KTEL 10-Q Quarter ended Sept. 30, 2020

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, 2020

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)

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.

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.”

APPLICABLE ONLY TO CORPORATE ISSUERS

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

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

References

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

Forward-Looking Statements

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

KONATEL, INC.

FORM 10-Q

SEPTEMBER 30, 2020

INDEX

PART I - FINANCIAL STATEMENTS

September 30, 2020

Table of Contents

KonaTel, Inc.

Condensed Consolidated Balance Sheets

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KonaTel, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

KONATEL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview of Company

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

KonaTel Inc., formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada 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 d/b/a “Apeiron” (“Apeiron Systems”), which is also our wholly-owned subsidiary. Apeiron Systems 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 Systems holds a Federal Communications Commission (the “FCC”) numbering authority license. Some of Apeiron Systems’ 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, LLC, an Oklahoma limited liability company, d/b/a “Infiniti Mobile” (“IM Telecom”), which became our wholly-owned subsidiary. 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.

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, 2019.

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, and customer lists. Actual results could differ from those estimates.

Basis of Consolidation

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

Net Income/(Loss) Per Share

Basic income/(loss) per common share calculations are determined by dividing net income/(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted income/(loss) per common share calculations are determined by dividing net income/(loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options. The dilutive common shares for the three and nine months periods ended September 30, 2019, are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

The following table reconciles the shares outstanding and net income/(loss) used in the computations of both basic and diluted earnings per share of common stockholders:

Basic income/(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.

Dilutive common share equivalents are computed using the Treasury Stock Method, which computes the number of new shares that may potentially be created by unexercised options. The effects of incremental shares under stock-based compensation would be anti-dilutive because no options are in the money during the reporting periods. The number of shares that would have been reported had the options been in the money would have been 3,400,000 and 2,650,000 respectively for both the three month and nine-month periods ended September 30, 2020, and 2019.

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 other cellular providers. As of September 30, 2020, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two customers in the amounts of 112,248, or 40.3% and $42,563, or 15.3%, of total accounts receivable respectively. As of December 31, 2019, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from three customers in the amounts of $89,078, or 24.4%, $77,662, or 21.3% and $48,475, or 13.3%, respectively.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the nine months ended September 30, 2020, the Company had one customer that accounted for $2,332,716 or 34.6%, of revenue. 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 27.0%, of the total revenue. For the three-month period ended September 30, 2020, the Company had one customer that accounted for $1,023,386 or 40.5%, of 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

The Company has evaluated all 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.

NOTE 2 – TRANSACTIONS

January 2019 Transaction – IM Telecom Acquisition

Effective February 7, 2018, we entered into an Agreement for the Purchase and Sale of Membership Interest (the “PMSI”) dated as of February 5, 2018, with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom d/b/a “Infiniti Mobile” from its sole owner, Trevan Morrow.  The principal asset of IM Telecom was a “Lifeline Program” license (an FCC approved Compliance Plan), the transfer of ownership of which required prior approval of the FCC. Following the FCC approval of the transfer of the Lifeline Program license to us on October 23, 2018, the PSMI was completed on January 31, 2019.  At the closing, we also engaged Mr. Morrow as an independent consultant for ninety (90) days in consideration of $100 and granted him an incentive stock option to purchase 500,000 shares of our common stock at an exercise price of $0.20 per share. The incentive stock option to purchase 500,000 shares was cancelled under a Settlement Agreement and Release between the Company and Mr. Morrow dated September 4, 2019, under the indemnifying obligations of Mr. Morrow under the PSMI, as amended, by reason of an overpayment made to IM Telecom of $168,277.

The purchase price of $583,690 consisted of payments of debt and accounts payable made by the Company on behalf of IM Telecom from the PMSI effective date of February 7, 2018, until January 31, 2019, the closing date. The purchase price allocation included the FCC license valued at $634,252, cash of $14,318, accounts receivable of $123,959, prepaid other assets of $2,400, furniture and equipment of $1,309. As part of the transaction, the Company also agreed to assume accounts payable of $24,271.

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

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the nine months ended September 30, 2020, and 2019, respectively:

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications as of September 30, 2020, and December 31, 2019:

Depreciation and amortization related to Property and Equipment amounted to $21,649 and $21,649 for the nine-month periods ended September 30, 2020, and 2019, respectively; and $7,216 and $7,217 for the three-month periods ended September 30, 2020, and 2019, respectively. Depreciation and amortization expense are included as a component of operating expenses in the accompanying statements of operations.

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 5.29% and 5.34%.

Amortization amounted to $139,958 and $54,421 for the nine months ended September 30, 2020, and 2019, respectively; and $38,290 and $18,140 for the three months ended September 30, 2020, and 2019, respectively. Amortization expense is included as a component of operating expenses in the accompanying Condensed Consolidated Statements of Operations.

The Company has Right-of-Use Assets through leases of property under three non-cancelable leases with terms in excess of one year. The current lease liabilities expire January 1, 2021, December 1, 2021, and May 15, 2022. Future lease liability payments under the terms of these leases are as follows:

The Company also leases two office spaces on a month-to-month basis. Total lease expense for the nine months ended September 30, 2020, and 2019, amounted to $10,653 and $52,592, respectively, for these leases.

NOTE 5 – INTANGIBLE ASSETS

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

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

The Lifeline License, because of the nature of the asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The Lifeline License was acquired through an acquisition. The fair market value of the License as of September 30, 2020, was $634,251.

Amortization expense amounted to $601,750 and $677,280 for the nine months ended September 30, 2020, and 2019, respectively; and $200,583 and $225,760 for the three months ended September 30, 2020, and 2019, 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:

NOTE 6 – AMOUNT DUE TO STOCKHOLDER

During 2019, Joshua Ploude, CEO of Apeiron Systems, 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, the interest rate 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. The amount due as of September 30, 2020, was $41,692.

NOTE 7 – NOTES PAYABLE

In June 2020, the Company received a Small Business Administration (“SBA”) Emergency Injury Disaster Loan (“EIDL”) in the amount of $150,000. The maturity date of the 30-year note is June, 2050. Interest will accrue at a rate of 3.75% per annum. Payments will begin in June 2021.

The Company also received three separate SBA Payroll Protection Loans in the amounts of $186,300, $101,800, and $20,900 for a total of $309,000. Each loan includes an interest rate of 1% and a maturity date of April 14, 2022; however, the Company believes that 100% of these loans will be forgiven based upon current loan SBA forgiveness guidelines. As of September 30, 2020, all loan proceeds have been recorded as forgiven and have been recorded as Other Income.

In conjunction with the Notes Payable, the Company received $10,000 in an SBA Emergency Injury Disaster Grant. This amount was recorded as Other Income.

NOTE 8 – 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, 2020, there are no ongoing legal proceedings.

Contract Contingency

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

Letters of Credit

The Company maintains irrevocable standby letter of credit arrangements with a certain cellular carrier in the aggregate amount of $60,000. 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, 2020, and December 31, 2019, respectively. The letters of credit are not considered in the financial statements.

NOTE 9 – 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 and Lifeline VETC.

Hosted Services – This segment includes a suite of hosted CPaaS services including SIP/VoIP services, SMS/MMS, BOT integration, mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and numerous API driven services.  Apeiron Systems developed, owns, and supports its services through its dedicated national telecommunications network. Apeiron Systems provides telecommunications services to application developers, call centers and small and medium size businesses and markets these services through its website, independent sales agents, ISOs and SCOs.

Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or “Internet of Things”) services. The Company consolidated its wholesale and retail services with Apeiron Systems’ hosted CPaaS services, providing Apeiron Systems with an expanded portfolio of mobile services to bundle with its existing services. Apeiron Systems’ mobile voice/text/data and mobile data services are supported by a blend of reseller agreements with selected 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 Systems’ mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid or pre-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers, and accessories. Apeiron Systems 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 through a single VETC agent agreement with another ETC.  Following our acquisition of IM Telecom, thereby securing our own FCC approved Lifeline ETC license, we are phasing out this segment and we no longer distribute Lifeline service under this single VETC agent agreement; however, we continue to collect monthly commissions for those Lifeline lines that we distributed and which remain active under this single VETC agent agreement.

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

NOTE 10 – STOCKHOLDERS’ EQUITY

Common Stock

The Company has not issued any common stock through September 30, 2020, nor for the year ended December 31, 2019.

Stock Compensation

The Company offers stock option equity awards to directors and key employees. Options vest in tranches and expire in five (5) years. During the nine months ended September 30, 2020, and 2019, the Company recorded vested options expense of $30,771 and $259,962, respectively. For the three months ended September 30, 2020, and 2019, the Company recorded vested options expense of $10,257 and ($14,455), respectively. The option expense not taken as of September 30, 2020, is $51,285, with a weighted average term of 2.6 years.

The following table represents stock option activity as of and for the nine months ended September 30, 2020:

NOTE 11 – SUBSEQUENT EVENTS

Below are events that have occurred since September 30, 2020:

Letters of Credit

As previously mentioned in NOTE 8, the Company had maintained an irrevocable standby letter of credit arrangement with a certain cellular carrier in the aggregate amount of $63,000. In late October 2020, the Company was notified by that carrier that it intended to cancel the letter of credit based upon the Company’s payment history and a lower requirement for security based upon usage. The release of this letter of credit will also cause the release of the UCC-1 currently held by our bank, Somerset Trust.

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, mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and numerous API driven services. Apeiron Systems developed, owns, and supports its services through its dedicated national telecommunications network. Apeiron Systems provides telecommunications services to application developers, call centers and small and medium size businesses. It markets these services through the Apeiron Systems 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 – “Internet of Things”) services. We consolidated our wholesale and retail mobile services with Apeiron Systems’ hosted CPaaS services, providing Apeiron Systems with a bundled portfolio of mobile and hosted CPaaS services. Its 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 Systems’ 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. It 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 services operate through a single VETC agent agreement with another ETC.  Following our acquisition of IM Telecom, thereby securing our own FCC approved Lifeline ETC license, we are phasing out this segment, and we no longer distribute Lifeline service under this single VETC agent agreement; however, we continue to collect monthly commissions for those Lifeline lines that we distributed and which remain active under this single VETC agent agreement.

Results of Operations

Comparison of the quarter ended September 30, 2020, to the quarter ended September 30, 2019

For the quarter ended September 30, 2020, we had $2,527,281 in revenues from operations compared to the quarter ended September 30, 2019, where we had $2,346,975 in revenue from operations. The cost of revenue for the quarter ended September 30, 2020, was $1,625,481, compared to $1,517,834 for the quarter ended September 30, 2019. We had a gross profit of $901,800 for the quarter ended September 30, 2020, and $829,141 for the quarter ended September 30, 2019.

For the quarter ended September 30, 2020, and the quarter ended September 30, 2019, total operating expenses were $958,223 and $993,537, respectively, for a decrease of $35,314.

For the quarter ended September 30, 2020, non-operating expenses were other income of $81,070 (expected PPP loan forgiveness) and interest expense of $4,694, compared to $221 interest income and interest expense of $11,631 for the quarter ended September 30, 2019.

For the quarter ended September 30, 2020, we had net income of $19,953. For the quarter ended September 30, 2019, we had a net loss of $175,805.

In comparing our Condensed Consolidated Statements of Operations between the three-month periods ended September 30, 2020, and 2019, respectively, 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 89.3% of the total gross revenue for the three months ended September 30, 2020. Mobile services showed a decline of 8.3%, and Lifeline VETC, a segment of our business being phased out in favor of our Lifeline ETC business, showed a decrease of 79.5% in gross revenue for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Gross profit margin overall was 34.4% for the three months ended September 30, 2020, compared to 35.3% for the three months ended September 30, 2019. Hosted Services profit margin was 36.5% compared to 47.2% for the three months ended September 30, 2020, and 2019, respectively. Lifeline ETC gross profit margin was 31% compared to 63.7% for the three months ended September 30, 2020, and 2019, respectively. Mobile services gross profit margin was 6.4% compared to 21% for the three months ended September 30, 2020, and 2019, respectively. Lifeline VETC gross profit margin was 73.2% compared to 19% for the three months ended September 30, 2020, and 2019, respectively.

Comparison of the nine months ended September 30, 2020, to the nine months ended September 30, 2019

For the nine months ended September 30, 2020, we had $6,741,830 in revenues from operations compared to the nine months ended September 30, 2019, where we had $7,253,641 in revenue from operations. The cost of revenue for the nine months ended September 30, 2020, was $4,196,528, compared to $4,836,732 for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, and the nine months ended September 30, 2019, total operating expenses were $2,883,526 and $3,476,815, respectively, for a decrease of $593,289.

For the nine months ended September 30, 2020, non-operating expenses were other income of 624,518 and interest expense of $23,459, compared to $1,562 interest income, other income of $14,836 and interest expense of $34,314 for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, we had net income of $262,835. For the nine months ended September 30, 2019, we had a net loss of $1,077,822.

In comparing our Condensed Consolidated Statements of Operations between the nine-month periods ended September 30, 2020, and 2019, 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 74.8% of the total gross revenue for the nine months ended September 30, 2020. Mobile services showed a decline of 32.7%, and Lifeline VETC showed a decrease of 83.4% in gross revenue for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

Gross profit margin overall was 36.2% for the nine months ended September 30, 2020, compared to 33.3% for the nine months ended September 30, 2019. Hosted Services gross profit margin was 32% compared to 38.3% for the nine months ended September 30, 2020, and 2019, respectively. Lifeline ETC gross profit margin was 39.3% compared to 58% for the nine months ended September 30, 2020, and 2019, respectively. Mobile services gross profit margin was 33.7% compared to 28.6% for the nine months ended September 30, 2020, and 2019, respectively. Lifeline VETC gross profit margin was 72.7% compared to 26.7% for the nine months ended September 30, 2020, and 2019, respectively.

Liquidity and Capital Resources

As of September 30, 2020, we had $588,213 in cash and cash equivalents on hand.

In comparing liquidity between the nine-month periods ending September 30, 2020, and September 30, 2019, cash assets increased by 321.24%. This increase was due to increased business, increased cash-flow performance, and the use of government emergency programs. Liabilities and total overall debt showed an 18.5% decrease in the nine-month period ended September 30, 2020, when compared to September 30, 2019. Going forward, equity investment and growth of new services are expected to provide additional liquidity for our business.

Overall, the current ratio (current assets divided by our current liabilities) improved to 0.89 as of September 30, 2020, compared to December 31, 2019, of 0.36. Working capital increased by 87.6%.

Cash Flow from Operations

During the nine months ended September 30, 2020, cash flow provided by operating activities was $441,606, and for the nine months ended September 30, 2019, cash flow used by operating activities was $20,972. Cash flows provided by operating activities were primarily attributable to the Company’s other income and dividends paid for the nine months ended September 30, 2020.

Cash Flows from Investing Activities

During the nine months ended September 30, 2020, cash flow used in investing activities was ($10,833) for asset purchases. For the nine months ended September 30, 2019, cash flow provided from investing activities was $58,603. The cash flow from investing activities for the nine months ended September 30, 2019, was derived from the purchase of IM Telecom.

Cash Flows from Financing Activities

During the nine months ended September 30, 2020, cash flow used in financing activities was $34,035. For the nine months ended September 30, 2019, cash flow provided by financing activities was $45,496. The funds used in financing for the nine months ended September 30, 2020, comprised of repayment of $12,237 on revolving lines of credit, $287,630 dividends paid to shareholders and $109,665 in repayments due to a shareholder. The funds provided by financing for the nine months ended September 30, 2020, comprised of proceeds from four separate SBA PPP and EIDL loans totaling $458,900.

Going Concern

For the nine months ended September 30, 2020, the Company generated net income of $262,835. For the nine months ended September 30, 2019, the net loss was $1,077,822. The Company has sustained itself through the operations of the business as is indicated by net cash provided by operations of $396,739 for the nine months ended September 30, 2020. The accumulated deficit as of September 30, 2020, is $5,944,271

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; diversification of our revenues through the acquisitions of Apeiron Systems and IM Telecom; receiving cash investments through the private placement of shares of our common stock during the first six months of 2018; and revenues from the growth of IM Telecom and Apeiron Systems, all of which have contributed to an improvement in our working capital, without the use of additional lines of credit, borrowings or additional cash investments beyond the initial private placement of shares of our common stock during the first six months of 2018.

Our overall goal was to diversify our sources of revenue and increase profit margins through cost controls and a shift to higher margin product offerings. Prior to acquiring Apeiron Systems and IM Telecom, we derived nearly 100% of our total revenue from cellular (voice) resales. For the nine months ended September 30, 2020, Hosted Services accounts for 53.7% of our total revenue; Mobile Services account for 19.3% of our total revenue; Lifeline (ETC) accounts for 21.2% of our total revenue; and Lifeline VETC, currently being phased out in favor of Lifeline ETC, accounts for 5.8% of our total revenue. Our profit margins were 36% and 33% for the nine months ended September 30, 2020, and 2019, respectively. Our overall expenses were decreased from $3,476,815 for the nine months ended September 30, 2019, to $2,883,526 for nine months ended September 30, 2020. We continue to be confident that with aggressive management and business development that we will continue to eliminate any going concern issues.

Off-Balance Sheet Arrangements

We had no Off-Balance Sheet arrangements during the period ended September 30, 2020.

Critical Accounting Policies

Net Income/(Loss) Per Share

Basic income/(loss) per common share calculations are determined by dividing net income/(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted income/(loss) per common share calculations are determined by dividing net income/(loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. As of September 30, 2020, and September 30, 2019, there are 3,400,000 potentially dilutive common shares. The dilutive common shares for the three and nine months ended September 30, 2019, 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.

The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of September 30, 2020, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two customers in the amount of $112,249, or 40.3% and $42,563, or 15.3% respectively. As of December 31, 2019, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from three customers in the amounts of $89,078, or 24.4%, $77,662, or 21.3% and $48,475, or 13.3%, respectively.

Concentration of Major Customer

A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the nine months ended September 30, 2020, the Company had one customer that accounted for $2,332,716 or 34.6%, of revenue. For the nine-month period ended September 30, 2019, the Company had one customer that accounted for $1,820,875, or 25.0%. For the three-month period ended September 30, 2020, the Company had one customer that accounted for $1,023,386 or 40.5%, of 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

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

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. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of September 30, 2020, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020, 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 11, of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2019, filed with the SEC on May 11, 2020, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.

Our business operations could be impacted by the current world health crisis. The following risk factor regarding the COVID-19 pandemic was one of the risk factors included in the Company’s 10-K Annual Report for the year ended December 31, 2019:

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

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

None; not applicable.

Item 3. Defaults upon Senior Securities

None; not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None; not applicable.

Item 6. Exhibits

Exhibits incorporated by reference:

Annual Report on Form 10-K for the year ended December 31, 2019, and filed with the SEC on May 11, 2020 .

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.

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

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