Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2020

☐

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		73-1473361

(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 þ		Smaller reporting company ☑
Emerging-growth company	☐

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 ☐ No þ

As of November 16, 2020, 15,097,749 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, 2020 (Unaudited) and December 31, 2019		3

Condensed Consolidated Statements of Operations — Three and nine months ended September 30, 2020 and 2019 (Unaudited)		4

Condensed Consolidated Statements of Shareholders’ Equity (Deficit) — Three and nine months ended September 30, 2020 and 2019 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2020 and 2019 (Unaudited)		7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8

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

Item1. Legal Proceedings		18

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		18

Item 5. Other Information		18

Item 6. Exhibits		19

Signatures		20

Exhibit 31.1
Exhibit 32.1

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2020 (Unaudited)	December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	`$1,169,022`	`$612,005`
Accounts receivable, net	`26,286`	`943`
Prepaid expenses and other current assets	`31,601`	`19,986`

Total current assets	`1,226,909`	`632,934`

PROPERTY AND EQUIPMENT, net	`61,136`	`57,751`

OTHER ASSETS AND INTANGIBLE ASSETS	`27,455`	`18,250`

RIGHT OF USE LEASED ASSET	`541,424`	`618,333`

TOTAL ASSETS	`$1,856,924`	`$1,327,268`

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable	`$50,024`	`$50,786`
Accrued and other liabilities	`425,151`	`475,776`
Operating lease liability – current portion	`110,449`	`103,651`
Deferred revenue	`772,110`	`508,861`

Total current liabilities	`1,357,734`	`1,139,074`

OPERATING LEASE LIABILITY – net of current portion	`430,975`	`514,682`
Total liabilities	`1,788,709`	`1,653,756`

SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred stock - $0.001 par value; authorized, 10,000,000 shares; Series A convertible; issued and outstanding, 568,257 and 875,054 shares in 2020 and 2019, respectively	`351,708`	`554,516`
Common stock - $0.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 15,097,749 and 14,539,675 shares in 2020 and 2019, respectively	`151`	`145`
Additional paid-in capital	`9,046,502`	`8,939,519`
Accumulated deficit	`(9,330,146)`	`(9,820,668)`
Total shareholders’ equity (deficit)	`68,215`	`(326,488)`

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	`$1,856,924`	`$1,327,268`

See accompanying notes to unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended		Nine Months Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019
REVENUES
Total revenue	`$935,823`	`$618,444`	`$2,538,605`	`$1,776,256`

OPERATING COSTS AND EXPENSES
Cost of revenue	`137,427`	`81,707`	`379,622`	`238,905`
Selling, general and administrative expenses	`498,802`	`465,480`	`1,664,658`	`1,414,639`
Depreciation and amortization	`2,353`	`4,082`	`6,752`	`12,362`
Total operating costs and expenses	`638,582`	`551,269`	`2,051,032`	`1,665,906`

INCOME FROM OPERATIONS	`297,241`	`67,175`	`487,573`	`110,350`

OTHER INCOME	`1,049`	`12,134`	`2,949`	`105,006`
INTEREST EXPENSE	`-`	`-`	`-`	`(277)`

NET INCOME	`$298,290`	`$79,309`	`$490,522`	`$215,079`
Preferred stock dividends	`(13,163)`	`(20,636)`	`(46,701)`	`(61,908)`
Net income available to common shareholders	`$285,127`	`$58,673`	`$443,821`	`$153,171`

Net income per share:
Basic	`$0.02`	`$0.00`	`$0.03`	`$0.01`
Diluted	`$0.02`	`$0.00`	`$0.02`	`$0.01`

Weighted average common shares outstanding:
Basic	`15,034,706`	`14,539,675`	`14,707,561`	`14,187,084`
Diluted	`18,876,162`	`16,192,390`	`17,957,425`	`15,857,856`

See accompanying notes to unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

Three Months Ended September 30, 2020

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at July 1, 2020

14,997,749

$150

568,257

$349,910

$9,046,267

$(9,628,436)

$(232,109)

Stock options expense

-

1,634

-

1,634

Amortization of increasing dividend rate preferred stock discount

-

1,798

(1,798)

-

Warrants exercised

100,000

1

-

399

-

400

Net income

-

298,290

Balance at September 30, 2020 – (unaudited)

15,097,749

$151

568,257

$351,708

$9,046,502

$(9,330,146)

$68,215

Nine Months Ended September 30, 2020

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at January 1, 2020

14,539,675

$145

875,054

$554,516

$8,939,519

$(9,820,668)

$(326,488)

Stock options expense

-

25,076

-

25,076

Common stock issued for repurchase of preferred stock

458,074

5

-

22,899

-

22,904

Preferred stock repurchased

-

(356,797)

(235,951)

37,927

-

(198,024)

Repurchased preferred stock assigned to settle related party liability

-

50,000

27,750

26,075

-

53,825

Amortization of increasing dividend rate preferred stock discount

-

5,393

(5,393)

-

Warrants exercised

100,000

1

-

399

-

400

Net income

-

490,522

Balance at September 30, 2020 – (unaudited)

15,097,749

$151

568,257

$351,708

$9,046,502

$(9,330,146)

$68,215

Three Months Ended September 30, 2019

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at July 1, 2019

14,539,675

$145

987,102

$645,573

$8,797,779

$(10,002,188)

$(558,691)

Stock options compensation

-

1,982

-

1,982

Amortization of increasing dividend rate preferred stock discount

-

3,363

(3,363)

-

Net income

-

79,309

Balance at September 30, 2019 – (unaudited)

14,539,675

$145

987,102

$648,936

$8,796,398

$(9,922,879)

$(477,400)

Nine Months Ended September 30, 2019

Common stock

Preferred stock

Additional

Accumulated

Shares

Amount

Shares

Amount

paid-in capital

deficit

Total

Balance at January 1, 2019

13,621,009

$136

987,102

$638,849

$8,765,712

$(10,137,958)

$(733,261)

Stock options compensation

-

21,968

-

21,968

Stock options exercised

38,666

-

116

-

116

Exercise of options by reducing deferred compensation payable

480,000

5

-

1,435

-

1,440

Amortization of increasing dividend rate preferred stock discount

-

10,087

(10,087)

-

Warrants issued

-

15,358

-

15,358

Warrants exercised

400,000

4

-

1,896

-

1,900

Net income

-

215,079

Balance at September 30, 2019 – (unaudited)

14,539,675

$145

987,102

$648,936

$8,796,398

$(9,922,879)

$(477,400)

See accompanying notes to unaudited condensed consolidated financial statements

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30, 2020	September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	`$490,522`	`$215,079`
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	`6,752`	`12,362`
Noncash lease expense	`76,909`	`109,901`
Stock options and warrants expense	`25,076`	`37,326`
Provision for (recovery of) uncollectible accounts receivable	`832`	`(1,698)`
Common stock issued for prior preferred stock repurchase charged to expense	`3,280`	`-`
Net (increase) decrease in
Accounts receivable	`(26,175)`	`6,351`
Prepaid expenses and other assets	`(20,820)`	`(10,528)`
Net increase (decrease) in
Accounts payable	`(762)`	`(7,426)`
Accounts payable – related party	`-`	`2,098`
Accrued and other liabilities	`3,200`	`17,281`
Deferred revenue	`263,249`	`74,763`
Operating lease obligation	`(76,909)`	`(97,670)`
Net cash provided by operating activities	`745,154`	`357,839`

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment	`(10,137)`	`-`
Net cash used in investing activities	`(10,137)`	`-`

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on borrowings under notes payable – related party	`-`	`(27,888)`
Exercise of options	`-`	`116`
Exercise of warrants	`400`	`1,900`
Payments for repurchase of preferred stock	`(178,400)`	`-`
Net cash used in financing activities	`(178,000)`	`(25,872)`

NET INCREASE IN CASH AND CASH EQUIVALENTS	`557,017`	`331,967`
Cash and cash equivalents at beginning of period	`612,005`	`246,237`
Cash and cash equivalents at end of period	`$1,169,022`	`$578,204`

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	`$-`	`$277`

NON-CASH INVESTING AND FINANCING ACTIVITIES
Right of use assets and operating lease liabilities recognized	`$-`	`$1,077,123`
Repurchased preferred stock assigned to settle related party liability	`$53,825`	`$-`
Common stock issued in connection with repurchase of preferred stock	`$19,624`	`$-`
Amortization of increasing dividend rate preferred stock discount	`$5,393`	`$10,087`
Exercise of options by reducing deferred compensation payable	`$-`	`$1,440`
Purchase of fixed asset through Accounts payable related party	`$-`	`$4,632`

See accompanying notes to the unaudited condensed consolidated financial statements.

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements and related notes of FullNet Communications and its subsidiaries (“we”, “our”, collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with 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 ended 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, although it has yet to do so.

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 June 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 chose early adoption of 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.

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 for options and warrants and the “if converted” method for convertible preferred stock.

The reconciliation of basic and diluted income per share are as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019
Net income:
Net income from operations	`$298,290`	`$79,309`	`$490,522`	`$215,079`
Preferred stock dividends	`(13,163)`	`(20,636)`	`(46,701)`	`(61,908)`
Net income available to common shareholders	`285,127`	`58,673`	`443,821`	`153,171`

Basic income per share:
Weighted average common shares outstanding used in income per share	`15,034,706`	`14,539,675`	`14,707,561`	`14,187,084`
Basic income per share	`0.02`	`0.00`	`0.03`	`0.01`

Diluted income per share:
Shares used in diluted income per share	`18,876,162`	`16,192,390`	`17,957,425`	`15,857,856`
Diluted income per share	`0.02`	`0.00`	`0.02`	`0.01`

Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	`15,034,706`	`14,539,675`	`14,707,561`	`14,187,084`
Effect of dilutive stock options	`3,568,267`	`1,386,846`	`2,989,353`	`1,377,907`
Effect of dilutive warrants	`273,189`	`265,869`	`260,511`	`264,977`
Effect of convertible promissory note	`-`	`-`	`-`	`27,888`
Weighted average shares and share equivalents outstanding – diluted	`18,876,162`	`16,192,390`	`17,957,425`	`15,857,856`

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended		Nine Months Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019
Stock options	`-`	`-`	`263,000`	`-`
Preferred stock	`568,257`	`987,102`	`568,257`	`987,102`
Total anti-dilutive securities excluded	`568,257`	`987,102`	`831,257`	`987,102`

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

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 $9.3 million. These losses have resulted in a negative working capital position of approximately $131,000 at September 30, 2020, of which approximately $269,000 of the Company’s current liabilities is owed to its officers and directors, and approximately $772,000 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 has been able to generate net income and positive net cash flow for each of the past two years. The Company generated positive cash flow from its operating activities of approximately $745,000 and $358,000, for the nine months ended September 30, 2020 and 2019, respectively. In addition, the Company was able to generate net income of approximately $491,000 and $215,000, for the nine months ended September 30, 2020 and 2019, respectively.

Management expects that the success of its revenue enhancement and cost saving 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 nine months ended September 30, 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	2,036,000	$ 0.015

Options forfeited during the period	(10,000)	$ 0.019

Options outstanding September 30, 2020	4,344,835	$ 0.012	7.48

Options exercisable September 30, 2020	3,085,835	$ 0.012	6.79	$ 273,094

During the nine months ended September 30, 2020, 2,036,000 nonqualified employee stock options were granted with an exercise price of $0.01 per option for 1,108,000 options and $0.02 for 928,000 options. The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the options was determined to be $29,270 of which $20,506 was recognized as stock-based compensation expense for the nine months ended September 30, 2020. 1,108,000 of the stock options will

vest one-third on each annual anniversary of the grant date (February 28, 2020), and 928,000 of the stock options vested immediately at the grant date (June 3, 2020). All will expire ten years from the date of the grant.

Total stock-based compensation expense for the nine months ended September 30, 2020 was $23,118 of which $20,506 was related to options issued during the nine months ended September 30, 2020 and $2,612 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, 2020:

		2020
Risk free interest rate		0.38% - 0.89%
Expected lives (in years)		5
Expected volatility		208% - 236%
Dividend yield		0%

4. WARRANT ACTIVITY

The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2020:

	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 issued during the period	100,000	$ 0.004

Warrants exercised during the period	(100,000)	$ 0.004

Warrants outstanding September 30, 2020	290,000	$ 0.004		2.66

Warrants exercisable September 30, 2020	290,000	$ 0.004		2.66	`$27,879`

During the nine months ended September 30, 2020, 100,000 common stock purchase warrants were granted with an exercise price of $0.004 per warrant. The warrants were valued using the Black-Scholes warrant pricing model on the date of issuance and the fair value of the shares was determined to be $1,958, which was recognized as expense for the nine months ended September 30, 2020. These warrants vested immediately upon grant (June 2, 2020) and were subsequently exercised during the nine months ended September 30, 2020.

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 ended 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 September 30, 2020, the aggregate outstanding accumulated arrearages of cumulative dividend was $156,713 or if issued in common shares, 1,565,561 shares.

During June 2020, the Company repurchased 356,797 shares of its Series A convertible preferred stock in return for the issuance of 392,477 shares of its common stock with a fair value of $19,624 and a payment of $178,400. The Company assigned 50,000 shares of the repurchased Series A convertible preferred stock to settle a related party liability of $53,825, and the remaining 306,797 shares were cancelled. Also during June 2020, an additional 65,597 shares of common stock with a fair value of $3,280 were issued and $9,541 was paid to a former preferred shareholder to equitably adjust the repurchase price of the Series A convertible preferred shares at the end of 2019 to those made in the second quarter of 2020. As of September 30, 2020, there were 568,257 shares of Series A convertible preferred stock outstanding.

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2020 was $5,393.

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 September 30, 2020, the remaining future cash payments under our lease total to $646,986.

For the nine months ended September 30, 2020, we amortized $76,909 of our operating right-of-use, or ROU, asset and made payments of the associated lease liability for the same amount. At September 30, 2020, an operating ROU asset and liability of $541,424, each, are included on our condensed consolidated balance sheet.

For the nine months ended September 30, 2020, our fixed operating lease cost was $114,174, which is included within operating costs and expenses in our condensed consolidated statement of operations. For the nine months ended September 30, 2019, our fixed operating lease cost was $178,567.

Future minimum lease payments under non-cancellable operating lease as of September 30, 2020, were as follows:

Year ending December 31,
2020 (three months remaining)	`$38,058`
2021	`152,232`
2022	`152,232`
2023	`152,232`
2024	`152,232`
Total future minimum lease payments	`646,986`
Present value of discount	`(105,562)`
Current portion lease liability	`(110,449)`
Long-term lease liability	`$430,975`

7. SUBSEQUENT EVENTS

On October 5, 2020, the Company granted 4,500 employee stock options to a new employee with an exercise price of $0.04. The stock options shall vest one-third each year starting October 5, 2021, and shall expire on October 5, 2030. The fair value of these options on the date granted was $739.

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, although it has yet to do so.

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.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of revenues for the three and nine months

ended September 30, 2020 and 2019:

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Revenue:

Total revenue

$935,823

100.0

$618,444

100.0

$2,538,605

100.0

$1,776,256

100.0

Cost of revenue

137,427

14.7

81,707

13.2

379,622

14.9

238,905

13.4

Selling, general and administrative expenses

498,802

53.3

465,480

75.3

1,664,658

65.6

1,414,639

79.6

Depreciation and amortization

2,353

0.2

4,082

0.7

6,752

0.3

12,362

0.7

Total operating costs and expenses

638,582

68.2

551,269

89.2

2,051,032

80.8

1,665,906

93.7

Income from operations

297,241

31.8

67,175

10.9

487,573

19.2

110,350

6.2

Other income

1,049

0.1

12,134

1.9

2,949

0.1

105,006

5.9

Interest expense

-

(277)

(0.0)

Net income

298,290

31.9

79,309

12.8

490,522

19.3

215,079

12.1

Preferred stock dividends

(13,163)

(1.4)

(20,636)

(3.3)

(46,701)

(1.8)

(61,908)

(3.5)

Net income available to common shareholders

$285,127

30.5

$58,673

9.5

$443,821

17.5

$153,171

8.6

Three Months Ended September 30, 2020 (the “2020 3rd Quarter”) Compared to Three Months Ended September 30, 2019 (the “2019 3rd Quarter”)

Revenues

Total revenue increased $317,379 or 51.3% to $935,823 for the 2020 3rd Quarter from $618,444 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 and reflects an increased interest in the Company’s automated group text and voice message delivery service as a result of the COVID-19 pandemic. It is unlikely that this rate of increase will continue once the COVID-19 pandemic subsides.

In the 2020 3rd Quarter, we had interest income of $49. In the 2019 3rd Quarter, we had interest income of $2,286.

Operating Costs and Expenses

Cost of revenue increased $55,720 or 68.2% to $137,427 for the 2020 3rd Quarter from $81,707 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 14.7% during the 2020 3rd Quarter, compared to 13.2% 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 $33,322 or 7.2% to $498,802 for the 2020 3rd Quarter compared to $465,480 for the same period in 2019. This increase was primarily related to increases in advertising, bank and credit card fees, employee costs, commercial insurance, and supplies of $46,756, $9,399, $6,362, $2,868, and $1,345, respectively, which were offset by decreases in rent, bad debt expense, repairs and maintenance, and meals of $28,732, $1,809, $1,733 and $1,074, respectively. Selling, general and administrative expenses as a percentage of total revenues decreased to 53.3% during the 2020 3rd Quarter from 75.3% during the same period in 2019.

Depreciation and amortization expense decreased $1,729 or 42.4% to $2,353 for the 2020 3rd Quarter compared to $4,082 for the same period in 2019. This decrease was related to several assets reaching full depreciation during the 2020 3rd Quarter.

Net Income

For the 2020 3rd Quarter, we realized net income of $298,290 compared to net income of $79,309 for the same period in 2019. The increase was due primarily to a 51.3 % increase in revenue and a decrease in operating costs and expenses as a percentage of revenue of 21%.

Nine Months Ended September 30, 2020 (the “2020 Period”) Compared to Nine Months Ended September 30, 2019 (the “2019 Period”)

Revenues

Total revenue increased $762,349 or 42.9% to $2,538,605 for the 2020 Period from $1,776,256 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 and reflects an increased interest in the Company’s automated group text and voice message delivery service as a result of the COVID-19 pandemic. It is unlikely that this rate of increase will continue once the COVID-19 pandemic subsides.

In the 2020 Period, we had other income of $2,949 made up of $1,949 of interest income and $1,000 of applied customer deposits. In the 2019 Period, we had other income of $105,006 made up of $6,191 of interest income, $81,920 from the sale of a block of excess IPv4 numbers, $9,849 from the write-off of certain contingent liabilities, $523 of applied customer deposits, and $6,523 from the recalculation of the long-term asset.

Operating Costs and Expenses

Cost of revenue increased $140,717 or 58.9% to $379,622 for the 2020 Period from $238,905 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 14.9% during the 2020 Period, compared to 13.4% 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 $250,019 or 17.7% to $1,664,658 for the 2020 Period compared to $1,414,639 for the same period in 2019. This increase was primarily related to increases in advertising, employee costs, bank and credit card fees, miscellaneous expense related to the Series A convertible preferred stock repurchase, commercial insurance, and supplies of $227,722, $90,434, $25,538, $11,636, $8,172, and $3,271, respectively, which were offset by decreases in rent, professional services, repairs and maintenance, and meals of $97,919, $8,321, $6,903, and $3,366, respectively. Selling, general and administrative expenses as a percentage of total revenues decreased to 65.6% during the 2020 Period from 79.60% during the same period in 2019.

Depreciation and amortization expense decreased $5,610 or 45.4% to $6,752 for the 2020 Period compared to $12,362 for the same period in 2019. This decrease was related to several assets reaching full depreciation during the 2020 Period.

Net Income

For the 2020 Period, we realized net income of $490,522 compared to net income of $215,079 for the same period in 2019. The increase was due primarily to a 42.9 % increase in revenue with a 12.9% decrease in operating costs and expenses as a percentage of revenue.

Liquidity and Capital Resources

As of September 30, 2020, we had $1,169,022 in cash and $57,887 in other current assets and $1,357,734 in current liabilities. Current liabilities consist primarily of $425,151 in accrued and other liabilities, of which $269,000 is owed to our officers and directors, and $772,110 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 September 30, 2020 and December 31, 2019, we had working capital deficits of $130,825 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 if additional funds were needed. We believe that our current cash balance is sufficient for our current needs and do not anticipate drawing additional funds from borrowings.

As of September 30, 2020, $46,005 of the $50,024 we owed to our trade creditors was past due. We have no formal agreements regarding payment of these amounts.

Cash flow for the nine-month period ended September 30, 2020 and 2019 consist of the following:

	For the Nine-Month Period Ended September 30,
	2020	2019
Net cash flows provided by operating activities	`$ 745,154`	$ 357,839
Net cash flows used in investing activities	`(10,137)`	`-`
Net cash flows used in financing activities	`(178,000)`	`(25,872)`

Cash used for the purchase of property and equipment was $10,137 in the nine months ended September 30, 2020. No property or equipment were purchased in the nine months ended September 30, 2019.

No intangible assets were purchased in the nine months ended September 30, 2020 and 2019.

Cash used for the payoff of the note payable in the nine months ended September 30, 2019 was $27,888.

During June, 2020, the Company repurchased 356,797 shares of its Series A convertible preferred stock in return for the issuance of 392,477 shares of its common stock and a payment of $178,400. The Company assigned 50,000 shares of the repurchased preferred stock to settle a related party liability of $53,825.

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:

•		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 ability to fund the capital expenditures and other costs contemplated by our business plan in the near term will depend upon, among other things, primarily our ability to generate consistent net income and positive cash flow from operations. Capital will be needed to implement our business plan, 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 maintaining a level of cash flows from operations sufficient to permit payment of our liabilities and execution of our business plan. If we are unable to generate sufficient cash flows from operations, we will be required to modify or abandon our growth plans, limit our capital expenditures, restructure or refinance our liabilities 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 adequately fund operations.

On March 13, 2020, the Company’s board of directors made the determination that it was in the best interest of the Company and its shareholders to conserve our working capital at this time and not make the annual dividend payment for the year ended December 31, 2019. We have never made an annual dividend payment on our Series A convertible preferred stock.

Financing Activities

During June 2020, the Company repurchased 356,797 shares of its Series A convertible preferred stock in return for the issuance of 392,477 shares of its common stock and a payment of $178,400. The Company assigned 50,000 shares of the repurchased preferred stock to settle a related party liability of $53,825, and the remaining 306,797 shares were cancelled. Also during June 2020, an additional 65,597 shares of common stock were issued and $9,541 was paid to a former preferred shareholder to equitably adjust the repurchase price of the Series A convertible preferred shares at the end of 2019 to those made in the second quarter of 2020.

On August 27, 2020, 100,000 warrants with an exercise price of $.004 per share were exercised for 100,000 restricted shares

of common stock, par value $.0001 per share. Proceeds from the exercise of the warrants were $400.

We had a secured convertible note from a shareholder which required monthly installments of $600, including principal and interest. This note was secured by certain equipment. The outstanding balance of $27,888 was paid in full on February 26, 2019.

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.

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 colocation revenues, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures.

Our principal executive officer, who is also our principal financial officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2020 pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our CEO/CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO/CFO, as appropriate, to allow timely decisions regarding required disclosure.

A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In February 2020, we granted 1,108,000 employee stock options, the disclosure of which was reported in a Form 8-K dated February 28, 2020, and filed with the SEC.

On June 2, 2020, we granted 100,000 common stock purchase warrants (the “Warrants”) with an expiration date of June 2, 2021, and an exercise price of $.004 per share.

On June 3, 2020, we granted 928,000 employee stock options, the disclosure of which was reported in a Form 8-K dated June 5, 2020, and filed with the SEC.

On June 26, 2020, the Company repurchased 356,797 shares of its Series A convertible preferred stock in return for the issuance of 392,477 shares of its common stock and a payment of $178,400. The Company assigned 50,000 shares of the repurchased preferred stock to settle a related party liability of $53,825, and the remaining 306,797 shares were cancelled. Also during June 2020, an additional 65,597 shares of common stock were issued and $9,541 was paid to a former preferred shareholder to equitably adjust the repurchase price of the Series A convertible preferred shares at the end of 2019 to those made in the second quarter of 2020.

On August 27, 2020, 100,000 shares of common stock were issued upon exercise of the 100,000 Warrants granted on June 2, 2020.

Item 5. Other Information

During the nine months ended September 30, 2020, all events reportable on Form 8-K were reported.

Item 6. Exhibits

(a)

The following exhibits are either filed as part of or are incorporated by reference in this Report:

Exhibit

Number

Exhibit

4.4

Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of FullNet Communications, Inc.

10.23

IPv4 Numbers Purchase Agreement executed February 4, 2019, by and between FullNet Communications, Inc. and Paycom Payroll, LLC.

10.24

Lease Agreements between the Company and BOKP Tower, LLC, dated November 22, 2019

31.1

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Roger P. Baresel

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Incorporated by reference to Exhibit 4.18 to the Form 8-K filed June 7, 2013

Incorporated by reference to Exhibit 10.23 to the Form 10-K filed April 1, 2019

Incorporated by reference to Exhibit 10.24 to the Form 10-K filed April 10, 2020

Filed herewith.

In accordance with Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	REGISTRANT: FULLNET COMMUNICATIONS, INC.
Date: November 16, 2020	By:	/s/ ROGER P. BARESEL
		Roger P. Baresel
		Chief Executive Officer and Chief Financial Officer