KonaTel, Inc. - Quarter Report: 2022 June (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 June 30, 2022

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 Systems”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infiniti Mobile”).

Forward-Looking Statements

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

KONATEL, INC.

FORM 10-Q

June 30, 2022

INDEX

PART I - FINANCIAL STATEMENTS

June 30, 2022

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

On December 31, 2018, we acquired Apeiron Systems, Inc. (www.apeiron.io) (“Apeiron Systems” or “Apeiron”), which is also our wholly owned subsidiary. Apeiron was organized in 2013 and is an international hosted services Communications Platform as a Service (“CPaaS”) provider that designed, built, owns and operates its national private core network, supporting a suite of business communications services, all accessible via proprietary Applications Programming Interfaces (“APIs”). As a Federal Communications Commissions (“FCC”) licensed Internet Telephony Service Provider (“ITSP”), Apeiron also holds an 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 Multiprotocol Label Switching (“MPLS”), 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. Apeiron primarily distributes its services nationally through its website, its sales staff, independent sales agents and Independent Sales Organizations (“ISOs”).

On February 5, 2018, we entered into a purchase agreement to acquire IM Telecom, LLC, an Oklahoma limited liability company (www.infinitimobile.com), doing business as Infiniti Mobile (“IM Telecom” or “Infiniti Mobile”). 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 operates as a wholly owned subsidiary of KonaTel. It is an FCC licensed Eligible Telecommunications Carrier (“ETC”) and is one of twenty-two (22) original FCC licensed wireless cellular resellers to hold an FCC approved Lifeline Compliance Plan since 2012, of which approximately twelve (12) license holders remain active today. The FCC has not approved (granted) a new wireless reseller Lifeline Compliance Plan since 2012. As a licensed ETC, IM Telecom is currently authorized to distribute Lifeline subsidized mobile voice/data service in nine (9) states. In addition to Lifeline, IM Telecom is also an FCC licensed Affordable Connectivity Program (“ACP”) provider, authorized to distribute ACP subsidized high-speed mobile data service in the forty-eight (48) contiguous states plus Washington D.C. and Puerto Rico. Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income Americans. ACP is an FCC program that provides subsidized high-speed wireless data services to low-income Americans. IM Telecom distributes Lifeline and ACP services under its Infiniti Mobile brand name through its website, sales staff, retail location and ISOs. IM Telecom also offers non-Lifeline and non-ACP services throughout the United States.

Apeiron Systems is headquartered in Los Angeles, California. It also has some management staff in Plano, Texas, customer service and software engineering resources staffed in Johnstown, Pennsylvania and software engineering services staffed in Europe and Asia. IM Telecom is headquartered in Plano, Texas, and operates a retail operation in Tulsa, Oklahoma.

We are headquartered in Plano, Texas. Apeiron Systems has fourteen (14) full-time employees; IM Telecom has thirteen (13) full-time employees and four (4) part-time employees; and we have four (4) full-time employees.

Principal Products or Services and their Markets

Our principal products and services, across our two wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for low-income Americans. Except for our ETC Lifeline services distributed in up to nine (9) states and our ACP services distributed in the forty-eight (48) contiguous states, Washington D.C. and Puerto Rico, our Apeiron Systems’ products and services are available worldwide and subject to U.S., international and local/national regulations.

We generate revenue from two (2) primary sources, Hosted Services and Mobile Services:

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, 2021.

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

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

Basic income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options. The dilutive common shares derived from stock options are 2,205,473 and 2,241,782, for the three and six months ended June 30, 2022, respectively, are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

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 cellular providers. As of June 30, 2022, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from one (1) customer in the amount of $1,308,193, or 92.1%. It should be noted that the largest customer is the FCC. As of December 31, 2021, the Company had a significant concentration of receivables from two (2) customers in the amounts of $783,431, or 63.9%, and $194,647, or 15.9%.

Concentration of Major Customer

A significant amount of the revenue is derived from large customers and the government. For the three months ended June 30, 2022, the Company had two (2) customers that accounted for $910,574 or 17.8% and $3,310,128 or 64.6% of revenue, respectively. For the three-month period ended June 30, 2021, the Company had two (2) customers that accounted for $944,509 or 32.4% and $1,071,386 or 36.8% of revenue, respectively. For the six months ended June 30, 2022, the Company had two (2) customers that accounted for $1,826,412 or 19.5% and $5,741,697 or 61.4% of revenue, respectively. For the six-month period ended June 30, 2021, the Company had two (2) customers that accounted for $1,774,644 or 33.4% and $1,664,735 or 31.4% of revenue, respectively.

Effect of Recent Accounting Pronouncements

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

NOTE 2 – INVENTORY

Inventory primarily consists of sim cards and cell phones, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the first-in, first-out (FIFO) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and on a quarterly basis inventory is reviewed for obsolescence and counted for accuracy with distributors. At June 30, 2022, and December 31, 2021, the Company had inventory of $1,007,206 and $566,839, respectively.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications as of June 30, 2022, and December 31, 2021:

Property and Equipment - Schedule of Property and Equipment

Depreciation related to Property and Equipment amounted to $2,059 and $12,969 for the three-month periods ended June 30, 2022, and 2021, respectively. For the six-month periods ended June 30, 2022, and 2021, depreciation was $6,176 and $25,938. Depreciation and amortization expenses are included as a component of operating expenses in the accompanying statements of operations.

NOTE 4 – RIGHT-OF-USE ASSETS

Minimum

Maximum

Right-of-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between 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 June 30, 2022, the Company had two (2) properties with a lease term more than one (1) year. These lease liabilities expire June 1, 2025, and March 31, 2026. The Company has one (1) current lease liability. This lease liability expired May 15, 2022. In January 2021, the Company entered into a new, five (5) year lease for its corporate headquarters located in Plano, TX. In June 2022, the Company entered into a three (3) year lease for its new U.S. based national call center operation in Atmore, AL.

Future lease liability payments under the terms of these leases are as follows:

Right-of-Use Assets - Schedule of Future Minimum Lease Payments for Operating Leases

The Company also leases two (2) office/retail spaces on a month-to-month basis. Total lease expense for the three months ended June 30, 2022, and 2021, was $7,217 and $3,967, respectively. Total lease expense for the six months ended June 30, 2022, and 2021, amounted to $13,435 and $8,185, respectively. Lease expense for the 2022 is for the remaining six months of the year.

NOTE 5 – 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 June 30, 2022, was $634,251.

Amortization expense amounted to $0, and $200,583 for the three months ended June 30, 2022, and 2021, respectively. Amortization expense amounted to $0, and $401,167 for the six months ended June 30, 2022, and 2021, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Current intangible assets, except for the Lifeline License, were fully amortized as of December 31, 2021.

NOTE 6 – NOTES PAYABLE

In 2020, the Company was granted a $150,000 Economic Injury Disaster Loan (“EIDL”) from the SBA. The term of the loan is thirty (30) years, at an interest rate of 3.75% on advanced funds. Installment payments were to begin twelve (12) months following the loan date but were deferred through September of 2022. As of June 30, 2022, the outstanding balance was paid in full and there are no further obligations due the SBA.

On June 14, 2022, the Company and its wholly owned subsidiary companies entered into a Note Purchase Agreement and related Guarantee and Security Agreement with CCUR Holdings, Inc. (as collateral agent), and Symbolic Logic, Inc., whereby the Company pledged its assets to secure $3,150,000 in debt financing. The term is for a period of twelve (12) months, at an interest rate of 15%, with two successive six-month optional extensions. As a condition of securing the loan, the Company paid a 3% origination fee, and other legal and closing expenses, in the amount of $153,284, resulting in a net loan balance of $2,984,181. The loan costs of $153,284 and the net loan balance of $2,984,181 are to be amortized over a 12-month period. Proceeds of the loan were used to retire the $150,000 SBA “EIDL” Loan and will be used in an ongoing capacity to support the acceleration of our mobile services growth strategy.

NOTE 7 – CONTINGENCIES AND COMMITMENTS

Litigation

From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of June 30, 2022, there are no ongoing legal proceedings.

Contract Contingency

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

Tax Audits

In June of 2021, the Company received an audit determination and assessment from the State of Pennsylvania related to sales and use tax for the audit period of January 1, 2016, through September 30, 2019. The assessment is in the amount of $115,000, including interest and penalties calculated on sales made inside and outside Pennsylvania. The Company appealed this assessment in August 2021 and at the request of the state, provided additional information to support its appeal. The Company’s position is that Pennsylvania has no sales tax authority to levy and collect sales tax on sales made outside Pennsylvania. The company recorded an expected liability of $7,000, based on known sales inside Pennsylvania. The State of Pennsylvania rejected an appeal by the Company. The company remains in discussions with the State of Pennsylvania and is working towards a plan to pay the full amount of the liability, under the possibility of an extended payout period. The company believes this is the best course of action, as following the final payoff of the liability, the Company can re-open an appeal with the state for a refund of the liability.

Letters of Credit

The Company had no outstanding letters of credit as of June 30, 2022.

NOTE 8 – SEGMENT REPORTING

The Company operates within two (2) reportable segments. The Company’s management evaluates performance and allocates resources based on the profit or loss from operations. Because the Company is a recurring revenue service business with very few physical assets, management does not use total assets by segment to make decisions regarding operations, and therefore, the total assets disclosure by segment has not been included.

The reportable segments consist of Hosted Services and Mobile Services.

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, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally through Apeiron’s website, its own sales staff, independent sales agents, and ISOs.

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers, and accessories. Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service by IM Telecom under its Infiniti Mobile brand to low-income American households that qualify for the FCC’s Lifeline voice service program and the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced, or eliminated.

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

Segment Reporting - Schedule of Segment Reporting Information

NOTE 9 – STOCKHOLDERS’ EQUITY

Common Stock

The Company has not issued common stock through June 30, 2022, nor for the year ended December 31, 2021.

Stock Compensation

The Company offers stock option equity grants to directors and key employees. Options vest in tranches and typically expire in five (5) years. For the six months ended June 30, 2022, and 2021, the Company recorded options expense of $354,296 and $79,058, respectively. The option expense not taken as of June 30, 2022, is $1,660,630, with a weighted average term of 2.30 years.

Executive Vice President

Through June 30, 2022, the Company granted 850,000 options. There was a total of 700,000 incentive stock options issued to two (2) employees, each vesting on the four (4) year anniversary dates of the respective grants. A total of 100,000 incentive stock options were issued to two (2) independent Board members, fully vested as of each grant date, at exercise prices based on 110% of the fair market value of our common stock on the date of grant, and 50,000 incentive stock options were issued to an independent consultant to the Company, fully vested, as of the date of grant. All option values were computed using the Black-Scholes-Merton pricing model, with a term of 5-years, an average interest-free rate of 2.17% and an average exercise price of $1.09.

The following table represents stock option activity as of and for the six months ended June 30, 2022:

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

NOTE 10 – SUBSEQUENT EVENTS

Below are events that have occurred since June 30, 2022:

Additional Office Leases

To support our expanding Mobile Services segment, the Company’s subsidiary, IM Telecom d/b/a Infiniti Mobile, executed a three (3) year office lease agreement out of its Tulsa, Oklahoma location, commencing August 1, 2022. This new location will primarily serve as a warehouse, staff office, and adds additional space for inventory management, equipment provisioning and distribution of equipment to our various channels throughout the U.S.

The Company also entered an eight (8) year lease agreement, located in Johnstown, Pennsylvania, for its Apeiron Systems subsidiary. The office will provide additional space to primarily house Apeiron customer service, equipment provisioning, software development and accounting personnel in support of our Hosted Services market segment.

In July 2022, IM Telecom d/b/a Infiniti Mobile, in support of our Mobile Services segment, opened its new national customer service center in Atmore, Alabama.

 Subsequent Event

Incentive Stock Option Grants

The Company granted a quarterly director 25,000 share Incentive Stock Option to Jeffrey Pearl, an independent director, on July 28, 2022, at an exercise price of $1.74, 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.

The Company also granted a quarterly director 25,000 share Incentive Stock Option to Robert Beaty, an independent director, on August 12, 2022, at an exercise price of $1.91, 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.

Notice of Stock Option Exercise

Paul LaPier, a former employee of the Company, has elected to exercise and purchase 300,000 shares, originally granted on October 24, 2019, under the 2018 Incentive Stock Option Plan, at a purchase price of $0.15 or an aggregate of $45,000. Payment for this option exercise cleared the Company’s bank on August 10, 2022; however, the shares underlying this incentive stock option, which have not yet been issued, are contemplated to be issued directly following the filing of this Quarterly Report.

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

We continue to pursue market opportunities for the distribution of our current products and services described in our “Principal Products or Services and their Markets” summary on page 8 of this Quarterly Report. In addition, we continue to pursue expanded market distribution opportunities, development of new products and services, the addition of new lines of business and accretive acquisition opportunities that may enhance or expand our current product and service offerings.

Results of Operations

Due to the accelerating expansion of our Mobile Services customer base, Management has chosen, initially disclosed in our first quarter 2022 quarterly report (Form 10-Q), to accelerate growth within this segment, at least through the end of this year. This growth has been driven by expansion of our distribution channels, including field agents and internet sales, along with increased government subsidies and new wireless voice/data services for eligible low-income families. As a result, the Company recognized increases in Mobile Services revenue and direct costs during the quarter ending June 30, 2022. Since the Company may not capitalize customer acquisition costs over the average life of a customer, we recognize the full incremental cost of each new Mobile Service customer at the start of service, which is typically recovered within 120 days after activation. During this period of intentional accelerated growth, initially disclosed in our first quarter 2022 quarterly report (Form 10-Q), Management foresees a temporary reduction of gross profit as we expand our Mobile Services base.

Comparison of the three months ended June 30, 2022, to the three months ended June 30, 2021

For the three months ended June 30, 2022, we had $5,123,097 in revenues from operations compared to $2,913,873 for the three months ended June 30, 2021, for a total revenue increase of $2,209,224. This increase in revenue was directly related to the growth in our Mobile Services segment. Mobile Services expansion continued under the Lifeline and ACP program. The revenues were derived as a result of delivering high-speed mobile data service to low-income consumers.

For the three months ended June 30, 2022, our cost of revenue was $4,680,530 compared to $1,476,485 in the three months ended June 30, 2021, for a cost of revenue increase of $3,204,045. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.

For the three months ended June 30, 2022, we had gross profit of $442,567 compared to $1,437,388 in the three months ended June 30, 2021, for a gross profit decrease of $994,821. This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.

For the three months ended June 30, 2022, total operating expenses were $1,819,701 compared to $1,056,320 in the three months ended June 30, 2021, for an increase of $763,381. This increase was due primarily to additions in payroll and related expenses resulting from the hiring of operations management and customer support positions in both our subsidiaries, Apeiron Systems and IM Telecom.

For the three months ended June 30, 2022, other income (expense) was $(101,219) compared to $(39,983) in the quarter ended June 30, 2021.

For the three months ended June 30, 2022, we had a net loss of $1,478,353 compared to net income of $341,085 in the three months ended June 30, 2021. The loss for the three months ended June 30, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased our customer acquisition costs and may not be amortized over the life of the customer, but must be recorded in full at the time of customer activation.

Comparison of the six months ended June 30, 2022, to the six months ended June 30, 2021

For the six months ended June 30, 2022, we had $9,350,954 in revenues from operations compared to $5,306,711 for the six months ended June 30, 2021, for a total revenue increase of $4,044,243. This increase in revenue was directly related to the growth in both our Hosted Services and Mobile Services segments. Mobile Services expansion continued under the Lifeline and ACP program. The revenues were derived as a result of delivering high-speed mobile data service to low-income consumers.

For the six months ended June 30, 2022, our cost of revenue was $7,261,127 compared to $2,958,162 for the six months ended June 30, 2021, for a cost of revenue increase of $4,302,965. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.

For the six months ended June 30, 2022, we had gross profit of $2,089,827 compared to $2,348,549 for the six months ended June 30, 2021, for a gross profit decrease of $258,722. This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.

For the six months ended June 30, 2022, total operating expenses were $3,416,258 compared to $2,125,317 for the six months ended June 30, 2021, for an increase of $1,290,941. This increase was due primarily to additions in payroll and related expenses resulting from the hiring of operations management and customer support positions in both our subsidiaries, Apeiron Systems and IM Telecom.

For the six months ended June 30, 2022, other income (expense) was $(196,372) compared to $(114,869) for the six months ended June 30, 2021.

For the six months ended June 30, 2022, we had a net loss of $1,522,803 compared to net income of $108,363 for the six months ended June 30, 2021. The loss for the six months ended June 30, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased our customer acquisition costs and may not be amortized over the life of the customer but must be recorded in full at the time of customer activation.

Liquidity and Capital Resources

As of June 30, 2022, we had $2,430,966 in cash and cash equivalents on hand.

In comparing liquidity between the six-month periods ending June 30, 2022, and June 30, 2021, cash increased by 208.4%. This increase was primarily attributable to short-term debt financing secured in the quarter. Liabilities and total overall debt increased by 221.1% in the six-month period ended June 30, 2022, when compared to June 30, 2021. This change was primarily the result of the short-term loan received during the quarter. As we scale capabilities alongside our growth strategy in our Mobile Services customer base, we expect it to provide long-term liquidity.

Our current ratio (current assets divided by our current liabilities) decreased to 1.14 as of June 30, 2022, compared to 1.51 as of June 30, 2021. Working capital increased by 5.8%.

Cash Flow from Operations

During the six months ended June 30, 2022, cash flow used in operating activities was $1,328,287, and for the six months ended June 30, 2021, cash flow provided by operating activities was $150,079.

Cash Flows from Investing Activities

During the six months ended June 30, 2022, and 2021, no cash flow was used in investing activities.

Cash Flows from Financing Activities

During the six months ended June 30, 2022, net cash flow provided by financing activities was $2,826,468, due to securing short-term debt financing for the business. For the six months ended June 30, 2021, net cash flow used in financing activities was $77,031, for repayments of notes payable.

Going Concern

For the six months ended June 30, 2022, the Company generated a net loss of $1,522,803, compared to net income for the six months ended June 30, 2021, of $108,363. The Company sourced short-term financing during the 2^nd quarter to help facilitate its growing Mobile Services segment and support higher customer acquisition costs (sales). The accumulated deficit as of June 30, 2022, is $6,868,307.

The Company has continued to ameliorate any substantial going concern doubt by generating additional cash flow in the first quarter of 2022, the year ended 2021 and the year ended 2020, and through securing financing in June, 2022. As the Company continues its growth strategy and increases its Mobile Services customer base, additional operating capital may be required to support the related increase in customer acquisition costs (sales).

Off-Balance Sheet Arrangements

We had no Off-Balance Sheet arrangements during the three-month period ended June 30, 2022.

Critical Accounting Policies

Earnings Per Share

We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. As of June 30, 2022, there are 2,205,473 potentially dilutive common shares derived from stock options, and as of June 30, 2021, there are 2,538,352 potentially dilutive common shares derived from stock options.

Concentrations of Credit Risk

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

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

The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of June 30, 2022, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from one (1) customer in the amount of $1,308,193, or 92.1%. It should be noted that the largest customer is the FCC. As of December 31, 2021, the Company had a significant concentration of receivables from two (2) customers in the amounts of $783,431, or 63.9%, and $194,647, or 15.9%.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the six months ended June 30, 2022, the Company had two (2) customers that accounted for $5,741,697 or 61.4% and $1,826,412 or 19.5% of revenue, respectively. For the six-month period ended June 30, 2021, the Company had two (2) customers that accounted for $1,774,644, or 33.4% and $1,664,735 or 31.37%, of revenue.

Effect of Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required.

Item 4. Controls and Procedures.

Management’s Quarterly Report on Internal Control Over Financial Reporting

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that material information relating to us is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of June 30, 2022, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required; however, see Item 1A. Risk Factors, Part I, commencing on page nine (9) of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2021, filed with the SEC on April 14, 2022, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.

Our business operations could be impacted by the current world health crisis. The following risk factor regarding the COVID-19 pandemic was one of the risk factors included in the Company’s 10-K Annual Report for the year ended December 31, 2021:

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

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

See NOTE 9-Stockholders’ Equity and NOTE 10-Subsequent Events, of our Condensed Consolidated Financial Statements included in this Quarterly Report respecting the grant of certain additional incentive stock options during and subsequent to the quarter ended June 30, 2022, and the Notice of Exercise and payment of an Incentive Stock Option Grant, and the expected time of issuance of the shares underlying such option.

Item 3. Defaults upon Senior Securities

None; not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information 

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

(ii) On August 15, 2022, the Company corrected the Incentive Stock Option Agreement of D. Sean McEwen that was granted to him on December 18, 2017, as an exchange of his shares of KonaTel, a Nevada corporation (“KonaTel Nevada”), for common shares and an option to acquire common shares of the Company under a merger whereby the Company acquired KonaTel Nevada from Mr. McEwen, its sole shareholder, to exclude the “incentive” and “employee” provisions, among other related provisions, with all terms of the grant and exercise dates and term of the stock options granted therein remaining unchanged. Our CFO (Brian Riffle) has determined that the revisions will have no material adverse impact on our prior or current financial statements. This action will require the withdrawal of the 1,500,000 shares underlying the initially issued Incentive Stock Option Agreement granted to Mr. McEwen from the unexercised incentive stock options registered on Form S-8 of the SEC on August 25, 2021, under our 2018 Stock Option Plan (the “Plan”), and results in the shares of our common stock underlying the corrected Stock Option Agreement being “restricted securities” if and when exercised by Mr. McEwen. It does not change, the strike price, vesting or the number of shares of Mr. McEwen’s option or the number of shares reserved for issuance under our Plan. This action was approved on the referenced date in good faith by the Board of Directors on a reasonable factual basis and related documentation presented to them by legal counsel for the Company prior to such approval. Mr. McEwen, the Chairman of the Board of Directors, abstained from voting on this matter. See Exhibit 10.1 in Part II, Item 6, for a copy of the corrected Stock Option Agreement.

Item 6. Exhibits

Exhibits incorporated by reference:

Annual Report on Form 10-K for the year ended December 31, 2021, and filed with the SEC on April 14, 2022.

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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