NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS

12 Months Ended

Dec. 31, 2018

Notes

NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS

NOTE A — SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Nature of Operations

FullNet Communications, Inc. and Subsidiaries (the Company) is an integrated communications provider offering 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 to individuals, businesses, organizations, educational institutions and governmental agencies. Through its subsidiaries, FullNet, Inc., FullTel, Inc., FullWeb, Inc. and CallMultiplier, Inc., the Company provides high quality, reliable and scalable Internet based solutions designed to meet customer needs. Services offered include:

Dial-up and direct high-speed connectivity to the Internet through the FullNet brand name; 

Carrier-neutral telecommunications premise colocation; 

Web page hosting; 

Equipment colocation; 

Customized live help desk outsourcing services; 

Group text and voice message delivery services; 

Advanced voice and data solutions; and 

Consolidation

The consolidated financial statements include the accounts of FullNet Communications, Inc. and its wholly owned subsidiaries FullNet, Inc., FullTel, Inc., FullWeb, Inc., and CallMultiplier, Inc. All material inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures; accordingly, actual results could differ from those estimates.

Cash Equivalents

Cash equivalents are represented by operating accounts or money market accounts maintained with insured financial institutions which consist of highly liquid investments that mature in three months or less from date of purchase.

Accounts Receivable

The Company operates and grants credit, on an uncollateralized basis. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across different industries as well as the Company’s emphasis on obtaining deposits and/or payment in advance for services from the majority of its customers.  During the year ended December 31, 2018, the Company had two customers that comprised approximately 12% and 6% of total revenues, respectively.  During the year ended December 31, 2017, the Company had two customers that each comprised approximately 8% of total revenues.

  All long-lived assets held and used by the Company, including intangible assets, are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  In accordance with ASC 360-10-35 “Impairment or Disposal of Long-lived Assets”, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable the Company determines whether impairment has occurred through the use of an undiscounted cash flows analysis of the asset. If impairment has

occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset. No intangible assets were purchased in 2018 and 2017. The Company incurred no impairment expense in 2018 or 2017.  Amortization expense for the years ended December 31, 2018 and 2017, was $8,833 and $9,051, respectively.

Revenue Recognition

Revenue is recognized when control of the services sold by the Company is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services  Revenue that is received in advance of the services provided is deferred until the services are provided by the Company. Revenue related to set up charges is also deferred and amortized over the life of the contract.  Revenues are presented net of taxes and fees billed to customers and remitted to governmental authorities.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer; 

Identification of the performance obligations in the contract; 

Determination of the transaction price; 

Allocation of the transaction price to the performance obligations in the contract; and 

Recognition of revenue when, or as, the Company satisfies a performance obligation. 

The Company’s revenue is derived from usage-based fees earned from customers utilizing the Company’s services.  The Company has four primary streams of revenue consisting of its automated voice and text group message delivery service, its colocation and web hosting service and its technical support service.  Prior to February 1, 2018, the Company also had revenue from traditional telephone services (see Note I – Discontinued Operations), which revenue was approximately 2% and 12% of total revenue for the years ended December 31, 2018 and 2017, respectively.

Revenue Description	For Year Ended December 31,2018	% of Total Revenue	For Year Ended December 31, 2017	% of Total Revenue
Automated voice and text group message delivery service	$ 1,259,656	61 %	$ 975,002	52 %
Colocation and web hosting service	520,923	25 %	518,939	27 %
Technical support service	238,431	12 %	248,803	13 %
Internet access service	51,470	2 %	146,869	8 %
Total revenue	$ 2,070,480	100 %	$ 1,889,613	100 %

Revenue from the Company’s automated voice and text group message delivery service and its access service is recognized pursuant to unwritten contracts created when the Company’s customers create an account on the Company’s website agreeing to be bound by the Company’s published Terms of Service and make a purchase.

Revenue from the Company’s traditional telephone services, its colocation and web hosting service, and its technical support service is recognized pursuant to written contracts executed by the Company and its customers.

Each of the Company's services represents a single performance obligation consisting of a distinct service that is transferred equally to each customer through the passage of time during a monthly service period, except for its automated voice and text group message delivery service which also includes transfer at the point in time that the customer utilizes the service.

None of the Company’s services have a transaction price which includes variable consideration, a significant financing component, any noncash consideration or consideration payable to a customer. The transaction price is the amount of consideration to which the Company expects to be entitled to in exchange for the service transferred to each customer.

Each of the Company’s services represents a single performance obligation and the “stand-alone selling price” is the same as the contract selling price.

All of the Company’s services are sold pursuant to written and unwritten contracts which require payment in advance for the services.

Advertising

The Company expenses advertising production costs as they are incurred and advertising communication costs the first time the advertising takes place.  Advertising expense for the years ended December 31, 2018 and 2017, was $283,979 and $247,947, respectively.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method.  Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted statutory tax rates in effect for the year in which the differences are expected to reverse.  The effects of future changes in tax laws or rates are not included in the measurement.  The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s financial statements or tax returns.  The Company currently has substantial net operating loss carry forwards. The Company has recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense and does not believe it has any material unrealized tax benefits at December 31, 2018.  The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. 

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.

Reconciliation of basic and diluted income (loss) per share (“EPS”) are as follows:

	December 31, 2018	December 31, 2017
Net income (loss):
Income from continuing operations	$99,610	$76,772
Income (loss) from discontinued operations – See Note I	167,473	(103,559)
Net income (loss)	267,083	(26,787)
Preferred stock dividends	(20,174)	(26,899)
Net income loss available to common shareholders	246,909	(53,686)
Basic income (loss) per share:
Weighted-average common shares outstanding used in income (loss) per share computations	12,321,694	11,871,009
Basic income (loss) per share:
Continuing operations	0.01	0.01
Discontinued operations – See Note I	0.01	(0.01)
Basic income (loss) per share	0.02	(0.00)
Diluted income (loss) per share:
Shares used in diluted income (loss) per share computations	15,259,570	14,865,058
Diluted income (loss) per share
Continuing operations	0.01	0.01
Discontinued operations – See Note I	0.01	(0.01)
Diluted income (loss) per share	0.02	(0.00)
Computation of shares used in income (loss) per share:
Weighted average shares and share equivalents outstanding	13,621,009	11,871,009
Effect of preferred stock	987,102	987,102
Effect of dilutive stock options	1,722,615	1,775,872
Effect of dilutive warrants	228,160	231,075
Weighted average shares and share equivalents outstanding – assuming dilution	16,558,886	14,865,058

Schedule of Anti-dilutive Securities Excluded	:
		December 31, 2018	December 31, 2017
Stock options		266,000	3,000
Convertible promissory notes		27,888	183,252
Total anti-dilutive securities excluded		293,888	186,252

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

Stock-Based Compensation

The Company does not have a written employee stock option plan.  The Company has historically granted only employee stock options with an exercise price equal to the market price of the Company’s stock at the date of grant, a contractual term of ten years, and a vesting period of three years ratably on the first, second and third anniversaries of the date of grant (with limited exceptions).

All employee stock options granted during 2018 and 2017 were nonqualified stock options.  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 fair values of the granted options are estimated at the date of grant using the Black-Scholes option pricing model.  See Note F – Common Stock and Stock-Based Compensation for further information on stock-based compensation.

Beneficial Conversion Features

The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

Related Parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

The Company has one secured convertible promissory note from a shareholder.  The note balance at December 31, 2018, was $27,888. The note balance at December 31, 2017, was $33,242 (see Note C – Convertible Note Payable Related Party).  Additionally, the Company had related party accounts payable to officers and directors for unpaid expense reimbursements in the amounts of $4,000 and $7,982 for years ending December 31, 2018 and 2017, respectively.

Fair Value Measurements

The Company measures its financial assets and liabilities in accordance with the requirements of FASB ASC 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09, along with the related updates (“ASC 606”), will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. ASC 606 provides a unified model to determine how revenue is recognized.

This new standard provides a five-step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. We adopted ASC 606 on its effective date, January 1, 2018, using the modified retrospective approach and the adoption of ASC 606 has not had a material effect on our consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the least term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations cash flows or financial condition.