UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM
For the quarterly period ended
For the transition period from ____________to____________
Commission File No.
(Exact name of the issuer as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer I.D. No.) |
(Address of Principal Executive Offices)
(Registrant’s 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.
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).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Smaller reporting company | |
| Emerging Growth company |
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
Our website is www.konatel.com.
Our common stock is quoted on the OTC Markets Group, LLC (the “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:
| Common Capital Voting Stock, $0.001 par value per share | shares | |
| Class | Outstanding as of August 14, 2024 |
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” (“IM Telecom” or “Infiniti Mobile”), of which we own 51%, which interest is subject to conveyance, if approved by the Federal Communications Commission (the “FCC”), to Excess Telecom, Inc., a Nevada corporation (“Excess Telecom”), under a Membership Interest Purchase Agreement effective at January 22, 2024 (the “Excess Telecom Purchase Agreement” or the “Membership Interest Purchase Agreement”). For additional information on the conditions of this conveyance and related agreements, see our 8-K Current Report dated January 22, 2024 (Excess Telecom Membership Purchase Agreement and related Agreements), filed with the SEC on January 30, 2024, which is Hyperlinked in Part II, Other Information, Item 6, Exhibits, hereof, and is incorporated herein by reference.
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, including the “Risk Factors” enumerated in “Part I, Item IA. Risk Factors” of our 10-K Annual Report for the year ended December 31, 2023, which commence on page ten (10) thereof; and issues related to “Cybersecurity” enumerated in “Part I, Item 1C. Cybersecurity,” which commence on page twenty (20) thereof. A copy of the Annual Report is attached hereto by Hyperlink in Part II-Other Information, in Item 6, Exhibits, hereof, and is incorporated herein by reference. 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.
Documents Incorporated by Reference
See Part II-Other Information, in Item 6, Exhibits, hereof.
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KONATEL, INC.
FORM 10-Q
June 30, 2024
INDEX
| Page No. | |
| PART I – FINANCIAL INFORMATION | |
| Item 1. Financial Statements & Footnotes | 4 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 20 |
| Item 4. Controls and Procedures | 20 |
| PART II – OTHER INFORMATION | |
| Item 1. Legal Proceedings | 21 |
| Item 1A. Risk Factors | 21 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
| Item 3. Defaults Upon Senior Securities | 21 |
| Item 4. Mine Safety Disclosures | 21 |
| Item 5. Other Information | 21 |
| Item 6. Exhibits | 22 |
| SIGNATURES | 22 |
PART I - FINANCIAL STATEMENTS
June 30, 2024
Table of Contents
| 3 |
KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| June 30, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, Net | ||||||||
| Inventory, Net | ||||||||
| Prepaid Expenses | ||||||||
| Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Other Assets | ||||||||
| Intangible Assets, Net | ||||||||
| Right of Use Assets | ||||||||
| Other Assets | ||||||||
| Total Other Assets | 780,437 | 1,152,122 | ||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Loans Payable, Net of Loan Fees | ||||||||
| Right of Use Operating Lease Obligation - Current | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Right of Use Operating Lease Obligation - Long Term | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at June 30, 2024 and outstanding and issued at December 31, 2023 | ||||||||
| Additional Paid In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Revenue | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Payroll and Related Expenses | ||||||||||||||||
| Operating and Maintenance | ||||||||||||||||
| Bad Debt | ||||||||||||||||
| Professional and Other Expenses | ||||||||||||||||
| Utilities and Facilities | ||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||
| General and Administrative | ||||||||||||||||
| Marketing and Advertising | ||||||||||||||||
| Application Development Costs | ||||||||||||||||
| Taxes and Insurance | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income and Expense | ||||||||||||||||
| Gain on Sale | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Income/(Expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income and Expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Income Before Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income Tax Expense (Benefit) | ( | ) | ||||||||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Earnings (Loss) per Share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted Average Outstanding Shares | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
KonaTel, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Stock Options Exercised | ||||||||||||||||||||
| Net Income | — | |||||||||||||||||||
| Balances as of June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of April 1, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Stock Options Exercised | ( | ) | ||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances as of June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Stock Options Exercised | ||||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances as of June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of April 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Stock Options Exercised | ||||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances as of June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Gain on Sale of IM Telecom (49%) | ( | ) | ||||||
| Loan Origination Cost Amortization | ||||||||
| Bad Debt | ||||||||
| Stock-based Compensation | ||||||||
| Non-Compensatory Stock Options Exercised | ||||||||
| Change in Right of Use Asset | ||||||||
| Change in Lease Liability | ( | ) | ( | ) | ||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid Expenses | ||||||||
| Other Assets | ( | ) | ||||||
| Notes Receivable | ( | ) | ||||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Sale of IM Telecom (49%) | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from Note Payable | ||||||||
| Repayments of Note Payable | ( | ) | ||||||
| Loan Origination Costs | ( | ) | ||||||
| Cash received from Stock Options Exercised | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash - Beginning of Year | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
KonaTel, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company
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”). During 1990, we ceased our then current operations. On March 11, 2000, our Board of Directors began the process of re-entering the development stage, and on June 2, 2014, we completed a merger with Dala Petroleum Corp., a Nevada corporation (respectively, “Dala Nevada” and the “Dala Merger”). We operated as an early-stage oil exploration company focused on our leased acreage acquired by Dala Nevada until 2016, at which time we assigned substantially all of our leased acreage to the former owner of Dala Nevada, and our remaining oil and gas leasehold interests, comprising leases covering approximately 7,489 and 403 acres, more or less, expired in 2017 and 2018, respectively.
On 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, and we succeeded to its operations; and we changed our name to “KonaTel, Inc.” on February 5, 2018.
KonaTel Nevada was organized under the laws of the
State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, our current Chairman and CEO, to conduct
the business of a full-service cellular provider that delivered cellular products and services to individual and business customers in
various retail and wholesale markets. Through its sales network, it provided these services nationwide. In furtherance of its proposed
business,
On December 31, 2018, we acquired Apeiron Systems (www.apeiron.io). 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 Communication Commission (“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”).
Apeiron Systems is headquartered in Johnstown, Pennsylvania, where it has customer service and software engineering resources staffed. Additional development resources are staffed out of Los Angeles, California, as well as in Europe and Asia.
On February 5, 2018, we entered into a purchase agreement to acquire 100% of the membership interest in IM Telecom (www.infinitimobile.com). On October 23, 2018, the FCC approved our acquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom operated as a wholly owned subsidiary of KonaTel until the sale of 51% of its membership interest to “Excess Telecom” on January 22, 2024, which is discussed below. 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. In addition to being an FCC
| 8 |
licensed ETC in thirty-six (36) states/territories, which are Vermont, South Carolina, Georgia, Maryland, Kentucky, Wisconsin, Oklahoma, California, New York, Pennsylvania, Nevada, Alaska, Arkansas, Florida, Louisiana, North Dakota, Nebraska, Ohio, Alabama, Colorado, Hawaii, Iowa, Idaho, Michigan, Minnesota, Missouri, New Jersey, Puerto Rico, Rhode Island, Tennessee, Utah, US Virgin Islands, Virginia, Washington, West Virginia, and Wyoming, IM Telecom has been an FCC licensed Affordable Connectivity Program (“ACP” and the “ACP Program”) provider, authorized to distribute ACP subsidized high-speed mobile voice/data service in the fifty (50) states, Washington D.C. and Puerto Rico. As of June 1, 2024, the ACP Program ended in its current form. The “ACP Extension Act,” among other legislative initiatives, is being considered by Congress for purposes of extending the ACP Program. Stand-alone ACP customers have been given the opportunity to enroll in the Lifeline program, in lieu of ACP benefits. Customers already enrolled in Lifeline, in combination with ACP benefits, continue with Lifeline services. Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income Americans. The ACP Program was an FCC program that provided subsidized high-speed wireless data services to low-income Americans. IM Telecom distributes Lifeline, and prior to June 1, 2024, had distributed ACP services, under its Infiniti Mobile brand name through its website, sales staff, retail locations and ISOs. IM Telecom also offers non-Lifeline and non-ACP services throughout the United States. IM Telecom has a US-based customer support center located in Atmore, Alabama.
On
January 22, 2024 (the “Effective Date”), KonaTel and IM Telecom entered into a Membership Interest Purchase Agreement
(the “Excess Telecom Purchase Agreement” or the “Membership Interest Purchase Agreement”) with Excess
Telecom, Inc., a Nevada corporation (“Excess Telecom”), pursuant to which KonaTel
conveyed
IM Telecom is headquartered in Plano, Texas, and has a warehouse operation in Tulsa, Oklahoma, and a customer service center in Atmore, Alabama. We are headquartered in Plano, Texas.
Apeiron Systems has twelve (12) full-time employees. The current employees of IM Telecom, twenty-two (22) full-time and one (1) part-time, novated to employees of KonaTel under the Excess Telecom Purchase Agreement. These employees continue to engage in the same manner and function of service provided prior to the aforementioned agreement. KonaTel has four (4) other full-time employees.
Principal Products or Services and their Markets
Our principal products and services, provided through Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS, POTS Replacement), 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 thirty-six (36) states/territories and our ACP services, which until June 1, 2024, had been distributed in the fifty (50) states, as well as 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:
| · | Our Hosted Services include a suite of hosted CPaaS services within 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, of which IoT provides device connectivity via wireless 4G/5G. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. |
| · | Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes, equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC |
| 9 |
| license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or previously under the FCC’s ACP 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 any change, reduction or elimination may have a material impact on our Mobile Services business. |
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, 2023.
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 our two (2) wholly owned corporate subsidiaries, KonaTel Nevada and Apeiron Systems, and IM Telecom, presently owned 51% by us. All significant intercompany transactions are eliminated.
Basic income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. The dilutive common shares for the three (3) months ended June 30, 2024, and 2023, and for the six (6) months ended June 30, 2023, are not included in the computation of diluted earnings per share because to do so would be anti-dilutive. As of June 30, 2023, there were potentially dilutive shares.
| Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Numerator | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Weighted-average common shares outstanding, basic | ||||||||
| Dilutive impact of stock options | ||||||||
| Weighted-average common shares outstanding, diluted | ||||||||
| Net income per common share | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| 10 |
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Numerator | ||||||||
| Net Income/Loss | $ | $ | ( | ) | ||||
| Denominator | ||||||||
| Weighted-average common shares outstanding, basic | ||||||||
| Dilutive impact of stock options | ||||||||
| Weighted-average common shares outstanding, diluted | ||||||||
| Net income per common share | ||||||||
| Basic | $ | $ | ( | ) | ||||
| 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.
The Company has a concentration of risk with respect
to trade receivables from customers and cellular providers. As of June 30, 2024, 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 amount of
$
Concentration of Major Customer
A significant amount of the revenue is derived from
contracts with major customers. For the three (3) months ended June 30, 2024, the Company had two (2) customers that accounted for $
Other Revenue
The Company has a shared relationship with distribution of Lifeline services through Excess Telecom. Revenue through this relationship is recorded on a net revenue basis. We have performed a principal versus agent analysis under ASC 606-10-25-25 and have determined that we are acting as agent under this relationship.
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.
Going Concern
For the six (6) months ended June 30, 2024,
the Company generated net income of $
We are one of only a few telecommunication carriers to hold a national wireless ETC Lifeline license, which provides us with additive reimbursement rates within the states we operate. In Q2 2024, we added an additional ten (10) state licenses, which continues to expand our nationally licensed wireless service coverage. We continue to target and expand into additional ETC licensed states.
| 11 |
As of June 1, 2024, funding for the ACP Program ended, which accounted for approximately 15% of our revenues in Q2 2024 and 33% of our revenues in Q1 2024. There are legislative bills to extend funding currently being discussed with Congressional leaders; however, the decision to further fund the ACP Program (or a similar program) remains uncertain. In light of this uncertainty, the Company has taken initial cost reduction measures while discussions continue in Congress, and further expense reduction steps will be required if the ACP Program is not reinstated. Irrespective of an ACP Program extension, the California Lifeline Program provides ongoing business continuity due to its additional state funding and Linkup program.
As a result of the Company’s elimination of outstanding debt and increased cash position, the Company has ameliorated any substantial going concern doubt.
NOTE 2 – INVENTORY
Inventory primarily consists of sim cards, cell phones
and tablets, 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
is reviewed for obsolescence and counted for accuracy with distributors. At June 30, 2024, and December 31, 2023, the Company had inventory
of $
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of June 30, 2024, and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||
| Lease Improvements | $ | $ | ||||||
| Furniture and Fixtures | ||||||||
| Billing Software | ||||||||
| Office Equipment | ||||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation related to Property and Equipment
amounted to $
NOTE 4 – RIGHT-OF-USE ASSETS
Right-of-Use Assets consist of assets accounted for
under ASC 842. The assets are recorded at present value using implied interest rates between
The Company has Right-of-Use Assets through leases
of property under non-cancelable leases. As of June 30, 2024,
Future lease liability payments under the terms of these leases are as follows:
| 2024 | $ | ||
| 2025 | $ | ||
| 2026 | $ | ||
| 2027 | $ | ||
| 2028 | $ | ||
| Thereafter | $ | ||
| Total | $ | ||
| Less Interest | $ | ||
| Present value of minimum lease payments | $ | ||
| Less Current Maturities | $ | ||
| Long Term Maturities | $ |
| 12 |
The weighted average term of the Right-to-Use
leases is
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 the Lifeline license granted by the FCC. The license, because of the nature of the asset and the limitation on the number of granted
Lifeline licenses by the FCC, will not be amortized. The license was acquired through an acquisition. The fair market value of the license
as of June 30, 2024, and December 31, 2023, was $
| June 30, 2024 | December 31, 2023 | |||||||
| Customer List | $ | $ | ||||||
| Software | ||||||||
| ETC License | ||||||||
| Less: Amortization | ( | ) | ( | ) | ||||
| Net Amortizable Intangibles | ||||||||
| Right of Use Assets - net | ||||||||
| Intangible Assets net | $ | $ | ||||||
Amortization expense amounted to $
The reclassification in the Balance Sheet for Right of Use Assets has been made in this filing to conform to both the current and future reported presentation.
NOTE 6 – NOTES PAYABLE
The Company had no outstanding notes payable as of June 30, 2024.
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, 2024, there are no ongoing legal proceedings.
Contract Contingencies
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 $
Letters of Credit
The Company had no outstanding letters of credit as of June 30, 2024.
| 13 |
NOTE 8 – SEGMENT REPORTING
The Company operates within two (
The reportable segments consist of Hosted Services and Mobile Services. Mobile Services reporting consists of our post-paid and pre-paid cellular business.
Hosted Services – Our Hosted Services include a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs.
Mobile Services – Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC Lifeline license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP Program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated.
The following table reflects the result of operations of the Company’s reportable segments:
| Hosted Services | Mobile Services | Total | ||||||||||
| For the six (6) months period ended June 30, 2024 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ | |||||||||
| For the three (3) months period ended June 30, 2024 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ |
| For the six (6) months period ended June 30, 2023 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ | |||||||||
| For the three (3) months period ended June 30, 2023 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ |
| 14 |
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock
On May 9, 2024, Robert Beaty, an independent Board member, conveyed to the Company shares of the Company’s common stock at a price of $, in an exempt transaction pursuant to Section 16b-3(c), and in full payment of the exercise of incentive stock options granted to him in 2019 at a price of $ per share, which was 110% of the fair market value of our common stock on the date of such grant. These ISO shares were issued to Mr. Beaty on May 9, 2024, in exchange for the conveyance of the shares to the Company.
Non-Compensatory Stock Option Grant
On June 17, 2024, D. Sean McEwen, the Chairman and CEO of the Company, exercised his sixth tranche of equity stock options by conveying to the Company shares of the Company’s common stock at a price of $, in an exempt transaction and in full payment of the exercise of the stock options granted to him in 2017 at a price of $ per share, which shares were issued on June 17, 2024.
Stock Option Grants
There were no Stock Option Grants provided for during the quarter ended June 30, 2024.
Stock Compensation
The Company offers incentive stock option grants
to directors and key employees. Options vest in tranches and typically expire five (5) years from the date of grant. For the six (6)
months ended June 30, 2024, and 2023, the Company recorded options expense of $
| Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||
| Options Outstanding – December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | — | |||||||||||||||
| Options Outstanding – June 30, 2024 | $ | $ | ||||||||||||||
| Exercisable and Vested, June 30, 2024 | $ | $ | ||||||||||||||
The aggregate intrinsic value for options outstanding as of June 30, 2024, is not calculated because the closing stock price on June 30, 2024, is less than the weighted average exercise price of outstanding options on that date.
NOTE 10 – SUBSEQUENT EVENTS
Below are events that have occurred since June 30, 2024:
On July 24, 2024, D. Sean McEwen, our Chairman and
CEO, received a payment in the amount of $
On July 29, 2024, the Company received a cease and desist notice from the State of California Public Utilities Commission (“CPUC”). The cause of the notice was identified as an improperly conducted SMS messaging campaign by one of our distribution channels. Upon receiving the notice, the Company took immediate action to identify the source of the complaint and eliminated the SMS messaging campaign associated with the specific distribution channel. The Company will continue conversations with the CPUC to ensure all marketing campaigns comply.
| 15 |
On August 9, 2024, Robert Beaty, an independent Board member, conveyed to the Company shares of the Company’s common stock at a price of $, in an exempt transaction pursuant to Section 16b-3(c), and in full payment of the exercise of incentive stock options granted to him in 2019 at a price of $0.1672 per share, which was 110% of the fair market value of our common stock on the date of such grant.
| 16 |
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 at the forepart of this Quarterly Report under the caption “Forward-Looking Statements” and include general economic factors, cybersecurity and conditions that may directly or indirectly impact our financial condition or results of operations.
Despite risks and uncertainties specifically related to Covid-19, the Company has not experienced adverse impacts to our business operations as a result of this ongoing health concern. Possible vulnerabilities to Covid-19, such as supply chain disruptions, inventory shortages and travel or resource limitations and delays will continue to be a risk that is presented to the Company, our suppliers, our customers and our investors.
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 commencing on page nine (9) 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
As stated previously in our filings during 2023, including our 10-K Annual Report for the year ended December 31, 2023 (see Part II-Other Information, Item 6, Exhibits, below, for a Hyperlink to this Annual Report), we have shifted our focus of mobile services activations to higher ARPU areas (“Average Revenue Per User”) within our eleven (11) Lifeline states. As of June 30, 2024, we have added twenty-five (25) new Lifeline states/territories, for a total of thirty-six (36) Lifeline states/territories. This expanded footprint provides our mobile services business with additional opportunities to serve customers. Under IM Telecom’s national ETC license, and in accordance with the Excess Telecom Purchase Agreement, the Company will continue to enroll and provide services to qualifying consumers in the FCC Lifeline Program. The Lifeline Program is a separate program from the ACP Program under the FCC, and remains committed and viable in support of providing affordable communication services for low-income consumers.
As mentioned in our Q1 2024 filing, funding for the FCC ACP Program was expected to sunset, or partially sunset, in April, 2024, according to an FCC announcement on February 7, 2024. Due to a lack of additional funding from Congress, the ACP program has ended for now, and effective June 1, 2024, households are no longer eligible to receive an ACP discount. The ACP Program had recently contributed approximately 30-35% of total Company revenues. In Q2 2024, ACP revenues were approximately 14% of total Company revenue; Hosted Services (“CPaaS services”) were approximately 40% of total Company revenue; and Lifeline sales accounted for approximately 42% of total Company revenue. The Lifeline Program is a U.S. government subsidized telecommunication program created in 1985. It is separately funded from the ACP Program through fees collected from all U.S. telecommunication invoices. According to the National Lifeline Association (“NaLA”), there are at least eight (8) separate ACP refunding legislative efforts currently moving through the U.S. Congress. Approximately 22 million American households were receiving ACP Program benefits, and ACP refunding efforts generally enjoy wide bi-partisan support. Regardless of the ACP’s future funding status, management continues to prioritize its growth initiatives within the Company’s Hosted Services segment. Specifically, our Hosted Services revenue for the six (6) months ended June 30, 2024, grew 22.1% over the six (6) months period ended June 2023. In Q1 2024, the Company added direct sales resources to our Hosted Services team, in an effort to expand revenues through established relationships in the wholesale, ISP, and carrier verticals. Operational resources were also added to this segment, to support new growth initiatives.
In Q1 2024, the Company chose to expand and reallocate its resources in California to offset the potential risk of an ACP Program end. In lieu of retaining the ACP subsidy, California offers state and federal subsidies which are similar in value to the ACP subsidy. Since Lifeline services are funded by Federal Universal Service Fees (“FUSF”), and not subject to enactment or renewal of government funded appropriations, the Company chose to redirect resources to California Lifeline, where ARPU is equal to or greater than that of ACP.
As previously reported during the first quarter of 2024, the Company entered into a Membership Interest Purchase Agreement with Excess Telecom to sell 49% of IM Telecom in consideration of the sum of $10,000,000. As part of this sale, the Company paid off all existing and outstanding debt, and gained substantial additional liquidity and Owner’s Equity into the business. Upon final sale of the remaining 51%, if approved by the FCC, the Company shall have the right to continue providing Lifeline
| 17 |
qualified services through a Master Distribution Agreement with Excess Telecom, for not less than ten (10) years. If the FCC does not approve Excess Telecom’s petition to acquire IM Telecom under the Membership Interest Purchase Agreement, KonaTel shall retain 51% ownership of IM Telecom and no monies paid by Excess Telecom to KonaTel shall be refundable. Further, if on or before December 31, 2024, the ACP Program is renewed by the U.S. Congress for a duration of greater than four (4) months (the “ACP Renewal Condition”), Excess Telecom shall pay KonaTel the additional sum of $5,000,000 (the “ACP Renewal Earnout), less the balance of a “Finder’s Fee Payment” to an unrelated third party of approximately $125,000. No assurance can be given that the ACP Program will be renewed by the FCC on or prior to December 31, 2024.
See the Hyperlinked 8-K Current Report dated January 22, 2024 (Excess Telecom Membership Interest Purchase Agreement and related Agreements), filed with the SEC on January 30, 2024, for additional information, in Part II, Other Information, Item 6, Exhibits, hereof.
Comparison of the three (3) months ended June 30, 2024, to the three (3) months ended June 30, 2023
For the three (3) months ended June 30, 2024, we had $4,343,179 in revenues from operations compared to $4,601,426 for the three (3) months ended June 30, 2023, for a total revenue decrease of ($258,247). The decrease in revenue was primarily due to the loss of mobile services revenues under the ACP Program, which only partially funded in May of 2024 and ended on June 1, 2024.
For the three (3) months ended June 30, 2024, our cost of revenue was $3,443,472 compared to $3,827,374 in the three (3) months ended June 30, 2023, for a cost of revenue decrease of ($383,902). Our cost of revenue decrease was a result of lower network, sales compensation and device costs, related to the activity decreases from our Mobile Services subscribers.
For the three (3) months ended June 30, 2024, we had gross profit of $899,707 compared to $774,052 in the three (3) months ended June 30, 2023, for a gross profit increase of $125,655. This increase primarily resulted from adding higher ARPU activations in our Mobile Services segment, and sourcing lower compensation and network costs.
For the three (3) months ended June 30, 2024, total operating expenses were $2,154,069 compared to $1,774,350 in the three (3) months ended June 30, 2023, for an increase of $379,719. This increase was primarily due to higher payroll and related expense associated with the addition of headcount in our Apeiron subsidiary.
For the three (3) months ended June 30, 2024, other income (expense) was $(4,763) compared to $(222,422) for the quarter ended June 30, 2023. This decrease was primarily the result of no longer owing interest following the payoff of the CCUR loan.
For the three (3) months ended June 30, 2024, we had net loss of $(1,109,697) compared to a net loss of ($1,222,720) in the three (3) months ended June 30, 2023.
Comparison of the six (6) months ended June 30, 2024, to the six (6) months ended June 30, 2023
For the six (6) months ended June 30, 2024, we had $9,979,016 in revenues from operations compared to $8,633,145 for the six (6) months ended June 30, 2023, for a total revenue increase of $1,345,871. The increase in revenue was primarily due to our focus on the California market, where unit economics remains favorable under the Lifeline program. The Company added resources to the California market in 2023, following the completion of our OSS/BSS transition to include the State of California. The Company was fully ramped in the six (6) months ended June 30, 2024, as compared to building a California base in 2023. Revenues in our Mobile Services segment are primarily gained as a result of delivering high-speed mobile voice and data service to low-income consumers. The State of California also includes a one-time Linkup fee, which is additive to the differential when comparing the periods. Revenues in our Hosted Services segment increased 21.2%, or approximately $550,000, by comparison during this same period, generally driven by higher volume contracted voice minutes and from the addition of new LTE Wireless WAN solutions customers.
For the six (6) months ended June 30, 2024, our cost of revenue was $7,951,804 compared to $6,857,214 in the six (6) months ended June 30, 2023, for a cost of revenue increase of $1,094,590. Our cost of revenue increase was primarily the result of higher network, sales compensation and device costs, related to a higher level of activity from Mobile Services subscribers.
For the six (6) months ended June 30, 2024, we had gross profit of $2,027,212 compared to $1,775,931 in the six (6) months ended June 30, 2023, for a gross profit increase of $251,280. This increase primarily resulted from adding a higher percent of activations in the California market in our Mobile Services segment, and sourcing lower per subscriber equipment and network costs.
For the six (6) months ended June 30, 2024, total operating expenses were $4,128,529 compared to $3,472,674 in the six (6) months ended June 30, 2023, for an increase of $655,855. This increase was primarily due to higher payroll and related expense associated with the addition of headcount in our Apeiron subsidiary, as well as higher stock expense from grants provided in Q4 2023.
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For the six (6) months ended June 30, 2024, other income (expense) was $9,074,704 compared to $(440,674) in the six (6) months ended June 30, 2023. This increase was a result of the gain on sale recognized as part of the sale of 49% interest in IM Telecom.
For the six (6) months ended June 30, 2024, we had net income of $6,973,387 compared to a net loss of ($2,137,417) in the six (6) months ended June 30, 2023.
Liquidity and Capital Resources
As of June 30, 2024, we had $3,681,162 in cash and cash equivalents on hand.
In comparing liquidity between the six (6) month period ending June 30, 2024, and December 31, 2023, cash increased by 373.7%. This increase is the result of cash received as part of the sale of 49% interest in IM Telecom. Liabilities and total overall debt decreased by 54.7% in the six (6) month period ended June 30, 2024, when compared to December 31, 2023, as part of the funds received with the sale of the 49% interest in IM Telecom were used by the Company to pay all material debt obligations then outstanding.
Our current ratio (current assets divided by our current liabilities) increased to 2.20 as of June 30, 2024, compared to .48 as of December 31, 2023. Working capital increased by 201.6%.
Cash Flow from Operations
During the six (6) months ended June 30, 2024, cash flow used in operating activities was ($2,990,950), primarily as a result of debt and other obligations which were paid off as part of a condition to the 49% sale of IM Telecom, as well as a note receivable resulting from the same sale of IM Telecom.
Cash Flows from Investing Activities
During the six (6) months ended June 30, 2024, cash flow provided by investing activities was $9,558,509, as a result of the gain on sale of IM Telecom.
Cash Flows from Financing Activities
During the six (6) months ended June 30, 2024, cash flow used in financing activities was ($3,663,500), primarily as a result of repayments of outstanding notes payable.
Going Concern
For the six (6) months ended June 30, 2024, the Company generated net income of $6,973,387, compared to a net loss for the six (6) months ended June 30, 2023, of ($2,137,417). The Company sold a 49% interest in IM Telecom, which allowed us to pay off all outstanding material debt and retain additive cash. The accumulated deficit as of June 30, 2024, is ($5,265,304).
We are one of only a few telecommunication carriers to hold a national wireless ETC Lifeline license, which provides us with additive reimbursement rates within the states we operate. In Q2 2024, we added an additional ten (10) state licenses, which continues to expand our nationally licensed wireless service coverage. We continue to target and expand into additional ETC licensed states.
As of June 1, 2024, funding for the ACP Program ended, which accounted for approximately 15% of our revenues in Q2 2024 and 33% of our revenues in Q1 2024. There are legislative bills to extend funding currently being discussed with Congressional leaders, however the decisions to further fund the ACP Program (or a similar program) remains uncertain. In light of this uncertainty, the Company has taken initial cost reduction measures while discussions continue in Congress, but further expense reduction steps will be required should it be clear the program will further lapse. Irrespective of an ACP Program extension, the California Lifeline Program provides ongoing business continuity due to its additional state funding and Linkup program.
As a result of the Company’s elimination of outstanding debt and increased cash position, the Company has ameliorated any substantial going concern doubt.
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the six (6) month period ending June 30, 2024.
| 19 |
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. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
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, 2024, 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 amount of $1,071,558 or 58.0%, and $465,576 or 25.2%. It should be noted that the largest customer is the State of California, and the second largest customer is the federal government, as administered by USAC, under the authority of the FCC. As of December 31, 2023, the Company had a significant concentration of receivables from two (2) customers in the amounts of $1,024,308 or 68.5%, and $285,536 or 19.0%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers. For the three (3) months ended June 30, 2024, the Company had two (2) customers that accounted for $1,321,520 or 30.3% and $1,071,558 or 24.6% of revenue, respectively. For the three (3) months ended June 30, 2023, the Company had two (2) customers that accounted for $2,614,769 or 56.8% and $745,484 or 16.2% 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.
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, 2024, 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, 2024.
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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, 2024, 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 Part I, Item 1A. Risk Factors, commencing on page ten (10) of our Annual Report for the year ended December 31, 2023, filed with the SEC on April 1, 2024, for a list of Risk Factors, which Annual Report can be accessed by Hyperlink in Part II-Other Information, in Item 6, Exhibits, hereof. Also see “Cybersecurity,” enumerated in “Part I, Item 1C. Cybersecurity,” of this Annual Report, which commence on page twenty (20) thereof, for information on matters related to cybersecurity issues that may affect our business.
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 exercise of certain non-compensatory stock options and the grant of certain incentive stock options during or subsequent to the quarter ended June 30, 2024.
The shares of common stock issued on the exercise of the non-compensatory stock option and the issuance of the referenced incentive stock options were exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof and applicable state law registration exemptions. The underlying and/or exercised shares that may be issued under the incentive stock options were registered with the SEC pursuant to an S-8 Registration Statement filed with the SEC on August 25, 2021, and as subsequently amended from time to time.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
(i) Effective July 16, 2024, certain individuals on our executive team voluntarily took up to 50% reductions in gross base salary. This compensation has not been accrued by the Company, and any reductions are to be considered temporarily in place if and until such time that the ACP Program is renewed or extended by Congress, or the Board determines otherwise. Additional reductions in salaries to non-executive positions were also made effective, as of August 1, 2024. These additional reductions have not been accrued by the Company and are also similarly considered temporary. See Part III, Item 11. Executive Compensation, in the December 31, 2023, Annual Report attached hereto by Hyperlink, in Part II, Item 6, Exhibits, hereof, commencing on page 37, regarding management compensation for the years ended December 31, 2023, and 2022.
(ii) No director
or Section 16 officer
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Item 6. Exhibits
|
Exhibit Number |
Description of Exhibit | Filing | ||
| 3(i) | Amended and Restated Certificate of Incorporation | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 3(i)(a) | Certificate of Amendment to Amended and Restated Certificate of Incorporation (Name Change). | Filed with the Form 8-K filed on February 12, 2018, and incorporated herein by reference. | ||
| 3(ii) | Amended and Restated Bylaws | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
| 104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL. |
Exhibits incorporated by reference:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KonaTel, Inc. | ||||
| Date: | August 14, 2024 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: | August 14, 2024 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO |
| Date: | August 14, 2024 | By: | /s/ Brian R. Riffle | |
| Brian R. Riffle | ||||
| Chief Financial Officer |
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