KonaTel, Inc. 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KONATEL, INC. FINANCIAL STATEMENTS December 31, 2023, and 2022 TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders’ Equity (Deficit) F-5 Consolidated Statements of Cash Flow F-6 Notes to Consolidated Financial Statements F-7 ( This space intentionally left blank ) 29 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 consolidated balance sheets of KonaTel, Inc. (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its consolidated operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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. F- 1 Valuation of Stock Based Compensation Description of the Matter: As discussed in Note 10 to the consolidated 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. How We Addressed the Matter in Our Audit We gained an understanding of management’s processes and methodology to develop the estimates. We reviewed the underlying option agreements. We evaluated management’s selection of a valuation method, tested the inputs used in the valuation method (Black-Scholes) calculation by agreeing terms of the underlying agreements and market information to third-party sites, and recalculated the value of the options. We also evaluated the adequacy of the disclosures related to these fair value measurements. /s/ Haynie & Company Haynie & Company Salt Lake City, Utah April 1, 2024 PCAOB # 457 We have served as the Company’s auditor since 2019. F- 2 KONATEL, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 Assets Current Assets Cash and Cash Equivalents $ 777,103 $ 2,055,634 Accounts Receivable, Net 1,496,799 1,510,118 Inventory, Net 1,229,770 526,337 Prepaid Expenses 129,706 61,241 Other Current Assets — 164 Total Current Assets 3,633,378 4,153,494 Property and Equipment, Net 24,184 36,536 Other Assets Intangible Assets, Net 634,251 634,251 Right of Use Asset 443,328 553,686 Other Assets 74,543 73,883 Total Other Assets 1,152,122 1,261,820 Total Assets $ 4,809,684 $ 5,451,850 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable and Accrued Expenses $ 3,709,691 $ 1,348,931 Loans Payable, Net of Loan Fees 3,655,171 3,070,947 Right of Use Operating Lease Obligation - Current 127,716 118,382 Total Current Liabilities 7,492,578 4,538,260 Long Term Liabilities Right of Use Operating Lease Obligation - Long Term 330,511 458,227 Total Long Term Liabilities 330,511 458,227 Total Liabilities 7,823,089 4,996,487 Commitments and Contingencies Stockholders’ Equity Common stock, $ 0.001 par value, 50,000,000 shares authorized, 43,145,720 outstanding and issued at December 31, 2023 and 42,240,406 outstanding and issued at December 31, 2022 43,146 42,240 Additional Paid In Capital 9,182,140 8,710,987 Accumulated Deficit ( 12,238,691 ) ( 8,297,864 ) Total Stockholders’ Equity ( 3,013,405 ) 455,363 Total Liabilities and Stockholders’ Equity $ 4,809,684 $ 5,451,850 The accompanying notes are an integral part of these consolidated financial statements. F- 3 KONATEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2023 2022 Revenue $ 18,223,745 $ 20,023,340 Cost of Revenue 14,850,105 15,033,733 Gross Profit 3,373,640 4,989,607 Operating Expenses Payroll and Related Expenses 3,995,698 4,974,989 Operating and Maintenance 5,804 8,129 Bad Debt 215 29,133 Professional and Other Expenses 1,526,947 1,509,269 Utilities and Facilities 191,556 206,380 Depreciation and Amortization 12,352 12,352 General and Administrative 155,734 300,042 Marketing and Advertising 154,533 106,402 Application Development Costs 138,600 146,400 Taxes and Insurance 312,804 251,196 Total Operating Expenses 6,494,243 7,544,292 Operating Loss ( 3,120,603 ) ( 2,554,685 ) Other Income and Expense Interest Expense ( 820,254 ) ( 399,031 ) Other Income/(Expense), net 30 1,356 Total Other Income and Expenses ( 820,224 ) ( 397,675 ) Net Loss $ ( 3,940,827 ) $ ( 2,952,360 ) Loss per Share Basic $ ( 0.09 ) $ ( 0.07 ) Diluted $ ( 0.09 ) $ ( 0.07 ) Weighted Average Outstanding Shares Basic 42,773,269 41,863,283 Diluted 42,773,269 41,863,283 The accompanying notes are an integral part of these consolidated financial statements. F- 4 KONATEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Common Shares Additional Accumulated Shares Amount Paid-in Capital Deficit Total Balances as of January 1, 2022 41,615,406 $ 41,615 $ 7,911,224 $ ( 5,345,504 ) $ 2,607,335 Exercised Stock Options 625,000 625 107,625 — 108,250 Stock Based Compensation — — 692,138 — 692,138 Net Loss — — — ( 2,952,360 ) ( 2,952,360 ) Balances as of December 31, 2022 42,240,406 $ 42,240 $ 8,710,987 $ ( 8,297,864 ) $ 455,363 Exercised Stock Options 905,314 906 213,596 — 214,502 Stock Based Compensation — — 257,557 — 257,557 Net Loss — — — ( 3,940,827 ) ( 3,940,827 ) Balances as of December 31, 2023 43,145,720 $ 43,146 $ 9,182,140 $ ( 12,238,691 ) $ ( 3,013,405 ) The accompanying notes are an integral part of these consolidated financial statements. Common Shares Additional Paid-in Capital Accumulated Deficit F- 5 KONATEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For Years Ended December 31, 2023 2022 Cash Flows from Operating Activities: Net Loss $ ( 3,940,827 ) $ ( 2,952,360 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization 12,352 12,352 Loan Origination Cost Amortization 161,474 94,478 Bad Debt 215 29,133 Stock-based Compensation 257,557 692,138 Non-Compensatory Stock Options Exercised 123,750 — Change in Right of Use Asset 110,358 ( 83,612 ) Change in Lease Liability ( 118,382 ) 92,941 Changes in Operating Assets and Liabilities: Accounts Receivable 13,104 ( 264,564 ) Inventory ( 703,433 ) 40,502 Prepaid Expenses ( 68,465 ) 98,640 Accounts Payable and Accrued Expenses 2,360,760 418,483 Other Assets ( 495 ) — Net cash used in operating activities ( 1,792,032 ) ( 1,821,869 ) Cash Flows from Investing Activities Sale of Assets — 10,000 Net cash provided by investing activities — 10,000 Cash Flows from Financing Activities Proceeds from short-term note payable 554,750 3,150,000 Loan origination cost ( 132,000 ) ( 173,532 ) Repayments of amounts of Notes Payable — ( 150,000 ) Cash received from Stock Options Exercised 90,751 108,250 Net cash provided by financing activities 513,501 2,934,718 Net Change in Cash ( 1,278,531 ) 1,122,849 Cash - Beginning of Year 2,055,634 932,785 Cash - End of Period $ 777,103 $ 2,055,634 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 419,525 $ 3,099 Cash paid for taxes $ — $ — Non-cash investing and financing activities: Right of use assets obtained in exchange for new operating lease liabilities $ — $ 472,974 The accompanying notes are an integral part of these consolidated financial statements. F- 6 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”) and 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 eleven (11) 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 intangible assets. Actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. Basis of Consolidation The consolidated financial statements for the year ended December 31, 2023, and 2022, include the Company and its three (3) wholly owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems, and IM Telecom. 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- 7 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. Net receivables from transactions with customers were $ 1,496,799 and $ 1,510,118 as of December 31, 2023 and December 31, 2022, respectively. 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, 2023, and 2022, management has determined that no allowance for doubtful receivables is necessary. Inventory Inventory consists primarily of the cost of cellular phones and tablets. 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, 2023, total inventory owned by the Company was $ 1,229,770 . Due to rapidly changing technology within the industry, inventory is evaluated on a regular basis to determine if any obsolescence exists. As of December 31, 2023, and 2022, 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, 2023, and 2022. Intangible Assets The Company accounts for intangible 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. As of December 31, 2023, intangible assets include our ETC 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 security deposits held with vendors. 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. F- 8 The Company held $ 0 in collateral deposits from various sub-reseller customers at December 31, 2023, and 2022, respectively. 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 5. 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, 2023, and December 31, 2022, our operating lease liabilities were $ 458,227 and $ 576,609 , 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 under 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. We distribute government subsidized mobile services through Master Agents. As part of the distribution process, we deliver mobile phones and/or tablets (devices) to our Master Agents, who then are responsible to subscribe qualifying consumers under a government F- 9 sponsored program (ACP and/or Lifeline). In most cases, devices that have been delivered to our Master Agents are subscribed to and activated by qualifying consumers within sixty (60) days, at which point we would receive a subsidy from a governing body ( the “Universal Service Administrative Company” or “ USAC” or certain states) and recognize revenue. Once a device is activated, and the intended service provided under the government program is deemed to have occurred, the program revenue is recognized, the expense is recognized, and the device is removed from inventory. 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 agent compensation. Advertising/Marketing Costs for advertising/marketing of 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/marketing expense was $ 154,533 and $ 106,402 for 2023, and 2022, respectively. The increase in advertising/marketing costs was a result of the expansion of the marketing for Infiniti Mobile throughout our independent agent footprint. 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. F- 10 Net Income (Loss) Per Share Basic 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 dilutive common shares for the years ended December 31, 2023, and 2022, are not included in the computation of diluted earnings per share because to do so would be anti-dilutive. As of December 31, 2023, there were potentially 1,981,926 dilutive shares. The following table reconciles the shares outstanding and net income used in the computations of both basic and diluted earnings per share of common stockholders: Summary of Significant Accounting Policies -Schedule of Earnings Per Share, Basic and Diluted Years Ended December 31, 2023 2022 Numerator Net Loss $ ( 3,940,827 ) $ ( 2,952,360 ) Denominator Weighted-average common shares outstanding 42,773,269 41,863,283 Dilutive impact of stock options — — Weighted-average common shares outstanding, diluted 42,773,269 41,863,283 Net income per common share Basic $ ( 0.09 ) $ ( 0.07 ) Diluted $ ( 0.09 ) $ ( 0.07 ) Concentrations of Credit Risk Trade Account Receivables Sales Revenue Customer Concentration 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, 2023, 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 $ 1,024,308 or 68.5 % and $ 283,536 or 19.0 %. It should be noted that the largest customer is the federal government, as administered by USAC, under the authority of the FCC). As of December 31, 2022, the Company had a significant concentration of receivables from two (2) customers in the amounts of $ 859,334 or 57.0 % and $ 255,136 or 16.9 %. Concentration of Major Customer A significant amount of the revenue is derived from contracts with major customers. For the year ended December 31, 2023, the Company had two (2) customers that accounted for $ 10,492,430 or 57.6 % and $ 3,000,498 or 16.5 % of revenue, respectively. For the year ended December 31, 2022, the Company had two (2) customers that accounted for $ 12,852,384 or 64.2 % and $ 3,431,875 or 17.1 % of revenue, respectively. The loss of a major customer would have a negative impact on the Company, and would subsequently require the Company to make significant changes to reduce expenses. It should be noted that the largest customer is the federal government, as administered by USAC under the authority of the FCC , as part of our participation in the federal Lifeline and ACP programs. F- 11 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 – INVENTORY Inventory primarily consists of sim cards, cell phones and tablets, which are stored at our warehouse, or have been delivered to distributors in the field. Inventories are stated at cost using the first-in, first-out (“FIFO”) valuation method. On a monthly basis, inventory is counted at our warehouse facility, and is reviewed for obsolescence and counted for accuracy with distributors. At December 31, 2023, and December 31, 2022, the Company had inventory of $ 1,229,770 and $ 526,337 , respectively. NOTE 3 – SIGNIFICANT TRANSACTIONS CCUR Loan ( and Extension) In 2022, the Company and its wholly owned subsidiary companies entered into a Note Purchase Agreement and related Guarantee and Security Agreement with CCUR Holdings, Inc. (as “Collateral Agent”), and Symbolic Logic, Inc., whereby the Company pledged its assets to secure $ 3,150,000 in debt financing (the “CCUR Loan”). The term was for a period of twelve ( 12 ) months, at an initial interest rate of 15 %, with two (2) successive six-month optional extensions. As a condition of securing the CCUR Loan, the Company paid a 3% origination fee, and other legal and closing expenses to the lender in the amount of $ 153,284 , resulting in a net loan balance of $ 2,984,181 . The loan costs of $ 153,284 and the net loan balance of $ 2,984,181 were amortized over a 12-month period. The Company incurred an additional $ 20,248 in legal expense related to the closing, which amount was also amortized over a 12-month period. Proceeds of the CCUR Loan were used to retire the $ 150,000 SBA “EIDL” Loan and were used in an ongoing capacity to support the acceleration of our mobile services growth strategy. In 2023, the Company exercised the first draw under the First Amendment to the NPA of $ 500,000 . As part of the First Amendment to NPA, the Company paid $ 15,000 to CCUR, which was equal to 1.5% of the initial delayed draw, and the initial interest rate established in the NPA was increased by 3 %. ACP Finance Line of Credit In December 2023, IM Telecom entered into a structured credit, non-dilutive facility with ACP Financing VII, LLC. The facility is used for mobile device purchases in support of our growing mobile services group. Approximately $ 1,500,000 was immediately available under the terms of the agreement. NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consist of the following major classifications as of December 31, 2023, and 2022: Property and Equipment - Schedule of Property and Equipment December 31, 2023 December 31, 2022 Lease Improvements Lease 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 ( 437,427 ) ( 425,075 ) Property and equipment, net $ 24,184 $ 36,536 Depreciation expense amounted to $ 12,352 and $ 12,352 for the years ended December 31, 2023, and 2022, respectively. Depreciation expense is included as a component of operating expenses in the accompanying statements of operations. NOTE 5 – 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 4.75 % and 7.50 %. The Right-of-Use Assets were $ 443,328 and $ 553,686 in 2023 and 2022, respectively. F- 12 The Company has right-of-use assets through leases of properties under non-cancelable leases. As of December 31, 2023, the Company had four (4) properties with lease terms in excess of one (1) year. Of these four (4) leases, two (2) leases expire in 2025; one (1) lease expires in 2026; and one (1) lease expires in 2030 . Lease payables as of December 31, 2023, was $ 458,227 . Future lease liability payments under the terms of these leases are as follows: Right-of-Use Assets - Schedule of Future Minimum Lease Payments for Operating Leases 2024 $ 155,325 2025 $ 129,543 2026 $ 65,967 2027 $ 54,000 2028 and Thereafter $ 144,000 Total $ 548,835 Less Interest $ 90,608 Present value of minimum lease payments $ 458,227 Less Current Maturities $ 127,716 Long Term Maturities $ 330,511 The weighted average term of the right-to-use leases is 60.4 months recorded with a weighted average discount of 6.87 %. For the year ended December 31, 2023, total lease expense was $ 145,485 . NOTE 6 – INTANGIBLE ASSETS Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions: Intangible Assets - Schedule of Acquired Finite-Lived Intangible Assets December 31, 2023 2022 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 ) ( 3,542,963 ) Net Amortizable Intangibles 634,251 634,251 Right of Use Assets - net 443,328 553,686 Intangible Assets net $ 1,077,579 $ 1,187,937 Amortization expense amounted to $ 0 and $ 0 for the years ended December 31, 2023, and 2022, 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, 2022. 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, 2023, and December 31, 2022, was $ 634,251 . NOTE 7 – LINES OF CREDIT The Company has no lines of credit as of December 31, 2023. 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, 2023, 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. F- 13 Regulatory Determination The Company has no outstanding regulatory determinations as of December 31, 2023. Tax Audits In June of 2021, the Company received an audit determination and assessment from the State of Pennsylvania related to sales and use tax for the audit period of January 1, 2016, through September 30, 2019. The assessment was in the amount of $ 115,000 , including interest and penalties calculated on sales made inside and outside Pennsylvania. The Company recorded the full amount of this assessment in 2022. The Company appealed the assessment in August, 2021, and at the request of the state, provided additional information to support its appeal. The Company’s position is that Pennsylvania has no sales tax authority to levy and collect sales tax on sales made outside of Pennsylvania. The State of Pennsylvania rejected an appeal by the Company. On November 6, 2023, the Company agreed to a payment plan with the State of Pennsylvania. The Company will pay $ 5,500 per month, over a twenty-four (24) month period, which commenced in December, 2023. Letters of Credit The Company had no outstanding letters of credit as of December 31, 2023. 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 – Our Hosted Services include 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 and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. Mobile Services – Our Mobile Services include 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 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 government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated. F- 14 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, 2023 Revenue $ 5,054,210 $ 13,169,535 $ 18,223,745 Gross Profit $ 1,397,711 $ 1,975,929 $ 3,373,640 Depreciation and amortization $ 11,944 $ 408 $ 12,352 Additions to property and equipment $ — $ — $ — For the year ended December 31, 2022 Revenue $ 5,567,308 $ 14,456,032 $ 20,023,340 Gross Profit $ 1,808,393 $ 3,181,214 $ 4,989,607 Depreciation and amortization $ 11,944 $ 408 $ 12,352 Additions to property and equipment $ — $ — $ — NOTE 10 – STOCKHOLDERS’ EQUITY Non-Compensatory Stock Options Sole Shareholder Effective December 18, 2017, the Company completed an Agreement and Plan of Merger whereby a newly formed wholly owned subsidiary merged with and into KonaTel Nevada, and under which KonaTel Nevada was the surviving corporation and became a wholly owned subsidiary of the Company. Mr. McEwen was the sole shareholder of KonaTel Nevada and received merger consideration of 13,500,000 shares of the Company’s common stock and 1,500,000 non-compensatory options to acquire shares of the Company’s Common Stock under the merger, at an exercise price of $ 0.22 per share, vesting quarterly, from March 18, 2018, to December 18, 2019. See NOTE 11 below. Chief Executive Officer In 2023, D. Sean McEwen, the Chairman and CEO of the Company, exercised 750,000 equity stock options for 750,000 shares of common stock at a price of $ 0.22 per share. Stock Compensation The Company offers incentive stock option equity awards to directors and key employees. Options vest in tranches and typically expire in five (5) years. During the year ended December 31, 2023, and 2022, the Company recorded options expense of $ 257,557 and $ 692,138 , respectively. The option expense not taken as of December 31, 2023, is $ 1,771,133 , with a weighted average term of 3.27 years. In 2023, 3,245,000 share incentive stock options were granted to two (2) independent members of the Board of Directors and twelve (12) employees. Each independent Board member was granted 25,000 shares in the first and second quarter of 2023, for a total of 50,000 shares each. Three (3) key employees were granted a total of 2,050,000 share options. An independent member of the Board of Directors was granted 750,000 share options, and a total of 345,000 share options were granted among nine (9) employees. During the year ended December 31, 2023, 200,000 shares were exercised by two (2) independent members of the Board of Directors. During the year ended 2023, 700,000 partially vested share options were forfeited by two (2) key employees of the Company. The Aggregate Intrinsic Value is based on the market value of the Company’s common stock of $0.89 on December 31, 2023. 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 2023 2022 Weighted average volatility 181.29 % 192.71 % Weighted average expected term (years) 5.00 5.00 Risk free interest rate 4.53 % 1.90 % Expected dividend yield — — F- 15 The following table represents incentive stock option activity as of and for the year ended December 31, 2023: Stockholders’ Equity - Schedule of Share-Based Compensation, Stock Option Activity Number of Weighted Average Weighted Average Aggregate Shares Exercise Price Remaining Life Intrinsic Value Options Outstanding – December 31, 2022 4,405,000 $ .59 3.22 $ 2,260,138 Granted 3,245,000 .86 Exercised ( 950,000 ) .53 Forfeited ( 700,000 ) Options Outstanding – December 31, 2023 6,000,000 $ .75 3.69 $ 872,463 Exercisable and Vested, December 31, 2023 641,155 $ .50 1.58 $ 247,547 The following table represents stock option activity as of and for the year ended December 31, 2022: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Life Aggregate Intrinsic Value Options Outstanding: December 31, 2021 4,260,000 $ .37 2.25 $ 5,862,938 Granted 900,000 $ 1.16 Exercised ( 625,000 ) .17 920,750 Forfeited ( 130,000 ) Options Outstanding: December 31, 2022 4,405,000 $ .59 3.22 $ 2,260,138 Exercisable and Vested: December 31, 2022 1,722,041 $ .36 1.80 $ 1,271,653 In 2022, 900,000 share incentive stock options were granted to two (2) independent members of the Board of Directors and two (2) key employees. Each independent Board member was granted 25,000 shares per quarter of service in 2022, for a total of 100,000 shares each. The key employees were granted 700,000 share options as part of their employment agreements. During the year ended December 31, 2022, 625,000 shares were exercised by three (3) former employees of the Company, who received these options as part of their employment agreements. During 2022, 130,000 share options were forfeited, of which 50,000 options were forfeited by an independent consultant, and 80,000 options were forfeited by two (2) former employees of the Company. The Aggregate Intrinsic Value is based on the market value of the Company’s common stock of $1.10 on December 31, 2022. NOTE 11 – INCOME TAX The Company provides for income taxes using an asset and liability-based approach. Deferred income tax assets and liabilities are recorded to reflect the future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Tax Cuts and Jobs Act was enacted on December 22, 2017, which reduced the U.S. corporate statutory tax rate from 35% to 21%. The Company changed its effective federal rate to 21% as the expected rate for our deferred tax items. The significant components of net deferred tax assets (liabilities) were as follows at December 31, 2023, and 2022: Income Tax - Schedule of Deferred Tax Assets and Liabilities December 31, 2023 2022 Net operating losses $ 1,657,095 $ 850,050 Depreciation and amortization ( 14,128 ) 3,716 Stock option expense 304,978 324,528 Valuation allowance ( 1,947,945 ) ( 1,178,294 ) Net Deferred Tax Asset $ — $ — F- 16 As of December 31, 2023, the Company had no unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate over the next twelve (12) months. A reconciliation of the expected income tax benefit at the U.S. Federal income tax rate to the income tax benefit actually recognized for the years ended December 31, 2023, and 2022 is set forth below: For the Year Ended December 31, 2023 2022 Tax at statutory federal rate $ ( 850,623 ) $ ( 619,996 ) Non-deductible expenses and other — — Change in valuation allowance 850,623 619,996 Benefit from income taxes $ — $ — As of December 31, 2023, the Company has a net operating loss carry-forward for U.S. federal income tax purposes of approximately ($ 7,890,930 ). This carryforward is available to offset future taxable income, if any, and will expire, if not used, from 2037 through 2042. The utilization of the net operating loss carry-forward is dependent upon the tax laws in effect at the time the net operating loss carry-forward can be utilized and may be limited by changes in ownership control of the Company. The Company’s U.S. federal tax return, constituting the return of the major taxing jurisdictions, are subject to examination by the taxing authorities for all open years as prescribed by applicable statute. No income tax waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute. The Company is no longer subject to U.S. federal tax examinations for tax years before and including December 31, 2019. During the years ended December 31, 2023, and 2022, the Company did not incur interest and penalties. Expiration NOL Amount 2037 $ 759,300 2038 $ 463,895 2039 $ 484,495 2040 $ 87,181 2041 $ 2,045,473 2042 $ 4,050,586 $ 7,890,930 NOTE 12 – SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date of this filing, and except for the following, no material subsequent events have occurred: Subsequent Event Excess Telecom Sale of IM Telecom On January 22, 2024 (the “Effective Date”), the Company and IM Telecom entered into a Membership Interest Purchase Agreement (the “Excess Purchase Agreement”) with Excess Telecom, Inc., a Nevada corporation (“Excess”), pursuant to which we conveyed 49 % of our Membership Interest in IM Telecom to Excess on the “Initial Closing Date” in consideration of the sum of $ 10,000,000 , and will convey the remaining 51% of the Membership Interest in IM Telecom to Excess for the sum of $100.00 on the Final Closing. The Final Closing is conditioned upon obtaining the necessary federal and state governmental approvals for a change in control of IM Telecom (the “Approvals”), among other customary closing conditions. If on or before December 31, 2024, the ACP Connectivity Program is renewed by the United States Congress for a duration of greater than four (4) months (the “ACP Renewal Condition”), Excess will pay the Company an additional sum of $ 5,000,000 (the “ACP Renewal Earnout). The parties also entered into a Management Services Agreement governing the management of the business of IM Telecom to be effective until the earlier of the Final Closing or ninety-nine (99) years, and whereby IM Telecom and Excess will be managing IM Telecom until final regulatory approval; and a Master Distribution Agreement whereby the Company, doing business as “Infiniti Mobile,” a tradename of IM Telecom that was excluded from the Excess Purchase Agreement, will be a master distributor of IM Telecom’s wireless services, products, Lifeline services, ACP services to potential customers and such other ancillary services relating to Lifeline and ACP services offered to the Company’s customers under the Licenses held by IM Telecom (the “Services”), the term of which will commence upon the Final Closing and continue for a period of not less than ten (10) years. The current employees of IM Telecom will novate to employees of Company under these agreements. The CCUR Loan and the total liability of Company under the ACP Financing Installment Sale Agreement, which are referenced above in NOTE 3, were paid in full on the Initial Closing Date of the Excess Purchase Agreement. The total payoff amount for the CCUR Loan was $ 3,681,660 , inclusive of unpaid interest and legal fees. The total payoff amount under the ACP Finance F- 17 Installment Sale Agreement was $ 1,462,345 . These respective payments eliminated all of the Company’s long-term debt. Additional information about the Excess Purchase Agreement and related agreements is contained in the Company’s 8-K Current Report dated April 6, 2023, and filed with the SEC on April 17, 2023. Extension of Agreement to Acquire Wireless Carrier On January 24, 2023, the Company entered into a non-material purchase agreement to acquire 100% of the membership interest of Tempo Telecom, LLC, a Georgia limited liability company and Eligible Telecommunications Carrier (“ETC”), pending FCC approval. Additionally, the Company has assigned its rights under the purchase agreement to Insight Mobile, Inc., a Delaware corporation, subject to various conditions of closing. If all conditions are timely satisfied, including the required FCC approval, this transaction will be materially beneficial to the Company and will not involve any dilution to the Company’s shareholders. Additional information about this assignment of the Company’s rights to the referenced purchase agreement is contained in the 8-K Current Report of the Company dated April 6, 2023, and filed with the SEC on April 17, 2023. On January 23, 2024, the Company exercised its rights under the aforementioned assigned agreement, seeking an extension of 180 days for closing or such longer period as may be required to satisfy the required Governmental Approvals to closing. Affordable Connectivity Program (ACP) Wind Down On February 7, 2024 the FCC announced that the Affordable Connectivity Program would stop accepting new enrollments and stated the last fully funded month for the program is April, 2024. All consumers in the program as of this enrollment freeze date will receive their benefit until the program ends unless Congress votes to extend the program. Under IM Telecom’s national ETC license, the Company will continue to enroll and provide services to qualifying consumers in the FCC Lifeline program. The Lifeline program is a separate program under the FCC, and remains committed and viable in support of providing affordable communication services for low-income consumers. Non-Compensatory Stock Option Grant On March 15, 2024, Mr. McEwen exercised his fifth tranche of 187,500 non-compensatory stock options for 187,500 shares of common stock at a price of $ 0.22 per share or an aggregate price of $ 41,250 , which shares were issued on March 15, 2024. Stock Option Grant On March 27, 2024, we granted 100,000 incentive stock options to an employee who will serve as the Director of Sales for Apeiron Systems at an exercise price of $ 0.626 . These options vest as follows, and they expire on the earlier of March 27, 2029, or ninety (90) days from resignation or termination of employment: 33,333 on March 27, 2024; 33,333 on March 27, 2025; and 33,334 on March 27, 2026 . Change of Tax Year The Company petitioned the IRS to change our tax period to a calendar tax year to coincide with our financial year. Additions to our State ETC Designations As of this date, we have filed for multiple state ETC designations, and have received additional ETC designations in Alabama, Colorado, Michigan, Missouri, Rhode Island, Tennessee, West Virginia, and Wyoming. 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.