UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

o   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended

x   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from October 1, 2017, to December 31, 2017

Commission File No. 001-10171

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    o Yes   x No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o Yes   x No

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes   o No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant ’ s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   x No

On June 30, 2017, the last business day of the Registrant ’ s most recently completed second quarter, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was $146,324, based upon the closing price on that date of the common stock of the Registrant on the OTC Markets Group (“OTC Markets”) “OTCQB Tier” system of $0.05. For purposes of this response, the Registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of its common stock on June 30, 2017, were deemed “affiliates” of the Registrant.

As of June 29, 2018, the Registrant had 32,942,286 shares of its common stock, $0.001 par value, issued and outstanding.

Explanatory Note

On December 18, 2017 (the “Effective Time”), we completed an Agreement and Plan of Merger between our newly formed and wholly-owned acquisition subsidiary, and KonaTel, Inc., a Nevada corporation (respectively, “KonaTel Nevada” and the “KonaTel Nevada Merger Agreement”), whereby at the Effective Time, KonaTel Nevada was the surviving corporation and became our wholly-owned subsidiary (the “KonaTel Nevada Merger”).  Following the merger, our primary business operations have been those conducted by KonaTel Nevada.  Additional information about the KonaTel Nevada Merger is contained in our 8-KA-1 and our 8-KA-2 Current Reports dated November 15, 2017, and respectively filed with the Securities and Exchange Commission (the “SEC”) on December 20, 2017, and April 17, 2018 (the “KonaTel Nevada Merger 8-K’s”), and is incorporated herein by reference.  These Current Reports can be viewed by Hyperlink in Part IV, Item 15 of this Transition Report.  Under the KonaTel Merger Agreement, we changed our fiscal year end from September 30, 2017, to a calendar year end; accordingly, we are filing this Transition Report for the period from October 1, 2017, to the year ended December 31, 2017.  

Cautionary Statements

We have a limited public float of our outstanding common stock, and there has been no established trading market in our common stock during the past three years.  See the caption “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II, Item 5 hereof.  These factors may result in uncertainty and volatility in the trading price of our common stock that may not have any relation to our current or future prospects.  On or about September 29, 2017, our Application for continued quotation of our common stock on the OTC Markets Group OTCQB Tier (respectively, the “OTC Markets” and the “OTCQB Tier”) was not approved because of our limited public float and the high concentration of the ownership in our common stock in one entity at that time, among other potential reasons. With the December 18, 2017, closing of the KonaTel Nevada Merger, the percentage of ownership of our common stock in limited holders has increased, with an aggregate of 26,174,500 shares (includes 574,500 shares underlying vested options that can be exercised within 60 days of the date of this Transition Report) being deemed to be beneficially owned by D. Sean McEwen, our Chairman, CEO, President and a director, 13,500,000 shares of direct ownership and 374,500 shares underlying personally owned vested options, and 12,225,000 shares (includes 125,000 shares underlying vested options owned by others) of indirect ownership under a Shareholder Voting Agreement executed and delivered at the Effective Time of the KonaTel Nevada Merger.  Based on the present number of outstanding shares of our common stock of 33,516,786 shares, which includes all 574,500 shares underlying vested options that can be exercised within 60 days of the date of this Transition Report, Mr. McEwen is currently the beneficial owner of approximately 77.9% of our outstanding shares.  See the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof for additional information on these computations.  No further Application could have been made by us to the OTC Markets for further consideration of quotations of our common stock on the OCTQB Tier until on or about March 31, 2018, and no determination by management has been made as to whether any such Application will be filed in the near future.  Our common stock is currently quoted on the OTC Markets OTC Pink Tier (the “OTC Pink Tier”) under the trading symbol “KTEL.”

This Transition Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Transition Report. We cannot assure you that the forward-looking statements in this Transition Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Transition Report completely, and it should be read and considered with all other reports filed by us with the SEC. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

TABLE OF CONTENTS

PART I

ITEM 1.  BUSINESS

Corporate History and Business

We were 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.   At that time, all of our prior operations were conducted through Lee Building Products and T. A. Kilgore & Company, which owned and operated a home center in League City, Texas, about 30 miles southeast of downtown Houston, Texas. During 1990, we ceased these operations, and the secured lenders took possession our assets.

On March 11, 2000, our Board of Directors began the process of re-entering the development stage with the appointment of new officers and directors, and began the process of seeking the acquisition of new business opportunities. These efforts resulted in the completion of the acquisition of Dala Petroleum Corp., a Nevada Corporation (“Dala Nevada”), pursuant to a transaction that is described below.

On June 2, 2014, we and our newly formed and wholly-owned acquisition subsidiary, Dala Acquisition Corp., a Nevada corporation (“Dala Acquisition”), and Dala Nevada, which was wholly-owned by Chisholm Partners II, LLC, a Louisiana limited liability company (“Chisholm II”), executed and delivered an Agreement and Plan of Merger (the “Dala Merger Agreement”) and all required or necessary documentation to complete the merger (collectively, the “Dala Merger Transaction Documents”), whereby Dala Acquisition merged with and into Dala Nevada, with Dala Nevada being the surviving company and becoming our wholly-owned subsidiary on the closing of the merger (the “Dala Merger”). Articles of Merger were filed with the Secretary of State of the State of Nevada on such date, which was the effective date of the merger.  We issued 10,000,000 shares of our common stock in exchange for all of the outstanding shares of common stock of Dala Nevada, to Dala Nevada’s sole shareholder. Following the receipt of the 10,000,000 shares, Chisholm II’s managing director approved the transfer of all of these shares to its members (or its members’ designees) on a pro rata basis. The transfer of shares to the members of Chisholm II occurred on June 8, 2014.  A condition precedent to the closing of the Dala Merger was that we would raise not less than $2,000,000 (the “Offering”) from persons who were “accredited investors” in consideration of the issuance (or the conversion) of a minimum of 2,000 shares and up to a maximum of 2,500 shares of our Series A 6% Convertible Preferred Stock at an offering price of $1,000 per Unit. Upon the closing of the Offering, we had sold 2,025 Units in the Offering, raising $2,025,000, which funds were planned to be utilized in the development of the 300 oil and gas leases we acquired in north central Kansas under the Dala Merger, with total leased acreage of approximately 80,000 acres, more or less. For additional information about the Dala Merger, see our 8-K Current Report dated June 3, 2014, and filed with the SEC on June 3, 2014, which is accessible by Hyperlink in Part IV, Item 15 hereof.

On July 24, 2014, we filed an S-1 Registration Statement with the SEC to register shares of our common stock underlying the conversion rights of our Series A 6% Convertible Preferred Stock, which became effective on September 12, 2014.

On August 29, 2014, we filed a Certificate of Amendment of Certificate of Incorporation with the State of Delaware changing our name to “Dala Petroleum Corp.”

Following the Dala Merger, we have been operating as an early-stage oil exploration company focused on our leased acreage.  We assigned the rights to explore the leased acreage to Chisholm II, an exploration and production company focused on the acquisition of Kansas oil leasehold interests and exploration and development and which was Dala Nevada’s sole shareholder prior to the Dala Merger.

On May 16, 2016, we entered into a Partial Cancellation Agreement (the “PCA”) by and among our subsidiary, Dala Nevada, Chisholm II and certain members of Chisholm II (the “Chisholm Members”) through which Chisholm II (after receiving shares from certain of its Chisholm Members) returned a total of 8,567,800 shares of our common stock to us for cancellation.  In exchange for the return of these shares for cancellation, we assigned 55,000 acres of our leased acreage or approximately 68.75% of our total holdings, to Chisholm II.  Additionally, on May 16, 2016, our Board of Directors, as part of a settlement with our Series A 6% Convertible Preferred Stock shareholders, authorized the filing of an Amended and Restated Certificate of Designation of our Series A 6% Convertible Preferred Stock (the “COD”), which (i) changed the conversion price of such preferred stock from $0.70 per share to $0.05 per share, and (ii) eliminated Section 7 “Certain Adjustments” of the COD. For additional information about the PCA and these settlement arrangements with our Series A 6% Convertible Preferred Stock shareholders, see our 8-K Current Report dated May 16, 2016, and filed with the SEC on May 27, 2016, which is accessible by Hyperlink in Part IV, Item 15 hereof.

On May 10, 2016, we terminated our Master Services Agreement with Chisholm II and all amounts due thereunder were released by Chisholm II. For additional information about the termination of this Master Service Agreement, see our 8-K Current Report dated May 10, 2016, and filed with the SEC on May 17, 2016, which is accessible by Hyperlink in Part IV, Item 15 hereof.

On July 20, 2017, pursuant to a Common Stock Purchase Agreement dated July 19, 2017, M2 Equity Partners, LLC, a Minnesota limited liability company (“M2”), acquired 12,100,000 shares of our common stock in consideration of the sum of $347,500, which resulted in a change in control of our Company.  As part of this transaction, substantially all of our outstanding liabilities were paid or compromised, and 1,584,200 shares of our common stock, 2008 shares of our Series A 6% Convertible Preferred Stock, which comprised all of this outstanding series (or any other series) of our preferred stock, and 1,928,571 warrants that were issued in connection with the issuance of such series of preferred stock, were cancelled.   For additional information about the closing of this Common Stock Purchase Agreement, see our 8-K Current Report dated July 19, 2017, and filed with the SEC on July 20, 2017, which is accessible by Hyperlink in Part IV, Item 15 hereof.

We estimate that we had leases with landowners on approximately 7,892 acres, more or less, at June 30, 2017; leases with landowners on approximately 3,744 acres at September 30, 2017; and presently, leases with landowners on approximately 1,290 acres.

Prior to the expiration of the leases on all but approximately 1,290 acres of our leasehold interests in mid-November, 2017, we had been evaluating these leasehold interests for several months to determine their present value and future potential for exploration, with the intention of contacting landowners and oil and gas operators active in the area of our current and expired leasehold interests to determine whether there was a potential future value to us in retaining, renewing or acquiring other leasehold interests with the prospect of entering into favorable arrangements with oil and gas operators that are active in this area to develop these properties as part of a coalition of landowners, leaseholders and operators, if and when economically feasible. These activities include seeking others with an interest in funding the development, extension or renewal of leases and the acquisition of other leases, either singly or with a joint venture partner or with a working interest, carried or fully funded by any such partner or other oil and gas operator.  We have contacted all of our current and former landowners of our leased acreage (approximately 127 landowners and approximately 24% of these landowners responded with responses of interest), as well as commencing the process of identifying oil and gas operators conducting development activities in this area of north Kansas; and we have received permission from Chisholm II to contact all landowners who were lessors of the leased acreage assigned to Chisholm II under the PCA referenced above, though we have not contacted any of these landowners as of the date of this Transition Report.  We have also identified one oil and gas company that has indicated an interest in reviewing our landowner responses and our proprietary geophysical databases and high resolution seismic data on this area, and we intend engage in discussions with this entity or others about the sale or other disposition of this information and our current leases, and management has expressed its intention to maximize the value of our present oil and gas leased acreage and our substantial geologic, proprietary geophysical database and high resolution seismic data information for the mutual benefit of the Company and our shareholders, to the extent that these activities do not adversely affect the benefits of the KonaTel Nevada acquisition and our current principal business operations in any reasonable respect.

All of our designated series of shares of preferred stock have been converted, reacquired or cancelled. Accordingly, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware on November 13, 2017, which removed all of our designated series of preferred stock from our Certificate of Incorporation, while reserving our 50,000,000 authorized and unissued one mill ($0.01) par value shares of preferred stock for future issuance as the Board of Directors may designate and approve.  A copy of our Amended and Restated Certificate of Incorporation is incorporated by reference as an Exhibit to this Transition Report.  See Part IV, Item 15, Exhibit 3(i).

On November 29, 2017, we filed a Post-Effective Amendment to our registration statement that became effective on September 12, 2014, regarding the registration of the shares of our common stock underlying our Series A 6% Convertible Preferred Stock, withdrawing from registration all shares that had not been converted, amounting to 1,949,333 shares.  Only 17 of our 2025 shares of such series of preferred stock had been converted, and the remaining shares of such series were cancelled under the above referenced Common Stock Purchase Agreement.  This Post-Effective Amendment was declared effective on December 1, 2017.

5

The KonaTel Nevada Merger was effective on December 18, 2017.  We issued 13,500,000 shares of our one mill ($0.001) par value common stock comprised of “restricted securities” as defined in SEC Rule 144 in exchange for all of the outstanding shares of common stock of KonaTel. Following the Effective Time of the KonaTel Nevada Merger, and except as discussed below about conditions to the closing, there were approximately 27,192,286 outstanding shares of our common stock, 13,500,000 shares of which were owned by D. Sean McEwen, who was the sole shareholder of KonaTel and a party to the KonaTel Nevada Merger Agreement; 12,100,000 shares of which were owned by M2 (Messrs. Mark Savage and Matthew Atkinson are members of M2 and collectively own approximately 65.2% of M2, which equated to an indirect beneficial ownership of approximately 3,950,000 shares of our common stock by each, and with Mr. Atkinson being the sole Manager of M2, he was also the beneficial owner of all of M2’s shares of our common stock until the closing of the KonaTel Nevada Merger and the execution and delivery of the Shareholder Voting Agreement referenced below; and 1,592,286 shares, which were owned by public shareholders.  M2 and Messrs. Savage and Atkinson were also parties to the KonaTel Nevada Merger Agreement, and Mr. Savage was our President and a director; and Mr. Atkinson was our Secretary.  See Part III, Items 10 and 12 hereof.  The following additional actions were taken at the closing of the KonaTel Nevada Merger, through the execution and delivery of various additional agreements among the parties and others, and which were conditions precedent to the closing:

·

the execution and delivery of a Stock Option Cancellation Agreement by the sole option holder of shares of KonaTel Nevada ( Exhibit 5.4(c) );

·

the assumption of the Employment Agreements of two key employees of KonaTel Nevada (Section 6.4(b)). For additional information about these Employment Agreements, see the heading “Significant Employees” of the caption “Directors and Executive Officers” of Part III, Item 12 hereof]);

·

the execution and delivery of an Employment Agreement with Mr. McEwen, employing him as the President, CEO, Chairman of the Board and a director ( Exhibit 6.4(c) . For additional information on the terms and provisions of this Employment Agreement, see the heading “McEwen Employment Agreement” of the caption “Executive Compensation” of Part III, Item 11 hereof]);

·

the execution and delivery of a Shareholder Voting Agreement between the Company, Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen whereby Mr. McEwen was granted an irrevocable proxy to vote the respective shares of our common stock owned or acquired by each of the foregoing, together with various additional rights, including a right of veto on certain corporate actions, for a period of two (2) years ( Exhibit 6.4(d) ).  For a further description of the Shareholder Voting Agreement, see the heading “Shareholder Voting Agreement” of the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof.

·

the reservation of 5,000,000 shares of our authorized common stock for issuance to directors, executive officers and employees, as incentives or bonuses, and the granting of an aggregate of 3,850,000 of those options at the closing, including grants to Messrs. Savage, Atkinson, Mr. McEwen and the two key employees whose Employment Agreements were assumed by the Company ( Exhibit 6.4(e) [the “Form of Incentive Stock Option Agreement”]). For additional information about these option grants, see the heading “Outstanding Equity Awards” of the caption “Executive Compensation” of Part III, Item 11 hereof;

·

the execution and delivery of a Lock-Up/Leak-Out Agreement by Mr. Savage, Mr. Atkinson, M2 and Mr. McEwen respecting the resale of their respective shares of common stock beneficially owned or subsequently acquired in the Company covering an 18 month period commencing at the closing ( Exhibit 6.4(f) [the “Form of the Lock-Up/Leak-Out Agreement]). For additional information on the terms and conditions of this Lock-Up/Leak-Out Agreement, see the heading “Lock-Up/Leak-Out Agreements” of the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III, Item 12 hereof;

·

the adoption of Amended and Restated Bylaws ( Exhibit 3(ii) hereto in Part IV, Item 15 hereof ) , which included provisions consistent with the terms and provisions of the Shareholder Voting Agreement;

·

the reservation of 6,500,000 shares of our common stock for offer and sale in a private placement to “accredited investors” for aggregate gross proceeds of $1,300,000 (Section 6.4(g)); and

·

the payment of $150,000 to Mr. McEwen for recent advances made to KonaTel Nevada prior to closing (Section 6.4(i)).

See Part IV, Item 15, for reference to the Exhibits that are briefly summarized above.  These summaries do not purport to be complete and are qualified in their entirety to the complete text of such Exhibits.

6

At the Effective Time, we changed our fiscal year from September 30 to a calendar year end of December 31 to coincide with the calendar fiscal year end of KonaTel Nevada, hence the filing of this Transition Report.

We have agreed to use our “best efforts,” in our sole discretion, under the KonaTel Nevada Merger Agreement (Section 6.4(j)), to complete the above referenced equity funding and to file a registration statement with the SEC within a reasonable time of the availability of the required audited and reviewed financial statements of the Company to register a reasonable portion of the outstanding shares of our common stock that are deemed to be “restricted securities” on a pro rata basis for resale by Company shareholders who are non-“affiliates,” with the primary purpose thereof being to increase the public float of our outstanding shares. A portion of our shares of common stock owned by our “affiliates” may also be included in any such registration statement, with all of such shares being subject to pro rata cutbacks by the SEC under SEC Rule 415 or otherwise. All of these shares are or will be subject to the terms and provisions of the Lock-Up/Leak-Out Agreement referenced above, as the private placement subscribers are also required to execute and deliver a similar agreement with any subscription, though the “Lock-Up Period” for any shares included in an effective registration statement will cease, while the provisions of the “Leak-Out Period” contained therein shall continue to apply during the 18 month term of the Lock-Up/Leak-Out Agreement.

Following the Merger, our primary operations will be those currently carried on by KonaTel. For information about our current and expired oil and gas leasehold interests and the area of north central Kansas where these leaseholder interest are located, including maps, see Part I, Item I, of our 10-K Annual Report for fiscal year ended September 30, 2016, filed with the SEC on January 13, 2017, which is incorporated herein by reference in Part IV, Item 15 hereof; and see the discussion above about our present plans and our current activities regarding the existing, expired and other leasehold interests in this area.

On January 8, 2017, we filed a Definitive Information Statement with the SEC to change our name to “KonaTel, Inc.”  See Part IV, Item 15 hereof.

On April 24, 2018, the 12,100,000 shares of our common stock that were acquired by M2 under the Common Stock Purchase Agreement referenced above were distributed to its members, pro rata, in accordance with their respective membership interests.  This action was approved by the requisite members of M2 on April 9, 2018.  All of these transferred shares remain subject to the Shareholder Voting Agreement and the Lock-Up/Leak-Out Agreement referenced above.

BUSINESS

Introduction

KonaTel Nevada was organized under the laws of the State of Nevada on October 14, 2014, by its founder and sole shareholder, D. Sean McEwen, to conduct the business of a full service cellular provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets. Through its sales network, it provided these services nationwide.  In furtherance of its proposed business, on November 1, 2014, it acquired most of the assets of Coast to Coast Cellular, Inc. (“Coast to Coast”), including inventories, property, plant and equipment and goodwill valued at approximately $950,000 net of liabilities in the approximate amount of $415,000; and on November 1, 2016, it acquired the assets of CS Agency LLC (“CS Agency”), consisting of contract rights related to the cellular industry, in consideration of assuming liabilities of CS Agency in the approximate amount of $300,000.  With the completion of the KonaTel Nevada Merger, we succeeded to the current and intended business operations of KonaTel Nevada.

Presently, our cellular industry segment operations principally comprise “Mobile Voice,” which includes wholesale priced minutes, text and data to mobile resellers; “Mobile Voice (MVNOs),” which includes traditional post-paid cellular services, primarily operating on mobile networks from Verizon Communications, Inc. (“Verizon”) and AT&T Mobility, Inc. (“AT&T”), sold to small and medium sized businesses and marketed through independent commissioned sales agents; “B2B & B2C Retail,” which comprises one retail location in upstate New York that functions as a Sprint Corporation (“Sprint”) authorized agent of cellular services and products, primarily selling B2C Retail Service, and which also sells Verizon and AT&T service from that location, mostly consisting of B2B Mobile Service; and “Internet of Things” or wireless data (“IoT”), a currently untapped business segment.  The Internet of Things is the network of physical devices, vehicles and other items embedded with electronics, software, sensors and network connectivity, which enable these objects to collect and exchange data.  Each “thing” is uniquely identifiable through its embedded computing system, but is able to interoperate within the existing Internet infrastructure.  We plan to devote additional sales resources to IoT and have direct wholesale mobile data agreements with Verizon and AT&T to provide us with wireless data services.  Some of our services are contracted from aggregators or Mobile Virtual Network Enablers (“MVNEs”) that are wholesale distributors of these services, like Telispire of Wichita Falls, Texas (“Telispire”), which provides nationwide access to trusted wireless networks; and Orbcomm Inc., of Rochelle Park, New Jersey (“Orbcomm” [NASDAQ-“ORBC”]), a global provider of IoT solutions.  In addition to our current wholesale mobile data agreements with Verizon, AT&T and others, we have also developed our own CPaaS (Communications Platform as a Service) software suite, “Orion” system, for provisioning/activating and managing mobile numbers, toll-free numbers, SMS to Email forwarding service, and call forwarding service, which allows us to resell mobile numbers and toll free numbers, and which a sub-reseller customer may require in providing these services to customers; and “Lifeline (virtual),” which we recently commenced marketing as a virtual eligible telecommunications carrier (“VETC”) of “Lifeline services.” This initiative was implemented by us as a precursor to eventually purchasing a licensed Lifeline ETC so we can market these services directly in various markets where we may be licensed to provide these services. Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income consumers.  We primarily distribute our products and services through independent field agents.

We have facilities in Johnstown, New York (approximately 1,500 square feet), which includes a sales office and store front business, supervised under a General Manager, with a total of six (6) employees; Johnstown, Pennsylvania (approximately 7,500 square feet, which is primarily used for accounting, engineering, compliance and the customer service departments of our B2B agent program and our wholesale service providers, and having seven (7) employees; and Dallas, Texas (approximately 3,000 square feet), and where D. Sean McEwen, our Chairman, CEO and President, and Charles L. Schneider, Jr., KonaTel Nevada’s CEO, are employed, with four (4) full-time employees. This office serves as our corporate headquarters and principal executive offices and houses our VETC operations.  We maintain a website at www.konatel.com , for easy access to us and our products and services.

Principal Products or Services and their Markets

Our principal products and services include our wholesale priced minutes, text and data to mobile resellers, wireless voice and data services, our Orion CPaaS system for provisioning or activating and managing mobile numbers and toll-free numbers, and our Lifeline (virtual), through which we recently commenced marketing eligible FCC subsidized, fixed or mobile, telecommunications services to low-income consumers through an existing agreement with an ETC in over 20 states.  All of these product offerings are available nationwide, except the Lifeline services, from our three current locations in Johnstown, New York; Johnstown, Pennsylvania; and Dallas, Texas.

8

The following are our principal revenue streams:

·

Our first revenue channel is our voice, text and data MVNO channel.  The MVNO, mobile virtual network operator or retail channel, is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers.  The MVNO channel provides us with the greatest ARPU (average revenue per unit) and the highest gross profit per unit.  The products sold are traditional post-paid wireless plans that include voice, text and data, wireless data only plans, and equipment that support the wireless plans. The equipment includes, but is not limited to, phones, tablets and accessories.  We market the MVNO channel products through our retail store in Johnstown, New York, under the “Telecon Wireless” brand.  These current products are sold to consumers, B2C (business to consumer), out of the storefront, and to businesses direct, B2B (business to business), by our General Manager.  We also market our products and services through independent (commissioned) sales agents through the “KonaTel” brand.  These agents market to small and medium sized businesses throughout the United States. This type of marketing is also considered B2B.

·

Our second revenue channel is our voice, text and data MNVE channel.  The MVNE, or mobile virtual network enabler, or wholesale channel, provides network infrastructure and related services, such as network subsystems, business support systems, provisioning, administration and operations support systems to MVNOs.  We provide a suite of services to the MVNOs.  All of our MVNO customers purchase the wireless network service from us and can choose, if they require, any suite of services we offer.  These related services include, but are not limited to, customer service, billing service and equipment procurement.

·

Our third revenue channel is our Sprint commission channel.  This channel is exclusive to the Johnstown, New York, retail location.  It is a consumer product, and the customer is a Sprint direct customer.  We receive a commission from Sprint for selling this product.  All products that are sold by a direct Sprint store, including their Boost product, are sold at the Johnstown, New York, location.

·

Our fourth revenue channel is our VETC, virtual eligible telecommunications carrier, our Lifeline service in California. We operate under the license of an ETC or eligible telecommunications carrier.  We currently market through five master agencies that specialize in Lifeline products.  These master agencies support dozens of field agents who market directly to the individuals requesting Lifeline cellular phone service.  We provide phones and wireless service to the individual requiring Lifeline service.  This channel is currently our fastest growing revenue producer.

·

Our fifth revenue channel is relatively new to us, which is the IoT or Internet of Things wireless data channel.  IoT refers to the ever-growing network of wireless physical objects that feature an IP address for Internet connectivity, and the communication that occurs between these objects and other Internet-enabled devices and systems.  We market as an IoT B2B reseller through independent agents.  We offer the wireless data service to businesses and direct product producers.  The direct product producer may also be a company that has developed an IoT product and needs to have a wireless data carrier to make the product work.

·

Our sixth revenue channel is our Orion CPaaS Channel.  This channel provides mobile number and toll-free number products with integrated/aggregated SMS to Email forwarding and call forwarding services.  We primarily offer this service to online retailers using a variety of social media platforms, like Facebook, and who consume mobile and toll-free numbers needed for account activation and customer service.

Distribution Methods of the Products or Services

Most of our products and services are primarily sold through agents and resellers, except our direct sales to consumers through our single retail location in Johnstown, New York.

In New York, our retail store resells Sprint cellular service (as an authorized agent for Sprint) and sells the Verizon cellular service; we purchase service from Telispire wholesale and repackage the service under our brand name.  A large part of our business revolves around our Verizon service (Verizon cellular purchased from Telispire and Verizon IoT data purchased directly from Verizon) sold both to consumers, businesses and other resellers.  Recently, we signed a direct reseller agreement with AT&T to resell their APEX (AT&T Partner Exchange) suite of services, a bundle of voice (cellular) and data (IoT) services targeted specifically to businesses (not consumers).

We primarily distribute our services through independent sales agents.  Agents are recruited and obtained to market these services via various means such as tradeshows, our website, word of mouth from other agents and cold calling.  Wholesale mobile and B2C retail services are sold and distributed via direct by our employees.  Wholesale mobile customers are solicited and obtained also via tradeshows, our website, word of mouth within the industry and cold calling.  B2C customers are sold products and services at our Johnstown, New York, retail store location.

9

Sources and Availability of Raw Materials and the Names of Principal Suppliers

Wholesale cellular services are sourced either directly from the carrier or from wholesalers that sit between us and the carrier.  Carriers include Verizon and AT&T.  Wholesalers include Prepaid Wireless Group (“PWG”) and Telispire.

Mobile Virtual Network Operator (“MVNOs”) like us or a wireless communications services provider that does not own the wireless infrastructure over which it provides services to its customers are not required to have any licenses with any carrier to do business.  We purchase services from the following sources:

·

Telispire: Verizon, Sprint and T-Mobile US, Inc. (“T-Mobile”) voice, text or data service.  Telispire, through a contract with us, has set pricing for voice, text and data wireless services per unit.  Pricing per unit is in the form of a monthly recurring charge (“MRC”) that may or may not include minutes of use, text units or data units.  Additional add on pricing per unit is available for additional data units;

·

AT&T APEX: AT&T voice, text or data service and AT&T IoT service.  AT&T APEX, under a contract with us, has set pricing for voice, text and data and IoT wireless services per unit.  Pricing per unit is in the form of an MRC that may or may not include minutes of use, text units or data units.  Additional add on pricing per unit is available for additional data units;

·

Verizon Wireless VPP, a Verizon IoT product: Verizon VPP, also through a contract with us, has set pricing for IoT wireless services per unit.  Pricing per unit is in the form of an MRC that includes data units with defined over plan use pricing;

·

Orbcomm, an Orbcomm T-Mobile IoT Product: Orbcomm, under a contract with us, has set pricing for IoT wireless services per unit.  Pricing per unit is in the form of an MRC that include data units with defined over plan use pricing; and

·

Global Connection Inc. of America, doing business as “StandUP Wireless”: StandUP Wireless, through a contract with us, has set pricing for Lifeline wireless services per unit.

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts

We were recently approved by the United States Patent and Trademark Office for the trademark “Lifeline+” and now need to demonstrate the use of this trademark to finalize the Trademark.

Our current VETC agreement expires on July 27, 2018, and is automatically renewed for an additional 12 months unless either party provides notice to the other within 120 days of the end of the term of its intention to terminate the agreement.

Competition

The wireless telecommunications industry is highly competitive.  Our primary competitors include other resellers and national carriers, such as AT&T, Verizon, Sprint and T-Mobile. These national providers are facility-based and are significantly larger than us and enjoy trade name and trademark public recognition internationally, as well as greater resources, scale and competitive advantages and direct FCC licenses, among other substantial factors, as compared to us. In addition, our competitors include numerous smaller regional carriers, existing MVNOs and ETCs, such as Cricket Wireless, LLC. (“Cricket”), TracFone Wireless, Inc. (“TracFone”) and Assurance Wireless, many of which offer or plan to offer Lifeline services, and no-contract postpaid and prepaid service plans. Competitive factors within the wireless telecommunications industry include pricing, market saturation, service and product offerings, customer experience, network investment and quality, development and deployment of technologies, and regulatory changes. Some competitors have shown a willingness to use aggressive pricing as a source of differentiation.  Other competitors have sought to add ancillary services, like mobile video, to enhance their offerings. Taken together, the competitive factors we face continue to put pressure on margins as companies compete to retain their current customer base and continue to add new developments, many proprietary or patented, and customers.

Need for any Governmental Approval of Principal Products or Services

We are pursuing the purchase of a United States Lifeline carrier with an FCC approved Compliance Plan.  Approval for the acquisition of a Lifeline carrier with an approved Compliance Plan rests with the FCC. Without FCC approval, we will be unable to purchase a Lifeline carrier with an FCC approved Compliance Plan.  Lifeline was created under President Ronald Reagan as part of the 1984 Telecommunications Act.  Under President George W. Bush, the program began to allow cell phones, and there was some initial duplication of service.  Industry reports reflect an estimated 39 million Lifeline eligible households in the United States with only about 10 million currently being served, leaving approximately 29 million unserved/eligible households.  Approximately 15 current ETCs hold an FCC approved Compliance Plan.  No new Compliance Plans have been approved by the FCC since 2012, so Lifeline is a tightly controlled market.  We anticipate that approximately one-third of our future gross revenues will come from Lifeline services, which will be overseen by Charles L. Schneider, Jr., one of our key personnel, who has over 30 years’ experience in the Telecom Industry and was the CEO of the nation’s eighth largest Lifeline carrier for five years.  See the heading “Significant Employees” of the caption “Directors and Executive Officers” of Part III, Item 10, below.

10

If this purchase is completed, we will be subject to substantial additional FCC rules and regulations that could have an adverse affect on this segment of our business.

Existing and Probable Government Regulation to Our Current and Intended Business

The FCC has a number of complex requirements and proceedings that affect our operations and that could increase our costs or diminish our revenues. For example, the FCC has rules regarding provision of 911 and E-911 services, porting telephone numbers, roaming, disabilities access, privacy and cyber security, consumer protection, and the universal service and Lifeline programs. Many of these and other issues are being considered in ongoing proceedings, and we cannot predict whether or how such actions will affect our business, financial condition or results of operations. Our ability to provide services and generate revenues could be harmed by adverse regulatory action or changes to existing laws and regulations. In addition, regulation of companies that offer competing services can impact our business indirectly.

We are also subject to the Sarbanes-Oxley Act of 2002.  The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence.  It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act could substantially increase our legal and accounting costs.

Number of Total Employees and Number of Full-Time Employees

We have 17 full time employees and, one part-time employee.

Subsidiaries

We have one wholly-owned operating subsidiary: KonaTel, Inc., a Nevada corporation.

Research and Development Costs During the Last Two Fiscal Years

We have not engaged in any research or development and have not devoted any efforts to research and development during our last two calendar years ended December 31, 2017, and 2016.

ITEM 1A.  RISK FACTORS

RISK FACTORS

As we are a “smaller reporting company” as defined by Section 12b-2 of the Exchange Act, we are not required to provide the information under this Item or in our annual or quarterly reports filed with the SEC; however, we believe this information may be of value to our shareholders or potential investors in our Company for this filing. These risk factors should be considered in light of the caption “Forward-Looking Statements” at the forepart of this Transition Report. We reserve the right not to provide risk factors in our future filings. Our primary risk factors and other considerations include:

Risks Related to the Company

We have a limited operating history and cannot ensure the long-term successful operation of our business or the execution of our business plan.

We have a limited operating history, having commenced our business operations in November of 2014, and our wireless marketing technology and solutions are an evolving business offering. As a result, investors have a limited track record by which to evaluate our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to successfully accomplish and fund our current endeavors, which would materially impact our ability to implement our business plan, including:

·

establishing and maintaining broad market acceptance of our technology, solutions, services and platforms, and converting that acceptance into direct and indirect sources of revenue;

·

establishing and maintaining adoption of our technology, solutions, services and platforms in and on a variety of environments, experiences and types of devices;

·

timely and successfully developing new technologies, solutions, services and platform features, and increasing the functionality and features of our existing technologies, solutions, services and platform offerings;

·

developing technologies, solutions, services and platforms that result in a high degree of customer satisfaction and a high level of end-customer usage;

·

successfully responding to competition, including competition from emerging technologies and solutions;

·

developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our technologies, solutions, services and platforms;

·

identifying, attracting and retaining talented engineering, network operations, program management, technical services, creative services and other personnel at reasonable market compensation rates in the markets in which we employ such personnel; and

·

integration of potential evolving offerings of products and acquisitions.

Our business strategy may be unsuccessful, and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish these tasks, our business will be harmed, and we may fail.

We have experienced minimal net income since our inception, and have incurred substantial losses, and there is no assurance that we will not continue to experience losses in our business.  As a result, we may be unable to continue as a “going concern.”

We reported gross revenues of approximately $11,477,723, cost of revenues of approximately $9,283,398, operating and other expenses of approximately $3,907,505 and a net loss of approximately $1,713,180 for the year ended December 31, 2017; and gross revenues of approximately $9,741,779, cost of revenues of approximately $7,070,796, operating expenses and other expenses of approximately $3,173,298 and a net loss of approximately $502,315 for year ended December 31, 2016.  If we cannot eliminate our losses and achieve profitability, our business may fail.

The Company did not generate net income during the years ended December 31, 2017, and 2016, and we have been dependent upon equity financing to support our operations.  In addition to losses of $1,713,180 and $502,315 in 2017 and 2016, respectively, we have experienced negative cash flow from operations of $1,000,836 and $49,278, respectively, during these years. Our accumulated deficit as of December 31, 2017, is $3,190,873.

13

We believe we have ameliorated any “going concern” issues by generating additional cash flow since the completion of our merger with KonaTel Nevada on December 18, 2017; receiving cash investments through the private placement of shares of our common stock; and the increase of revenues from the growth of our Virtual ETC program, all of which has contributed to an improvement in our working capital, resulting in a working capital surplus, without the use of additional lines of credit or borrowings.  Additionally, we also have two options to finance our mobile phone equipment purchases whereby multiple equipment suppliers provide us short term credit terms of up to 60 days on mobile phone purchases and a bank line of credit for purchases of select mobile phones.

The United States Government’s dissolution or reduction of the Lifeline Program or the elimination of “resellers” of these services would have a substantial adverse affect on our current and planned business operations.

·

Considering there are approximately 10 million current Lifeline recipients, this would be a draconian move, like dissolving Medicare or Social Security; however, that is a possibility.  Federal or state governmental agencies could also significantly reduce or delay Lifeline reimbursement payments to Lifeline carriers, forcing Lifeline carriers to continue to provide minimum Lifeline services and at a reduced reimbursement rate.  Depending on any reimbursement reduction, a reduction would diminish earnings and could make Lifeline unprofitable.  “ The FCC established the Lifeline program in 1985 to ensure that qualifying low-income consumers could afford phone service and the opportunities and security it provides. Congress supported and strengthened Lifeline in the Telecommunications Act of 1996, requiring that affordable service and advanced communications be available to low-income consumers across the country.”

·

The FCC is considering a modification to the Lifeline program rules wherein the FCC may limit Lifeline distribution to facilities-based carriers that would eliminate “resellers” of these services like us.  This modification has been open for public comment and even though public comment seems to be trending against the rule change, if it is approved by the FCC, this revision would have a substantial adverse effect on our current and planned business operations.

·

Lifeline requires several factors to be successful.  The impact of negative governmental changes and negative national carrier pricing have been outlined above.  In addition to those two risks, an interruption to the supply of low cost phones and/or a reduction of Lifeline agents (no access to or not enough access to agents) would have a negative impact on Lifeline.

·

Adequate equipment financing and available cash resources to pay up-front commission payments (sometimes required) is critical to facilitate Lifeline, B2B and retail sales and the lack of these resources would have a negative impact on our business.

A national carrier (Verizon, AT&T, T-Mobile or Sprint) could dissolve, reduce or restrict any wholesale program, agent program or reseller program.  This includes both voice and data IoT, which would adversely affect our business.

We, like all voice and data resellers, are dependent on the FCC licensed national carriers to provide services that can be resold for a profit.  The wireless carriers own/control their respective network (towers) and provide the wireless service.  Resellers do not own their own network and are dependent on the national carriers to provide a reseller program.  These carriers could eliminate a reseller program or reduce the profit margins making any applicable program unprofitable.  They could also implement market restorations reducing markets we could sell into, which would have a direct adverse affect on our current and future prospects.  Similarly, one of these national carriers could reduce their own retail pricing, with no corresponding reduction in their wholesale pricing, which could create a situation where a reseller is unable to make enough profit to sustain operations.  This has happened in the past with Verizon until Verizon’s wholesale (reseller) division finally reduced wholesale prices.

A wireless reseller could gain a significant price advantage over other wireless resellers by entering into a special national carrier pricing agreement not available to other resellers.

Any special national carrier pricing agreement that was not available to us would allow that particular reseller to “undercut” all other resellers.  This scenario could also apply to a national wireless carrier acquiring a reseller then allowing that reseller to operate with special wholesale pricing not available to other resellers.  This scenario has happened in the past with Cricket Communications, Inc. and Ultra Mobile, resellers that were acquired by a national carrier.  Any such event could have a substantial adverse impact on our business and revenues.

The increase in the number of resellers of services and products that we provide by any national carrier could saturate the markets and market segments of our targeted customers, which could affect our business adversely.

Market saturation could occur when a national carrier allows too many resellers into the market and margins drop so low the reseller business model is unsustainable, and our business may suffer and fail.

14

A decrease in the number of wholesale voice from aggregators of these services could cause a substantial reduction in our business and customers.

We purchase the majority of our mobile data service (IoT) directly from national carriers, and purchase some of our wholesale voice and mobile data from wholesale aggregators or MVNEs like Telispire and Orbcomm.  If one of these aggregators vacated the market, such action could strand many resellers of these services, like us, and could substantially reduce our current and anticipated revenues from our IoT service.

Adequate funds for our current and intended operations may not be available, requiring us to raise additional financing or curtail our current and planned operations significantly.

We will likely be required to raise additional funding through public or private debt or equity financings. Any additional equity financings may be dilutive to our shareholders and may be completed at a discount to the then-current market price of our common stock, which common stock currently trades in an illiquid market on the OTC Pink Tier. Debt financing, if available, would likely involve restrictive covenants on our operations or pertaining to future debt or equity financing arrangements. Nevertheless, we may not successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us. If adequate funds are not available, our plans to operate our business may be adversely affected, and we could be required to curtail our activities significantly and/or cease operations.

We will be unable to implement our business plan if we cannot raise sufficient capital and may be required to pay higher prices for capital based on the current illiquid market for our common stock, among other factors.

We anticipate that we will need additional capital to implement our business plan, and if we cannot attract sufficient capital from customary sources, we may be required to pay a higher price for capital.

We will need to obtain additional capital to implement our business plan and meet our financial obligations as they become due. We may not be able to raise the additional capital needed or may be required to pay a higher price for any required capital. Factors affecting the availability and price of capital may include the following:

·

the availability and cost of capital generally;

·

our financial results;

·

the experience and reputation of our management team;

·

market interest, or lack of interest, in our industry, industry segments and our business plan;

·

the trading volume of, and volatility in, the market for our common stock, assuming there is a reasonable trading market for our common stock;

·

our ongoing success, or failure, in executing our business plan;

·

the amount of our capital needs; and

·

the amount of debt, options, warrants and convertible securities that may be outstanding in our Company at any time.

We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital. If we are unable to obtain any required capital for an extended period of time, we may be forced to discontinue or curtail our business operations and we may fail.

We expect that there will be significant consolidation in our industry. Our failure or inability to lead that consolidation would have a severe adverse impact on our access to financing, customers, technologies and human resources.

Our industry is currently composed of a small number of substantial entities, and a relatively large number of small businesses, no single one of which is dominant, or which provides integrated solutions and product offerings incorporating much of the available technology. Accordingly, we believe that substantial consolidation of the smaller companies may occur in our industry in the near future as has occurred with many larger participants. If we do not play a positive role in that consolidation, either as a leader or as a participant whose capabilities and offerings are merged into a larger entity, we may be left out of this process, with product and service offerings of limited value compared with those of our competitors. Moreover, even if we lead the consolidation process, the market may not validate the decisions we make in that process and our business will suffer and may fail.

Our success depends on our product and service technologies achieving and maintaining widespread acceptance in our targeted markets.

Our success will depend to a large extent on broad market acceptance of our wireless solutions among our current and prospective customers. Our prospective customers may be unwilling to use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity with our technologies, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of our technologies by prospective customers will depend primarily on the following factors:

·

our ability to demonstrate the economic and other benefits attendant to our products and services;

15

·

our customers becoming comfortable with using our wireless technologies; and

·

the reliability of these services and technologies.

Because we do not have long-term purchase commitments from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have an adverse affect on our business and future prospects.

Our business is characterized by short-term purchase orders and contracts that do not require that purchases be made. This makes forecasting our sales difficult. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements, or otherwise, could have a material adverse affect on our business, financial condition and results of operations. We have experienced such challenges in the past and may experience such challenges in the future.

Most of our contracts are terminable by our customers with limited notice and without penalty payments, and early terminations could have a material adverse affect on our business, operating results and financial condition.

Most of our contracts are terminable by our customers following limited notice and without early termination payments or liquidated damages due from them. In addition, each stage of a project often represents a separate contractual commitment, at the end of which the customer may elect to delay or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a material contract or materially reduce the scope of any large project. The delay, cancellation or significant reduction in the scope of a large project or a number of projects could have a material adverse affect on our business, operating results and financial condition.

Our industry is characterized by frequent technological change. If we are unable to adapt our products and services and develop new products and services to keep up with these rapid changes, we will not be able to obtain or maintain market share and our business may fail.

The market for our products and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition and frequent new product and service introductions. If we fail to develop new products and services or modify or improve our existing products and services in response to these changes in technology, customer demands or industry standards, our products and services could become less competitive or obsolete.

We must respond to changing technology and industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products and services or enhancing existing products and services in a timely and cost-effective manner. Furthermore, even if we successfully adapt our products and services, these new technologies or enhancements may not achieve market acceptance.

A portion of our business involves the use of software technologies that we have developed or licensed. Industries involving the ownership and licensing of software-based intellectual property are characterized by frequent intellectual property litigation, and we could face claims of infringement by others in the industry.  Such claims are costly and add uncertainty to our operational results.

A portion of our business involves our ownership and/or licensing of software. This market space is characterized by frequent intellectual property claims and litigation. We could be subject to claims of infringement of third-party intellectual property rights resulting in significant expense and the potential loss of our own intellectual property rights. From time to time, third parties may assert copyright, trademark, patent or other intellectual property rights to technologies that are important to our business. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. If any such litigation resulted in an adverse ruling, we could be required to:

·

pay substantial damages;

·

cease the development, use, licensing or sale of infringing products;

·

discontinue the use of certain technologies; or

·

obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms or at all.

Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our products and services.

Our business may be adversely affected by malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our products or products that impact our business. These applications may attempt to interfere with our ability to communicate with our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative experience that our customers may associate with our products and services. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The ability to provide customers with a superior interactive marketing technology experience is critical to our success. If our efforts to combat these malicious

16

applications fail, or if our products and services have actual or perceived vulnerabilities, there may be claims based on such failures and our reputation may be harmed, which would damage our business and financial condition and our ability to continue our business.

We compete with other companies that have substantially greater resources, and we are at a distinct competitive disadvantage in our chosen industry.

The market for our products and service solution technologies is generally highly competitive, and we expect competition to increase in the future. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we have. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than us.

We expect competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. Successful new product and service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services, cause intense price competition or make our products and services obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer and we may fail.  Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could also adversely affect our business and financial condition.

Our future success depends on key personnel and our ability to attract and retain additional personnel.

Our success is dependent upon attracting and maintaining key personnel, including our founder, D. Sean McEwen, and various key executive employees, including Charles L. Schneider, Jr., from whom we acquired CS Agency, and J. William Riner, a former co-owner of Coast to Coast.  Further, if we fail to retain our key personnel or to attract, retain and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected. Our future success depends significantly on the continued service of our key technical, sales and senior management personnel and their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other employers who offer competitive or superior compensation packages.

Unpredictability in financing markets could impair our ability to grow our business through acquisitions.

We anticipate that opportunities to acquire similar businesses will materially depend on the availability of financing alternatives with acceptable terms. As a result, poor credit and other market conditions or uncertainty in financial markets could materially limit our ability to grow through acquisitions since such conditions and uncertainty make obtaining financing more difficult.

Our reliance on information management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service provider experiences a security breach.

Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure, in addition to denial of service attacks and corruption of our data. Further, we rely on the information security internal controls maintained by our outsourced service provider. Breaches of our information management system could also adversely affect our business reputation. Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably report results.

Because our technology, products, platforms and services are complex and are deployed in and across complex environments, they may have errors or defects that could seriously harm our business.

Our technology, proprietary platforms, products and services are highly complex and are designed to operate in and across data centers, large and complex networks and other elements of the digital media workflow that we do not own or control. On an ongoing basis, we need to perform proactive maintenance services on our platform and related software services to correct errors and defects. In the future, there may be additional errors and defects in our software that may adversely affect our services. We may not have in place adequate reporting, tracking and monitoring and quality assurance procedures to ensure that we can detect errors in our software in a timely manner. If we are unable to efficiently and cost-effectively correct errors or other problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers and our business may fail.

17

We may have insufficient network or server capacity for our current and planned business, which could result in interruptions in our services and the loss of revenues, and result in a negative impact on our business.

Our operations are dependent, in part, upon network capacity provided by third-party telecommunications networks; data center services provider owned and leased infrastructure and capacity; server capacity located at the data center services provider partner or partners; and our own infrastructure and equipment. Collectively, this infrastructure, equipment and capacity must be sufficiently robust to handle all of our customers’ wireless requirements, particularly in the event of unexpected surges in high-definition video traffic and network services incidents. We may not be adequately prepared for unexpected increases in bandwidth and related infrastructure demands from our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes, outages or such service providers going out of business. Any failure of these service providers or our own infrastructure to provide the capacity we require due to financial or other reasons may result in a reduction in or the interruption of service to our customers, leading to an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses, which could result in the cessation of all or part of our business operations.

We do not have sufficient capital to engage in material research and development, which may harm our long-term growth.

In light of our limited resources in general, we have made no material investments in research and development. This conserves capital in the short term. In the long term, as a result of our failure to invest in research and development, our technologies and product offerings may not keep pace with the market, and we may lose any existing competitive advantage. Over the long term, this may harm our revenue growth and our ability to become profitable.

Our business operations are susceptible to interruptions caused by events beyond our control.

Our business operations are susceptible to interruptions caused by events beyond our control. We are vulnerable to the following potential problems, among others:

·

our platform, technologies, products, and services and underlying infrastructure, or that of our key suppliers, may be damaged or destroyed by events beyond our control, such as fires, earthquakes, floods, power outages or telecommunications failures;

·

we and our customers and/or partners may experience interruptions in service as a result of the accidental or malicious actions of Internet users, hackers or current or former employees;

·

we may face liability for transmitting viruses to third parties that damage or impair their access to computer networks, programs, data or information. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to our customers; and

·

the failure of our systems or those of our suppliers may disrupt service to our customers (and from our customers to their customers), which could materially impact our operations (and the operations of our customers), adversely affecting our relationships with our customers and lead to lawsuits and contingent liabilities.

The occurrence of any of the foregoing could result in claims for consequential and other damages, significant repair and recovery expenses and extensive customer losses and otherwise have a material adverse affect on our business, financial condition and results of operations.

General global market and economic conditions may have an adverse impact on our operating performance and results of operations.

Our business has been and could continue to be affected by general economic and market conditions. Weakness in the United States and worldwide economy could have a negative effect on our operating results. Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet and corresponding decrease in traffic delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers on which we rely for equipment, field services, servers, bandwidth, co-location and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our business operations or revenues. Flat or worsening economic conditions may harm our operating results and financial condition.

The markets in which we operate are rapidly emerging, and we may be unable to compete successfully against existing or future competitors to our business.

The markets in which we operate are becoming increasingly competitive. Our current competitors generally include those that offer similar products and services. These competitors, including future new competitors who may emerge, may be able to develop comparable or superior solution capabilities, platforms, services, products and/or a series of services that provide a similar or more robust set of features and functionality than the technologies, products and services we offer. If this occurs, we may be unable to grow as necessary to make our business profitable.

18

Regardless of whether we have superior products, many of these current and potential future competitors have a longer operating history in their current respective business areas and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Existing and potential competitors with an extended operating history, even if not directly related to our business, have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations to a company that may be perceived as unproven or in the early stage of its development. In addition, our existing and potential future competitors may be able to use their extensive resources:

·

to develop and deploy new products and services more quickly and effectively than we can;

·

to develop, improve and expand their platforms and related infrastructures more quickly than we can;

·

to reduce costs, particularly hardware costs, because of discounts associated with large volume purchases and longer term relationships and commitments;

·

to offer less expensive products, technologies, platforms and services as a result of a lower cost structure, greater capital reserves or otherwise;

·

to adapt more swiftly and completely to new or emerging technologies and changes in customer requirements;

·

to take advantage of acquisition and other opportunities more readily; and

·

to devote greater resources to the marketing and sales of their products, technology, platform, and services.

If we are unable to compete effectively in our various markets, or if competitive pressures place downward pressure on the prices at which we offer our products and services, our business, financial condition and results of operations may suffer and our business may fail.

Compliance with the reporting requirements of federal securities laws can be expensive.

We are a public “reporting company” in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, rules and regulations, including compliance obligations under the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited and reviewed financial statements in reports filed with the SEC, along with required communications with our shareholders, are substantial. We have incurred, and expect to continue to incur costs associated with becoming and continuing as a public company, including, but not limited to, legal, accounting, filing and other related costs and expenses.  Failure to comply with the applicable securities laws could result in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business and financial condition, the value of our common stock and the ability of our shareholders to resell their common stock.

We do not intend to pay dividends on our common stock for the foreseeable future.

All future revenues are anticipated to be utilized for research, development and the furtherance of our business plan and our technologies, products, services and platform, and accordingly, it is highly unlikely that you will receive any dividends from us in the near future, if ever.

We do not intend to provide guidance about future events in the foreseeable future.

Our Board of Directors anticipates adopting a policy that will preclude us from providing guidance about matters that may happen in the foreseeable future, though any such policy will not prohibit our responsibilities to provide forward-looking information to our shareholders and to the public in our Exchange Act filings with the SEC, including our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” required in a number of SEC reports and registration statements.

Risks Related to Our Common Stock

Our common stock trades only in an illiquid trading market.

Quotations for our common stock are contained in the OTC Markets OTC Pink Tier under the trading symbol “KTEL.” This lower categorized market tier may have an adverse affect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock. It may also result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock, regardless of whether we are successful in our current and planned business operations.  On or about September 29, 2017, our Application for continued quotation of our common stock on the OTC Markets Group OTCQB Tier was not approved because of our limited public float and the high concentration of the ownership in our common stock in one entity at that time, among other potential reasons. We were advised by the OTC Markets that no further Application for consideration of quotations of our common stock on the OCTQB Tier could be made by us until on or about March 31, 2018, and no determination by management has been made as to whether any such Application will be filed by us in the near future.

19

There is not now and there may not ever be an active market for our shares of common stock.

In general, there has been a minimal trading volume in our common stock. The small trading volume will likely make it difficult for shareholders to sell their shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.

We also have a limited public float of approximately 1,529,286 shares, with approximately 909,600 of these shares being reflected as “restricted securities,” and there has not been an “established trading market” in our common stock.  All but 250,000 shares (issued in July, 2017) of the 909,600 shares reflected as being “restricted securities” have been held approximately three years and are believed to be freely tradeable under Rule 144 or Section 4(a)(1) of the Securities Act, based upon our legal counsel’s advice.  This number excludes approximately 5,750,000 shares of our common stock recently sold under our current private placement, all of which are “restricted securities” and all of which were sold in March (4,750,000) or April (1,000,000) of 2018; and 12,100,000 shares acquired by M2 on or about July 20, 2017, and which were disbursed to its members on April 24, 2018, pro rata; and 13,500,000 shares acquired by D. Sean McEwen under the KonaTel Nevada Merger on or about December 18, 2017.  The shares of common stock that can be acquired under vested and unvested Incentive Stock Options that we have granted are also not included in the foregoing.  See the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part II, Item 11, for a description of all outstanding Incentive Stock Options.

Additionally, if we do not timely file our reports required to be filed with the SEC under the Exchange Act, broker-dealers may not be able or willing to trade our common stock, and the OTC Markets will post adverse warnings on its website about such failures, which, unless such failures are corrected by us, could have an additional adverse impact on the viability of any market that may develop for our common stock.  Other adverse warnings of the OTC Markets under their current and future policies could similarly have an adverse affect on any market for our common stock, and there is no assurance that we will be able to satisfy comments or concerns of the OTC Markets, if any are expressed.

Furthermore, we may be deemed to have been a “shell company” by reason of our recent limited business operations.  If that were the case, and assuming your shareholdings were “restricted securities,” you may not be able to sell any common stock in the Company for at least one (1) year from the filing of “Form 10 Information,” among other factors outlined in subparagraph (i) of SEC Rule 144, and this information would include the audited financial statements of KonaTel Nevada for the years ended December 31, 2016, and 2015, and reviewed financial statements for the nine (9) month period ended September 30, 2017, which were filed with the SEC on April 17, 2018, in our 8-KA-2 Current Report dated November 15, 2017; and this designation could certainly inhibit the ability of the Company to raise any additional required funding for planned operations.

If an active market for our common stock develops, there is a significant risk that the Company’s common stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control, including, but not limited to:

·

variations in our quarterly operating results;

·

announcements that our revenue or income are below analysts’ expectations;

·

general economic slowdowns;

·

sales of large blocks of our common stock by insiders and others; and

·

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital raises.

Our common stock is subject to the “penny stock” rules of the SEC, which may make it more difficult for shareholders to sell our common stock.

The SEC has adopted Rule 15g-9, which established the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and that the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

20

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and may cause a decline in the market value of its stock.

Because of increased regulatory efforts of governmental and quasi-governmental agencies regarding the trading of securities in the over-the-counter market where the Company’s shares of common stock are presently quoted, the cost and expense of depositing and inducing a broker-dealer to effect sales of these shares is very costly, which can be in excess of value of the shares sought to be sold, and often includes requirements of legal opinions of both the selling shareholder’s counsel and the broker-dealer’s counsel, both at the expense of the selling shareholder.

Currently, broker-dealers require legal opinions of shareholders of almost all over-the-counter stocks to deposit and sell these shares, and all of these legal opinions are required to be paid for by the shareholder; and often, two legal opinions are required, one from the shareholder’s legal counsel and one from the broker-dealer’s legal counsel.  This policy has been required of mostly all low priced over-the-counter shares, regardless of whether the shares have been registered with the SEC, or whether there is no legend on the stock certificate representing the shares and always if the shares are designated as “restricted securities.”  Larger, national broker-dealers will generally not even trade these securities.  The high cost of these types of legal opinions is often more than the value of the shares sought to be sold, and the process can take two to three weeks or more.  Accordingly, shareholders with limited shares of low priced stocks will be unable to economically sell their shares, regardless of whether an “established trading market” for the shares exists, and if they could sell their shares, the required selling process will inhibit their ability to sell the shares when they desire to sell their shares.

Because we became public by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.

Because we became public through a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. Moreover, no assurance can be given that brokerage firms will want to conduct capital raises on our behalf, presently or in the future.

We have granted “piggy-back” registration rights to certain of our shareholders who hold or may purchase shares of our common stock that are “restricted securities,” and the sale of these shares of common stock could have an adverse affect on any market for the Company’s common stock that may develop in the future.

Shares of our common stock registered for resale by other shareholders may create a ceiling on any market that develops for our common stock, and may enable persons to “short” or otherwise cause material adverse affects on any such market; you may not be able to sell your shares and you could lose your entire investment in our shares of common stock.

Our investors’ ownership in the Company may be diluted in the future.

In the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests of our present shareholders. We expect to need to issue a substantial number of shares of our common stock or other securities convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, raising additional capital in the future to fund our operations and other business purposes. We currently offer incentive stock options for our officers, directors and certain significant employees and may extend this policy to others. Additional shares of common stock issued by us in the future will dilute an investor’s investment in the Company.

Directors, executive officers, principal shareholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that our shareholders do not consider to be in their best interests.

As of the date of this Transition Report, D. Sean McEwen, our Chairman and Chief Executive Officer, beneficially owns approximately 77.9% of our issued and outstanding shares of common voting stock by reason of his personal holdings and the irrevocable proxies granted to him under the Shareholder Voting Agreement executed and delivered by M2 and Messrs. Atkinson, McEwen and Savage at the closing of the KonaTel Nevada Merger.  This percentage also includes certain vested Incentive Stock Options that can be exercised within 60 days of the date of this Transition Report, all of which options are described under the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part IV, Item 11, below, and a portion of which are reflected in Mr. McEwen’s beneficial ownership of shares of our common stock under the caption “Security Ownership of Certain Beneficial Owners and Management” in Part III, Item 12 hereof.  As a result this ownership and various other provisions of the Shareholder Voting Agreement, Mr. McEwen may have the ability to control the election of our board of directors, the outcome of issues requiring approval by our shareholders and other corporate actions until December 18, 2019, and beyond. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company that may be favored by other shareholders; and could prevent transactions in which shareholders might otherwise recover a premium for their shares over current market prices. This concentration of ownership and influence in management and board decision making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock, whether by making a tender offer or attempting to obtain control of our Company.  For a more detailed discussion of the provisions of the Shareholder Voting Agreement, see the heading “Shareholder Voting Agreement” of the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof.

21

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results in a timely manner or detect fraud. Consequently, investors could lose confidence in our financial reporting, and this may adversely affect any trading price of our common stock that may then exist.

We must maintain effective internal controls to provide reliable financial reports and to detect and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as would be possible with an effective control system in place. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement.

We have been assessing our internal controls to identify areas that need improvement and we are continually in the process of evaluating our internal controls. Failure to implement changes to our internal controls that we may deem to be ineffective or any others that we may identify as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence could have a substantial negative affect on the trading price of our common stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2:  PROPERTIES

We do not own any property, though we do have the rights to engage in oil exploration and development on certain assigned leases in north central Kansas with total acreage of approximately 3,744 acres at December 31, 2017; and presently, approximately 1,290 acres.  These lease assets were valued at $37,475 as of December 31, 2017.

Through our wholly-owned subsidiary, KonaTel Nevada, we have leases on the following properties:

Our Pennsylvania office and former headquarters, consisting of approximately 7,500 square feet and located at 1910 Minno Drive, # 210, Johnstown, Pennsylvania 15905, under a lease that commenced on January 1, 2014, and expires on April 30, 2019, at a monthly rent of $5,500.

Our New York retail store, consisting of approximately of 1,500 square feet and located at 299 N Comrie Avenue, Johnstown, New York 12095, under a lease that commenced on January 1, 2003, and expired on January 1, 2007, and which is now leased on a month to month basis, at a monthly rent of $2,200.

Our Texas and Principal Executive Offices, consisting of approximately 3,000 square feet and located at 13601 Preston, Road, # E816, Dallas, Texas 75240, under a lease that commenced on January 1, 2018, and expires on December 31, 2018, at a monthly rent of $3,819.

ITEM 3:  LEGAL PROCEEDINGS

Except as indicated below, we are not a party to any pending legal proceeding. To the knowledge of our management, no federal, state or local governmental agency is presently contemplating any proceeding against us. No director, executive officer or affiliate of ours or owner of record or beneficially of more than 5% of our common stock is a party adverse to us or has a material interest adverse to us in any legal proceeding.

ITEM 4:  MINE SAFETY DISCLOSURES

None; not applicable.

PART II

ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock was listed on the OTC Bulletin Board of the National Association of Securities Dealers (the “NASD,” now, “FINRA”) on June 14, 2007, under the symbol “WSPD.” Beginning September 2014, our common stock was listed under the symbol “DALP” on the OTCQB of OTC Markets.  Presently, our common stock is quoted on the OTC Pink Tier under the symbol “KTEL.” No assurance can be given that any market for our common stock will develop or be maintained.

For any market that develops for our common stock, the sale of shares of our common stock comprised of “restricted securities” pursuant to Rule 144 of the SEC, any other available exemption from registration under the Securities Act or by registration under the Securities Act by members of management or others, including any person to whom any such securities may be issued in the future, may have a substantial adverse impact on any such public market.  For information regarding the requirements of resales under Rule 144, see the heading “Rule 144” of this Item below.  We have a limited public float of approximately 1,529,286 shares, with approximately 909,600 of these shares being reflected as “restricted securities,” and there has not been an “established trading market” in the Company’s common stock for many years.  All but 250,000 shares (issued in July, 2017) of the 909,600 shares reflected as being “restricted securities” have been held approximately three years and are believed to be freely tradeable under Rule 144 or Section 4(a)(1) of the Securities Act, based upon legal counsel’s advice. This number excludes approximately 5,750,000 shares of our common stock recently sold under our current private placement, all of which are “restricted securities” and all of which were sold in March (4,750,000) or April (1,000,000) of 2018; and 12,100,000 shares acquired by M2 on or about July 20, 2017, and which were disbursed to its members on April 24, 2018, pro rata; and 13,500,000 shares acquired by D. Sean McEwen under the KonaTel Nevada Merger on or about December 18, 2017.  The common stock that can be acquired under vested and unvested Incentive Stock Options that we have granted are also not included in the foregoing computations.  See the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part II, Item 11, for a description of all outstanding Incentive Stock Options.  Substantially all of these shares are subject to resale under Lock-Up/Leak-Out Agreements referenced herein, including those sold under our private placement.  See the heading “Lock-Up/Leak-Out Agreements” of the caption “Security Ownership of Certain Beneficial Owners and Management” of Part III, Item 12 hereof.

Because of our current limited public float, among other unknown factors (see the heading “Risk Related to Our Common Stock” of the caption “Risk Factors” in Part I, Item 1A herein), the OTC Markets has refused to allow the Company’s common stock to be listed on its “OTCQB Tier,” and no new application could have been filed for such a listing until on or about March 31, 2018.  Management has not determined whether we will seek any such listing for quotations of our common stock.

The following table sets forth, for the periods indicated over the last two years, the high and low closing bid quotations, as reported by the OTC Markets, and represents prices between dealers, does not include retail markups, markdowns or commissions, and may not represent actual transactions:

These prices were obtained from OTC Markets and do not necessarily reflect actual transactions, retail markups, mark downs or commissions.

23

Shell Companies

The following is an excerpt from Rule 144(i) regarding resales of securities of shell companies:

(i)  Unavailability to securities of issuers with no or nominal operations and no or nominal non-cash assets .

(1)

This section is not available for the resale of securities initially issued by an issuer defined below:

(i)  An issuer, other than a business combination related shell company, as defined in §230.405, or an asset-backed issuer, as defined in Item 1101(b) of Regulation AB (§229.1101(b) of this chapter), that has:

(A)

No or nominal operations; and

(B)

Either:

(1)  No or nominal assets;

(2)  Assets consisting solely of cash and cash equivalents; or

(3)  Assets consisting of any amount of cash and cash equivalents and nominal other assets; or

(ii)

An issuer that has been at any time previously an issuer described in paragraph (i)(1)(i).

(2)

Notwithstanding paragraph (i)(1), if the issuer of the securities previously had been an issuer described in paragraph (i)(1)(i) but has ceased to be an issuer described in paragraph (i)(1)(i); is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issue was required to file such reports and materials), other than Form 8-K reports (§249.308 of this chapter); and has filed current “Form 10 information” with the Commission reflecting its status as an entity that is no longer an issuer described in paragraph (i)(1)(i), then those securities may be sold subject to the requirements of this section after one year has elapsed from the date that the issuer filed “Form 10 information” with the Commission.

24

(3)

The term ‘Form 10 information’ means the information that is required by Form 10 or Form 20-F (§249.220f of this chapter), as applicable to the issuer of the securities, to register under the Exchange Act each class of securities being sold under this rule.  The issuer may provide the Form 10 information in any filing of the issuer with the Commission.  The Form 10 information is deemed filed when the initial filing is made with the Commission.

Securities of a “shell company” cannot be publicly sold under Rule 144 in the absence of compliance with subparagraph (i) of Rule 144, though the SEC has implied that these restrictions would not be enforced respecting securities issued by a “shell company” prior to it having been determined to be a “shell company,” a position that would only affect shares issued prior to 1990 and is not deemed to be material to us or our shareholders’ holdings.

If we are deemed to be a “shell company” since the Dala Merger in 2014 by reason of our recent limited business operations, and assuming your shareholdings are “restricted securities,” you may not be able to sell any common stock in the Company for at least one (1) year from the filing of “Form 10 Information,” among other factors outlined in subparagraph (i) of SEC Rule 144, and this information must include the audited financial statements of KonaTel Nevada for the years ended December 31, 2016, and 2015, and reviewed financial statements for the nine month period ended September 30, 2017, along with the unaudited combined condensed pro forma financial statements of the Company and KonaTel, which were filed with the SEC on April 17, 2018, in our 8-K/A-2 dated November 15, 2017; and this designation could certainly inhibit our ability to raise any additional required funding for planned operations.

We do not believe we have been a “shell company” since our completion of the Dala Merger on June 2, 2014, following which we filed the referenced “Form 10 Information” with the SEC on June 3, 2014, in an 8-K Current Report of that date.  We have had material assets comprised of oil and gas leases from June 2, 2014, through the end of our fiscal year ended September 30, 2017, and we have expended substantial funding on oil and gas exploration activities, though our development operations have been limited during the last three fiscal years.  See our 10-K Annual Reports for the fiscal years ended September 30, 2017, and 2016, respectively filed with the SEC on February 2, 2018, and January 13, 2018, and accessible by Hyperlink in Part IV, Item 15 below.

Holders

We currently have 577 shareholders, not including an indeterminate number of shareholders who may hold their shares in “street name.”

Dividends

We have not declared any cash dividends with respect to our common stock, and do not intend to declare dividends in the foreseeable future.  All future revenues are anticipated to be utilized for research, development and the furtherance of our business plan and our technologies, products, services and platform, and accordingly, it is highly unlikely that you will receive any dividends from us in the near future, if ever.

There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.

Securities Authorized for Issuance Under Equity Compensation Plans

See the heading “Outstanding Equity Awards” of the caption “Executive Compensation” in Part III, Item 11 hereof.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

12,100,000 Shares-M2 (July 19, 2017).

50,000 Shares-Daniel Ryweck for $2,500 in compensation (July 25, 2017).

200,000 Shares-Leonard W. Burningham, Esq. for $10,000 in compensation (July 25, 2017).

13,500,000 Shares-D. Sean McEwen-KonaTel Merger (December 18, 2017).

3,850,000 Incentive Stock Option Agreement grants under the KonaTel Merger (December 18, 2017).

300,000 Incentive Stock Option Agreement grants to newly appointed directors (February 12, 2018).

4,750,000 Shares-Private Placement at $0.20 per share for an aggregate of $950,000 (Effective March 8, 2018).

1,000,000 Shares-Private Placement at $0.20 per share for an aggregate of $200,000, $100,000 in cash and $100,000 in payment of our note to this subscriber (Effective April 13, 2018).

25

These securities were offered and sold pursuant to an exemption from registration under the Securities Act provided in Section 4(a)(2) thereof, and/or pursuant to Rule 506(b) of Regulation D promulgated by the SEC under the Securities Act.

Use of Proceeds of Registered Securities

None; not applicable.

Purchases of Equity Securities by Us and Affiliated Purchasers

None; not applicable.

ITEM 6:  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

When used in this Transition Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position.  Persons reviewing this Transition Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors.  Such factors are discussed further below under “Trends and Uncertainties,” and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.

Overview of Current and Planned Business Operations

We are a cellular reseller of wholesale priced minutes, text and data, including traditional post-paid cellular services, primarily operating on mobile networks of major communications companies like Verizon and AT&T; and we are a Sprint authorized agent of cellular services and products that principally include business to business and business to customer products and services, mostly B2B Mobile Service and Internet of Things or wireless data.  During the coming year, we plan to devote additional sales resources to IoT, and we have direct wholesale data agreements with Verizon and AT&T to provide us with our required wireless services.  We also presently provide Lifeline Program service through a virtual eligible telecommunications carrier with a Lifeline Program license; and we have entered into an agreement with IM Telecom of Oklahoma, whose principal asset is a “Lifeline Program” license issued by the FCC, to acquire 100% of the membership interest in IM Telecom, subject to approval of the transfer of this license to us as a 100% member owner of IM Telecom by the FCC, if there is an FCC approved transfer and subsequent closing of this agreement.  The parties continue to seek approval of the transfer of this license, and no assurance can be given that any such transfer will be approved by the FCC.  Lifeline was created under President Ronald Reagan as part of the 1984 Telecommunications Act.  Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income consumers.  We primarily distribute all of our products and services through independent field agents.

Comparison of the Year Ended December 31, 2017, to the Year ended December 31, 2016

Results of Operations

For the year ended December 31, 2017, we had $11,477,723 in revenues from operations compared to the year ended December 31, 2016, where we had $9,741,779 in revenue from operations.  The cost of revenue for the year ended December 31, 2017, was $9,283,398, compared to $7,070,796 for the year ended December 31, 2016.  We had a gross profit of $2,194,325 for the year ended December 31, 2017, and $2,670,983 for the year ended December 31, 2016.

For the year ended December 31, 2017, and the year ended December 31, 2016, total operating expenses were $3,797,816 and $3,148,561, respectively, for an increase of $649,255.

For the year ended December 31, 2017, non-operating expenses were interest expense of $109,689 compared to $24,737 for the year ended December 31, 2016.

For the year ended December 31, 2017, and the year ended December 31, 2016, we had a net loss from operations of $1,713,180 and $502,315, respectively.

In comparing our Statements of Operations between the years ended December 31, 2017, and 2016, we began to diversify our services and product mix.  Though revenue increased by 16.6%, our gross profit declined by 17.2%.  This was caused by several factors, with the main factor being a more competitive marketplace for the wholesale services we provided.  Gross profit per line per month decreased for wholesale services by 17.3% and 33.9% for retail services.  New services, such as Virtual ETC, began to grow during the 4 ^th quarter 2017, which resulted in the decrease in retail services gross profit per line.

The new services and diversification were created through the acquisition of CS Agency in November of 2016.  This acquisition created a new operations center in Texas.  The additional expenses incurred for 2017 were for the opening and operation of this office.  For 2017, the Texas location created payroll expense of $485,044 and $164,181 of other expenses.  The Texas location is considered as a retail operation under the segment reporting.

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA