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 continue to pursue market opportunities for the distribution of our current products and services described in our “ Principal Products or Services and their Markets ” summary on page 6 of this Annual Report. In addition, we continue to pursue expanded market distribution opportunities, development of new products and services, the addition of new lines of business (i.e., the FCC’s anticipated ACP service expansion), and accretive acquisition opportunities that may enhance or expand our current product and service offerings. Comparison of the Year Ended December 31, 2021, to the Year ended December 31, 2020 Results of Operations In comparing our Statements of Operations between the years ended December 31, 2021, and 2020, we grew revenue, realized increased costs of revenue and operating expenses, and increased net income. For the year ended December 31, 2021, we had $12,834,844 in revenues from operations compared to $9,358,999 in the prior year ended December 31, 2020, for a total revenue increase of $3,475,845 in 2021. The increase in 2021 revenue was caused by an increase in both our Hosted Services and Mobile Services segments, with Mobile Services expanding largely due to the introduction of the EBB program that added additional revenues for the distribution of high-speed mobile data service to low-income consumers. For the year ended December 31, 2021, our cost of revenue was $7,105,464 compared to $5,823,552 in the prior year ended December 31, 2020, for a cost of revenue increase of $1,281,912 in 2021. Our 2021 cost of revenue increase was primarily the result of increased network, handset and sales commission costs related to distributing additional services. For the year ended December 31, 2021, we had a gross profit of $5,729,380 compared to $3,535,447 in the prior year ended December 31, 2020, for a gross profit increase of $2,193,933 in 2021. For the year ended December 31, 2021, total operating expenses were $5,091,033 compared to $3,895,466 in the prior the year ended December 31, 2020, for an increase of $1,195,567 in 2021. This increase was due primarily to increases in payroll and related expenses resulting mostly from the hiring of management level operations positions in both Apeiron Systems and IM Telecom. For the year ended December 31, 2021, other income (expense) was ($15,361) compared to $598,637 in the prior year ended December 31, 2020 (see Note to of our Consolidated Financial Statements included in this Annual Report). For the year ended December 31, 2021, we had net income of $622,986 compared to $238,618 in the prior year ended December 31, 2020. Liquidity and Capital Resources As of December 31, 2021, we had $932,785 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 twelve (12) months with revenues from our operations. In comparing liquidity between the years ending December 31, 2021, and 2020, cash increased by 30.4%. The increase was the result of improved revenues and margins. Liabilities and total overall debt showed a 10% decrease in 2021 when compared to 2020. Our revolving lines of credit were eliminated through payments in 2020. Going forward, growth from new service offerings is expected to 21 provide additional liquidity for our business. Working capital increased by $1,943,386 for the year ended December 31, 2021, resulting from increases in cash, accounts receivable and inventory. Our current ratio (current assets divided by current liabilities) was 2.91 as of December 31, 2021, and 0.94 in 2020. Cash Flow from Operations During the year ended December 31, 2021, and the year ended December 31, 2020, cash flow provided by operating activities was $211,929 and $571,546, respectively. Decreased cash flows provided by operating activities were primarily attributable to a material increase in inventory purchases to support increased distribution of Mobile Services. Cash Flows from Investing Activities During the year ended December 31, 2021, and the year ended December 31, 2020, cash flow used in investing activities was $(10,000) and ($10,833), respectively. The cash used in investing activities during 2021 was the result of the purchase of assets. Cash Flows from Financing Activities During the year ended December 31, 2021, and the year ended December 31, 2020, cash flow provided by (used in) financing activities was $15,661 and ($36,992), respectively. The funds provided by financing were comprised of cash received from the exercise of incentive stock options in 2021 of $110,000 and proceeds received from the PPP loans and notes payable of $548,900 in 2020. Cash flow used in financing activities in 2021 was ($94,339) for repayments of notes payable and repayments of amounts due to a related party ($151,357); repayment of revolving lines of credit ($12,237); repayment of notes payable ($112,168), and as part of the Apeiron Systems Merger Agreement’s “surplus net working capital settlement provision,” a paid-in-full payment paid as a dividend to the two (2) former Apeiron Systems shareholders of ($310,130) in 2020. Going Concern The Company generated net income of $622,986 during the year ended December 31, 2021. We had two (2) consecutive years of net income, in 2021 and 2020. The Company experienced positive cash flow of $217,590 and $523,721 in 2021 and 2020, respectively. The accumulated deficit as of December 31, 2021, was $5,345,504, which continues to decline. The Company has continued to ameliorate any substantial going concern doubt by generating additional cash flow in 2021 and 2020, respectively, and generating net income in 2021 and 2020. Reduction of costs in our Hosted Services and Mobile Services businesses and increase in revenues from the growth of our Mobile Services customer base has allowed the Company to retire debt and other lines of credit, all of which have contributed to an improvement in our working capital, without the use of lines of credit, borrowings or shareholder dilution. 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 had a $1.00 “Guaranteed Value” if the Company’s common stock trading price did 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. This condition was fully satisfied effective June 16, 2021. See the Company’s 8-KA Current Report dated and filed with the SEC on that date and which is available by Hyperlink in Part IV, Item 15. 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. 22 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. 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 Codification (ASC) 606, “Revenue from Contracts with Customers.” 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. 23 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, 2021, and 2020. 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, 2021, and 2020. 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.