KonaTel, Inc. 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KONATEL, INC. FINANCIAL STATEMENTS December 31, 2020, and 2019 TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheet F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders’ Equity (Deficit) F-4 Consolidated Statements of Cash Flow F-5 Notes to Consolidated Financial Statements F-6 ( This space intentionally left blank ) 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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’ equity, 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 audits. 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. In the fiscal year ended December 31, 2020, the Company did not record any impairment of intangible assets. How We Addressed the Matter in Our Audit. 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 effectively. 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 2019. F- 1 KONATEL, INC. CONSOLIDATED BALANCE SHEETS Years Ended December 31, 2020 2019 Assets Current Assets Cash and Cash Equivalents $ 715,195 $ 191,474 Accounts Receivable, net 434,801 377,485 Inventory, Net 17,786 4,659 Prepaid Expenses 2,365 1,743 Other Current Assets 194 — Total Current Assets 1,170,341 575,361 Property and Equipment, Net 79,571 102,689 Other Assets Intangible Assets, Net 1,517,163 2,317,502 Other Assets 172,065 207,740 Total Other Assets 1,689,228 2,525,242 Total Assets $ 2,939,140 $ 3,203,292 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable and Accrued Expenses $ 1,042,567 $ 1,223,195 Amount Due to Stockholder — 151,357 Revolving Line of Credit — 12,237 Note Payable - current portion 94,339 75,905 Right of Use Operating Lease Obligations - current 66,323 69,148 Deferred Revenue 37,677 53,074 Customer Deposits — 31,087 Total Current Liabilities 1,240,906 1,616,003 Long Term Liabilities Right of Use Operating Lease Obligations - long term 15,399 12,942 Note Payable - long term 150,000 50,603 Total Long Term Liabilities 165,399 63,545 Total Liabilities 1,406,305 1,679,548 Commitments and contingencies Stockholders’ Equity Common stock, $.001 par value, 50,000,000 shares authorized, 40,692,286 outstanding and issued at December 31, 2020 and December 31, 2019 40,692 40,692 Additional Paid In Capital 7,460,632 7,380,029 Accumulated Deficit (5,968,489 ) (5,896,977 ) Total Stockholders’ Equity 1,532,835 1,523,744 Total Liabilities and Stockholders’ Equity $ 2,939,140 $ 3,203,292 The accompanying notes are an integral part of these consolidated financial statements. F- 2 KONATEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2020 2019 Revenue $ 9,358,999 $ 9,173,520 Cost of Revenue 5,823,552 6,303,053 Gross Profit 3,535,447 2,870,467 Operating Expenses Payroll and Related Expenses 1,968,415 1,853,995 Operating and Maintenance 803,987 1,397,995 Bad Debt 2,313 36,635 Utilities and Facilities 139,171 174,245 Depreciation and Amortization 838,003 916,897 General and Administrative 62,560 99,365 Marketing and Advertising 15,840 26,042 Taxes and Insurance 65,177 10,488 Total Operating Expenses 3,895,466 4,515,662 Operating Loss (360,019 ) (1,645,195 ) Other Income and Expense Interest Income — 1,562 Other Income 625,591 15,499 Interest Expense (26,954 ) (55,270 ) Total Other Income and Expenses $ 598,637 $ (38,209 ) Net Income (Loss) before Provision for Income Tax $ 238,618 $ (1,683,404 ) Provision for Income Taxes (Benefit) — 98,500 Net Income (Loss) $ 238,618 $ (1,584,904 ) Net Income (Loss) per Share Basic $ 0.01 $ (0.04 ) Diluted — — Weighted Average Number of Shares Basic 40,692,286 40,692,286 Diluted — — The accompanying notes are an integral part of these consolidated financial statements. F- 3 KONATEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Common Shares Additional Accumulated Shares Amount Paid-in Capital Deficit Total Balances as of January 1, 2019 40,692,286 $ 40,692 $ 7,041,696 $ (4,352,073 ) $ 2,730,315 Dividend Settled in 2018 40,000 40,000 Stock Based Compensation 338,333 338,333 Net Loss (1,584,904 ) (1,584,904 ) Balances as of December 31, 2019 40,692,286 $ 40,692 $ 7,380,029 $ (5,896,977 ) $ 1,523,744 Stock Based Compensation 80,603 80,603 Dividends Paid to Apeiron shareholders (310,130 ) (310,130 ) Net Income 238,618 238,618 Balances as of December 31, 2020 40,692,286 $ 40,692 $ 7,460,632 $ (5,968,489 ) $ 1,532,835 The accompanying notes are an integral part of these consolidated financial statements. ( This space intentionally left blank ) F- 4 KONATEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 Cash Flows from Operating Activities: Net Income (Loss) $ 238,618 $ (1,584,904 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and Amortization 838,003 916,897 Bad Debt 2,313 36,635 Stock-based Compensation 80,603 338,333 Change in Right of Use Asset (1,994 ) (78,583 ) Change in Lease Liability (367 ) 82,090 Grant Revenue (319,000 ) — Changes in Operating Assets and Liabilities, net of effects of acquisition: Accounts Receivable (59,629 ) 745,112 Inventory (13,127 ) (3,574 ) Prepaid Expenses (622 ) 8,011 Accounts Payable and Accrued Expenses (182,443 ) (145,797 ) Note Payable — (41,769 ) Deferred Revenue (15,397 ) (16,914 ) Customer Deposits (31,087 ) 2,233 Other Assets 35,675 (150,472 ) Net cash provided by operating activities 571,546 107,298 Cash Flows from Investing Activities Cash Received in Acquisition of IM Telecom — 14,318 Notes Receivable from Sale of Business Component — 66,667 Purchase of Assets (10,833 ) — Asset Purchase of IM Telecom — (22,382 ) Net cash provided by (used in) investing activities (10,833 ) 58,603 Cash Flows from Financing Activities Repayment of Revolving Lines of Credit (12,237 ) (91,142 ) Advances made by Stockholder — 200,000 Proceeds from Federal SBA Covid Loans 468,900 — Repayments of amounts due to Related Party and Seller (151,357 ) (139,795 ) Repayments of Amounts of Notes Payable (112,168 ) — Proceeds from Notes Payable 80,000 — Dividends Paid to Apeiron Shareholders (310,130 ) — Net cash used in financing activities (36,992 ) (30,937 ) Net Change in Cash 523,721 134,964 Cash - Beginning of Year 191,474 56,510 Cash - End of Period $ 715,195 $ 191,474 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 21,591 $ 40,660 Cash paid for taxes $ — $ — Non-cash investing and financing activities: Asset Purchase of IM Telecom Accounts Receivable $ — $ 123,959 Prepaid Expense $ — $ 2,400 Furniture and Equipment at Fair Market Value $ — $ 1,308 Accounts Payable and Accrued Expenses, net of cash $ — $ (24,271 ) Note Payable $ — $ (168,277 ) License $ — $ 634,252 Right of use assets obtained in exchange for new operating lease liabilities $ 28,576 $ 151,471 The accompanying notes are an integral part of these consolidated financial statements. F- 5 KONATEL, INC. Notes to Consolidated Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview of Company KonaTel Nevada (as defined below) was organized under the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business of a full-service MVNO (“Mobile Virtual Network Operator”) provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. KonaTel Inc., formerly known as Dala Petroleum Corp. (“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. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada sub S-Corporation (“KonaTel Nevada”), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly owned subsidiary. On December 31, 2018, we acquired Apeiron Systems, Inc., a Nevada corporation d/b/a “Apeiron” (“Apeiron Systems”), which is also our wholly owned subsidiary. Apeiron Systems was organized in 2013 and is an international hosted services CPaaS (“Communications Platform as a Service”) provider that designed, built, owns, and operates its private core network, supporting a suite of real-time business communications services and Applications Programming Interfaces (“APIs”). As an Internet Telephony Service Provider (“ITSP”), Apeiron Systems holds a Federal Communications Commission (“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. Infiniti 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. 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, 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. F- 6 Cash and Cash Equivalents 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. 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. Allowance for Doubtful Receivables The allowance for doubtful receivables is determined 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, 2020, and 2019, management has determined that no allowance for doubtful receivables is necessary. Inventory 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. 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, 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, F- 7 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, 2020, there is no impairment of the value of the license. Other Assets 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 $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: 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. See NOTE 4. 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. F- 8 Revenue Recognition Services revenues are generated from cellular and telecommunication services. The revenue is derived from wholesale and retail services. Telecommunications and mobile telecommunication services include network platforms, voice, data, and text services. 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. 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. 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. 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 thirty (30) or thirty-one (31)-day period. This charge 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 Cost of Revenue includes the cost of communication services, equipment and accessories, shipping costs, and commissions of sub-agents. Advertising 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. 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. 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 nonemployees 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. 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. F- 9 Income Taxes 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. Diluted 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, 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, 2020 2019 Numerator Net Income/Loss $ 238,618 $ (1,584,904 ) Denominator Weighted-average common shares outstanding 40,692,286 40,692,286 Dilutive impact of stock options — — Weighted-average common shares outstanding, diluted 40,692,286 40,692,286 Net income per common share Basic $ 0.01 $ (0.04 ) Diluted $ — $ — 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; 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, 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% of the total receivables for the years ended December 31, 2020, and 2019, respectively. F- 10 Concentration of Major Customer A significant amount of the revenue is derived from contracts with major customers and cellular providers. For the year ended December 31, 2020, the Company had one (1) cellular 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 revenue. 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 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. The incentive stock option to purchase 500,000 shares to Mr. Morrow 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 method. The purchase price allocation to assets and liabilities assumed in the transaction was: Cash $ 14,318 Accounts Receivable 123,959 Prepaid Expenses and Deposits 2,400 Furniture and Equipment at Fair Value 1,309 License 634,252 Accounts Payable (24,271 ) Note Payable (168,277 ) Net Assets Acquired $ 583,690 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; and Mr. 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. Glosser 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 31, 2018. 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 Agreement. The net working capital amount was deemed to be payable by Apeiron Systems to the Apeiron Systems shareholders pro rata: 90% or $279,117 to Joshua Ploude and 10% or $31,013 to Vyacheslav Yanson. F- 11 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. Yanson. 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 20, 2020. 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: December 31, 2020 2019 Leasehold Improvements $ 46,950 $ 46,950 Furniture and Fixtures 217,163 102,946 Billing Software 102,945 217,163 Office Equipment 94,552 86,887 461,610 453,946 Less: Accumulated Depreciation and Amortization (382,040 ) (351,257 ) Property and equipment, net $ 79,570 $ 102,689 Depreciation and amortization amounted to $30,783 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. The assets are recorded at present value using implied interest rates between 5.34% and 3.29%. 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 (1) year. 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: 2021 $ 66,323 2022 $ 15,399 Thereafter $ — Total $ 81,722 Less Current Maturities $ 66,323 Long Term Maturities $ 15,399 F- 12 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: December 31, 2020 2019 Customer Lists $ 1,135,961 $ 1,135,961 Software 2,407,001 2,407,001 License 634,251 634,252 Less: Accumulated Amortization (2,740,629 ) (1,938,296 ) Intangible Assets, net $ 1,436,584 $ 2,238,918 Amortization expense amounted to $802,334 and $886,255 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 expected to be as follows: 2021 $ 802,332 2022 $ 634,252 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, 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. Sean McEwen was owed $191,500. This advance matured and final payment was received in October, 2019. 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 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 was extended without a defined maturity end date. The amount due as of December 31, 2019, was $151,357. 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 Litigation From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of December 31, 2020, there are no legal proceedings. F- 13 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 agreements. 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 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. The loan had 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 15, 2020. 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. Under the 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 had no outstanding letters of credit as December 31, 2020. Going Concern 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; 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. 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. F- 14 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. Because the 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. 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 Mobile Services Total For the year ended December 31, 2020 Revenue $ 4,810,573 $ 4,548,426 $ 9,358,999 Gross Margin $ 1,786,531 $ 1,748,915 $ 3,535,447 Depreciation and amortization $ 761,511 $ 76,492 $ 838,003 Additions to property and equipment $ — $ — $ — Gross Margin % 37.1 % 38.5 % 37.8 % For the year ended December 31, 2019 Revenue $ 2,616,830 $ 6,556,690 $ 9,173,520 Gross Margin $ (369,658 ) $ 3,240,125 $ 2,870,467 Depreciation and amortization $ 430,256 $ 486,641 $ 916,897 Additions to property and equipment $ — $ — $ — Gross Margin % -14.1 % 49.4 % 31.3 % NOTE 10 – STOCKHOLDERS’ EQUITY Stock Compensation 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, 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 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 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%. F- 15 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 280.02 % 278.0 % Weighted average expected term (years) 2.2 3.0 Risk free interest rate 0.9 % 1.59 % Expected dividend yield — — The following table represents stock option activity as of and for the year ended December 31, 2020: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Life Aggregate Intrinsic Value Options Outstanding – December 31, 2019 3,800,000 $ .20 3.0 $ — Granted 400,000 $ .15 4.5 Exercised Forfeited (400,000 ) Options Outstanding – December 31, 2020 3,800,000 $ .21 3.6 $ 812,350 Exercisable and Vested, December 31, 2020 3,600,000 $ .22 2.4 $ 698,475 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 shares each. 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: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Life Aggregate Intrinsic Value Options Outstanding – December 31, 2018 4,250,000 $ 0.24 3.9 $ — Granted 1,100,000 $ 0.17 4.8 Exercised — Forfeited (1,550,000 ) Options Outstanding – December 31, 2019 3,800,000 $ 0.20 3.0 $ — Exercisable and Vested, December 31, 2019 3,400,000 $ 0.24 3.1 $ — In 2019, 1,100,000 share options were granted. 500,000 share options were granted as part of the acquisition of IM Telecom. 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 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. F- 16 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: December 31, 2020 2019 Deferred tax assets: Net operating loss carryforward $ 333,393 $ 460,374 Total gross deferred tax assets 333,393 460,374 Less: Deferred tax asset valuation allowance (333,393 ) (460,374 ) Total net deferred tax assets — — Deferred tax liabilities: Federal $ — $ — State - California — — 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 be realized. 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 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 (PPP) Loans 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 forgiven. 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. Commencing 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. F- 17 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. ( This space intentionally left blank ) F- 18 ITEM 9: 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.