FULLNET COMMUNICATIONS INC - Quarter Report: 2019 June (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 June 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 August 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 — June 30, 2019 (Unaudited) and December 31, 2018			3
Condensed Consolidated Statements of Operations — Three and six months ended June 30, 2019 and 2018 (Unaudited)			4
Condensed Consolidated Statements of Stockholders’ Deficit — Three and six months ended June 30, 2019 and 2018 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows — Six months ended June 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

		June 30, 2019 (Unaudited)		DECEMBER 31, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$479,998		$245,462
Accounts receivable, net		39		5,026
Prepaid expenses and other current assets		45,112		30,848
Total current assets		525,149		281,336
PROPERTY AND EQUIPMENT, net		47,403		51,267
OTHER ASSETS AND INTANGIBLE ASSETS		8,563		12,979
RIGHT OF USE LEASED ASSET		1,003,856		-
ASSETS OF DISCONTINUED OPERATIONS, net		854		775
TOTAL ASSETS		$1,585,825		$346,357
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable		$19,322		$18,428
Accounts payable, related party		-		4,000
Accrued and other liabilities		557,302		534,168
Convertible notes payable, related party - current portion		-		7,203
Operating lease liability – current portion		139,023		-
Deferred revenue		504,403		442,771
Total current liabilities		1,220,050		1,006,570
CONVERTIBLE NOTES PAYABLE, related party - less current portion		-		20,685
OPERATING LEASE LIABILITY – less current portion		872,987		-
LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 10)		51,479		52,363
Total liabilities		2,144,516		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		645,573		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		8,797,779		8,765,712
Accumulated deficit		(10,002,188)		(10,137,958)
Total stockholders’ deficit		(558,691)		(733,261)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$1,585,825		$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				Six Months Ended
		June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
REVENUES
Total revenue		$557,981		$503,193		$1,157,812		$1,010,253
OPERATING COSTS AND EXPENSES
Cost of revenue		80,404		62,427		157,198		111,263
Selling, general and administrative expenses		458,668		418,122		948,201		968,479
Depreciation and amortization		4,100		4,095		8,280		8,484
Total operating costs and expenses		543,172		484,644		1,113,679		1,088,226
INCOME (LOSS) FROM OPERATIONS		14,809		18,549		44,133		(77,973)
OTHER INCOME		2,391		16,605		92,349		22,605
INTEREST EXPENSE		-		(166)		(277)		(496)
INCOME TAX EXPENSE		-		(7,334)		-		(12,000)
Net income (loss) from continuing operations		17,200		27,654		136,205		(67,864)
Gain from sale of discontinued asset		-		-		-		233,277
Net income (loss) from discontinued operations (NOTE 10)		44		(21,669)		(435)		(52,990)
NET INCOME		$17,244		$5,985		$135,770		$112,423
Preferred stock dividends		(3,362)		(3,363)		(6,724)		(10,087)
Net income available to common stockholders		$13,882		$2,622		$129,046		$102,336
Net income (loss) per share:
Continuing operations – basic and diluted		0.00		0.00		0.01		(0.01)
Discontinued operations – basic and diluted		0.00		(0.00)		(0.00)		0.02
Net income (loss) – basic and diluted		$0.00		$0.00		$0.01		$0.01
Weighted average common shares outstanding:
Basic		14,271,793		11,871,009		14,007,867		11,871,009
Diluted		16,876,730		14,753,128		16,594,615		11,871,009

 

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 June 30, 2019

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at April 1, 2019		14,021,009		$140		987,102		$642,211		$8,797,535		$(10,019,432)		$(579,546)
Stock options compensation		-		-		-		-		2,055		-		2,055
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		-		-		-		3,362		(3,362)		-		-
Net income		-		-		-		-		-		17,244		17,244
Balance at June 30, 2019 – (unaudited)		14,539,675		$145		987,102		$645,573		$8,797,779		$(10,002,188)		$(558,691)

Six Months Ended June 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		-		-		-		-		19,986		-		19,986
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		-		-		-		6,724		(6,724)		-		-
Warrants issued		-		-		-		-		15,358		-		15,358
Warrants exercised		400,000		4		-		-		1,896		-		1,900
Net income		-		-		-		-		-		135,770		135,770
Balance at June 30, 2019 – (unaudited)		14,539,675		$145		987,102		$645,573		$8,797,779		$(10,002,188)		$(558,691)

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Three Months Ended June 30, 2018

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at April 1, 2018		11,871,009		$119		987,102		$625,399		$8,702,982		$(10,298,603)		$(970,103)
Stock options compensation		-		-		-		-		2,116		-		2,116
Amortization of increasing dividend rate preferred stock discount		-		-		-		3,363		(3,363)		-		-
Net income		-		-		-		-		-		5,985		5,985
Balance at June 30, 2018 – (unaudited)		11,871,009		$119		987,102		$628,762		$8,701,735		$(10,292,618)		$(962,002)

 

Six Months Ended June 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		-		-		-		-		71,053		-		71,053
Amortization of increasing dividend rate preferred stock discount		-		-		-		10,087		(10,087)		-		-
Net income		-		-		-		-		-		112,423		112,423
Balance at June 30, 2018 – (unaudited)		11,871,009		$119		987,102		$628,762		$8,701,735		$(10,292,618)		$(962,002)

 

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)

		Six Months Ended
		June 30, 2019		June 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$135,770		$112,423
(Income) loss from discontinued operations		435		(180,287)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		8,280		8,484
Noncash lease expense		73,267		-
Stock options and warrants expense		35,344		71,053
Provision for uncollectible accounts receivable		(1,847)		(7,147)
Net (increase) decrease in
Accounts receivable		6,834		15,454
Prepaid expenses and other current assets		(14,264)		(24,641)
Net increase (decrease) in
Accounts payable		894		(19,057)
Accounts payable – related party		(4,000)		(2,876)
Accrued and other liabilities		24,574		26,114
Deferred revenue		61,632		24,919
Operating lease obligation		(65,113)		-
Net cash provided by operating activities		261,806		24,439
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)		(2,637)
Exercise of warrants		1,900		-
Exercise of options		116		-
Net cash used in financing activities		(25,872)		(2,637)
DISCONTINUED OPERATIONS
Net cash used in operating activities		(1,398)		(26,246)
Net cash provided by investing activities		-		218,153
Net cash used in financing activities		-		(116,592)
Net cash provided by (used in) discontinued operations		(1,398)		75,315
NET INCREASE (DECREASE) IN CASH		234,536		89,645
Cash at beginning of period		245,462		29,399
Cash at end of period		$479,998		$119,044
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income tax		$-		$12,000
Cash paid for interest – continuing operations		277		964
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		6,724		10,087
Exercise of options by reducing deferred compensation payable		1,440		-

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See accompanying notes to the unaudited condensed consolidated financial statements.

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				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Net income (loss):
Income (loss) from continuing operations	$17,200		$27,654		$136,205		$(67,864)
Income (loss) from discontinued operations – See Note 10	44		(21,669)		(435)		180,287
Net income (loss)	17,244		5,985		135,770		112,423
Preferred stock dividends	(3,362)		(3,363)		(6,724)		(10,087)
Net income (loss) available to common shareholders	$13,882		$2,622		$129,046		$102,336
Basic income (loss) per share:
Weighted average common shares outstanding used in income (loss) per share	14,271,793		11,871,009		14,007,867		11,871,009
Basic income (loss) per share:
Continuing operations	0.00		0.00		0.01		(0.01)
Discontinued operations – See Note 10	0.00		(0.00)		(0.00)		0.02
Basic income (loss) per share	0.00		0.00		0.01		0.01
Diluted income (loss) per share:
Shares used in diluted income (loss) per share	16,876,730		14,753,128		16,594,615		11,871,009
Diluted income (loss) per share:
Continuing operations	0.00		0.00		0.01		(0.01)
Discontinued operations – See Note 10	0.00		(0.00)		(0.00)		0.02
Diluted income (loss) per share	0.00		0.00		0.01		0.01
Computation of shares used in income (loss) per share:
Weighted average shares and share equivalents outstanding – basic	14,271,793		11,871,009		14,007,867		11,871,009
Effect of preferred stock	987,102		987,102		987,102		-
Effect of dilutive stock options	1,351,658		1,670,017		1,335,155		-
Effect of dilutive warrants	266,177		225,000		264,491		-
Weighted average shares and share equivalents outstanding – diluted	16,876,730		14,753,128		16,594,615		11,871,009

 

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Preferred stock	-		-		-		987,102
Stock options	-		2,043,000		-		4,117,834
Warrants	3,000		-		3,000		250,000
Convertible promissory notes	-		30,605		27,888		30,605
Total anti-dilutive securities excluded	3,000		2,073,605		30,888		5,385,541

 

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 $695,000 at June 30, 2019, of which approximately $409,000 of the Company’s current liabilities is owed to its officers and directors, and approximately $504,403 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 $260,000 and $24,000, for the six months ending June 30, 2019 and 2018, respectively.  In addition, the Company was able to generate net income of approximately $136,000 and $112,000, for the six months ending June 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.     CONVERTIBLE NOTES PAYABLE RELATED PARTY

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.

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4.     STOCK BASED COMPENSATION

 

The following table summarizes the Company’s employee stock option activity for the six months ended June 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	480,000		$0.003
Options expired during the period	-		-
Options exercised during the period	518,666		$0.003
Options outstanding June 30, 2019	2,332,168		$0.010		6.93
Options exercisable June 30, 2019	1,584,832		$0.007		6.46		$ 49,227

 

 

During the six months ended June 30, 2019, 480,000 nonqualified employee stock options were granted with an exercise price of $0.003 per option.  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 $15,875 of which $15,875 was recognized as stock-based compensation expense for the six months ended June 30, 2019.  These stock options 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 and Rule 506 of Regulation D thereunder without payment of any form of commissions or other remuneration.  

 

Total stock-based compensation expense for the six months ended June 30, 2019 was $19,986, of which $15,876 was related to options issued during the six months ended June 30, 2019 and $4,110 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 six   months ended June 30, 2019:

 

 

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

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5.     WARRANT ACTIVITY

 

The following table summarizes the Company’s warrant activity for the six months ended June 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 June 30, 2019	290,000		$0.004		3.92
Warrants exercisable June 30, 2019	290,000		$0.004		3.92		$ 9,899

 

During the six months ended June 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 six months ended June 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 six   months ended June 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 June 30, 2019, the aggregate outstanding accumulated arrearages of cumulative dividend was $182,614 or if issued in common shares, 4,793,015 shares.

 

The amortization of the increasing dividend rate preferred stock discount for the six months ended June 30, 2019 was $6,724.

 

7.      PROPERTY AND EQUIPMENT

 

During the six months ended June 30, 2019, no purchases were made for property and equipment.  During the six months ended June 30, 2019, $3,864 was recorded as depreciation expense.

 

8.     INTANGIBLE ASSETS

 

During the six months ended June 30, 2019, $4,416 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 June 30, 2019, the remaining future cash payments under our lease total approximately $1,317,647.

 

For the six months ending June 30, 2019, we amortized $73,267 and $65,113, of our operating right-of-use, or ROU, asset and liability, respectively.  At June 30, 2019, an operating ROU asset and liability of approximately $1,003,856 and $1,012,010, respectively, are included on our condensed consolidated balance sheet.  

 

For the six months ended June 30, 2019, our fixed operating lease cost was $119,045, which is included within operating costs and expenses in our condensed consolidated statement of operations.

 

For the six months ended June 30, 2019, cash paid for amounts included in the measurement of our lease liability included within our cash flows from operating activities was $110,891.

 

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

 

Year ending December 31,
2019 (excluding the six months ended June 30, 2019)	$110,891
2020	228,305
2021	234,828
2022	241,351
2023	247,874
Thereafter	254,398
Total future minimum lease payments	1,317,647
Less imputed interest	(305,637)
Total liability	$1,012,010

 

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