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FULLNET COMMUNICATIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion is qualified in its entirety by the more detailed
information in our 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, 2010 (collectively
referred to as the "Disclosure Documents"). Certain forward-looking statements
contained in this Report and in the Disclosure Documents regarding our business
and prospects are based upon numerous assumptions about future conditions which
may ultimately prove to be inaccurate and actual events and results may
materially differ from anticipated results described in such statements. Our
ability to achieve these results is subject to certain risks and uncertainties,
including those inherent risks and uncertainties generally in the Internet
service provider and competitive local exchange carrier industries, the impact
of competition and pricing, changing market conditions, and other risks. Any
forward-looking statements contained in this Report represent our judgment as of
the date of this Report. We disclaim, however, any intent or obligation to
update these forward-looking statements. As a result, the reader is cautioned
not to place undue reliance on these forward-looking statements. References to
us in this report include our subsidiaries: FullNet, Inc. ("FullNet"), FullTel,
Inc. ("FullTel") and FullWeb, Inc. ("FullWeb").
Overview
We are an integrated communications provider offering integrated communications
and Internet connectivity to individuals, businesses, organizations, educational
institutions and government agencies. Through our subsidiaries, we provide high
quality, reliable and scalable Internet access, web hosting, equipment
co-location and traditional telephone services. Our overall strategy is to
become a successful integrated communications provider for residents and small
to medium-sized businesses in Oklahoma.
Our principal executive offices are located at 201 Robert S. Kerr Avenue,
Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is
(405) 236-8200. We also maintain Internet sites on the World Wide Web ("WWW") at
www.fullnet.net, www.fulltel.com and www.callmultiplier.com. Information
contained on our Web sites is not and should not be deemed to be a part of this
Report.
Company History
We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation,
to bring dial-up Internet access and education to rural locations in Oklahoma
that did not have dial-up Internet access. We changed our name to FullNet
Communications, Inc. in December 1995. Today we are a total solutions provider
to individuals and companies seeking a "one-stop shop" in Oklahoma.
Our current business strategy is to become a successful integrated
communications provider in Oklahoma. We expect to grow through the acquisition
of additional customers for our carrier-neutral co-location space and
traditional telephone services, as well as through the acquisition of Internet
service providers.
We market our carrier neutral co-location solutions in our network operations
center to other competitive local exchange carriers, Internet service providers
and web-hosting companies. Our co-location facility is carrier neutral, allowing
customers to choose among competitive offerings rather than being restricted to
one carrier. Our network operations 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 andgenerator backup.
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Through FullTel, our wholly owned subsidiary, we are a fully licensed
competitive local exchange carrier or CLEC in Oklahoma. FullTel activates local
access telephone numbers for the cities in which we market, sell and operate our
retail FullNet Internet service provider brand, wholesale dial-up Internet
service; our business-to-business network design, connectivity, domain and Web
hosting businesses; and traditional telephone services. At September 30, 2012
FullTel provided us with local telephone access in approximately 232 cities.
Our common stock trades on the OTC Bulletin Board under the symbol FULO. While
our common stock trades on the OTC Bulletin Board, it is very thinly traded, and
there can be no assurance that our stockholders will be able to sell their
shares should they so desire. Any market for the common stock that may develop,
in all likelihood, will be a limited one, and if such a market does develop, the
market price may be volatile.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of revenues for the three and nine months ended September 30, 2012
and 2011:
Three Months Ended Nine Months Ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
Amount Percent Amount Percent Amount Percent Amount Percent
Revenues:
Access service
revenues $ 36,580 9.1 % $ 63,353 12.9 % $ 127,901 10.6 % $ 184,843 13.1 %
Co-location
and other
revenues 364,687 90.9 427,767 87.1 1,077,214 89.4 1,222,884 86.9
Total revenues 401,267 100.0 491,120 100.0
1,205,115 100.0 1,407,727 100.0
Cost of access
service
revenues 32,859 8.2 42,973 8.7 101,473 8.4 131,586 9.3
Cost of
co-location
and other
revenues 78,765 19.6 89,273 18.2 255,905 21.2 273,855 19.5
Selling,
general and
administrative
expenses 305,228 76.1 312,624 63.7 928,737 77.1 914,820 65.0
Depreciation
and
amortization 7,424 1.8 15,278 3.1 25,070 2.1 40,066 2.8
Total
operating
costs andexpenses 424,276 105.7 460,148 93.7 1,311,185 108.8 1,360,327 96.6
Income (loss)
fromoperations (23,009) (5.7) 30,972 6.3 (106,070) (8.8) 47,400 3.4
Interest
expense (5,641) (1.4) (6,001) (1.2) (17,047) (1.4) (18,217) (1.3)
Income (loss)
before incometaxes (28,650) (7.1) 24,971 5.1 (123,117) (10.2) 29,183 2.1
Income tax
(benefit) - - - - - - - -
Net income
(loss) $ (28,650) (7.1) % $ 24,971 5.1 % $ (123,117) (10.2) % $ 29,183 2.1 %
Three Months Ended September 30, 2012 (the "2012 3rd Quarter") Compared to Three
Months Ended September 30, 2011 (the "2011 3rd Quarter")
Revenues
Access service revenues decreased $26,773 or 42.3% to $36,580 for the 2012 3rd
Quarter from $63,353 for the same period in
2011 primarily due to a decline in number of customers.
Co-location and other revenues decreased $63,080 or 14.7% to $364,687 for the
2012 3rd Quarter from $427,767 for the same period in 2011. This decrease was
primarily attributable to reductions in services to existing customers in
addition to a decline in the number of traditional phone service customers.Operating Costs and Expenses
Cost of access service decreased $10,114 or 23.5% to $32,859 for the 2012 3rd
Quarter from $42,973 for the same period in 2011. This decrease was primarily
due to reductions in recurring costs associated with our network. Cost of access
service revenues as a percentage of access service revenues increased to 89.8%
during the 2012 3rd Quarter, compared to 67.8% during the same period in 2011.
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Cost of co-location and other revenues decreased $10,508 or 11.8% to $78,765 for
the 2012 3rd Quarter from $89,273 for the same period in 2011 primarily related
to reductions in costs of servicing our traditional phone service customers due
to a reduction in the number of customers utilizing that service. Cost of
co-location and other revenues as a percentage of co-location and other revenues
increased to 21.6% during the 2012 3rd Quarter, compared to 20.9% during the
same period in 2011.
Selling, general and administrative expenses decreased $7,396 or 2.4% to
$305,228 for the 2012 3rd Quarter compared to $312,624 for the same period in
2011primarily related to a decrease in employee costs offset by an increase in
advertising expenses. Selling, general and administrative expenses as a
percentage of total revenues increased to 76.1% during the 2012 3rd Quarter from
62.0% during the 2011 3rd Quarter.
Depreciation and amortization expense decreased $7,854 or 51.4% to $7,424 for
the 2012 3rd Quarter compared to $15,278 for the 2011 3rd Quarter primarily
related to several assets reaching full depreciation.
Interest Expense
Interest expense remained relatively the same at $5,641 for the 2012 3rd Quarter
compared to $6,001 for the same period in 2011.
Nine Months Ended September 30, 2012 (the "2012 Period") Compared to Nine Months
Ended September 30, 2011 (the "2011 Period")
Revenues
Access service revenues decreased $56,942 or 30.8% to $127,901 for the 2012
Period from $184,843 for the 2011 Period primarily due to a decline in our
number of customers.
Co-location and other revenues decreased $145,670 or 11.9% to $1,077,214 for the
2012 Period from $1,222,884 for the 2011 Period. This decrease was primarily
attributable to reductions in services to existing customers in addition to a
decline in the number of traditional phone service customers.
Operating Costs and Expenses
Cost of access service revenues decreased $30,113 or 22.9% to $101,473 for the
2012 Period from $131,586 for the 2011 Period. This decrease was primarily due
to reductions in recurring costs associated with our network. Cost of access
service revenues as a percentage of access service revenues increased to 79.3%
during the 2012 Period, compared to 71.2% during the 2011 Period.
Cost of co-location and other revenues decreased $17,950 or 6.6% to $255,905 for
the 2012 Period from $273,855 for the 2011 Period primarily related to
reductions in costs of servicing our traditional phone service customers due to
a reduction in the number of customers utilizing that service. Cost of
co-location and other revenues as a percentage of co-location and other revenues
increased to 23.8% during the 2012 Period compared to 22.4% during the 2011
Period.
Selling, general and administrative expenses increased $13,917 or 1.5% to
$928,737 for the 2012 Period compared to $914,820 for the 2011 Period. This
increase was primarily related to increases in advertising expenses. Selling,
general and administrative expenses as a percentage of total revenues increased
to 77.1% during the 2012 Period from 65.0% during the 2011 Period.
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Depreciation and amortization expense decreased $14,996 or 37.4% to $25,070 for
the 2012 Period compared to $40,066 for the 2011 Period primarily related to
several assets reaching full depreciation.
Interest Expense
Interest expense decreased $1.170 or 6.4% to $17,047 for the 2012 Period
compared to $18,217 for the 2011 Period primarily related to a decrease in notes
payable.
Liquidity and Capital Resources
As of September 30, 2012, we had $7,124 in cash and $1,972,535 in current
liabilities, including $179,525 of deferred revenues that will not require
settlement in cash.
At September 30, 2012 and December 31, 2011, we had a working capital deficit of
$1,906,156 and $1,801,314, respectively. We do not have a line of credit or
credit facility to serve as an additional source of liquidity. Historically we
have relied on shareholder loans as an additional source of funds.
As of September 30, 2012, of the $165,885 we owed to our trade creditors $80,796
was past due. We have no formal agreements regarding payment of these amounts.
At September 30, 2012, $256,443 payable under a matured lease obligation was
outstanding. The lessor has not made any formal demands for payment or
instituted collection action; however we are in discussions with the lessor to
restructure this liability. At September 30, 2012, we had outstanding principal
and accrued interest owed on a matured convertible promissory note totaling
$56,733. We have been making quarterly interest payments on this note and the
lender has not made any demands for payment of the principal. At September 30,
2012 we had outstanding principal and accrued interest owed on a matured secured
promissory note totaling $255,938. We have been making monthly principal and
interest payments on this note and the lender has not made any demands for
payment of the outstanding balance of this note.
In addition, during the nine months ended September 30, 2012, we had two
customers that each comprised approximately 12% and 9% of total revenues,
respectively. During the three months ended September 30, 2012, these two
customers each comprised approximately 12% and 8% of total revenues,
respectively. During the nine months ended September 30, 2011, we had two
customers that each comprised approximately 16% and 9% of total revenues,
respectively. During the three months ended September 30, 2011, these two
customers each comprised approximately 20% and 9% of total revenues,
respectively.
.
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Cash flow for the nine-month periods ending September 30, 2012 and 2011 consist
of the following.
For the Nine-Month Periods Ended
September 30,
2012 2011Net cash flows provided by operations $ 22,156 $
57,351
Net cash flows used in investing activities (8,669) (46,335)
Net cash flows used in financing activities (17,350) (10,121)
Cash used for the purchase of equipment was $8,669 and $36,279, respectively,
for the nine months ended September 30, 2012 and 2011. Cash used for the
acquisition of a business was $10,056 for the nine months ended September 30,
2011.
Cash used for principal payments on notes payable was $17,770 and $17,377 for
the nine months ended September 30, 2012 and 2011. Cash provided by the
exercise of options was $420 and $7,256 for the nine months ended September 30,
2012 and 2011, respectively.
The planned expansion of our business will require significant capital to fund
capital expenditures, working capital needs, and debt service. Our principal
capital expenditure requirements will include:
• mergers and acquisitions and
• further development of operations support systems and other automated back
office systems
Because our cost of developing new networks and services, funding other
strategic initiatives, and operating our business depend on a variety of factors
(including, among other things, the number of subscribers 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 current cash balances will not be
sufficient to fund our current business plan beyond a few months. As a
consequence, we are currently focusing on revenue enhancement and cost cutting
opportunities as well as working to sell non-core assets and to extend vendor
payment terms. We continue to seek additional convertible debt or equity
financing as well as the placement of a credit facility to fund our liquidity
needs. There is no assurance that we will be able to obtain additional capital
on satisfactory terms or at all or on terms that will not dilute our
shareholders' interests.
Until we obtain sufficient additional capital, the further development of our
network will be delayed or we will be required to take other actions. Our
inability to obtain additional capital resources has had and will continue to
have a material adverse effect on our business, operating results and financial
condition.
Our ability to fund the capital expenditures and other costs contemplated by our
business plan and to make scheduled payments with respect to borrowings will
depend upon, among other things, our ability to seek and obtain additional
financing in the near term. Capital will be needed in order to implement our
business plan, deploy our network, expand our operations and obtain and retain a
significant number of customers in our target markets. Each of these factors is,
to a large extent, subject to economic, financial, competitive, political,
regulatory, and other factors, many of which are beyond our control.
There is no assurance that we will be successful in developing and maintaining a
level of cash flows from operations sufficient to permit payment of our
outstanding indebtedness. If we are unable to generate sufficient cash flows
from operations to service our indebtedness, we will be required to modify or
abandon our growth plans, limit our capital expenditures, restructure or
refinance our indebtedness or seek additional capital or liquidate our assets.
There is no assurance that (i) any of these strategies could be effectuated on
satisfactory terms, if at all, or on a timely basis or (ii) any of these
strategies will yield sufficient proceeds to service our debt or otherwise
adequately fund operations.
Financing Activities
We have a secured promissory note from a shareholder which requires monthly
installments of interest only through December 30, 2010 then monthly
installments of $3,301 including principal and interest which matured
December 30, 2011 and is secured by all of our tangible and intangible assets
(see Note 8 - Notes Payable to our financial statements, above). We agreed to
issue additional shares of stock to the shareholder in the event that any
additional shares are issued at less than $.50 per share, excluding employee
stock options, prior to the payment in full of the secured promissory note. At
September 30, 2012, the outstanding principal and interest of the secured
promissory note was $255,938.
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We have an operating lease for certain equipment which is leased from one of our
shareholders whose parent company holds a $255,308 secured promissory note (see
Note 8 - Notes Payable to our financial statements, above). The original lease
was dated November 21, 2001 and the terms were $6,088 per month for 12 months
with a fair market purchase option at the end of the lease. Upon default on the
lease, we were allowed to continue leasing the equipment on a month-to-month
basis at the same monthly rate as the original lease. We have been unable to
make the month-to-month payments. In January and November 2006, we agreed to
extend the expiration date on 425,000 and 140,000, respectively, of common stock
purchase warrants for the lessor in return for a credit of $17,960 and $3,940,
respectively, on the operating lease. In September 2007, the lessor agreed to
cease the monthly lease payments effective January 1, 2007 which generated a
total of $54,795 of forgiveness of debt income. The lessor also agreed to accept
payments of $499 per month on the balance owed. In January and December 2009, we
agreed to extend the expiration date on 425,000 and 140,000, respectively, of
common stock purchase warrants for the lessor in return for a credit of $3,445
and $773, respectively, on the operating lease. At September 30, 2012 and
December 31, 2011 we had recorded $256,443 in unpaid lease payments. The loss of
this equipment would have a material adverse effect on our business, financial
condition and results of operations. We have been unable to make all of the
required payments pursuant to the terms of the September 2007 agreement. The
lessor has not made any formal demands for payment or instituted collection
action; however we are in discussions with the lessor to restructure this
liability.
We have a convertible promissory note that matured in November 2003. We have
been unable to pay this note and have been making quarterly interest
payments. The lender has not made any demands for payment of the principal. At
September 30, 2012, the outstanding principal and accrued interest of the
convertible promissory note was $56,733.
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Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect certain reported amounts and
disclosures. In applying our accounting principles, we must often make
individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, 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.
Access service revenues are recognized on a monthly basis over the life of each
contract as services are provided. Contract periods range from monthly to
yearly. Carrier-neutral telecommunications co-location revenues and traditional
telephone services are recognized on a monthly basis over the life of the
contract as services are provided. Revenue that is received in advance of the
services provided is deferred until the services are provided by us. Revenue
related to set up charges is also deferred and amortized over the life of the
contract. We classify certain taxes and fees billed to customers and remitted to
governmental authorities on a net basis in revenue.
We began billing AT&T (formerly SBC) reciprocal compensation (fees for
terminating AT&T customer's local calls onto our network) during 2004, and have
billed for the periods of March 2003 through June 2006. AT&T failed to pay and
is disputing approximately $183,700. We are pursuing AT&T for all balances due,
however there is significant uncertainty as to whether or not we will be
successful. Upon the ultimate resolution of AT&T's challenge, we will recognize
the associated revenue, if any. We do not expect reciprocal compensation to be a
significant or a long-term revenue source.
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