What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-04-06 compared with 2020-05-12 · 684 added, 835 removed, 234 unchanged (87% of the section changed)

6 unchanged sentences

Consolidated Statements of Operations

Consolidated Statements of Stockholders’

Equity (Deficit)

Consolidated Statements of Stockholders’ Equity (Deficit)

Consolidated Statements of Cash Flow

Notes to Consolidated Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

To the Board of Directors and

Stockholders of KonaTel, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets

of KonaTel, Inc.

(the Company) as of December 31, 2020 and 2019, and the related statements of operations, stockholders’

and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as

the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of

the Company as of December 31, 2021 and 2019, and the results of its operations and its cash flows for each of the years in the two-year

period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below

are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to

the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our

especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion

on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions

on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment of Intangible Assets

Description of the Matter:

We identified the assessment of the valuation of intangible assets as a

critical audit matter due to the materiality to the financial statements and significant estimate involved.

As discussed in Note 6 to

the financial statements, the Company’s intangible assets are subject to impairment.

Intangible assets are valued at cost and amortized

using the straight-line method over the useful economic life of the asset and

tested for impairment.

The Company’s

intangible assets are comprised of FCC license and software arising from past acquisitions.

The assessment of intangible asset impairment

can be subjective and requires management to make judgements about whether the impairment needs to be recorded and the amount.

fiscal year ended December 31, 2020, the Company did not record any impairment of intangible assets.

How We Addressed the Matter in Our

We obtained a thorough understanding

of the controls the Company has in place to perform this assessment including the analysis of whether the controls are designed and operating

We performed our own detailed evaluation on the analysis of intangible asset impairment prepared by the management by comparing

the year-end balances to the undiscounted future cash flows from the intangible assets to evaluate the Company’s determination of

the carrying value as of December 31, 2020 and analyzed the inputs of the future cash flows to verifiable data.

/s/ Haynie & Company

Haynie & Company

Salt Lake City, Utah

April 6, 2021

We have served as the Company’s auditor since

KONATEL, INC.

CONSOLIDATED BALANCE SHEETS

Years Ended December 31,

Current Assets

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Accounts Receivable, net

Note Receivable

Inventory, Net

Prepaid Expenses

Other Current Assets

Total Current Assets

Property and Equipment, Net

Right of Use Assets, Net

Total Fixed Assets

Intangible Assets, Net

Advances for Acquisition Target

Total Other Assets

5 unchanged sentences

Note Payable - current portion

Lease Liabilities - current portion

Right of Use Operating Lease Obligations - current

Deferred Revenue

Income Tax Payable

Customer Deposits

1 unchanged sentence

Long Term Liabilities

Lease Liabilities - long term

Right of Use Operating Lease Obligations - long term

Note Payable - long term

Deferred Tax Liability

Total Long Term Liabilities

Total Liabilities

Commitments and contingencies

Stockholders’

4 unchanged sentences

Total Liabilities and Stockholders’

The accompanying notes are an integral part of

these consolidated financial statements.

The accompanying notes are an integral part of these

consolidated financial statements.

KONATEL, INC.

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Interest Income

Gain on Sale of Assets

Interest Expense

Total Other Income and Expenses

Net Loss before Provision for Income Tax

$ (1,683,404 )

Net Income (Loss) before Provision for Income Tax

$ (1,683,404 )

Provision for Income Taxes (Benefit)

$ (1,584,904 )

Net Income (Loss)

$ (1,584,904 )

Net Loss per Share

Weighted Average Number of Basic and Diluted Shares

The accompanying notes are an integral part of

these consolidated financial statements.

Net Income (Loss) per Share

Weighted Average Number of Shares

The accompanying notes are an integral part of these

consolidated financial statements.

KONATEL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Shares

2 unchanged sentences

$ (4,352,073 )

Issuance of Common Stock

Issuance of Common Stock in Acquisition

Dividend Settled in 2018

Stock Based Compensation

1 unchanged sentence

$ (5,896,977 )

Dividend Settled in 2018

Stock Based Compensation

Dividends Paid to Apeiron shareholders

Balances as of December 31, 2020

$ (5,968,489 )

The accompanying notes are an integral part of

these consolidated financial statements.

Statements of Cash Flows

The accompanying notes are an integral part of these

consolidated financial statements.

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KONATEL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

Cash Flows from Operating Activities:

$ (1,584,904 )

Net Income (Loss)

$ (1,584,904 )

Adjustments to reconcile net loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and Amortization

Stock-based Compensation

Gain on Sale of Business Component

Change in Right of Use Asset

Change in Lease Liability

Grant Revenue

Changes in Operating Assets and Liabilities, net of effects of acquisition:

4 unchanged sentences

Customer Deposits

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Cash Flows from Investing Activities

1 unchanged sentence

Notes Receivable from Sale of Business Component

Proceeds from Sale of Business Component

Advances for Acquisition Target

Purchase of Assets

Asset Purchase of IM Telecom

1 unchanged sentence

Cash Flows from Financing Activities

Proceeds from issuance of common stock

Repayment of Revolving Lines of Credit

Advances made by Stockholder

Payments on Operating Lease Liabilities

Proceeds from Federal SBA Covid Loans

Repayments of amounts due to Related Party and Seller

Net cash provided by (used in) financing activities

Repayments of Amounts of Notes Payable

Proceeds from Notes Payable

Dividends Paid to Apeiron Shareholders

Net cash used in financing activities

Net Change in Cash

5 unchanged sentences

Non-cash investing and financing activities:

Sale of Assets

Note Receivable

Accounts Payable and Accrued Expenses, net of Cash

Asset Purchase of Apeiron

Intangible Assets

Issuance of Common Stock

$ (2,450,000 )

Accounts Receivable

Vendor Deposits

Property and Equipment

Accounts Payable and Accrued Expenses, net of Cash

Income Tax Payable

Deferred Revenue

Deferred Tax Liability

Asset Purchase of IM Telecom

4 unchanged sentences

Right of use assets obtained in exchange for new operating lease liabilities

The accompanying notes are an integral part of

these consolidated financial statements.

The accompanying notes are an integral part of these

consolidated financial statements.

KONATEL, INC.

Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 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,

(“KonaTel,” 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.

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.

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 (FCC) numbering authority license.

Some of Apeiron Systems’

services include SIP/VoIP services, SMS/MMS processing, BOT integration, NLP (“Natural Language Processing”), ML (“Machine

Learning”), number services including mobile, toll free and DID landline numbers, SMS to Email services, Database Dip services,

SD-WAN, voice termination, and numerous API driven services including voice, messaging, and network management.

On January 31, 2019, we acquired IM Telecom,

an Oklahoma limited liability company, d/b/a Infiniti Mobile, (“Infiniti Mobile”) 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

Inc., a Nevada corporation d/b/a “Apeiron” (“Apeiron Systems”), which is also our wholly owned subsidiary.

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 (“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, an Oklahoma

limited liability company, d/b/a Infiniti Mobile, (“Infiniti Mobile”), which became our wholly owned subsidiary.

Mobile is an FCC licensed ETC (“Eligible Telecommunications Carrier”) and is one of nineteen (19) 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 (8) states.

Basis of Presentation

The accompanying financial statements have

been prepared using the accrual basis of accounting.

The preparation of financial statements in

conformity with accounting principles generally accepted in the United States of America requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities

at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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.

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 consolidated financial statements for

the year ended December 31, 2019, include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron

Systems and Infiniti Mobile (February through December).

The consolidated balance sheet as of December 31, 2018, includes the

Company and the wholly-owned corporate subsidiaries, KonaTel Nevada and Apeiron Systems.

The consolidated statements of operations,

cash flows, and stockholders’

equity (deficit) for the year ended December 31, 2018, include the Company and the wholly-owned

corporate subsidiary, KonaTel Nevada.

Aperion Systems was acquired on December 31, 2018.

All significant intercompany transactions

are eliminated.

The consolidated financial statements for the year

ended December 31, 2020, include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems, and

Infiniti Mobile (January through December).

The consolidated financial statements for the year ended December 31, 2019, include the Company

and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems, and Infiniti Mobile (February through December).

All significant intercompany transactions are eliminated.

Cash and Cash Equivalents

Cash and Cash Equivalents include cash on hand

and all short-term investments with maturities of three months or less.

Cash and Cash Equivalents include cash on hand and

all short-term investments with maturities of three months or less.

Trade Accounts Receivable

The Company accounts for trade receivables

based on amounts billed to customers.

The Company accounts for trade receivables based on

amounts billed to customers.

Past due receivables are determined based on contractual terms.

The Company does not accrue

interest and does not require collateral on any of its trade receivables.

The Company does not accrue interest and

does not require collateral on any of its trade receivables.

Allowance for Doubtful Receivables

1 unchanged sentence

by management based on customer credit history, specific customer circumstances and general economic conditions.

Periodically,

management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables

against the allowance when all attempts to collect the receivable have failed.

As of December 31, 2019, and 2018, management has

determined that no allowance for doubtful receivables is necessary.

Note Receivable

The Company entered into an Assets Sale Agreement

with Telecon Wireless Resources, Inc.

(the “Telecon Wireless Agreement”), with an effective date of July 31, 2018.

As part of the Agreement, the Company agreed to hold a one (1) year note of $100,000 to be paid in 12 payments of $8,333.

December 31, 2019, the receivable was paid in full.

The note in the Telecon Wireless Agreement did not reference an interest rate.

The note was being recorded with an implied interest rate of 5.00%.

Inventory consists primarily of the cost of

cellular phones and cellular accessories.

Periodically, management

reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against

the allowance when all attempts to collect the receivable have failed.

As of December 31, 2020, and 2019, management has determined that

no allowance for doubtful receivables is necessary.

Inventory consists primarily of the cost of cellular

phones and cellular accessories.

Inventory is reported at the lower of cost or net realizable value.

Cost is determined

by the first-in, first-out (“FIFO”) method.

Due to the sale of the assets in July 2018, inventory is minimal as of

December 31, 2019.

Due to the rapidly changing technology within

the industry, inventory is evaluated on a regular basis to determine if any obsolescence exists.

As of December 31, 2019, and 2018,

the allowance for inventory obsolescence was $0.

Cost is determined by the first-in,

first-out (“FIFO”) method.

As of December 31, 2020, total inventory owned by the company was $17,786.

Due to the rapidly changing technology within the

industry, inventory is evaluated on a regular basis to determine if any obsolescence exists.

As of December 31, 2020, and 2019, the allowance

for inventory obsolescence was $0.

Property and Equipment

Property and equipment are recorded at cost

and are depreciated on the straight-line method over their estimated useful lives.

Leasehold improvements are amortized over the

lesser of the lease term or estimated useful life, furniture and fixtures, equipment, and vehicles are depreciated over periods

ranging from five to seven (5-7) years, and billing software is depreciated over three (3) years which represents the estimated

useful life of the assets.

Maintenance and repairs are charged to expense as incurred while major replacements and improvements

are capitalized.

When property and equipment are retired or sold, the cost and applicable accumulated depreciation are removed

from the respective accounts and the related gain or loss is recognized.

The Company recognizes impairment losses for

long-lived assets whenever changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected

future cash flows associated with such assets.

Management has concluded that no impairment reserves are required as of December

31, 2019, and 2018.

Intangible Assets –

Long-Lived Assets

The Company accounts for long-lived assets

in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment

or Disposal of Long-Lived Assets.”

This statement requires that long-lived assets and certain identifiable intangibles be

reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted

net cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized

is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed

of are reported at the lower of the carrying amount or fair value less costs to sell.

Intangible assets consist of customer

lists, licenses and software arising from acquisitions which are amortized on a straight-line basis over three (3) years,

their estimated useful lives.

Property and equipment are recorded at cost and are

depreciated on the straight-line method over their estimated useful lives.

Leasehold improvements are amortized over the lesser of the

lease term or estimated useful life, furniture and fixtures, equipment, and vehicles are depreciated over periods ranging from five to

seven (5-7) years, and billing software is depreciated over three (3) years which represents the estimated useful life of the assets.

Maintenance and repairs are charged to expense as incurred while major replacements and improvements are capitalized.

When property and

equipment are retired or sold, the cost and applicable accumulated depreciation are removed from the respective accounts and the related

gain or loss is recognized.

The Company recognizes impairment losses for long-lived

assets whenever changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows

associated with such assets.

Management has concluded that no impairment reserves are required as of December 31, 2020, and 2019.

Intangible Assets – Long-Lived Assets

The Company accounts for long-lived assets in accordance

with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived

Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be

held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated

by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying

amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or

fair value less costs to sell.

Intangible assets consist of customer lists, licenses,

and software arising from acquisitions which are amortized on a straight-line basis over three (3) years, their estimated useful lives.

Other Intangibles

The Company accounts for other intangibles

in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment

or Disposal of Long-Lived Assets.”

This statement requires that long-lived assets and certain identifiable intangibles be

reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted

net cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized

is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed

of are reported at the lower of the carrying amount or fair value less costs to sell.

During 2019, KonaTel, through the acquisition

of IM Telecom, recorded, at fair market value, a FCC License in the amount of $634,251.

The Company accounts for other intangibles in accordance

with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived

Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be

held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated

by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying

amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or

fair value less costs to sell.

During 2019, KonaTel,

through the acquisition of IM Telecom, recorded, at

fair market value, an FCC License in the amount of $634,251.

Other Intangible Assets are not amortized.

As of December 31, 2019, there is no impairment of the value of the license.

Other Assets represent items classified as

long-term assets in accordance with the Statement of Financial Accounting Standards ASC 210-10-45.

Other Assets include vendor

deposits and security deposits that the Company is required to maintain.

As of December 31, 2020, there

is no impairment of the value of the license.

Other Assets represent items classified as long-term

assets in accordance with the Statement of Financial Accounting Standards ASC 210-10-45.

Other Assets include vendor deposits and security

deposits that the Company is required to maintain.

Customer Deposits

Before entering into a contract with a sub-reseller

customer, the Company requires the customer to either secure a formal letter of credit with a bank or require a certain level of

cash collateral deposits from the customer.

These collateral requirements are determined by management and may be adjusted upward

or downward depending on the volume of business with the sub-reseller customer, or if management’s assessment of credit risk

for a sub-reseller customer would change.

The Company held $18,745 and $28,854 in collateral

deposits from various sub-reseller customers at December 31, 2019, and 2018, respectively.

Such amounts represent collateral received

from the sub-resellers in order to contract with the Company.

The related contracts have an option to terminate within a period

of less than one (1) year, and accordingly, these collateral deposits are classified as current liabilities in the accompanying

balance sheet.

customer, the Company requires the customer to either secure a formal letter of credit with a bank or require a certain level of cash

collateral deposits from the customer.

These collateral requirements are determined by management and may be adjusted upward or downward

depending on the volume of business with the sub-reseller customer, or if management’s assessment of credit risk for a sub-reseller

customer would change.

The Company held $0 and $31,088 in collateral deposits

from various sub-reseller customers at December 31, 2020, and 2019, respectively.

Such amounts represent collateral received from the

sub-resellers in order to contract with the Company.

The related contracts have an option to terminate within a period of less than one

(1) year, and accordingly, these collateral deposits are classified as current liabilities in the accompanying balance sheet.

Fair Market Value of Assets

The Company measures its financial assets and

liabilities in accordance with generally accepted accounting principles.

For certain of our financial instruments, including cash,

accounts payable, accrued expenses, deposits received from customers for receivables and short-term loans the carrying amounts

approximate fair value due to their short maturities.

Long-term assets purchased through acquisitions are valued at the Fair Market

Value of the asset at the time of acquisition.

The Fair Market Value is based on observable inputs on assets in active market-

places for fixed assets, and estimations and assumptions developed by us for Other Intangibles.

The Company follows accounting guidance for

financial and non-financial assets and liabilities.

This standard defines fair value, provides guidance for measuring fair value

and requires certain disclosures.

This standard does not require any new fair value measurements, but rather applies to all other

accounting pronouncements that require or permit fair value measurements.

This guidance does not apply to measurements related

to share-based payments.

This guidance discusses valuation techniques, such as the market approach (comparable market prices),

the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity

of an asset or replacement cost).

The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques

used to measure fair value into three broad levels.

The following is a brief description of those three levels:

The Company measures its financial assets and liabilities

in accordance with generally accepted accounting principles.

For certain of our financial instruments, including cash, accounts payable,

accrued expenses, deposits received from customers for receivables and short-term loans the carrying amounts approximate fair value due

to their short maturities.

Long-term assets purchased through acquisitions are valued at the Fair Market Value of the asset at the time

of acquisition.

The Fair Market Value is based on observable inputs on assets in active market- places for fixed assets, and estimations

and assumptions developed by us for Other Intangibles.

The Company follows accounting guidance for financial

and non-financial assets and liabilities.

This standard defines fair value, provides guidance for measuring fair value and requires certain

This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements

that require or permit fair value measurements.

This guidance does not apply to measurements related to share-based payments.

This guidance

discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income

or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).

The guidance utilizes a fair

value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.

The following

is a brief description of those three levels:

Observable inputs such as quoted prices (unadjusted) in

active markets for identical assets or liabilities.

Inputs other than quoted prices,

which are observable, either directly or indirectly.

These include quoted prices for similar assets or liabilities in active markets

and quoted prices for identical or similar assets or liabilities in markets that are not active.

Unobservable inputs in which

little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that

a market participant would use.

Inputs other than quoted prices, which

are observable, either directly or indirectly.

These include quoted prices for similar assets or liabilities in active markets and quoted

prices for identical or similar assets or liabilities in markets that are not active.

Unobservable inputs in which little

or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant

In February 2016, the FASB updated the accounting

guidance related to leases.

The most significant change in the updated accounting guidance requires lessees to recognize lease

assets and liabilities on the balance sheet for all operating leases with the exception of short-term leases.

The standard also

expands the disclosures regarding the amount, timing and uncertainty of cash flows arising from leases.

For a lessee, the recognition,

measurement and presentation of expenses and cash flows arising from a lease did not significantly change from previous guidance.

We adopted the updated guidance on January 1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted

to reflect the impacts of the updated guidance.

In addition, as permitted under the transition guidance within the new standard,

prior scoping and classification conclusions were carried forward for leases existing as of the adoption date.

The most significant change in the updated accounting guidance requires lessees to recognize lease assets

and liabilities on the balance sheet for all operating leases with the exception of short-term leases.

The standard also expands the disclosures

regarding the amount, timing and uncertainty of cash flows arising from leases.

For a lessee, the recognition, measurement and presentation

of expenses and cash flows arising from a lease did not significantly change from previous guidance.

We adopted the updated guidance on

January 1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the updated guidance.

In addition, as permitted under the transition guidance within the new standard, prior scoping, and classification conclusions were carried

forward for leases existing as of the adoption date.

Upon adoption, we recorded $151,471 for operating

lease assets and liabilities, which includes the impact of fair value adjustments, prepaid and deferred rent.

As of December 31, 2020,

and December 31, 2019, our operating lease assets and liabilities were $80,578 and $81,723, respectively.

Revenue Recognition

Services revenues are generated from cellular

and telecommunication services.

Services revenues are generated from cellular and

telecommunication services.

The revenue is derived from wholesale and retail services.

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services include network platforms, voice, data, and text services.

The Company recognizes revenue as telecommunications and mobile

services are provided in service revenue.

The Company recognizes revenue as telecommunications and mobile services

are provided in service revenue.

Telecommunications and mobile services are billed and paid on a monthly basis.

are billed and paid on a monthly basis.

Services are billed and

paid on a monthly basis.

These bills include an amount for the monthly recurring charge and a usage charge.

We earn revenue from contracts with customers,

primarily through the provision of telecommunications and other services.

We account for these revenues under Accounting Standards

Update (ASU) 2014-09, “Revenue from Contracts with Customers”

(Topic 606), which we adopted on January 1, 2018, using

the modified retrospective approach.

This standard update, along with related subsequently issued updates, clarifies the principles

for recognizing revenue and develops a common revenue standard U.S.

The standard update also amends current guidance for

the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs

of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service.

The adoption of this guidance did not have a material impact on the consolidated financial statements.

We earn revenue from contracts with customers, primarily

through the provision of telecommunications and other services.

We account for these revenues under Accounting Standards Update (ASU)

2014-09, “Revenue from Contracts with Customers” (Topic 606), which we adopted on January 1, 2018, using the modified retrospective

This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops

a common revenue standard U.S.

The standard update also amends current guidance for the recognition of costs to obtain and fulfill

contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred

and amortized consistent with the transfer of the related good or service.

The adoption of this guidance did not have a material impact

on the consolidated financial statements.

Deferred Revenue

Services for cellular and telecommunication

services have a monthly recurring charge that is billed in advance.

This charge covers a 30 or 31- day period.

This charge is deferred

for the period in which it was received and recorded as revenue at the conclusion of the 30 to 31-day period.

Costs, mainly from

outside providers, associated with the deferred revenue are recognized in the same period as revenue is recognized.

Services for cellular and telecommunication services

have a monthly recurring charge that is billed in advance.

This charge covers a thirty (30) or thirty-one (31)-day period.

is deferred for the period in which it was received and recorded as revenue at the conclusion of this period.

Costs, mainly from outside

providers, associated with the deferred revenue are recognized in the same period as revenue is recognized.

Cost of Revenue

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services, equipment and accessories, shipping costs, and commissions of sub-agents.

Costs for advertising products and services,

as well as other promotional and sponsorship costs, are charged to Selling, general and administrative expense in the periods in

which they are incurred.

Costs for advertising products and services, as well

as other promotional and sponsorship costs, are charged to Selling, general and administrative expense in the periods in which they are

Advertising expense was $15,840 and $23,275 for 2020 and 2019 respectively.

Stock-based Compensation

The Company records stock-based compensation

in accordance with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee

stock option awards.

The Company records stock-based compensation in accordance

with the guidance in ASC 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards.

This requires that such transactions be accounted for using a fair-value-based method.

The Company recognizes

the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

The Company accounts for equity instruments

issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions

reached by the ASC 505-50.

Costs are measured at the estimated fair market value of the consideration received or the estimated

fair value of the equity instruments issued, whichever is more reliably measurable.

The value of equity instruments issued for

consideration other than employee services is determined on the earliest of a performance commitment or completion of performance

by the provider of goods or services.

In June 2018, the FASB issued ASU 2018-07,

“Compensation-Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting,”

which expands

the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees.

2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services

to be used or consumed in its own operations by issuing share-based payment awards.

ASU 2018-07 also clarifies that Topic 718 does

not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction

with selling goods or services to customers as part of a contract accounted for under ASC 606.

The amendments in ASU 2018-07 are

effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

In 2019, KonaTel

issued stock-based options to key employees of the company.

Implementation of the aforementioned standard had no effect on the

issuance of the 2019 options.

Provisions for income taxes are based on taxes

payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and

pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements.

Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates

applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

As changes in

tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The benefits of uncertain tax positions are

recorded in the Company’s Consolidated Financial Statements only after determining a more-likely-than-not probability that

the uncertain tax positions will withstand challenge, if any, from taxing authorities.

The Company records interest and penalties

related to unrecognized tax benefits in interest expense in the Company’s Consolidated Statements of Operations.

Net Loss Per Share

Basic loss per common share calculations are

determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

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.

The Company recognizes the cost of all share-based

awards on a graded vesting basis over the vesting period of the award.

The Company accounts for equity instruments issued

in exchange for the receipt of goods or services from nonemployees in accordance with ASC 718-10 and the conclusions reached by the ASC

Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity

instruments issued, whichever is more reliably measurable.

The value of equity instruments issued for consideration other than employee

services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock

Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include

all share-based payment transactions for acquiring goods and services from nonemployees.

ASU 2018-07 specifies that Topic 718 applies

to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations

by issuing share-based payment awards.

ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively

provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract

accounted for under ASC 606.

The amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, including

interim periods within those fiscal years.

In 2020, KonaTel issued stock-based options to key employees of the company.

Implementation

of the aforementioned standard had no effect on the issuance of the 2020 options.

Provisions for income taxes are based on taxes payable

or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial

income and between the tax bases of assets and liabilities and their reported amounts in the financial statements.

Deferred tax assets

and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in

which the deferred tax assets and liabilities are expected to be realized or settled.

As changes in tax laws or rate are enacted, deferred

tax assets and liabilities are adjusted through the provision for income taxes.

The benefits of uncertain tax positions are recorded

in the Company’s Consolidated Financial Statements only after determining a more-likely-than-not probability that the uncertain

tax positions will withstand challenge, if any, from taxing authorities.

The Company records interest and penalties related to unrecognized

tax benefits in interest expense in the Company’s Consolidated Statements of Operations.

Net Income / Loss Per Share

Basic net 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.

net 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 December 31, 2020, there are 3,600,000 potentially dilutive common shares.

As of December

31, 2018, there were 4,250,000 potentially dilutive common shares.

The dilutive common shares are not included in the computation

of diluted earnings per share, because to do so would be anti-dilutive.

As of December 31, 2019, there were 3,675,000 potentially dilutive common shares.

The dilutive common shares for the year ended December

31, 2020, and December 31, 2019, are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.

The following table provides a reconciliation of the

numerators and denominators used to determine basic and diluted net income/loss per common share:

Years Ended December 31,

Net Income/Loss

$ (1,584,904 )

Weighted-average common shares outstanding

Dilutive impact of stock options

Weighted-average common shares outstanding, diluted

Net income per common share

Concentrations of Credit Risk

Financial instruments which potentially subject

the Company to concentrations of credit risk consist primarily of receivables, cash, and cash equivalents.

All cash and cash equivalents and restricted

cash and cash equivalents are held at high credit financial institutions.

These deposits are generally insured under the FDIC’s

deposit insurance coverage;

Financial instruments which potentially subject the

Company to concentrations of credit risk consist primarily of receivables, cash, and cash equivalents.

All cash and cash equivalents and restricted cash

and cash equivalents are held at high credit financial institutions.

These deposits are generally insured under the FDIC’s deposit

insurance coverage;

however, from time to time, the deposit levels may exceed FDIC coverage levels.

The Company has a concentration of risk with

respect to trade receivables from customers and cellular providers.

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 (3) customers

in the amounts of $89,078, or 24.4%, $77,662, or 21.3% and $48,475, or 13.3%.

As of December 31, 2018, the Company had a significant

concentration of receivables from one (1) customer in the amount of $496,252 or 45.3%.

The Company has a concentration of risk with respect

to trade receivables from customers and cellular providers.

As of December 31, 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 (2) customers in the amounts of

$194,509 or 52.4% and $52,843 or 14.2%.

As of December 31, 2019, the Company had a significant concentration of receivables from three

(3) customers in the amounts of $89,078, or 24.4%, $77,662, or 21.3% and $48,475, or 13.3%.

These receivables represented 14% and 59%

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For the year ended December 31, 2020, the Company had one (1) cellular

provider that accounted for $3,728,456, or 39.6% and one (1) customer that accounted for $2,200,761, or 23.4%, of the revenue.

For the year ended December 31, 2018, the Company had one (1) cellular provider that accounted for $4,679,647, or 49.7%, of the

The loss of a major customer would create a very negative impact on the company, which would require the company to make

significant changes to reduce expenses.

Segment Reporting

The Company operates within four reportable

The Company’s management evaluates performance and allocates resources based on the profit or loss from operations.

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.

provider that accounted for $3,337,262, or 35.7% of revenue and one (1) customer that accounted for $1,472,962, or 15.7%, of the

For the year ended December 31, 2019, the Company had one (1) cellular provider that accounted for $3,728,456, or 39.6% of

revenue and one (1) customer that accounted for $2,200,761, or 23.4%, of the revenue.

The loss of a major customer would create a

very negative impact on the company, which would require the company to make significant changes to reduce expenses.

Effect of Recent Accounting Pronouncements

In February 2016, the FASB updated the accounting

guidance “Accounting Standards Update (ASU) No.

2016- 02, Leases (Topic 842),”

related to leases.

The most significant

change in the updated accounting guidance requires lessees to recognize lease assets and liabilities on the balance sheet for

all operating leases with the exception of short-term leases.

The standard also expands the disclosures regarding the amount,

timing and uncertainty of cash flows arising from leases.

For a lessee, the recognition, measurement and presentation of expenses

and cash flows arising from a lease did not significantly change from previous guidance.

We adopted the updated guidance on January

1, 2019 on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the updated guidance.

In addition, as permitted under the transition guidance within the new standard, prior scoping and classification conclusions

were carried forward for leases existing as of the adoption date.

Upon adoption, we recorded $151,471 for operating

lease assets and liabilities, which includes the impact of fair value adjustments, prepaid and deferred rent.

The Company currently

has four equipment operating leases and one Property lease;

and the Property lease expires in April 2020.

The Company has determined

that this pronouncement will not have a material impact on the financial statements.

In June 2018, the FASB issued ASU 2018-07,

“Compensation-Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting,”

which expands

the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees.

2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services

to be used or consumed in its own operations by issuing share-based payment awards.

ASU 2018-07 also clarifies that Topic 718

does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction

with selling goods or services to customers as part of a contract accounted for under ASC 606.

The amendments in ASU 2018-07 are

effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company has evaluated all other recent

accounting pronouncements and believes that none will have a significant effect on the Company’s financial statement.

Emerging Growth Company

The Company is an emerging growth company and

has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided

pursuant to Section 13(a) of the Exchange Act.

NOTE 2 –

SIGNIFICANT TRANSACTIONS

August 2018 Transaction

On August 9, 2018, the Company entered into

an Asset Purchase Agreement with Telecon Wireless Resources, Inc., a New York corporation (the “Telecon Wireless”);

and KonaTel Nevada, our wholly-owned subsidiary, whereby KonaTel Nevada sold to Telecon Wireless various assets, including furniture,

fixtures, equipment, account receivable and customer lists, among other assets, which were utilized in the Company’s wireless

services and telecommunications operations conducted under the name “Telecon Wireless”

in its retail store located

in Johnstown, New York, for a purchase price of approximately $406,017, which included $266,043 in cash, a note receivable of $100,000

and a debt of $39,974.

December 2018 Transaction –

Apeiron Systems Acquisition

Dated and effective as of December 31, 2018,

the Company and its newly formed acquisition subsidiary entered into an Agreement and Plan of Merger with Apeiron Systems (the

“Apeiron Systems Merger Agreement”).

The Company exchanged 7,000,000 shares of its common stock for all of the outstanding

securities of Apeiron Systems.

Apeiron Systems became a wholly-owned subsidiary (the “Apeiron Systems Merger”).

connection with the closing of the Apeiron Systems Merger, the Company entered into (i) Employment Agreements;

and (ii) a Lock-Up/Leak-Out

Agreement, which govern the resale of the Company’s shares each Apeiron Systems shareholder received.

Additionally, a Shareholder

Voting Agreement with a two (2) year term between us, D.

Sean McEwen, our President and Chairman of the Board of Directors and

the Apeiron Systems shareholders, was executed and delivered by these parties as a condition of the closing.

The Apeiron Systems shareholders also have

a $1.00 “Guaranteed Value”

of the “KonaTel Shares”

they received under the Apeiron Systems Merger Agreement,

which indicates, subject to certain enumerated conditions, that in the event that the KonaTel common stock does not reach an average

closing price equal to or exceeding $1.00 per share over any period of ten consecutive Trading Days during the period commencing

on December 31, 2020, and ending on December 31, 2021, as quoted by the applicable Trading Market on which the KonaTel shares of

common stock are listed or quoted for trading, KonaTel shall issue to the Apeiron Systems shareholders for each such share of the

KonaTel shares of common stock continuously owned and held of record in the respective names of the Apeiron Systems shareholders

during the Valuation Period the number of shares of KonaTel common stock that is equal to the number of Qualifying Shares multiplied

by the difference between the Guaranteed Value and the highest Calculated Value achieved during the Valuation Period.

There was also a “Net Working Capital”

computation that was intended to provide sufficient cash resources to operate Apeiron Systems for a period of not less than ninety

(90) days, with the understanding that at the end of such ninety (90) period, the parties will review and re-compute the “New

Working Capital”

computation, with the further understanding that any overage of the estimate shall be paid to the Apeiron

Systems shareholders and any deficit shall be paid by the Apeiron Systems shareholders to us.

As of this date, the parties have

made this re-computation.

The total purchase price was $2,450,000.

purchase included the issuance of 7,000,000 shares of the Company’s common stock in exchange for all the outstanding common

shares of Apeiron Systems common stock.

The purchase price was derived and based on the fair market value of the 7,000,000 shares

at the December 31, 2018, common stock price of $.35 per share.

The acquisition provides the Company with expansion and diversification

within the telecommunications industry.

Apeiron Systems brings business networking and telecommunications to the Company that has

significant business in the wireless telecommunications industry.

The combination allows the Company to share customers and provide

complete and vertical integrations to the customers.

Acquisitions and mergers are/were a major

factor towards the diversification of services provided by the Company.

These mergers created a move from a lower margin product

mix that relied on quantity to a more profitable higher margin product mix in a less competitive marketplace.

The newly acquired

products and services provide a framework for future growth and improvement.

The transaction was accounted for under the

purchase method.

The purchase price allocation to assets and liabilities assumed in the transaction was:

Accounts receivable

Vendor deposits

Fair value of property and equipment

Fair value of software

Accounts payable and accrued expenses

Income tax payable

Deferred tax liability

Deferred revenue

Net assets acquired

The following table provides unaudited proforma results, prepared

in accordance with ASC 805, for the years ended December 31, 2018:

$ (1,015,932 )

Net loss per share, basic and diluted

January 2019 Transaction –

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 from its sole owner, Trevan Morrow.

The principal asset of IM Telecom was a “Lifeline Program”

license (a Federal Communications Commission [the “FCC”] approved Compliance Plan), the transfer of ownership of 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.

The Company has evaluated all other recent accounting

pronouncements and believes that none will have a significant effect on the Company’s financial statement.

NOTE 2 – SIGNIFICANT 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 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 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.

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 to Mr.

Morrow was cancelled

as discussed in NOTE 8.

The purchase price of $617,920 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.

was cancelled as discussed in NOTE 8.

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

The purchase price allocation to assets and liabilities assumed in the transaction was:

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Net Assets Acquired

The following table provides unaudited proforma

results, prepared in accordance with ASC 805, for the years ended December 31, 2019, and 2018, as if IM Telecom and Apeiron Systems

had been acquired on January 1, 2018:

For the Year Ended

December 31, 2019

For the Year Ended

December 31, 2018

Net Profit (Loss)

$ (1,624,585 )

$ (1,205,687 )

Net profit (loss) per share, basic and diluted

NOTE 3 –

PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications

as of December 31, 2019, and 2018:

Glosser Arbitration Settlement

In August, 2019, the Company won an arbitration award

(ratified by the court) from Mr.

Glosser in the amount of $357,914, together with arbitrator’s compensation of $4,957, for a total

award of $362,871;

Glosser’s counterclaim was found to be without merit.

The Company and Mr.

Glosser entered into a Settlement

Agreement and Mutual Release on February 24, 2020, pursuant to which this matter was fully settled, resolving all claims, and Mr.

paid the Company $300,000.

Apeiron Systems Working Capital Settlement

On December 31, 2018, the Company and the shareholders

of Apeiron Systems entered into an Agreement and Plan of Merger.

Section 2.2 Estimated Net Working Capital and Section 2.3 Final Settlement

of that agreement provided for a method to calculate and reconcile any surplus or deficit in net working capital amounts as of December

On November 22, 2019, the Company, Apeiron Systems and the Apeiron Systems’ shareholders reached an agreement on the final

surplus net working capital amount of $310,130 owed by Apeiron Systems to the Apeiron Systems shareholders under the Apeiron Systems Merger

The net working capital amount was deemed to be payable by Apeiron Systems to the Apeiron Systems shareholders pro rata:

or $279,117 to Joshua Ploude and 10% or $31,013 to Vyacheslav Yanson.

On February 14, 2020, the Company, on behalf of Apeiron

Systems, made a partial payment of $5,000 towards the surplus net working capital balance of $31,013 Apeiron Systems owed to Mr.

On March 5, 2020, the Company, on behalf of Apeiron Systems, paid Yanson $26,013, representing the final payment of the surplus net working

capital balance owed to Yanson.

On March 8, 2020, the Company, on behalf of Apeiron Systems, paid Mr.

Ploude $225,000.

The remaining surplus

net working capital balance of $54,117 was paid to Mr.

Ploude during 2020.

Euler Hermes/Sky Phone Settlement

Between March and July 2019, IM Telecom purchased

wireless handsets from Sky Phone, LLC in the amount of $192,293.

Subsequently, a dispute arose between the parties regarding the amount

of the debt, a lack of sufficient transaction documentation and problems with some of the handsets.

On or about December 2019, the debt

was transferred to Euler Hermes North America Insurance Company.

On April 22, 2020, the parties entered into an agreement to settle the

matter whereby IM Telecom agreed to pay $80,000 in monthly payments of $4,000 over twenty (20) months.

The first payment was made on May

SBA Paycheck Protection Program

On April 14, 2020 the operating companies of the Company

made loan applications to participate in the Small Business Administration’s Paycheck Protection Program created as a result of

the COVID-19 pandemic.

On April 15, 2020, the loan applications of Apeiron Systems, IM Telecom and KonaTel Nevada were approved and loan

proceeds in the amounts of $101,800, $20,900 and $186,300, respectively, were received.

The Company has followed all prescribed loan forgiveness

guidelines provided by our local bank and the SBA by using these loan proceeds to fund employee payrolls.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following major classifications as

of December 31, 2020, and 2019:

Leasehold Improvements

6 unchanged sentences

and $30,642 for the years ended December 31, 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.

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 5.34% and 3.29%.

Right-of-Use Assets

Accumulated Depreciation

Right-of-Use, net

Depreciation amounted to $72,888 for the year

ended December 31, 2019.

Depreciation expense is included as a component of operating expenses in the accompanying statements of

The Company has right-of-use assets through leases of property

under three non-cancelable leases with terms in excess of one (1) year.

The current lease liabilities expire September 1, 2020,

January 1, 2021, and December 1, 2021.

The net Right-of-Use Assets

were $80,578 and $78,584 in 2020 and 2019 respectively.

The Company has right-of-use assets through leases

of properties under non-cancelable leases.

As of December 31, 2020, the Company had two (2) properties with lease terms in excess of one

These lease liabilities expire April 30, 2022, and December 31, 2021.

Lease payables as of December 31, 2020, are $81,722.

Future lease liability payments under

the terms of these leases are as follows:

lease liability payments under the terms of these leases are as follows:

Less Current Maturities

Long Term Maturities

The weighted average term of the right-to-use

leases is 14.5 months recorded with a weighted average discount of 2.84%.

The Company also leases two office spaces on

a month-to-month basis.

Total lease expense for the year ended December 31, 2019, and 2018 amounted to $67,889 and $142,248, respectively.

NOTE 5 –

INTANGIBLE ASSETS

Intangible Assets with definite useful life consist of licenses,

customer lists and software that were acquired through acquisitions:

The weighted average term of the right-to-use leases

is 15.4 months recorded with a weighted average discount of 3.53%.

The Company also leases two (2) office spaces on a

month-to-month basis.

Total rent expense for the year ended December 31, 2020, and 2019, amounted to $109,960 and $140,778, respectively.

NOTE 5 – INTANGIBLE ASSETS

Intangible Assets with definite useful life consist of licenses, customer

lists and software that were acquired through acquisitions:

Customer Lists

3 unchanged sentences

for the years ended December 31, 2020, and 2019, respectively.

Amortization expense is included as a component of operating

expenses in the accompanying statements of operations.

Amortization expense is included as a component of operating expenses in

the accompanying statements of operations.

Amortization expense is expected to be as follows:

Intangible Assets with indefinite useful life

consist of a license granted by the FCC:

The License, because of the nature of the asset

and the limitation on the number of granted licenses by the FCC, will not be amortized.

Intangible Assets with indefinite useful life consist

of a license granted by the FCC:

The License, because of the nature of the asset and

the limitation on the number of granted licenses by the FCC, will not be amortized.

The License was acquired through an acquisition.

The fair market value of the License as of December 31, 2019, was $634,252.

NOTE 6 –

LINES OF CREDIT

The Company has two lines of credit with a

bank which provide aggregate maximum borrowing availability of $1,050,000 as of December 31, 2019, and 2018, respectively.

of credit are payable on demand and bear interest at a variable rate with rate ranges from 7.5% to 8.0%.

Outstanding advances under

these lines of credit arrangements amounted to $12,237 as of December 31, 2019, and $103,379 as of December 31, 2018.

of credit matured and were paid in full on January 5, 2020, and February 14, 2020.

The lines are secured by the general assets

of the Company and aggregate amounts drawn under the lines of credit may be limited to a borrowing base, as defined.

The revolving

lines of credit are guaranteed by an officer of the Company.

NOTE 7 –

AMOUNT DUE TO STOCKHOLDER

fair market value of the License as of December 31, 2020, and December 31, 2019, was $634,252.

NOTE 6 – LINES OF CREDIT

The Company previously had two (2) lines of credit

with a bank which provided aggregate maximum borrowing availability of $1,050,000 as of 2020, and 2019, respectively.

The lines of credit

were payable on demand and bore interest at a variable rate with rate ranges from 7.5% to 8.0%.

Outstanding advances under these lines

of credit arrangements amounted to $0 as of December 31, 2020, and $12,237 as of December 31, 2019.

The lines of credit matured in 2020

and were paid in full on January 5, 2020, and February 14, 2020.

NOTE 7 – AMOUNT DUE TO STOCKHOLDER

As of January 1, 2018, D.

1 unchanged sentence

This advance matured and final payment was received in October, 2019.

During 2018, Gary Stevens advanced the Company

The amount was used for working capital purposes.

The note consisted of a $5,000 loan fee, plus an annual interest rate

This amount was settled in full in April 2018.

During 2019, Joshua Ploude, CEO of Apeiron

Systems, advanced the Company $200,000.

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, will increase to 12% per annum.

The note carried a 10% per annum interest rate

until May 1, 2019, at which time, increased 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 loan was extended

without a defined maturity end date.

The amount due as of December 31, 2019, was $151,357.

The total amount of repayment for the years

ended December 31, 2019, and 2018, to stockholders was $147,251 and $132,175, respectively.

NOTE 8 –

CONTINGENCIES AND COMMITMENTS

From time to time, the Company may be subject

to legal proceedings and claims which arise in the ordinary course of business.

The advance was fully repaid with interest

on November 25, 2020.

The total amount of repayment for the years ended

December 31, 2020, and 2019, to stockholders was $151,357 and $147,251, respectively.

NOTE 8 – CONTINGENCIES AND COMMITMENTS

From time to time, the Company may be subject to legal

proceedings and claims which arise in the ordinary course of business.

As of December 31, 2020, there are no legal proceedings.

except the following:

On August 28, 2018, we filed a claim in AAA

Arbitration against a former employee, Saul Glosser.

In August 2019, the Company won an arbitration award (ratified by the court)

Glosser in the amount of $362,871 ($357,914 plus arbitrator compensation of $4,957).

The award has been deemed final

Glosser has not preserved any outstanding issues for review.

This matter has been settled.

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.

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

Pursuant to an Independent Contractor Agreement (the

“ICA”) effective October 17, 2019, between the Company and Charles L.

Schneider, Jr., in the event that Infiniti Mobile is

granted its request for Eligible Telecommunications Carrier (“ETC”) status from the California Public Utilities Commission

(“CPUC”) to distribute Lifeline cellular phone service within the State of California, Mr.

Schneider will be granted a one

(1) year Warrant, with a customary “cashless”

exercise feature, to purchase 250,000 shares of the Company’s common

stock at an exercise price to be determined on the date of any such approval.

The ICA was for a term of one (1) year, extendable by the

parties yearly.

Regulatory Determination

On May 17, 2019, IM Telecom was notified by

the United States Administrative Company (“USAC”) of an over-payment of Universal Service Fund reimbursements in the

amount of $168,277.

On July 25, 2019, the Company entered into a Letter of Acknowledgement with the FCC and requested a 24-month

payment plan regarding the repayment of the over-payment amounts.

The FCC decision regarding the payment plan request is pending

and is expected before June 30, 2020.

As required by the Letter of Acknowledgement requirements, IM Telecom has made a good faith

down payment in the amount of 10% of the total over-payment and continues to make regular monthly payments of 1/24th of the outstanding

balance pending payment plan approval.

The over-payment amount was recorded as a current acquisition expense.

The Company entered into a Settlement Agreement

and Release with the former owner of IM Telecom regarding this matter, effective September 4, 2019, which was the date of delivery

of the fully executed Settlement Agreement and Release that was dated August 22, 2019, and filed with the SEC on September 4, 2019.

Under the Settlement Agreement, and as part of the previous owner’s obligations to indemnify and hold the Company harmless

from any liability arising from the breach of any representations and warranties in the initial PSMI dated February 5, 2019, and

filed with the SEC on February 6, 2019, which included this liability, the vested $0.20 per share 500,000 share incentive stock

option grant that was awarded to the previous owner at the closing of the PSMI was cancelled and deemed null and void, and the

previous owner was released from any liability for the $168,677 over-payment.

All of the other terms and conditions of the PSMI

remain in full force and effect, including the continuing indemnification provisions regarding all other representations and warranties.

On May 17, 2019, IM Telecom was notified by the United

States Administrative Company (“USAC”) of an over-payment of Universal Service Fund reimbursements in the amount of $168,277.

On July 25, 2019, the Company entered into a Letter of Acknowledgement with the FCC and requested a twenty-four (24)-month payment plan

regarding the repayment of the over-payment amounts.

While awaiting approval of this repayment plan, the Company continued to make monthly

payments against the outstanding balance.

On October 15, 2020, the Company received approval of the payment plan and signed a promissory

note with Universal Service Administrative Company to repay the remainder of the unpaid balance in the amount of $67,105.

a commencement date of November 13, 2020, a term of twelve (12) months, with an annual interest rate of 12.75%.

The Company agreed to

pay Universal Services Administration Company $5,986 per month for twelve (12) months, and a $1,000 Administrative Fee due on October

As of December 31, 2020, the outstanding balance on this promissory note was $56,559.

The Company entered into a Settlement Agreement and

Release with the former owner of IM Telecom regarding this matter, effective September 4, 2019, which was the date of delivery of the

fully executed Settlement Agreement and Release that was dated August 22, 2019, and filed with the SEC on September 4, 2019.

Settlement Agreement and Release, and as part of the previous owner’s obligations to indemnify and hold the Company harmless from

any liability arising from the breach of any representations and warranties in the initial PSMI dated February 5, 2019, and filed with

the SEC on February 6, 2019, which included this liability, the vested $0.20 per share 500,000 share incentive stock option grant that

was awarded to the previous owner at the closing of the PSMI was cancelled and deemed null and void, and the previous owner was released

from any liability for the $168,277 over-payment.

All of the other terms and conditions of the PSMI remain in full force and effect, including

the continuing indemnification provisions regarding all other representations and warranties.

Letters of Credit

The Company maintains irrevocable standby letter

of credit arrangements with certain cellular carriers in the aggregate amount of $225,000.

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 December

31, 2019 and 2018.

The letters of credit are not considered in the financial statements.

The Company had no outstanding letters of credit as

December 31, 2020.

Going Concern

As the Company did not generate net income

during the years ended December 31, 2019, and 2018, the Company has been dependent upon equity financing to support its operations.

In addition to losses of $1,584,904 and $1,161,200 for the years ended December 31, 2019, and 2018, respectively, the Company has

experienced cash provided by (used in) operations of $176,678 and $(1,011,453), respectively.

The accumulated deficit as of December

31, 2019, is $5,896,977.

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;

acquisition of Apeiron Systems and IM Telecom;

receiving cash investments through the private placement of shares of our common

and revenues from the growth of IM Telecom, all of which has contributed to an improvement in our working capital, without

the use of additional lines of credit or borrowings.

Our overall goal was to increase profit margins

through cost controls and selection of high margin product offerings.

From 2018 to 2019 our profit margins increased from 19.6%

to 31.3% respectively.

Our net operations (pre-depreciation & amortization expenses) improved 49% from 2018 to 2019.

operating expenses were up by 13% we continue to streamline customer offerings to drive costs down over an extended period of time.

We continue to be confident that with aggressive management and business development that we will continue to eliminate any going

concern issues.

N OTE 9 –

SEGMENT REPORTING

The Company operates within four reportable

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

The Company generated net income during the year ended

December 31, 2020.

In 2019 and 2018, the Company had been dependent upon equity financing to support its operations.

In addition to net

income of $238,618 and loss of $1,584,904 for the years ended December 31, 2020, and 2019, respectively, the Company experienced cash

provided by operations of $571,546 and $107,298, respectively.

The accumulated deficit as of December 31, 2020, is $5,968,489.

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;

the acquisition

of Apeiron Systems and IM Telecom;

receiving cash investments through the private placement of shares of our common stock;

from the growth of IM Telecom, all of which has contributed to an improvement in our working capital, without the use of additional lines

of credit or borrowings.

In addition, the Company took advantage of the Paycheck Protection Program under the CARES Act of 2020.

Our overall goal was to increase margins through cost

controls and selection of higher margin product offerings.

From 2019 to 2020, our gross margins increased from 31.3% to 37.8% respectively.

Our net operating income (pre-depreciation and amortization expenses) improved 133% from 2019 to 2020.

We decreased operating expenses

by 13.4% in 2020, as we continue to streamline customer offerings to drive costs down over an extended period of time.

We continue to

be confident that with aggressive management and business development that we will continue to eliminate any going concern issues.

N OTE 9 – SEGMENT REPORTING

The Company operates within two (2) reportable segments.

The Company’s management evaluates performance and allocates resources based on the profit or loss from operations.

Company is a recurring revenue 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 –

includes a suite of hosted CPaaS services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”),

ML, 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

Apeiron Systems provides telecommunications services to application developers, call centers and small and medium size

Apeiron Systems markets these services through the Apeiron Systems website, independent sales agents, ISOs and SCOs.

Services –

This segment includes retail and wholesale cellular voice/text/data services and mobile data (IoT or

“Internet of Things”) services.

KonaTel consolidated its wholesale and retail services with Apeiron 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

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’

voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data

or wireless data only plans.

Sometimes equipment is provided which can include, but is not limited to, phones, tablets, modems,

routers and accessories.

Apeiron Systems primarily markets its mobile services through independent sales agents and ISOs via the

“Apeiron”

These agents and ISOs generally market to small and medium sized businesses throughout the United

This type of marketing is also considered B2B (“Business to Business”) sales.

Lifeline ETC –

operates under its own FCC approved Compliance Plan and FCC wireless ETC designation in eight (8) states which currently include

Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont and Wisconsin.

IM Telecom, operating under its Infiniti

Mobile brand, currently markets its Lifeline service through its Internet presence, its storefront in Tulsa, Oklahoma and through

ISOs that specialize in the distribution of Lifeline services.

These ISOs typically support teams of field agents who market

directly to Lifeline eligible individuals requesting Lifeline service.

We provide phones and wireless voice/text/data service

to Lifeline eligible individuals requesting Lifeline service.

In some states and depending on government requirements, we may only

provide voice/text service with no mobile data.

Lifeline VETC –

This segment operates under the license of another ETC.

We currently market our Lifeline VETC sales through ISOs that specialize

in the distribution of Lifeline services.

These ISOs typically support teams of field agents who market directly to Lifeline

eligible individuals requesting Lifeline service.

We provide phones and wireless voice/text/data service to Lifeline eligible individuals

requesting Lifeline service.

In some states and depending upon government requirements, we may only provide voice/text service

with no mobile data.

The following table reflects the result of

operations of the Company’s reportable segments:

Previously, the Company had

reported four (4) segments of Hosted Services, Mobile Services, Lifeline ETC and Lifeline VETC.

The Company has made the decision to consolidate

and align its segment reporting by the type of service offering and believes that this reporting will provide for a more accurate view

of its lines of operation.

The reportable segments consist of Hosted Services

& Mobile Services.

Mobile Services reporting will now consist of our post-paid and pre-paid cellular business.

Hosted Services – This segment includes

a suite of hosted CPaaS services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”),

ML, mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, wireless data services, voice termination

and numerous API driven services.

Apeiron Systems developed, owns, and supports its hosted service platform through its dedicated

national telecommunications network.

Apeiron Systems provides telecommunications services to application developers, call centers and

small and medium size businesses.

Apeiron Systems markets these services through the Apeiron Systems 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 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.

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 as mobile services are the resale of cellular

services to low-income consumers that qualify for the federal Lifeline program.

The portion of mobile services is operated by IM Telecom,

operating under its Infiniti Mobile brand.

The following table reflects the result of operations

of the Company’s reportable segments:

Hosted Services

1 unchanged sentence

For the year ended December 31, 2020

$ (1,584,904 )

Depreciation and amortization

Additions to property and equipment

Gross Margin %

For the year ended December 31, 2019

$ (1,010,242 )

$ (1,161,200 )

Depreciation and amortization

Additions to property and equipment

NOTE 10 –

STOCKHOLDERS’

On March 8, 2018, the Company issued 4,750,000

shares of our common stock in a private placement to “accredited investors”

at $0.20 per share for an aggregate amount

On April 16, 2018, the Company issued 1,000,000 shares of our common stock in a private placement to “accredited

investors”

at $0.20 per share for an aggregate amount of $200,000.

On December 18, 2018, it issued 750,000 shares of our

common stock in a private placement to “accredited investors”

at $0.20 per share for an aggregate amount of $150,000.

Gross Margin %

NOTE 10 – STOCKHOLDERS’ EQUITY

Stock Compensation

The Company offers stock option equity awards

to directors and key employees.

The Company offers stock option equity awards to directors

and key employees.

Options vested in tranches and expire in five (5) years.

During the year ended December 31, 2019,

and 2018, the Company recorded vested options expense of $338,333 and $602,163, respectively.

The option expense not taken as of

December 31, 2019, is $940,496, with a weighted average term of 3.0 years.

During the year ended December 31, 2020, and 2019, the Company

recorded vested options expense of $80,603 and $338,333 respectively.

The option expense not taken as of December 31, 2020, is $1,058,593,

with a weighted average term of 2.2 years.

The stock option valuation as of December 31, 2020

31, 2019 was computer using the Black-Scholes-Merton pricing model using a stock price of $.15.2, a strike price of $.15, an expected

was computed using the Black-Scholes-Merton pricing model using an average stock price of $0.141, a strike price of $0.155, an expected

term of five (5) years, volatility of 280.02% and a risk-free discount rate of 0.9%.

The stock option valuation as of December 31, 2019

31, 2018 was computed using the Black-Scholes-Merton pricing model using a stock price of $.30, a strike price of $.22, an expected

term of five (5) years, volatility of 331.63% and a risk-free discount rate of 2.70%.

The option expense not taken as of December

31, 2018 is $602,163 with a weighted average term of 3.9 years.

The estimated grant-fair value of stock option

grants was calculated using the Black-Scholes-Merton option-pricing model using the following assumptions:

was computed using the Black-Scholes-Merton pricing model using a stock price of $.152, a strike price of $.15, an expected term of five

(5) years, volatility of 258.10% and a risk-free discount rate of 1.52%.

The estimated grant-fair value of stock option grants

was calculated using the Black-Scholes-Merton option-pricing model using the following assumptions:

Weighted average

2 unchanged sentences

Expected dividend yield

The following table represents stock option

activity as of and for the year ended December 31, 2018:

The following table represents stock option activity

as of and for the year ended December 31, 2020:

Weighted Average

3 unchanged sentences

Intrinsic Value

Options Outstanding –

December 31, 2017

Options Outstanding –

December 31, 2018

Options Outstanding – December 31, 2019

Options Outstanding – December 31, 2020

Exercisable and Vested, December 31, 2020

In 2018, 400,000 share options were granted

to four (4) members of the Board of Directors.

Each member was granted 100,000 shares each.

The following table represents stock option activity as of

and for the year ended December 31, 2019:

In 2020, 400,000 share options were granted to two

(2) members of the Board of Directors.

Each member was granted 25,000 shares per quarter of service for 2019 and 2020 for a total of 200,000

During the year, 350,000 share options were forfeited.

The forfeited options were 300,000 from a key employee and 50,000

from a board member who had resigned and had not exercised his options prior to their expiration.

The Aggregate Intrinsic Value is based

on the market value of the Company’s common stock of $0.421 on December 31, 2020.

The following table represents stock option activity

as of and for the year ended December 31, 2019:

Weighted Average

3 unchanged sentences

Intrinsic Value

Options Outstanding –

December 31, 2018

Options Outstanding –

December 31, 2019

Options Outstanding – December 31, 2018

Options Outstanding – December 31, 2019

Exercisable and Vested, December 31, 2019

2 unchanged sentences

600,000 share options were granted to key employees.

During the year, 1,550,000 share options were forfeited.

The forfeited options were 1,000,000 from a key employee, 500,000 from

the IM Telecom acquisition amendment, and 50,000 from a board member who had resigned prior to their vesting.

NOTE 11 –

For the years ending December 31, 2019, and

2018, there were no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.

The tax effect of significant components of

the Company’s deferred tax assets and liabilities at December 31, 2019 and 2018, respectively, are as follows:

During the year,

1,550,000 share options were forfeited.

The forfeited options were 1,000,000 from a key employee, 500,000 from the IM Telecom acquisition

amendment, and 50,000 from a board member who had resigned and not exercised the options prior to their expiration.

NOTE 11 – INCOME TAX

For the years ending December 31, 2020, and December

31, 2019, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.

The tax effect of significant components of the Company’s

deferred tax assets and liabilities at December 31, 2020, and 2019, respectively, are as follows:

Deferred tax assets:

6 unchanged sentences

Total net deferred taxes

In assessing the realizability of deferred

tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the

periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities,

projected future taxable income and tax planning strategies in making this assessment.

Because of the historical earnings history

of the Company, the net deferred tax assets for 2019 and 2018 were fully offset by a 100% valuation allowance.

The total NOL as

of December 31, 2019, is $2,192,257.

On December 22, 2017, the United States Government

passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%.

In addition to

applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects

the way the Company can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred

tax assets recorded on our balance sheet.

Given that the deferred tax assets are offset by a full valuation allowance, these

changes did not have an impact on the Company’s financial position and net loss.

However, if and when the Company becomes

profitable, the Company will receive a reduced benefit from such deferred tax assets.

NOTE 12 –

SUBSEQUENT EVENTS

The Company has evaluated subsequent events

through the date of this filing, and with the exception of the following, no material subsequent events have occurred:

COVID-19 Pandemic

In March, 2020, the Company took measures

to continue operations through stay-at-home orders related to the COVID-19 pandemic.

To date, the Company has seen no significant

revenue or service delivery impacts as telecommunications services are considered essential under COVID-19 Declaration of National

The Company and its subsidiaries have benefitted from the CARES Act Paycheck Protection Program and per program guidelines,

we intend to use the proceeds from these loans to satisfy future payroll liabilities.

Glosser Arbitration Settlement

On August 28, 2018, we filed a claim in AAA Arbitration

against a former employee, Saul Glosser, and Mr.

Glosser filed a counterclaim against us.

Both matters were consolidated in KonaTel,

Saul Glosser, Case No.

01-18-0003-2772, with the American Arbitration Association (International Center for Dispute Resolution).

In August, 2019, the Company won an arbitration

award (ratified by the court) from Mr.

Glosser in the amount of $357,914, together with arbitrator’s compensation of $4,957,

for a total award of $362,871;

Glosser’s counterclaim was found to be without merit.

The Company and Mr.

entered into a Settlement Agreement and Mutual Release on February 24, 2020, pursuant to which this matter was fully settled,

resolving all claims, and Mr.

Glosser paid the Company $300,000.

Apeiron Systems Working Capital Settlement

On December 31, 2018, KonaTel and the shareholders

of Apeiron Systems, Inc.

entered into an Agreement and Plan of Merger.

Section 2.2 Estimated Net Working Capital and Section 2.3

Final Settlement of that agreement provided for a method to calculate and reconcile any surplus or deficit in net working capital

amounts as of December 31, 2018.

On November 22, 2019, KonaTel, Apeiron Systems and the Apeiron Systems’

shareholders reached

an agreement on the final surplus net working capital amount of $310,129.57 owed by Apeiron Systems to the Apeiron Systems shareholders

under the Apeiron Systems Merger Agreement.

The net working capital amount was deemed to be payable by Apeiron Systems to the Apeiron

Systems shareholders pro rata:

90% or $279,116.91 to Joshua Ploude and 10% or $31,012.96 to Vyacheslav Yanson.

On February 14, 2020, KonaTel, on behalf of

Apeiron Systems, made a partial payment of $5,000 towards the surplus net working capital balance of $31,012.96 Apeiron owed to

On March 5, 2020, KonaTel, on behalf of Apeiron Systems, paid Yanson $26,012.96, representing the final payment of

the surplus net working capital balance owed to Yanson.

On March 8, 2020, KonaTel, on behalf of Apeiron Systems, paid Mr.

The remaining surplus net working capital balance of $54,116.61 will be paid to Mr.

Ploude on or before December 31,

Euler Hermes/Sky Phone Settlement

Between March and July 2019 IM Telecom, LLC purchased

wireless handsets from Sky Phone, LLC in the amount of $192,293.34.

Subsequently, a dispute arose between the parties regarding

the amount of the debt, a lack of sufficient transaction documentation and problems with some of the handsets.

On or about December

2019 the debt was transferred to Euler Hermes North America Insurance Company.

On April 22, 2020, the parties entered into an agreement

to settle the matter whereby IM Telecom agreed to pay $80,000 in monthly payments of $4,000 over 20 months.

The first payment was

made on May 20, 2020.

TAG Mobile Bankruptcy Settlement

On or about January 4, 2018, KonaTel received

a $50,000 payment from its customer, TAG Mobile, for previous telecommunications services it provided to TAG Mobile.

October 5, 2017 (the “Petition Date”), creditors of TAG Mobile filed an involuntary petition for relief under Chapter

7 of Title 11 of the United States Code (the “Bankruptcy Code”).

On January 30, 2018 (the “Relief Date”),

the court entered an Order for Relief in an Involuntary Case, and on February 2, 2018, the court converted TAG’s bankruptcy

case to a case under Chapter 11 of the Bankruptcy Code.

Subsequently, the bankruptcy trustee and the

court determined the $50,000 payment received by KonaTel fell between the Petition Date and the Relief Date and was ordered returned.

On January 20, 2020, KonaTel and the bankruptcy trustee entered into a settlement agreement whereby KonaTel would return of $15,000

of the $50,000 payment.

Per the January 20, 2020, settlement agreement, KonaTel paid a total of $15,000 on or before April

The matter was resolved and subsequently dismissed by the court on April 30, 2020.

SBA Paycheck Protection Program

On April 14, 2020 the operating companies

of KonTel made loan applications to participate in the Small Business Administration’s Paycheck Protection Program created

as a result of the COVID-19 pandemic.

On April 15, 2020, the loan applications of Apeiron Systems, IM Telecom and KonaTel Nevada

were approved and loan proceeds in the amounts of $101,800, $20,900 and $186,300, respectively, was received.

KonaTel intends

to follow all prescribed loan forgiveness guidelines provided by our local bank and the SBA by using these loan proceeds to fund

employee payrolls through the 60-day period ending on June 15, 2020.

In assessing the realizability of deferred tax assets,

management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those

temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable

income and tax planning strategies in making this assessment.

Because of the historical earnings history of the

Company, the net deferred tax assets for 2020 and 2019 were fully offset by a 100% valuation allowance.

The total NOL as of December 31,

2020, is $1,587,111.

On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will

lower the corporate tax rate from 35% to 21%.

In addition to applying the new lower corporate tax rate in 2018 and thereafter to

any taxable income the Company may have, the legislation affects the way the Company can use and carry forward net operating losses previously

accumulated and results in a revaluation of deferred tax assets recorded on our balance sheet.

Given that the deferred tax assets

are offset by a full valuation allowance, these changes did not have an impact on the Company’s financial position and net loss.

As long as the Company continues to be profitable, the Company will receive a reduced benefit from such deferred tax assets.

NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through

the date of this filing, and with the exception of the following, no material subsequent events have occurred:

Loss of Significant Employee

Effective February 19, 2021 one (1) of our significant

employees, Vyacheslav “Slava” Yanson resigned his position as Chief Technology Officer of Apeiron Systems.

The Company is

in the process of evaluating several channels for replacing Mr.

Yanson’s industry knowledge and expertise.

Forgiveness of CARES Act Paycheck Protection Program

During March 2021, the Company received confirmation

from the Small Business Administration that the PPP loans for Apeiron Systems ($101,800) and IM Telecom ($20,900) respectively have been

Application for forgiveness for the remaining loan to KonaTel Nevada in the amount of $186,300 is in process.

New Leased Headquarters Office Space

On December 18, 2020, the Company entered into a lease

agreement for an office suite in Plano, TX to commence on January 25, 2021.

Lease payments are deferred until May 1, 2021.

on May 1, 2021 lease payments will be $3,650 per month for the 12-month period ended April 30, 2022.

The lease term is five (5) years.

100,000 Incentive Stock Options granted to Terry Addington,

a director who resigned effective January 1, 2020, expired on January 1, 2021.

The Company granted two (2) quarterly director 25,000

share Incentive Stock Options, one to Jeffrey Pearl on January 28, 2021, at an exercise price of $0.4895, fully vested;

and one to Robert

Beaty on February 12, 2021, at an exercise price of $0.44, fully vested.

The exercise prices were based upon 110% of the fair market value

of our common stock on these respective dates.

On April 1, 2021, the Company also granted 150,000

Incentive Stock Options to an employee at an exercise price of $ 0.32 , with 50,000 shares

vesting annually on April 1, 2022, 2023 and 2024.

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CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

our two (2) most recent fiscal years, no independent accountant who was previously engaged as the principal accountant to audit

our financial statements, or an independent accountant who was previously engaged to audit a significant subsidiary and on whom

the principal accountant expressed reliance in its report, has resigned (or indicated it has declined to stand for re-election

after the completion of the current audit) or was dismissed.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

During our two

(2) most recent fiscal years, no independent accountant who was previously engaged as the principal accountant to audit our financial

statements, or an independent accountant who was previously engaged to audit a significant subsidiary and on whom the principal accountant

expressed reliance in its report, has resigned (or indicated it has declined to stand for re-election after the completion of the current

audit) or was dismissed.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data