KonaTel, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to____________

Commission File No. 001-10171

KonaTel, Inc.

(Exact name of the issuer as specified in its charter)

500 N. Central Expressway, Ste. 202

Plano, Texas 75074

(Address of Principal Executive Offices)

214-323-8410

(Registrant Telephone Number)

The Registrant does not have any securities registered pursuant to Section 12(b) of the Exchange Act.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No o

Indicate by check mark whether the Registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

Our website is www.konatel.com.

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:

References

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

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Quarterly Report completely, and it should be read and considered with all other reports filed by us with the United States Securities and Exchange Commission (the “SEC”) that are contained in the SEC Edgar Archives. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

KONATEL, INC.

FORM 10-Q

September 30, 2021

INDEX

PART I - FINANCIAL STATEMENTS

September 30, 2021

Table of Contents

KonaTel, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

Common Shares

Additional Paid-in Capital

Accumulated Deficit

KonaTel, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview of Company

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

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

On December 31, 2018, we acquired Apeiron Systems, Inc., a Nevada corporation d/b/a “Apeiron” (“Apeiron” or “Apeiron Systems”), which is also our wholly-owned subsidiary. Apeiron was organized in 2013 and is an international Hosted Services CPaaS (“Communications Platform as a Service”) provider that designed, built, owns and operates its national private core network, supporting a suite of business communications services all accessible via proprietary Applications Programming Interfaces (“APIs”). As an Internet Telephony Service Provider (“ITSP”), Apeiron holds a Federal Communications Commission (“FCC”) numbering authority license. Some of Apeiron’s Hosted Services include Voice over IP (“VoIP”), cellular and Over-The-Top (“OTT”) telephony, SMS/MMS messaging and broadcast services, numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording, and other services through local, toll-free and international phone numbers. Supported by its national redundant network, Apeiron also provides public and private IP network services including MPLS (Multiprotocol Label Switching), Dedicated Internet and LTE Wireless WAN solutions. Apeiron’s Cloud Services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”), and Internet of Things (“IOT”) data and device management.

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

Basis of Presentation

Interim Financial Statements

The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2020.

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

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

Basis of Consolidation

The condensed consolidated financial statements include the Company and three wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany transactions are eliminated.

Earnings Per Share

Basic income per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options.

The following table illustrates the computation of the dilutive common share equivalents under the Treasury Stock Method: Summary of Significant Accounting Policies - Schedule of Computation of Dilutive Common Share Equivalents Under Treasury Stock Method 

The following table reconciles the shares outstanding and net income used in the computations of both basic and diluted earnings per share of common stockholders: Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic and Diluted

Concentrations of Credit Risk

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

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

Trade Account Receivables

Sales Revenue

The Company has a concentration of risk with respect to trade receivables from customers and other cellular providers. As of September 30, 2021, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $111,672 and $639,429, or 11.23% and 64.33% of total accounts receivable, respectively. It should be noted that the largest customer is the FCC. As of December 31, 2020, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $194,509, or 52.4%, and $52,843, or 14.2%, respectively.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the nine months ended September 30, 2021, the Company had two (2) customers that accounted for $3,297,984 or 37% and $2,818,465 or 31.6% of revenue, respectively. For the nine-month period ended September 30, 2020, the Company had one (1) customer that accounted for $2,332,716, or 34.6%, of revenue.

Effect of Recent Accounting Pronouncements

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

NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications as of September 30, 2021, and December 31, 2020: Property and Equipment - Schedule of Property and Equipment

Depreciation related to Property and Equipment amounted to $12,969 and $7,216 for the three-month periods ended September 30, 2021, and 2020, respectively. For the nine-month periods ended September 30, 2021, and 2020, was $38,907 and $21,649, respectively. Depreciation and amortization expenses are included as a component of operating expenses in the accompanying statements of operations.

NOTE 3 – RIGHT-OF-USE ASSETS

Minimum

Maximum 

Right-of-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between 3.29% and 5.34%. Right-of-Use Assets are recorded on the balance sheet as intangible assets.

The Company has Right-of-Use Assets through leases of property under three (3) non-cancelable leases. As of September 30, 2021, the Company had one (1) property with a lease term in excess of one (1) year. This lease liability expires March 31, 2026. The Company has two (2) current lease liabilities. These lease liabilities expire December 1, 2021, and May 15, 2022, respectively. In January 2021, the Company entered into a new, five (5) year lease for its corporate headquarters located in Plano, TX.

Future lease liability payments under the terms of these leases are as follows: Right-of-Use Assets - Schedule of Future Minimum Lease Payments for Operating Leases

The Company also leases two (2) office/retail spaces on a month-to-month basis. Total lease expense for the three months ended September 30, 2021, and 2020, was $6,217 and $7,216, respectively. Total lease expense for the nine months ended September 30, 2021, and 2020, amounted to $18,652 and $21,649, respectively, for these leases.

NOTE 4 – INTANGIBLE ASSETS

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

Intangible Assets with indefinite useful life consist of a Lifeline License granted by the FCC.

The Lifeline License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The Lifeline License was acquired through an acquisition. The fair market value of the License as of September 30, 2021, was $634,251. 

Amortization expenses for the three months ended September 30, 2021, and 2020, was $200,583. Amortization expense amounted to $601,750 for the nine months ended September 30, 2021, and 2020, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations.

Remaining amortization expense is expected to be as follows:

Intangible Assets - Schedule of Intangible Assets Future Amortization Expense

Current intangible assets, with the exception of the Lifeline License, will be fully amortized as of December 31, 2021.

NOTE 5 – NOTES PAYABLE

On September 30, 2020, IM Telecom entered into a promissory note agreement to repay a Federal Universal Service Fund overpayment in the amount of $67,105. The term of the note was twelve (12) months and interest accrued at a rate of 12.75% per annum. This promissory note, including accrued interest, was paid in full in August 2021.

NOTE 6 – CONTINGENCIES AND COMMITMENTS

Litigation

From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of September 30, 2021, there are no ongoing legal proceedings.

Contract Contingency

The Company has the normal obligation for the completion of its cellular provider contracts in accordance with the appropriate standards of the industry and that may be provided in the contractual agreements.

Tax Audits

In June of 2021, the Company received an audit determination and assessment from the State of Pennsylvania in respect of an audit of sales and use tax liability for the audit period of January 1, 2016, through September 30, 2019. The assessment is in the amount of $111,650, including interest and penalties. The Company appealed this assessment in August 2021 and at the request of the state, has provided additional information to support its appeal. The Company believes that based on previous taxpayer outcomes with the State of Pennsylvania, that it will be successful on appeal on a minimum of 93% of the assessment amount. A potential liability in the amount of $7,000 has been recorded.

Letters of Credit

The Company had no outstanding letters of credit as of September 30, 2021.

NOTE 7 – SEGMENT REPORTING

The Company operates within two (2) reportable segments. The Company’s management evaluates performance and allocates resources based on operational needs and results. Because the Company is a recurring revenue service business with very few physical assets, management does not use total assets by segment to make decisions regarding operations, and therefore, the total assets disclosure by segment has not been included. Previously, the Company reported four (4) segments, including Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC. The Company has made the decision to consolidate and align its segment reporting by the type of service offering and believes this reporting will provide for a more accurate view of its lines of operation. Reportable segments now include Hosted Services and Mobile Services.

Hosted Services – This segment includes a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free, and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, Software-Defined Wide Area Networking (SD-WAN), and IOT data and device management. These Hosted Services are marketed nationally through Apeiron’s website, independent sales agents, ISOs and SCOs.

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and IOT mobile data services from Apeiron and IM Telecom. Mobile voice/text/data and IOT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers.  A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service to low-income American households that qualify for the FCC’s Lifeline voice service program and the FCC’s temporary Emergency Broadband Benefit (“EBB”) mobile data program as part of the federal government’s temporary COVID relief efforts, distributed by IM Telecom under its Infiniti Mobile brand. Even though government programs like Lifeline have existed for many years (since the Telecommunications Act of 1984), these programs, along with newer programs like the temporary EBB program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced, or eliminated.

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

Segment Reporting - Schedule of Segment Reporting Information

NOTE 8 – STOCKHOLDERS’ EQUITY

Common Stock

The Company has issued 575,000 shares of common stock through September 30, 2021. All shares were issued as result of three (3) holders of incentive stock options delivering Notices of Exercise and required exercise payments regarding certain granted and vested incentive stock options. No common stock was issued during the year ended December 31, 2020.

Stock Compensation

The Company offers stock option equity grants to directors and key employees. Options vest in tranches and typically expire in five (5) years. For the three months ended September 30, 2021 and 2020, the Company recorded options expense of $62,877 and $10,257 respectively. For the nine months ended September 30, 2021, and 2020, the Company recorded options expense of $141,935 and $30,771, respectively. The option expense not taken as of September 30, 2021, is $62,876, with a weighted average term of 4.62 years.

The stock option valuation as of September 30, 2021, was computed using the Black-Scholes-Merton pricing model using an average stock price of $0.794, a strike price of $0.874, an expected term of five (5) years, volatility of 236.05% and a risk-free discount rate of 0.78%.

The following table represents stock option activity as of and for the nine months ended September 30, 2021:

Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity

NOTE 9 – SUBSEQUENT EVENTS

Below are events that have occurred since September 30, 2021:

On October 23, 2021, IM Telecom entered into a national master distribution agreement with Community Outreach Partnerships, LLC (“COP”). Under the agreement and utilizing IM Telecom’s Infiniti Mobile brand name, COP shall recruit and manage a national network of independent sales agents to distribute Lifeline and/or EBB eligible cellular voice, SMS (texting) and mobile data services to low-income households. COP shall distribute these services within those states authorized by IM Telecom. COP shall be compensated based upon certain customer acquisition and retention criteria.

On October 25, 2021, IM Telecom entered into a national master distribution agreement with Royal Marketing Group (“Royal”). Under the agreement and utilizing IM Telecom’s Infiniti Mobile brand name, Royal shall recruit and manage a national network of independent sales agents to distribute Lifeline and/or EBB eligible cellular voice, SMS (texting) and mobile data services to low-income households. Royal shall distribute these services within those states authorized by IM Telecom. Royal shall be compensated based upon certain customer acquisition and retention criteria.

Subsequent Event

Director 

The Company granted a quarterly director 25,000 share Incentive Stock Option to Jeffrey Pearl on October 28, 2021, at an exercise price of $1.595, fully vested. The exercise price was based upon 110% of the fair market value or closing public trading price of the Company’s common stock on the date of grant.

On Friday, November 5, 2021, the below referenced Infrastructure Bill was passed in the House of Representatives and is now expected to be signed into law by President Biden.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position.  Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors.  Such factors are discussed further below under “Trends and Uncertainties,” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.

Overview of Current and Planned Business Operations

Our Hosted Services are provided by our wholly- owned subsidiary, Apeiron Systems, a CPaaS provider that designed, built, owns, and operates a national network, supporting a suite of business communications services all accessible via its proprietary Applications Programming Interfaces (“APIs”). Some of Apeiron’s Hosted Services include SIP/VoIP and cellular telephony, SMS/MMS messaging and numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording, and other functions provided with local, toll-free, and international phone numbers.

Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, dedicated ethernet, broadband, and LTE wireless WAN solutions. Apeiron’s network services enable private WAN networking, Internet access, public cloud connectivity and Low Power Wide Area (“LPWA”) network solutions for both mobile & local IoT connectivity. Apeiron’s Cloud Services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”), and IoT data processing as well as device and sensor management.

Apeiron continues to expand its agent sales channel outreach, agent sales software platform, and invest in new product development to drive revenue diversification and higher margin services. In addition to new product development and existing channel development, Apeiron continues to enhance its billing system capabilities. Apeiron’s expanding billing system can enable distribution channels to increase new product sales and take advantage of Apeiron’s customizable white label billing solutions across its product lines.

We believe we are moving towards an increasingly wireless/mobile future, so Apeiron continues to evolve its network, cloud infrastructure, and Hosted Services platforms to capitalize on new and emerging technology trends, including IoT deployments and the inevitable migration to 5G technology across national cellular networks. Apeiron’s response to these trends can be seen in its product development cycles and network development efforts, which continue to strategically position Apeiron in the market.

Our Mobile Services include retail and wholesale cellular voice/text/data services delivered using the three major domestic wireless networks. A wireless communications service reseller typically does not own the wireless network infrastructure over which customer services are provided. Mobile voice/text/data and mobile data solutions are generally sold as post-paid or pre-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers, and accessories.

Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service to low-income American households that qualify for the FCC’s Lifeline program and the FCC’s temporary EBB program. Our Lifeline mobile services are provided by our wholly- owned subsidiary, IM Telecom, marketed under its brand name Infiniti Mobile. IM Telecom operates under an FCC approved Compliance Plan and FCC wireless ETC designation across nine (9) states, including California, Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont, and Wisconsin.

IM Telecom was approved to participate in the FCC’s temporary EBB program on April 6, 2021, and to distribute EBB eligible mobile data services within the states it was then authorized as a Lifeline ETC. Subsequently, on September 1, 2021, the FCC approved IM Telecom’s application to expand its EBB authorized distribution territory (not Lifeline) to include the remaining thirty-nine (39) contiguous states, as well as the District of Columbia and Puerto Rico.

There is pending legislation before the U.S. Congress within the Infrastructure Bill (H.R.3684 - Infrastructure Investment and Jobs Act, further described in Title V Broadband Affordability and starting in Section 60501), to offer subsidized mobile data service under a new program, following the expiration of the EBB program, with new rules that is expected to be called the Affordable Connectivity Benefit (“ACB”) program; and the ACB program would be subject to interpretation and administration by the FCC and its administration company, USAC. On Friday, November 5, 2021, the above referenced Infrastructure Bill was passed in the House of Representatives and is now expected to be signed into law by President Biden.

IM Telecom, operating under its brand name Infiniti Mobile, distributes cellular voice and mobile data services through its storefront in Tulsa, Oklahoma, a current group of independent field agents, two (2) new master agent relationships described above in Note 9 – Subsequent Events, of our Condensed Consolidated Financial Statements accompanying this Quarterly Report, and through its Infiniti Mobile website (www.infinitimobile.com). With IM Telecom’s recent approval on June 3, 2021, to expand its Lifeline distribution into California, we anticipate California distribution will commence in the fourth quarter of 2021.

In 2017, before it acquired IM Telecom, the Company successfully distributed California Lifeline service under a Virtual ETC (“VETC”) distribution agreement with another ETC. Under that agreement, the Company provided marketing, field distribution, agent management, device (equipment) sourcing and configuration, and compliance assurance with FCC and California regulations for the approval and distribution of new Lifeline service.

At its peak, the Company distributed over 10,000 new lines of Lifeline service per month in California. The Company ceased California VETC Lifeline distribution shortly after it acquired IM Telecom in early 2018, while it waited for the California Public Utilities Commission to approve IM Telecom’s California Lifeline distribution application.

The FCC’s Universal Service Administrative Company (“USAC”) website (https://www.usac.org/lifeline/resources/program-data/) currently indicates there are 3,630,292 Lifeline eligible households in California, of which 1,242,787 currently receive service, leaving an estimated 2,387,505 unserved Lifeline eligible households in the State of California.

The Company’s previous California VETC Lifeline management team is the same management team now operating IM Telecom. The Company expects that IM Telecom’s management team will be successful in the distribution of applicable Lifeline, EBB, and/or ACB (if it becomes law) services in California.

Results of Operations

Comparison of the quarter ended September 30, 2021, to the quarter ended September 30, 2020

For the quarter ended September 30, 2021, we had $3,612,861 in revenues from operations compared to the quarter ended September 30, 2020, where we had $2,527,281 in revenue from operations. The cost of revenue for the quarter ended September 30, 2021, was $1,988,624 compared to $1,625,481 for the quarter ended September 30, 2020. We had a gross profit of $1,624,237 for the quarter ended September 30, 2021, and $901,800 for the quarter ended September 30, 2020.

For quarter ended September 30, 2021, our gross profit margin was 44.9% compared to 35.7% for the three months ended September 30, 2020.

For the quarters ended September 30, 2021, and 2020, respectively, total operating expenses were $1,252,632 and $958,223, for an increase of $294,409. This increase was primarily a result of infrastructure expansion consisting of primarily payroll, professional services, handset costs, and application development costs to support sales channel growth.

For the quarter ended September 30, 2021, non-operating expenses were interest expense of $2,573 and other non-operating expenses of $49,197 consisting primarily of stock option expenses, compared to other income of $81,070 and interest expense of $4,694 for the quarter ended September 30, 2020.

For the quarter ended September 30, 2021, we had a net income of $319,835. For the quarter ended September 30, 2020, we had net income of $19,953.

In comparing our Condensed Consolidated Statements of Operations between the three-month periods ended September 30, 2021, and 2020, respectively, the Company continued diversifying and expanding its service offerings. Revenues for both Hosted Services and Mobile Services were up from the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020. Hosted Services revenue increased by 3.5%, while Mobile Services revenue increased by 103.9%. Gross profit margin overall was 45% for the three months ended September 30, 2021, compared to 35.7% for the three months ended September 30, 2020. Hosted Services gross profit margin was 35.3% compared to 38.9% for the three months ended September 30, 2021, and 2020, respectively. Mobile Services gross profit margin was 52.6% compared to 30.8% for the three months ended September 30, 2021, and 2020, respectively.

Comparison of the nine months ended September 30, 2021, to the nine months ended September 30, 2020

For the nine months ended September 30, 2021, we had $8,919,573 in revenues from operations compared to the nine months ended September 30, 2020, where we had $6,741,830 in revenue from operations. The cost of revenue for the nine months ended September 30, 2021, was $4,946,786 compared to $4,196,528 for the nine months ended September 30, 2020. We had a gross profit of $3,972,787 for the nine months ended September 30, 2021, and $2,545,302 for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, our gross profit margin was 44.5% compared to 37.7% for the nine months ended September 30, 2020. The increase was primarily due to enhanced COGS measures as well as Infiniti Mobile’s expansion of the EBB program into new states.

For the nine months ended September 30, 2021, and 2020, respectively, total operating expenses were $3,377,950 and $2,883,526, for an increase of $494,424. This increase was primarily a result of infrastructure expansion, primarily payroll, professional services, handset costs, and application development costs to support sales channel growth.

For the nine months ended September 30, 2021, non-operating expenses were interest expense of $12,329 and other non-operating expenses of $154,310 consisting primarily of stock option expenses, compared to other income (PPP loan forgiveness and settlement income) of $624,518 and interest expense of $23,459 for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, we had a net income of $428,199. For the nine months ended September 30, 2020, we had net income of $262,835.

In comparing our Condensed Consolidated Statements of Operations between the nine-month periods ended September 30, 2021, and 2020, respectively, the Company continued diversifying and expanding its service offerings, including participating in the temporary EBB program. Revenues for both Hosted Services and Mobile Services were up for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Hosted Services revenue increased by 17.6%, while Mobile Services revenue increased by 50.4%. Gross profit margin was 44.5% overall for the nine months ended September 30, 2021, compared to 37.8% for the nine months ended September 30, 2020. Hosted Services gross profit margin was 36.5% compared to 36.5% for the nine months ended September 30, 2021, and 2020, respectively. Mobile Services gross profit margin was 52.3% compared to 39.3% for the nine months ended September 30, 2021, and 2020, respectively.

Marketing and Advertising expense increased due mostly to an increase in Mobile Services sales activity and an enhancement of our Mobile Services website. Utilities and Facilities expense increased due mostly to the execution of a new headquarters office lease in Plano, TX, combined with a change in rent expense recognition rules. General and Administrative costs increased due mostly to costs related to new hires and increased travel. In 2020, we categorized Hosted Services’ software development costs within Operating and Maintenance; then in 2021, we began categorizing software development costs into a new category, “Application Development Costs.”

Liquidity and Capital Resources

As of September 30, 2021, we had $1,358,722 in cash and cash equivalents on hand.

In comparing liquidity between the nine-month periods ending September 30, 2021, and September 30, 2020, cash assets increased by 131%. This increase was due largely to expanded revenues from the EBB program and increased cash-flow performance. Liabilities and total overall debt showed a 2.4% decrease in the nine-month period ended September 30, 2021, when compared to September 30, 2020. Going forward, growth in new services as well as the introduction of the ACB program is expected to provide additional liquidity for our business.

Overall, the current ratio (current assets divided by our current liabilities) increased to 2.05 as of September 30, 2021, compared to December 31, 2020, of .94. Working capital increased 117.7%.

Cash Flow from Operations

During the nine months ended September 30, 2021, cash flow provided by operating activities was $636,557, and for the nine months ended September 30, 2020, cash flow provided by operating activities was $441,506.

Cash Flows from Investing Activities

During the nine months ended September 30, 2021, $10,000 of cash flow was used in investing activities for the purchase of a percentage ownership in another telecommunications company. For the nine months ended September 30, 2020, cash flow used in investing activities was $10,833 for the purchase of assets.

Cash Flows from Financing Activities

During the nine months ended September 30, 2021, cash flow provided by financing activities was $16,970 for net cash received from exercises of stock options after repayments of amounts of notes payable of $93,030. For the nine months ended September 30, 2020, net cash flow used in financing activities was $33,934, comprised of proceeds from Federal SBA Covid-19 loans ($459,000), repayments of revolving lines of credit, ($12,237), repayments of amounts due to a related party, ($87,165), and a one-time dividend paid to former Apeiron shareholders of ($310,129) as part of the acquisition of Apeiron Systems.

Going Concern

For the nine months ended September 30, 2021, the Company generated net income of $428,199. For the three months ended September 30, 2021, net income was $319,835. The Company has sustained itself through the operations of the business, indicated by net cash from operations of $636,557 for the nine months ended September 30, 2021. The accumulated deficit as of September 30, 2021, is $5,540,291.

The Company has ameliorated any substantial going concern doubt issues by generating additional cash flow from operations through diversification of product offerings and revenue growth of its subsidiaries, Apeiron Systems and IM Telecom. We have continued to use additional cash flow to retire debt, while also adding resources to enable further revenue growth. Our working capital continues to improve without the use of lines of credit, borrowings or additional cash investments beyond our long term, low interest SBA EIDL loan proceeds from June 20, 2020.

We continue to diversify sources of revenue and increase margins through cost controls and a shift to higher margin product offerings. Prior to acquiring Apeiron Systems and IM Telecom, we derived nearly 100% of our revenue from cellular (voice) sales. With continued aggressive management and sales channel development we anticipate no future going concern issues.

Off-Balance Sheet Arrangements

We had no Off-Balance Sheet arrangements during the nine-month period ended September 30, 2021.

Critical Accounting Policies

Earnings Per Share

Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2021, and September 30, 2020, there are 2,676,266 and 3,400,000 respectively, potentially dilutive common shares.

Concentrations of Credit Risk

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

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

The Company has a concentration of risk with respect to trade receivables from customers, other cellular providers, and the FCC. As of September 30, 2021, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $111,672 and $639,429, or 11.23% and 64.33% of total accounts receivable, respectively. As of December 31, 2020, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $194,509, or 52.4%, and $52,843, or 14.2%, respectively.

Concentration of Major Customers

A significant amount of the revenue is derived from contracts with major customers, cellular partners and the federal government. For the nine-month period ended September 30, 2021, the Company had two (2) customers that accounted for $3,297,984 or 37% and $2,818,465 or 31.6% of total revenue, respectively. For the nine-month period ended September 30, 2020, the Company had one (1) customer that accounted for $2,332,716 or 34.6%, of revenue.

Effect of Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required.

Item 4. Controls and Procedures.

Management’s Quarterly Report on Internal Control Over Financial Reporting

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that material information relating to us is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of September 30, 2021, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required; however, see Item 1A. Risk Factors, Part I, commencing on page 10, of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2020, filed with the SEC on April 6, 2021, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.

Our business operations could be impacted by the current world health crisis. The following risk factor regarding the COVID-19 pandemic was one of the risk factors included in the Company’s 10-K Annual Report for the year ended December 31, 2020:

On January 30, 2020, the World Health Organization declared the coronavirus (the ‘COVID-19’) outbreak a “Public Health Emergency of International Concern,” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be on us, to date and as a result of actions taken by management to mitigate a material impact to our financial statements or our operational results, we are not currently experiencing a material impact to our financial statements or our results of operations; however, a pandemic typically results in social distancing, travel bans and quarantines, which may result in limited access to our facilities, customers, management, support staff and professional advisors.  These, in turn, may not only impact our operations, financial condition and demand for our services, but our overall ability to react timely to mitigate the impact of this event.  Given our small staff, if a key member of our team were disabled by COVID-19, it could have a material negative impact on our business.  Also, it may substantially hamper our efforts to provide our investors with timely information and to comply with our filing obligations under the Exchange Act with the SEC. If this pandemic were to last a prolonged period of time, we could see a decline in revenue due to the closure of customer businesses, which could then impact our ability pay our short-term debts. Our concentration of revenue from a small group of Apeiron Systems’ customers makes it reasonably possible that we are vulnerable to the risk of a long-term severe impact. Our dependence on certain suppliers to provide equipment to be distributed or sold to our customers could also be impacted if inventory shortages occur due to import or export restrictions resulting from the pandemic.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company issued 575,000 shares of common stock during the quarter ended September 30, 2021. All of these shares were issued as result of three (3) holders of vested incentive stock options granted in 2017 delivering Notices of Exercise and required exercise payments (75,000 of these shares were issued in a “cashless” exercise) regarding certain vested incentive stock options. 500,000 of these shares were issued pursuant to the Company’s S-8 Registration Statement that was filed with the SEC on August 25, 2021, at an exercise price of $0.22 per share; and 75.000 of these shares were issued pursuant to Section 4(a)(2) of the Securities Act, prior to the filing of the S-8 Registration Statement, in exchange for 98,116 additional vested incentive stock options. No common stock was issued during the year ended December 31, 2020.

Also, see NOTE 9-Subsequent Events, of our Condensed Consolidated Financial Statements included in this Quarterly Report respecting the grant of certain incentive stock options subsequent to the quarter ended September 30, 2021.

Item 3. Defaults upon Senior Securities

None; not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information 

Earlier today, the Company disseminated a press release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press release in being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only.  This press release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.

Item 6. Exhibits

Exhibits incorporated by reference:

Annual Report on Form 10-K for the year ended December 31, 2020, and filed with the SEC on April 6, 2021.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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