2. GOING CONCERN AND MANAGEMENT'S PLANS
At March 31, 2018 current liabilities exceeded current assets by $949,685. 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.
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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, 2017 the Company had a secured convertible promissory note from a shareholder with a balance of $33,242. 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, 2018, the Company made principal and interest payments totaling $1,801, of which $1,309 applied to the principal. The secured convertible promissory note had a balance of $31,933 at March 31, 2018 of which $7,203 is short-term and $24,730 is long-term.
4. STOCK BASED COMPENSATION
The following table summarizes the Company’s employee stock option activity for the three months ended March 31, 2018:
Schedule of Employee Stock Option Activity
|
|
Options
|
|
Weighted average
exercise price
|
|
Weighted average
remaining
contractual life (yrs)
|
|
Aggregate
Intrinsic value
|
Options outstanding, December 31, 2017
|
2,110,834
|
|
$.006
|
|
8.18
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2017
|
626,834
|
|
$0.003
|
|
6.03
|
|
$ 22,902
|
|
|
|
|
|
|
|
|
Options issued during the period
|
2,010,000
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, March 31, 2018
|
4,120,834
|
|
$0.023
|
|
8.88
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, March 31, 2018
|
2,822,167
|
|
$0.027
|
|
8.81
|
|
$ 26,678
|
During the three months ended March 31, 2018, 2,010,000 nonqualified employee stock options were granted with an exercise price of $.04. 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 $76,895 of which $67,280 was recognized as stock-based compensation expense for the three months ended March 31, 2018. 1,750,000 of the stock options vested immediately and 260,000 will vest one-fifth on each annual anniversary date of the grant. The total 2,010,000 will expire ten years from the date of the grant.
Total stock-based compensation expense for the three months ended March 31, 2018 was $68,937 of which $67,280 was related to options issued during the three months ended March 31, 2018 and $1,657 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, 2018:
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9
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|
|
2018
|
Risk free interest rate
|
|
2.65%
|
Expected lives (in years)
|
|
5
|
Expected volatility
|
|
178%
|
Dividend yield
|
|
0%
|
5. SERIES A CONVERTIBLE PREFERRED STOCK
On March 9, 2018 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, 2017, 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, 2018 was $6,724.
6. PROPERTY AND EQUIPMENT
During the three months ended March 31, 2018, 5,916 was paid for property and equipment and $2,180 was recorded as depreciation expense.
During the three months ended March 31, 2017, $766 was paid for property and equipment and $2,432 was recorded as depreciation expense.
7. INTANGIBLE ASSET
During the three months ended March 31, 2018, $2,209 was recorded as amortization 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.
8. DISCONTINUED OPERATIONS
In response to the changes in the telecommunications market and deterioration in the Company’s ability to effectively compete, the Company made the decision to exit the CLEC business. On October 27, 2017, the Company’s board of directors adopted a plan to exit the CLEC business as soon as possible through the sale of its wholly owned CLEC subsidiary and/or substantially all of its CLEC subsidiary’s operating assets. The Company was in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of its CLEC subsidiary’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018, (the “Sale”).
The Company determined that the Sale represented a strategic shift that will have a major effect on the Company’s operations and financial results since it represented a complete exit from the CLEC business and, therefore, classified it’s CLEC subsidiary as held for sale at December 31, 2017.
The Company recognized a gain of $233,277 on the Sale based on total considerations of $264,872 less total basis in the assets sold and transactions costs of $31,595. The assets sold consisted primarily of customers and associated customer premise equipment.
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|
|
|
|
Consideration:
|
|
|
|
Cash
|
|
$
|
246,500
|
Assumption of deferred revenue
|
|
|
8,366
|
Waived service obligation for February 2018
|
|
|
10,006
|
Total consideration
|
|
$
|
264,872
|
|
|
|
|
Total assets sold:
|
|
|
|
Customer contracts
|
|
$
|
-
|
Fiber innerduct
|
|
|
3.248
|
Fiber strands
|
|
|
-
|
Customer CPE
|
|
|
-
|
Total assets
|
|
|
3,248
|
Transactional costs
|
|
|
28,347
|
Total basis
|
|
$
|
31,595
|
Net gain
|
|
$
|
233,277
|
At December 31,2017, the Company had a secured convertible promissory note from a shareholder with a balance of $116,592. The interest rate of this note was 6% through December 31, 2014, 7% through December 31, 2015 and was 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, 2018, the Company paid the remaining balance of $116,592 in full.
Assets and Liabilities of Discontinued Operations
|
|
March 31, 2018
|
|
December 31, 2017
|
Carrying amounts of assets included in discontinued operations
|
|
|
|
|
Cash
|
|
$
2,007
|
|
$
1,801
|
Prepaid expenses and other current assets
|
|
2,467
|
|
2,671
|
Property and equipment, net
|
|
19,305
|
|
24,871
|
Total Assets of Discontinued Operations
|
|
$
23,779
|
|
$
29,343
|
|
|
|
|
|
Carrying amounts of liabilities included in discontinued operations
|
|
|
|
|
Accounts payable
|
|
$
59,312
|
|
$
57,342
|
Accrued and other liabilities
|
|
22,943
|
|
19,878
|
Convertible notes payable, related party – current portion
|
|
-
|
|
116,592
|
Convertible notes payable, related party – less current portion
|
|
-
|
|
-
|
Total Liabilities of Discontinued Operations
|
|
$
82,255
|
|
$
193,812
|
Operating Results of Discontinued Operations
|
|
March 31, 2018
|
|
March 31, 2017
|
Revenues included in discontinued operations
|
|
|
|
|
Total colocation and other revenues
|
|
$
28,091
|
|
$ 42,280
|
|
|
|
|
|
Operating costs and expenses included in discontinued operations
|
|
|
|
|
Cost of services
|
|
$
53,886
|
|
$ 56,396
|
Selling, general and administrative expenses
|
|
3,157
|
|
4,662
|
Depreciation and amortization
|
|
2,318
|
|
2,537
|
Interest expense
|
|
51
|
|
4,010
|
Total operating costs and expenses included in discontinued operations
|
|
59,412
|
|
67,605
|
|
|
|
|
|
Other Income included in discontinued operations
|
|
|
|
|
Gain on sale of assets
|
|
233,277
|
|
-
|
Net Income (Loss) from Discontinued Operations
|
|
$
201,956
|
|
$
(25,325)
|
Net Income (Loss) per share from discontinued operations basic and diluted
|
|
$
0.02
|
|
$
(0.00)
|
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Cash Flows from Discontinued Operations
|
|
March 31,2018
|
|
March 31, 2017
|
Net cash used in operating activities
|
|
(5,598)
|
|
(19,814)
|
Net cash provided by investing activities
|
|
218,153
|
|
-
|
Net cash used in financing activities
|
|
(116,592)
|
|
(9,192)
|
Net cash provided by (used in) discontinued operations
|
|
95,963
|
|
(29,006)
|
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-
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is qualified in its entirety by the more detailed information in our 2017 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, 2017 (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.
Overview
We are an integrated communications provider. Through our subsidiaries, we provide high quality, reliable and scalable Internet access, web hosting, equipment co-location, customized live help desk outsourcing services, group text and voice message delivery services, traditional telephone services as well as advanced voice and data solutions.
References to us in this Report include our subsidiaries: FullNet, Inc. (“FullNet”), FullTel, Inc. (“FullTel”), and FullWeb, Inc. (“FullWeb”). 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.
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 December 31, 2017 FullTel provided us with local telephone access in approximately 232 cities.
In response to changes in the telecommunications market and deterioration in our ability to effectively compete, we made the decision in the fourth quarter of 2017, to affect an orderly exit from the CLEC business. We were in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of FullTel’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018.
Through CallMultiplier, our wholly owned subsidiary, we offer a comprehensive cloud-based solution to consumers and businesses for automated group voice and text message delivery.
Our common stock trades on the OTC “Pink Sheets” under the symbol FULO. While our common stock trades on the OTC “Pink Sheets”, it is very thinly traded, and there can be no assurance that our stockholders will be able to sell their shares should they so desire. Any market for the common stock that may develop, in all likelihood, will be a limited one, and if such a market does develop, the market price may be volatile.
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13
-
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Results of Operations
The following table, which includes both continuing and discontinued operations (see Note 8 – Discontinued Operations of the financial statement appearing elsewhere in this Report), sets forth certain statement of operations data as a percentage of revenues for the three months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access service revenues
|
$
|
10,206
|
|
|
|
2.0
|
%
|
|
$
|
11,859
|
|
|
|
2.5
|
%
|
Co-location and other revenues
|
|
496,854
|
|
|
|
98.0
|
|
|
|
453,724
|
|
|
|
97.5
|
|
Total revenues
|
|
507,060
|
|
|
|
100.0
|
|
|
|
465,583
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of access service revenues
|
|
2,527
|
|
|
|
0.5
|
|
|
|
2,429
|
|
|
|
0.5
|
|
Cost of co-location and other revenues
|
|
46,309
|
|
|
|
9.1
|
|
|
|
33,988
|
|
|
|
7.3
|
|
Selling, general and administrative expenses
|
|
550,357
|
|
|
|
108.5
|
|
|
|
393,125
|
|
|
|
84.4
|
|
Depreciation and amortization
|
|
4,389
|
|
|
|
0.9
|
|
|
|
4,773
|
|
|
|
1.0
|
|
Total operating costs and expenses
|
|
603,582
|
|
|
|
119.0
|
|
|
|
434,315
|
|
|
|
93.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(96,522)
|
|
|
|
(19.0)
|
|
|
|
31,268
|
|
|
|
6.7
|
|
Other income
|
|
6,000
|
|
|
|
1.2
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
(330)
|
|
|
|
(0.1)
|
|
|
|
(754)
|
|
|
|
(0.2)
|
|
Income tax expense
|
|
(4,666)
|
|
|
|
(0.9)
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) from continuing operations
|
$
|
(95,518)
|
|
|
|
(18.8)
|
%
|
|
$
|
30,514
|
|
|
|
6.6
|
%
|
Net income (loss) from discontinued operations
|
|
201,956
|
|
|
|
39.8
|
|
|
|
(25,325)
|
|
|
|
(5.4)
|
|
Net income
|
|
106,438
|
|
|
|
21.0
|
|
|
|
5,189
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
(6,724)
|
|
|
|
(1.3)
|
|
|
|
(6,724)
|
|
|
|
(1.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
99,714
|
|
|
|
19.7
|
%
|
|
$
|
(1,535)
|
|
|
|
(0.3)
|
%
|
Three Months Ended March 31, 2018 (the “2018 1st Quarter”) Compared to Three Months Ended March 31, 2017 (the “2017 1st Quarter”)
Revenues
Access service revenues decreased $1,653 or 13.9% to $10,206 for the 2018 1st Quarter from $11,859 for the same period in 2017 primarily due to a decline in the number of customers.
Co-location and other revenues increased $43,130 or 9.5% to $496,854 for the 2018 1st Quarter from $453,724 for the same period in 2017. 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 increased $98 or 4.0% to $2,527 for the 2018 1st Quarter from $2,429 for the same period in 2017. This increase was primarily due to increases in costs of servicing access customers. Cost of access service revenues as a percentage of access service revenues remained unchanged at .5% during the 2018 1st Quarter from the same period in 2017.
Cost of co-location and other revenues increased $12,321 or 36.3% to $46,309 for the 2018 1st Quarter from $33,988 for the same period in 2017. This increase was primarily related to an increase in advertising costs. Cost of co-location and other revenues as a percentage of co-location and other revenues increased to 9.1% during the 2018 1st Quarter, compared to 7.3% during the same period in 2017.
Selling, general and administrative expenses increased $157,232 or 40.0% to $550,357 for the 2018 1st Quarter compared to $393,125 for the same period in 2017. This increase was primarily related to increases in employee costs, advertising,
-
14
-
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professional services, rent expense, and credit card fees of $128,463, $21,634, $2,929, $2,452, and $2,005, respectively. Selling, general and administrative expenses as a percentage of total revenues increased to 108.5 during the 2018 1st Quarter from 84.4% during the same period in 2017.
Depreciation and amortization expense decreased $384 or 8.0% to $4,389 for the 2018 1
st
Quarter compared to $4,773 for the same period in 2017. This decrease was primarily related to several assets reaching full depreciation.
Interest Expense
Interest expense decreased $424 or 56.2% to $330 for the 2018 1
st
Quarter compared to $754 for the same period in 2017. This decrease was primarily related to the payoff of the related-party note payable made during the 2018 1
st
Quarter.
Liquidity and Capital Resources
As of March 31, 2018, we had $143,423 in cash and $1,122,648 in current liabilities, including $435,279 of deferred revenues that will not require settlement in cash.
At March 31, 2018 and December 31, 2017, we had working capital deficits of $949,685 and $1,014,382, 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, 2018, of the $41,110 we owed to our trade creditors $29,072 was past due. We have no formal agreements regarding payment of these amounts.
Cash flow for the three-month periods ended March 31, 2018 and 2017 consist of the following.
|
|
For the Three-Months Periods Ended
March 31,
|
|
|
2018
|
|
2017
|
Net cash flows provided by operating activities
|
|
$
25,286
|
|
$
49,187
|
Net cash flows used in investing activities
|
|
(5,916)
|
|
(8,466)
|
Net cash flows used in financing activities
|
|
(1,309)
|
|
(1,648)
|
Cash used for the purchase of property and equipment was $5,916 and $766, respectively, for the three months ended March 31, 2018 and 2017.
No intangible assets were purchased in the three months ended March 31, 2018, and cash used for the purchase of intangible assets was $7,700 in the three months ended March 31, 2017.
Cash used for principal payments on notes payable was $1,309 and $1,648, respectively, for the three months ended March 31, 2018 and 2017.
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: