FULLNET COMMUNICATIONS INC - Quarter Report: 2022 September (Form 10-Q)

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

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Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

See accompanying notes to the unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

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 our audited consolidated financial statements of and notes thereto for the year ended December 31, 2021.

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, 2022.

Recently Adopted Accounting Pronouncements

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:

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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 our employee stock option activity for the nine months ended September 30, 2022:

During the nine months ended September 30, 2022, 4,500 nonqualified employee stock options were granted with an exercise price of $0.20 per option. The options were valued using Black-Scholes option pricing model on the date of issuance, and the fair value of the options was determined to be $1,547 of which $129 was recognized as stock-based compensation expense for the nine months ended September 30, 2022. The 4,500 options will vest one-third on each annual anniversary of the grant date and will expire ten years from the date of grant.

During the nine months ended September 30, 2022, certain employees of ours exercised options to purchase 1,746,633 restricted shares of our common stock, par value $00001 per share. Proceeds from the exercise of the Options were $26,174. 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 June 15, 2022, we paid the May 13, 2022 dividends declared on our common stock of $537,425, to shareholders of record on May 31, 2022. On September 15, 2022, we paid the August 15, 2022 dividends declared on our common stock of $57,581, to shareholders of record on August 31, 2022.

Total stock-based compensation expense for the nine months ended September 30, 2022 was $9,041, of which $129 was related to options issued during the nine months ended September 30, 2022, and $8,912 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).  

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3.     WARRANT ACTIVITY

The following table summarizes our warrant activity for the nine months ended September 30, 2022:

During the nine months ended September 30, 2022, no warrants were issued.

During the nine months ended September 30, 2022, 250,000 warrants with an exercise price of $.003 per share, and 40,000 warrants with an exercise price of $.01 per share, were exercised for 290,000 restricted shares of common stock, par value $.00001 per share. Proceeds from exercise of the warrants were $1,150. 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.

4.     SERIES A CONVERTIBLE PREFERRED STOCK

On January 3, 2022, we paid the December 9, 2021 dividends declared on our Series A Convertible Preferred Stock of $51,143. As of September 30, 2022, the aggregate outstanding accumulated arrearages of cumulative dividend was $42,619 or if issued in common shares, 80,414 shares.

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2022 was $2,430.

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, 2022, the remaining future cash payments under our lease total to $342,522.

For the nine months ended September 30, 2022, we amortized $91,106 of our operating right-of-use, or ROU, asset and made payments of the associated lease liability for the same amount. At September 30, 2022, an operating ROU asset and liability of $310,764, each, are included on our condensed consolidated balance sheet.

For the nine months ended September 30, 2022 and 2021, 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, 2022, were as follows:

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The following discussion is qualified in its entirety by the more detailed information in our 2021 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, 2021 (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. These statements can sometimes be identified by our use of forward-looking words such as “may”, “believe”, “plan”, “will”, “anticipate”, “estimate”, “expect”, “intend”, and other phrases of similar meaning. 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) continues to rapidly evolve, and it presents material uncertainty and risk with respect to our business, financial condition, and results of operations. 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.

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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, 2022 and 2021:

Three Months Ended September 30, 2022 (the “2022 3rd Quarter”) Compared to Three Months Ended September 30, 2021 (the “2021 3rd Quarter”)

Revenue

Total revenue increased $36,629 or 3.6% to $1,052,408 for the 2022 3rd Quarter from $1,015,779 for the same period in 2021. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

In the 2022 3rd Quarter, we had interest income of $12,720. In the 2021 3rd Quarter, we had interest income of $143.

Cost of Revenue

Cost of revenue increased $31,053 or 15.7% to $229,197 for the 2022 3rd Quarter from $198,144 for the same period in 2021. This increase was primarily related to servicing new customers added through growth of business and price increases from our vendors. Cost of revenue as a percentage of total revenue increased to 21.8% during the 2022 3rd Quarter, compared to 19.5% during

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the same period in 2021, as a result of increased utilization of higher cost components of our service offerings combined with price increases from our vendors.

Gross Profit

Gross profit as a percentage of revenue decreased 2.3% to 78.2% for the 2022 3rd Quarter from 80.5% for the same period in 2021. This decrease was primarily related to increased utilization of higher cost components of our services offerings combined with price increases from our vendors.

Operating Expenses

Sales and marketing expenses decreased $1,539 or 1.1% to $138,681 for the 2022 3rd Quarter from $140,220 for the 3rd Quarter of 2021. This decrease was primarily a result of decreases in advertising expense. Sales and marketing expense as a percentage of total revenues decreased to 13.2% for the 3rd Quarter of 2022 compared to 13.8% for the 3rd Quarter of 2021.

General and administrative expenses increased $20,446 or 4.9% to $440,748 for the 2022 3rd Quarter compared to $420,302 for the same period in 2021. This increase was primarily related to increases in employee costs and bank and credit card fees of $17,203 and $3,134, respectively. General and administrative expenses as a percentage of total revenues increased to 41.9% during the 2022 3rd Quarter from 41.4% during the same period in 2021.

Depreciation and amortization expense increased $1,841 or 72.0% to $4,397 for the 2022 3rd Quarter compared to $2,556 for the same period in 2021. This increase was related to depreciation associated with assets purchased during 2021 and 2022.

  Income Taxes

Our deferred tax asset related primarily to net operating loss carryforwards for income tax purposes which were fully utilized during the 1^st Quarter of 2022. Income tax expense for the 3rd Quarter of 2022 was $64,145.

  Net Income

For the 2022 3rd Quarter, we realized net income of $187,960 compared to net income of $188,004 for the same period in 2021. The decrease was due primarily to the decline in our gross profit as a percentage of revenue. 

Nine Months Ended September 30, 2022 (the”2022 Period”) Compared to Nine Months Ended September 30, 2021 (the “2021 Period”)

Revenues

Total revenue increased $194,613 or 6.4% to $3,231,267 for the 2022 Period from $3,036,654 for the same period in 2021. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

In the 2022 Period, we had interest income of $17,016. In the 2021 Period, we had interest income of $678 and other income of $20,000 from the settlement of a property damage claim.

Cost of Revenue

Cost of revenue increased $157,702 or 30.7% to $671,807 for the 2022 Period from $514,105 for the same period in 2021. This increase was primarily related to servicing new customers added through growth of business and price increases from our vendors. Cost of revenue as a percentage of total revenue increased to 20.8% during the 2022 Period, compared to 16.9% during the same period in 2021, as a result of increased utilization of higher cost components of our service offerings combined with price increases from our vendors.

Gross Profit

Gross profit as a percentage of revenue decreased 3.9 % to 79.2% for the 2022 Period from 83.1% for the same period in 2021. This decrease was primarily related to increased utilization of higher cost components of our services offerings combined with price increases from our vendors.

Operating Expenses

Sales and marketing expenses increased $126,964 or 37.0% to $469,714 for the 2022 Period from $342,750 for the same period of 2021. This increase was primarily a result of increases in advertising expense. Sales and marketing expense as a percentage in total revenues increased to 14.5% for the 2022 Period compared to 11.3% for the same period in 2021.

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General and administrative expenses increased $158,715 or 13.2% to $1,356,812 for the 2022 Period compared to $1,198,097 for the same period in 2021. This increase was primarily related to increases in employee costs and bank and credit card fees of $132,440 and $12,200, respectively. General and administrative expenses as a percentage of total revenues increased to 42.0% during the 2022 Period from 39.4% during the same period in 2021.

Depreciation and amortization expense increased $3,635 or 47.4% to $11,304 for the 2022 Period compared to $7,669 for the same period in 2021. This increase was related to depreciation associated with assets purchased during 2021 and 2022.

  Income Taxes

Our deferred tax asset related primarily to net operating loss carryforwards for income tax purposes which were fully utilized during the 1^st Quarter of 2022. Income tax expense for the 2022 Period was $188,313.

  Net Income

For the 2022 Period, we realized net income of $550,333 compared to net income of $736,026 for the same period in 2021. The decrease was due primarily to the decline in our gross profit as a percentage of revenue combined with a 37.0% increase in sales and marketing expense, and a 13.2% increase in general and administrative expenses. 

Liquidity and Capital Resources

At September 30, 2022 and December 31, 2021, we had positive working capital of $1,107,578 and $1,114,565, respectively.

As of September 30, 2022, $45,217 of the $51,746 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, 2022 and 2021 consist of the following:

Cash used for the purchase of property and equipment was $47,889 and $5,847 in the nine months ended September 30, 2022 and 2021, respectively.

No intangible assets were purchased in the nine months ended September 30, 2022 and 2021.  

On January 1, 2022, we paid the December 9, 2021, preferred stock dividends declared of $51,143.

On June 15, 2022, we paid the May 13, 2022, common stock dividends declared of $537,425. On September 15, 2022, we paid the August 15, 2022 common stock dividends declared of $57,581.

Growth of our business and the anticipated continued payment of common stock dividends (at a rate substantially less than the initial special common stock dividend paid on May 13, 2022), may require additional capital to fund capital expenditures and working capital needs. These additional capital expenditure requirements could 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

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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 could increase our future capital requirements.

Our ability to fund these potential capital expenditures and other potential costs 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 if necessary. 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.

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

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, 2022 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.

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Changes in Internal Control over Financial Reporting

PART II—OTHER INFORMATION

We are not a party to any material legal proceedings.

During the nine months ended September 30, 2022, all events reportable on Form 8-K were reported.

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Item 6.     Exhibits

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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.

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