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 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, 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.”
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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 March 31, 2023 |
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”).
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, 2022, which commence on page ten (10) thereof. A copy of this “Annual Report” is attached hereto by Hyperlink in Part II-Other Information, in Item 6 hereof. 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.
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KONATEL, INC.
FORM 10-Q
March 31, 2023
INDEX
| Page No. | |
| PART I – FINANCIAL INFORMATION | |
| Item 1. Financial Statements & Footnotes | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 |
| Item 4. Controls and Procedures | 19 |
| PART II – OTHER INFORMATION | |
| Item 1. Legal Proceedings | 19 |
| Item 1A. Risk Factors | 19 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
| Item 3. Defaults Upon Senior Securities | 19 |
| Item 4. Mine Safety Disclosures | 19 |
| Item 5. Other Information | 20 |
| Item 6. Exhibits | 20 |
| SIGNATURES | 21 |
PART I - FINANCIAL STATEMENTS
March 31, 2023
Table of Contents
| 3 |
KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2023 | December 31, 2022 | |||||||
| 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 Asset | ||||||||
| Other Assets | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| 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 | ||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at March 31, 2023 and outstanding and issued at December 31, 2022 | ||||||||
| Additional Paid In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 Income/(Loss) | ( | ) | ||||||
| Other Income and Expense | ||||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Other Income/(Expense), net | ( | ) | ||||||
| Total Other Income and Expenses | ( | ) | ( | ) | ||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Earnings (Loss) per Share | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Outstanding Shares | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercised Stock Options | ||||||||||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances as of March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common Shares | Additional | Accumulated | ||||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Balances as of January 1, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercised Stock Options | ||||||||||||||||||||
| Stock Based Compensation | — | |||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances as of March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Loan Origination Cost Amortization | ||||||||
| Bad Debt | ||||||||
| Stock-based Compensation | ||||||||
| Change in Right of Use Asset | ||||||||
| Change in Lease Liability | ( | ) | ( | ) | ||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid Expenses | ||||||||
| Accounts Payable and Accrued Expenses | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Net cash (used in) investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| 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.
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KonaTel, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company
KonaTel Nevada (as defined below) was organized under the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business of a full-service MVNO (“Mobile Virtual Network Operator”) provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. It is currently inactive.
KonaTel Inc., a Delaware corporation, formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada subchapter S-Corporation (“KonaTel Nevada”), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly owned subsidiary.
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, CA, as well as in Europe and Asia.
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 nine (9) full-time employees; IM Telecom has twenty-one (21) full-time employees and two (2) part-time employees; and we have four (4) full-time employees.
Principal Products or Services and their Markets
Our principal products and services, across our two (2) active wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for low-income Americans. Except for our ETC Lifeline services distributed in up to ten (10) states and our ACP services 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. |
| 8 |
| · | Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC 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. |
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, 2022.
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 its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. 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 months ended March 31, 2023, and 2022, are not included in the computation of diluted earnings per share because to do so would be anti-dilutive. As of March 31, 2023, and 2022, there were and dilutive shares.
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| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Weighted-average common shares outstanding | ||||||||
| 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 March 31, 2023, 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 months ended March 31, 2023, the Company had two (2) customers that accounted for $
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
NOTE 2 – INVENTORY
Inventory primarily consists of sim cards and cell
phones, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the
first-in, first-out (“FIFO”) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and is
reviewed for obsolescence and counted for accuracy with distributors. At March 31, 2023, and December 31, 2022, the Company had inventory
of $
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NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| 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 March 31, 2023,
Future lease liability payments under the terms of these leases are as follows:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | ||||
| Less Interest | ||||
| Present value of minimum lease payments | ||||
| Less Current Maturities | ||||
| Long Term Maturities | $ |
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:
| March 31, 2023 | December 31, 2022 | |||||||
| Customer List | $ | $ | ||||||
| Software | ||||||||
| ETC License | ||||||||
| Less: Amortization | ( | ) | ( | ) | ||||
| Intangible Assets, net | $ | $ | ||||||
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Amortization expense amounted to $
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 March 31, 2023, and December 31, 2022, was $
NOTE 6 – NOTES PAYABLE
On June 14, 2022, the Company and its wholly owned
subsidiary companies entered into a Note Purchase Agreement and related Guarantee and Security Agreement with CCUR Holdings, Inc. (“CCUR”),
as collateral agent, and Symbolic Logic, Inc., whereby the Company pledged its assets to secure $
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 March 31, 2023, 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 March 31, 2023.
NOTE 8 – SEGMENT REPORTING
The Company operates within two (
| 12 |
The reportable segments consist of Hosted Services and Mobile Services. Mobile Services reporting will now consist 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 our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC 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 three months period ended March 31, 2023 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ | |||||||||
| For the three months period ended March 31, 2022 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | $ | $ | $ |
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock
On February 9, 2023, 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(e), and in full payment of the exercise of incentive stock options granted to him in 2018 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 shares were originally acquired by him through an unrelated private transaction in 2020.
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Non-Compensatory Stock Option Grant
On March 16, 2023, D. Sean McEwen, the Chairman and CEO of the Company, exercised his first tranche of equity stock options for shares of common stock at a price of $ per share, which shares were issued on March 20, 2023.
Stock Compensation
The Company offers incentive stock option equity grants
to directors and key employees. Options vest in tranches and typically expire in five (5) years. For the three months ended March 31,
2023, and 2022, the Company recorded options expense of $
Jeffrey Pearl, an independent Board member, was granted quarterly
incentive stock options on January 30, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of
our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock
price of $, a strike price of $
Robert Beaty, an independent Board member, was granted quarterly
incentive stock options on February 13, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of
our common stock on the date of such grant. The stock option value was computed using the Black-Scholes-Merton pricing model using a stock
price of $, a strike price of $
| Number of | Weighted Average | Weighted Average | Aggregate | ||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | ||||||||||||
| Options Outstanding – December 31, 2022 | $ | $ | |||||||||||||
| Granted | |||||||||||||||
| Exercised | ( | ) | |||||||||||||
| Forfeited | — | — | |||||||||||||
| Options Outstanding – March 31, 2023 | $ | $ | |||||||||||||
| Exercisable and Vested, March 31, 2023 | $ | $ | |||||||||||||
NOTE 10 – SUBSEQUENT EVENTS
Below are events that have occurred since March 31, 2023:
Incentive Stock Option Grants
Jeffrey Pearl, an independent Board member, was granted quarterly incentive stock options on April 28, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant.
Robert Beaty, an independent Board member, was granted quarterly incentive stock options on May 12, 2023, at an exercise price of $, fully vested, which was 110% of the fair market value of our common stock on the date of such grant.
| 14 |
Assignment of Agreement to Acquire Wireless Carrier
On April 6, 2023, we assigned our rights to acquire a wireless carrier to Insight Mobile, Inc., a Delaware corporation (respectively, the “Assignment Agreement” and “Insight Mobile”), which Assignment Agreement shall be held in escrow by counsel for Insight Mobile pending satisfaction of all conditions to the closing of the Assignment Agreement. Additional information about this assignment is contained in the 8-K Current Report of the Company dated April 6, 2023, and filed with the SEC on April 17, 2023, which is available by Hyperlink in Part II-Other Information, in Item 6 hereof.
Loan Extension
On April 28, 2023, the Company provided notice
to CCUR of its election to extend the “First Extension Option,” under the CCUR Loan
by an additional six (6) months. As part of the condition to extend, the Company paid $
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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 at the forepart of this Quarterly Report under the caption “Forward-Looking Statements” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview of Current and Planned Business Operations
We continue to pursue market opportunities for the distribution of our current products and services described in our “Principal Products or Services and their Markets” summary on page eight (8) of this Quarterly Report. In addition, we continue to pursue expanded market distribution opportunities, development of new products and services, the addition of new lines of business and accretive acquisition opportunities that may enhance or expand our current product and service offerings.
Results of Operations
As previously discussed in our filings during 2022 (including our 10-K Annual Report for the year ended December 31, 2022 [see Part II-Other Information, Item 6 below, for a Hyperlink to this Annual Report]), we began to accelerate growth opportunities within our Mobile Services market segment through our wholly owned subsidiary, IM Telecom. In Q4 2022, activity slowed as we repositioned distribution channels to higher profit territories. Through March 31, 2023, we have seen increasing activations and ARPU (“Average Revenue Per User”) within these channels.
The Company recognized increases in Mobile Services direct costs during the quarter ended March 31, 2023, driving down gross profit, as a result of the increase in activity. Since the Company may not capitalize customer acquisition costs over the average life of a customer, we recognize the full incremental cost of each new Mobile Service customer at the start of service, which is typically recovered within 120 days after activation.
Comparison of the three months ended March 31, 2023, to the three months ended March 31, 2022
For the three months ended March 31, 2023, we had $4,031,719 in revenues from operations compared to $4,227,856 for the three months ended March 31, 2022, for a total revenue decrease of $196,137. This decrease in revenue was primarily related to higher per activation reimbursements received in Q1 2022 under the Emergency Broadband Benefit Program (“EBB”), prior to conversion under the ACP supported program. Activations have continued to increase in Q1 2023 as we relocate distribution partners to higher margin positions within our Mobile Services segment. These revenues were primarily derived as a result of delivering high-speed mobile data service to low-income consumers.
For the three months ended March 31, 2023, our cost of revenue was $3,029,840 compared to $2,580,595 in the three months ended March 31, 2022, for a cost of revenue increase of $449,245. Our cost of revenue increase was primarily the result of increased network, handset and sales compensation costs related to distributing additional services.
For the three months ended March 31, 2023, we had gross profit of $1,001,879 compared to $1,647,261 in the three months ended March 31, 2022, for a gross profit decrease of ($645,382). This decline is directly related to up-front costs incurred by accelerating growth to acquire new customers within our Mobile Services segment.
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For the three months ended March 31, 2023, total operating expenses were $1,755,074 compared to $1,596,556 in the three months ended March 31, 2022, for an increase of $158,517. This increase was due primarily to professional services costs as we expanded licensing within new markets for IM Telecom.
For the three months ended March 31, 2023, other income (expense) was $(161,502) compared to $(95,154) in the quarter ended March 31, 2022. This increase is due to interest on our CCUR Loan.
For the three months ended March 31, 2023, we had a net loss of ($914,697) compared to net loss of ($44,449) in the three months ended March 31, 2022. The loss for the three months ended March 31, 2023, was impacted by lower revenue and increased customer acquisition costs directly related to higher activations within our Mobile Services segment. Customer acquisition costs may not be amortized over the life of the customer, and are recorded in full at the time of customer activation.
Liquidity and Capital Resources
As of March 31, 2023, we had $1,596,048 in cash and cash equivalents on hand.
In comparing liquidity between the three-month periods ending March 31, 2023, and March 31, 2022, cash increased by 9.9%. This increase was primarily attributable to short-term debt financing secured of the CCUR Loan. Liabilities and total overall debt increased by 266.2% in the three-month period ended March 31, 2023, when compared to March 31, 2022. This change was primarily the result of the short-term loan received in the CCUR Loan. As we scale capabilities alongside our growth strategy in our Mobile Services customer base, we expect it to provide long-term liquidity.
Our current ratio (current assets divided by our current liabilities) decreased to .76 as of March 31, 2023, compared to 2.81 as of March 31, 2022. Working capital decreased by 155.6%.
Cash Flow from Operations
During the three months ended March 31, 2023, cash flow provided by (used in) operating activities was ($500,836).
Cash Flows from Investing Activities
During the three months ended March 31, 2023, no cash flow was provided by (used in) investing activities.
Cash Flows from Financing Activities
During the three months ended March 31, 2023, cash flow provided by (used in) financing activities was $41,250, consisting of cash received from the exercise of stock options.
Going Concern
For the three months ended March 31, 2023, the Company generated a net loss of ($914,697), compared to a net loss for the three months ended March 31, 2022, of ($44,449). The Company sourced short-term financing in June 2022 to help facilitate its growing Mobile Services segment and support higher customer acquisition costs (sales). The accumulated deficit as of March 31, 2023, is ($9,212,561).
We received $3,150,000 in capital financing during the year ended December 31, 2022, to help grow the Mobile Services base in IM Telecom. Our business gained additional distribution channels as a result, and at its peak more than tripled our subscriber base. High growth phases require immediate expense recognition, and as a result, management expected net operating losses during this high growth phase. Following this initial high-growth phase, management slowed the acceleration, and our business had an immediate (and expected) return to positive cash flow and recorded net operating profit of $301,135 in Q4 2022. In Q4 2022, management shifted our distribution channels towards the highest profit areas, and has seen Average Revenue Per User (“ARPU”) increase as a result. Management also gained additional equipment suppliers, and has been able to leverage terms on device purchases, moving from prepayments up to thirty (30) days. We expect terms to become more favorable and offer greater use of our cash resources in 2023.
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We are one of only a few businesses to hold a national ETC license, which provides us with additive reimbursement rates within the states we operate. We will continue to target and expand into new ETC licensed areas, and expect increasing returns as a result. Management believes as we expand state licensing under our ETC designation, this activity will only continue to increase the value of our ETC license within the marketplace and afford us additional financing capabilities for growth.
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the three-month period ending March 31, 2023.
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 March 31, 2023, 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 $738,706, or 61.4%, and $223,604, or 18.6%. It should be noted that the largest customer is the FCC. As of December 31, 2022, the Company had a significant concentration of receivables from two (2) customers in the amounts of $859,334, or 57.0%, and $255,136, or 16.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers. For the three months ended March 31, 2023, the Company had two (2) customers that accounted for $2,258,114 or 56.0% and $717,577 or 17.8% of revenue, respectively. For the three months ended March 31, 2022, the Company had two (2) customers that accounted for $2,431,569 or 57.5% of revenue and $915,837 or 21.7% of the 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.
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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 March 31, 2023, 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 March 31, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023, 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, 2022, filed with the SEC on April 17, 2023, for a list of Risk Factors, which Annual Report can be accessed by Hyperlink in Part II-Other Information, in Item 6 hereof.
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 certain incentive stock options and the grant of certain additional incentive stock options during and subsequent to the quarter ended March 31, 2023.
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 of the incentive stock options were registered with the SEC pursuant to an S-8 Registration Statement filed with the SEC on August 25, 2021.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
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Item 5. Other Information
Today, the Company disseminated a press release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press release is being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only. This press release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.
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. | ||
| 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 March 31, 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:
8-K Current Report dated April 6, 2023 (“Tempo Assignment”), filed with the SEC April 17, 2023
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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: | May 15, 2023 | 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: | May 15, 2023 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO |
| Date: | May 15, 2023 | By: | /s/ Brian R. Riffle | |
| Brian R. Riffle | ||||
| Chief Financial Officer |
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