KonaTel, Inc. 10-Q

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 commencing on page nine (9) of this Quarterly Report. In addition, we continue to pursue additional market distribution opportunities, such as our expanded short-code messaging (“SMS”) service, development of new products and services, including our newly released wholesale POTS (“Plain Old Telephone Service”) replacement service, and pursuit of accretive acquisition opportunities that may enhance or expand our current product and service offerings. Results of Operations In the six months and quarter ended June 30, 2026, Hosted Services (“CPaaS services”) accounted for approximately 87% of total Company revenue, and Mobile Services accounted for approximately 13% of Company revenue. While the Mobile Services segment does include distributions from our IM Telecom partnership, management continues to prioritize it growth initiatives with the Company’s Hosted Services segment as we focus our efforts on new sales opportunities with our expanded short-code messaging (“SMS”) service, which has doubled in revenue over the past twelve (12) months, and our wholesale POTS service currently provided to regional carriers and resellers who, as of the end of this quarter, have activated approximately 1,000 POTS lines during our initial deployment period. Comparison of the three (3) months ended June 30, 2026, to the three (3) months ended June 30, 2025 For the three (3) months ended June 30, 2026, we had $1,869,848 in revenues from operations compared to $2,158,656 for the three (3) months ended June 30, 2025, for a total revenue decrease of $288,808. The decrease in revenue was primarily due to the decline in Lifeline subscribers in the mobile services segment. The Company continues to explore new revenue streams such as delivery of mobile services through certain health care initiatives and hosted services partnerships. For the three (3) months ended June 30, 2026, our cost of revenue was $1,376,954 compared to $1,608,415 in the three (3) months ended June 30, 2025, for a cost of revenue decrease of $231,462. Our cost of revenue decrease was primarily a result of a decrease in sales compensation and device costs related to the Mobile Services segment and additional cost control efforts in our Hosted Services segment. For the three (3) months ended June 30, 2026, we had gross profit of $492,894 compared to $550,240 in the three (3) months ended June 30, 2025, for a gross profit decrease of $57,346. This decrease primarily resulted from a significant decline in activations in our Mobile Services segment. For the three (3) months ended June 30, 2026, total operating expenses were $644,101 compared to $1,748,798 in the three (3) months ended June 30, 2025, for a decrease of $1,104,696. This decrease was primarily due to lower payroll costs, a reduction in legal and other professional fees and a reduction of application development costs. 18 For the three (3) months ended June 30, 2026, other income (expense) was ($48,136) compared to $10,917 in the quarter ended June 30, 2025. The decrease of $59,053 was due primarily to an increase in accrued interest and the loss on sale of remaining Lifeline related inventory. For the three (3) months ended June 30, 2026, we had a net loss of ($199,343) compared to a net loss of ($1,187,641) in the three (3) months ended June 30, 2025. The decrease in losses of $988,297 was primarily related to lower operating costs. Comparison of the six (6) months ended June 30, 2026, to the six (6) months ended June 30, 2025 For the six (6) months ended June 30, 2026, we had $3,774,910 in revenues from operations compared to $4,327,370 for the six (6) months ended June 30, 2025, for a total revenue decrease of $552,460, a decrease of 12.8%. The decrease in revenue was primarily due to the decline in revenues in our mobile services segment resulting from the shift in sales efforts from Lifeline to our Hosted Services product offerings. For the six (6) months ended June 30, 2026, our cost of revenue was $2,476,412 compared to $3,125,237 in the six (6) months ended June 30, 2025, for a cost of revenue decrease of $648,825, or a decrease of 20.8%. Our cost of revenue decrease was primarily the result of lower network and sales compensation costs, as the Company refocused sales efforts in our Hosted Services segment. For the six (6) months ended June 30, 2026, we had gross profit of $1,298,498 compared to $1,202,133 in the six (6) months ended June 30, 2025, for a gross profit increase of $96,365. This increase primarily resulted from the marketing of higher margin products such as POTS replacement and SMS messaging. For the six (6) months ended June 30, 2026, total operating expenses were $1,730,920 compared to $3,330,335 in the six (6) months ended June 30, 2025, for a decrease of $1,599,416. This decrease was primarily due to lower payroll related expenses, reduced professional fee expenses and lower application development costs in the period. For the six (6) months ended June 30, 2026, other income (expense) was ($49,511) compared to $23,033 in the six (6) months ended June 30, 2025. This decrease was a result of the loss on sale of remaining Lifeline related inventory and a reduction in the amount of interest income earned in 2026. For the six (6) months ended June 30, 2026, we had a net loss of ($481,933) compared to a net loss of ($2,105,169) in the six (6) months ended June 30, 2025. The decrease in losses of $1,623,236 was a result in decreases in costs of revenue and operating expenses. Liquidity and Capital Resources As of June 30, 2026, we had $200,013 in cash and cash equivalents on hand. In comparing liquidity between the six (6) month period ending June 30, 2026, and December 31, 2025, cash decreased by 71.6%. This decrease is the result of less cash flow generated for the period as compared to cash requirements. Liabilities and total overall debt decreased by 1.8% in the six (6) month period ended June 30, 2026, when compared to December 31, 2025, primarily due to a decrease in right of use operating lease obligations. Our current ratio (current assets divided by our current liabilities) decreased to .36 as of June 30, 2026, compared to .68 as of December 31, 2025. Working capital increased by 100.3%. Cash Flow from Operations During the six (6) months ended June 30, 2026, the net cash flow used in operating activities was ($504,706), primarily as a result of changes in stock-based compensation and inventory and consigned equipment. The net cash flow used in operations for the six (6) month period ended June 30, 2025, was ($337,999). Cash Flows from Investing Activities During the six (6) months ended June 30, 2026, cash flow used in investing activities was $148. During the six (6) months ended June 30, 2025, the net cash flow provided by investing activities was the $150,000 note receivable payment received. Cash Flows from Financing Activities During the six (6) months ended June 30, 2026 and June 30, 2025, respectively, there were no cash flows provided by or used in financing activities. 19 Going Concern For the three (3) months ended June 30, 2026, the Company generated a net loss of ($199,343), compared to a net loss of ($1,187,641) for the three (3) months ended June 30, 2025. For the six (6) months ended June 30, 2026, the Company generated a net loss of ($481,933), compared to a net loss for the six (6) months ended June 30, 2025, of ($2,105,169). The accumulated deficit as of June 30, 2026, is ($10,566,076). Effective with the creation of the First Omnibus Agreement between KonaTel and Excess Telecom, under “the Annual Plan,” on October 1, 2025, IM Telecom began to operate as a standalone entity with employees not shared by KonaTel; and KonaTel will continue to receive distributions based upon a new Distribution Agreement for compensation from its sales only under the IM Telecom’s vertical sales channel, including all new sales stemming from our new healthcare vertical partnership as originally agreed. Our Hosted Services offering in particular, is the replacement of copper-wire Plain Old Telephone Service (“POTS”) analog phone lines. Based upon data from the FCC, it is estimated there are approximately 22 million commercial (i.e., used in commercial operations) copper-wire POTS analog phone lines. These lines are scheduled to be phased out (terminated) across the United States by the end of the decade. So, in support of the increasing demand from end-of-life copper-wire POTS service providers, one of the Company’s new services, deployed and tested throughout 2025 and the first and second quarters of 2026, includes a wireless POTS replacement solution targeted at large national telecommunication service providers. Our primary sales efforts over the next four (4) years will be focused on this project. We are also focused on ongoing retail and wholesale sales of our Short Messaging Service (“SMS”) product, which saw continued growth through Q2 of 2026. In May of this year the Company took additional steps to further reduce our operating costs by executing an additional reduction in force of six (6) full-time equivalents. In addition, certain key personnel agreed to take reductions in salary. We have also reduced our reliance on outside application development resources in order to reduce operating costs. Since the quarter ended on June 30, 2026 we have signed an agreement to increase our current capital expenditure line of credit facility from $5M to $10M in order facilitate the growth of our POTS replacement and SMS messaging product offerings, subject to the satisfaction of a $1,500,000 funding requirement. We continue to pursue additional credit facilities to fund the operational growth of the Company. As in previous quarters, the Company continues to implement broad reductions and improve efficiencies to extend and utilize cash resources in the most efficient manner. The above-mentioned product applications and sales initiatives will require capital to expand infrastructure as sales increase. The growth of these products and the launch of certain contracted programs, along with the ability to raise additional capital, will play a significant role in our ability to continue operations with additional cost reduction measures. A lack of success in executing on any one of these initiatives raises doubt about our ability to remain a going concern for the twelve (12) month period from the date of this Quarterly Report. Off-Balance Sheet Arrangements We had no Off-Balance Sheet arrangements during both the three (3) and six (6) month periods ended June 30, 2026, respectively. Critical Accounting Policies Earnings Per Share We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents. All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels. The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of June 30, 2026, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from three (3) customers in the amounts of $100,709 or 45.6%, $29,648 or 13.4% and $28,679 or 11.9%. As of June 30, 2025, the Company had a significant concentration of receivables from three (3) customers in the amounts of $183,185 or 35.6%, $96,017 or 18.7% and $63,848 or 12.4%. 20 Concentration of Major Customer A significant amount of the revenue is derived from contracts with major customers. For the three (3) months ended June 30, 2026, the Company had two (2) customers that accounted for $701,879 or 37.5% of revenue and $320,346 or 17.1% of revenue, respectively. For the three (3) months ended June 30, 2025, the Company had one (1) customer that accounted for $746,954 or 34.6% of revenue. For the six (6) months ended June 30, 2026, the Company had three (3) customers that accounted for $1,412,566 or 37.4%, $590,760 or 15.6% and $407,513 or 10.8% of revenue, respectively. For the six (6) months ended June 30, 2025, the Company had three (3) customers that accounted for $1,430,589 or 33.1%, $469,671 or 10.9% and $464,388 or 10.7% of revenue, respectively. Effect of Recent Accounting Pronouncements The Company will prospectively adopt Accounting Standards Update (“ASU”) 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40) effective with our annual 2027 10-K filing and interim reporting periods effective with our interim report for the quarter ended March 31, 2028. Accordingly, prior-period disclosures will not be made. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not required.