FULLNET COMMUNICATIONS INC - Quarter Report: 2021 September (Form 10-Q)

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, 2021

☐

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		(I.R.S. Employer Identification No.)
incorporation or organization)

201 Robert S. Kerr Avenue, Suite 210

Oklahoma City, Oklahoma 73102

(Address of principal executive offices)

(405) 236-8200

(Registrant’s telephone number)

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 12, 2021, 17,146,121 shares of the registrant’s common stock, $0.00001 par value, were outstanding.

FORM 10-Q

TABLE OF CONTENTS


	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets — September 30, 2021 (Unaudited) and December 31, 2020		3

Condensed Consolidated Statements of Operations — Three and nine months ended September 30, 2021 and 2020 (Unaudited)		4

Condensed Consolidated Statements of Shareholders' Equity — Three and nine months ended September 30, 2021 and 2020 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows —Nine months ended September 30, 2021 and 2020 (Unaudited)		7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		15

Item 4. Controls and Procedures		15

PART II. OTHER INFORMATION

Item 1 . Legal Proceeding s		16

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16

Item 5. Other Information		16

Item 6. Exhibits		17

Signatures		18

Exhibit 31.1
Exhibit 32.1

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2021 (Unaudited)	December 31, 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents	`$2,465,507`	`$1,407,917`
Accounts receivable, net	`27,523`	`30,751`
Prepaid expenses and other current assets	`27,070`	`19,640`

Total current assets	`2,520,100`	`1,458,308`

PROPERTY AND EQUIPMENT, net	`61,145`	`62,967`

OTHER ASSETS AND INTANGIBLE ASSETS	`21,953`	`26,158`

RIGHT OF USE LEASED ASSET	`430,975`	`514,682`

DEFERRED TAX ASSET	`80,512`	`339,197`

TOTAL ASSETS	`$3,114,685`	`$2,401,312`

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	`$50,874`	`$50,205`
Accrued and other liabilities	`438,700`	`389,053`
Dividends payable	`-`	`168,079`
Operating lease liability – current portion	`120,211`	`112,812`
Deferred revenue	`949,666`	`777,029`

Total current liabilities	`1,559,451`	`1,497,178`

OPERATING LEASE LIABILITY – net of current portion	`310,764`	`401,870`
Total liabilities	`1,870,215`	`1,899,048`

SHAREHOLDERS’ EQUITY
Preferred stock - $0.001 par value; authorized, 10,000,000 shares; Series A convertible; issued and outstanding, 568,257 shares in 2021 and 2020	`356,202`	`353,505`
Common stock - $0.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 16,660,121 and 16,457,121 shares in 2021 and 2020, respectively	`167`	`165`
Additional paid-in capital	`9,068,336`	`9,064,855`
Accumulated deficit	`(8,180,235)`	`(8,916,261)`
Total shareholders’ equity	`1,244,470`	`502,264`

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	`$3,114,685`	`$2,401,312`

See accompanying notes to unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended		Nine Months Ended
	September 30, 2021	September 30, 2020	September 30, 2021	September 30, 2020
REVENUES
Total revenue	`$1,015,779`	`$935,823`	`$3,036,654`	`$2,538,605`

OPERATING COSTS AND EXPENSES
Cost of revenue	`198,144`	`137,427`	`514,105`	`379,622`
Selling, general and administrative expenses	`560,522`	`498,802`	`1,540,847`	`1,664,658`
Depreciation and amortization	`2,556`	`2,353`	`7,669`	`6,752`
Total operating costs and expenses	`761,222`	`638,582`	`2,062,621`	`2,051,032`

INCOME FROM OPERATIONS	`254,557`	`297,241`	`974,033`	`487,573`

OTHER INCOME	`143`	`1,049`	`20,678`	`2,949`

NET INCOME BEFORE INCOME TAX	`254,700`	`298,290`	`994,711`	`490,522`

Income tax expense - deferred	`(66,696)`	`-`	`(258,685)`	`-`
NET INCOME	`$188,004`	`$298,290`	`$736,026`	`$490,522`
Preferred stock dividends	`(13,685)`	`(13,163)`	`(41,054)`	`(46,701)`
Net income available to common shareholders	`$174,319`	`$285,127`	`$694,972`	`$443,821`

Net income per share:
Basic	`$0.01`	`$0.02`	`$0.04`	`$0.03`
Diluted	`$0.01`	`$0.02`	`$0.04`	`$0.02`

Weighted average common shares outstanding:
Basic	`16,660,121`	`15,034,706`	`16,597,659`	`14,707,561`
Diluted	`19,688,994`	`18,876,162`	`19,585,761`	`17,957,425`

See accompanying notes to unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2021

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at July 1, 2021

16,660,121

$167

568,257

$355,303

$9,066,598

$(8,368,239)

$1,053,829

Stock options expense

-

2,637

-

2,637

Amortization of increasing dividend rate preferred stock discount

-

899

(899)

-

Net income

-

188,004

Balance at September 30, 2021 – (unaudited)

16,660,121

$167

568,257

$356,202

$9,068,336

$(8,180,235)

$1,244,470

Nine Months Ended September 30, 2021

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at January 1, 2021

16,457,121

$165

568,257

$353,505

$9,064,855

$(8,916,261)

$502,264

Stock options expense

-

5,571

-

5,571

Stock options exercised

203,000

2

-

607

-

609

Amortization of increasing dividend rate preferred stock discount

-

2,697

(2,697)

-

Net income

-

736,026

Balance at September 30, 2021 – (unaudited)

16,660,121

$167

568,257

$356,202

$9,068,336

$(8,180,235)

$1,244,470

Three Months Ended September 30, 2020

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at July 1, 2020

14,997,749

$150

568,257

$349,910

$9,046,267

$(9,628,436)

$(232,109)

Stock options expense

-

1,634

-

1,634

Amortization of increasing dividend rate preferred stock discount

-

1,798

(1,798)

-

Warrants exercised

100,000

1

-

399

-

400

Net income

-

298,290

Balance at September 30, 2020 – (unaudited)

15,097,749

$151

568,257

$351,708

$9,046,502

$(9,330,146)

$68,215

Nine Months Ended September 30, 2020

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at January 1, 2020

14,539,675

$145

875,054

$554,516

$8,939,519

$(9,820,668)

$(326,488)

Stock options expense

-

25,076

-

25,076

Common stock issued for repurchase of preferred stock

458,074

5

-

22,899

-

22,904

Preferred stock repurchased

-

(356,797)

(235,951)

37,927

-

(198,024)

Repurchase preferred stock assigned to settle related party liability

-

50,000

27,750

26,075

-

53,825

Amortization of increasing dividend rate preferred stock discount

-

5,393

(5,393)

-

Warrants exercised

100,000

1

-

399

-

400

Net income

-

490,522

Balance at September 30, 2020 - (unaudited)

15,097,749

$151

568,257

$351,708

$9,046,502

$(9,330,146)

$68,215

See accompanying notes to unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30, 2021	September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	`$736,026`	`$490,522`
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	`7,669`	`6,752`
Noncash lease expense	`83,707`	`76,909`
Provision for deferred tax expense	`258,685`	`-`
Stock options expense	`5,571`	`25,076`
Provision for uncollectible accounts receivable	`208`	`832`
Common stock issued for prior preferred stock repurchase charged to expense	`-`	`3,280`
Net (increase) decrease in
Accounts receivable	`3,020`	`(26,175)`
Prepaid expenses and other assets	`(3,225)`	`(20,820)`
Net increase (decrease) in
Accounts payable	`669`	`(762)`
Accrued and other liabilities	`49,647`	`3,200`
Deferred revenue	`172,637`	`263,249`
Operating lease obligation	`(83,707)`	`(76,909)`
Net cash provided by operating activities	`1,230,907`	`745,154`

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment	`(5,847)`	`(10,137)`
Net cash used in investing activities	`(5,847)`	`(10,137)`

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options	`609`	`-`
Proceeds from exercise of warrants	`-`	`400`
Payments for repurchase of preferred stock	`-`	`(178,400)`
Payment of dividends payable - preferred stock	`(168,079)`	`-`
Net cash used in financing activities	`(167,470)`	`(178,000)`

NET INCREASE IN CASH AND CASH EQUIVALENTS	`1,057,590`	`557,017`
Cash and cash equivalents at beginning of period	`1,407,917`	`612,005`
Cash and cash equivalents at end of period	`$2,465,507`	`$1,169,022`

NON-CASH INVESTING AND FINANCING ACTIVITIES
Repurchased preferred stock assigned to settle related party liability	`-`	`$53,825`
Common stock issued in connection with repurchase of preferred stock	`-`	`$19,624`
Amortization of increasing dividend rate preferred stock discount	`$2,697`	`$5,393`

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 of FullNet Communications, Inc. and its subsidiaries (“we”, “our”, collectively, the “Company”) 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, 2020.

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, 2021.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. This guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company’s consolidated financial statements.

Income Per Share

Income per share – basic is calculated by dividing net income 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 for options and warrants and the “if converted” method for convertible preferred stock.

The reconciliation of basic and diluted income per share are as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2021	September 30, 2020	September 30, 2021	September 30, 2020
Net income:
Net income	`$188,004`	`$298,290`	`$736,026`	`$490,522`
Preferred stock dividends	`(13,685)`	`(13,163)`	`(41,054)`	`(46,701)`
Net income available to common shareholders	`174,319`	`285,127`	`694,972`	`443,821`

Basic income per share:
Weighted average common shares outstanding used in income per share	`16,660,121`	`15,034,706`	`16,597,659`	`14,707,561`
Basic income per share	`0.01`	`0.02`	`0.04`	`0.03`

Diluted income per share:
Shares used in diluted income per share	`19,688,994`	`18,876,162`	`19,585,761`	`17,957,425`
Diluted income per share	`0.01`	`0.02`	`0.04`	`0.02`

Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	`16,660,121`	`15,034,706`	`16,597,659`	`14,707,561`
Effect of dilutive stock options	`2,741,040`	`3,568,267`	`2,701,422`	`2,989,353`
Effect of dilutive warrants	`287,833`	`273,189`	`286,680`	`260,511`
Weighted average shares and share equivalents outstanding – diluted	`19,688,994`	`18,876,162`	`19,585,761`	`17,957,425`

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended		Nine Months Ended
	September 30, 2021	September 30, 2020	September 30, 2021	September 30, 2020
Stock options	`-`	`-`	`45,000`	`263,000`
Preferred stock	`568,257`	`568,257`	`568,257`	`568,257`
Total anti-dilutive securities excluded	`568,257`	`568,257`	`613,257`	`831,257`

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

2. STOCK BASED COMPENSATION

The following table summarizes the Company’s employee stock option activity for the nine months ended September 30, 2021:

Schedule of Employee Stock Option Activity

	Options	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate Intrinsic value
Options outstanding, December 31, 2020	`2,989,963`	`$0.012`	`7.19`

Options exercisable, December 31, 2020	`1,727,463`	`$0.010`	`5.93`	$ 155,595

Options exercised during the period	`203,000`	`$0.003`

Options expired during the period	`31,334`	`$0.003`

Options issued during the period	`90,000`	`$0.240`

Options outstanding September 30, 2021	`2,845,629`	`$0.020`	`6.85`

Options exercisable September 30, 2021	`1,913,133`	`$0.012`	`6.12`	$ 1,336,090

During the nine months ended September 30, 2021, 90,000 nonqualified employee stock options were granted with an exercise price of $0.01 per option for 45,000 options and $0.47 per option for 45,000 options. The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the options was determined to be $21,147 and $21,124, respectively, of which $1,174 was recognized as stock-based compensation expense for the nine months ended September 30, 2021. 45,000 of the stock options will vest one-third on each annual anniversary of the grant date (August 23, 2021), and 45,000 of the stock options will vest one-third on each annual anniversary date beginning four years after the date of grant (August 23, 2021).

During the nine months ended September 30, 2021, certain employees of the Company exercised options to purchase 203,000 restricted shares of the Company’s common stock. Proceeds from the exercise of the Options were $609. 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, 2021 was $5,571 of which $1,174 was related to options issued during the nine months ended September 30, 2021 and $4,397 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).

3. WARRANT ACTIVITY

The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2021:

Schedule of Warrant Activity

		Warrants	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate Intrinsic value
Warrants outstanding, December 31, 2020	`290,000`		`$0.004`	`2.41`


Warrants exercisable, December 31, 2020	`290,000`	`$0.004`	`2.41`	`$27,850`

Warrants outstanding September 30, 2021	`290,000`	`$0.004`	`1.66`

Warrants exercisable September 30, 2021	`290,000`	`$0.004`	`1.66`	`$204,750`

During the nine months ended September 30, 2021, no warrants were issued or exercised.

4. SERIES A CONVERTIBLE PREFERRED STOCK

On January 4, 2021 the Company paid the December 7, 2020 dividends declared on its Series A Convertible Preferred Stock of $168,079. As of September 30, 2021, the aggregate outstanding accumulated arrearages of cumulative dividend was $38,357 or if issued in common shares, 54,024 shares.

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2021 was $2,697.

5. LEASES

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 was renewed 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%) in determining the present value of the lease payments over the lease expiration date of December 31, 2024. At September 30, 2021, the remaining future cash payments under our lease total to $494,754.

For the nine months ended September 30, 2021, we amortized $83,707 of our operating right-of-use, or ROU, asset and made payments of the associated lease liability for the same amount. At September 30, 2021, an operating ROU asset and liability of $430,975, each, are included on our condensed consolidated balance sheet.

For each of the nine months ended September 30, 2021 and 2020, our fixed operating lease cost was $114,174, which is included within operating costs and expenses in our condensed consolidated statements of operations.

Future minimum lease payments under non-cancellable operating lease as of September 30, 2021, were as follows:

Year ending December 31,
2021 (three months remaining)	`$38,058`
2022	`152,232`
2023	`152,232`
2024	`152,232`
Total future minimum lease payments	`494,754`
Present value of discount	`(63,779)`
Current portion lease liability	`(120,211)`
Long-term lease liability	`$310,764`

6. SUBSEQUENT EVENT

On October 28, 2021, the Company issued 486,000 restricted shares of the Company’s common stock for cash proceeds of $1,458 pursuant to the exercise of common stock purchase options by an employee and a former employee of the Company.

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 2020 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, 2020 (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 integrated communications provider. Through our subsidiaries, we have historically provided high quality, reliable and scalable Internet access, web hosting, local telephone service, equipment colocation, customized live help desk outsourcing services, mass notification services using text messages and automated telephone calls, as well as advanced voice and data solutions. As explained below, the majority of our focus going forward is on our revenue and customers coming from three primary types of service: 1) Mass notification services using text messages and automated telephone calls, 2) Equipment colocation and related services, and 3) Customized live help desk outsourcing service.

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.

COVID-19 Pandemic

The global outbreak of the coronavirus disease (COVID-19), which the World Health Organization has characterized as a “pandemic”, has resulted in a crisis affecting economies and financial markets worldwide. The pandemic, and its attendant economic damage, has impacted market segments in different ways, with industries experiencing significant losses while others actually gained. We believe that the COVID-19 pandemic, with its shifts in human interactions and communications, resulted for us in a net addition of new customers and the sale of additional services to existing customers and increased interest in our automated group text and voice message delivery services. As the COVID-19 pandemic subsides, it is possible that the increases we have experienced may slow, resulting in adverse effects on our business, results of operations and financial condition. The ultimate extent of its impact on us will depend on future developments, which are highly uncertain and cannot be predicted, including the extent to which people return to preexisting patterns of behavior when the COVID-19 pandemic subsides.

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. Through a wholly owned subsidiary, we started a competitive local exchange carrier (“CLEC”) in 2003 and later exited the retail telephone service business in early 2018. In response to the rapidly evolving Internet based telecommunications services environment, we have continued to expand and improve our service offerings.

Today we are an integrated communications provider primarily focused on providing mass notification services using text messages and automated telephone calls, equipment colocation and related services, and customized live help desk outsourcing service.

Through CallMultiplier Inc., our wholly owned subsidiary, we offer a comprehensive cloud-based solution to consumers and businesses for automated mass texting and voice message delivery. We serve groups throughout the United States and Canada that come from a wide range of industries including religious groups, non-profit companies, schools and universities, businesses, sports groups, staffing companies, property management groups, government entities, and more. These customers use CallMultiplier to quickly send important and informational messages to groups ranging in size from five to more than 250,000 people. We exclusively focus on messages that recipients have asked for or otherwise desire to receive. Sending unsolicited marketing or any unlawful messages through CallMultiplier is a violation of our Terms of Service.

We market our carrier neutral colocation solutions in our data center to competitive local exchange carriers, Internet service providers and businesses that need a physical presence in the Oklahoma City market. 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.

Our customized live help desk outsourcing service is used by companies that want the benefit of having someone answer the telephone and respond to email 24 hours a day, without wanting to incur the costs to maintain the necessary staff to do so themselves. This service complements our existing staff and leverages the resources we have in place 24 hours a day.

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 shareholders 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.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of revenues for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Revenue:

Total revenue

$1,015,779

100.0

$935,823

100.0

$3,036,654

100.0

$2,538,605

100.0

Cost of revenue

198,144

19.5

137,427

14.7

514,105

16.9

379,622

14.9

Selling, general and administrative expenses

560,522

55.2

498,802

53.3

1,540,847

50.7

1,664,658

65.6

Depreciation and amortization

2,556

0.2

2,353

0.2

7,669

0.3

6,752

0.3

Total operating costs and expenses

761,222

74.9

638,582

68.2

2,062,621

67.9

2,051,032

80.8

Income from operations

254,557

25.1

297,241

31.8

974,033

32.1

487,573

19.2

Other income

143

0.0

1,049

0.1

20,678

0.6

2,949

0.1

Income tax expense

(66,696)

(6.6)

-

(258,685)

(8.5)

-

Net income

188,004

18.5

298,290

31.9

736,026

24.2

490,522

19.3

Preferred stock dividends

(13,685)

(1.3)

(13,163)

(1.4)

(41,054)

(1.3)

(46,701)

(1.8)

Net income available to common shareholders

$174,319

17.2

$285,127

30.5

$694,972

22.9

$443,821

17.5

Three Months Ended September 30, 2021 (the “2021 3rd Quarter”) Compared to Three Months Ended September 30, 2020 (the “2020 3rd Quarter”)

Revenues

Total revenue increased $79,956 or 8.5% to $1,015,779 for the 2021 3rd Quarter from $935,823 for the same period in 2020. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

In the 2021 3rd Quarter, we had interest income of $143. In the 2020 3rd Quarter, we had interest income of $49.

Operating Costs and Expenses

Cost of revenue increased $60,717 or 44.2% to $198,144 for the 2021 3rd Quarter from $137,427 for the same period in 2020. 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 19.5% during the 2021 3rd Quarter, compared to 14.7% during the same period in 2020, 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 $61,720 or 12.4% to $560,522 for the 2021 3rd Quarter compared to $498,802 for the same period in 2020. This increase was primarily related to increases in employee costs, advertising, bank and credit card fees, bad debt expense, miscellaneous expense related to the Series A convertible preferred stock repurchase, business insurance, and travel and entertainment of $53,571, $4,963, $4,282, $2,051, $1,763, $939, and $740, respectively, which were offset by decreases in professional services, utilities, agent commissions, and supplies of $3,747, $1,661, $670, and $657, respectively. Selling, general and administrative expenses as a percentage of total revenues increased to 55.2% during the 2021 3rd Quarter from 53.3% during the same period in 2020.

Depreciation and amortization expense increased $203 or 8.6% to $2,556 for the 2021 3rd Quarter compared to $2,353 for the same period in 2020. This increase was related to depreciation associated with assets purchased during the 2021 1st Quarter.

Income Taxes

Our deferred tax assets relate primarily to net operating loss carryforwards for income tax purposes at September 30, 2021, totaling approximately $313,000 which will begin to expire in 2023. On a regular basis, we evaluate all available evidence, both positive and negative, regarding the ultimate realization of the tax benefits of our deferred tax assets. Based upon the historical trend of increasing earnings we concluded that it is more likely than not that a tax benefit will be realized from our deferred tax assets and therefore in the 4th Quarter of 2020 eliminated the previously recorded valuation allowance for our deferred tax assets. Elimination of the valuation allowance resulted in a deferred tax asset at December 31, 2020, of approximately $339,000 and a corresponding tax benefit for the fiscal year ended December 31, 2020. As a result, we began recording income tax expense in the 1st Quarter of 2021. Income tax expense for the 3rd Quarter of 2021 was $66,696.

Net Income

For the 2021 3rd Quarter, we realized net income of $188,004 compared to net income of $298,290 for the same period in 2020. The decrease was due primarily to a 19.2% increase in operating costs and expenses, the addition of income tax expense, and only an 8.5% increase in revenue.

Nine Months Ended September 30, 2021 (the “2021 Period”) Compared to Nine Months Ended September 30, 2020 (the “2020 Period”)

Revenues

Total revenue increased $498,049 or 19.6% to $3,036,654 for the 2021 Period from $2,538,605 for the same period in 2020. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers and reflects an increased interest in the Company’s automated group text and voice message delivery service as a result of the COVID-19 pandemic. It is unlikely that this rate of increase will continue once the COVID-19 pandemic subsides.

In the 2021 Period, we had interest income of $678 and other income of $20,000 from the settlement of a property damage claim. In the 2020 Period, we had interest income of $1,949 and other income of $1,000 from applied customer deposits.

Operating Costs and Expenses

Cost of revenue increased $134,483 or 35.4% to $514,105 for the 2021 Period from $379,622 for the same period in 2020. 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 16.9% during the 2021 Period, compared to 14.9% during the same period in 2020, 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 decreased $123,811 or 7.4% to $1,540,847 for the 2021 Period compared to $1,664,658 for the same period in 2020. This decrease was primarily related to decreases in advertising, professional fees, miscellaneous expense related to the Series A convertible preferred stock repurchase, utilities, and supplies expense of $157,552, $18,139, $9,475, $4,981, and $4,142, respectively, which were offset by increases in employee costs, bank and credit card fees, rent, and business insurance of $44,866, $15,893, $6,847, and $2,817, respectively. Selling, general and administrative expenses as a percentage of total revenues decreased to 50.7% during the 2021 Period from 65.6% during the same period in 2020.

Depreciation and amortization expense increased $917 or 13.6% to $7,669 for the 2021 Period compared to $6,752 for the same period in 2020. This increase was related to depreciation associated with assets purchased during the 2021 1st Quarter.

Income Taxes

Our deferred tax assets relate primarily to net operating loss carryforwards for income tax purposes at September 30, 2021,

totaling approximately $313,000 which will begin to expire in 2023. On a regular basis, we evaluate all available evidence, both positive and negative, regarding the ultimate realization of the tax benefits of our deferred tax assets. Based upon the historical trend of increasing earnings we concluded that it is more likely than not that a tax benefit will be realized from our deferred tax assets and therefore in the 4th Quarter of 2020 eliminated the previously recorded valuation allowance for our deferred tax assets. Elimination of the valuation allowance resulted in a deferred tax asset at December 31, 2020, of approximately $339,000 and a corresponding tax benefit for the fiscal year ended December 31, 2020. As a result, we began recording income tax expense in the 1st Quarter of 2021. Income tax expense for the 2021 Period was $258,685.

Net Income

For the 2021 Period, we realized net income of $736,026 compared to net income of $490,522 for the same period in 2020. The increase was due primarily to a 19.6% increase in revenue as well as a 12.9% decrease in operating costs and expenses as a percentage of revenue.

Liquidity and Capital Resources

As of September 30, 2021, we had $2,465,507 in cash and $2,520,100 in current assets and $1,559,451 in current liabilities. Current liabilities consist primarily of $438,700 in accrued and other liabilities, of which $263,125 is owed to our officers and directors, and $949,666 is deferred revenue. Our 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 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, 2021 and December 31, 2020, we had positive working capital of $960,649 and a working capital deficit of $38,870, 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, 2021, $45,217 of the $50,874 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, 2021 and 2020 consist of the following:

	For the Nine-Month Period Ended September 30,
	2021	2020
Net cash flows provided by operating activities	`$1,230,907`	`$745,154`
Net cash flows used in investing activities	`(5,847)`	`(10,137)`
Net cash flows used in financing activities	`(167,470)`	`(178,000)`

Cash used for the purchase of property and equipment was $5,847 and $10,137 in the nine months ended September 30, 2021 and 2020, respectively.

No intangible assets were purchased in the nine months ended September 30, 2021 and 2020.

On January 4, 2021, we paid the December 7, 2020, preferred stock dividends declared of $168,079.

On March 25, 2021, employee stock options for 203,000 shares of our common stock were exercised. Proceeds from the exercise of the options were $609.

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:

•		mergers and acquisitions;
•		improvements of existing services, development of new services; and
•		further development of operations support systems and other automated back-office systems.

Because our cost of developing new services, funding other strategic initiatives, and operating our business depend on a variety of factors (including, among other things, the number of customers and the service for which they subscribe, the nature and penetration of services that may be offered by us, regulatory changes, and actions taken by competitors in response to our strategic initiatives), it is almost certain that actual costs and revenues will materially vary from expected amounts and these variations are likely to increase our future capital requirements.

Our ability to fund the capital expenditures and other costs contemplated by our business plan in the near term will depend upon, among other things, our ability to generate consistent net income and positive cash flow from operations as well as our ability to seek and obtain additional financing. Capital will be needed in order to implement our business plan, expand our operations and obtain and retain a significant number of customers in our target markets. Each of these factors is, to a large extent, subject to economic, financial, competitive, political, regulatory, and other factors, many of which are beyond our control.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect certain reported amounts and disclosures. In applying these accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As might be expected, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

We periodically review the carrying value of our property and equipment whenever business conditions or events indicate that those assets may be impaired. If the estimated future undiscounted cash flows to be generated by the property and equipment are less than the carrying value of the assets, the assets are written down to fair market value and a charge is recorded to current operations. Significant and unanticipated changes in circumstances, including significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, could require a provision for impairment in a future period.

We review loss contingencies and evaluate the events and circumstances related to these contingencies. We disclose material loss contingencies that are possible or probable, but cannot be estimated. For loss contingencies that are both estimable and probable the loss contingency is accrued and expense is recognized in the financial statements.

All of our revenues are recognized over the life of the contract as services are provided. Revenue that is received in advance of the services provided is deferred until the services are provided. Revenue related to set up charges is also deferred and amortized over the life of the contract. We classify certain taxes and fees billed to customers and remitted to governmental authorities on a net basis in revenue.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required and have not elected to report any information under this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures.

Our principal executive officer, who is also our principal financial officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2021 pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our CEO/CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO/CFO, as appropriate, to allow timely decisions regarding required disclosure.

A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 25, 2021, we issued 203,000 restricted shares of our common stock, par value $0.00001 per share pursuant to the exercise of common stock purchase options (the “Options”) held by various employees. Proceeds from the exercise of the Options were $609. 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.

On October 28, 2021, we issued 486,000 restricted shares of our common stock pursuant to the exercise of Options by an employee and a former employee of the Company. Proceeds from the exercise of the Options were $1,458.

Immediately following the exercise of the Options, we had 17,146,121 shares of common stock issued and outstanding.

Item 5. Other Information

During the nine months ended September 30, 2021, all events reportable on Form 8-K were reported.

Item 6. Exhibits

The following exhibits are either filed as part of or are incorporated by reference in this Report:

Exhibit

Number

Exhibit

4.4

Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of FullNet Communications, Inc.

31.1

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Roger P. Baresel

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Incorporated by reference to Exhibit 4.18 to the Form 8-K filed June 7, 2013

Filed herewith.

In accordance with Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	REGISTRANT: FULLNET COMMUNICATIONS, INC.
Date: November 15, 2021	By:	/s/ ROGER P. BARESEL
		Roger P. Baresel
		Chief Executive Officer and Chief Financial Officer