Company Quick10K Filing
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Konatel
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-11-20 Earnings, Regulation FD, Exhibits
8-K 2019-09-04 Other Events, Exhibits
8-K 2019-07-30 Regulation FD, Exhibits
8-K 2019-02-19 Regulation FD, Exhibits
8-K 2019-01-31 Accountant, Exhibits
8-K 2019-01-31 Regulation FD, Exhibits
8-K 2018-12-31 Enter Agreement, M&A, Sale of Shares, Exhibits
8-K 2018-10-28 Officers, Exhibits
8-K 2018-08-09 Enter Agreement, Enter Agreement, M&A, Exhibits
8-K 2018-03-08 Sale of Shares, Exhibits
8-K 2018-02-07 Other Events, Exhibits
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GRMC Goldrich Mining 3
STLT Spotlight Innovation 2
PSD Puget Energy 0
JADG Jade Global Holdings 0
KTEL 2019-09-30
Part I - Financial Statements
Note 1 - Organization
Note 2 - Transactions
Note 3 - Basis of Presentation
Note 4 - Property and Equipment
Note 5 - Right-To-Use Assets
Note 6 - Intangible Assets
Note 7 - Lines of Credit
Note 8 - Leases
Note 9 - Amount Due To Stockholder
Note 10 - Contingencies and Commitments
Note 11 - Segment Reporting
Note 12 - Stockholders' Equity
Note 13 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exhibit311.htm
EX-31.2 exhibit312.htm
EX-32 exhibit32.htm

Konatel Earnings 2019-09-30

KTEL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ktel10q093019.htm 10-Q KonaTel, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

________________

 

FORM 10-Q

________________

 

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

 

For the quarterly period ended September 30, 2019

 

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

 

For the transition period from ____________ to____________

 

Commission File No. 001-10171

 

KonaTel, Inc.

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

 

     
Delaware   80-0000245
(State or Other Jurisdiction of incorporation or organization)   (I.R.S. Employer I.D. No.)

 

13601 Preston Road, # E816

Dallas, Texas 75240

(Address of Principal Executive Offices)

 

214-323-8410

(Registrant Telephone Number)

 

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

 

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

Yes x No o

 

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

 

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

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer Smaller reporting company x
  Emerging Growth company x

 

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

 

 

 

 

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

 

Our website is www.konatel.com.

 

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

 

 

 

 

 

 

 

 

2 

 

 

 

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   40,692,286 shares
Class   Outstanding as of November 18, 2019

 

References

 

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

 

 

3 

 

 

 

KONATEL, INC.

FORM 10-Q

SEPTEMBER 30, 2019

INDEX

 

       
  Page No.
PART I – FINANCIAL INFORMATION 4
Item 1.      Financial Statements 5
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3.      Quantitative and Qualitative Disclosures About Market Risk 21
Item 4.      Controls and Procedures 21
PART II – OTHER INFORMATION 22
Item 1.      Legal Proceedings 22
Item 1A.   Risk Factors 22
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3.      Defaults Upon Senior Securities 22
Item 4.      Mine Safety Disclosures 22
Item 5.      Other Information 22
Item 6.      Exhibits 23
   
SIGNATURES 24

 

 

PART I - FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2019

Table of Contents

  

   
Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited), and December 31, 2018 5
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019, and 2018 (unaudited) 6
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2019, and 2018 (unaudited) 7
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019, and 2018 (unaudited) 8
Notes to Condensed Consolidated Financial Statements (unaudited) 9

 

 

 

 

4 

 

 

KonaTel, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

   September 30,   December 31, 
   2019   2018 
 Assets          
    Current Assets          
Cash and Cash Equivalents  $139,637   $56,510 
Accounts Receivable, net   720,158    1,035,273 
Note Receivable   —      66,667 
Inventory, Net   1,562    1,085 
Prepaid Expenses   3,677    7,354 
    Total Current Assets   865,034    1,166,889 
           
    Fixed Asset          
Property and Equipment, Net   111,682    132,023 
Right to Use Assets, Net   58,614    —   
    Total Fixed Assets   170,296    132,023 
           
    Other Assets          
Intangible Assets, Net   2,508,089    2,490,922 
Advances for Acquisition Target   —      561,309 
Other Assets   257,740    57,266 
    Total Other Assets   2,765,829    3,109,497 
 Total Assets  $3,801,159   $4,408,409 
           
 Liabilities and Stockholders’ Equity          
    Current Liabilities          
      Accounts Payable and Accrued Expenses  $1,417,543   $1,265,080 
      Amount Due to Stockholder   204,344    91,152 
      Revolving Line of Credit   35,683    103,379 
      Lease Liabilities   42,271    —   
      Deferred Revenue   42,867    69,988 
      Income Tax Payable   87,800    108,941 
      Customer Deposits   29,988    28,854 
    Total Current Liabilities   1,860,496    1,667,394 
           
    Long Term Liabilities          
      Lease Liabilities   17,508    —   
      Deferred Tax Liability   10,700    10,700 
    Total Long Term Liabilities   28,208    10,700 
    Total Liabilities   1,888,704    1,678,094 
           
    Stockholders’ Equity          
Common stock, $0.001 par value, 50,000,000 shares authorized, 40,692,286 outstanding and issued at September 30, 2019, and December 31, 2018   40,692    40,692 
      Additional Paid In Capital   7,301,658    7,041,696 
      Accumulated Deficit   (5,429,895)   (4,352,073)
    Total Stockholders’ Equity   1,912,455    2,730,315 
  Total Liabilities and Stockholders’ Equity  $3,801,159   $4,408,409 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5 

 

 

KonaTel, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2019   2018   2019   2018 
                 
 Revenue  $2,346,975   $2,453,514   $7,253,641   $7,591,218 
 Cost of Revenue   1,517,834    1,892,988    4,836,732    6,481,979 
                     
 Gross Profit   829,141    560,526    2,416,909    1,109,239 
                     
 Operating Expenses                    
    Payroll and Related Expenses   461,331    336,660    1,403,872    1,120,388 
    Operating and Maintenance   225,252    332,718    1,034,287    936,212 
    Bad Debt   3,300    —      3,300    15,210 
    Utilities and Facilities   21,066    41,883    80,839    147,389 
    Depreciation and Amortization   251,117    61,582    753,350    206,172 
    General and Administrative   13,306    26,560    91,639    64,485 
    Marketing and Advertising   2,550    4,995    24,020    42,284 
    Taxes and Insurance   15,615    21,437    85,508    124,771 
 Total Operating Expenses   993,537    825,835    3,476,815    2,656,911 
                     
 Operating Loss   (164,396)   (265,309)   (1,059,906)   (1,547,672)
                     
 Other Income and Expense                    
    Interest Income   221    456    1,562    4,757 
    Other Income   —      318,257    14,836    318,257 
    Interest Expense   (11,631)   (7,087)   (34,314)   (30,951)
 Total Other Income and Expenses   (11,410)   311,626    (17,916)   292,063 
                     
 Net Profit (Loss)  $(175,805)  $46,317   $(1,077,822)  $(1,255,609)
                     
 Net loss per share  $(0.00)  $0.00   $(0.03)  $(0.04)
Weighted Average Number of Basic and Diluted Shares   40,692,286    32,942,286    40,692,286    31,423,055 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6 

 

 

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, 2019   40,692,286   $40,692   $7,041,696   $(4,352,073)  $2,730,315 
Stock Based Compensation             259,962         259,962 
Net Loss                  (1,077,822)   (1,077,822)
                          
Balances as of September 30, 2019   40,692,286   $40,692   $7,301,658   $(5,429,895)  $1,912,455 
                          
                          
Balances as of July 1, 2019   40,692,286   $40,692   $7,414,595   $(5,254,089)  $2,201,198 
Cancellation of Stock Options             (98,482)        (98,482)
Stock Based Compensation             (14,455)        (14,455)
Net Loss                  (175,806)   (175,806)
                          
Balances as of September 30, 2019   40,692,286   $40,692   $7,301,658   $(5,429,895)  $1,912,455 

 

   Common Shares   Additional   Accumulated     
   Shares   Amount   Paid-in Capital   Deficit   Total 
Balances as of January 1, 2018   27,192,286   $27,192   $2,703,033   $(3,190,873)  $(460,648)
Issuance of Common Stock   5,750,000    5,750    1,144,250         1,150,000 
Stock Based Compensation             454,434         454,434 
Net Loss                  (1,255,609)   (1,255,609)
                          
Balances as of September 30, 2018   32,942,286   $32,942   $4,301,717   $(4,446,482)  $(111,823)
                          
                          
Balances as of July 1, 2018   32,942,286   $32,942   $4,139,734   $(4,492,799)  $(320,123)
Issuance of Common Stock                       —   
Stock Based Compensation             161,983         161,983 
Net Profit                  46,317    46,317 
                          
Balances as of September 30, 2018   32,942,286   $32,942   $4,301,717   $(4,446,482)  $(111,823)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7 

 

 

KonaTel, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended September 30, 
   2019   2018 
  Cash Flows from Operating Activities:          
    Net Loss  $(1,077,822)  $(1,255,609)
    Adjustments to reconcile net loss to net cash used in operating activities:          
      Depreciation and Amortization   753,350    206,172 
      Bad Debt   3,300    15,210 
      Stock-based Compensation   259,962    454,434 
      Gain on Sale of Business Component   —      (318,257)
           
    Changes in Operating Assets and Liabilities, net of effects of acquisition:          
       Accounts Receivable   375,579    (391,445)
       Inventory   (477)   39,246 
       Prepaid Expenses   6,077    (229,749)
       Accounts Payable and Accrued Expenses   (61,226   140,998 
       Deferred Revenue   (27,121)   36,305 
       Customer Deposits   1,134    —   
       Other Assets   (200,474)   506 
  Net cash provided by (used in) operating activities   32,282    (1,302,189)
           
  Cash Flows from Investing Activities          
    Cash Received in Acquisition of IM Telecom   14,318    —   
    Notes Receivable from Sale of Business Component   66,667    8,333 
    Proceeds from Sale of Business Component   —      226,043 
    Asset Purchase of IM Telecom   (22,382)   —   
  Net cash provided by (used in) investing activities   58,603    234,376 
           
  Cash Flows from Financing Activities          
     Proceeds from issuance of common stock   —      1,150,000 
     Repayment of Revolving Lines of Credit   (67,696)   —   
     Principal Payments on Lease Liabilities   (53,254)     
     Advances made by Stockholder   200,000    100,000 
     Repayments of amounts due to Related Party   (86,808)   (213,328)
  Net cash provided by (used in) financing activities   (7,758)   1,036,672 
           
  Net Change in Cash   83,127    (31,141)
  Cash - Beginning of Year   56,510    94,149 
  Cash - End of Period  $139,637   $63,008 
           
Supplemental Disclosure of Cash Flow Information          
     Cash paid for interest  $29,920   $20,359 
     Lease Obligations for Right to Use Assets  $59,658   $—   
     Cash paid for taxes  $—     $—   
           
Non-cash investing and financing activities:          
Asset Purchase of IM Telecom          
Accounts Receivable  $63,764      
Prepaid Expense  $2,400      
Furniture and Equipment at Fair Market Value  $1,308      
Accounts Payable and Accrued Expenses, net of cash  $(192,548)     
License  $694,447      
Sale of Business Component          
Notes Receivable       $(100,000)
Accounts Payable and Accrued Expenses, net of cash       $3,819 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8 

 

 

KONATEL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – ORGANIZATION

 

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

 

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

 

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

 

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

 

NOTE 2 – TRANSACTIONS

 

The following are significant transactions that impact the operations of the Company:

 

Apeiron Acquisition

 

On December 31, 2018, the Company purchased Apeiron, which became a wholly-owned subsidiary. The total purchase price was $2,450,000. The purchase included the issuance of 7,000,000 shares of the Company’s common stock in exchange for all the outstanding common shares of Apeiron common stock. The purchase price was derived and based on the fair market value of the 7,000,000 shares at the December 31, 2018, common stock price of $0.35 per share. The acquisition provides the Company with expansion and diversification within the telecommunications industry. Apeiron brings CPaaS and business networking services to the Company that have significant business in the wireless telecommunications industry. The combination allows the Company to share customers and provide bundled service integrations.

 

Infiniti Mobile Acquisition

 

On January 31, 2019, the Company completed the acquisition of Infiniti Mobile. The purchase price was $752,366 and included $100 in cash, advances to Infiniti Mobile for the period from the sales agreement dated February 5, 2018, until January 31, 2019, in the amount of $465,056, USAC over-payment settlement of $168,277 and accounts receivables due to the Company in the amount of $152,764.

 

9 

 

 

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

 

Cash  $14,318 
Accounts Receivable   63,764 
Prepaid Expenses and Deposits   2,400 
Furniture and Equipment at Fair Value   1,309 
License   694,447 
Accounts Payable   (192,548)
   Net Assets Acquired  $583,690 

 

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the three and nine months ended September 30, 2019, and 2018 respectively, as if Infiniti Mobile and Apeiron had been acquired on January 1, 2018:

 

  

For the Three

Months Ended

September 30, 2019

  

For the Three

Months Ended

September 30, 2018

  

For the Nine

Months Ended

September 30, 2019

  

For the Nine

Months Ended

September 30, 2018

 
Net Sales  $2,346,975   $3,279,615   $7,317,859   $10,225,430 
Net Profit (Loss)  $(175,805)  $89,147   $(1,043,590)  $(928,468)
Net profit (loss) per share, basic and diluted  $(0.00)  $0.00   $(0.03)  $(0.03)

 

NOTE 3 – 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, 2018.

 

Basis of Presentation

 

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

 

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

 

Basis of Consolidation

 

The condensed consolidated financial statements include the Company and three (3) wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron and Infiniti Mobile. The condensed consolidated financial statements for the nine-month period ended September 30, 2019, include the Company and its three (3) wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron and Infiniti Mobile (February through September). The condensed consolidated balance sheet for year ended December 31, 2018, includes the Company and the wholly-owned corporate subsidiaries, KonaTel Nevada and Apeiron. The condensed consolidated statements of operations, cash flows, and stockholders’ equity (deficit) for the nine-month period ended September 30, 2018, include the Company and the wholly owned corporate subsidiary, KonaTel Nevada. All significant intercompany transactions are eliminated.

 

10 

 

 

Going Concern

 

As the Company did not generate net income during the nine-month periods ended September 30, 2019, and 2018, the Company has been dependent upon equity financing to support its operations. The Company incurred losses of $1,077,822 and $1,255,609 for the nine-month periods ended September 30, 2019, and 2018, respectively. The Company has had significant improvement in providing cash from the operations. Net cash provided by operating activities was $32,282 and used in operating activities was ($1,302,189) for the nine-months ended September 30, 2019, and 2018, respectively. The accumulated deficit as of September 30, 2019, is $5,429,895.

 

The Company has ameliorated any substantial doubt issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017, including: the acquisition of Apeiron and Infiniti Mobile; receiving cash investments through the private placement of shares of our common stock; and revenues from the growth of our Virtual ETC program, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings. Additionally, the Company also has two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of up to 60 days on mobile phone purchases and a bank line of credit for purchases of select mobile phones.

 

Net Loss Per Share

 

Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2019, and December 31, 2018, there are 4,575,000 and 4,325,000 potentially dilutive common shares, respectively. The dilutive common shares are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

 

Concentrations of Credit Risk

 

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

 

All cash and cash equivalents and restricted cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels. The Company also has a concentration of risk with respect to trade receivables from customers and cellular providers. As of September 30, 2019, the Company had no significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables). As of December 31, 2018, the Company had a significant concentration of receivables due from two customers in the amounts of $441,934, or 42.7%.

 

Concentration of Major Customer

 

A significant amount of the revenue is derived from contracts with major customers and cellular providers. For the nine-month period ended September 30, 2019, the Company had one customer that accounted for $1,810,875, or 25.0% and one cellular provider that accounted for $2,028,814, or 28.0%, of the total revenue. For the three-month period ended September 30, 2019, the Company had one customer that accounted for $634,668, or 27.0% and one cellular provider that accounted for $612,092, or 26.1% of the total revenue.

 

Effect of Recent Accounting Pronouncements

 

On February 25, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Early application is permitted. The Company has determined that adoption of the standard will begin January 1, 2019. The Company currently has four equipment operating leases and one Property lease; and the Property lease expires in April 2020. The Company has determined that this pronouncement will not have a material impact on the financial statements (see NOTE 5).

 

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

 

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Emerging Growth Company

 

The Company is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following major classifications as of September 30, 2019, and December 31, 2018:

 

  

September 30,

2019

  

December 31,

2018

 
Leasehold Improvements  $46,950   $46,950 
Furniture and Fixtures   102,946    101,638 
Billing Software   217,163    217,163 
Office Equipment   86,887    86,887 
    453,946    452,638 
Less:  Accumulated Depreciation and Amortization   (342,264)   (320,615)
Property and equipment, net  $111,682   $132,023 

 

Depreciation and amortization expense amounted to $21,649 and $21,649 for the nine-month periods ended September 30, 2019, and 2018 and $7,217 and $7,216 for the three-month periods ended September 30, 2019, and 2018, respectively. Depreciation and amortization expense are included as a component of operating expenses in the accompanying statements of operations.

 

NOTE 5 – RIGHT-TO-USE ASSETS

 

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

 

  

September 30,

2019

  

December 31,

2018

 
Right-to-Use Assets  $113,035   $—   
Less:  Accumulated Depreciation   (54,421)   —   
Right-to-Use, net  $58,614   $—   

 

Depreciation amounted to $54,421 for the nine-month period and $18,140 for the three-month period ended September 30, 2019. Depreciation expense is included as a component of operating expenses in the accompanying statements of operations.

 

NOTE 6 – INTANGIBLE ASSETS

 

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

 

  

September 30,

2019

  

December 31,

2018

 
Customer Lists  $1,135,961   $1,135,961 
Software   2,407,001    2,407,001 
License   694,447    —   
Less: Accumulated Amortization   (1,729,320)   (1,052,040)
Intangible Assets, net  $2,508,089   $2,490,922 

 

Amortization expense amounted to $677,280 and $151,059 for the nine-month periods ended September 30, 2019, and 2018 and $225,761 and $20,903 for the three-month periods ended September 30, 2019, and 2018, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. Amortization expense is expected to be as follows:

 

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2019  $  208,976 
2020  $  802,334 
2021  $  802,333 

 

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

 

The License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The License was acquired through an acquisition. The fair market value of the License as of September 30, 2019, was $624,255.

 

NOTE 7 – LINES OF CREDIT

 

The Company has two lines of credit with a bank which provide aggregate maximum borrowing availability of $1,050,000 as of September 30, 2019, and December 31, 2018. The lines of credit are payable on demand and bear interest at a variable rate with rate ranges from 7.5% to 8.0%. Outstanding advances under these line of credit arrangements amounted to $35,683 and $103,379 as of September 30, 2019, and December 31, 2018, respectively. The lines of credit mature on January 5, 2020, and February 14, 2020.

 

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

 

NOTE 8 – LEASES

 

The Company has right-to-use assets through leases of property under three non-cancelable leases with terms in excess of one year. The current lease liabilities expire April 30, 2020, September 1, 2020, and December 1, 2021. Future lease liability payments under the terms of these leases are as follows:

 

2019   $18,110 
2020   $31,373 
2021   $10,175 
Total   $59,658 
Less Current Maturities   $42,150 
Long Term Maturities   $17,508 

 

The Company also leases two office spaces on a month-to-month basis. Total lease expense for the nine-month periods ended September 30, 2019, and 2018 amounted to $52,592 and $110,023 and $15,392 and $33,677 for the three-month periods ended September 30, 2019, and 2018, respectively.

 

NOTE 9 – AMOUNT DUE TO STOCKHOLDER

 

As of September 30, 2019, and December 31, 2018, the Company’s principal shareholder, D. Sean McEwen was owed $4,344 and $91,152, respectively, for advances used for working capital under a note. The note bears a 10% per annum interest rate. The note matures on November 30, 2019.

 

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

 

NOTE 10 – CONTINGENCIES AND COMMITMENTS

 

Litigation

 

From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of September 30, 2019, there are no legal proceedings, except the following:

 

On August 28, 2018, we filed a claim in AAA Arbitration against a former employee, Saul Glosser. In August 2019, the Company won an arbitration award (ratified by the court) from Mr. Glosser in the amount of $362,871 ($357,914 plus arbitrator compensation of

 

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$4,957). The award has been deemed final as Mr. Glosser has not preserved any outstanding issues for review. At this time collectability is yet to be determined, and therefore the award is not currently reflected in the balance sheet.

 

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.

 

Letters of Credit

 

The Company maintains irrevocable standby letter of credit arrangements with certain cellular carriers in the aggregate amount of $63,000. The letters of credit serve as collateral and security for various resale contracts the Company has with their suppliers. The letters of credit are unused as of September 30, 2019, and December 31, 2018. The letters of credit are not considered in the financial statements.

 

Regulatory Determinations

 

On May 17, 2019, Infiniti Mobile was notified by the United States Administrative Company (“USAC”) of an over-payment of Universal Service Fund reimbursements in the amount of $168,677. On July 25, 2019, the Company entered into a Letter of Acknowledgement with the FCC and requested a 24-month payment plan regarding the repayment of the over-payment amounts. The FCC decision regarding the payment plan request is pending and is expected before December 31, 2019. As required by the Letter of Acknowledgement requirements, Infiniti Mobile has made a good faith down payment in the amount of 10% of the total over-payment and continues to make regular monthly payments of 1/24th of the outstanding balance pending payment plan approval. The over-payment amount was recorded as a current acquisition expense.

 

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

 

NOTE 11 – SEGMENT REPORTING

 

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

 

The reportable segments consist of Hosted Services, Mobile Services, Lifeline ETC (“Eligible Communications Carrier”), and Lifeline VETC (“Virtual Eligible Communications Carrier”).

 

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

 

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or “Internet of Things”) services. KonaTel consolidated its wholesale and retail services with Apeiron’s hosted CPaaS services, providing Apeiron with an expanded portfolio of mobile services to bundle with its existing services. Apeiron’s mobile voice/text/data and mobile data

 

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

 

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

 

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

 

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

 

   Hosted Services   Mobile Services   Lifeline ETC   Lifeline VETC   Total 
For the nine-month period ended September 30, 2019                         
Revenue  $2,450,483   $1,943,318   $506,931   $2,352,909   $7,253,641 
Net Loss  $(215,291)  $144,955   $(462,519)  $(544,967)  $(1,077,822)
Depreciation and amortization  $428,060   $269,712   $34,705   $20,872   $753,350 
Additions to property and equipment  $—     $—     $—     $—     $—   
                          
For the three-month period ended September 30, 2019                         
Revenue  $875,256   $600,553   $276,073   $595,093   $2,346,975 
Net Loss  $46,816   $(93,308)  $21,819  $(151,133)  $(175,806)
Depreciation and amortization  $199,586   $19,711   $1,507   $30,313   $251,117 
Additions to property and equipment  $—     $—     $—     $—     $—   
                          
For the nine-month period ended September 30, 2018                         
Revenue  $—     $3,929,840   $—     $3,661,378   $7,591,218 
Net Loss  $—     $(676,925)  $—     $(578,684)  $(1,255,609)
Depreciation and amortization  $—     $115,140   $—     $91,032   $206,172 
Additions to property and equipment  $—     $—     $—     $—     $—   
                          
For the three-month period ended September 30, 2018                         
Revenue  $—     $945,764   $—     $1,507,750   $2,453,514 
Net Profit (Loss)  $—     $(254,292)  $—     $300,609   $46,317 
Depreciation and amortization  $—     $52,542   $—     $9,040   $61,582 
Additions to property and equipment  $—     $—     $—     $—     $—   

 

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NOTE 12 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

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

 

On April 13, 2018, the Company issued 1,000,000 shares in a private placement to “accredited investors” at $0.20 per share for an aggregate amount of $200,000, $100,000 of which was in cash and $100,000 of which was in settlement of an advance in that amount from this subscriber.

 

Stock Compensation

 

The Company offers stock option equity awards to directors and key employees. Options vested in tranches and expire in five (5) years. During the nine-months ended September 30, 2019, and 2018, the Company recorded vested options expense of $141,804 and $454,434, respectively. The option expense not taken as of September 30, 2019, is $743,967, with a weighted average term of 3.1 years.

 

The following table represents stock option activity as of and for the three-month period ended September 30, 2019:

 

   

Number of

Shares

  

Weighted Average

Exercise Price

  

Weighted Average

Remaining Life

  

Aggregate

Intrinsic Value

 
                  
Options Outstanding – December 31, 2018    4,325,000   $0.20    3.1   $—   
Granted    500,000   $0.20    2.3      
Exercised                     
Forfeited    1,550,000                
Options Outstanding – September 30, 2019    3,275,000   $0.19    3.2   $—   
                      
Exercisable and Vested, September 30, 2019    2,925,250   $0.19    3.1   $—   

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date of this filing and no material subsequent events have occurred.

 

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

 

Pursuant to the Severance Agreement, Mr. Schneider’s Employment Agreement with the Company dated July 1, 2016, was terminated. The Company agreed to pay his salary (16,667 per month) and benefits through December 31, 2019; allowed him to retain his laptop, monitors, keyboard/mouse and printer; and assigned him certain Company contract rights as a reseller of Lifeline services for StandUp Wireless, another Lifeline provider, which he agreed to assume. The Company had determined that it was no longer interested in acting as a distributor of Lifeline services for StandUp Wireless and intended to focus its efforts on distributing Lifeline service under its own FCC Lifeline license. Additionally, the parties agreed that 500,000 of the 1,500,000 incentive stock options held by Mr. Schneider had vested; that the remaining 1,000,000 incentive stock options that he had been granted were void; and the Amended Incentive Stock Option Agreement was revised to include a customary “cashless” exercise feature for the 500,000 vested options. A Lock-Up/Leak-Out Agreement (the “LULO Agreement”) was also executed and delivered by the Company and Mr. Schneider, which provides for a Lock-Up Period of six (6) months from the exercise of the option to purchase any shares underlying the vested options; and an eighteen (18) month Leak-Out Period thereafter by which he

 

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is limited to the resale of shares of common stock acquired in any such exercise (including shares currently owned or hereafter acquired) to the greater of (i) (5%) of the total shares of the Company publicly traded on any nationally recognized medium of a stature no less than the Pink OTC Markets, Inc. (the “OTC Pink Tier”) of the OTC Markets Group, Inc. (the “OTC Markets”) over the previous ten (10) trading days, or (ii) one percent (1%) of the total outstanding shares of the Company as reported in the Company’s most recently filed SEC report or registration statement in the Edgar Archives of the SEC, divided by thirteen (13) weeks.

 

Pursuant to the Independent Contractor Agreement (the “ICA”) entered into with the Company, Mr. Schneider has agreed to assist the Company in having its wholly-owned subsidiary, Infiniti Mobile, being granted its request for Eligible Telecommunications Carrier (“ETC”) status from the California Public Utilities Commission (“CPUC”) to distribute Lifeline cellular phone service within the State of California. In the event that the Company is successful in this process, Mr. Schneider will be granted a one (1) year Warrant with a customary “cashless” exercise feature to purchase 250,000 shares of the Company’s common stock at an exercise price to be determined on the date of any such approval. The ICA has a term of one (1) year and may be extended by the parties yearly. The LULO Agreement is applicable to any shares that may be acquired under any such Warrant, with the eighteen (18) month term commencing on the exercise of any such Warrant that may be issued. Mr. Schneider has more than thirty (30) year experience in the telecommunications industry should be invaluable to the Company in this process.

 

These agreements also contained customary representations and warranties, confidentiality provisions and non-disparagement provisions, as may have been applicable, among other customary terms and conditions

 

The Company also granted the Vice President of Operations of Infiniti Mobile and the Vice President of Finance stock options under its Form of Incentive Stock Option Agreement and incentive stock option plan, 300,000 options to each at an exercise price of $0.15 per share, which is the current public market price for the common stock of the Company on the OTC Pink Tier, with 100,000 shares each vesting on December 31, 2019, and with the remainder vesting at the rate of 100,000 shares each on December 31, 2020, and 2021.

 

 

 

 

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

 

Overview of Current and Planned Business Operations

 

Our Hosted Services (“CPaaS or Communications Platform as a Service”) include SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”), ML (“Machine Learning”), mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and numerous API driven services. Apeiron developed, owns and supports its services through its dedicated national telecommunications network. Apeiron provides telecommunications services to application developers, call centers and small and medium size businesses. Apeiron markets these services through the Apeiron website, independent sales agents, ISOs (Independent Sales Organizations) and Social Media Optimization (“SCO”).

 

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

 

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

 

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

 

Results of Operations

 

Comparison of the quarter ended September 30, 2019, to the quarter ended September 30, 2018

 

For the quarter ended September 30, 2019, we had $2,346,975 in revenues from operations compared to the quarter ended September 30, 2018, where we had $2,453,514 in revenue from operations. The cost of revenue for the quarter ended September 30, 2019, was $1,517,834, compared to $1,892,988 for the quarter ended September 30, 2018. We had a gross profit of $829,141 for the quarter ended September 30, 2019, and $560,526 for the quarter ended September 30, 2018.

 

For the quarter ended September 30, 2019, and the quarter ended September 30, 2018, total operating expenses were $993,536 and $825,835, respectively, for an increase of $167,701.

 

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For the quarter ended September 30, 2019, non-operating expenses were interest income of $221 and interest expense of $11,631, compared to $456 interest income, other income (gain on sale of business component) of $318,257, and interest expense of $7,087 for the quarter ended September 30, 2018.

 

For the quarter ended September 30, 2019, we had net loss of $175,805. For the quarter ended September 30, 2018, we had a net profit of $46,317.

 

In comparing our Statements of Operations between the three-month periods ended September 30, 2019, and 2018, the Company continued the process of diversifying the service mix. Gross Revenue from Hosted Services and Lifeline ETC were new services added through acquisitions and accounted for 49.1% of the total gross revenue for the three months ended September 30, 2019. Mobile services showed a decline of 36.5%, and Lifeline VETC showed a decrease of 60.5% in gross revenue for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Gross profit margin overall was 35.3% for the three months ended September 30, 2019, compared to 22.8% for the three months ended September 30, 2018. Hosted services and Lifeline ETC gross profit margin was 47.2% and 63.7%, respectively, for the three months ended September 30, 2019. Mobile services gross profit margin was 21.0% compared to (5.90%) for the three months ended September 30, 2019, and 2018, respectively. Lifeline VETC gross profit margin was 19.0% compared to 40.9% for the three months ended September 30, 2019, and 2018, respectively.

 

Comparison of the nine months ended September 30, 2019, to the nine months ended September 30, 2018

 

For the nine months ended September 30, 2019, we had $7,253,641 in revenues from operations compared to the nine months ended September 30, 2018, where we had $7,591,218 in revenue from operations. The cost of revenue for the nine months ended September 30, 2019, was $4,836,732, compared to $6,481,979 for the nine months ended September 30, 2018. We had a gross profit of $2,416,909 for the nine months ended September 30, 2019, and $1,109,239 for the nine months ended September 30, 2018.

 

For the nine months ended September 30, 2019, and the nine months ended September 30, 2018, total operating expenses were $3,476,815 and $2,656,911, respectively, for an increase of $819,904.

 

For the nine months ended September 30, 2019, non-operating expenses were interest income of $1,562, other income of $14,836 and interest expense of $34,314, compared to $4,757 interest income, other income (gain on sale of business component) of $318,257, and interest expense of $30,951 for the nine months ended September 30, 2018.

 

For the nine months ended September 30, 2019, we had net loss of $1,077,822. For the nine months ended September 30, 2018, we had a net loss of $1,255,609.

 

In comparing our Statements of Operations between the nine-month periods ended September 30, 2019, and 2018, the Company continued the process of diversifying the service mix. Gross Revenue from Hosted Services and Lifeline ETC were new services added through acquisitions and accounted for 40.8% of the total gross revenue for the nine months ended September 30, 2019. Mobile services showed a decline of 50.5%, and Lifeline VETC showed a decrease of 35.7% in gross revenue for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Gross profit margin overall was 33.3% for the nine months ended September 30, 2019, compared to 14.6% for the nine months ended September 30, 2018. Hosted services and Lifeline ETC gross profit margin was 38.3% and 58.0%, respectively, for the nine months ended September 30, 2019. Mobile services gross profit margin was 28.6% compared to 13.9% for the nine months ended September 30, 2019, and 2018, respectively. Lifeline VETC gross profit margin was 26.7% compared to 15.4% for the nine months ended September 30, 2019, and 2018, respectively.

 

Liquidity and Capital Resources

 

As of September 30, 2019, we have $139,637 in cash and cash equivalents on hand.

 

In comparing liquidity between the three-month periods ending September 30, 2019, and September 30, 2018, cash and short-term assets decreased by 32.5%. Accounts receivable decrease accounted for the overall decrease. Liabilities and total overall debt showed a 0.6% increase in the three-month period ending September 30, 2019, when compared to September 30, 2018. Going forward, equity investment and growth of new services is expected to provide the liquidity for our business.

 

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Overall, the current ratio (current assets divided by our current liabilities) decreased to .46 as of September 30, 2019, compared to .70 as of December 31, 2018. Working capital decreased by 98.9%. The decreases were created due decreases in accounts receivable and to a short-term borrowing from a stockholder.

 

Cash Flow from Operations

 

During the nine months ended September 30, 2019, cash flow provided by operating activities was $32,282, and for the nine months ended September 30, 2018, cash flow used in operating activities was ($1,302,189). Cash flows used in operating activities were primarily attributable to the Company’s net loss of $1,255,609 for the nine months ended September 30, 2018.

 

Cash Flows from Investing Activities

 

During the nine months ended September 30, 2019, and the nine months ended September 30, 2018, cash flow provided by investing activities was $58,603 and $226,043, respectively. The cash flow from investing activities for the nine months ended September 30, 2019, were from the asset purchase of Infiniti Mobile and payment from a note receivable created in the sale of a business component. The cash flow from investing activities for the nine months ended September 30, 2018, was derived from the sale of a business component.

 

Cash Flows from Financing Activities

 

During the nine months ended September 30, 2019, and the nine months ended September 30, 2018, cash flow provided by (used in) financing activities was ($7,758) and $1,036,672, respectively. The funds provided by financing were comprised of $67,696 for repayment of revolving lines of credit, $53,254 principal payments on lease liabilities, $200,000 in advances from stockholder and $86,808 in repayments due to a stockholder for the nine months ended September 30, 2019. The funds provided by financing were comprised of proceeds from issuance of common stock, $1,150,000, $100,000 in advances made by stockholder and repayments to a stockholder of $213,328 for the nine months ended September 30, 2018.

 

Going Concern

 

As the Company did not generate net income during the nine-month periods ended September 30, 2019, and 2018, the Company has been dependent upon equity financing to support its operations. The Company incurred losses of $1,128,616 and $1,255,609 for the nine-month periods ended September 30, 2019, and 2018, respectively. The Company has had significant improvement in providing cash from the operations. Net cash provided by operating activities was $32,282 and used in operating activities was ($1,293,856) for the nine-months ended September 30, 2019, and 2018, respectively. The accumulated deficit as of September 30, 2019, is $5,429,895.

 

The Company has ameliorated any substantial doubt issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017, including: the acquisition of Apeiron and Infiniti Mobile; receiving cash investments through the private placement of shares of our common stock; and cost reductions in Apeiron and VETC, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings. Additionally, the Company also has two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of up to 60 days on mobile phone purchases and a bank line of credit for purchases of select mobile phones.

 

Off-Balance Sheet Arrangements

 

We had no Off-Balance Sheet arrangements during the period ended September 30, 2019.

 

Critical Accounting Policies

 

Net Loss Per Share

 

Basic loss per common share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share calculations are determined by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2019, and December 31, 2018, there are 2,925,250 and 4,325,000 potentially dilutive common shares, respectively. The dilutive common shares are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

 

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Concentrations of Credit Risk

 

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

 

All cash and cash equivalents and restricted cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels. The Company also has a concentration of risk with respect to trade receivables from customers and cellular providers. As of September 30, 2019, the Company had no significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables). As of December 31, 2018, the Company had a significant concentration of receivables due from two customers in the amounts of $441,934, or 42.7%.

 

Concentration of Major Customer

 

A significant amount of the revenue is derived from contracts with major customers and cellular providers. For the nine-month period ended September 30, 2019, the Company had one customer that accounted for $1,810,875, or 25.0% and one cellular provider that accounted for $2,028,814, or 28.0%, of the total revenue. For the three-month period ended September 30, 2019, the Company had one customer that accounted for $634,668, or 27.0% and one cellular provider that accounted for $612,092, or 26.1% of the total revenue.

 

Effect of Recent Accounting Pronouncements

 

On February 25, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Early application is permitted. The Company has determined that adoption of the standard will begin January 1, 2019. The Company currently has four equipment operating leases and one Property lease; and the Property lease expires in April 2020. The Company has determined that this pronouncement will not have a material impact on the financial statements.

 

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

 

Emerging Growth Company

 

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

 

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.

 

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Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of September 30, 2019, 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 adequate as of September 30, 2019. During this period, we achieved effective controls for ensuring the accuracy of reporting over significant account balances, including the review, approval, documentation of related transactions, and other complex accounting procedures. These control improvements were achieved through the implementation of a Vice President of Finance function and additional segregation of duties and responsibilities as well as multi-level review procedures to validate accounts and financial results. The Company also currently has two independent directors.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

Not required; however, see Item 1A. Risk Factors, Part I, commencing on page 10, of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2018, filed with the SEC on April 23, 2019, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.

 

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

 

None; not applicable.

 

Item 3. Defaults upon Senior Securities

 

None; not applicable.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

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

 

Pursuant to the Severance Agreement, Mr. Schneider’s Employment Agreement with the Company dated July 1, 2016, was terminated. The Company agreed to pay his salary (16,667 per month) and benefits through December 31, 2019; allowed him to retain his laptop, monitors, keyboard/mouse and printer; and assigned him certain Company contract rights as a reseller of Lifeline services for StandUp Wireless, another Lifeline provider, which he agreed to assume. The Company had determined that it was no longer interested in acting as a distributor of Lifeline services for StandUp Wireless and intended to

 

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focus its efforts on distributing Lifeline service under its own FCC Lifeline license. Additionally, the parties agreed that 500,000 of the 1,500,000 incentive stock options held by Mr. Schneider had vested; that the remaining 1,000,000 incentive stock options that he had been granted were void; and the Amended Incentive Stock Option Agreement was revised to include a customary “cashless” exercise feature for the 500,000 vested options. A Lock-Up/Leak-Out Agreement (the “LULO Agreement”) was also executed and delivered by the Company and Mr. Schneider, which provides for a Lock-Up Period of six (6) months from the exercise of the option to purchase any shares underlying the vested options; and an eighteen (18) month Leak-Out Period thereafter by which he is limited to the resale of shares of common stock acquired in any such exercise (including shares currently owned or hereafter acquired) to the greater of (i) (5%) of the total shares of the Company publicly traded on any nationally recognized medium of a stature no less than the Pink OTC Markets, Inc. (the “OTC Pink Tier”) of the OTC Markets Group, Inc. (the “OTC Markets”) over the previous ten (10) trading days, or (ii) one percent (1%) of the total outstanding shares of the Company as reported in the Company’s most recently filed SEC report or registration statement in the Edgar Archives of the SEC, divided by thirteen (13) weeks.

 

Pursuant to the Independent Contractor Agreement (the “ICA”) entered into with the Company, Mr. Schneider has agreed to assist the Company in having its wholly-owned subsidiary, Infiniti Mobile, being granted its request for Eligible Telecommunications Carrier (“ETC”) status from the California Public Utilities Commission (“CPUC”) to distribute Lifeline cellular phone service within the State of California. In the event that the Company is successful in this process, Mr. Schneider will be granted a one (1) year Warrant with a customary “cashless” exercise feature to purchase 250,000 shares of the Company’s common stock at an exercise price to be determined on the date of any such approval. The ICA has a term of one (1) year and may be extended by the parties yearly. The LULO Agreement is applicable to any shares that may be acquired under any such Warrant, with the eighteen (18) month term commencing on the exercise of any such Warrant that may be issued. Mr. Schneider has more than thirty (30) year experience in the telecommunications industry should be invaluable to the Company in this process.

 

These agreements also contained customary representations and warranties, confidentiality provisions and non-disparagement provisions, as may have been applicable, among other customary terms and conditions

 

(2)       Effective October 24, 2019, the Company granted the Vice President of Operations of Infiniti Mobile and the Vice President of Finance stock options under its Form of Incentive Stock Option Agreement and incentive stock option plan, 300,000 options to each at an exercise price of $0.15 per share, which is the current public market price for the common stock of the Company on the OTC Pink Tier, with 100,000 shares each vesting on December 31, 2019, and with the remainder vesting at the rate of 100,000 shares each on December 31, 2020, and 2021.

 

Item 6. Exhibits

 

Exhibit

Number

  Description of Exhibit   Filing
3(i)   Amended and Restated Certificate of Incorporation   Filed with the Form 8-K/A filed on December 20, 2017 and incorporated herein by reference.
3(ii)   Amended and Restated Bylaws   Filed with the Form 8-K/A filed on December 20, 2017 and incorporated herein by reference.
14   Code of Ethics   Filed with the Form 8-K/A filed on December 20, 2017 and incorporated herein by reference.
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith.
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith.
101.INS   XBRL Instance Document    
101.SCH   XBRL Taxonomy Extension Schema    
101.CAL   XBRL Taxonomy Extension Calculation Linkbase    
101.DEF   XBRL Taxonomy Extension Definition Linkbase    
101.LAB   XBRL Taxonomy Extension Label Linkbase    
101.PRE   XBRL Taxonomy Extension Presentation Linkbase    

 

Exhibits incorporated by reference:

 

Annual Report on Form 10-K for the year ended December 31, 2018, and filed with the SEC on April 23, 2019.

  

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SIGNATURES

 

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

 

KonaTel, Inc.

 

Date: November 19, 2019   By: /s/ D. Sean McEwen
        D. Sean McEwen
        Chairman, President 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: November 19, 2019   By: /s/ D. Sean McEwen
        D. Sean McEwen
        Chairman, President, CEO and a Director

 

Date: November 19, 2019   By: /s/ Brian R. Riffle
        Brian R. Riffle
        Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

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