KonaTel, Inc. 10-K

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS When used in this Annual Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under “Trends and Uncertainties,” and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations. Overview of Current and Planned Business Operations We are a cellular reseller of wholesale priced minutes, text, and data, including traditional post-paid cellular services, primarily operating on mobile networks of major communications companies like Verizon and AT&T; and we are a Sprint authorized agent of cellular services and products that principally include business to business and business to customer products and services, mostly B2B Mobile Service and Internet of Things or wireless data. During the coming year, we plan to devote additional sales resources to IoT, and we have direct wholesale data agreements with Verizon and AT&T to provide us with our required wireless services. We also presently provide Lifeline Program service through a virtual eligible telecommunications carrier with a Lifeline Program license; and we own an eligible telecommunications carrier (ETC), IM Telecom. We primarily distribute all of our products and services through independent field agents. Comparison of the Year Ended December 31, 2020, to the Year ended December 31, 2019 Results of Operations For the year ended December 31, 2020, we had $9,358,999 in revenues from operations compared to the year ended December 31, 2019, where we had $9,173,520 in revenue from operations. The cost of revenue for the year ended December 31, 2020, was $5,823,552, compared to $6,303,053 for the year ended December 31, 2019. We had a gross profit of $3,535,447 for the year ended December 31, 2020, and $2,870,467 for the year ended December 31, 2019. For the year ended December 31, 2020, and the year ended December 31, 2019, total operating expenses were $3,895,466 and $4,515,662, respectively, for a decrease of $620,196. For the year ended December 31, 2020, other income (expense) was $598,637 compared to ($38,209) for the year ended December 31, 2019. For the years ended December 31, 2020 and December 31, 2019, we had net income of $238,618 and net loss of $1,584,904, respectively. In comparing our Statements of Operations between the years ended December 31, 2020, and 2019, we grew revenue and reduced expenses. The increase in revenue was primarily caused by growth in IP Voice revenue from Apeiron Systems and increased Lifeline subscriber revenue. The expense decrease was due primarily to the reduced operating and maintenance expenses resulting from improved cost control. Liquidity and Capital Resources As of December 31, 2020, we have $ 715,195 in cash and cash equivalents on hand. The ability to continue as a business is dependent upon our generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next (6) six months with profits from our operations. In comparing liquidity between the years ending December 31, 2020, and 2019, cash and short-term assets increased by 103%. The increase was caused through continuing focus on products that are paid in advance. Additionally, we received $458,900 in Federal SBA Paycheck Protection Loan Program introduced in 2020, of which $309,000 will be forgiven. Liabilities and total overall debt showed a 15% decrease in 2020 when compared to 2019. Stockholder debt had a net decrease as a shareholder loan was repaid in full. The revolving lines of credit were eliminated through payments in 2020. Going forward, equity investment and growth of new service offerings are expected to provide the liquidity for our business. 23 Working capital increased by 109% for the year ending December 31, 2020, compared to 2019, resulting from our larger cash balance and reduction in accounts payable and accrued expenses. Overall, the current ratio (current assets divided by our current liabilities) was 1.05 and .36 as of December 31, 2020, and 2019, respectively. Cash Flow from Operations During the year ended December 31, 2020, and the year ended December 31, 2019, cash flow provided by operating activities was $571,546 and $107,298, respectively. Cash flows provided by operating activities were primarily attributable to the Company’s net income of $238,618 and a decrease in stock-based compensation in 2020. Cash Flows from Investing Activities During the year ended December 31, 2020, and the year ended December 31, 2019, cash flow provided by (used in) investing activities was $(10,833) and $58,603, respectively. The cash used in investing activities during 2020 were created through the purchase of assets. Cash Flows from Financing Activities During the year ended December 31, 2020, and the year ended December 31, 2019, cash flow used in financing activities was ($36,992) and ($30,937), respectively. The funds provided by financing were comprised of proceeds from Federal SBA PPP & EIDL Loans and grants of $468,900 in 2020 and $0 in 2019; dividends paid to former Apeiron Systems shareholders, ($310,129) in 2020 and $0 for 2019; repayment of notes payable of ($112,168) in 2020 and $0 for 2019; repayments of amounts due to related party were ($151,357) in 2020 and ($139,795) in 2019; repayment of revolving line of credit of ($12,237) in 2020 and ($91,142) in 2019; and Advances made by Stockholders of $0 in 2020 and $200,000 in 2019. Going Concern The Company generated net income of $238,618 during the year ended December 31, 2020. In 2019, the Company had been dependent upon equity financing to support its operations. In addition to net income of $238,618 and net loss of $1,584,904 for the years ended December 31, 2020, and 2019, respectively, the Company experienced positive cash flow of $523,721 and $134,964, respectively. The accumulated deficit as of December 31, 2020, is $5,968,489. The Company has continued to ameliorate any substantial going concern doubt by generating additional cash flow in 2019 and 2020 respectively and generating net income in 2020. Reduction of costs in our CPaaS business and increase in revenues from the growth of our ETC customer base has allowed the Company to retire debt and other lines of credit, all of which has contributed to an improvement in our working capital, without the use of additional lines of credit or borrowings. Off-Balance Sheet Arrangements The Company entered into an off-balance sheet arrangement as a result of the purchase of Apeiron Systems. The former Apeiron Systems stockholders have a $1.00 “Guaranteed Value” if the Company’s common stock trading price does not reach or exceed $1.00 per share over a ten (10) consecutive day period between December 31, 2020, and ending on December 31, 2021. If the share price is not reached, the Company shall issue to the Apeiron Systems stockholders for each such share of the Company’s 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.” See Section 5.10 of the Apeiron Systems Merger Agreement that was filed as an Exhibit to the Company’s 8-K Current Report dated December 31, 2018, and filed with the SEC on December 31, 2018, and which is accessible by Hyperlink in Part IV, Item 15, under the heading “Apeiron Systems Merger Current Reports.” 24 Critical Accounting Policies and Estimates Use of Estimates 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. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the website and property and equipment, valuation of warrant and beneficial conversion feature debt discounts, valuation of share-based payments and the valuation allowance on deferred tax assets. Impairment of Long-Lived Assets We account 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. Fair Value of Financial Instruments and Fair Value Measurements We measure their financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses escrow liability and short-term loans the carrying amounts approximate fair value due to their short maturities. We have adopted accounting guidance for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position, or liquidity. 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: Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: 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. Level 3: 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. Leases 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. 25 Revenue Recognition 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. GAAP. 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. Revenue from these services is generally recognized monthly as the services are provided. Such revenue is recognized based on usage, which can vary from month to month or at a contractually committed amount, net of credits or other billing adjustments. Advance billings for future service in the form of monthly recurring charges are not recognized as revenue until the service is provided. Stock-Based Compensation We record 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. We account 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. Income Taxes We account for income taxes in accordance with FASB ASC 740, “Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rules on deferred tax assets and liabilities is recognized in operations in the year of change. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized. Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return. We had no liability for uncertain tax positions as of December 31, 2020, and 2019. Interest and penalties, if any, related to unrecognized tax benefits would be recognized as interest expense. We do not have any accrued interest or penalties associated with unrecognized tax benefits, nor was any significant interest expense recognized during the years ended December 31, 2020, and 2019. On December 22, 2018, 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 we may have, the legislation affects the way we 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 will have no net impact on the Company’s financial position and net loss. In 2020 we were profitable, and we will receive a reduced benefit from our deferred tax assets resulting from the tax rate change in 2018. Had this legislation passed prior to our December 31, 2019, fiscal year-end, the effect of the legislation would have been a reduction in deferred tax assets and the corresponding valuation allowance. 26 Earnings Per Share We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. For the year ended December 31, 2020, stock equivalents’ calculations were anti-dilutive and were not recorded in the earnings per share. As the Company incurred losses for the year ended December 31, 2019, dilutive loss per share is the same as loss per share.