10-Q

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

2

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.

3

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.

4

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	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	490,522
Balance at September 30, 2020 – (unaudited)	15,097,749	$151	568,257	$351,708	$9,046,502	$(9,330,146)	$68,215

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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	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	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

6

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.

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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 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.

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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.

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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

10

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.

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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.

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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 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

13

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

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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.

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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

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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.

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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.

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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.		1
	10.23		IPv4 Numbers Purchase Agreement executed February 4, 2019, by and between FullNet Communications, Inc. and Paycom Payroll, LLC.		2
	10.24		Lease Agreements between the Company and BOKP Tower, LLC, dated November 22, 2019		3
	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	**
1		Incorporated by reference to Exhibit 4.18 to the Form 8-K filed June 7, 2013
2		Incorporated by reference to Exhibit 10.23 to the Form 10-K filed April 1, 2019
3		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.

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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

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Roger P. Baresel, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2020, 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: November 16, 2020			/s/ Roger P. Baresel,
			Chief Executive Officer and Chief Financial Officer

EX-32.1

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 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 September 30, 2020 (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: November 16, 2020	/s/ Roger P. Baresel,
	Chief Executive Officer and Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2020	Nov. 16, 2020
Details
Registrant CIK	0001092570
Fiscal Year End	--12-31
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2020
Document Transition Report	false
Entity File Number	000-27031
Entity Registrant Name	FULLNET COMMUNICATIONS INC.
Entity Incorporation, State or Country Code	OK
Entity Tax Identification Number	73-1473361
Entity Address, Address Line One	201 Robert S. Kerr Avenue, Suite 210
Entity Address, City or Town	Oklahoma City
Entity Address, State or Province	OK
Entity Address, Postal Zip Code	73102
City Area Code	405
Local Phone Number	236-8200
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		15,097,749
Amendment Flag	false
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q3

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (June 30, 2020 Unaudited) - USD ($)	Sep. 30, 2020	Dec. 31, 2019
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
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, Value	351,708	554,516
Common Stock, Value	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

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (June 30, 2020 Unaudited) - Parenthetical - $ / shares	Sep. 30, 2020	Dec. 31, 2019
Details
Preferred Stock, Par or Stated Value Per Share	$ 0.001	$ 0.001
Preferred Stock, Shares Authorized	10,000,000	10,000,000
Preferred Stock, Shares Issued	568,257	875,054
Preferred Stock, Shares Outstanding	568,257	875,054
Common Stock, Par or Stated Value Per Share	$ 0.00001	$ 0.00001
Common Stock, Shares Authorized	40,000,000	40,000,000
Common Stock, Shares, Issued	15,097,749	14,539,675
Common Stock, Shares, Outstanding	15,097,749	14,539,675

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 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	0	0	0	(277)
Net Income (Loss) Attributable to Parent	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
Earnings Per Share
Basic income per share	$ 0.02	$ 0.00	$ 0.03	$ 0.01
Diluted income per share	$ 0.02	$ 0.00	$ 0.02	$ 0.01
Weighted Average Number of Shares Outstanding, Basic	15,034,706	14,539,675	14,707,561	14,187,084
Weighted Average Number of Shares Outstanding, Diluted	18,876,162	16,192,390	17,957,425	15,857,856

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) - USD ($)	Common Stock	Preferred Stock	Additional Paid In Capital	Accumulated Deficit	Total
Equity Balance, Starting at Dec. 31, 2018	$ 136	$ 638,849	$ 8,765,712	$ (10,137,958)	$ (733,261)
Shares Outstanding, Starting at Dec. 31, 2018	13,621,009	987,102
Shares Granted, Value, Share-based Payment Arrangement, after Forfeiture	$ 0	$ 0	21,968	0	21,968
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	0	0
Amortization of increasing dividend rate preferred stock discount	$ 0	$ 10,087	(10,087)	0	0
Stock Issued During Period, Value, Stock Options Exercised	$ 0	$ 0	116	0	116
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	38,666	0
Net Income (Loss)	$ 0	$ 0	0	215,079	215,079
Equity Balance, Ending at Sep. 30, 2019	$ 145	$ 648,936	8,796,398	(9,922,879)	(477,400)
Shares Outstanding, Ending at Sep. 30, 2019	14,539,675	987,102
Exercise of options by reducing deferred compensation payable, Value	$ 5	$ 0	1,435	0	1,440
Exercise of options by reducing deferred compensation payable, Shares	480,000	0
Warrants issued, amount	$ 0	$ 0	15,358	0	15,358
Warrants issued, shares	0	0
Warrants exercised, amount	$ 4	$ 0	1,896	0	1,900
Warrants exercised, shares	400,000	0
Equity Balance, Starting at Jun. 30, 2019	$ 145	$ 645,573	8,797,779	(10,002,188)	(558,691)
Shares Outstanding, Starting at Jun. 30, 2019	14,539,675	987,102
Shares Granted, Value, Share-based Payment Arrangement, after Forfeiture	$ 0	$ 0	1,982	0	1,982
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	0	0
Amortization of increasing dividend rate preferred stock discount	$ 0	$ 3,363	(3,363)	0	0
Net Income (Loss)	0	0	0	79,309	79,309
Equity Balance, Ending at Sep. 30, 2019	$ 145	$ 648,936	8,796,398	(9,922,879)	(477,400)
Shares Outstanding, Ending at Sep. 30, 2019	14,539,675	987,102
Equity Balance, Starting at Dec. 31, 2019	$ 145	$ 554,516	8,939,519	(9,820,668)	(326,488)
Shares Outstanding, Starting at Dec. 31, 2019	14,539,675	875,054
Shares Granted, Value, Share-based Payment Arrangement, after Forfeiture	$ 0	$ 0	25,076	0	25,076
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	0	0
Amortization of increasing dividend rate preferred stock discount	$ 0	$ 5,393	(5,393)	0	0
Stock Issued During Period, Value, Stock Options Exercised	$ 1	$ 0	399	0	400
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	100,000	0
Net Income (Loss)	$ 0	$ 0	0	490,522	490,522
Equity Balance, Ending at Sep. 30, 2020	$ 151	$ 351,708	9,046,502	(9,330,146)	68,215
Shares Outstanding, Ending at Sep. 30, 2020	15,097,749	568,257
Common stock issued for repurchase of preferred stock, Value	$ 5	$ 0	22,899	0	22,904
Common stock issued for repurchase of preferred stock, Shares	458,074	0
Preferred stock repurchased, Value	$ 0	$ (235,951)	37,927	0	(198,024)
Preferred stock repurchased, Shares	0	(356,797)
Repurchased preferred stock assigned to settle related party liability, Value	$ 0	$ 27,750	26,075	0	53,825
Repurchased preferred stock assigned to settle related party liability, Shares	0	50,000
Equity Balance, Starting at Jun. 30, 2020	$ 150	$ 349,910	9,046,267	(9,628,436)	(232,109)
Shares Outstanding, Starting at Jun. 30, 2020	14,997,749	568,257
Shares Granted, Value, Share-based Payment Arrangement, after Forfeiture	$ 0	$ 0	1,634	0	1,634
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	0	0
Amortization of increasing dividend rate preferred stock discount	$ 0	$ 1,798	(1,798)	0	0
Stock Issued During Period, Value, Stock Options Exercised	$ 1	$ 0	399	0	400
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	100,000	0
Net Income (Loss)	$ 0	$ 0	0	298,290	298,290
Equity Balance, Ending at Sep. 30, 2020	$ 151	$ 351,708	$ 9,046,502	$ (9,330,146)	$ 68,215
Shares Outstanding, Ending at Sep. 30, 2020	15,097,749	568,257

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	9 Months Ended
	Sep. 30, 2020	Sep. 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	0
Net (increase) decrease in
Accounts receivable	(26,175)	6,351
Prepaid expenses and other assets	(20,820)	(10,528)
Accounts payable	(762)	(7,426)
Accounts payable - related party	0	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)	0
Net cash used in investing activities	(10,137)	0
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on borrowings under notes payable - related party	0	(27,888)
Exercise of options	0	116
Exercise of warrants	400	1,900
Payments for repurchase of preferred stock	(178,400)	0
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 Carrying Value, Beginning Balance	612,005	246,237
Cash and Cash Equivalents, at Carrying Value, Ending Balance	1,169,022	578,204
Supplemental Cash Flow Information
Interest Paid, Including Capitalized Interest, Operating and Investing Activities	0	277
Cash Flow, Noncash Investing and Financing Activities Disclosure
Right of use assets and operating lease liabilities recognized	0	1,077,123
Repurchased preferred stock assigned to settle related party liability	53,825	0
Common stock issued in connection with repurchase of preferred stock	19,624	0
Amortization of increasing dividend rate preferred stock discount	5,393	10,087
Exercise of options by reducing deferred compensation payable	0	1,440
Purchase of fixed asset through Accounts payable related party	$ 0	$ 4,632

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2020

Notes

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

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.

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2. MANAGEMENT'S PLANS

9 Months Ended

Sep. 30, 2020

Notes

2. MANAGEMENT'S PLANS

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.

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3. STOCK BASED COMPENSATION

9 Months Ended

Sep. 30, 2020

Notes

3. STOCK BASED COMPENSATION

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%

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4. WARRANT ACTIVITY

9 Months Ended

Sep. 30, 2020

Notes

4. WARRANT ACTIVITY

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.

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5. SERIES A CONVERTIBLE PREFERRED STOCK

9 Months Ended

Sep. 30, 2020

Notes

5. SERIES A CONVERTIBLE PREFERRED STOCK

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.

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6. LEASES

9 Months Ended

Sep. 30, 2020

Notes

6. LEASES

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

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Recently Adopted Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2020

Policies

Recently Adopted Accounting Pronouncements

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.

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Recently Issued Accounting Pronouncements Not Yet Adopted (Policies)

9 Months Ended

Sep. 30, 2020

Policies

Recently Issued Accounting Pronouncements Not Yet Adopted

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.

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income (Loss) Per Share (Policies)

9 Months Ended

Sep. 30, 2020

Policies

Income (Loss) Per Share

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.

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: COVID-19 Pandemic (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

COVID-19 Pandemic

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.

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income (Loss) Per Share: Schedule of Earnings Per Share, Basic and Diluted (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Schedule of Earnings Per Share, Basic and Diluted

	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

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income (Loss) Per Share: Schedule of Anti-dilutive Securities Excluded (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Schedule of Anti-dilutive Securities Excluded

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

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3. STOCK BASED COMPENSATION: Schedule of Employee Stock Option Activity (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Schedule of Employee Stock Option Activity

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

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3. STOCK BASED COMPENSATION: Fair Value Assumptions for options granted (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Fair Value Assumptions for options granted

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

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4. WARRANT ACTIVITY: Schedule of Warrant Activity (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Schedule of Warrant Activity

	Warrants		Weighted average exercise price	Weighted average remaining contractual life (yrs)		Aggregate Intrinsic value
Warrants outstanding December 31, 2019	290,000	$ 0.004		3.41
Warrants exercisable December 31, 2019	290,000	$ 0.004		3.41	$7,550
Warrants 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

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6. LEASES: Schedule of Future Minimum Rental Payments for Operating Leases (Tables)

9 Months Ended

Sep. 30, 2020

Tables/Schedules

Schedule of Future Minimum Rental Payments for Operating Leases

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

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income (Loss) Per Share: Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Net income:
Income (Loss) from Continuing Operations, Net of Tax, Including Portion Attributable to Noncontrolling Interest	$ 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 shares and share equivalents outstanding –basic	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 Number of Shares 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	$ 0	$ 0	$ 0	$ 27,888
Weighted Average Number of Shares Outstanding, Diluted	18,876,162	16,192,390	17,957,425	15,857,856

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income (Loss) Per Share: Schedule of Anti-dilutive Securities Excluded (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Details
Anti-dilutive Securities Excluded, Stock Options	0	0	263,000	0
Preferred stock	568,257	987,102	568,257	987,102
Total anti-dilutive securities excluded	568,257	987,102	831,257	987,102

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2. MANAGEMENT'S PLANS (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Details
Net cash provided by operating activities			$ 745,154	$ 357,839
Net Income (Loss) Attributable to Parent	$ 298,290	$ 79,309	$ 490,522	$ 215,079

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3. STOCK BASED COMPENSATION: Schedule of Employee Stock Option Activity (Details) - Employee stock options - USD ($)			9 Months Ended
	Sep. 30, 2020	Dec. 31, 2019	Sep. 30, 2020
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance			2,318,835
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Beginning Balance			$ 0.010
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	7 years 5 months 23 days	6 years 5 months 1 day
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number			1,628,165
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price			$ 0.007
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Remaining Contractual Term	6 years 9 months 14 days	6 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Intrinsic Value			$ 37,682
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			2,036,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price			$ 0.015
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period			(10,000)
Share-based Compensation Arrangements by Share-based Payment Award, Options, Expirations in Period, Weighted Average Exercise Price			$ 0.019
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	4,344,835	2,318,835	4,344,835
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance	$ 0.012	$ 0.010	$ 0.012
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number	3,085,835	1,628,165	3,085,835
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price	$ 0.012	$ 0.007	$ 0.012
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Intrinsic Value	$ 273,094	$ 37,682	$ 273,094

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3. STOCK BASED COMPENSATION (Details)	9 Months Ended
	Sep. 30, 2020 USD ($) $ / shares shares
Share-based Payment Arrangement, Expense | $	$ 23,118
Nonqualified employee stock options
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	2,036,000
Non-qualified Options 1
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	1,108,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares	$ 0.01
Non-qualified Options 2
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	928,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares	$ 0.02

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3. STOCK BASED COMPENSATION: Fair Value Assumptions for options granted (Details) - Employee stock options	9 Months Ended
	Sep. 30, 2020
Risk free interest rate	0.0038
Expected lives (in years)	5 years
Expected volatility	2.08
Dividend yield	0

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4. WARRANT ACTIVITY: Schedule of Warrant Activity (Details) - Warrants - shares			9 Months Ended
	Sep. 30, 2020	Dec. 31, 2019	Sep. 30, 2020
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance			290,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	2 years 7 months 28 days	3 years 4 months 28 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number			290,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Remaining Contractual Term	2 years 7 months 28 days	3 years 4 months 28 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			100,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	290,000	290,000	290,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number	290,000	290,000	290,000

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4. WARRANT ACTIVITY (Details) - Warrant 1	9 Months Ended
	Sep. 30, 2020 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares	100,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price | $ / shares	$ 0.004

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5. SERIES A CONVERTIBLE PREFERRED STOCK (Details)	9 Months Ended
	Sep. 30, 2020 USD ($) shares
Details
Aggregate outstanding accumulated arrearages of cumulative dividend	$ 156,713
Aggregate outstanding accumulated arrearages of cumulative dividend, Shares | shares	1,565,561
Amortization of the increasing dividend rate preferred stock discount	$ 5,393

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6. LEASES (Details) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Details
Operating Leases, Future Minimum Payments Due		$ 646,986
Noncash lease expense		76,909	$ 109,901
RIGHT OF USE LEASED ASSET		541,424		$ 618,333
Fixed operating lease cost		$ 114,174
Cash paid for amounts included in the measurement of lease liability	$ 178,567

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6. LEASES: Schedule of Future Minimum Rental Payments for Operating Leases (Details) - USD ($)	Sep. 30, 2020	Dec. 31, 2019
Details
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)
Operating lease liability - current portion	(110,449)	$ (103,651)
Long-term lease liability	$ 430,975