2.     MANAGEMENT'S PLANS

On August 27, 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.

The Company has historically experienced significant operating losses with cumulative losses from inception of approximately $10 million. These losses have resulted in a negative working capital position of approximately $614,000 at September 30, 2019, of which approximately $399,000 of the Company’s current liabilities is owed to its officers and directors, and approximately $517,000 of the Company’s current liabilities is deferred revenue.  The Company’s officers and directors, who are also major shareholders, have agreed to not seek payment of any of the amounts owed to them if such payment would jeopardize the Company’s ability to continue as a going concern.  The deferred revenue represents advance payments for services from the Company’s customers which will be satisfied by its delivery of services in the normal course of business and will not require settlement in cash.

The Company started a number of initiatives in 2017 which included revenue enhancement initiatives, cost saving initiatives, the sale of excess assets and an orderly exit from the CLEC business.  The Company was successful with its revenue enhancement and cost saving initiatives and in selling certain excess assets in the third quarter of 2018 and the first quarter of 2019, as well as effecting an orderly exit from the CLEC business through the sale of substantially all of its wholly owned subsidiary’s CLEC operating assets (see Note 10 – Discontinued Operations).

As a result of these initiatives, the Company generated positive cash flow from its operating activities of approximately $363,000 and $93,000, for the nine months ending September 30, 2019 and 2018, respectively.  In addition, the Company was able to generate net income of approximately $215,000 and $199,000, for the nine months ending September 30, 2019 and 2018, respectively.

Management expects that the success of these initiatives will provide the Company with sufficient liquidity for it to operate for the next 12 months.

As a result of the revenue enhancement initiatives, the cost saving initiatives, the excess asset sales and the successful exit from the CLEC business, the Company has been able to significantly improve its working capital position and alleviate any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-15.  We believe that the actions discussed above mitigate the substantial doubt raised by our prior operating losses and satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate additional liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. Additionally, a failure to generate additional liquidity could negatively impact our ability to effectively execute our business plan.

3.     RELATED PARTY TRANSACTIONS

At December 31, 2018, the Company had a secured convertible promissory note from a shareholder with a balance of $27,888.  The interest rate of this note was 6%, required monthly installments of $600 including principal and interest and matured May 31, 2023.  This convertible promissory note was secured by certain equipment of the Company.  The note holder had the right to convert the note, in its entirety or in part, into common stock of the Company at the rate of $1.00 per share.  On February 26, 2019, the Company paid the remaining balance of $27,888.

At September 30, 2019, the Company had related party accounts payable of $10,730, which were comprised of employee reimbursements for out-of-pocket expenses paid on behalf of the Company.  These reimbursements were subsequently paid in the following month.

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4.     STOCK BASED COMPENSATION

The following table summarizes the Company’s employee stock option activity for the nine months ended September 30, 2019:

During the nine months ended September 30, 2019, 480,000 and 3,000 nonqualified employee stock options were granted with exercise prices of $0.003 per option and $0.04 per option, respectively.  The options were valued using Black-Scholes option pricing model on the respective date of issuance and the fair value of the shares was determined to be $15,989 of which $15,876 was recognized as stock-based compensation expense for the nine months ended September 30, 2019.  Of these stock options, 480,000 vested immediately upon grant (February 19, 2019) and will expire one year from the date of the grant.  On May 17, 2019, certain employees, officers and directors of the Company and their family members exercised options to purchase 518,666 restricted shares of the Company’s common stock.  Proceeds from the exercise of the Options were $1,556, of which $1,440 was derived from the reduction of deferred compensation payable the Company owed to these officers and directors.  The common shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, without payment of any form of commissions or other remuneration.  

Total stock-based compensation expense for the nine months ended September 30, 2019 was $21,968, of which $15,876 was related to options issued during the nine months ended September 30, 2019 and $6,092 was related to options issued in prior years.  Stock-based compensation is measured at the grant date, based on the calculated fair value of the option, and is recognized as an expense on a straight-line basis over the requisite employee service period (generally the vesting period of the grant).  

The Black-Scholes option pricing model was used with the following weighted-average assumptions for options granted during the nine   months ended September 30, 2019:

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During the nine months ended September 30, 2019, 300,000 and 140,000 common stock purchase warrants were granted with exercise prices of $0.003 and $0.01, respectively, per option.  The warrants were valued using Black-Scholes warrant pricing model on the respective date of issuance and the fair value of the shares was determined to be $15,358, which was recognized as expense for the nine months ended September 30, 2019.  These warrants vested immediately upon grant (January 2, 2019) and will expire five years from the date of the grant.  

On March 4, 2019, 300,000 warrants with an exercise price of $.003 per share, and 100,000 warrants with an exercise price of $.01 per share, were exercised for 400,000 restricted shares of common stock, par value $.0001 per share.  Proceeds from the exercise of the warrants were $1,900.

The Black-Scholes pricing model was used with the following weighted-average assumptions for warrants granted during the nine   months ended September 30, 2019:

6.     SERIES A CONVERTIBLE PREFERRED STOCK

On March 9, 2019 the Company’s board of directors determined that it was in the best interest of the Company and its stockholders to conserve the Company’s working capital at this time and not make the annual dividend payment for the year ending December 31, 2018, on its Series A Convertible Preferred Stock.  The Company has never made an annual dividend payment on its Series A convertible preferred stock.  As of September 30, 2019, the aggregate outstanding accumulated arrearages of cumulative dividend was $195,720 or if issued in common shares, 4,893,010 shares.

The amortization of the increasing dividend rate preferred stock discount for the nine months ended September 30, 2019 was $10,087.

7.      PROPERTY AND EQUIPMENT

During the nine months ended September 30, 2019, no purchases were made for property and equipment.  During the nine months ended September 30, 2019, $5,737 was recorded as depreciation expense.

8.     INTANGIBLE ASSETS

During the nine months ended September 30, 2019, $6,625 was recorded as amortization expense.

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9.     LEASES

The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.

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 has a remaining life of one year and based on previous experience, we expect to renew it 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%), based on the information available at the date of adoption in determining the present value of the lease payments and a lease expiration date of December 31, 2024.  At September 30, 2019, the remaining future cash payments under our lease total approximately $979,453.

For the nine months ending September 30, 2019, we amortized $109,901 and $97,670, of our operating right-of-use, or ROU, asset and liability, respectively.  At September 30, 2019, an operating ROU asset and liability of approximately $967,222 and $979,453, respectively, are included on our condensed consolidated balance sheet.  

For the nine months ended September 30, 2019, our fixed operating lease cost was $178,567, which is included within operating costs and expenses in our condensed consolidated statement of operations.

For the nine months ended September 30, 2019, cash paid for amounts included in the measurement of our lease liability included within our cash flows from operating activities was $166,336.

Future minimum lease payments under non-cancellable operating lease as of September 30, 2019, were as follows:

10.     DISCONTINUED OPERATIONS

In response to the changes in the telecommunications market and deterioration in the Company’s ability to effectively compete, the Company made the decision to exit the competitive local exchange carrier or CLEC business.  On October 27, 2017, the Company’s board of directors adopted a plan to exit the CLEC business as soon as possible through the sale of its wholly owned CLEC subsidiary and/or substantially all of its CLEC subsidiary’s operating assets.  The Company was in negotiations with a potential buyer at December 31, 2017, which buyer subsequently purchased substantially all of its CLEC subsidiary’s operating assets pursuant to an asset purchase agreement which was executed and closed on February 1, 2018 (the “Sale”).

The Company determined that the Sale represented a strategic shift that will have a major effect on the Company’s operations and financial results since it represented a complete exit from the CLEC business and, therefore, classified its CLEC subsidiary as held for sale at December 31, 2017.

During February, 2018, the Company recognized a gain of $233,277 on the Sale based on total consideration of $264,872 less total basis in the assets sold and transactions costs of $31,595.  The assets sold consisted primarily of customers and associated customer premise equipment.

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