FULLNET COMMUNICATIONS INC - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 000-27031

 

FULLNET COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)

Oklahoma		73-1473361
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

201 Robert S. Kerr Avenue, Suite 210

Oklahoma City, Oklahoma 73102

(Address of principal executive offices)

 

(405) 236-8200

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(g) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.00001 per share	FULO	OTC Markets Group Pink

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yes þ  No o

 

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

 

Large accelerated filer o			Accelerated filer o		Non-accelerated Filer þ		Smaller reporting company ☑
Emerging-growth company	☐

 

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. o

 

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

 

As of November 14, 2019, 14,539,675 shares of the registrant’s common stock, $0.00001 par value, were outstanding.

 

 

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FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — September 30, 2019 (Unaudited) and December 31, 2018			3
Condensed Consolidated Statements of Operations — Three and nine months ended September 30, 2019 and 2018 (Unaudited)			4
Condensed Consolidated Statements of Stockholders’ Deficit — Three and nine months ended September 30, 2019 and 2018 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2019 and 2018 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			19
Item 4. Controls and Procedures			19
PART II. OTHER INFORMATION
Item1. Legal Proceedings			20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 5. Other Information			20
Item 6. Exhibits			21
Signatures			22
Exhibit 31.1
Exhibit 32.1

 

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30, 2019 (Unaudited)		DECEMBER 31, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$577,350		$245,462
Accounts receivable, net		373		5,026
Prepaid expenses and other current assets		41,376		30,848
Total current assets		619,099		281,336
PROPERTY AND EQUIPMENT, net		50,162		51,267
OTHER ASSETS AND INTANGIBLE ASSETS		6,354		12,979
RIGHT OF USE LEASED ASSET		967,222		-
ASSETS OF DISCONTINUED OPERATIONS, net		854		775
TOTAL ASSETS		$1,643,691		$346,357
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable		$10,296		$18,428
Accounts payable, related party		10,730		4,000
Accrued and other liabilities		551,258		534,168
Convertible notes payable, related party - current portion		-		7,203
Operating lease liability – current portion		143,421		-
Deferred revenue		517,534		442,771
Total current liabilities		1,233,239		1,006,570
CONVERTIBLE NOTES PAYABLE, related party - less current portion		-		20,685
OPERATING LEASE LIABILITY – less current portion		836,032		-
LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 10)		51,820		52,363
Total liabilities		2,121,091		1,079,618
STOCKHOLDERS’ DEFICIT
Preferred stock - $0.001 par value; authorized, 10,000,000 shares; Series A convertible; issued and outstanding, 987,102 shares in 2019 and 2018		648,936		638,849
Common stock - $0.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 14,539,675 and 13,621,009 shares in 2019 and 2018, respectively		145		136
Additional paid-in capital		8,796,398		8,765,712
Accumulated deficit		(9,922,879)		(10,137,958)
Total stockholders’ deficit		(477,400)		(733,261)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$1,643,691		$346,357

 

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended				Nine Months Ended
		September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
REVENUES
Total revenue		$618,444		$514,483		$1,776,256		$1,524,736
OPERATING COSTS AND EXPENSES
Cost of revenue		81,707		66,867		238,905		178,130
Selling, general and administrative expenses		465,145		416,052		1,413,346		1,384,531
Depreciation and amortization		4,082		4,192		12,362		12,676
Total operating costs and expenses		550,934		487,111		1,664,613		1,575,337
INCOME (LOSS) FROM OPERATIONS		67,510		27,372		111,643		(50,601)
OTHER INCOME		12,134		79,646		104,483		102,251
INTEREST EXPENSE		-		(108)		(277)		(604)
INCOME TAX EXPENSE		-		(6,000)		-		(18,000)
Net income (loss) from continuing operations		79,644		100,910		215,849		33,046
Gain from sale of discontinued asset		-		-		-		233,277
Net income (loss) from discontinued operations (NOTE 10)		(335)		(13,825)		(770)		(66,815)
NET INCOME		$79,309		$87,085		$215,079		$199,508
Preferred stock dividends		(3,363)		(5,044)		(10,087)		(15,131)
Net income available to common stockholders		$75,946		$82,041		$204,992		$184,377
Net income (loss) per share:
Continuing operations – basic		0.01		0.01		0.02		0.00
Continuing operations – diluted		0.00		0.01		0.01		0.00
Discontinued operations – basic and diluted		(0.00)		(0.00)		(0.00)		0.01
Net income (loss) – basic		$0.01		$0.01		$0.01		$0.02
Net income (loss) – diluted		$0.00		$0.01		$0.01		$0.01
Weighted average common shares outstanding:
Basic		14,539,675		11,909,052		14,187,084		11,883,830
Diluted		17,179,013		14,851,830		16,844,572		14,815,054

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (UNAUDITED)

 

FullNet Communications, Inc. and Subsidiaries

Three Months Ended September 30, 2019

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at July 1, 2019		14,539,675		$145		987,102		$645,573		$8,797,779		$(10,002,188)		$(558,691)
Stock options compensation		-		-		-		-		1,982		-		1,982
Amortization of increasing dividend rate preferred stock discount		-		-		-		3,363		(3,363)		-		-
Net income		-		-		-		-		-		79,309		79,309
Balance at September 30, 2019 – (unaudited)		14,539,675		$145		987,102		$648,936		$8,796,398		$(9,922,879)		$(477,400)

Nine Months Ended September 30, 2019

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at January 1, 2019		13,621,009		$136		987,102		$638,849		$8,765,712		$(10,137,958)		$(733,261)
Stock options compensation		-		-		-		-		21,968		-		21,968
Stock options exercised		38,666		-		-		-		116		-		116
Exercise of options by reducing deferred compensation payable		480,000		5		-		-		1,435		-		1,440
Amortization of increasing dividend rate preferred stock discount		-		-		-		10,087		(10,087)		-		-
Warrants issued		-		-		-		-		15,358		-		15,358
Warrants exercised		400,000		4		-		-		1,896		-		1,900
Net income		-		-		-		-		-		215,079		215,079
Balance at September 30, 2019 – (unaudited)		14,539,675		$145		987,102		$648,936		$8,796,398		$(9,922,879)		$(477,400)

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Three Months Ended September 30, 2018

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at July 1, 2018		11,871,009		$119		987,102		$628,762		$8,701,735		$(10,292,618)		$(962,002)
Stock options compensation		-		-		-		-		2,023		-		2,023
Amortization of increasing dividend rate preferred stock discount		-		-		-		5,044		(5,044)		-		-
Exercise of options by reducing deferred compensation payable		1,750,000		17		-		-		69,983		-		70,000
Net income		-		-		-		-		-		87,085		87,085
Balance at September 30, 2018 – (unaudited)		13,621,009		$136		987,102		$633,806		$8,768,697		$(10,205,533)		$(802,894)

 

Nine Months Ended September 30, 2018

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at January 1, 2018		11,871,009		$119		987,102		$618,675		$8,640,769		$(10,405,041)		$(1,145,478)
Stock options compensation		-		-		-		-		73,076		-		73,076
Amortization of increasing dividend rate preferred stock discount		-		-		-		15,131		(15,131)		-		-
Exercise of options by reducing deferred compensation payable		1,750,000		17		-		-		69,983		-		70,000
Net income		-		-		-		-		-		199,508		199,508
Balance at September 30, 2018 – (unaudited)		13,621,009		$136		987,102		$633,806		$8,768,697		$(10,205,533)		$(802,894)

 

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended
		September 30, 2019		September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$215,079		$199,508
(Income) loss from discontinued operations		770		(166,462)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		12,362		12,676
Noncash lease expense		109,901		-
Stock options and warrants expense		37,326		73,076
Provision for uncollectible accounts receivable		(1,698)		(5,796)
Net (increase) decrease in
Accounts receivable		6,351		6,067
Prepaid expenses and other current assets		(10,528)		(37,759)
Net increase (decrease) in
Accounts payable		(8,132)		(14,420)
Accounts payable – related party		2,098		(4,286)
Accrued and other liabilities		18,530		12,148
Deferred revenue		74,763		19,030
Operating lease obligation		(97,670)		-
Net cash provided by operating activities		359,152		93,782
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment		-		(7,472)
Net cash used in investing activities		-		(7,472)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on borrowings under notes payable – related party		(27,888)		(3,986)
Exercise of warrants		1,900		-
Exercise of options		116		-
Net cash used in financing activities		(25,872)		(3,986)
DISCONTINUED OPERATIONS
Net cash used in operating activities		(1,392)		(36,846)
Net cash provided by investing activities		-		218,153
Net cash used in financing activities		-		(116,592)
Net cash provided by (used in) discontinued operations		(1,392)		64,715
NET INCREASE (DECREASE) IN CASH		331,888		147,039
Cash at beginning of period		245,462		29,399
Cash at end of period		$577,350		$176,438
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income tax		$-		$18,000
Cash paid for interest – continuing operations		277		1,417
Cash paid for interest – discontinued operations		-		51
NON-CASH INVESTING AND FINANCING ACTIVITIES
Right of use assets and operating lease liabilities recognized		$1,077,123		$-
Amortization of increasing dividend rate preferred stock discount		10,087		15,131
Exercise of options by reducing deferred compensation payable		1,440		70,000
Purchase of fixed assets through Accounts payable related party		4,632		-

 

See accompanying notes to the unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.     UNAUDITED INTERIM FINANCIAL STATEMENTS

 

The unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2018.

 

Certain reclassifications have been made to prior period balances to conform with the presentation for the current period.  These reclassifications did not impact the net income (loss).

 

The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2019.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which requires lessees to record assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance.  Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases).  We adopted the new standard effective January 1, 2019, as allowed, using the modified retrospective approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods.  The only lease that we have is the real estate lease for our headquarters facility.  As of January 1, 2019, the adoption of the standard resulted in recognition of an operating right-of-use, or ROU, liability of approximately $1,077,123 and an operating ROU asset of $1,077,123.  These amounts are based on the present value of such commitments using the Company’s incremental borrowing rate.  The standard does not materially affect our results of operations, cash flows and liquidity.  See Note 9 for further information.

 

Effective January 1, 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

 

Income (Loss) Per Share

 

Income (loss) per share – basic is calculated by dividing net income (loss) by the weighted average number of shares of stock outstanding during the year, including shares issuable without additional consideration. Income per share – assuming dilution is calculated by dividing net income by the weighted average number of shares outstanding during the year adjusted for the effect of dilutive potential shares calculated using the treasury stock method.

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Schedule of Income (Loss) Per Share
	Three Months Ended				Nine Months Ended
	September 30,      2019		September 30,      2018		September 30,      2019		September 30,      2018
Net income (loss):
Income (loss) from continuing operations	$79,644		$100,910		$215,849		$33,046
Income (loss) from discontinued operations – See Note 10	(335)		(13,825)		(770)		166,462
Net income (loss)	79,309		87,085		215,079		199,508
Preferred stock dividends	(3,363)		(5,044)		(10,087)		(15,131)
Net income (loss) available to common shareholders	$75,946		$82,041		$204,992		$184,377
Basic income (loss) per share:
Weighted average common shares outstanding used in income (loss) per share	14,539,675		11,909,052		14,187,084		11,883,830
Basic income (loss) per share:
Continuing operations	0.01		0.01		0.02		0.00
Discontinued operations – See Note 10	(0.00)		(0.00)		(0.00)		0.01
Basic income (loss) per share	0.01		0.01		0.01		0.02
Diluted income (loss) per share:
Shares used in diluted income (loss) per share	17,179,013		14,851,830		16,844,572		14,815,054
Diluted income (loss) per share:
Continuing operations	0.00		0.01		0.01		0.00
Discontinued operations – See Note 10	(0.00)		(0.00)		(0.00)		0.01
Diluted income (loss) per share	0.00		0.01		0.01		0.01
Computation of shares used in income (loss) per share:
Weighted average shares and share equivalents outstanding – basic	14,539,675		11,909,052		14,187,084		11,883,830
Effect of preferred stock	987,102		987,102		987,102		987,102
Effect of dilutive stock options	1,386,367		1,727,251		1,377,521		1,716,322
Effect of dilutive warrants	265,869		228,425		264,977		227,800
Convertible promissory notes	-		-		27,888		-
Weighted average shares and share equivalents outstanding – diluted	17,179,013		14,851,830		16,844,572		14,815,054

 

 

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended				Nine Months Ended
	September 30,          2019		September 30,          2018		September 30,          2019		September 30,          2018
Preferred stock	-		-		-		-
Stock options	-		266,000		-		266,000
Warrants	-		-		-		-
Convertible promissory notes	-		29,256		-		29,256
Total anti-dilutive securities excluded	-		295,256		-		295,256

 

 

 

Anti-dilutive securities consist of stock options and convertible promissory notes whose exercise price or conversion price, respectively, was greater than the average market price of the common stock.

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2.     MANAGEMENT'S PLANS

 

On August 27, 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.

 

The Company has historically experienced significant operating losses with cumulative losses from inception of approximately $10 million. These losses have resulted in a negative working capital position of approximately $614,000 at September 30, 2019, of which approximately $399,000 of the Company’s current liabilities is owed to its officers and directors, and approximately $517,000 of the Company’s current liabilities is deferred revenue.  The Company’s officers and directors, who are also major shareholders, have agreed to not seek payment of any of the amounts owed to them if such payment would jeopardize the Company’s ability to continue as a going concern.  The deferred revenue represents advance payments for services from the Company’s customers which will be satisfied by its delivery of services in the normal course of business and will not require settlement in cash.

 

The Company started a number of initiatives in 2017 which included revenue enhancement initiatives, cost saving initiatives, the sale of excess assets and an orderly exit from the CLEC business.  The Company was successful with its revenue enhancement and cost saving initiatives and in selling certain excess assets in the third quarter of 2018 and the first quarter of 2019, as well as effecting an orderly exit from the CLEC business through the sale of substantially all of its wholly owned subsidiary’s CLEC operating assets (see Note 10 – Discontinued Operations).

 

As a result of these initiatives, the Company generated positive cash flow from its operating activities of approximately $363,000 and $93,000, for the nine months ending September 30, 2019 and 2018, respectively.  In addition, the Company was able to generate net income of approximately $215,000 and $199,000, for the nine months ending September 30, 2019 and 2018, respectively.

 

Management expects that the success of these initiatives will provide the Company with sufficient liquidity for it to operate for the next 12 months.

 

As a result of the revenue enhancement initiatives, the cost saving initiatives, the excess asset sales and the successful exit from the CLEC business, the Company has been able to significantly improve its working capital position and alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-15.  We believe that the actions discussed above mitigate the substantial doubt raised by our prior operating losses and satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate additional liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. Additionally, a failure to generate additional liquidity could negatively impact our ability to effectively execute our business plan.

3.     RELATED PARTY TRANSACTIONS

At December 31, 2018, the Company had a secured convertible promissory note from a shareholder with a balance of $27,888.  The interest rate of this note was 6%, required monthly installments of $600 including principal and interest and matured May 31, 2023.  This convertible promissory note was secured by certain equipment of the Company.  The note holder had the right to convert the note, in its entirety or in part, into common stock of the Company at the rate of $1.00 per share.  On February 26, 2019, the Company paid the remaining balance of $27,888.

At September 30, 2019, the Company had related party accounts payable of $10,730, which were comprised of employee reimbursements for out-of-pocket expenses paid on behalf of the Company.  These reimbursements were subsequently paid in the following month.

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4.     STOCK BASED COMPENSATION

 

The following table summarizes the Company’s employee stock option activity for the nine months ended September 30, 2019:

 

 

Schedule of Employee Stock Option Activity
	Options		Weighted average exercise price		Weighted average remaining contractual life (yrs)		Aggregate Intrinsic value
Options outstanding, December 31, 2018	2,370,834		$0.010		7.45
Options exercisable, December 31, 2018	1,126,167		$0.005		6.39		$ 34,623
Options issued during the period	483,000		$0.003
Options expired during the period	-		-
Options exercised during the period	518,666		$0.003
Options outstanding September 30, 2019	2,335,168		$0.010		6.68
Options exercisable September 30, 2019	1,625,832		$0.007		6.25		$ 53,621

 

 

During the nine months ended September 30, 2019, 480,000 and 3,000 nonqualified employee stock options were granted with exercise prices of $0.003 per option and $0.04 per option, respectively.  The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the shares was determined to be $15,989 of which $15,876 was recognized as stock-based compensation expense for the nine months ended September 30, 2019.  Of these stock options, 480,000 vested immediately upon grant (February 19, 2019) and will expire one year from the date of the grant.  On May 17, 2019, certain employees, officers and directors of the Company and their family members exercised options to purchase 518,666 restricted shares of the Company’s common stock.  Proceeds from the exercise of the Options were $1,556, of which $1,440 was derived from the reduction of deferred compensation payable the Company owed to these officers and directors.  The common shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, without payment of any form of commissions or other remuneration.  

 

Total stock-based compensation expense for the nine months ended September 30, 2019 was $21,968, of which $15,876 was related to options issued during the nine months ended September 30, 2019 and $6,092 was related to options issued in prior years.  Stock-based compensation is measured at the grant date, based on the calculated fair value of the option, and is recognized as an expense on a straight-line basis over the requisite employee service period (generally the vesting period of the grant).  

 

The Black-Scholes option pricing model was used with the following weighted-average assumptions for options granted during the nine   months ended September 30, 2019:

 

 

		2019
Risk free interest rate		1.55% - 2.51%
Expected lives (in years)		1 - 5
Expected volatility		36% - 170%
Dividend yield		0%

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5.     WARRANT ACTIVITY

 

The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2019:

 

Schedule of Warrant Activity
	Warrants		Weighted average exercise price		Weighted average remaining contractual life (yrs)		Aggregate Intrinsic value
Warrants outstanding December 31, 2018	250,000		$0.003		5.32
Warrants exercisable December 31, 2018	250,000		$0.003		4.32		$ 8,250
Warrants issued during the period	440,000		$0.005
Warrants exercised during the period	400,000		$0.005
Warrants outstanding September 30, 2019	290,000		$0.004		3.67
Warrants exercisable September 30, 2019	290,000		$0.004		3.67		$ 10,450

 

During the nine months ended September 30, 2019, 300,000 and 140,000 common stock purchase warrants were granted with exercise prices of $0.003 and $0.01, respectively, per option.  The warrants were valued using Black-Scholes warrant pricing model on the respective date of issuance and the fair value of the shares was determined to be $15,358, which was recognized as expense for the nine months ended September 30, 2019.  These warrants vested immediately upon grant (January 2, 2019) and will expire five years from the date of the grant.  

 

On March 4, 2019, 300,000 warrants with an exercise price of $.003 per share, and 100,000 warrants with an exercise price of $.01 per share, were exercised for 400,000 restricted shares of common stock, par value $.0001 per share.  Proceeds from the exercise of the warrants were $1,900.

 

The Black-Scholes pricing model was used with the following weighted-average assumptions for warrants granted during the nine   months ended September 30, 2019:

 

		2019
Risk free interest rate		2.51%
Expected lives (in years)		5
Expected volatility		146%
Dividend yield		0%

 

6.     SERIES A CONVERTIBLE PREFERRED STOCK

 

On March 9, 2019 the Company’s board of directors determined that it was in the best interest of the Company and its stockholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2018, on its Series A Convertible Preferred Stock.  The Company has never made an annual dividend payment on its Series A convertible preferred stock.  As of September 30, 2019, the aggregate outstanding accumulated arrearages of cumulative dividend was $195,720 or if issued in common shares, 4,893,010 shares.

 

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2019 was $10,087.

 

7.      PROPERTY AND EQUIPMENT

 

During the nine months ended September 30, 2019, no purchases were made for property and equipment.  During the nine months ended September 30, 2019, $5,737 was recorded as depreciation expense.

 

8.     INTANGIBLE ASSETS

 

During the nine months ended September 30, 2019, $6,625 was recorded as amortization expense.

 

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9.     LEASES

 

The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.

 

We determine if a contract contains a lease by evaluating the nature and substance of the agreement. The only lease that we have is the real estate lease for our headquarters facility, which was originally executed on December 2, 1999, and which has been extended several times.  This lease has a remaining life of one year and based on previous experience, we expect to renew it for a term of five additional years.  We recognize lease expense for this lease on a straight-line basis over the lease term.

 

We used our incremental borrowing rate (8.5%), based on the information available at the date of adoption in determining the present value of the lease payments and a lease expiration date of December 31, 2024.  At September 30, 2019, the remaining future cash payments under our lease total approximately $979,453.

 

For the nine months ending September 30, 2019, we amortized $109,901 and $97,670, of our operating right-of-use, or ROU, asset and liability, respectively.  At September 30, 2019, an operating ROU asset and liability of approximately $967,222 and $979,453, respectively, are included on our condensed consolidated balance sheet.  

 

For the nine months ended September 30, 2019, our fixed operating lease cost was $178,567, which is included within operating costs and expenses in our condensed consolidated statement of operations.

 

For the nine months ended September 30, 2019, cash paid for amounts included in the measurement of our lease liability included within our cash flows from operating activities was $166,336.

 

Future minimum lease payments under non-cancellable operating lease as of September 30, 2019, were as follows:

 

Year ending December 31,
2019 (excluding the nine months ended September 30, 2019)	$55,445
2020	228,305
2021	234,828
2022	241,351
2023	247,874
Thereafter	254,398
Total future minimum lease payments	1,262,201
Less imputed interest	(282,748)
Total liability	$979,453

 

 

10.     DISCONTINUED OPERATIONS

 

In response to the changes in the telecommunications market and deterioration in the Company’s ability to effectively compete, the Company made the decision to exit the competitive local exchange carrier or CLEC business.  On October 27, 2017, the Company’s board of directors adopted a plan to exit the CLEC business as soon as possible through the sale of its wholly owned CLEC subsidiary and/or substantially all of its CLEC subsidiary’s operating assets.  The Company was in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of its CLEC subsidiary’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018 (the “Sale”).

 

The Company determined that the Sale represented a strategic shift that will have a major effect on the Company’s operations and financial results since it represented a complete exit from the CLEC business and, therefore, classified its CLEC subsidiary as held for sale at December 31, 2017.

 

During February, 2018, the Company recognized a gain of $233,277 on the Sale based on total consideration of $264,872 less total basis in the assets sold and transactions costs of $31,595.  The assets sold consisted primarily of customers and associated customer premise equipment.

 

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Consideration:
Cash		$	246,500
Assumption of deferred revenue			8,366
Waived service obligation for February 2018			10,006
Total consideration		$	264,872
Total assets sold:
Customer contracts		$	-
Fiber innerduct			3,248
Fiber strands			-
Customer CPE			-
Total assets			3,248
Transactional costs			28,347
Total basis		$	31,595
Net gain		$	233,277

 

Assets and Liabilities of Discontinued Operations

 

		September 30, 2019		December 31, 2018
Carrying amounts of assets included in discontinued operations
Cash		$854		$775
Total Assets of Discontinued Operations		$854		$775
Carrying amounts of liabilities included in discontinued operations
Accounts payable		$43,611		$42,905
Accrued and other liabilities		8,209		9,458
Total Liabilities of Discontinued Operations		$51,820		$52,363

 

Operating Results of Discontinued Operations

	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Revenues included in discontinued operations
Total colocation and other revenues	$-		$-		$-		$28,091
Operating costs and expenses included in discontinued operations
Cost of services	$-		$10,128		$-		$82,674
Selling, general and administrative expenses	335		1,379		1,293		5,226
Depreciation and amortization	-		2,318		-		6,955
Interest expense	-		-		-		51
Total operating costs and expenses discontinued operations	$335		$13,825		$1,293		$94,906
Other Income included in discontinued operations
Gain on sale of assets	-		-		-		233,277
Other income from applied customer deposits	-		-		523		-
Net Income (Loss) from Discontinued Operations	$(335)		$(13,825)		$(770)		$166,462
Net Income (Loss) per share from discontinued operations basic and diluted	$(0.00)		$(0.00)		$(0.00)		$0.01

 

Cash Flows from Discontinued Operations

 

		September 30, 2019		September 30, 2018
Net cash used in operating activities		$ (1,392)		$(36,846)
Net cash provided by investing activities		-		218,153
Net cash used in financing activities		-		(116,592)
Net cash provided by (used in) discontinued operations		$ (1,392)		$64,715

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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is qualified in its entirety by the more detailed information in our 2018 Annual Report on Form 10-K and the financial statements contained therein, including the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission since December 31, 2018 (collectively referred to as the “Disclosure Documents”). Certain forward-looking statements contained in this Report and in the Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. Our ability to achieve these results is subject to certain risks and uncertainties, including those inherent risks and uncertainties generally in the Internet service provider and group message delivery industries, the impact of competition and pricing, changing market conditions, and other risks. Any forward-looking statements contained in this Report represent our judgment as of the date of this Report. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements.

 

Overview

We are an advanced voice and data solutions provider.  Through our subsidiaries, we provide high quality, reliable and scalable Internet access, web hosting, equipment colocation, customized live help desk outsourcing services, group text and voice message delivery services, as well as advanced voice and data solutions.

References to us in this Report include our subsidiaries: FullNet, Inc. (“FullNet”), FullTel, Inc. (“FullTel”), FullWeb, Inc. (“FullWeb”), and CallMultiplier, Inc. (“CallMultiplier”).  Our principal executive offices are located at 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is (405) 236-8200.  We also maintain Internet sites on the World Wide Web (“WWW”) at www.fullnet.net, www.fulltel.com and www.callmultiplier.com.  Information contained on our Web sites is not, and should not be deemed to be, a part of this Report.

 

Company History

We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation, to bring dial-up Internet access and education to rural locations in Oklahoma that did not have dial-up Internet access. We changed our name to FullNet Communications, Inc. in December 1995. Today we are an advanced voice and data solutions provider.

We market our carrier neutral colocation solutions in our data center to competitive local exchange carriers, Internet service providers and web-hosting companies. Our colocation facility is carrier neutral, allowing customers to choose among competitive offerings rather than being restricted to one carrier. Our data center is Telco-grade and provides customers a high level of operative reliability and security. We offer flexible space arrangements for customers and 24-hour onsite support with both battery and generator backup.

 

Through FullTel, our wholly owned subsidiary, we are a fully licensed competitive local exchange carrier or CLEC in Oklahoma.  However, in response to changes in the telecommunications market and deterioration in our ability to effectively compete, we made the decision in the fourth quarter of 2017, to affect an orderly exit from the CLEC business.  We were in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of FullTel’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018.

 

Through CallMultiplier, our wholly owned subsidiary, we offer a comprehensive cloud-based solution to consumers and businesses for automated group voice and text message delivery.

Our common stock trades on the OTC “Pink Sheets” under the symbol FULO.  While our common stock trades on the OTC “Pink Sheets”, it is very thinly traded, and there can be no assurance that our stockholders will be able to sell their shares should they so desire. Any market for the common stock that may develop, in all likelihood, will be a limited one, and if such a market does develop, the market price may be volatile.

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Results of Operations

The following table, which includes both continuing and discontinued operations (see Note 10 – Discontinued Operations of the financial statement appearing elsewhere in this Report), sets forth certain statement of operations data as a percentage of revenues for the three and nine months ended September 30, 2019 and 2018:

 

	Three Months Ended								Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Revenue:
Total revenue	618,444		100.0		$514,483		100.0		1,776,256		100.0		$1,524,736		100.0
Cost of revenue	81,707		13.2		66,867		13.0		238,905		13.4		178,130		11.7
Selling, general and administrative expenses	465,145		75.2		416,052		80.9		1,413,346		79.6		1,384,531		90.8
Depreciation and amortization	4,082		0.7		4,192		0.8		12,362		0.7		12,676		0.8
Total operating costs and expenses	550,934		89.1		487,111		94.7		1,664,613		93.7		1,575,337		103.3
Income (loss) from operations	67,510		10.9		27,372		5.3		111,643		6.3		(50,601)		(3.3)
Other income	12,134		2.0		79,646		15.5		104,483		5.9		102,251		6.7
Interest expense	-		-		(108)		(0.02)		(277)		(0.0)		(604)		(0.04)
Income tax expense	-		-		(6,000)		(1.2)		-		-		(18,000)		(1.2)
Net income (loss) from continuing operations	79,644		12.9		100,910		19.6		215,849		12.2		33,046		2.2
Gain from sale of discontinued asset	-		-		-		-		-		-		233,277		15.3
Net income (loss) from discontinued operations	(335)		(0.1)		(13,825)		(2.7)		(770)		(0.1)		(66,815)		(4.4)
Net income (loss)	79,309		12.8		87,085		16.9		215,079		12.1		199,508		31.1
Preferred stock dividends	(3,363)		(0.5)		(5,044)		(1.0)		(10,087)		(0.6)		(15,131)		(1.0)
Net income available to common stockholders	75,946		12.3		$82,041		15.9		204,992		11.5		$184,377		12.1

Three Months Ended September 30, 2019 (the “2019 3rd Quarter”) Compared to Three Months Ended September 30, 2018 (the “2018 3rd Quarter”)

Revenues

 

Total revenue increased $103,961 or 20.2% to $618,444 for the 2019 3rd Quarter from $514,483 for the same period in 2018. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

 

In the 2019 3rd Quarter, we had interest income of $2,286 and other income of $9,848, from the write-off of contingent liabilities.  In the 2018 3rd Quarter, we had other income of $79,646, which included $64,492 from the sale of a block of excess IPv4 numbers, and $15,155 from the refund of the overpayment of certain property taxes.

 

Operating Costs and Expenses

 

Cost of revenue increased $14,840 or 22.2% to $81,707 for the 2019 3rd Quarter from $66,867 for the same period in 2018.  This increase was primarily related to servicing new customers added through growth of business. Cost of revenue as a percentage of total revenue increased to 13.2% during the 2019 3rd Quarter, compared to 13.0% during the same period in 2018, as a result of increased utilization of higher cost components of our service offerings combined with price increases from our vendors.

 

Selling, general and administrative expenses increased $49,093 or 11.8% to $465,145 for the 2019 3rd Quarter compared to $416,052 for the same period in 2018.  This increase was primarily related to increases in employee costs and advertising costs of $29,495 and $19,805, respectively.  Selling, general and administrative expenses as a percentage of total revenues decreased to

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75.2% during the 2019 3rd Quarter from 80.9% during the same period in 2018.

 

Depreciation and amortization expense remained relatively the same at $4,082 for the 2019 3rd Quarter compared to $4,192 for the same period in 2018.  

 

  Interest Expense

 

Interest expense decreased $108 or 100% to $0 for the 2019 3rd Quarter compared to $108 for the same period in 2018.  This decrease was primarily related to the payoff of the related-party notes payable made during the 1st Quarter of 2019 and 2018.

Net Income

For the 2019 3rd Quarter, we realized net income of $79,309 compared to net income of $87,085 for the same period in 2018.  The decrease was due primarily to a decrease in other income of $67,512, which was offset primarily by an increase in income from operations of $40,138, and a reduction in the net loss from discontinued operations of $13,490. 

Nine Months Ended September 30, 2019 (the “2019 Period”) Compared to Nine Months Ended September 30, 2018 (the “2018 Period”)

Revenues

Total revenue increased $251,520 or 16.5% to $1,776,256 for the 2019 Period from $1,524,736 for the 2018 Period.  This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

In the 2019 Period, we had other income of $104,483, which included $6,191 of interest income, $9,849 from the write-off of certain contingent liabilities, $81,920 from the sale of a block of excess IPv4 numbers, and $6,523 from the recalculation of the long-term lease asset.  In the 2018 Period, we had other income of $102,251, which included $6,000 from the sale of certain assets, $64,492 from the sale of a block of excess IPv4 numbers, and $31,759 from the refund of the overpayment of certain property taxes.

Operating Costs and Expenses

 

Cost of revenue increased $60,775 or 34.1% to $238,905 for the 2019 Period from $178,130 for the 2018 Period.  This increase was primarily related to increases in costs of servicing new customers added through growth of business.  Cost of revenue as a percentage of revenue increased to 13.4% during the 2019 Period compared to 11.7% during the 2018 Period.

 

Selling, general and administrative expenses increased $28,823 or 2.1% to $1,413,354 for the 2019 Period compared to $1,384,531 for the 2018 Period.  This increase is primarily related to increases in advertising costs and professional services costs of $59,096 and $25,850, respectively.  These increases were offset by a decrease in employee costs of $56,860.  Selling, general and administrative expenses as a percentage of total revenue decreased to 79.6% during the 2019 Period from 90.8% during the 2018 Period.

 

Depreciation and amortization expense remained relatively the same at $12,362 for the 2019 Period compared to $12,676 for the 2018 Period.

 

Interest Expense

 

Interest expense decreased to $277 for the 2019 Period compared to $604 for the 2018 Period.

Net Income

For the 2019 Period, we realized net income of $215,079 compared to net income of $199,508 for the 2018 Period.  The increase was due primarily to an increase in income from operations of $162,244.  In the 2018 Period, net income was largely composed of a $233,277 one-time gain from the sale of discontinued asset, which was partially offset by a net loss from discontinued operations of $66,045. 

 

Liquidity and Capital Resources

 

As of September 30, 2019, we had $577,350 in cash and $41,749 in other current assets and $1,233,239 in current liabilities.  Current liabilities consist primarily of $551,258 in accrued and other liabilities, of which $399,091 is owed to our officers and directors, and $517,534 in deferred revenue.  Our officers and directors, who are also major shareholders, have agreed to not seek

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payment of any of the amounts owed to them if such payment would jeopardize our ability to continue as a going concern.  The deferred revenue represents advance payments for services from our customers which will be satisfied by our delivery of services in the normal course of business and will not require settlement in cash.

 

At September 30, 2019 and December 31, 2018, we had working capital deficits of $614,140 and $725,234, respectively. We do not have a line of credit or credit facility to serve as an additional source of liquidity. Historically we have relied on shareholder loans as an additional source of funds.

 

As of September 30, 2019, $7,732 of the $10,296 we owed to our trade creditors was past due. We have no formal agreements regarding payment of these amounts.

Cash flow for the nine-month periods ended September 30, 2019 and 2018 consist of the following:

 

		For the Nine-Month Period Ended September 30,
		2019		2018
Net cash flows provided by operating activities		$359,152		$93,782
Net cash flows used in investing activities		-		(7,472)
Net cash flows used in financing activities		(25,872)		(3,986)

 

No property or equipment were purchased in the nine months ended September 30, 2019, and cash used for the purchase of property and equipment was $7,472 for the nine months ended September 30, 2018.  

 

No intangible assets were purchased in the nine months ended September 30, 2019 and 2018.  

 

Cash used for the payoff of the note payable in the nine months ended September 30, 2019 was $27,888, and principal payments on notes payable were $3,986 for the nine months ended September 30, 2018.      

The planned expansion of our business will require significant capital to fund capital expenditures and working capital needs. Our principal capital expenditure requirements will include: