FULO Fullnet Communications Inc (PK)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

o

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		731473361
(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 o		Smaller reporting company þ
Emerging-growth company	o

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 o  No þ

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As of November 14, 2018, 13,621,009 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, 2018 (Unaudited) and December 31, 2017			3
Condensed Consolidated Statements of Operations — Three and Nine months ended September 30, 2018 and 2017 (Unaudited)			4
Condensed Consolidated Statements of Stockholders’ Deficit — Nine months ended September 30, 2018 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2018 and 2017 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			18
Item 4. Controls and Procedures			18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 5. Other Information			19
Item 6. Exhibits			20
Signatures			21
Exhibit 31.1
Exhibit 32.1

 

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED BALANCE SHEETS

		SEPTEMBER 30, 2018 (Unaudited)		DECEMBER 31, 2017
ASSETS
CURRENT ASSETS
Cash		$ 176,438		$ 29,399
Accounts receivable, net		8,583		8,854
Prepaid expenses and other current assets		43,869		6,110
Assets of discontinued operations, net ( Note 8 )		6,357		4,472
Total current assets		235,247		48,835
PROPERTY AND EQUIPMENT, net		40,869		39,448
OTHER ASSETS AND INTANGIBLE ASSETS		15,188		21,813
LONG-TERM ASSETS DISCONTINUED OPERATIONS, net (Note 8)		14,668		24,871
TOTAL ASSETS		$ 305,972		$ 134,967
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable		$ 23,131		$ 37,371
Accounts payable, related party		3,516		7,982
Accrued and other liabilities		552,255		610,107
Convertible notes payable, related party - current portion		7,203		5,354
Deferred revenue		416,961		397,931
Liabilities of discontinued operations (Note 8)		83,747		140,566
Total current liabilities		1,086,813		1,199,311
CONVERTIBLE NOTES PAYABLE, related party - less current portion		22,053		27,888
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 8)		-		53,246
Total liabilities		1,108,866		1,280,445
STOCKHOLDERS’ DEFICIT
Preferred stock - $0.001 par value; authorized, 10,000,000 shares; Series A convertible; issued and outstanding, 987,102 shares in 2018 and 2017		633,806		618,675
Common stock - $0.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 13,621,009 shares in 2018 and 11,871,009 in 2017		136		119
Additional paid-in capital		8,768,697		8,640,769
Accumulated deficit		(10,205,533)		(10,405,041)
Total stockholders’ deficit		(802,894)		(1,145,478)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$ 305,972		$ 134,967

 

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended				Nine Months Ended
		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
REVENUES
Co-location and other revenues		$ 505,642		$ 452,860		$ 1,498,594		$ 1,355,728
Access service revenues		8,841		9,759		26,142		32,892
Total revenues		514,483		462,619		1,524,736		1,388,620
OPERATING COSTS AND EXPENSES
Cost of co-location and other revenues		64,492		43,874		170,288		114,502
Cost of access service revenues		2,375		2,536		7,842		7,880
Selling, general and administrative expenses		416,052		407,971		1,384,531		1,200,782
Depreciation and amortization		4,192		4,156		12,676		13,577
Total operating costs and expenses		487,111		458,537		1,575,337		1,336,741
INCOME (LOSS) FROM OPERATIONS		27,372		4,082		(50,601)		51,879
OTHER INCOME		79,646		-		102,251		-
INTEREST EXPENSE		(108)		(495)		(604)		(1,612)
INCOME TAX EXPENSE		(6,000)		-		(18,000)		-
Net income from continuing operations		100,910		3,587		33,046		50,267
Gain from sale of discontinued asset		-		-		233,277		-
Net loss from discontinued operations (NOTE 8)		(13,825)		(19,211)		(66,815)		(76,380)
NET INCOME (LOSS)		$ 87,085		$ (15,624)		$ 199,508		$ (26,113)
Preferred stock dividends		(5,044)		(6,725)		(15,131)		(20,174)
Net income (loss) available to common stockholders		$ 82,041		$ (22,349)		$ 184,377		$ (46,287)
Net income (loss) per share:
Continuing operations – basic		0.01		0.00		0.00		0.00
Continuing operations – diluted		0.01		0.00		0.00		0.00
Discontinued operations – basic		(0.00)		(0.00)		0.01		(0.01)
Discontinued operations - diluted		(0.00)		(0.00)		0.01		(0.01)
Net income (loss) - basic		$ 0.01		$ (0.00)		$ 0.02		$ (0.00)
Net income (loss) - diluted		$ 0.01		$ (0.00)		$ 0.01		$ (0.00)
Weighted average common shares outstanding:
Basic		11,909,052		11,871,009		11,883,830		11,871,009
Diluted		14,851,830		14,887,069		14,815,054		14,833,073

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (UNAUDITED)

Nine Months Ended September 30, 2018

		Common stock				Preferred stock				Additional		Accumulated
		Shares		Amount		Shares		Amount		paid-in capital		deficit		Total
Balance at January 1, 2018		11,871,009		$ 119		987,102		$ 618,675		$ 8,640,769		$ (10,405,041)		$ (1,145,478)
Stock options compensation		-		-		-		-		73,076		-		73,076
Amortization of increasing dividend rate preferred stock discount		-		-		-		15,131		(15,131)		-		-
Exercise of options by reducing deferred compensation payable		1,750,000		17		-		-		69,983		-		70,000
Net income		-		-		-		-		-		199,508		199,508
Balance at September 30, 2018 – (unaudited)		13,621,009		$ 136		987,102		$ 633,806		$ 8,768,697		$ (10,205,533)		$ (802,894)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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FullNet Communications, Inc. and Subsidiaries

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Nine Months Ended
		September 30, 2018		September 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$ 199,508		$ (26,113)
(Income) loss from discontinued operations		(166,462)		76,380
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		12,676		13,577
Stock options compensation		73,076		11,005
Provision for uncollectible accounts receivable		(5,796)		262
Net (increase) decrease in
Accounts receivable		6.067		(1,320)
Prepaid expenses and other current assets		(37,759)		(14,766)
Net increase (decrease) in
Accounts payable		(14,420)		(47,702)
Accounts payable – related party		(4,286)		(10,474)
Accrued and other liabilities		12,148		55,915
Deferred revenue		19,030		36,479
Net cash provided by operating activities		93,782		93,243
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment		(7,472)		(1,471)
Net cash used in investing activities		(7,472)		(1,471)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on borrowings under notes payable – related party		(3,986)		(3,755)
Net cash used in financing activities		(3,986)		(3,755)
DISCONTINUED OPERATIONS
Net cash used in operating activities		(36,846)		(63,529)
Net cash provided by investing activities		218,153		-
Net cash used in financing activities		(116,592)		(21,054)
Net cash provided by (used in) discontinued operations		64,715		(84,583)
NET INCREASE (DECREASE) IN CASH		147,039		3,434
Cash at beginning of period		29,399		19,383
Cash at end of period		$ 176,438		$ 22,817
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income tax		$ 18,000		$ -
Cash paid for interest – continuing operations		1.417		1,612
Cash paid for interest – discontinued operations		51		8,652
NON-CASH INVESTING AND FINANCING ACTIVITIES
Amortization of increasing dividend rate preferred stock discount		$ 15,131		$ 20,174
Exercise of options by reducing deferred compensation payable		70,000		-

 

See accompanying notes to the unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.     UNAUDITED INTERIM FINANCIAL STATEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.”  Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition”, and requires entities to recognize revenue when they transfer control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  We adopted Topic 606 as of January 1, 2018.  The adoption of Topic 606 did not have a material impact to our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Income because the revenue of the Company does not include contracts that extend over several periods.

 

The unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2017.

 

Certain reclassifications have been made to prior period balances to conform with the presentation for the current period.  These reclassifications did not impact the net income (loss).

 

The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2018.  

 

Income (Loss) Per Share

 

Income (loss) per share – basic is calculated by dividing net income (loss) by the weighted average number of shares of stock outstanding during the year, including shares issuable without additional consideration. Income per share – assuming dilution is calculated by dividing net income by the weighted average number of shares outstanding during the year adjusted for the effect of dilutive potential shares calculated using the treasury stock method.

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Schedule of Anti-dilutive Securities Excluded
	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Preferred stock	-		-		-		-
Stock options	266,000		-		266,000		-
Warrants	-		-		-		-
Convertible promissory notes	29,256		158,444		29,256		158,444
Total anti-dilutive securities excluded	295,256		158,444		295,256		158,444

 

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

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2.     GOING CONCERN AND MANAGEMENT'S PLANS

At September 30, 2018 current liabilities exceeded current assets by $851,566.  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. There can be no assurance that current cash balances will 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%, 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 nine months ended September 30, 2018, the Company made principal and interest payments totaling $5,403, of which $3,986 was applied to the principal.  The note had a balance of $29,256 at September 30, 2018, of which $7,203 is short-term and $22,053 is long-term.

 

At December 31, 2017, the Company had a convertible promissory note from a shareholder with a balance of $116,592, which was secured by all tangible and intangible assets of the Company. The Company paid the remaining balance of $116,592 in full on February 1, 2018, to complete the sale of the Company’s competitive local exchange carrier or CLEC business.  See footnote 8 – Discontinued Operations.

 

4.     STOCK BASED COMPENSATION

 

The following table summarizes the Company’s employee stock option activity for the nine months ended September 30, 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		$0.006		8.18
Options exercisable, December 31, 2017	626,834		$0.003		6.03		$ 22,902
Options issued during the period	2,013,000		$0.040
Options expired during the period	3,000		$0.003
Options exercised during the period	1,750,000		$0.040
Options outstanding September 30, 2018	2,370,834		$0.010		7.65
Options exercisable, September 30, 2018	1,125,167		$0.005		6.64		$ 34,590

 

 

During the nine months ended September 30, 2018, 2,013,000 nonqualified employee stock options were granted with an exercise

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price of $.04 per option.  The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the shares was determined to be $76,996 of which $68,277 was recognized as stock-based compensation expense for the nine months ended September 30, 2018.  Of these stock options, 1,750,000 of the stock options vested immediately upon grant (February 14, 2018) and 260,000 will vest one-fifth on each annual anniversary date of the grant.  The total 2,013,000 will expire ten years from the date of the grant.  On September 28, 2018, certain officers and directors and their family members exercised options to purchase 1,750,000 restricted shares of the Company’s common stock.  Proceeds from the exercise of the Options were $70,000, which was derived from the reduction of deferred compensation payable the Company owed to these officers and directors.  The common shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D thereunder without payment of any form of commissions or other remuneration.

 

Total stock-based compensation expense for the nine months ended September 30, 2018 was $73,076 of which $68,277 was related to options issued during the nine months ended September 30, 2018 and $4,799 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 nine   months ended September 30, 2018:

 

 

		2018
Risk free interest rate		2.65% - 2.77%
Expected lives (in years)		5
Expected volatility		163% - 178%
Dividend yield		0%

 

5.     SERIES A CONVERTIBLE PREFERRED STOCK

 

On March 9, 2018 the Company’s board of directors determined that it was in the best interest of the Company and its stockholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2017, on its Series A Convertible Preferred Stock.  The Company has never made an annual dividend payment on its Series A convertible preferred stock.  As of September 30, 2018, the aggregate outstanding accumulated arrearages of cumulative dividend was $103,970 or if issued in common shares, 2,888,045 shares.

 

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2018 was $15,131.

 

6.      PROPERTY AND EQUIPMENT

 

During the nine months ended September 30, 2018, $7,472 was paid for property and equipment.  During the three and nine months ended September 30, 2018, $1,984 and $6,051 was recorded as depreciation expense, respectively.

 

7     INTANGIBLE ASSETS

 

During the three and nine months ended September 30, 2018, $2,208 and $6,625 was recorded as amortization expense, respectively.  

 

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 competitive local exchange carrier or CLEC business.  On October 27, 2017, the Company’s board of directors adopted a plan to exit the CLEC business as soon as possible through the sale of its wholly owned CLEC subsidiary and/or substantially all of its CLEC subsidiary’s operating assets.  The Company was in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of its CLEC subsidiary’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018 (the “Sale”).

 

The Company determined that the Sale represented a strategic shift that will have a major effect on the Company’s operations and financial results since it represented a complete exit from the CLEC business and, therefore, classified its CLEC subsidiary as held for sale at December 31, 2017.

 

The Company recognized a gain of $233,277 on the Sale based on total consideration of $264,872 less total basis in the assets sold and transactions costs of $31,595.  The assets sold consisted primarily of customers and associated customer premise equipment.

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Assets and Liabilities of Discontinued Operations

 

		September 30, 2018		December 31, 2017
Carrying amounts of assets included in discontinued operations
Cash		$ 3,442		$ 1,801
Prepaid expenses and other current assets		2,915		2,671
Property and equipment, net		14,668		24,871
Total Assets of Discontinued Operations		$ 21,025		$ 29,343
Carrying amounts of liabilities included in discontinued operations
Accounts payable		$ 61,940		$ 57,342
Accrued and other liabilities		21,807		19,878
Convertible notes payable, related party – current portion		-		116,592
Convertible notes payable, related party – less current portion		-		-
Total Liabilities of Discontinued Operations		$ 83,747		$ 193,812

 

Operating Results of Discontinued Operations

	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Revenues included in discontinued operations
Total colocation and other revenues	-		$     39,357		28,091		$    115,807
Operating costs and expenses included in discontinued operations
Cost of services	10,128		$    49,227		82,674		$   162,639
Selling, general and administrative expenses	1,379		4,069		5,226		13,285
Depreciation and amortization	2,318		2,537		6,955		7,611
Interest expense	-		2,735		51		8,652
Total operating costs and expenses discontinued operations	$  13,825		$  58,568		$  94,906		$  192,187
Other Income included in discontinued operations
Gain on sale of assets	-		-		233,277		-
Net Income (Loss) from Discontinued Operations	$ (13,825)		$ (19,211)		$ 166,462		$ (76,380)
Net Income (Loss) per share from discontinued operations basic	$     (0.00)		$     (0.00)		$       0.01		$     (0.01)
Net Income (Loss) per share from discontinued operations diluted	$     (0.00)		$     (0.00)		$       0.01		$     (0.01)

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Cash Flows from Discontinued Operations

 

		September 30, 2018		September 30, 2017
Net cash used in operating activities		(36,846)		(63,529)
Net cash provided by investing activities		218,153		-
Net cash used in financing activities		(116,592)		(21,054)
Net cash provided by (used in) discontinued operations		64,715		(84,583)

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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 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 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”), 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.

 

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 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.  However, 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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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 and nine months ended September 30, 2018 and 2017:

	Three Months Ended								Nine Months Ended
	September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Revenues:
Co-location and other revenues	$ 505,642		98.3%		$ 452,860		97.9%		$ 1,498,594		98.3		$ 1,355,728		97.6%
Access service revenues	8,841		1.7		9,759		2.1		26,142		1.7		32,892		2.4
Total revenues	514,483		100.0		462,619		100.0		1,524,736		100.0		1,388,620		100.0
Cost of co-location and other revenues	64,492		12.5		43,874		9.5		170,288		11.2		114,502		8.2
Cost of access service revenues	2,375		0.5		2,536		0.5		7,842		0.5		7,880		0.6
Selling, general and administrative expenses	416,052		80.9		407,971		88.2		1,384,531		90.8		1,200,782		86.5
Depreciation and amortization	4,192		0.8		4,156		0.9		12,676		0.8		13,577		1.0
Total operating costs and expenses	487,111		94.7		458,537		99.1		1,575,337		103.3		1,336,741		96.3
Income (loss) from operations	27,372		5.3		4,082		0.9		(50,601)		(3.3)		51,879		3.7
Other income	79,646		15.5		-		-		102,251		6.7		-		-
Interest expense	(108)		(0.02)		(495)		(0.1)		(604)		(0.04)		(1,612)		(0.1)
Income tax expense	(6,000)		(1.2)		-		-		(18,000)		(1.2)		-		-
Net income from continuing operations	100,910		19.6		$ 3,587		0.8		33,046		2.2		50,267		3.6
Gain from sale of discontinued asset	-		-		-		-		233,277		15.3		-		-
Net loss from discontinued operations	(13,825)		(2.7)		(19,211)		(4.2)		(66,815)		(4.4)		(76,380)		(5.5)
Net income (loss)	87,085		16.9		(15,624)		(3.4)		199,508		13.1		(26,113)		(1.9)
Preferred stock dividends	(5,044)		(1.0)		(6,725)		(1.4)		(15,131)		(1.0)		(20,174)		(1.4)
Net income available to common stockholders	82,041		15.9		$ (22,349)		(4.8)		184,377		12.1		$ (46,287)		(3.3)%

 

Three Months Ended September 30, 2018 (the “2018 3rd Quarter”) Compared to Three Months Ended September 30, 2017 (the “2017 3rd Quarter”)

Revenues

 

Co-location and other revenues increased $52,782 or 11.7% to $505,642 for the 2018 3rd Quarter from $452,860 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.

 

Access service revenues decreased $918 or 9.4% to $8,841 for the 2018 3rd Quarter from $9,759 for the same period in 2017 primarily due to a decline in the number of access customers.

 

In the 2018 3 rd Quarter, we had other income of $79,646, which included $64,492 from the sale of a block of excess IPv4 numbers and $15,155 from the refund of the overpayment of certain property taxes.  We had no such income in the 2017 3 rd Quarter.

 

Operating Costs and Expenses

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Cost of co-location and other revenues increased $20,618 or 47.0% to $64,492 for the 2018 3rd Quarter from $43,874 for the same period in 2017. This increase was primarily related to servicing new customers added through growth of business. Cost of co-location and other revenues as a percentage of co-location and other revenues increased to 12.8% during the 2018 3rd Quarter, compared to 9.7% during the same period in 2017.

 

Cost of access service decreased $161 or 6.3% to $2,375 for the 2018 3rd Quarter from $2,536 for the same period in 2017. This decrease was primarily due to decreases in the costs of servicing access customers. Cost of access service revenues as a percentage of access service revenues increased to 26.9% during the 2018 3rd Quarter from 26.0 % during the same period in 2017. This increase was primarily a factor of fixed costs that were not reduced by a decline in access customers.

 

Selling, general and administrative expenses increased $8,081 or 2.0% to $416,052 for the 2018 3rd Quarter compared to $407,971 for the same period in 2017.  This increase was primarily related to an increase in employee costs of $5,817 and an increase in the provision for bad debt of $1,753.  Selling, general and administrative expenses as a percentage of total revenues decreased to 80.9% during the 2018 3rd Quarter from 88.2% during the same period in 2017.

 

Depreciation and amortization expense increased $36 or 0.9% to $4,192 for the 2018 3 rd Quarter compared to $4,156 for the same period in 2017.  This increase was related to asset purchases made during the 2018 3 rd Quarter.  

 

   Interest Expense

 

Interest expense decreased $387 or 78.0% to $108 for the 2018 3 rd Quarter compared to $495 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.

Net Income

For the 2018 3 rd Quarter, we realized net income of $87,085 compared to a net loss of $15,624 for the same period in 2017.  The increase was due primarily to an increase in income from operations of $23,290 and from other income of $79,646.  

Nine Months Ended September 30, 2018 (the “2018 Period”) Compared to Nine Months Ended September 30, 2017 (the “2017 Period”)

Revenues

Co-location and other revenues increased $142,866 or 10.5% to $1,498,594 for the 2018 Period from $1,355,728 for the 2017 Period.  This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

Access service revenues decreased $6,750 or 20.5% to $26,142 for the 2018 Period from $32,892 for the 2017 Period primarily due to a decline in the number of access customers.

 

Operating Costs and Expenses

 

Cost of co-location and other revenues increased $55,786 or 48.7% to $170,288 for the 2018 Period from $114,502 for the 2017 Period.  This increase was primarily related to increases in costs of servicing new customers added through growth of business.  Cost of co-location and other revenues as a percentage of co-location and other revenues increased to 11.4% during the 2018 Period compared to 8.4% during the 2017 Period.

 

Cost of access service revenues decreased $38 or 0.5% to $7,842 for the 2018 Period from $7,880 for the 2017 Period. This decrease was primarily due to decreases in costs of servicing access customers.  Cost of access service revenues as a percentage of access service revenues increased to 30.0% during the 2018 Period, compared to 24.0% during the 2017 Period.  This increase was primarily a factor of fixed costs that were not reduced by a decline in access customers.

 

Selling, general and administrative expenses increased $183,749 or 15.3% to $1,384,531 for the 2018 Period compared to $1,200,782 for the 2017 Period.  This increase is primarily related to increases in advertising, employee costs, professional services fees, and administrative telephone expense of $37,939, $115,741, $29,393, and $4,183, respectively.  These increases were offset by a decrease in property taxes of $5,215.  In the 2017 Period we had non-recurring agent commissions expense of $13,225.  Selling, general and administrative expenses as a percentage of total revenues increased to 90.8% during the 2018 Period from 86.5% during the 2017 Period.

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Depreciation and amortization expense decreased to $12,676 for the 2018 Period compared to $13,577 for the 2017 Period primarily due to the sale of some assets.

 

Interest Expense

 

Interest expense decreased to $604 for the 2018 Period compared to $1,612 for the 2017 Period.

 

  Net Income

 

For the 2018 Period, we realized net income of $199,508 compared to a net loss of $26,113 for the 2017 Period.  The increase was due primarily to a $233,277 gain on the sale of our discontinued CLEC assets and $102,251 of other income, which offset a $50,601 net loss from operations and $66,815 loss from discontinued operations.

 

Liquidity and Capital Resources

 

As of September 30, 2018, we had $176,438 in cash and $235,247 in current assets and $1,086,813 in current liabilities.  Current liabilities consist primarily of $552,255 in accrued and other liabilities, of which $363,407 is owed to our officers and directors, and $416,961 in deferred revenue.  Our officers and directors, who are also major shareholders, have informally 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, 2018 and December 31, 2017, we had working capital deficits of $851,566 and $1,150,476, 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, 2018, of the $23,131 we owed to our trade creditors $18,209 was past due. We have no formal agreements regarding payment of these amounts.

Cash flow for the nine-month periods ended September 30, 2018 and 2017 consist of the following:

 

		For the Nine-Months Period Ended September 30,
		2018		2017
Net cash flows provided by operating activities		$ 93,782		$ 93,243
Net cash flows used in investing activities		(7,472)		(1,471)
Net cash flows used in financing activities		(3,986)		(3,755)

 

Cash used for the purchase of property and equipment was $7,472 and $1,471, respectively, for the nine months ended September 30, 2018 and 2017.  

 

No intangible assets were purchased in the nine months ended September 30, 2018 and 2017.  

 

Cash used for principal payments on notes payable was $3,986 and $3,755, respectively, for the nine months ended September 30, 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: