|
|
|
2.
|
|
GOING CONCERN AND MANAGEMENT
’
S PLANS
|
At March 31, 2017 current liabilities exceeded current assets by $1,100,384. The Company does not have a line of credit or credit facility to serve as an additional source of liquidity. Historically the Company has relied on shareholder loans as an additional source of funds. These factors raise substantial doubts about the Company
’
s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon continued operations of the Company that in turn is dependent upon the Company
’
s ability to meet its financing requirements on a continuing basis, to maintain present financing, to achieve the objectives of its business plan and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
The Company
’
s business plan includes, among other things, expansion through mergers and acquisitions and the development of its co-location and advanced voice and data solutions. Execution of the Company
’
s business plan will require significant capital to fund capital expenditures, working capital needs and debt service. Current cash balances will not be sufficient to fund the Company
’
s current business plan beyond the next few months. As a consequence, the Company is currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. The Company continues to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund the Company
’
s liquidity. There can be no assurance that the Company will be able to obtain additional capital on satisfactory terms, or at all, or on terms that will not dilute the shareholders
’
interests.
|
|
|
3.
|
|
CONVERTIBLE NOTES PAYABLE RELATED PARTY
|
At December 31, 2016 the Company had a secured convertible promissory note from a shareholder with a balance of $144,966. The interest rate of this note was 6% through December 31, 2014, 7% through December 31, 2015and is 8% through December 31, 2016, 8.5% through December 31, 2017, and 9% through May 31, 2018, with fixed monthly payments of $3,301 and matures May 31, 2018, at which time the remaining balance of principal and all accrued interest shall be due and payable. This convertible promissory note is secured by all tangible and intangible assets of the Company. The note holder has 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. During the three months ended March 31, 2017, the Company made principal and interest payments totaling $13,203. The secured convertible promissory note had a balance of $135,773 at March 31, 2017 of which $39,608 is short-term and $96,165 is long-term.
At December 31, 2016 the Company had a secured convertible promissory note from a shareholder with a balance of $38,286. The interest rate of this note is 6%, required monthly installments of interest only through May 31, 2014, then requires monthly installments of $600 including principal and interest and matures May 31, 2023. This convertible promissory note is secured by certain equipment of the Company. The note holder has 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. During the three months ended March 31, 2017, the Company made principal and interest payments totaling $2,401. The secured convertible promissory note had a balance of $36,638 at March 31, 2017 of which $7,203 is short-term and $29,435 is long-term.
- 7 -
Table of Contents
|
|
|
4.
|
|
STOCK BASED COMPENSATION
|
The following table summarizes the Company
’
s employee stock option activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted average
exercise price
|
|
Weighted average
remaining
contractual life (yrs)
|
|
Aggregate
Intrinsic value
|
Options outstanding, December 31, 2016
|
514,934
|
|
$.005
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2016
|
425,934
|
|
$.003
|
|
5.78
|
|
$ 9,350
|
|
|
|
|
|
|
|
|
Options issued during the period
|
1,503,000
|
|
$.007
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, March 31, 2017
|
2,017,934
|
|
$.006
|
|
8.80
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, March 31, 2017
|
426,934
|
|
$.003
|
|
5.45
|
|
$ 5,956
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2017, 850,000, 650,000 and 3,000 nonqualified employee stock options were granted with exercise prices of $.01, $.003 and $.02, respectively. The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the shares was determined to be $14,461 of which $1,202 was recognized as stock-based compensation expense for the three months ended March 31, 2017. The stock options will vest one-third on each annual anniversary date of the grant and will expire ten years from the date of the grant.
Total stock-based compensation expense for the three months ended March 31, 2017 was $1,651of which $1,202 was related to options issued during the three months ended March 31, 2017 and $449 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 three months ended March 31, 2017:
|
|
|
|
|
2017
|
Risk free interest rate
|
|
1.80% - 1.97 %
|
Expected lives (in years)
|
|
5
|
Expected volatility
|
|
173% - 174 %
|
Dividend yield
|
|
0 %
|
|
|
|
5.
|
|
SERIES A CONVERTIBLE PREFERRED STOCK
|
On March 30, 2017 the Company
’
s board of directors made the determination 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, 2016,
on its Series A Convertible Preferred Stock. The Company has never made an annual dividend payment on its Series A convertible preferred stock.
The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2017 was $6,724.
|
|
|
6.
|
|
PROPERTY AND EQUIPMENT
|
During the three months ended March 31, 2017, $766 was paid for property and equipment and $4,969 was recorded as depreciation expense.
During the three months ended March 31, 2017, $7,700 was paid for an intangible asset and $2,341 was recorded as amortization expense. There is a remaining balance of $8,300 purchased on account at March 31, 2017.
- 8 -
Table of Contents
|
|
|
|
|
|
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 2016 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, 2016 (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 competitive local exchange carrier 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. References to us in this report include our subsidiaries: FullNet, Inc. (
“
FullNet
”
), FullTel, Inc. (
“
FullTel
”
), FullWeb, Inc. (
“
FullWeb
”
) and CallMultiplier, Inc. (
“
CallMultiplier
”
).
Overview
We are an integrated communications provider. Through our subsidiaries, we provide high quality, reliable and scalable Internet access, web hosting, equipment co-location, traditional telephone services as well as advanced voice and data solutions.
Our principal executive offices are located at 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is (405) 236-8200. We also maintain Internet sites on the World Wide Web (
“
WWW
”
) at
www.fullnet.net
,
www.fulltel.com
and
www.callmultiplier.com
. Information contained on our Web sites is not, and should not be deemed to be, a part of this Report.
Company History
We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation, to bring dial-up Internet access and education to rural locations in Oklahoma that did not have dial-up Internet access. We changed our name to FullNet Communications, Inc. in December 1995. Today we are an integrated communications provider.
As an integrated communications provider, we intend to increase shareholder value by continuing to build scale through both acquisitions and internal growth and then leveraging increased revenues over our fixed-costs base. Our strategy is to meet the customer service requirements of retail, business, educational and government advanced voice and data solutions users in our target markets, while benefiting from the scale advantages obtained through being a fully integrated backbone and broadband provider.
We market our carrier neutral co-location solutions in our network operations center to other competitive local exchange carriers, Internet service providers and web-hosting companies. Our co-location facility is carrier neutral, allowing customers to choose among competitive offerings rather than being restricted to one carrier. Our data center is Telco-grade and provides customers a high level of operative reliability and security. We offer flexible space arrangements for customers and 24-hour onsite support with both battery and generator backup.
Through FullTel, our wholly owned subsidiary, we are a fully licensed competitive local exchange carrier or CLEC in Oklahoma. FullTel activates local access telephone numbers for the cities in which we market, sell and operate our retail FullNet Internet service provider brand, wholesale dial-up Internet service; our business-to-business network design, connectivity, domain and Web hosting businesses; and traditional telephone services as well as advanced voice and data solutions. At March 31, 2017 FullTel provided us with local telephone access in approximately 232 cities.
Through CallMultiplier, our wholly owned subsidiary, we offer a comprehensive cloud-based solution to consumers and businesses for automated calling, texting and voice message delivery.
Our common stock trades on the OTC
“
Pink Sheets
”
under the symbol FULO. While our common stock trades on the OTC
“
Pink Sheets
”
, it is very thinly traded, and there can be no assurance that our stockholders will be able to sell their shares should they so desire. Any market for the common stock that may develop, in all likelihood, will be a limited one, and if such a market does develop, the market price may be volatile.
- 9 -
Table of Contents
Results of Operations
The following table sets forth certain statement of operations data as a percentage of revenues for the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access service revenues
|
$
|
11,859
|
|
|
|
2.3
|
%
|
|
$
|
16,883
|
|
|
|
3.4
|
%
|
|
Co-location and other revenues
|
|
496,004
|
|
|
|
97.7
|
|
|
|
474,396
|
|
|
|
96.6
|
|
|
Total revenues
|
|
507,863
|
|
|
|
100.0
|
|
|
|
491,279
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of access service revenues
|
|
12,875
|
|
|
|
2.5
|
|
|
|
20,444
|
|
|
|
4.2
|
|
|
Cost of co-location and other revenues
|
|
79,938
|
|
|
|
15.7
|
|
|
|
83,388
|
|
|
|
17.0
|
|
|
Selling, general and administrative expenses
|
|
397,787
|
|
|
|
78.3
|
|
|
|
407,608
|
|
|
|
83.0
|
|
|
Depreciation and amortization
|
|
7,310
|
|
|
|
1.5
|
|
|
|
7,093
|
|
|
|
1.4
|
|
|
Total operating costs and expenses
|
|
497,910
|
|
|
|
98.0
|
|
|
|
518,533
|
|
|
|
105.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
9,953
|
|
|
|
2.0
|
|
|
|
(27,254)
|
|
|
|
(5.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(4,764)
|
|
|
|
(1.0)
|
|
|
|
(4,033)
|
|
|
|
(0.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
5,189
|
|
|
|
1.0
|
%
|
|
$
|
(31,287)
|
|
|
|
(6.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
(6,724)
|
|
|
|
(1.3)
|
|
|
|
(11,768)
|
|
|
|
(2.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
$
|
(1,535)
|
|
|
|
(0.3)
|
%
|
|
$
|
(43,055)
|
|
|
|
(8.8)
|
%
|
|
Three Months Ended March 31, 2017 (the
“
2017 1st Quarter
”
) Compared to Three Months Ended March 31, 2016 (the
“
2016 1st Quarter
”
)
Revenues
Access service revenues decreased $5,024 or 29.8% to $11,859 for the 2017 1st Quarter from $16,883 for the same period in 2016 primarily due to a decline in the number of customers.
Co-location and other revenues increased $21,608 or 4.6% to $496,004 for the 2017 1st Quarter from $474,396 for the same period in 2016. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.
Operating Costs and Expenses
Cost of access service decreased $7,569 or 37.0% to $12,875 for the 2017 1st Quarter from $20,444 for the same period in 2016. This decrease was primarily due to reductions in costs of servicing access customers due to a reduction in the number of customers. Cost of access service revenues as a percentage of access service revenues decreased to 108.6% during the 2017 1st Quarter, compared to 121.1% during the same period in 2016.
Cost of co-location and other revenues decreased $3,450 or 4.1% to $79,938 for the 2017 1st Quarter from $83,388 for the same period in 2016. This decrease was primarily related to a reduction in long distance usage. Cost of co-location and other revenues as a percentage of co-location and other revenues decreased to 16.1% during the 2017 1st Quarter, compared to 17.6% during the same period in 2016.
- 10 -
Table of Contents
Selling, general and administrative expenses decreased $9,821 or 2.4% to $397,787 for the 2017 1st Quarter compared to $407,608 for the same period in 2016. This decrease was primarily related to decreases in employee costs, professional services,
rent expense and supplies of $12,080, $2,702, $2,145 and $1,064, respectively. These decreases were offset by an increase in advertising costs of $8,036. Selling, general and administrative expenses as a percentage of total revenues decreased to 78.3% during the 2017 1st Quarter from 83.0% during the same period in 2016.
Depreciation and amortization expense increased $217 or 3.1% to $7,310 for the 2017 1
st
Quarter compared to $7,093 for the same period in 2016. This increase was primarily related to the amortization of an intangible asset offset by several assets reaching full depreciation.
Interest Expense
Interest expense increased $731 or 18.1% to $4,764 for the 2017 1
st
Quarter compared to $4,033 for the same period in 2016. This increase was primarily related to an additional note payment made during the 2017 1
st
Quarter.
Liquidity and Capital Resources
As of March 31, 2017, we had $31,479 in cash and $1,159,236 in current liabilities, including $408,846 of deferred revenues that will not require settlement in cash.
At March 31, 2017 and December 31, 2016, we had working capital deficits of $1,100,384 and $1,102,927, 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 March 31, 2017, of the $109,761 we owed to our trade creditors $106,258 was past due. We have no formal agreements regarding payment of these amounts.
Cash flow for the three-month periods ended March 31, 2017 and 2016 consist of the following.
|
|
|
|
|
|
|
For the Three-Months Periods Ended
March 31,
|
|
|
2017
|
|
2016
|
Net cash flows provided by operations
|
|
$
30,397
|
|
$
4,801
|
Net cash flows used in investing activities
|
|
(8,466)
|
|
(719)
|
Net cash flows used in financing activities
|
|
(10,841)
|
|
(7,671)
|
Cash used for the purchase of property and equipment was $766 and $719, respectively, for the three months ended March 31, 2017 and 2016.
Cash used for the purchase of an intangible asset was $7,700 for the three months ended March 31, 2017. There is a remaining balance of $8,300 purchased on account at March 31, 2017. No intangible assets were purchased in the three months ended March 31, 2016.
Cash used for principal payments on notes payable was $10,841 and $7,671, respectively, for the three months ended March 31, 2017 and 2016.
The planned expansion of our business will require significant capital to fund capital expenditures, working capital needs, and debt service. Our principal capital expenditure requirements will include:
|
|
|
|
|
•
|
|
mergers and acquisitions and
|
|
|
|
|
|
•
|
|
further development of operations support systems and other automated back office systems
|
Because our cost of developing new networks and 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 current cash balances will not be sufficient to fund our current business plan beyond a few months. As a consequence, we are currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. We continue to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund our liquidity. There is no
assurance that we will be able to obtain additional capital on satisfactory terms or at all or on terms that will not dilute our shareholders
’
interests.
- 12 -
Table of Contents
Until we obtain sufficient additional capital, the further development of our network will be delayed or we will be required to take other actions. Our inability to obtain additional capital resources has had and will continue to have a material adverse effect on our business, operating results and financial condition.
Our ability to fund the capital expenditures and other costs contemplated by our business plan and to make scheduled payments with respect to borrowings will depend upon, among other things, our ability to seek and obtain additional financing in the near term. Capital will be needed in order to implement our business plan, deploy our network, 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.
There is no assurance that we will be successful in developing and maintaining a level of cash flows from operations sufficient to permit payment of our outstanding indebtedness. If we are unable to generate sufficient cash flows from operations to service our indebtedness, we will be required to modify or abandon our growth plans, limit our capital expenditures, restructure or refinance our indebtedness or seek additional capital or liquidate our assets. There is no assurance that (i) any of these strategies could be effectuated on satisfactory terms, if at all, or on a timely basis or (ii) any of these strategies will yield sufficient proceeds to service our debt or otherwise adequately fund operations.
On March 30, 2017 our board of directors made the determination that it was in the best interest of the Company and its stockholders to conserve our working capital at this time and not make the annual dividend payment for the year ending December 31, 2016. We have never made an annual dividend payment on our Series A convertible preferred stock.
Financing Activities
We have a secured convertible promissory note from a shareholder which requires monthly installments of $3,301 including principal and interest and is secured by all of our tangible and intangible assets. At March 31, 2017, the outstanding principal and accrued interest of the secured convertible promissory note was $135,773.
We have a secured convertible promissory note from a shareholder which requires monthly installments of interest only through May 31, 2014 then monthly installments of $600 including principal and interest. This note is secured by certain equipment. At March 31, 2017, the outstanding principal and accrued interest of the secured convertible promissory note was $36,638.
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 intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of these cash flows and fair value, however, could affect the calculation and result in additional impairment charges in future periods.
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.
- 13 -
Table of Contents
Access service revenues are recognized on a monthly basis over the life of each contract as services are provided. Contract periods range from monthly to yearly. Carrier-neutral telecommunications co-location revenues, traditional telephone services and advanced voice and data services are recognized on a monthly basis 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 by us. 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.