems.  He has worked directly with software, hardware and carrier network vendors to oversee the development of Apeiron Systems’ product set; and has also had the responsibility to work with internal software development teams to ensure Apeiron Systems’ software provides the requisite function to support product and operational initiatives.

He has also been responsible for planning and building Competitive Local Exchange Carrier (“CLEC”) and Internet Service Provider (“ISP”) facilities-based networks since 2001 and has managed 5+ “Greenfield network” (the installation of a network where there was not previously one in use) builds across all types of wire-line and wireless network infrastructures.

Mr. Ploude holds a Bachelor of Science in Political Science from UCLA and a Master of Science in Telecommunications Management from Golden Gate University.  He has had the following business experience since 1999: 1999-2005 - CTO of PCS1/Datavo - A facilities-based CLEC serving a California-wide footprint; 2006-2010 - President/CEO of Ethos Communications - A consultancy helping CLECs and ISPs with operational and technology development; 2010-2013 - CTO of TNCI - A facilities-based CLEC & ISP, serving a 48 state footprint; and 2013-Present - Co-Founder, CEO and President of Apeiron Systems.

Vyacheslav “Slava” Yanson

Mr. Yanson is 34 years old.  Effective December 31, 2018, Apeiron Systems and Mr. Yanson executed and delivered a 36-month Employment Agreement under which Mr. Yanson will be the Chief Technology Officer of Apeiron Systems, with the attendant duties and responsibilities outlined in his Employment Agreement, at a monthly salary of $12,500.  The Employment Agreement has customary provisions regarding trade secrets; a one (1) year covenant not to compete; confidentiality; Apeiron Systems continued ownership of intellectual property; a duty to cooperate; free, fully-paid licensing to Apeiron Systems of inventions created by Mr. Yanson that he provides or incorporates into any Employer product or system during his employment with Apeiron Systems; and an assignment of Mr. Yanson’s interest in all relevant intellectual property utilized by Apeiron Systems, among other terms and conditions.

Mr. Yanson is the CTO of Apeiron Systems.  As CTO of Apeiron Systems, he has overseen the development of all of Apeiron Systems software development operations, with a focus on code stewardship for sustainable operations at scale. Apeiron Systems’ business is built on an industry leading “BSS/OSS,” and Mr. Yanson has been responsible for this software platform and its integration to the network, product and external partners.  He has had the following business experience since 2006: 2006-2008 - Senior Framework Architect at Wiredrive - Cloud-media sharing platform for advertising, entertainment and consumer marketing companies; 2008-2010 - CTO of OneCubicle - Social collaboration and job search platform for college graduates; 2010-2012 - CTO and President of Killer Beaver - Software and Business Process Consultancy delivering scalable and automated solutions for clients of the company; 2012-2013 - Infrastructure Architect for Grail - news feed and video content aggregation and distribution platform; and 2013-Present - Co-Founder and CTO of Apeiron Systems.

Family Relationships

There are no family relationships between any of our officers and directors.

Involvement in Other Public Companies

Except as may be indicated above, none of our officers or directors is an “affiliate” of any other publicly held companies.

Involvement in Certain Legal Proceedings

During the past ten (10) years, none of our directors, executive officers or persons nominated to become directors or executive officers (or those in similar positions with us) has been the subject of any of the following:

(1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two (2) years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two (2) years before the time of such filing;

(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from, or otherwise limiting, the following activities:

(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

(ii) Engaging in any type of business practice; or

(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

(4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than sixty (60) days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;

(5) Such person was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;

(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

(7) Such person was the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

(i) Any federal or state securities or commodities law or regulation; or

(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29)), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Compliance with Section 16(a) of the Exchange Act

The common stock of the Company is registered under the Exchange Act, and therefore, the officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a) which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2019, and based upon a review of the filings contained in the Edgar Archives, all such required reports were believed to be timely filed.

Code of Ethics

We have adopted a Code of Ethics for our principal executive and financial officers.  See Exhibit 14 in Part IV, Item 15. We anticipate that our Code of Ethics will be updated in the near future by our current Board of Directors.

Corporate Governance

Nominating Committee

We have not established a Nominating Committee because until our closing of the KonaTel Merger, we had only one (1) director and two (2) executive officers, and we believed that we were able to effectively manage the issues normally considered by a Nominating Committee and currently believe we can do without a Nominating Committee.  

If we do establish a Nominating Committee, we will disclose our procedures in recommending nominees by our Board of Directors.

Audit Committee

We have not established an Audit Committee for the same reasons why we have not established a Nominating Committee, and a further review of this issue will no doubt be necessitated and undertaken by our management in the future.

ITEM 11:  EXECUTIVE COMPENSATION

All Compensation

Our Chief Executive Officer will be compensated according to the terms of his Employment Agreement that was filed as an Exhibit to our 8-KA-1 Current Report dated November 15, 2017, filed with the SEC on December 20, 2017, which may be accessed by Hyperlink in Part IV, Item 15 hereof, and which is discussed below under the heading “Employment Agreement of D. Sean McEwen” of this Item. There are no other employment contracts, compensatory plans or arrangements, including payments to be received from us with respect to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company. However, see the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part III, Item 11 hereof.

Summary Compensation Table