NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS

12 Months Ended

Dec. 31, 2021

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 (“we”) is an integrated communications provider primarily focused on providing mass notification services using text messages and automated telephone calls, equipment colocation and related services, and customized live help desk outsourcing services to individuals, businesses, organizations, educational institutions and governmental agencies. Through our subsidiaries, FullNet, Inc., FullTel, Inc., FullWeb, Inc. and CallMultiplier, Inc., we provide high quality, reliable and scalable Internet based advanced voice and data solutions designed to meet customer needs. Services offered include:

·Mass notification services using text messages and automated telephone calls; 

·Carrier-neutral equipment colocation, web hosting and related services; and 

·Customized live help desk outsourcing services. 

Reclassifications

Certain reclassifications have been made to the 2020 financial statements to conform to the 2021 presentation.

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.

We have not experienced any losses in such accounts. We do not believe there is significant credit risk related to our cash and cash equivalents.

Accounts Receivable

We operate and grant credit, on an uncollateralized basis. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across different industries as well as our emphasis on obtaining deposits and/or payment in advance for services from the majority of our customers. During the year ended December 31, 2021, we had two customers that comprised approximately 10% and 3% of total revenues, respectively. During the year ended December 31, 2020, we had two customers that comprised approximately 12% and 4% of total revenues, respectively.

Accounts receivable, other than certain large customer accounts which are evaluated individually, are considered past due for purposes of determining the allowance for doubtful accounts based on past experience of collectability as follows:

1 – 29 days	1.5 %
30 – 59 days	30 %
60 – 89 days	50 %
> 90 days	100 %

In addition, if we become aware of a specific customer’s inability to meet our financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Total bad debt expense and direct write-off for the year ended December 31, 2021 was $1,024. Total bad debt expense and direct write-off for the year ended December 31, 2020 was $1,278.

Accounts receivable consist of the following at December 31:

Schedule of Accounts Receivable
	2021	2020
Accounts receivable	$238,078	$237,698
Less allowance for doubtful accounts	(207,971)	(206,947)
	$30,107	$30,751

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets as follows:

Software	3 years
Computers and equipment	5 years
Furniture and fixtures	7 years
Leasehold improvements	Shorter of estimated life of improvement or the lease term

Property and equipment consist of the following at December 31:

	2021	2020
Computers and equipment	$312,870	$307,023
Leasehold improvements	1,067,934	1,067,934
Software	-	-
Furniture and fixtures	33,929	33,929
	1,414,733	1,408,886
Less accumulated depreciation	(1,356,132)	(1,345,919)
	$58,601	$62,967

Depreciation expense for the years ended December 31, 2021 and 2020, was $10,213 and $8,969, respectively.

Long-Lived Assets

All long-lived assets held and used by us, 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”, we base our 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, we determine whether impairment has occurred through the use of an undiscounted cash flows analysis of the asset. If impairment has occurred, we recognize a loss for the difference between the carrying amount and the estimated value of the asset. No intangible assets were purchased in 2021 and 2020. We incurred no impairment expense in 2021 or 2020. We incurred no amortization expense of intangible assets for the years ended December 31, 2021 and 2020, respectively.

Revenue Recognition

Revenue is recognized when control of the services sold by us is transferred to customers in an amount that reflects the consideration we expect 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 us. 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.

We determine 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, we satisfy a performance obligation. 

Our revenue is derived from fees earned from customers utilizing our services. We have four streams of revenue as shown in the following table:

Revenue Description	For Year Ended December 31, 2021	% of Total Revenue	For Year Ended December 31, 2020	% of Total Revenue
Mass notification services using text messages and automated telephone calls	$3,258,095	78%	$2,598,840	74%
Colocation and web hosting services	445,816	11%	455,795	13%
Live help desk support services	407,770	10%	423,312	12%
Internet access service	23,835	1%	24,552	1%
Total revenue	$4,135,516	100%	$3,502,499	100%

Revenue from our mass notification service and our access service is recognized as the services are provided pursuant to unwritten contracts created when our customers create an account on our website agreeing to be bound by our published Terms of Service when they purchase our service.

Revenue from our colocation and web hosting services, its live help desk support services, and our internet access services is recognized as the services are provided pursuant to written contracts executed by us and our customers.

Each of our services represent a single performance obligation consisting of a distinct service. All of our revenues are recognized as the services are provided over the life of the contract. Revenue that is received in advance of the services provided is deferred until the services are provided.

None of our 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 we expect to be entitled to in exchange for the service transferred to each customer.

Each of our services represent a single performance obligation and the “stand-alone selling price” is the same as the contract selling price.

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

Advertising

We expense advertising production costs as they are incurred and advertising communication costs the first time the advertisement takes place. Advertising expense for the years ended December 31, 2021 and 2020, was $477,565 and $635,515, respectively.

Income Taxes

We account for income taxes utilizing the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes, 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.  

On a regular basis, we evaluate all available evidence, both positive and negative, regarding the ultimate realization of the tax benefits of our deferred tax assets and a valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. 

Income Per Share

Income per share – basic is calculated by dividing net income 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 from options and warrants calculated using the treasury stock method and the if-converted method for preferred stock.

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

	December 31, 2021	December 31, 2020
Net income:
Net income	$892,977	$1,072,486
Preferred stock dividends	(54,739)	(59,771)
Net income available to common shareholders	838,238	1,012,715
Basic income per share:
Weighted-average common shares outstanding used in income per share computations	16,698,620	14,913,351
Basic income per share	0.05	0.07
Diluted income per share:
Shares used in diluted income per share computations	19,216,153	17,533,766
Diluted income per share	0.05	0.06
Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding - basic	16,698,620	14,913,351
Effect of dilutive stock options	2,229,933	2,351,621
Effect of dilutive warrants	287,600	268,794
Weighted average shares and share equivalents outstanding – assuming dilution	19,216,153	17,533,766

Schedule of Anti-dilutive Securities Excluded:	December 31, 2021	December 31, 2020
Convertible preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

Stock-Based Compensation

We do not have a written employee stock option plan. We have historically generally granted employee stock options with an exercise price equal to the market price of our 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 2021 and 2020 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 E – 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 us if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with us. Related parties also include principal owners of us, our management, members of the immediate families of principal owners of us and our management and other parties with which we 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 our 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 our own separate interests is also a related party.

At December 31, 2021, we had no related party accounts payable to officers and directors for unpaid expense reimbursements. Additionally, we had no related party accounts payable to officers and directors for unpaid expense reimbursements as of December 31, 2020.

Fair Value Measurements

We measure our 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.

The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2021 and 2020, are based upon the short-term nature of the assets and liabilities. 

Recent Accounting Pronouncements

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. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers excluding smaller reporting companies, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. On October 16, 2019 FASB voted to delay implementation of ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326) -Measurement of Credit Losses on Financial Instruments.” For all other entities, the amendments are now effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We chose early adoption of this guidance effective January 1, 2020. We continue to evaluate the impact of these amendments to our financial position and results of operations and currently expect no material impact of the adoption of the amendments on our consolidated financial statements.

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 adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.