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 March 31, 2022

☐ 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 May 4, 2022, 17,146,121 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 — March 31, 2022 (Unaudited) and December 31, 2021		3
Condensed Consolidated Statements of Operations — Three months ended March 31, 2022 and 2021 (Unaudited)		4
Condensed Consolidated Statements of Shareholders’ Equity — Three months ended March 31, 2022 and 2021 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows —Three months ended March 31, 2022 and 2021 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		13
Item 4. Controls and Procedures		13
PART II. OTHER INFORMATION
Item1. Legal Proceedings		14
Item 5. Other Information		14
Item 6. Exhibits		15
Signatures		16
Exhibit 31.1
Exhibit 32.1

2

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2022 (Unaudited)	December 31, 2021
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$2,964,139	$2,655,112
Accounts receivable, net	589	30,107
Prepaid expenses and other current assets	46,993	24,939
Total current assets	3,011,721	2,710,158
PROPERTY AND EQUIPMENT, net	57,090	58,601
OTHER ASSETS AND INTANGIBLE ASSETS	18,989	20,645
RIGHT OF USE LEASED ASSET	372,142	401,870
DEFERRED TAX ASSET	-	38,359
TOTAL ASSETS	$3,459,942	$3,229,633
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$50,055	$53,148
Accrued and other liabilities	478,119	463,022
Dividends payable	-	51,143
Operating lease liability – current portion	125,412	122,784
Deferred revenue	1,002,392	905,496
Total current liabilities	1,655,978	1,595,593
OPERATING LEASE LIABILITY – net of current portion	246,730	279,086
Total liabilities	1,902,708	1,874,679
SHAREHOLDERS’ EQUITY
Preferred stock - $0.001 par value; authorized, 10,000,000 shares; Series A convertible; issued and outstanding, 568,257 shares in 2022 and 2021	358,000	357,101
Common stock - $0.00001 par value; authorized, 40,000,000 shares; issued and outstanding, 17,146,121 shares in 2022 and 2021, respectively	171	171
Additional paid-in capital	9,074,429	9,072,109
Accumulated deficit	(7,875,366)	(8,074,427)
Total shareholders’ equity	1,557,234	1,354,954
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$3,459,942	$3,229,633

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended
	March 31, 2022	March 31,2021
REVENUE	$1,116,446	$1,025,984
COST OF REVENUE	227,467	148,873
Gross profit	888,979	877,111
OPERATING EXPENSES
Sales and marketing	162,287	109,391
General and administrative expenses	457,460	392,973
Depreciation and amortization	2,554	2,470
Total operating expenses	622,301	504,834
INCOME FROM OPERATIONS	266,678	372,277
OTHER INCOME	385	326
NET INCOME BEFORE INCOME TAX	267,063	372,603
Income tax expense	(68,002)	(96,669)
NET INCOME	$199,061	$275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	$183,956	$262,249
Net income per share:
Basic	$0.01	$0.02
Diluted	$0.01	$0.01
Weighted average common shares outstanding:
Basic	17,146,121	16,470,654
Diluted	19,665,241	19,341,419

See accompanying notes to unaudited condensed consolidated financial statements.

4

FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2022

	Common stock		Preferred stock		Additional	Accumulated
	Shares	Amount	Shares	Amount	paid-in capital	deficit	Total
Balance at January 1, 2022	17,146,121	$171	568,257	$357,101	$9,072,109	$(8,074,427)	$1,354,954
Stock options expense	-	-	-	-	3,219	-	3,219
Amortization of increasing dividend rate preferred stock discount	-	-	-	899	(899)	-	-
Net income	-	-	-	-	-	199,061	199,061
Balance at March 31, 2022 – (unaudited)	17,146,121	$171	568,257	$358,000	$9,074,429	$(7,875,366)	$1,557,234

Three Months Ended March 31, 2021

	Common stock		Preferred stock		Additional	Accumulated
	Shares	Amount	Shares	Amount	paid-in capital	deficit	Total
Balance at January 1, 2021	16,457,121	$165	568,257	$353,505	$9,064,855	$(8,916,261)	$502,264
Stock options expense	-	-	-	-	1,467	-	1,467
Stock options exercised	203,000	2	-	-	607	-	609
Amortization of increasing dividend rate preferred stock discount	-	-	-	899	(899)	-	-
Net income	-	-	-	-	-	275,934	275,934
Balance at March 31, 2021 – (unaudited)	16,660,121	$167	568,257	$354,404	$9,066,030	$(8,640,327)	$780,274

See accompanying notes to unaudited condensed consolidated financial statements.

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FullNet Communications, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended
	March 31, 2022	March 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$199,061	$275,934
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	2,554	2,470
Noncash lease expense	29,728	27,313
Provision for deferred tax expense	38,359	96,669
Stock options expense	3,219	1,467
Provision for uncollectible accounts receivable	(974)	(535)
Changes in operating assets and liabilities
Accounts receivable	30,492	30,110
Prepaid expenses and other assets	(20,398)	(7,010)
Accounts payable	(3,093)	(70)
Accrued and other liabilities	15,097	37,974
Deferred revenue	96,896	98,129
Operating lease liability	(29,728)	(27,313)
Net cash provided by operating activities	361,213	535,138
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment	(1,043)	(5,847)
Net cash used in investing activities	(1,043)	(5,847)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options	-	609
Payment of dividends payable - preferred stock	(51,143)	(168,079)
Net cash used in financing activities	(51,143)	(167,470)
NET INCREASE IN CASH AND CASH EQUIVALENTS	309,027	361,821
Cash and cash equivalents at beginning of period	2,655,112	1,407,917
Cash and cash equivalents at end of period	$2,964,139	$1,769,738
NON-CASH INVESTING AND FINANCING ACTIVITIES
Amortization of increasing dividend rate preferred stock discount	$899	$899

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, Inc. 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 our audited consolidated financial statements of and notes thereto for the year ended December 31, 2021.

The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2021.

Recently Adopted Accounting Pronouncements

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. We adopted this guidance effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on our consolidated financial statements.

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 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
	March 31, 2022	March 31, 2021
Net income:
Net income	$199,061	$275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	183,956	262,249
Basic income per share:
Weighted average common shares outstanding used in income per share	17,146,121	16,470,654
Basic income per share	0.01	0.02
Diluted income per share:
Shares used in diluted income per share	19,665,241	19,341,419
Diluted income per share	0.01	0.01
Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	17,146,121	16,470,654
Effect of dilutive stock options	2,231,210	2,586,500
Effect of dilutive warrants	287,910	284,265
Weighted average shares and share equivalents outstanding – diluted	19,665,241	19,341,419

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended
	March 31, 2022	March 31, 2021
Preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

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

2.     STOCK BASED COMPENSATION

The following table summarizes our employee stock option activity for the three months ended March 31, 2022:

Schedule of Employee Stock Option Activity
	Options	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate Intrinsic value
Options outstanding, December 31, 2021	2,342,629	$0.023	7.20	$1,522,619
Options canceled during the period	13,666	$0.017
Options outstanding March 31, 2022	2,328,963	$0.023	6.95	$1,280,840
Options exercisable March 31, 2022	1,825,303	$0.015	6.67	$977,435

During the three months ended March 31, 2022, no nonqualified employee stock options were granted.

During the three months ended March 31, 2022, no options were exercised.

Total stock-based compensation expense for the three months ended March 31, 2022 was $3,219, all of which is 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).  

3.     WARRANT ACTIVITY

The following table summarizes our warrant activity for the three months ended March 31, 2022:

Schedule of Warrant Activity
	Warrants	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate intrinsic value
Warrants outstanding December 31, 2021	290,000	$ 0.004	1.41	$ 187,350
Warrants outstanding March 31, 2022	290,000	$ 0.004	1.16	$ 158,350

During the three months ended March 31, 2022, no warrants were issued or exercised.

4.     SERIES A CONVERTIBLE PREFERRED STOCK

On January 3, 2022 we paid the December 9, 2021 dividends declared on our Series A Convertible Preferred Stock of $51,143. As of March 31, 2022, the aggregate outstanding accumulated arrearages of cumulative dividend was $14,206 or if issued in common shares, 25,830 shares.

The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2022 was $899.

5.     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 March 31, 2022, the remaining future cash payments under our lease total to $418,638.

For the three months ended March 31, 2022, we amortized $29,728 of our operating right-of-use, or ROU, asset and made payments of

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the associated lease liability for the same amount. At March 31, 2022, an operating ROU asset and liability of $372,142, each, are included on our condensed consolidated balance sheet.

For the three months ended March 31, 2022 and 2021, our fixed operating lease cost was $38,058, which is included within operating costs and expenses in our condensed consolidated statements of operations.

Future minimum lease payments under non-cancellable operating lease as of March 31, 2022, were as follows:

Year ending December 31,
2022 (nine months remaining)	$114,174
2023	152,232
2024	152,232
Total future minimum lease payments	418,638
Present value of discount	(46,496)
Current portion lease liability	(125,412)
Long-term lease liability	$246,730

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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 2021 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, 2021 (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 have historically provided high quality, reliable and scalable Internet access, web hosting, local telephone service, equipment colocation, customized live help desk outsourcing services, mass notification services using text messages and automated telephone calls, as well as advanced voice and data solutions. As explained below, the majority of our focus going forward is on our revenue and customers coming from three primary types of service: 1) Mass notification services using text messages and automated telephone calls, 2) Equipment colocation and related services, and 3) Customized live help desk outsourcing service.

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) continues to rapidly evolve, and it presents material uncertainty and risk with respect to our business, financial condition, and results of operations. The pandemic, and its attendant economic damage, has impacted market segments in different ways, with industries experiencing significant losses while others actually gained. We believe that the COVID-19 pandemic, with its shifts in human interactions and communications, resulted for us in a net addition of new customers and the sale of additional services to existing customers and increased interest in our automated group text and voice message delivery services. As the COVID-19 pandemic subsides, it is possible that the increases we have experienced may slow, resulting in adverse effects on 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 extent to which people return to preexisting patterns of behavior when the COVID-19 pandemic subsides.

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. Through a wholly owned subsidiary, we started a competitive local exchange carrier (“CLEC”) in 2003 and later exited the retail telephone service business in early 2018. In response to the rapidly evolving Internet based telecommunications services environment, we have continued to expand and improve our service offerings.

Today we are 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 service.

Through CallMultiplier Inc., our wholly owned subsidiary, we offer a comprehensive cloud-based solution to consumers and businesses for automated mass texting and voice message delivery. We serve groups throughout the United States and Canada that come from a wide range of industries including religious groups, non-profit companies, schools and universities, businesses, sports groups, staffing companies, property management groups, government entities, and more. These customers use CallMultiplier to quickly send important and informational messages to groups ranging in size from five to more than 250,000 people. We exclusively focus on messages that recipients have asked for or otherwise desire to receive. Sending unsolicited marketing or any unlawful messages through CallMultiplier is a violation of our Terms of Service.

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We market our carrier neutral colocation solutions in our data center to competitive local exchange carriers, Internet service providers and businesses that need a physical presence in the Oklahoma City market. 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.

Our customized live help desk outsourcing service is used by companies that want the benefit of having someone answer the telephone and respond to email 24 hours a day, without wanting to incur the costs to maintain the necessary staff to do so themselves. This service complements our existing staff and leverages the resources we have in place 24 hours a day.

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 months ended March 31, 2022 and 2021:

	Three Months Ended
	March 31, 2022		March 31, 2021
	Amount	Percent	Amount	Percent
REVENUE	$1,116,446	100.0	$1,025,984	100.0
COST OF REVENUE	227,467	20.4	148,873	14.5
Gross Profit	888,979	79.6	877,111	85.5
OPERATING EXPENSES
Sales and marketing	162,287	14.5	109,391	10.7
General and administrative	457,460	41.0	392,973	38.3
Depreciation and amortization	2,554	0.2	2,470	0.2
Total operating expenses	622,301	55.7	504,834	49.2
Income from operations	266,678	23.9	372,277	36.3
Other income	385	0.0	326	0.0
Income tax expense	(68,002)	(6.1)	(96,669)	(9.4)
Net income	199,061	17.8	275,934	26.9
Preferred stock dividends	(15,105)	1.3	(13,685)	(1.3)
Net income available to common shareholders	$183,956	16.5	$262,249	25.6

Three Months Ended March 31, 2022 (the “2022 1st Quarter”) Compared to Three Months Ended March 31, 2021 (the “2021 1st Quarter”)

Revenue

Total revenue increased $90,462 or 8.8% to $1,116,446 for the 2022 1st Quarter from $1,025,984 for the same period in 2021. This increase was primarily attributable to the net addition of new customers and the sale of additional services to existing customers.

In the 2022 1st Quarter, we had interest income of $385. In the 2021 1st Quarter, we had interest income of $326.

Cost of Revenue

Cost of revenue increased $78,594 or 52.8% to $227,467 for the 2022 1st Quarter from $148,873 for the same period in 2021. This increase was primarily related to servicing new customers added through growth of business and price increases from our vendors. Cost of revenue as a percentage of total revenue increased to 20.4% during the 2022 1st Quarter, compared to 14.5% during the same period in 2021, as a result of increased utilization of higher cost components of our service offerings combined with price

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increases from our vendors.

Gross Profit

Gross profit as a percentage of revenue decreased 5.9 % to 79.6% for the 2022 1st Quarter from 85.5% for the same period in 2021. This decrease was primarily related to increased utilization of higher cost components of our services offerings combined with price increases from our vendors.

Operating Expenses

Sales and marketing expenses increased $52,896 or 48.3% to $162,287 for the 2022 1st Quarter from $109,391 for the 1st Quarter of 2021. This increase was primarily a result of increases in advertising expense. Sales and marketing expense as a percentage of total revenues increased to 14.5% for the 1st Quarter of 2022 compared to 10.7% for the 1st Quarter of 2021.

General and administrative expenses increased $64,487 or 16.4% to $457,460 for the 2022 1st Quarter compared to $392,973 for the same period in 2021. This increase was primarily related to increases in employee costs, bank and credit card fees, miscellaneous expense, and business insurance of $53,171, $5,823, $4,096, and $1,030, respectively. Selling, general and administrative expenses as a percentage of total revenues increased to 41.0% during the 2022 1st Quarter from 38.3% during the same period in 2021.

Depreciation and amortization expense increased $84 or 3.4% to $2,554 for the 2022 1st Quarter compared to $2,470 for the same period in 2021. This increase was related to depreciation associated with assets purchased during the 2022 1st Quarter.

  Income Taxes

Our deferred tax asset related primarily to net operating loss carryforwards for income tax purposes which were fully utilized during the 1st Quarter of 2022. Income tax expense for the 1st Quarter of 2022 was $68,002.

  Net Income

For the 2022 1st Quarter, we realized net income of $199,061 compared to net income of $275,934 for the same period in 2021. The decrease was due primarily to a 48.3% increase in sales and marketing expense, and a 16.4% increase in general and administrative expenses, with only an 8.8% increase in revenue. 

Liquidity and Capital Resources

As of March 31, 2022, we had $2,964,139 in cash and $3,011,721 in current assets and $1,655,978 in current liabilities. Current liabilities consist primarily of $478,119 in accrued and other liabilities, of which $272,123 is owed to our officers and directors, and $1,002,392 is 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 March 31, 2022 and December 31, 2021, we had positive working capital of $1,355,743 and $1,114,565, respectively.

As of March 31, 2022, $45,217 of the $50,055 we owed to our trade creditors was past due. We have no formal agreements regarding payment of these amounts.

Cash flow for the three-month periods ended March 31, 2022 and 2021 consist of the following:

	For the Three-Month Period Ended March 31,
	2022	2021
Net cash flows provided by operating activities	$361,213	$535,138
Net cash flows used in investing activities	(1,043)	(5,847)
Net cash flows used in financing activities	(51,143)	(167,470)

Cash used for the purchase of property and equipment was $1,043 and $5,847 in the three months ended March 31, 2022 and 2021, respectively.

No intangible assets were purchased in the three months ended March 31, 2022 and 2021.  

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On January 1, 2022, we paid the December 9, 2021, preferred stock dividends declared of $51,143.

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;

• improvements of existing services, development of new services; and

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

Because our cost of developing new 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, our ability to generate consistent net income and positive cash flow from operations as well as our ability to seek and obtain additional financing. Capital will be needed in order 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.

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 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.

All of our revenues are recognized 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. Revenue related to set up charges is also deferred and amortized over the life of the contract. We classify certain taxes and fees billed to customers and remitted to governmental authorities on a net basis in revenue.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our principal executive officer, who is also our principal financial officer, evaluated the effectiveness of disclosure controls

13

and procedures as of March 31, 2022 pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our CEO/CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO/CFO, as appropriate, to allow timely decisions regarding required disclosure.

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

Changes in Internal Control over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1.  Legal Proceedings

We are not a party to any material legal proceedings.

Item 5.     Other Information

During the three months ended March 31, 2022, all events reportable on Form 8-K were reported.

14

Item 6.     Exhibits

			The following exhibits are either filed as part of or are incorporated by reference in this Report:
Exhibit
Number				Exhibit
	3.2			Bylaws (filed as Exhibit 2.2 to Registrant’s Registration Statement on Form 10-SB, file number 000-27031 filed on August 13, 1999, and incorporated herein by reference)		#
	3.3			Amended and Restated Certificate of Incorporation of FullNet Communications, Inc. (filed as Exhibit 3.3 to Registrant’s Form 8-K, file number 000-27031 filed on June 7, 2013, and incorporated herein by reference)		#
	4.4			Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of FullNet Communications, Inc.		1
	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	**
	104			Cover Page Interactive Data File (embedded within the Inline XBRL document)
1		Incorporated by reference to Exhibit 4.18 to the Form 8-K filed June 7, 2013
*		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.

15

SIGNATURES

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

	REGISTRANT: FULLNET COMMUNICATIONS, INC.
Date: May 5, 2022	By:	/s/ ROGER P. BARESEL
		Roger P. Baresel
		Chief Executive Officer and Chief Financial Officer

16

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 March 31, 2022, of FullNet Communications, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2022			/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 March 31,2022 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 5, 2022	/s/ Roger P. Baresel,
	Chief Executive Officer and Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2022	May 04, 2022
Details
Registrant CIK	0001092570
Fiscal Year End	--12-31
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2022
Document Transition Report	false
Securities Act 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		17,146,121
Amendment Flag	false
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q1

XML

CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2022 Unaudited) - USD ($)	Mar. 31, 2022	Dec. 31, 2021
CURRENT ASSETS
Cash and cash equivalents	$ 2,964,139	$ 2,655,112
Accounts receivable, net	589	30,107
Prepaid expenses and other current assets	46,993	24,939
Total current assets	3,011,721	2,710,158
PROPERTY AND EQUIPMENT, net	57,090	58,601
OTHER ASSETS AND INTANGIBLE ASSETS	18,989	20,645
RIGHT OF USE LEASED ASSET	372,142	401,870
DEFERRED TAX ASSET	0	38,359
TOTAL ASSETS	3,459,942	3,229,633
CURRENT LIABILITIES
Accounts payable	50,055	53,148
Accrued and other liabilities	478,119	463,022
Dividends payable	0	51,143
Operating lease liability - current portion	125,412	122,784
Deferred revenue	1,002,392	905,496
Total current liabilities	1,655,978	1,595,593
OPERATING LEASE LIABILITY - net of current portion	246,730	279,086
Total liabilities	1,902,708	1,874,679
SHAREHOLDERS' EQUITY
Preferred Stock, Value	358,000	357,101
Common Stock, Value	171	171
Additional paid-in capital	9,074,429	9,072,109
Accumulated deficit	(7,875,366)	(8,074,427)
Total shareholders' equity	1,557,234	1,354,954
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 3,459,942	$ 3,229,633

XML

CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2022 Unaudited) - Parenthetical - $ / shares	Mar. 31, 2022	Dec. 31, 2021
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	568,257
Preferred Stock, Shares Outstanding	568,257	568,257
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	17,146,121	17,146,121
Common Stock, Shares, Outstanding	17,146,121	17,146,121

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Details
REVENUE	$ 1,116,446	$ 1,025,984
COST OF REVENUE	227,467	148,873
Gross profit	888,979	877,111
OPERATING EXPENSES
Sales and marketing	162,287	109,391
General and administrative expenses	457,460	392,973
Depreciation and amortization	2,554	2,470
Total operating expenses	622,301	504,834
INCOME FROM OPERATIONS	266,678	372,277
OTHER INCOME	385	326
NET INCOME BEFORE INCOME TAX	267,063	372,603
Income tax expense	(68,002)	(96,669)
Net Income (Loss) Attributable to Parent	199,061	275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	$ 183,956	$ 262,249
Earnings Per Share
Basic income per share	$ 0.01	$ 0.02
Diluted income per share	$ 0.01	$ 0.01
Weighted Average Number of Shares Outstanding, Basic	17,146,121	16,470,654
Weighted Average Number of Shares Outstanding, Diluted	19,665,241	19,341,419

XML

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) - USD ($)	Common Stock	Preferred Stock	Additional Paid In Capital	Accumulated Deficit	Total
Equity Balance, Starting at Dec. 31, 2020	$ 165	$ 353,505	$ 9,064,855	$ (8,916,261)	$ 502,264
Shares Outstanding, Starting at Dec. 31, 2020	16,457,121	568,257
Shares Granted, Value, Share-Based Payment Arrangement, after Forfeiture	$ 0	$ 0	1,467	0	1,467
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	$ 899	(899)	0	0
Net Income (Loss)	0	0	0	275,934	275,934
Equity Balance, Ending at Mar. 31, 2021	$ 167	$ 354,404	9,066,030	(8,640,327)	780,274
Shares Outstanding, Ending at Mar. 31, 2021	16,660,121	568,257
Stock Issued During Period, Value, Stock Options Exercised	$ 2	$ 0	607	0	609
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Exercises in Period	203,000
Equity Balance, Starting at Dec. 31, 2021	$ 171	$ 357,101	9,072,109	(8,074,427)	1,354,954
Shares Outstanding, Starting at Dec. 31, 2021	17,146,121	568,257
Shares Granted, Value, Share-Based Payment Arrangement, after Forfeiture	$ 0	$ 0	3,219	0	3,219
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	$ 899	(899)	0	0
Net Income (Loss)	0	0	0	199,061	199,061
Equity Balance, Ending at Mar. 31, 2022	$ 171	$ 358,000	$ 9,074,429	$ (7,875,366)	$ 1,557,234
Shares Outstanding, Ending at Mar. 31, 2022	17,146,121	568,257

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 199,061	$ 275,934
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	2,554	2,470
Noncash lease expense	29,728	27,313
Provision for deferred tax expense	38,359	96,669
Stock options expense	3,219	1,467
Provision for uncollectible accounts receivable	(974)	(535)
Changes in operating assets and liabilities
Accounts payable	(3,093)	(70)
Accrued and other liabilities	15,097	37,974
Deferred revenue	96,896	98,129
Operating lease liability	(29,728)	(27,313)
Accounts receivable	30,492	30,110
Prepaid expenses and other assets	(20,398)	(7,010)
Net cash provided by operating activities	361,213	535,138
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment	(1,043)	(5,847)
Net cash used in investing activities	(1,043)	(5,847)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options	0	609
Payment of dividends payable - preferred stock	(51,143)	(168,079)
Net cash used in financing activities	(51,143)	(167,470)
NET INCREASE IN CASH AND CASH EQUIVALENTS	309,027	361,821
Cash and cash equivalents at beginning of period	2,655,112	1,407,917
Cash and cash equivalents at end of period	2,964,139	1,769,738
NON-CASH INVESTING AND FINANCING ACTIVITIES
Amortization of increasing dividend rate preferred stock discount	$ 899	$ 899

XML

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

3 Months Ended

Mar. 31, 2022

Notes

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

1.     UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements and related notes of FullNet Communications, Inc. 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 our audited consolidated financial statements of and notes thereto for the year ended December 31, 2021.

The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2021.

Recently Adopted Accounting Pronouncements

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. We adopted this guidance effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on our consolidated financial statements.

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 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
	March 31, 2022	March 31, 2021
Net income:
Net income	$199,061	$275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	183,956	262,249
Basic income per share:
Weighted average common shares outstanding used in income per share	17,146,121	16,470,654
Basic income per share	0.01	0.02
Diluted income per share:
Shares used in diluted income per share	19,665,241	19,341,419
Diluted income per share	0.01	0.01
Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	17,146,121	16,470,654
Effect of dilutive stock options	2,231,210	2,586,500
Effect of dilutive warrants	287,910	284,265
Weighted average shares and share equivalents outstanding – diluted	19,665,241	19,341,419

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended
	March 31, 2022	March 31, 2021
Preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

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

XML

2. STOCK BASED COMPENSATION

3 Months Ended

Mar. 31, 2022

Notes

2. STOCK BASED COMPENSATION

2.     STOCK BASED COMPENSATION

The following table summarizes our employee stock option activity for the three months ended March 31, 2022:

Schedule of Employee Stock Option Activity
	Options	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate Intrinsic value
Options outstanding, December 31, 2021	2,342,629	$0.023	7.20	$1,522,619
Options canceled during the period	13,666	$0.017
Options outstanding March 31, 2022	2,328,963	$0.023	6.95	$1,280,840
Options exercisable March 31, 2022	1,825,303	$0.015	6.67	$977,435

During the three months ended March 31, 2022, no nonqualified employee stock options were granted.

During the three months ended March 31, 2022, no options were exercised.

Total stock-based compensation expense for the three months ended March 31, 2022 was $3,219, all of which is 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).  

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3. WARRANT ACTIVITY

3 Months Ended

Mar. 31, 2022

Notes

3. WARRANT ACTIVITY

3.     WARRANT ACTIVITY

The following table summarizes our warrant activity for the three months ended March 31, 2022:

Schedule of Warrant Activity
	Warrants	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate intrinsic value
Warrants outstanding December 31, 2021	290,000	$ 0.004	1.41	$ 187,350
Warrants outstanding March 31, 2022	290,000	$ 0.004	1.16	$ 158,350

During the three months ended March 31, 2022, no warrants were issued or exercised.

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4. SERIES A CONVERTIBLE PREFERRED STOCK

3 Months Ended

Mar. 31, 2022

Notes

4. SERIES A CONVERTIBLE PREFERRED STOCK

4.     SERIES A CONVERTIBLE PREFERRED STOCK

On January 3, 2022 we paid the December 9, 2021 dividends declared on our Series A Convertible Preferred Stock of $51,143. As of March 31, 2022, the aggregate outstanding accumulated arrearages of cumulative dividend was $14,206 or if issued in common shares, 25,830 shares.

The amortization of the increasing dividend rate preferred stock discount for the three months ended March 31, 2022 was $899.

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5. LEASES

3 Months Ended

Mar. 31, 2022

Notes

5. LEASES

5.     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 March 31, 2022, the remaining future cash payments under our lease total to $418,638.

For the three months ended March 31, 2022, we amortized $29,728 of our operating right-of-use, or ROU, asset and made payments of

the associated lease liability for the same amount. At March 31, 2022, an operating ROU asset and liability of $372,142, each, are included on our condensed consolidated balance sheet.

For the three months ended March 31, 2022 and 2021, our fixed operating lease cost was $38,058, which is included within operating costs and expenses in our condensed consolidated statements of operations.

Future minimum lease payments under non-cancellable operating lease as of March 31, 2022, were as follows:

Year ending December 31,
2022 (nine months remaining)	$114,174
2023	152,232
2024	152,232
Total future minimum lease payments	418,638
Present value of discount	(46,496)
Current portion lease liability	(125,412)
Long-term lease liability	$246,730

XML

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

3 Months Ended

Mar. 31, 2022

Policies

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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. We adopted this guidance effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on our consolidated financial statements.

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

3 Months Ended

Mar. 31, 2022

Policies

Income Per Share

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 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
	March 31, 2022	March 31, 2021
Net income:
Net income	$199,061	$275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	183,956	262,249
Basic income per share:
Weighted average common shares outstanding used in income per share	17,146,121	16,470,654
Basic income per share	0.01	0.02
Diluted income per share:
Shares used in diluted income per share	19,665,241	19,341,419
Diluted income per share	0.01	0.01
Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	17,146,121	16,470,654
Effect of dilutive stock options	2,231,210	2,586,500
Effect of dilutive warrants	287,910	284,265
Weighted average shares and share equivalents outstanding – diluted	19,665,241	19,341,419

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended
	March 31, 2022	March 31, 2021
Preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

Anti-dilutive securities consist of stock options and convertible preferred stock 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: Income Per Share: Schedule of Earnings Per Share, Basic and Diluted (Tables)

3 Months Ended

Mar. 31, 2022

Tables/Schedules

Schedule of Earnings Per Share, Basic and Diluted

	Three Months Ended
	March 31, 2022	March 31, 2021
Net income:
Net income	$199,061	$275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	183,956	262,249
Basic income per share:
Weighted average common shares outstanding used in income per share	17,146,121	16,470,654
Basic income per share	0.01	0.02
Diluted income per share:
Shares used in diluted income per share	19,665,241	19,341,419
Diluted income per share	0.01	0.01
Computation of shares used in income per share:
Weighted average shares and share equivalents outstanding – basic	17,146,121	16,470,654
Effect of dilutive stock options	2,231,210	2,586,500
Effect of dilutive warrants	287,910	284,265
Weighted average shares and share equivalents outstanding – diluted	19,665,241	19,341,419

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

3 Months Ended

Mar. 31, 2022

Tables/Schedules

Schedule of Anti-dilutive Securities Excluded

Schedule of Anti-dilutive Securities Excluded
	Three Months Ended
	March 31, 2022	March 31, 2021
Preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

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

3 Months Ended

Mar. 31, 2022

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, 2021	2,342,629	$0.023	7.20	$1,522,619
Options canceled during the period	13,666	$0.017
Options outstanding March 31, 2022	2,328,963	$0.023	6.95	$1,280,840
Options exercisable March 31, 2022	1,825,303	$0.015	6.67	$977,435

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

3 Months Ended

Mar. 31, 2022

Tables/Schedules

Schedule of Warrant Activity

Schedule of Warrant Activity
	Warrants	Weighted average exercise price	Weighted average remaining contractual life (yrs)	Aggregate intrinsic value
Warrants outstanding December 31, 2021	290,000	$ 0.004	1.41	$ 187,350
Warrants outstanding March 31, 2022	290,000	$ 0.004	1.16	$ 158,350

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

3 Months Ended

Mar. 31, 2022

Tables/Schedules

Schedule of Future Minimum Rental Payments for Operating Leases

Year ending December 31,
2022 (nine months remaining)	$114,174
2023	152,232
2024	152,232
Total future minimum lease payments	418,638
Present value of discount	(46,496)
Current portion lease liability	(125,412)
Long-term lease liability	$246,730

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income Per Share: Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Net income
Income (Loss) from Continuing Operations, Net of Tax, Including Portion Attributable to Noncontrolling Interest	$ 199,061	$ 275,934
Preferred stock dividends	(15,105)	(13,685)
Net income available to common shareholders	$ 183,956	$ 262,249
Basic income per share
Weighted Average Number of Shares Outstanding, Basic	17,146,121	16,470,654
Basic income per share	$ 0.01	$ 0.02
Diluted income per share
Shares used in diluted income per share	19,665,241	19,341,419
Diluted income per share	$ 0.01	$ 0.01
Computation of shares used in income per share
Weighted Average Number of Shares Outstanding, Basic	17,146,121	16,470,654
Effect of dilutive stock options	$ 2,231,210	$ 2,586,500
Effect of dilutive warrants	$ 287,910	$ 284,265
Weighted Average Number of Shares Outstanding, Diluted	19,665,241	19,341,419

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1. UNAUDITED INTERIM FINANCIAL STATEMENTS: Income Per Share: Schedule of Anti-dilutive Securities Excluded (Details) - shares	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Details
Preferred stock	568,257	568,257
Total anti-dilutive securities excluded	568,257	568,257

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2. STOCK BASED COMPENSATION: Schedule of Employee Stock Option Activity (Details) - Employee stock options - USD ($)			3 Months Ended
	Mar. 31, 2022	Dec. 31, 2021	Mar. 31, 2022
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Number, Beginning Balance			2,342,629
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Beginning Balance			$ 0.023
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	6 years 11 months 12 days	7 years 2 months 12 days
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Intrinsic Value			$ 1,522,619
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Forfeitures in Period			13,666
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Forfeitures and Expirations in Period, Weighted Average Exercise Price			$ 0.017
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Number, Ending Balance	2,328,963	2,342,629	2,328,963
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance	$ 0.023	$ 0.023	$ 0.023
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Intrinsic Value	$ 1,280,840	$ 1,522,619	$ 1,280,840
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Exercisable, Number	1,825,303		1,825,303
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Exercisable, Weighted Average Exercise Price	$ 0.015		$ 0.015
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Exercisable, Weighted Average Remaining Contractual Term	6 years 8 months 1 day
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Exercisable, Intrinsic Value	$ 977,435		$ 977,435

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2. STOCK BASED COMPENSATION (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Stock Issued During Period, Value, Stock Options Exercised		$ 609
Share-Based Payment Arrangement, Expense	$ 3,219
Employee stock options
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross	0
Stock Issued During Period, Value, Stock Options Exercised	$ 0

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3. WARRANT ACTIVITY: Schedule of Warrant Activity (Details) - Warrants - USD ($)	Mar. 31, 2022	Dec. 31, 2021
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	1 year 1 month 28 days	1 year 4 months 28 days
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Number, Ending Balance	290,000	290,000
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance	$ 0.004	$ 0.004
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Intrinsic Value	$ 158,350	$ 187,350

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3. WARRANT ACTIVITY (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Stock Issued During Period, Value, Stock Options Exercised		$ 609
Warrants
Stock Issued During Period, Value, Stock Options Exercised	$ 0

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4. SERIES A CONVERTIBLE PREFERRED STOCK (Details)	3 Months Ended
	Mar. 31, 2022 USD ($) shares
Details
Aggregate outstanding accumulated arrearages of cumulative dividend	$ 14,206
Aggregate outstanding accumulated arrearages of cumulative dividend, Shares | shares	25,830
Amortization of the increasing dividend rate preferred stock discount	$ 899

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5. LEASES (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Dec. 31, 2021
Details
Operating Leases, Future Minimum Payments Due	$ 418,638
Noncash lease expense	29,728	$ 27,313
RIGHT OF USE LEASED ASSET	372,142		$ 401,870
Cash paid for amounts included in the measurement of lease liability	$ 38,058	$ 38,058

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5. LEASES: Schedule of Future Minimum Rental Payments for Operating Leases (Details) - USD ($)	Mar. 31, 2022	Dec. 31, 2021
Details
2022 (nine months remaining)	$ 114,174
2023	152,232
2024	152,232
Total future minimum lease payments	418,638
Present value of discount	(46,496)
Operating lease liability - current portion	(125,412)	$ (122,784)
Long-term lease liability	$ 246,730