Notes From Conversation with KTEL CEO Sean McEwen

After the company’s latest quarterly report, I had the pleasure of talking with Sean McEwen, the CEO of Konatel Inc (OOTC:KTEL). I am long the stock and have had several conversations with Sean about the transformation of the company’s business. The company is well positioned to capture some of the reimbursement money provided in the Federal Emergency Broadband Benefit (EBB) program. The company’s recent approval to sell its Lifeline service in CA could be a gamechanger.

Sean pointed out there is another possible program working its way through Congress that could be a post-EBB long-term solution, which would be a great benefit to KTEL. Sean views their Lifeline business as a counter-cyclical business and a way for KTEL to self-fund its growing Hosting Services. 

The notes are in simple outline form. I have highlighted information that I think is new or important.

• Some changes to 10Q disclosures were result of conversations with GEO members.

• I Suggested breaking disclosure down further to include operating margins/income by segment.

• Apeiron acquisition amortization expense, worth about $850k annually, will be used up at the end of 2021, immediately boosting annual net income by $850k starting in 2022. EPS will start to reflect Cash Flow and possibility attract investors that use screens looking for EPS growth. Not a fundamental point, but you never know. 

• Discussed 10Q disclosure of Charles Griffin and 1.1M options grant @ $0.75 per share by Jan. 7th, 2022. Did not discuss vesting of options.

  • Griffin was co-founder of Lingo/Impact with board member Robert Beatty.

    • Grew business from zero to $200M in annual revenue with 200 employees.

    • Not a big company bureaucrat.  

    • Proven track record on how to manage and grow a small telecom focused business. 

    • Goal is to have Griffin run day-to-day operations.

    • 6-month trial period to see how he works with current team.

      • There are several former Lingo/Impact employees now at KTEL.

      • Team and network are now in place.

      • We didn’t’ talk about agent network that is starting to sell. Follow up.

    • Took big pay cut (60% ) to join KonaTel and wanted options to capture upside of success of business (i.e., working for the stock price)

    • This is a major long-term hire for success or failure of firm.

    • Frees up Sean to focus on long-term strategic planning and M&A

      • This is more of Sean’s strength

      • Suggested a group call to meet Charles and discuss his plans for company.

    • Long-term goal after reaching critical size and sustainable growth, acquisition by a large telecommunications carrier, cable-TV provider, or other company that wants to add telecommunications and the company’s software based, recurring revenue cloud services platform to its portfolio.

• Looking at acquisitions in the $5M-$10M revenue range.

  • UCaaS one possible focus due to few companies available.

    • 1-2X revenue estimated value of a targeted acquisition.

    • Brings ability to offer Microsoft Teams PBX to better serve wide range of customers.

    • Apeiron’s infrastructure now supports Microsoft Teams trunk (i.e., phone line) service.

  • Acquisitions are mostly about:

    • Expanding product suite.

    • Adding new customers to upsell other Apeiron CPaaS products.

    • Technical, sales, and cultural synergies important.

  • A few acquisition candidates now, but a little reluctant to make acquisition (especially with stock) at these valuations for KTEL. 

    • Board is supportive of reengaging an acquisition strategy, but even accretive acquisitions must have significant long-term strategic value, not just short-term accretion.

  • Revenue growth (organic and/or through acquisitions) to improve market cap and owner’s equity for a NASDAQ up listing is forefront in Sean’s mind.

• Joe Hamblin Vice President & General Manager of ATGN’s Microsoft Team’s division is fan of Apeiron and Apeiron’s CEO Josh Ploude

  • Suggested we talk to Joe to get a customer view of the Apeiron platform and capability (both technology and staff).

  • ATGN and KTEL working closer every week.

  • Revenue/collaboration possibilities?

• EBB/ETC (Lifeline)

  • Thinks investors focus too much on this side of the business because it is much easier to understand. 

  • Counter cyclical and cash flow funds growth of Hosting business (i.e., an internal funding source triggering no shareholder dilution). 

  • Won’t get great valuation for this cash flow because govt could not renew.

    • However, there is an ETC program working through Congress somewhere that would add $30 per month per line (after or excluding EBB $50) for 3-5 years.  A post-EBB long term solution.

    • We need to figure out what that is and how to track it.

  • Maryland added $15 a month so now customers in Maryland get ~$25 a month before EBB.

  • Didn’t discuss if getting EBB in Maryland or $55 a month per line per customer.

  • Oklahoma

    • Sounds like 5000 customers are paying $80 a month for nearly $4.8M a year in revenue.

  • Now active in all their registered states because the $50 a month is above base Lifeline $9.25 a month which was not profitable because network costs run $11-12 a month.

  • Two-month payback on cost of phone commission 

  • AmeriMex, a national Lifeline provider with only 5 Lifeline states, including CA, has about 120K lines mostly in CA doing $25M a year in revenue and $8M in operating income (last year).

    • If KTEL eventually reached 100,000 CA lines at roughly $25 a line per month that would be $30M in revenue and maybe ~$10M in GP if network costs were still $11-$12 a line per month.  This does not take into consideration EBB or future-EBB data reimbursement on top of CA $25/line/month.

      • This probably takes 12-24 months to achieve.

      • Prior to COVID, as a reference, AmeriMex was activating 50,000 new Lifeline lines per month in CA and there are still at least 1,000,000 eligible/underserved Lifeline eligible households in CA per the FCC’s USAC estimates.