10-Q

Table of Contents

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 March 31, 2014

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	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. Yesþ  Noo

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). Yesþ  Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso  Noþ

As of May 15, 2014, 9,118,161 shares of the registrant’s common stock, $0.00001 par value, were outstanding.

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FORM 10-Q

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — March 31, 2014 (Unaudited) and December 31, 2013		3
Condensed Consolidated Statements of Operations — Three months ended March 31, 2014 and 2013 (Unaudited)		4
Condensed Consolidated Statement of Stockholders’ Deficit — Three months ended March 31, 2014 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2014 and 2013 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		13
Item 4. Controls and Procedures		13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		14
Item 5. Other Information		14
Item 6. Exhibits		14
Signatures		21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

	MARCH 31,			DECEMBER 31,
	2014			2013
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	22,880		$	30,072
Accounts receivable, net		13,137			17,540
Prepaid expenses and other current assets		12,032			8,728
Total current assets		48,049			56,340
PROPERTY AND EQUIPMENT, net		121,993			44,635
OTHER ASSETS AND INTANGIBLE ASSETS		9,471			10,948
TOTAL ASSETS	$	179,513		$	111,923
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	159,390		$	127,077
Accrued and other liabilities		442,942			410,763
Convertible notes payable, related party - current portion		45,761			45,060
Deferred revenue		352,650			302,129
Total current liabilities		1,000,743			885,029
CONVERTIBLE NOTES PAYABLE, related party – less current portion		222,871			230,129
Total liabilities		1,223,614			1,115,158
STOCKHOLDERS’ DEFICIT
Preferred stock — $.001 par value; authorized, 10,000,000 shares; Series A    convertible; issued and outstanding 987,102 shares in 2014, and 2013		445,513			430,382
Common stock — $.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 9,118,161 shares in 2014 and 2013		91			91
Additional paid-in capital		8,707,364			8,716,803
Accumulated deficit		(10,197,069	)		(10,150,511	)
Total stockholders’ deficit		(1,044,101	)		(1,003,235	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	179,513		$	111,923

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
	March 31, 2014			March 31, 2013
REVENUES
Access service revenues	$	23,789		$	34,406
Co-location and other revenues		399,988			358,539
Total revenues		423,777			392,945
OPERATING COSTS AND EXPENSES
Cost of access service revenues		27,214			28,679
Cost of co-location and other revenues		85,417			90,900
Selling, general and administrative expenses		345,694			325,594
Depreciation and amortization		7,915			8,083
Total operating costs and expenses		466,240			453,256
LOSS FROM OPERATIONS		(42,463	)		(60,311	)
INTEREST EXPENSE		(4,095	)		(5,387	)
NET LOSS	$	(46,558	)	$	(65,698	)
Preferred stock dividends		(15,131	)		-
Net loss available to common stockholders	$	(61,689	)	$	(65,698	)
Net loss per common share
Basic and diluted	$	(.01	)	$	(.01	)
Weighted average common shares outstanding
Basic and diluted		9,118,161			9,118,161

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)

Three Months Ended March 31, 2014

	Common stock				Preferred stock		Additional		Accumulated
	Shares		Amount		Shares	Amount	paid-in capital		deficit		Total
Balance at January 1, 2014		9,118,161		$ 91	987,102	$ 430,382		$ 8,716,803		$ (10,150,511)		$ (1,003,235)
Stock options compensation		-		-	-	-		5,692		-		5,692
Amortization of increasing dividend rate preferred stock discount		-		-	-	15,131		(15,131)		-		-
Net loss		-		-	-	-		-		(46,558)		(46,558)
Balance at March 31, 2014		9,118,161		$ 91	987,102	$ 445,513		$ 8,707,364		$ (10,197,069)		$ (1,044,101)

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)

	Three Months Ended
	March 31, 2014			March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(46,558	)	$	(65,698	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		7,915			8,083
Stock options compensation		5,692			936
Provision for uncollectible accounts receivable		(8,176	)		5,120
Net (increase) decrease in
Accounts receivable		12,579			(8,815	)
Prepaid expenses and other current assets		(3,304	)		(2,381	)
Net increase (decrease) in
Accounts payable		(12,397	)		5,586
Accrued and other liabilities		32,179			61,886
Deferred revenue		50,521			8,147
Net cash provided by operating activities		38,451			12,864
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(39,086	)		(2,448	)
Net cash used in investing activities		(39,086	)		(2,448	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Principal payments on borrowings under notes payable – related party		(6,557	)		(6,195	)
Net cash used in financing activities		(6,557	)		(6,195	)
NET INCREASE (DECREASE) IN CASH		(7,192)			4,221
Cash at beginning of period		30,072			10,847
Cash at end of period	$	22,880		$	15,068
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	4,095		$	5,441
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fixed assets purchased on accounts	$	44,710		$	-
Amortization of increasing dividend rate preferred stock discount	$	15,131		$	-

See accompanying notes to 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

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, 2013.

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, 2014.  Certain reclassifications have been made to prior period balances to conform with the presentation for the current period.

2. GOING CONCERN AND MANAGEMENT’S PLANS

At March 31, 2014, current liabilities exceed current assets by $952,694. 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 web hosting, co-location, traditional telephone services and advanced voice and data solutions. Execution of the Company’s business plan will require significant capital to fund capital expenditures, working capital needs and debt service. Current cash balances will not be sufficient to fund the Company’s current business plan beyond the next few months. As a consequence, the Company is currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. The Company continues to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund the Company’s liquidity. There can be no assurance that the Company will be able to obtain additional capital on satisfactory terms, or at all, or on terms that will not dilute the shareholders’ interests.

3. CONVERTIBLE NOTES PAYABLE RELATED PARTY

At December 31, 2013 the Company had a secured convertible promissory note from a shareholder with a balance of $225,189.  During the three months ended March 31, 2014, the Company made principal and interest payments totaling $6,557.  The secured convertible promissory note had a balance of $218,632 at March 31, 2014.  

At December 31, 2013 the Company had a secured convertible promissory from a shareholder with a balance of $50,000.  During the three months ended March 31, 2014, the Company made interest payments totaling $750.  The secured convertible promissory note had a balance of $50,000 at March 31, 2014.

4. STOCK BASED COMPENSATION

The following table summarizes the Company’s employee stock option activity for the three months ended March 31, 2014:

Schedule of Employee Stock Option Activity
					Weighted
			Weighted		average	Aggregate
			average		remaining	intrinsic
	Options		exercise price		contractual life (yrs)	value
Options outstanding, December 31, 2013	3,202,882		$.030		9.10
Options exercisable, December 31, 2013	1,755,882		$.027		8.75	$ 42,261
Options granted during the period	3,000		.050
Options outstanding, March 31, 2014		3,205,882		$.030	8.85
Options exercisable, March 31, 2014		1,756,882		$.027	8.50		$ 15,838

During the three months ended March 31, 2014, 3,000 nonqualified employee stock options were granted with an exercise price of $.05.  The stock options shall vest one-third each year starting from February 11, 2015, and shall expire on February 11, 2024.  

Stock-based compensation expense for the three months ended March 31, 2014 was $5,692.  

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, 2014:

Risk-free interest rate 1.7%

Expected option life 5 years

Expected volatility 234%

Expected dividend yield 0%

5. SERIES A CONVERTIBLE PREFERRED STOCK

On March 31, 2014 the Company’s board of directors made the determination that it was in the best interest of the Company and its stockholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2013.  As a result, pursuant to the Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock, each share of the Series A Convertible Preferred Stock shall hereafter be entitled to two votes upon any matter that the holders of the Company’s common stock are entitled to vote.

The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2014 was $15,131.

6. SUBSEQUENT EVENTS

In April 2014, the Company granted 1,500 employee stock options to one employee with an exercise price of $.03. The stock options shall vest one-third each year starting from April 2, 2015, and shall expire on April 2, 2024.

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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 2013 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, 2013 (collectively referred to as the “Disclosure Documents”). Certain forward-looking statements contained in this Report and in the Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. Our ability to achieve these results is subject to certain risks and uncertainties, including those inherent risks and uncertainties generally in the Internet service provider and competitive local exchange carrier industries, the impact of competition and pricing, changing market conditions, and other risks. Any forward-looking statements contained in this Report represent our judgment as of the date of this Report. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements. References to us in this report include our subsidiaries: FullNet, Inc. (“FullNet”), FullTel, Inc. (“FullTel”), FullWeb, Inc. (“FullWeb”) and CallMultiplier, Inc.

Overview

We are an integrated communications provider offering integrated communications and Internet connectivity to individuals, businesses, organizations, educational institutions and government agencies. Through our subsidiaries, we provide high quality, reliable and scalable Internet access, web hosting, equipment co-location, traditional telephone services as well as advanced voice and data solutions.

Our principal executive offices are located at 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is (405) 236-8200. We also maintain Internet sites on the World Wide Web (“WWW”) at  www.fullnet.net,  www.fulltel.com and www.callmultiplier.com. Information contained on our Web sites is not and should not be deemed to be a part of this Report.

Company History

We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation, to bring dial-up Internet access and education to rural locations in Oklahoma that did not have dial-up Internet access. We changed our name to FullNet Communications, Inc. in December 1995. Today we are a total solutions provider to individuals and companies seeking a “one-stop shop” in Oklahoma.

Our current business strategy is to become a successful integrated communications provider in Oklahoma. We expect to grow through the acquisition of additional customers for our carrier-neutral co-location space, traditional telephone services and advanced voice and data solutions.

We market our carrier neutral co-location solutions in our network operations center to other competitive local exchange carriers, Internet service providers and web-hosting companies. Our co-location facility is carrier neutral, allowing customers to choose among competitive offerings rather than being restricted to one carrier. Our facility is Telco-grade and provides customers a high level of operative reliability and security. We offer flexible space arrangements for customers and 24-hour onsite support with both battery and generator backup.

   Through FullTel, our wholly owned subsidiary, we are a fully licensed competitive local exchange carrier or CLEC in Oklahoma. FullTel activates local access telephone numbers for the cities in which we market, sell and operate our retail FullNet Internet service provider brand, wholesale dial-up Internet service; our business-to-business network design, connectivity, domain and Web hosting businesses; and traditional telephone services as well as advanced voice and data solutions. At March 31, 2014 FullTel provided us with local telephone access in approximately 232 cities.

Our common stock trades on the OTC QB marketplace under the symbol FULO. While our common stock trades on the OTC QB marketplace, 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 sets forth certain statement of operations data as a percentage of revenues for the three months ended March 31, 2014 and 2013:

	Three Months Ended
	March 31, 2014						March 31, 2013
	Amount			Percent			Amount			Percent
Revenues:
Access service revenues	$	23,789			5.6	%	$	34,406			8.8	%
Co-location and other revenues		399,988			94.4			358,539			91.2
Total revenues		423,777			100.0			392,945			100.0
Cost of access service revenues		27,214			6.4			28,679			7.3
Cost of co-location and other revenues		85,417			20.1			90,900			23.1
Selling, general and administrative expenses		345,694			81.6			325,594			82.9
Depreciation and amortization		7,915			1.9			8,083			2.0
Total operating costs and expenses		466,240			110.0			453,256			115.3
Loss from operations		(42,463	)		(10.0	)		(60,311	)		(15.3	)
Interest expense		(4,095	)		(1.0	)		(5,387	)		(1.4	)
Net loss	$	(46,558	)		(11.0	)%	$	(65,698	)		(16.7	)%
Preferred stock dividends		(15,131	)		(3.6	)		-			-
Net loss available to common stockholders	$	(61,689	)		(14.6	)%	$	(65,698	)		(16.7	)%

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenues

Access service revenues decreased $10,617 or 30.9% to $23,789 for the 2014 1st Quarter from $34,406 for the same period in 2013 primarily due to a decline in the number of customers.

   Co-location and other revenues increased $41,449 or 11.6% to $399,988 for the 2014 1st Quarter from $358,539 for the same period in 2013.  This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

Operating Costs and Expenses

Cost of access service revenues decreased $1,465 or 5.1% to $27,214 for the 2014 1st Quarter from $28,679 for the same period in 2013. This decrease was primarily due to reductions in recurring costs associated with our network. Cost of access service revenues as a percentage of access service revenues increased to 114.4% during the 2014 1st Quarter, compared to 83.4% during the same period in 2013.

Cost of co-location and other revenues decreased $5,483 or 6.0% to $85,417 for the 2014 1st Quarter from $90,900 for the same period in 2013 primarily related to reductions in costs of servicing our traditional phone service customers due to a reduction in the number of customers utilizing that service.  Cost of co-location and other revenues as a percentage of co-location and other revenues decreased to 21.4% during the 2014 1st Quarter, compared to 25.4% during the same period in 2013.

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Selling, general and administrative expenses increased $20,100 or 6.2% to $345,694 for the 2014 1^st Quarter compared to $325,594 for the same period in 2013.   This increase was primarily related to increases in employee costs, advertising, rent and travel and entertainment expenses of $34,086, $9,259, $7,933 and $2,834, respectively.  These increases were offset by decreases in professional services, agent commissions, bad debt and property tax expenses of $18,824, $6,378, $5,050 and $4,441, respectively.  Selling, general and administrative expenses as a percentage of total revenues decreased to 81.6% during the 2014 1st Quarter from 82.9% during the same period in 2013.

Depreciation and amortization expense remained relatively the same at $7,915 for the 2014 1st Quarter compared to $8,083 for the same period in 2013.

Interest Expense

Interest expense decreased $1,292 or 24.0% to $4,095 for the 2014 1^st Quarter compared to $5,387 for the same period in 2013 primarily related to a decrease in notes payable.  

Liquidity and Capital Resources

As of March 31, 2014, we had $22,880 in cash and $1,000,743 in current liabilities, including $352,650 of deferred revenues that will not require settlement in cash.

At March 31, 2014 and December 31, 2013, we had working capital deficits of $951,694 and  $828,689, 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, 2014, of the $159,390 we owed to our trade creditors, $135,854 was past due. We have no formal agreements regarding payment of these amounts.

In addition, during the three months ended March 31, 2014, we had two customers that each comprised approximately 9% and 8% of total revenues, respectively.  During the three months ended March 31, 2013, these two customer each comprised approximately 10% and 8% of total revenues, respectively.

Cash flow for the periods ending March 31, 2014 and 2013 consist of the following.

	For the Periods Ended March 31,
	2014			2013
Net cash flows provided by operations	$	38,451		$	12,864
Net cash flows used in investing activities		(39,086	)		(2,448	)
Net cash flows used in financing activities		(6,557	)		(6,195	)

Cash used for the purchase of equipment was $39,086 and $2,448, respectively for the three months ended March 31, 2014 and 2013.  

Cash used for principal payments on notes payable was $6,557 and $6,195, respectively for the three months ended March 31, 2014 and 2013.  

The planned expansion of our business will require significant capital to fund capital expenditures, working capital needs, and debt service. Our principal capital expenditure requirements will include:

• mergers and acquisitions and

• further development of operations support systems and other automated back office systems

Because our cost of developing new networks and services, funding other strategic initiatives, and operating our business depend on a variety of factors (including, among other things, the number of customers and the service for which they subscribe, the nature and penetration of services that may be offered by us, regulatory changes, and actions taken by competitors in response to our strategic initiatives), it is almost certain that actual costs and revenues will materially vary from expected amounts

11

and these variations are likely to increase our future capital requirements. Our current cash balances will not be sufficient to fund our current business plan beyond a few months. As a consequence, we are currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. We continue to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund our liquidity needs. There is no assurance that we will be able to obtain additional capital on satisfactory terms or at all or on terms that will not dilute our shareholders’ interests.

Until we obtain sufficient additional capital, the further development of our network will be delayed or we will be required to take other actions. Our inability to obtain additional capital resources has had and will continue to have a material adverse effect on our business, operating results and financial condition.

Our ability to fund the capital expenditures and other costs contemplated by our business plan and to make scheduled payments with respect to borrowings will depend upon, among other things, our ability to seek and obtain additional financing in the near term. Capital will be needed in order to implement our business plan, deploy our network, expand our operations and obtain and retain a significant number of customers in our target markets. Each of these factors is, to a large extent, subject to economic, financial, competitive, political, regulatory, and other factors, many of which are beyond our control.

There is no assurance that we will be successful in developing and maintaining a level of cash flows from operations sufficient to permit payment of our outstanding indebtedness. If we are unable to generate sufficient cash flows from operations to service our indebtedness, we will be required to modify or abandon our growth plans, limit our capital expenditures, restructure or refinance our indebtedness or seek additional capital or liquidate our assets. There is no assurance that (i) any of these strategies could be effectuated on satisfactory terms, if at all, or on a timely basis or (ii) any of these strategies will yield sufficient proceeds to service our debt or otherwise adequately fund operations.

On March 31, 2014 our board of directors made the determination that it was in the best interest of the Company and its stockholders to conserve our working capital at this time and not make the annual dividend payment for the year ending December 31, 2013.  As a result, pursuant to the Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock, each share of the Series A Convertible Preferred Stock shall hereafter be entitled to two votes upon any matter that the holders of our common stock are entitled to vote.

Financing Activities

We have a secured convertible promissory note from a shareholder which requires monthly installments of $3,301 including principal and interest and is secured by all of our tangible and intangible assets.  At March 31, 2014, the outstanding principal and accrued interest of the secured convertible promissory note was $218,632.  

We have a secured convertible promissory note from a shareholder which requires monthly installments of interest only through May 31, 2014 then monthly installments of $600 including principal and interest.  This note is secured by certain equipment.  At March 31, 2014, the outstanding principal and accrued interest of the secured convertible promissory note was $50,000.

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 our 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 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

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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 co-location revenues, traditional telephone services and advanced voice and data services are recognized on a monthly basis over the life of the contract as services are provided. Revenue that is received in advance of the services provided is deferred until the services are provided by us. Revenue related to set up charges is also deferred and amortized over the life of the contract. We classify certain taxes and fees billed to customers and remitted to governmental authorities on a net basis in revenue.

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 and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of March 31, 2014 pursuant to Rule 13a-15(b) under the Exchange Act.  Based upon that evaluation, our CEO and 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 and CFO, as appropriate, to allow timely decisions regarding required disclosure, due to the material weaknesses identified below.

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.

13

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

As a provider of telecommunications, we are affected by regulatory proceedings in the ordinary course of our business at the state and federal levels. These include proceedings before both the Federal Communications Commission and the Oklahoma Corporation Commission (“OCC”). In addition, in our operations we rely on obtaining many of our underlying telecommunications services and/or facilities from incumbent local exchange carriers or other carriers pursuant to interconnection or other agreements or arrangements. In January 2007, we concluded a regulatory proceeding pursuant to the Federal Telecommunications Act of 1996 before the OCC relating to the terms of our interconnection agreement with Southwestern Bell Telephone, L.P. d/b/a AT&T, which succeeds a prior interconnection agreement. The OCC approved this agreement in May 2007. This agreement may be affected by regulatory proceedings at the federal and state levels, with possible adverse impacts on us. We are unable to accurately predict the outcomes of such regulatory proceedings at this time, but an unfavorable outcome could have a material adverse effect on our business, financial condition or results of operations.

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

During the three months ended March 31, 2014, we issued 3,000 nonqualified employee stock options with an exercise price of $.05.  The stock options shall vest one-third each year starting from February 11, 2015, and shall expire on February 11, 2024.  We do not have a written employee stock option plan.  In connection with the issuance of these common stock options, no underwriting discounts or commissions were paid or will be paid. The common stock options were issued without registration under the Securities Act of 1933, as amended, in reliance on the registration exemption afforded by Regulation D and more specifically Rule 506 of Regulation D.

Item 5. Other Information

During the three months ended March 31, 2014 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
	3.1	Certificate of Incorporation, as amended (filed as Exhibit 2.1 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).		#
	3.2	Bylaws (filed as Exhibit 2.2 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference)		#
	4.1	Specimen Certificate of Registrant’s Common Stock (filed as Exhibit 4.1 to the Company’s Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference).		#
	4.2		Certificate of Correction to the Amended Certificate of Incorporation and the Ninth Section of the Certificate of Incorporation (filed as Exhibit 2.1 to Registrant’s Registration Statement on form 10-SB, file number 000-27031 and incorporated by reference).		#
	4.3		Certificate of Correction to Articles II and V of Registrant’s Bylaws (filed as Exhibit 2.1 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).		#
	4.4		Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.5		Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.2 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.6		Form of Promissory Note for Florida Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.7		Form of Warrant Certificate for Georgia Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.4 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.8		Form of Promissory Note for Georgia Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.5 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.9		Form of Warrant Certificate for Illinois Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.6 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.10		Form of Promissory Note for Illinois Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.7 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.11		Form of Warrant Agreement for Interim Financing in the amount of $500,000 (filed as Exhibit 4.8 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.12		Form of Warrant Certificate for Interim Financing in the amount of $500,000 (filed as Exhibit 4.9 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.13		Form of Promissory Note for Interim Financing in the amount of $500,000 (filed as Exhibit 4.10 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).		#
	4.14		Form of Convertible Promissory Note for September 29, 2000, private placement (filed as Exhibit 4.13 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated herein by reference).		#
	4.15		Form of Warrant Agreement for September 29, 2000, private placement (filed as Exhibit 4.13 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated herein by reference).		#
	4.16		Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to Registrant’s Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference)		#
	4.17		Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to Registrant’s Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference)		#
	10.1		Financial Advisory Services Agreement between the Company and National Securities Corporation, dated September 17, 1999 (filed as Exhibit 10.1 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference).			#
	10.2		Lease Agreement between the Company and BOK Plaza Associates, LLC, dated December 2, 1999 (filed as Exhibit 10.2 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference).			#
	10.3		Interconnection agreement between Registrant and Southwestern Bell dated March 19, 1999 (filed as Exhibit 6.1 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).			#
	10.4		Stock Purchase Agreement between the Company and Animus Communications, Inc. (filed as Exhibit 6.2 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).			#
	10.5		Registrar Accreditation Agreement effective February 8, 2000, by and between Internet Corporation for Assigned Names and Numbers and FullWeb, Inc. d/b/a FullNic f/k/a Animus Communications, Inc. (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference).			#
	10.6		Master License Agreement For KMC Telecom V, Inc., dated June 20, 2000, by and between FullNet Communications, Inc. and KMC Telecom V, Inc. (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference).			#
	10.7		Domain Registrar Project Completion Agreement, dated May 10, 2000, by and between FullNet Communications, Inc., FullWeb, Inc. d/b/a FullNic and Think Capital (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference).			#
	10.8		Amendment to Financial Advisory Services Agreement between Registrant and National Securities Corporation, dated April 21, 2000 (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference).			#
	10.9		Asset Purchase Agreement dated June 2, 2000, by and between FullNet of Nowata and FullNet Communications, Inc. (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on June 20, 2000 and incorporated herein by reference).			#
	10.10		Asset Purchase Agreement dated February 4, 2000, by and between FullNet of Bartlesville and FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrant’s Form 8-K filed on February 18, 2000 and incorporated herein by reference).			#
	10.11		Agreement and Plan of Merger Among FullNet Communications, Inc., FullNet, Inc. and Harvest Communications, Inc. dated February 29, 2000 (filed as Exhibit 2.1 to Registrant’s Form 8-K filed on March 10, 2000 and incorporated herein by reference).			#
	10.12		Asset Purchase Agreement dated January 25, 2000, by and between FullNet of Tahlequah, and FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrant’s Form 8-K filed on February 9, 2000 and incorporated herein by reference).			#
	10.13		Promissory Note dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.13 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.14		Warrant Agreement dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.14 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.15		Warrant Certificate dated August 2, 2000 issued to Timothy J. Kilkenny (filed as Exhibit 10.15 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.16		Stock Option Agreement dated December 8, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.16 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.17		Warrant Agreement dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.17 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.18		Warrant Agreement dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit 10.18 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.19		Stock Option Agreement dated February 29, 2000, issued to Wallace L Walcher (filed as Exhibit 10.19 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.20		Stock Option Agreement dated February 17, 1999, issued to Timothy J. Kilkenny (filed as Exhibit 3.1 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).			#
	10.21		Stock Option Agreement dated October 19, 1999, issued to Wesdon C. Peacock (filed as Exhibit 10.21 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.22		Stock Option Agreement dated April 14, 2000, issued to Jason C. Ayers (filed as Exhibit 10.22 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.23		Stock Option Agreement dated May 1, 2000, issued to B. Don Turner (filed as Exhibit 10.23 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.24		Form of Stock Option Agreement dated December 8, 2000, issued to Jason C. Ayers, Wesdon C. Peacock, B. Don Turner and Wallace L. Walcher (filed as Exhibit 10.24 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.25		Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.25 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.26		Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.26 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.27		Warrant Certificate Dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit 10.27 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.28		Stock Option Agreement dated October 13, 2000, issued to Roger P. Baresel (filed as Exhibit 10.28 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.29		Stock Option Agreement dated October 12, 1999, issued to Travis Lane (filed as Exhibit 10.29 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.30		Promissory Note dated January 5, 2001, issued to Generation Capital Associates (filed as Exhibit 10.30 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.31		Placement Agency Agreement dated November 8, 2000 between FullNet Communications, Inc. and National Securities Corporation (filed as Exhibit 10.31 to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000).			#
	10.32		Promissory Note dated January 25, 2000, issued to Fullnet of Tahlequah, Inc.			#
	10.33		Promissory Note dated February 7, 2000, issued to David Looper			#
	10.34		Promissory Note dated February 29, 2000, issued to Wallace L. Walcher			#
	10.35		Promissory Note dated June 2, 2000, issued to Lary Smith			#
	10.36		Promissory Note dated June 15, 2001, issued to higganbotham.com L.L.C.			#
	10.37		Promissory Note dated November 19, 2001, issued to Northeast Rural Services			#
	10.38		Promissory Note dated November 19, 2001, issued to Northeast Rural Services			#
	10.39		Form of Convertible Promissory Note dated September 6, 2002			#
	10.40		Employment Agreement with Timothy J. Kilkenny dated July 31, 2002			#
	10.41		Employment Agreement with Roger P. Baresel dated July 31, 2002			#
	10.42		Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 30, 2003			#
	10.43		Form 8-K dated January 30, 2003 reporting the change in certifying accountant			#
	10.44		Form 8-K dated September 20, 2005 reporting the change in certifying accountant			#
	10.45		Secured Promissory Note and Security Agreement dated December 30, 2009, issued to High Capital Funding, LLC			#
	10.46		Employment Agreement with Jason Ayers dated January 1, 2011			#
	10.47		Employment Agreement with Timothy J. Kilkenny dated July 6, 2011			#
	10.48		Employment Agreement with Roger P. Baresel dated July 6, 2011			#
	10.49		Employment Agreement with Jason Ayers dated July 6, 2011			#
	10.50		Form of Exchange Offer Acceptance Agreement			#
	10.51		Secured Exchange Promissory Note and Security Agreement dated May 31, 2013, issued to High Capital Funding, LLC			#
	10.52		Secured Exchange Promissory Note and Security Agreement dated May 31, 2013, issued to High Capital Funding, LLC			#
	22.1		Subsidiaries of the Registrant			#
	31.1		Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny			*
	31.2		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 Timothy J. Kilkenny			*
	32.2		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.
*	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.

Table of Contents

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: May 15, 2014	By:	/s/ TIMOTHY J. KILKENNY
		Timothy J. Kilkenny
		Chief Executive Officer
Date: May 15, 2014	By:	/s/ ROGER P. BARESEL
		Roger P. Baresel
		President and Chief Financial and Accounting Officer

21

EXHIBIT 31.1

CERTIFICATIONS

I, Timothy J. Kilkenny, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2014 of FullNet Communications, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Timothy J. Kilkenny,

  Chief Executive Officer

Table of Contents

EXHIBIT 31.2

CERTIFICATIONS

I, Roger P. Baresel, certify that:.

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2014 of FullNet Communications, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Roger P. Baresel,

  President and Chief Financial Officer

23

Exhibit 32.1

CERTIFICATION PURSUANT TO

 18 U.S.C. SECTION 1350,

 AS ADOPTED PURSUANT TO

 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of FullNet Communications, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2014 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 15, 2014	/s/ Timothy J. Kilkenny,
	Chief Executive Officer

Table of Contents

Exhibit 32.2

CERTIFICATION PURSUANT TO

 18 U.S.C. SECTION 1350,

 AS ADOPTED PURSUANT TO

 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. §1350 (as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002), I, the undersigned President and Chief Financial and Accounting Officer of FullNet Communications, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2014 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 15, 2014	/s/ Roger P. Baresel,
	President and Chief Financial and
	Accounting Officer

 _____________________________________

25

XML

Convertible Notes Payable Related Party

3 Months Ended

Mar. 31, 2014

Notes

Convertible Notes Payable Related Party

3. CONVERTIBLE NOTES PAYABLE RELATED PARTY

At December 31, 2013 the Company had a secured convertible promissory note from a shareholder with a balance of $225,189.  During the three months ended March 31, 2014, the Company made principal and interest payments totaling $6,557.  The secured convertible promissory note had a balance of $218,632 at March 31, 2014.  

At December 31, 2013 the Company had a secured convertible promissory from a shareholder with a balance of $50,000.  During the three months ended March 31, 2014, the Company made interest payments totaling $750.  The secured convertible promissory note had a balance of $50,000 at March 31, 2014.

XML

Going Concern And Management's Plans

3 Months Ended

Mar. 31, 2014

Notes

Going Concern And Management's Plans

2. GOING CONCERN AND MANAGEMENT’S PLANS

At March 31, 2014, current liabilities exceed current assets by $952,694. 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 web hosting, co-location, traditional telephone services and advanced voice and data solutions. Execution of the Company’s business plan will require significant capital to fund capital expenditures, working capital needs and debt service. Current cash balances will not be sufficient to fund the Company’s current business plan beyond the next few months. As a consequence, the Company is currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. The Company continues to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund the Company’s liquidity. There can be no assurance that the Company will be able to obtain additional capital on satisfactory terms, or at all, or on terms that will not dilute the shareholders’ interests.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2014		Dec. 31, 2013
ASSETS
Cash	$ 22,880		$ 30,072
Accounts receivable, net	13,137		17,540
Prepaid expenses and other current assets	12,032		8,728
Total current assets	48,049		56,340
PROPERTY AND EQUIPMENT, net	121,993		44,635
OTHER ASSETS AND INTANGIBLE ASSETS	9,471		10,948
TOTAL ASSETS	179,513		111,923
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable	159,390		127,077
Accrued and other liabilities	442,942		410,763
Convertible notes payable, related party - current portion	45,761		45,060
Deferred revenue	352,650		302,129
Total current liabilities	1,000,743		885,029
CONVERTIBLE NOTES PAYABLE, related party - less current portion	222,871		230,129
Total liabilities	1,223,614		1,115,158
STOCKHOLDERS' DEFICIT
Preferred stock	445,513	[1]	430,382	[1]
Common stock	91	[2]	91	[2]
Additional paid-in capital	8,707,364		8,716,803
Accumulated deficit	(10,197,069)		(10,150,511)
Total stockholders' deficit	(1,044,101)		(1,003,235)
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIT	$ 179,513		$ 111,923

[1] $.001 par value; authorized, 10,000,000 shares; Series A convertible issued and outstanding, 987,102 shares

[2] $.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 9,118,161 shares

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash Flow Statement
Net loss	$ (46,558)	$ (65,698)
Depreciation and amortization	7,915	8,083
Stock options compensation	5,692	936
Provision for uncollectible accounts receivable	(8,176)	5,120
Net (increase) decrease in Accounts receivable	12,579	(8,815)
Net (increase) decrease in Prepaid expenses and other current assets	(3,304)	(2,381)
Net increase (decrease) in Accounts payable	(12,397)	5,586
Net increase (decrease) in Accrued and other liabilities	32,179	61,886
Net increase (decrease) in Deferred revenue	50,521	8,147
Net cash provided by operating activities	38,451	12,864
Purchases of property and equipment	(39,086)	(2,448)
Net cash used in investing activities	(39,086)	(2,448)
Principal payments on borrowings under notes payable	(6,557)	(6,195)
Net cash used in financing activities	(6,557)	(6,195)
Net increase (decrease) in cash	(7,192)	4,221
Cash at beginning of period	30,072	10,847
Cash at end of period	22,880	15,068
Cash paid for interest	$ 4,095	$ 5,441
Fixed assets purchased on accounts	44,710
Amortization of increasing dividend rate preferred stock discount	15,131

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Unaudited Interim Financial Statements

3 Months Ended

Mar. 31, 2014

Notes

Unaudited Interim Financial Statements

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

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, 2013.

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, 2014.  Certain reclassifications have been made to prior period balances to conform with the presentation for the current period.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Statement of Financial Position Parenthetical
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock Series A convertible, shares outstanding	987,102	987,102
Common stock, par value	$ 0.00001	$ 0.00001
Common stock, shares authorized	40,000,000	40,000,000
Common stock, shares outstanding	9,118,161	9,118,161

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Convertible Notes Payable Related Party (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Details
Convertible Notes Payable	$ 218,632	$ 225,189
Repayments of Convertible Debt	6,557
Convertible Debt	$ 50,000	$ 50,000

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014
Document and Entity Information:
Entity Registrant Name	FULLNET COMMUNICATIONS INC
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Entity Central Index Key	0001092570
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding	9,118,161
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	No
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

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Stock Based Compensation: Schedule of Share-based Compensation, Stock Options, Activity (Details) (USD $)	1 Months Ended	3 Months Ended
	Apr. 30, 2014	Mar. 31, 2014	Dec. 31, 2013
Details
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number		3,205,882	3,202,882
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price		$ 0.030	$ 0.030
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term		8.85	8.50
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number		1,756,882	1,755,882
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price		$ 0.027	$ 0.027
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	1,500	3,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price	$ 0.03	$ 0.050
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Intrinsic Value		$ 15,838

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Statement
Access service revenues	$ 23,789	$ 34,406
Co-location and other revenues	399,988	358,539
Total revenues	423,777	392,945
Cost of access service revenues	27,214	28,679
Cost of co-location and other revenues	85,417	90,900
Selling, general and administrative expenses	345,694	325,594
Depreciation and amortization	7,915	8,083
Total operating costs and expenses	466,240	453,256
LOSS FROM OPERATIONS	(42,463)	(60,311)
INTEREST EXPENSE	(4,095)	(5,387)
NET LOSS	(46,558)	(65,698)
Preferred stock dividends	(15,131)	0
Net loss available to common stockholders	$ (61,689)	$ (65,698)
Net loss per common share -basic and diluted	$ (0.01)	$ (0.01)
Weighted average shares outstanding - basic and diluted	9,118,161	9,118,161

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Subsequent Events

3 Months Ended

Mar. 31, 2014

Notes

Subsequent Events

6. SUBSEQUENT EVENTS

In April 2014, the Company granted 1,500 employee stock options to one employee with an exercise price of $.03. The stock options shall vest one-third each year starting from April 2, 2015, and shall expire on April 2, 2024.

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Series A Convertible Preferred Stock

3 Months Ended

Mar. 31, 2014

Notes

Series A Convertible Preferred Stock

5. SERIES A CONVERTIBLE PREFERRED STOCK

On March 31, 2014 the Company’s board of directors made the determination that it was in the best interest of the Company and its stockholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2013.  As a result, pursuant to the Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock, each share of the Series A Convertible Preferred Stock shall hereafter be entitled to two votes upon any matter that the holders of the Company’s common stock are entitled to vote.

The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2014 was $15,131.

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Stock Based Compensation (Details) (USD $)	1 Months Ended	3 Months Ended
	Apr. 30, 2014	Mar. 31, 2014
Details
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	The stock options shall vest one-third each year starting from April 2, 2015	The stock options shall vest one-third each year starting from February 11, 2015
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Date	April 2, 2024	February 11, 2024
Allocated Share-based Compensation Expense		$ 5,692

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Stock Based Compensation: Share-based Compensation, Option and Incentive Plans Policy (Policies)

3 Months Ended

Mar. 31, 2014

Policies

Share-based Compensation, Option and Incentive Plans Policy

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, 2014:

Risk-free interest rate 1.7%

Expected option life 5 years

Expected volatility 234%

Expected dividend yield 0%

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Unaudited Interim Financial Statements: Basis of Accounting, Policy (Policies)

3 Months Ended

Mar. 31, 2014

Policies

Basis of Accounting, Policy

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, 2013.

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Going Concern And Management's Plans: Liquidity Disclosure (Policies)

3 Months Ended

Mar. 31, 2014

Policies

Liquidity Disclosure

At March 31, 2014, current liabilities exceed current assets by $952,694. 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 web hosting, co-location, traditional telephone services and advanced voice and data solutions. Execution of the Company’s business plan will require significant capital to fund capital expenditures, working capital needs and debt service. Current cash balances will not be sufficient to fund the Company’s current business plan beyond the next few months. As a consequence, the Company is currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. The Company continues to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund the Company’s liquidity. There can be no assurance that the Company will be able to obtain additional capital on satisfactory terms, or at all, or on terms that will not dilute the shareholders’ interests.

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Stock Based Compensation: Schedule of Share-based Compensation, Stock Options, Activity (Tables)

3 Months Ended

Mar. 31, 2014

Tables/Schedules

Schedule of Share-based Compensation, Stock Options, Activity

Schedule of Employee Stock Option Activity
					Weighted
			Weighted		average	Aggregate
			average		remaining	intrinsic
	Options		exercise price		contractual life (yrs)	value
Options outstanding, December 31, 2013	3,202,882		$.030		9.10
Options exercisable, December 31, 2013	1,755,882		$.027		8.75	$ 42,261
Options granted during the period	3,000		.050
Options outstanding, March 31, 2014		3,205,882		$.030	8.85
Options exercisable, March 31, 2014		1,756,882		$.027	8.50		$ 15,838

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Subsequent Events (Details) (USD $)	1 Months Ended	3 Months Ended
	Apr. 30, 2014	Mar. 31, 2014
Details
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	1,500	3,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price	$ 0.03	$ 0.050
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	The stock options shall vest one-third each year starting from April 2, 2015	The stock options shall vest one-third each year starting from February 11, 2015
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Date	April 2, 2024	February 11, 2024

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (USD $)	Common Stock	Preferred Stock	Additional Paid In Capital	Accumulated Deficit	Total
Stockholders' deficit at Dec. 31, 2013	$ 91	$ 430,382	$ 8,716,803	$ (10,150,511)	$ (1,003,235)
Shares outstanding at Dec. 31, 2013	9,118,161	987,102			10,105,263
Stock options compensation			5,692		5,692
Amortization of increasing dividend rate preferred stock discount	0	15,131	(15,131)	0
Net loss				(46,558)	(46,558)
Stockholders' deficit at Mar. 31, 2014	$ 91	$ 445,513	$ 8,707,364	$ (10,197,069)	$ (1,044,101)
Shares outstanding at Mar. 31, 2014	9,118,161	987,102			10,105,263

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Stock Based Compensation

3 Months Ended

Mar. 31, 2014

Notes

Stock Based Compensation

4. STOCK BASED COMPENSATION

The following table summarizes the Company’s employee stock option activity for the three months ended March 31, 2014:

Schedule of Employee Stock Option Activity
					Weighted
			Weighted		average	Aggregate
			average		remaining	intrinsic
	Options		exercise price		contractual life (yrs)	value
Options outstanding, December 31, 2013	3,202,882		$.030		9.10
Options exercisable, December 31, 2013	1,755,882		$.027		8.75	$ 42,261
Options granted during the period	3,000		.050
Options outstanding, March 31, 2014		3,205,882		$.030	8.85
Options exercisable, March 31, 2014		1,756,882		$.027	8.50		$ 15,838

During the three months ended March 31, 2014, 3,000 nonqualified employee stock options were granted with an exercise price of $.05.  The stock options shall vest one-third each year starting from February 11, 2015, and shall expire on February 11, 2024.  

Stock-based compensation expense for the three months ended March 31, 2014 was $5,692. 

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, 2014:

Risk-free interest rate 1.7%

Expected option life 5 years

Expected volatility 234%

Expected dividend yield 0%

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Stock Based Compensation: Share-based Compensation, Option and Incentive Plans Policy (Details)	3 Months Ended
	Mar. 31, 2014
Details
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate	1.70%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term	5
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate	234.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate	0.00%