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.
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
As of May 15, 2020, 14,539,675 shares of the registrant’s common stock, $0.00001 par value, were outstanding.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements and related notes of FullNet Communications and its subsidiaries (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2019.
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 for the prior period.
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, 2020.
COVID-19 Pandemic
As the global spread of COVID-19 continues, the pandemic has disrupted economies worldwide and its ultimate impacts are uncertain. While the ultimate impacts of COVID-19 cannot be determined, they have had and will continue to have material and adverse economic effects, and the pandemic could materially and adversely affect the Company’s business, financial condition and results of operations.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal-use software. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance effective January 1, 2020. The adoption of ASU No. 2018-15 did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Simplifying the Test for Goodwill Impairment", which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company adopted this guidance effective January 1, 2020. The adoption of ASU No. 2017-04 did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 (as amended through March 2020), “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. ASU No. 2016-13 introduced a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables, contract assets and held-to-maturity debt securities. The Company adopted this guidance effective January 1, 2020. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. This guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements.
7
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.
The reconciliation of basic and diluted income per share are as follows:
|
|
Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Net income:
|
|
|
|
|
Net income from operations
|
$50,607
|
|
$118,526
|
|
Preferred stock dividends
|
(20,375)
|
|
(20,636)
|
|
Net income available to common shareholders
|
30,232
|
|
97,890
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
Weighted average common shares outstanding used in income per share
|
14,539,675
|
|
13,741,009
|
|
Basic income per share
|
0.00
|
|
0.01
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
Shares used in diluted income per share
|
16,501,851
|
|
16,248,621
|
|
Diluted income per share
|
0.00
|
|
0.01
|
|
|
|
|
|
|
Computation of shares used in income per share:
|
|
|
|
|
Weighted average shares and share equivalents outstanding – basic
|
14,539,675
|
|
13,741,009
|
|
Effect of dilutive stock options
|
1,741,198
|
|
2,245,133
|
|
Effect of dilutive warrants
|
220,978
|
|
262,479
|
|
Weighted average shares and share equivalents outstanding – diluted
|
16,501,851
|
|
16,248,621
|
|
Schedule of Anti-dilutive Securities Excluded
|
|
|
Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Stock options
|
300,000
|
|
3,000
|
|
Preferred stock
|
875,054
|
|
987,102
|
|
Convertible promissory notes
|
-
|
|
27,888
|
|
Total anti-dilutive securities excluded
|
1,175,054
|
|
1,017,990
|
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.
8
2. MANAGEMENT'S PLANS
On August 27, 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
The Company has historically experienced significant operating losses with cumulative losses from inception of approximately $10 million. These losses have resulted in a negative working capital position of approximately $459,000 at March 31, 2020, of which approximately $333,000 of the Company’s current liabilities is owed to its officers and directors, and approximately $670,000 of the Company’s current liabilities is deferred revenue. The Company’s officers and directors, who are also major shareholders, have agreed to not seek payment of any of the amounts owed to them if such payment would jeopardize the Company’s ability to continue as a going concern. The deferred revenue represents advance payments for services from the Company’s customers which will be satisfied by its delivery of services in the normal course of business and will not require settlement in cash.
The Company started a number of initiatives in 2017 which included revenue enhancement initiatives, cost saving initiatives and the sale of excess assets. The Company has been successful with its revenue enhancement and cost saving initiatives, and in selling certain excess assets in the third quarter of 2018 and the first quarter of 2019.
As a result of these initiatives, the Company generated positive cash flow from its operating activities of approximately $236,000 and $246,000, for the three months ending March 31, 2020 and 2019, respectively. In addition, the Company was able to generate net income of approximately $51,000 and $119,000, for the three months ending March 31, 2020 and 2019, respectively.
Management expects that the success of these initiatives will provide the Company with sufficient liquidity for it to operate for the next 12 months.
As a result of the revenue enhancement initiatives, the cost saving initiatives and the excess asset sales, the Company has been able to significantly improve its working capital position and alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. We believe that the actions discussed above mitigate the substantial doubt raised by our prior operating losses and satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate additional liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. Additionally, a failure to generate additional liquidity could negatively impact our ability to effectively execute our business plan.
3. STOCK BASED COMPENSATION
The following table summarizes the Company’s employee stock option activity for the three months ended March 31, 2020:
|
Schedule of Employee Stock Option Activity
|
|
|
Options
|
|
Weighted average
exercise price
|
|
Weighted average
remaining
contractual life (yrs)
|
|
Aggregate
Intrinsic value
|
|
Options outstanding, December 31, 2019
|
2,318,835
|
|
$0.010
|
|
6.42
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2019
|
1,628,165
|
|
$0.007
|
|
6.00
|
|
$ 37,682
|
|
|
|
|
|
|
|
|
|
|
Options issued during the period
|
1,108,000
|
|
$0.010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expired during the period
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding March 31, 2020
|
3,426,835
|
|
$0.010
|
|
7.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable March 31, 2020
|
2,116,835
|
|
$0.008
|
|
6.02
|
|
$ 7,902
|
During the three months ended March 31, 2020, 1,108,000 nonqualified employee stock options were granted with an exercise price of $0.01 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 $11,052 of which $307 was recognized as stock-based compensation expense for the three months ended March 31, 2020. These stock options will vest one-third on each annual anniversary of the grant date (February 28, 2020) and will expire ten years from the date of the grant.
9
Total stock-based compensation expense for the three months ended March 31, 2020 was $1,231 of which $307 was related to options issued during the three months ended March 31, 2020 and $924 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, 2020:
|
|
|
2020
|
|
Risk free interest rate
|
|
0.89%
|
|
Expected lives (in years)
|
|
5
|
|
Expected volatility
|
|
208%
|
|
Dividend yield
|
|
0%
|
4. WARRANT ACTIVITY
The following table summarizes the Company’s warrant activity for the three months ended March 31, 2020:
|
Schedule of Warrant Activity
|
|
|
Warrants
|
|
Weighted average
exercise price
|
|
Weighted average
remaining
contractual life (yrs)
|
|
Aggregate
Intrinsic value
|
|
Warrants outstanding December 31, 2019
|
290,000
|
|
$0.004
|
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable December 31, 2019
|
290,000
|
|
$0.004
|
|
3.41
|
|
$ 7,550
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding March 31, 2020
|
290,000
|
|
$0.004
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable March 31, 2020
|
290,000
|
|
$0.004
|
|
3.16
|
|
$ 1,750
|
During the three months ended March 31, 2020, no warrants were issued or exercised.
5. SERIES A CONVERTIBLE PREFERRED STOCK
On March 13, 2020 the Company’s board of directors determined that it was in the best interest of the Company and its shareholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2019, 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 March 31, 2020, the aggregate outstanding accumulated arrearages of cumulative dividend was $206,318 or if issued in common shares, 20,631,829 shares.
The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2020 was $2,874.
6. LEASES
We determine if a contract contains a lease by evaluating the nature and substance of the agreement. The only lease that we have is the real estate lease for our headquarters facility, which was originally executed on December 2, 1999, and which has been extended several times. This lease was renewed for a term of five additional years. We recognize lease expense for this lease on a straight-line basis over the lease term.
We used our incremental borrowing rate (8.5%) in determining the present value of the lease payments over the lease expiration date of December 31, 2024. At March 31, 2020, the remaining future cash payments under our lease total to $723,102.
For the three months ended March 31, 2020, we amortized $25,096 of our operating right-of-use, or ROU, asset and made payments of the associated lease liability for the same amount. At March 31, 2020, an operating ROU asset and liability of $593,237, each, are included on our condensed consolidated balance sheet.
10
For the three months ended March 31, 2020, our fixed operating lease cost was $38,058, which is included within operating costs and expenses in our condensed consolidated statement of operations. For the three months ended March 31, 2019, our fixed operating lease cost was $59,522.
Future minimum lease payments under non-cancellable operating lease as of March 31, 2020, were as follows:
|
Year ending December 31,
|
|
|
2020 (nine months remaining)
|
$114,174
|
|
2021
|
152,232
|
|
2022
|
152,232
|
|
2023
|
152,232
|
|
2024
|
152,232
|
|
Total future minimum lease payments
|
723,102
|
|
Present value of discount
|
(129,865)
|
|
Current portion lease liability
|
(105,869)
|
|
Long-term lease liability
|
$487,368
|
11
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 2019 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, 2019 (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 colocation, customized live help desk outsourcing services, group text and voice message delivery 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.
COVID-19 Pandemic
The global outbreak of the coronavirus disease (COVID-19), which the World Health Organization has characterized as a “pandemic”, has resulted in a crisis affecting economies and financial markets worldwide. The pandemic, and its attendant economic damage, could adversely affect 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 duration and severity of the pandemic and actions taken to contain or prevent its further spread, among others. These and other potential impacts of COVID-19 could therefore materially and adversely affect our business, financial condition and results of operations.
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 colocation solutions in our data center to competitive local exchange carriers, Internet service providers and web-hosting companies. 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.
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 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.
12
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, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenue
|
714,347
|
|
100.0
|
|
599,831
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
108,671
|
|
15.2
|
|
76,794
|
|
12.8
|
|
Selling, general and administrative expenses
|
554,662
|
|
77.6
|
|
490,012
|
|
81.7
|
|
Depreciation and amortization
|
2,190
|
|
0.3
|
|
4,180
|
|
0.7
|
|
Total operating costs and expenses
|
665,523
|
|
93.1
|
|
570,986
|
|
95.2
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
48,824
|
|
6.8
|
|
28,845
|
|
4.8
|
|
Other income
|
1,783
|
|
0.2
|
|
89,958
|
|
15.0
|
|
Interest expense
|
-
|
|
-
|
|
(277)
|
|
(0.1)
|
|
Net income
|
50,607
|
|
7.0
|
|
118,526
|
|
19.7
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
(20,375)
|
|
(2.8)
|
|
(20,636)
|
|
(3.4)
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
30,232
|
|
4.2
|
|
$97,890
|
|
16.3
|
Three Months Ended March 31, 2020 (the “2020 1st Quarter”) Compared to Three Months Ended March 31, 2019 (the “2019 1st Quarter”)
Revenues
Total revenue increased $114,516 or 19.1% to $714,347 for the 2020 1st Quarter from $599,831 for the same period in 2019. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.
In the 2020 1st Quarter, we had interest income of $1,783. In the 2019 1st Quarter, we had interest income of $1,515 and other income of $81,920 from the sale of a block of excess IPv4 numbers and $6,523 from the recalculation of the long-term lease asset.
Operating Costs and Expenses
Cost of revenue increased $31,877 or 41.5% to $108,671 for the 2020 1st Quarter from $76,794 for the same period in 2019. This increase was primarily related to servicing new customers added through growth of business. Cost of revenue as a percentage of total revenue increased to 15.2% during the 2020 1st Quarter, compared to 12.8% during the same period in 2019, as a result of increased utilization of higher cost components of our service offerings combined with price increases from our vendors.
Selling, general and administrative expenses increased $64,650 or 13.2% to $554,662 for the 2020 1st Quarter compared to $490,012 for the same period in 2019. This increase was primarily related to increases in advertising, employee costs, credit card fees, and bad debt expense of $87,877, $17,790, $6,785, and $3,813, respectively, which were offset by decreases in rent, professional services, and repairs and maintenance of $28,731, $19,717, and $3,167, respectively. Selling, general and administrative expenses as a percentage of total revenues decreased to 77.6% during the 2020 1st Quarter from 81.7% during the same period in 2019.
Depreciation and amortization expense decreased $1,990 or 47.6% to $2,190 for the 2019 1st Quarter compared to $4,180 for
13
the same period in 2019. This decrease was related to several assets reaching full depreciation during the 2020 1st Quarter.
Interest Expense
Interest expense decreased $277 or 100.0% to zero for the 2020 1st Quarter compared to $277 for the same period in 2019. This decrease was primarily related to the payoff of the notes payable made during the 1st Quarter of 2019.
Net Income
For the 2020 1st Quarter, we realized net income of $50,607 compared to net income of $118,526 for the same period in 2019. The decrease was due primarily to a decrease in other income from the sale of IPv4 numbers of $81,290 in the 1st Quarter of 2019 that was not present in the 1st Quarter of 2020.
Liquidity and Capital Resources
As of March 31, 2020, we had $842,647 in cash and $882,333 in current assets and $1,341,710 in current liabilities. Current liabilities consist primarily of $505,211 in accrued and other liabilities, of which $333,396 is owed to our officers and directors, and $670,417 in deferred revenue. Our officers and directors, who are also major shareholders, have agreed to not seek payment of any of the amounts owed to them if such payment would jeopardize our ability to continue as a going concern. The deferred revenue represents advance payments for services from our customers which will be satisfied by our delivery of services in the normal course of business and will not require settlement in cash.
At March 31, 2020 and December 31, 2019, we had working capital deficits of $459,377 and $506,140, 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, 2020, $45,865 of the $60,213 we owed to our trade creditors was past due. We have no formal agreements regarding payment of these amounts.
Cash flow for the three-month periods ended March 31, 2020 and 2019 consist of the following:
|
|
|
For the Three-Month Period Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
Net cash flows provided by operating activities
|
|
$235,689
|
|
$246,245
|
|
Net cash flows used in investing activities
|
|
(5,047)
|
|
-
|
|
Net cash flows used in financing activities
|
|
-
|
|
(25,988)
|
Cash used for the purchase of property and equipment was $5,047 in the three months ended March 31, 2020. No property or equipment were purchased in the three months ended March 31, 2019.
No intangible assets were purchased in the three months ended March 31, 2020 and 2019.
Cash used for the payoff of the note payable in the three months ended March 31, 2019 was $27,888.
The planned expansion of our business will require significant capital to fund capital expenditures and working capital needs. Our principal capital expenditure requirements will include: