KonaTel, Inc. 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KONATEL, INC. FINANCIAL STATEMENTS December 31, 2021, and 2020 TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets 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 ) 25 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, 2021 and 2020, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, 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 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, 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. Valuation of Stock Based Compensation Description of the Matter: As discussed in Note 10 to the financial statements, the Company offers stock option awards that involve complex accounting estimates. Management evaluates the stock option awards in accordance with ASC Topic 718, “Compensation-Stock Compensation” and uses the Black Scholes Model to value the stock option awards. This model requires management to make assumptions, use judgment, and can be complex. Auditing management's assessments and valuations can be complex, involves judgment, and requires a thorough understanding of award terms. How We Addressed the Matter in Our Audit. We reviewed all contracts to obtain a thorough understanding of the terms. We tested the inputs and assumptions management used in the Black-Scholes Model. We reperformed the calculation of the stock-based compensation to test management’s valuations. /s/ Haynie & Company Haynie & Company Salt Lake City, Utah April 14, 2022 PCAOB # 457 We have served as the Company’s auditor since 2019. F- 1 KONATEL, INC. CONSOLIDATED BALANCE SHEETS Years Ended December 31, 2021 2020 Assets Current Assets Cash and Cash Equivalents $ 932,785 $ 715,195 Accounts Receivable, net 1,274,687 434,801 Inventory, Net 566,839 17,786 Prepaid Expenses 79,467 2,365 Other Current Asset 164 194 Total Current Assets 2,853,942 1,170,341 Property and Equipment, Net 48,887 79,571 Other Assets Intangible Assets, Net 807,775 1,517,163 Other Assets 154,297 172,065 Investments 10,000 — Total Other Assets 972,072 1,689,228 Total Assets $ 3,874,901 $ 2,939,140 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable and Accrued Expenses $ 930,449 $ 1,042,567 Note Payable - current portion — 94,339 Right of Use Operating Lease Obligation - current 50,672 66,323 Deferred Revenue — 37,677 Total Current Liabilities 981,121 1,240,906 Long Term Liabilities Right of Use Operating Lease Obligation - long term 136,445 15,399 Note Payable - long term 150,000 150,000 Total Long Term Liabilities 286,445 165,399 Total Liabilities $ 1,267,566 $ 1,406,305 Commitments and contingencies - Footnote 8 Stockholders’ Equity Common stock, $ .001 par value, 50,000,000 shares authorized, 41,615,406 outstanding and issued at December 31, 2021 and 40,692,286 outstanding and issued at December 31, 2020 41,615 40,692 Additional Paid In Capital 7,911,224 7,460,632 Accumulated Deficit ( 5,345,504 ) ( 5,968,489 ) Total Stockholders’ Equity 2,607,335 1,532,835 Total Liabilities and Stockholders’ Equity $ 3,874,901 $ 2,939,140 The accompanying notes are an integral part of these consolidated financial statements. F- 2 KONATEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2021 2020 Revenue $ 12,834,844 $ 9,358,999 Cost of Revenue 7,105,464 5,823,552 Gross Profit 5,729,380 3,535,447 Operating Expenses Payroll and Related Expenses 2,702,495 2,117,713 Professional and Other Expenses 965,671 553,940 Bad Debt 31,318 2,313 Utilities and Facilities 146,254 129,396 Depreciation and Amortization 833,016 848,865 General and Administrative 157,344 117,570 Marketing and Advertising 89,678 15,840 Taxes and Insurance 165,257 109,829 Total Operating Expenses 5,091,033 3,895,466 Operating Income/(Loss) $ 638,347 $ ( 360,019 ) Other Income and Expense Other Income — 625,591 Interest Expense ( 15,361 ) ( 26,954 ) Other Expenses — — Total Other Income and Expenses ( 15,361 ) 598,637 Net Income 622,986 238,618 Earnings per Share Basic $ 0.02 $ 0.01 Diluted $ 0.01 $ 0.01 Weighted Average Outstanding Shares Basic 40,909,085 40,692,286 Diluted 42,891,011 44,092,286 The accompanying notes are an integral part of these consolidated financial statements. ( This space intentionally left blank ) 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, 2020 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 Systems 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 Exercised Stock Options 923,120 923 109,077 — 110,000 Stock Based Compensation — — 341,515 — 341,515 Net Income — — — 622,986 622,986 Balances as of December 31, 2021 41,615,406 $ 41,615 $ 7,911,224 $ ( 5,345,503 ) $ 2,607,335 Common Stock Additional Paid-in Capital Accumulated Deficit 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 For Years Ended December 31, 2021 2020 Cash Flows from Operating Activities: Net Income $ 622,986 $ 238,618 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and Amortization 833,016 838,003 Bad Debt 31,318 2,313 Stock-based Compensation 341,515 80,603 Change In Right of Use Assets ( 92,947 ) ( 1,994 ) Change in Lease Liability 105,395 ( 368 ) Amount recorded as loan forgiveness of SBA Covid-19 Loans ( 319,000 ) Changes in Operating Assets and Liabilities: Accounts Receivable ( 871,204 ) ( 59,629 ) Inventory ( 549,053 ) ( 13,127 ) Prepaid Expenses ( 77,102 ) ( 621 ) Accounts Payable and Accrued Expenses ( 112,117 ) ( 182,443 ) Deferred Revenue ( 37,677 ) ( 15,397 ) Customer Deposits — ( 31,087 ) Other Assets 17,800 35,675 Net cash provided by operating activities 211,930 571,546 Cash Flows from Investing Activities Purchase of Assets ( 10,000 ) ( 10,833 ) Net cash (used in) investing activities ( 10,000 ) ( 10,833 ) Cash Flows from Financing Activities Repayment on Revolving Lines of Credit — ( 12,237 ) Cash received from Stock Options Exercised 110,000 — Proceeds from Federal SBA Covid-19 Loans — 468,900 Repayments of amounts due to Related Party — ( 151,357 ) Repayments of amounts of Notes Payable ( 94,339 ) ( 112,168 ) Proceeds from Notes Payable — 80,000 Dividends Paid to Apeiron shareholders — ( 310,130 ) Net cash provided by (used in) financing activities 15,661 ( 36,992 ) Net Change in Cash 217,591 523,721 Cash - Beginning of Year 715,195 191,474 Cash - End of Period $ 932,785 $ 715,195 Supplemental Disclosure of Cash Flow Information Cash paid for interest 6,796 21,591 Cash paid for taxes — — Non-cash investing and financing activities: Right of use assets obtained in exchange for new operating lease liabilities 199,245 28,576 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. At the closing of this merger, our IRS Federal EIN number was changed from 80-0000245 through customary processing, and EIN number 80-0973608 was assigned to us by the IRS on March 5, 2019. 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, (“IM Telecom” or “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, 2021, 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, 2020, include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems, and Infiniti Mobile (February through December). All significant intercompany transactions are eliminated. Cash and Cash Equivalents Cash and Cash Equivalents include cash on hand and all short-term investments with maturities of three months or less. F- 6 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 our 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, 2021, and 2020, 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, 2021, total inventory owned by the company was $ 566,839 . 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, 2021, and 2020, 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, 2021, and 2020. 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. 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, the Company, 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, 2021, 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. F- 7 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 in collateral deposits from various sub-reseller customers at December 31, 2021, and 2020, 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 of 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. 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, 2021, and December 31, 2020, our operating lease assets and liabilities were $ 187,117 and $ 81,723 , respectively. 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 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 F- 8 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 $ 89,678 and $ 15,840 for 2021 and 2020 respectively. The increase in advertising costs was a result of the expansion of the marketing of Infiniti Mobile via independent agents and local advertising efforts in Oklahoma. Professional and Other Expenses Previously for 2020, the Company presented certain professional fees and other expenses under the category of “Operating and Maintenance.” These expenses are now being presented under the category of “Professional and Other Expenses” as this change better represents the types of expenses that were incurred during 2021 and 2020, 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. 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, 2021, there are 1,981,926 potentially dilutive common shares. F- 9 The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income/loss per common share: Summary of Significant Accounting Policies - Schedule of Earnings Per Share, Basic and Diluted Years Ended December 31, 2021 2020 Numerator Net Income/Loss $ 622,986 $ 238,618 Denominator Weighted-average common shares outstanding 40,909,085 40,692,286 Dilutive impact of stock options 1,981,926 3,400,000 Weighted-average common shares outstanding, diluted 42,891,011 44,092,286 Net income per common share Basic $ 0.02 $ 0.01 Diluted $ 0.01 $ 0.01 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, 2021, 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 $ 783,431 or 63.9 % and $ 194,647 or 15.9 %. As of December 31, 2020, the Company had a significant concentration of receivables from two (2) customers in the amounts of $ 194,509 , or 52.4 %, and $ 52,843 , or 14.2 %. Concentration of Major Customer A significant amount of the revenue is derived from contracts with major customers. For the year ended December 31, 2021, the Company had two (2) customers that accounted for $ 5,494,625 or 42.8 % of revenue and $ 3,617,833 or 28.2 %, of the revenue. For the year ended December 31, 2020, the Company had two (2) customers that accounted for $ 3,337,262 or 35.7 % and $ 1,472,962 or 15.7 % of 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. It should be noted that the primary major customer is the FCC through the federal Lifeline and EBB programs. 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 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 . F- 10 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. 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 one (1) of its officers, Vyacheslav Yanson. On March 5, 2020, the Company, on behalf of Apeiron Systems, paid Mr. Yanson $ 26,013 , representing the final payment of the surplus net working capital balance owed to Mr. Yanson. On March 8, 2020, the Company, on behalf of Apeiron Systems, paid another of its officers, Joshua Ploude, $ 225,000 towards the surplus net working capital balance owned to Mr. Ploude. The remaining surplus net working capital balance of $ 54,117 owed to Mr. Ploude was paid to Mr. Ploude during 2020. With the final payment of $54,117 paid to Mr. Ploude, the Company has fully satisfied its surplus net working capital obligation under the Apeiron Systems Merger Agreement. Euler Hermes/Sky Phone Settlement Between March and July of 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. As of August 2021, the settlement had been paid in full. 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 (SBA”) Paycheck Protection Program (“PPP”) created as a result of the COVID-19 pandemic. On April 15, 2020, the PPP 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 followed all prescribed PPP loan forgiveness guidelines provided by our local bank and the SBA. As of December 31, 2021, all PPP loans have been forgiven by the SBA. EIDL Loan In 2020, the Company was granted a $ 150,000 Economic Injury Disaster Loan (“EIDL”) from the SBA. The term of the loan is thirty (30) years, at an interest rate of 3.75% on advanced funds. Installment payments were to begin twelve (12) months following the loan date. The SBA has subsequently granted automatic deferments of payments through March of 2022. NOTE 3 – PROPERTY AND EQUIPMENT Property and equipment consist of the following major classifications as of December 31, 2021, and 2020: Property and Equipment - Schedule of Property and Equipment December 31, 2021 2020 Leasehold Improvements Leasehold Improvements $ 46,950 $ 46,950 Furniture and Fixtures Furniture and Fixtures 102,946 102,946 Billing Software 217,163 217,163 Office Equipment Office Equipment 94,552 94,552 461,611 461,611 Less: Accumulated Depreciation ( 412,724 ) ( 382,040 ) Property and equipment, net $ 48,887 $ 79,571 Depreciation expense amounted to $ 30,683 and $ 30,783 for the years ended December 31, 2021, and 2020, respectively. Depreciation expense is included as a component of operating expenses in the accompanying statements of operations. F- 11 NOTE 4 – RIGHT-OF-USE ASSETS Minimum Maximum Right-of-Use Assets consist of assets accounted for under ASC 842. The assets are recorded at present value using implied interest rates between 3.29 % and 5.34 %. The Right-of-Use Assets were $ 173,524 and $ 80,578 in 2021 and 2020, respectively. The Company has right-of-use assets through leases of properties under non-cancelable leases. As of December 31, 2021, the Company had one (1) property with lease terms in excess of (1) year. This lease liability expires December 31, 2026. Lease payables as of December 31, 2020, are $ 81,722 . Future lease liability payments under the terms of these leases are as follows: 2022 $ 58,547 2023 $ 45,578 2024 $ 46,596 2025 $ 47,615 2026 $ 11,967 Total $ 210,304 Less Interest $ 23,186 Present value of minimum lease payments $ 187,117 Less Current Maturities $ 50,672 Long Term Maturities $ 136,445 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, 2021, and 2020, amounted to $ 123,843 and $ 109,960 , 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, 2021 2020 Customer List $ 1,135,962 $ 1,135,962 Software 2,407,001 2,407,001 ETC License 634,251 634,251 Less: Amortization ( 3,542,963 ) ( 2,740,629 ) Net Amortizable Intangibles 634,251 1,436,585 Right of Use Assets - net 173,524 80,578 Intangible Assets net $ 807,775 $ 1,517,163 Amortization expense amounted to $ 802,334 and $ 802,334 for the years ended December 31, 2021, and 2020, respectively. Amortization expense is included as a component of operating expenses in the accompanying statements of operations. With the exception of the license granted by the FCC, all intangible assets are fully amortized as of December 31, 2021. Intangible Assets with indefinite useful life consist of the Lifeline license granted by the FCC. The license, because of the nature of the asset and the limitation on the number of granted Lifeline 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, 2021, and December 31, 2020, was $ 634,251 . 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. The lines of credit were payable on demand and bore interest at a variable rate with rate ranges from 7.5% to 8.0%. The lines of credit matured in 2020 and were paid in full on January 5, 2020, and February 14, 2020, respectively. The Company had no outstanding lines of credit as of December 31, 2021. F- 12 NOTE 7 – AMOUNT DUE TO STOCKHOLDER The Company received a $ 200,000 advance from a shareholder in 2019, who is also the CEO of Apeiron Systems. The loan accrued interest at a range rate between 10% and 12% . As of October, 2020, the loan had been repaid. NOTE 8 – CONTINGENCIES AND COMMITMENTS Litigation From time to time, the Company may be subject to legal proceedings and claims that arise in the ordinary course of business. As of December 31, 2021, there are no such legal proceedings. 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 was granted its request for ETC status from the California Public Utilities Commission (“CPUC”) to distribute Lifeline cellular phone service within the State of California, Mr. Schneider was to 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, and extendable by the parties yearly. This agreement expired prior to December 31, 2020. Regulatory Determination On May 17, 2019, IM Telecom was notified by 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 USAC 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 USAC $5,986 per month for twelve (12) months, and a $1,000 Administrative Fee due on October 15, 2020. The promissory note was paid in full in August of 2021. Letters of Credit The Company had no outstanding letters of credit as December 31, 2021. 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. The reportable segments consist of Hosted Services and 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 within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free, and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN, and IoT data and device management. These Hosted Services are marketed nationally through Apeiron’s website, its own sales staff, independent sales agents, and ISOs. Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT 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 typically 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 F- 13 plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service by IM Telecom under its Infiniti Mobile brand to low-income American households that qualify for the FCC’s Lifeline voice service program and the FCC’s temporary EBB mobile data program, with EBB to eventually be replaced by FCC’s ACP in 2022. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the temporary EBB program and future ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced, or eliminated. The following table reflects the result of operations of the Company’s reportable segments: Segment Reporting - Schedule of Segment Reporting Information Hosted Services Mobile Services Total For the year ended December 31, 2021 Revenue $ 5,740,728 $ 7,094,116 $ 12,834,844 Gross Margin $ 2,013,459 $ 3,715,921 $ 5,729,380 Depreciation and amortization $ 805,469 $ 27,547 $ 833,016 Additions to property and equipment $ — $ — $ — Gross Margin % 35.1 % 52.4 % 44.6 % For the year ended December 31, 2020 Revenue $ 5,296,151 $ 4,062,847 $ 9,358,999 Gross Margin $ 1,927,060 $ 1,608,387 $ 3,535,447 Depreciation and amortization $ 820,794 $ 28,071 $ 848,865 Additions to property and equipment $ — $ — $ — Gross Margin % 36.4 % 39.6 % 37.8 % NOTE 10 – STOCKHOLDERS’ EQUITY Stock Compensation The Company offers incentive stock option equity awards to directors and key employees. Options vest in tranches and expire in five (5) years, subject to conditions of their grant. During the year ended December 31, 2021, and 2020, the Company recorded vested options expense of $ 341,515 and $ 80,603 , respectively. The option expense not taken as of December 31, 2021, is $ 1,306,337 , with a weighted average term of 2.25 years. In 2021, 1,635,000 share incentive stock options were granted to two (2) independent members of the Board of Directors and six (6) key employees. Each independent Board member was granted 25,000 shares per quarter of service for 2020 and 2021 for a total of 200,000 shares each. The key employees were granted 1,435,000 share options as part of their employment agreements. During the year ended December 31, 2021, 923,210 shares were exercised. 250,000 of these options were exercised by one (1) former Board member who received his options at the time of the KonaTel Nevada merger in 2017 and who was not an independent director, and 250,000 of these options were exercised by an officer who also received his options at the time of the KonaTel Nevada merger; the remaining 423,120 options were exercised by a former key employee. During the year, 251,880 share options were forfeited. The forfeited options were 76,880 granted to a former key employee and 175,000 granted to former independent Board members. The Aggregate Intrinsic Value is based on the market value of the Company’s common stock of $1.75 on December 31, 2021. Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. The estimated grant date fair value of stock option grants was calculated using the Black-Scholes-Merton option-pricing model using the following assumptions: Stockholders’ Equity - Schedule of Fair Value of Stock Options Valuation Assumptions Weighted average 231.59 % 280.02 % Weighted average expected term (years) 2.25 2.2 Risk free interest rate 0.78 % .90 % Expected dividend yield — — F- 14 The following table represents stock option activity as of and for the year ended December 31, 2021: Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity Number of Shares Weighted Average Exercise Price Weighted Average Remaining Life Aggregate Intrinsic Value Options Outstanding: December 31, 2020 3,800,000 $ .21 3.60 $ 812,350 Granted 1,635,000 $ .75 4.65 Exercised ( 923,120 ) $ .21 Forfeited ( 251,880 ) Options Outstanding: December 31, 2021 4,260,000 $ .37 2.25 $ 5,862,938 Exercisable and Vested: December 31, 2021 1,981,926 $ .25 1.65 $ 2,970,907 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 3.00 $ — Granted 400,000 $ .15 4.50 Exercised Forfeited ( 400,000 ) Options Outstanding: December 31, 2020 3,800,000 $ .21 3.60 $ 812,350 Exercisable and Vested: December 31, 2020 3,600,000 $ .22 2.40 $ 698,475 In 2020, 400,000 share options were granted to two (2) independent 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 2020, 400,000 share options were forfeited. The forfeited options were 300,000 from a key employee and 100,000 from an independent Board member who had resigned and had not exercised his options prior to their expiration following resignation. The Aggregate Intrinsic Value is based on the market value of the Company’s common stock of $0.421 on December 31, 2020. ( This space intentionally left blank ) F- 15 NOTE 11 – INCOME TAX For the years ending December 31, 2021, and 2020, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances. The components of the provision for income taxes for the years ended December 31, 2021, and 2020 consisted of the following: Income Tax - Schedule of Components of Income Tax Expense 2021 2020 Current : Federal — — State — — Total Current Deferred : Federal — — State — — Total Deferred Deferred tax assets: Net loss carryforward $ 318,892 $ 333,393 Depreciation $ 269,166 $ 204,362 Directors' fees $ 124,000 Stock option expense $ 819,341 $ 1,008,761 Total deferred tax assets $ 1,407,399 $ 1,670,516 Deferred tax liabilities: Amortization $ 153,499 $ 63,291 The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the years ended December 31, 2021 and 2020 2021 2020 Tax at statutory federal rate $ 130,827 $ 50,110 Loss carryforward at statutory tax federal rate $ ( 130,827 ) $ ( 50,110 ) Provision for income tax — — ( This space intentionally left blank ) F- 16 The tax effect of significant components of the Company’s deferred tax assets and liabilities at December 31, 2021, and 2020, respectively, are as follows: Income Tax - Schedule of Deferred Tax Assets and Liabilities December 31, 2021 2020 Deferred tax assets: Net operating loss carryforward $ 318,892 $ 333,393 Total gross deferred tax assets 318,892 333,393 Less: Deferred tax asset valuation allowance ( 318,892 ) ( 333,393 ) 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. The total NOL as of December 31, 2021, is $ 1,518,534 , represented below based on year of expiration; Income Tax - Schedule of Operating Loss Carryforward Expiration NOL Amount 2037 $ 570,143 2038 $ 463,895 2039 $ 484,496 $ 1,518,534 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: Changes of Officers and Directors Effective January 1, 2022, Charles D. Griffin was hired as President and Chief Operating Officer of the Company. Mr. Griffin will lead the Company’s sales and marketing divisions and all Company operations, subject to advice and consultation with the Chairman and CEO, D. Sean McEwen. Mr. McEwen and the Company executed a third amendment to his Employment Agreement, effective April 12, 2022. Effective February 4, 2022, Paul LaPier resigned his position as Vice President of Finance and Secretary of the Company. Mr. LaPier has agreed to continue to assist the Company as a consultant through December 31, 2022. Effective January 24, 2022, the Company elected Todd Murcer as Executive Vice President of Finance and Secretary to replace Mr. LaPier. Jason N. Welch was elected as the President of IM Telecom, effective February 14, 2022. The Company entered into Employment Agreements with Messrs. Murcer and Welch, effective January 24, 2022, and February 14, 2022, respectively, or the effective dates of their respective Employment Agreements. Effective February 28, 2022, Nicholas Metherd resigned as the COO of IM Telecom. Mr. Metherd has agreed to continue to assist the Company as a consultant through December 21, 2022 Increase in Common Stock reserved for Employee Stock Option Grants Effective February 10, 2022, the Board of Directors of the Company increased the shares reserved for issuance under its 2018 Incentive Stock Option Plan by an additional 2,000,000 shares. F- 17 Employee Stock Option Grants Mr. Murcer was granted 350,000 incentive stock options as of the effective date of his Employment Agreement at an exercise price of $ 1.165 per share, vesting on the four (4) year anniversary dates of the grants, at the fair market value of our common stock on the date of grant or January 24, 2022. Jeffrey Pearl, an independent Board member, was granted 25,000 quarterly incentive stock options on January 28, 2022, at an exercise price of $ 1.342 , fully vested, which was 110% of the fair market value of our common stock on the date of grant. Robert Beaty, an independent Board member, was granted 25,000 quarterly incentive stock options on February 12, 2022, at an exercise price of $ 1.138 , fully vested, which was 110% of the fair market value of our common stock on the date of grant. Mr. Welch was granted 350,000 incentive stock options as of the effective date of his Employment Agreement at an exercise price of $ 1.04 per share, vesting on the four (4) year anniversary dates of the grants, at the fair market value of our common stock on the date of grant or February 12, 2022. SBA EIDL Loan The Company received notice on March 16, 2022, of an additional six (6) month automatic repayment deferment on its $ 150,000 SBA EIDL loan, with monthly loan payments to commence on or about September 2022. 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.