KonaTel, Inc. 10-K

ITEM 1. BUSINESS Corporate History and Business Development We were incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation. At that time, all of our prior operations were conducted through Lee Building Products and T. A. Kilgore & Company, which owned and operated a home center in League City, Texas, about 30 miles southeast of downtown Houston, Texas. During 1990, we ceased these operations, and the secured lenders took possession our assets. We changed our name to “Dala Petroleum Corp.” on August 29, 2014; and then to “KonaTel, Inc.” on February 5, 2018, following the closing of two respective mergers that are discussed below. On March 11, 2000, our Board of Directors began the process of re-entering the development stage, and on June 2, 2014, we completed a merger with Dala Petroleum Corp., a Nevada corporation (respectively, “Dala Nevada” and the “Dala Merger”). Dala Nevada was wholly owned by Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”). We operated as an early-stage oil exploration company focused on our leased acreage acquired by Dala Nevada until 2016, when Chisholm II returned a total of 8,567,800 shares of the 10,000,000 shares of our common stock exchanged under the Dala Merger to us for cancellation in exchange for our assignment of approximately 55,000 acres, more or less, of our leased acreage or approximately 68.75% of our total holdings, to Chisholm II. All of our remaining oil and gas leasehold interests, comprising leases covering approximately 7,489 and 403 acres, more or less, expired in 2017 and 2018, respectively. On July 20, 2017, pursuant to a Common Stock Purchase Agreement dated July 19, 2017, M2 Equity Partners, LLC, a privately held Minnesota limited liability company (“M2”), acquired 12,100,000 shares of our common stock in consideration of the sum of $367,500, which resulted in a change in control of our Company. For additional information about this Common Stock Purchase Agreement, see Part IV, Item 15 hereof, under the heading “M2 Change of Control.” On April 24, 2018, these 12,100,000 shares were distributed to M2’s members, pro rata, in accordance with their respective membership interests. On November 13, 2017, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which removed all of the designations of our preferred stock from our Certificate of Incorporation, while reserving our 50,000,000 authorized and unissued one mill ($0.01) par value shares of preferred stock for future issuance as the Board of Directors may designate and approve. See Part IV, Item 15, Exhibit 3(i). Effective December 18, 2017, we completed an Agreement and Plan of Merger (the “KonaTel Merger Agreement”) with KonaTel, Inc., a Nevada corporation (the “KonaTel Nevada”), under which KonaTel Nevada became our wholly owned subsidiary on the closing of the merger (the “KonaTel Nevada Merger”) and we succeeded to the business operations of KonaTel Nevada. For additional information on the KonaTel Nevada Merger, see Part IV, Item 15 hereof, under the heading “KonaTel Merger Current Reports.” Effective February 7, 2018, we entered into an Agreement for the Purchase and Sale of Membership Interest dated as of February 5, 2018 (the “PSMI”), with the transaction documents being deposited in escrow on February 7, 2018, respecting the acquisition of 100% of the membership interest in IM Telecom, LLC, an Oklahoma limited liability company (“IM Telecom” doing business as “Infiniti Mobile”), from its sole owner, Trevan Morrow (“Mr. Morrow”). The principal asset of IM Telecom was a “Lifeline Program” license (a Federal Communications Commission [the “FCC”] approved Compliance Plan). For additional information regarding the PSMI and transactions with Mr. Morrow, see Part IV, Item 15 hereof, under the heading “IM Telecom Current Reports.” On August 9, 2018, we entered into an Asset Purchase Agreement (the “Telecon Agreement”) with Telecon Wireless Resources, Inc., a New York corporation (the “Telecon Wireless”), whereby we sold various assets, including furniture, fixtures, equipment, account receivable and a customer list, among other assets and liabilities. Additional information on the Telecon Agreement can be accessed in Part IV, Item 15 hereof, under the heading “Telecon Wireless Sale Current Report.” In August, 2019, we won an arbitration award (ratified by a court) from Saul Glosser in the amount of $357,914, together with arbitrator’s compensation of $4,957, for a total award of $362,871. See Exhibit 10.2 of this Annual Report in Part IV, Item 15. 4 Effective December 31, 2018, we completed an Agreement and Plan of Merger with Apeiron Systems, Inc., a Nevada corporation (respectively, “Apeiron Systems” and the “Apeiron Systems Merger Agreement”), under which Apeiron Systems became our wholly owned subsidiary on the closing of the merger (the “Apeiron Systems Merger”). We issued 7,000,000 shares of our common stock in exchange for all of the outstanding shares of common stock of Apeiron Systems, to Apeiron Systems two shareholders, Joshua Ploude (6,300,000 shares) and Vyacheslav Yanson (700,000 shares), pro rata, in accordance with their respective equity interests in Apeiron Systems. Closing conditions to the Apeiron Systems Merger Agreement included, among other conditions that the Apeiron Systems shareholders would have a $1.00 per share “Guaranteed Value” on the KonaTel shares they received under the Apeiron Systems Merger if the KonaTel shares do not trade at or above $1.00 for ten (10) consecutive days during the period commencing on December 31, 2020, and ending December 31, 2021, on the applicable trading market for our common stock during that period, and subject to such shares being continuously owned of record by the Apeiron Systems shareholders, as outlined in Section 5.10 of the Apeiron Systems Merger Agreement; (ii) there would be 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 (see Exhibit 10.3 of this Annual Report in Part IV, Item 15); and (iii) Employment Agreements with Messrs. Ploude and Yanson were executed and delivered. See the heading “Apeiron Systems Merger Current Reports” in Part IV, Item 15, for additional information on these matters. Mr. Yanson, a former significant employee, resigned as an employee of the Company on February 19, 2021. Effective October 15, 2019 (though executed October 17, 2019), the Company and Charles L. Schneider, Jr., the then CEO of our wholly owned subsidiary, KonaTel Nevada, and the President and CEO of our wholly owned subsidiary, Infiniti Mobile, executed and delivered a Severance Agreement and Release (the “Severance Agreement”). In connection with the execution and delivery of the Severance Agreement, the parties also executed and delivered the following additional agreements: (i) various assignments to Mr. Schneider regarding the Company’s reseller agreement with Standup Wireless; (ii) an Amended Incentive Stock Option Agreement; and (iii) an Independent Contractor Agreement. Pursuant to the Severance Agreement, Mr. Schneider’s Employment Agreement with the Company dated July 1, 2016, was terminated. The Company agreed to pay Mr. Schneider’s salary ($16,666.66 per month) and benefits through December 31, 2019; allowed him to retain his laptop, monitors, keyboard/mouse and printer; and assigned him certain Company contract rights as a reseller of Lifeline services for StandUp Wireless, another Lifeline provider, which he agreed to assume. Additionally, the parties agreed that 500,000 of the 1,500,000 Incentive Stock Options held by Mr. Schneider had vested; that the remaining 1,000,000 Incentive Stock Options that he had been granted were void; and the Amended Incentive Stock Option Agreement was revised to include a customary “cashless” exercise feature for the 500,000 vested options. A Lock-Up/Leak-Out Agreement (the “LULO Agreement”) was also executed and delivered by the Company and Mr. Schneider. Pursuant to the Independent Contractor Agreement (the “ICA”) entered into with the Company, Mr. Schneider agreed to assist the Company in having its wholly owned subsidiary, Infiniti Mobile, being granted its request for Eligible Telecommunications Carrier (“ETC”) status from the California Public Utilities Commission (“CPUC”) to distribute Lifeline cellular phone service within the State of California. In the event that the Company is successful in this process, Mr. Schneider will be granted a one (1) year Warrant with a customary “cashless” exercise feature to purchase 250,000 shares of the Company’s common stock at an exercise price to be determined on the date of any such approval. The ICA had a term of one (1) year, extendable by the parties yearly. The LULO Agreement is applicable to any shares that may be acquired under any such Warrant, with the eighteen (18) month term commencing on the exercise of any such Warrant to purchase common stock of the Company that may be issued. A copy the Settlement Agreement is filed as Exhibit 10.1 to this Annual Report in Part IV, Item 15. On April 14, 2020, our operating subsidiaries made loan applications to participate in the Small Business Administration’s (the “SBA”) Paycheck Protection Program created under the Cares Act 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. We followed all prescribed loan forgiveness guidelines provided by our local bank and the SBA by using these loan proceeds to fund employee payroll through the 60-day period ending on June 15, 2020. On December 14, 2020, the shares of the Company’s common stock were approved for uplisting to OTC Markets Group Inc.’s OTCQB ® Venture Market (“OTCQB”). OTCQB is a venture market operated by the OTC Markets. To be eligible for quotation on the OTCQB, companies must be current in their reporting obligations under Section 13 or 15(d) of the Exchange Act and undergo an annual verification and management certification process. Companies must also meet a minimum bid price test and other financial conditions. OTCQB is recognized by the U.S. Securities and Exchange Commission as an established public market and provides current public information to investors that need to analyze, value, and trade securities. 5 BUSINESS KonaTel Nevada 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 cellular provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. Through its sales network, it provided these services nationwide. In furtherance of its proposed business, on November 1, 2014, it acquired most of the assets of Coast to Coast Cellular, Inc. (“Coast to Coast”), including inventories, property, plant and equipment and its customer list, all valued at approximately $950,000 net of liabilities in the approximate amount of $415,000; and on November 1, 2016, it acquired the assets of CS Agency LLC (“CS Agency”), consisting of contract rights related to the cellular industry, in consideration of assuming liabilities of CS Agency in the approximate amount of $300,000. With the completion of the KonaTel Nevada Merger, we succeeded to the current and intended business operations of KonaTel Nevada. On December 31, 2018, we acquired Apeiron Systems ( www.apeiron.io ), which now operates as a wholly owned subsidiary of KonaTel. Apeiron Systems was established in 2015 as a software-based Communications Platform as a Service (“CPaaS”) telecommunications carrier. Apeiron Systems provides a wide variety of wholesale and retail telecommunications products/services including text and messaging services (“SMS/MMS”), voice termination, toll free numbers, database dip services and least cost routing services, all supported by a redundant national network integrated with numerous international telecom carriers and most U.S. rate centers. Apeiron Systems’ services are provided through a web-based management portal and a corresponding library of APIs (“Applications Program Interface”). KonaTel’s CPaaS service, the “Orion” system, which provides SMS to Email services, KonaTel’s toll-free number service and KonaTel’s B2B (business to business) wholesale/retail cellular services have merged into Apeiron Systems suite of services and are marketed under the Apeiron Systems brand. On February 5, 2018, we entered into a purchase agreement to acquire IM Telecom, d/b/a “Infiniti Mobile” ( www.infinitimobile.com ). On October 23, 2018, the FCC approved our acquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom now operates as a wholly owned subsidiary of KonaTel. IM Telecom is an Eligible Telecommunications Carrier (“ETC”) and is one of fifteen (15) carriers that hold an FCC approved Lifeline Compliance Plan. The FCC has not approved (granted) a new Lifeline Compliance Plan since 2012. Lifeline is an FCC program that provides subsidized, fixed or mobile, telecommunications services to low-income Americans. We primarily distribute our Lifeline products and services through ISOs (“Independent Sales Organizations”). Apeiron Systems, headquartered in Los Angeles, California, also has some customer service and software engineering resources staffed in Johnstown, Pennsylvania, and part of its software engineering services are staffed in Kiev, Ukraine. IM Telecom is headquartered in Plano, Texas, and operates a Lifeline retail operation in Tulsa, Oklahoma. We are headquartered in Plano, Texas, shared with IM Telecom’s offices. Apeiron Systems has twelve (12) full-time employees and one (1) part time employee; IM Telecom has three (3) full-time employees and one (1) part-time employee; and we have four (4) full-time employees. Principal Products or Services and their Markets Our principal products and services, across our two wholly owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data services, wholesale voice terminations services, and our ETC and Virtual Eligible Telecommunications Carrier (“VETC”) Lifeline services. Except for our ETC Lifeline services distributed in up to eight (8) states and our VETC Lifeline services distributed in up to twenty (20) states, our Apeiron Systems’ products and services are available nationwide and subject to U.S., international and local/national regulations, most Apeiron Systems’ services are available worldwide The following are our principal revenue streams: · Our first revenue channel is our Apeiron Systems’ CPaaS channel. This channel provides a variety of services including SIP/VoIP services, SMS/MMS, BOT integration, NLP (“Natural Language Processing”), ML (“Machine Learning”), mobile numbers, toll free numbers, DID landline numbers, SMS to Email, Database Dip, SD-WAN, voice termination and API driven services. Apeiron Systems developed, owns and supports its services through its dedicated national telecommunications network. Apeiron Systems provides telecommunications services to applications developers, call centers and small and medium size businesses. Apeiron Systems markets these services through the Apeiron Systems’ website, ISOs and Social Media Optimization (“SCO”). 6 · Our second revenue channel is Apeiron Systems’ MVNO and reseller channels marketing mobile voice/text/data and mobile data solutions. Apeiron Systems’ mobile voice/text/data and mobile data services are supported by a blend of MVNO and reseller agreements with select national wireless carriers. A wireless communications services provider, reseller or MVNO, does not own the wireless network infrastructure over which services are provided to its customers. Apeiron Systems’ mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided which can include, but is not limited to, phones, tablets, modems, routers and accessories. Apeiron Systems primarily markets its mobile voice/text/data and mobile data services through ISOs via the “Apeiron Systems” brand. These ISOs market to small and medium sized businesses throughout the United States. This type of marketing is also considered B2B (“Business to Business”) sales. · Our third revenue channel is Lifeline VETC channel. A VETC operates under the license of an ETC. We currently market our Lifeline VETC sales through ISOs that specialize in Lifeline products. These master agencies support dozens of field agents who market directly to the individuals requesting Lifeline service. We provide phones and wireless voice/text/data service to the individual requiring Lifeline service. In some states, and depending upon government requirements, we may only provide voice/text service with no mobile data. Effective August 15, 2019, we ceased to actively market under the VETC channel and reached an agreement with both of the ETCs with which we are doing business that we would continue to receive residual commissions on the existing customer base until all customers had disconnected Lifeline service. · Our fourth revenue channel is our IM Telecom Lifeline ETC channel. IM Telecom operates under its own FCC approved Compliance Plan and FCC wireless ETC designation in eight (8) states which include Georgia, Kentucky, Maryland, Nevada, Oklahoma, South Carolina, Vermont, and Wisconsin. IM Telecom currently markets, under its Infiniti Mobile brand, through its storefront in Tulsa, Oklahoma, and through ISOs that specialize in Lifeline products. These master agencies support dozens of field agents who market directly to individuals requesting Lifeline service. We provide phones and wireless voice/text/data service to the individuals requiring Lifeline service. In some states, and depending on government requirements, we may only provide voice/text service with no mobile data. Distribution Methods of the Products or Services We primarily distribute our Lifeline services through ISOs and resellers (“Agents”). Agents are recruited and contractually retained to market these services via various means such as tradeshows, our website, word of mouth from other agents and cold calling. Wholesale mobile services are marketed and distributed via our direct employees. Wholesale mobile customers are solicited and obtained also via tradeshows, our website, word of mouth within the industry and cold calling. We primarily distribute our B2B cellular services through Agents. We market some CPaaS services through Agents and through SCO efforts. Sources and Availability of Raw Materials and the Names of Principal Suppliers Wholesale cellular services are sourced either directly from the carrier or from wholesalers that sit between us (Apeiron Systems and IM Telecom) and the carrier. Carriers include Verizon, T-Mobile, Sprint and AT&T. Wholesalers include Prepaid Wireless Group (“PWG”), Sprint and Telispire. Resellers and Mobile Virtual Network Operator (“MVNOs”) like us typically do not own the wireless infrastructure over which services are provided. We purchase services from the following sources: · Telispire: Verizon voice, text and data service. Telispire, through a contract with us, has set pricing for voice, text and data wireless services per unit. Pricing per unit is in the form of a monthly recurring charge (“MRC”) that may or may not include minutes of use, text units or data units. Additional add on pricing per unit is available for additional data units; · AT&T APEX: AT&T voice, text or data service and AT&T IoT service. AT&T APEX, under a contract with us, has set pricing for voice, text and data and IoT wireless services per unit. Pricing per unit is in the form of an MRC that may or may not include minutes of use, text units or data units. Additional add on pricing per unit is available for additional data units; 7 · Verizon Wireless VPP, a Verizon IoT product: Verizon VPP, also through a contract with us, has set pricing for IoT wireless services per unit. Pricing per unit is in the form of an MRC that includes data units with defined over plan use pricing; · T-Mobile: T-Mobile voice, text or data service. T-Mobile, through a contract with us, has set pricing for bundled voice, text and data wireless services. Pricing bundles are in the form of a monthly recurring charge (“MRC”) that include minutes of use, text units or data units. Bundled plans include unlimited talk, text and a set amount of data. Larger data plans are available for purchase for consumers requiring larger data packages; · Sprint: Sprint voice, text or data service. Sprint, through a contract with us, has set pricing for bundled voice, text and data wireless services. Pricing bundles are in the form of an MRC that include minutes of use, text units or data units. Bundled plans include unlimited talk, text and a set amount of data. Larger data plans are available for purchase for consumers requiring larger data packages; and · Prepaid Wireless Group (“PWG”): T-Mobile voice, text or data Lifeline service. PWG, through a contract with us, has set pricing for bundled voice, text and data wireless services. Pricing bundles are in the form of an MRC that include minutes of use, text units or data units. Larger data plans are available for purchase for consumer requiring larger voice and data packages. Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts Our wholly owned subsidiary, IM Telecom, is one of twelve (12) active Lifeline carriers in the U.S. that holds an FCC approved Lifeline Compliance Plan. This Compliance Plan allows IM Telecom, subject to state approval, to expand into additional states to provide Lifeline services. We have been approved by the United States Patent and Trademark Office for the trademark “Lifeline+” and are now using this Trademark in our marketing materials. Competition The telecommunications industry is highly competitive. Our primary cellular competitors include other resellers and national carriers, such as AT&T, Verizon, Sprint and T-Mobile. These national cellular carriers are facility-based, are significantly larger than us and enjoy trade name and trademark public recognition, as well as greater resources, scale and competitive advantages, among other substantial factors, as compared to us. In addition, our cellular competitors also include numerous smaller regional carriers, existing MVNOs and ETCs, such as Metro PCS (“Metro”), Cricket Wireless, LLC. (“Cricket”), TracFone Wireless, Inc. (“TracFone”) and Assurance Wireless, many of which offer or plan to offer Lifeline services, and no-contract postpaid and prepaid service plans. Our CPaaS competitors include, but are not limited to, Twilio, Plivo, Bandwidth, Thinq, VoIP Innovations, Telnyx, Coredial, Vonage/Nexmo, CLX Comm, Genband Kandy, Tropo, Telestax, 2600Hz, and Signal Wire. Competitive factors within the telecommunications industry include pricing, market saturation, service and product offerings, customer experience, network investment and quality, development and deployment of technologies, and regulatory changes. Some competitors have shown a willingness to use aggressive pricing as a source of differentiation. Other competitors have sought to add ancillary services, like mobile video, to enhance their offerings. Taken together, the competitive factors we face continue to put pressure on margins as companies compete to retain their current customer base and continue to add new developments, many proprietary or patented, and customers. Need for any Governmental Approval of Principal Products or Services On October 23, 2018, the FCC approved our acquisition of IM Telecom. Lifeline was created under President Ronald Reagan as part of the 1984 Telecommunications Act. Prior to President Obama taking office, the Lifeline program began to allow cell phones, and there was some initial duplication of service in the early days of Lifeline cell phone deployment. Approximately nineteen (19) current ETCs hold an FCC approved Lifeline Compliance Plan. The FCC has not approved any new Lifeline Compliance Plans since 2012, so Lifeline is a tightly controlled market. We anticipate that approximately one-third of our future gross revenues may come from Lifeline services. 8 Existing and Probable Government Regulation to Our Current and Intended Business The FCC has a number of complex requirements and proceedings that affect our operations and that could increase our costs or diminish our revenues. For example, the FCC has rules regarding provision of 911 and E-911 services, porting telephone numbers, roaming, disabilities access, privacy and cyber security, consumer protection, and the universal service and Lifeline programs, including eligibility, reimbursement and program requirements. Many of these and other issues are being considered in ongoing proceedings, and we cannot predict whether or how such actions will affect our business, financial condition or results of operations. Our ability to provide services and generate revenues could be harmed by adverse regulatory action or changes to existing laws and regulations. In addition, regulation of companies that offer competing services can impact our business indirectly. Smaller Reporting Company We are subject to the reporting requirements of Section 13 of the Exchange Act, and we are subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K. Emerging Growth Company In 2020 our “emerging growth company” designation as defined in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act,” expired as of the fifth anniversary of our initial registered public offering. During our “emerging growth company” designation we did not utilize any financial statement waivers as a result of that designation. Sarbanes/Oxley Act We are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act could substantially increase our legal and accounting costs. Exchange Act Reporting Requirements Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to our shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders. We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and are required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K. Number of Total Employees and Number of Full-Time Employees Across our companies, we have a total of twenty-one (21) employees: nineteen (19) full-time employees and two (2) part-time employees. Subsidiaries We have three (3) wholly owned operating subsidiaries: KonaTel, Inc., a Nevada corporation; IM Telecom, LLC (d/b/a Infiniti Mobile) an Oklahoma limited liability company; and Apeiron Systems, Inc., a Nevada corporation. 9 Additional Information You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all the reports or registration statements that we have previously filed electronically with the SEC at its Internet site at www.sec.gov.