10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

For the fiscal year ended December 31, 2021:

Or

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 Crexendo, Inc.

 (Exact name of registrant as specified in its charter)

Nevada	001-32277	87-0591719
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation or Organization)	File Number)	Identification No.)

1615 South 52nd Street, Tempe, AZ 85281

 (Address of Principal Executive Office) (Zip Code)

(602) 714-8500

 (Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐    No ☒

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 ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒     No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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.

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐     No ☒

The aggregate market value of the common stock held by non-affiliates of the registrant as of December 31, 2021 was approximately $50,029,600.

The number of shares of the registrant’s common stock outstanding as of February 28, 2022 was 22,274,371.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I		1
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS.	8
ITEM 2.	PROPERTIES	24
ITEM 3.	LEGAL PROCEEDINGS	24
ITEM 4.	MINE SAFETY DISCLOSURES	24
PART II		24
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	25
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	40
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	41
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	79
ITEM 9A.	CONTROLS AND PROCEDURES	79
ITEM 9B.	OTHER INFORMATION	79
PART III		79
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	79
ITEM 11.	EXECUTIVE COMPENSATION	80
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS	80
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	80
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	80
PART IV		81
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	81

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PART I

Throughout this Annual Report, we refer to Crexendo, Inc., together with its subsidiaries, as “we,” “us,” “our Company,” “Crexendo®” or “the Company.” As used in this Annual Report, “Ride The Cloud^™” is a registered trademark of our Company in the United States and other countries. All other product names are or may be trademarks of, and are used to identify the products and services of, their respective owners.

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,” “INTEND,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PROJECT,” “PREDICT,” “POTENTIAL” OR “CONTINUE” (INCLUDING THE NEGATIVE OF SUCH TERMS), OR OTHER SIMILAR TERMINOLOGY. THESE STATEMENTS ARE ONLY ESTIMATIONS, AND ARE BASED UPON VARIOUS ASSUMPTIONS THAT MAY NOT BE REALIZED. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISKS OUTLINED BELOW UNDER ITEM 1A. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT.

ALTHOUGH WE BELIEVE THAT THE ESTIMATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING STATEMENTS. WE DO NOT INTEND TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS, UNLESS REQUIRED BY LAW.

ITEM 1. BUSINESS

OVERVIEW

Crexendo, Inc. is an award-winning premier provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings:

Cloud Telecommunications Services – Our cloud telecommunications services transmit calls using IP or cloud technology, which converts voice signals into digital data packets for transmission over the Internet or cloud. Each of our calling plans provides a number of basic features typically offered by traditional telephone service providers, plus a wide range of enhanced features that we believe offer an attractive value proposition to our customers. This platform enables a user, via a single “identity” or telephone number, to access and utilize services and features regardless of how the user is connected to the Internet or cloud, whether it’s from a desktop device or an application on a mobile device.

We generate recurring revenue from our cloud telecommunications and broadband Internet services. Our cloud telecommunications contracts typically have a thirty-six to sixty month term. We may also charge activation and flash fees and the Company generally allocates a portion of the activation fees to the desktop devices, which is recognized at the time of the installation or customer acceptance, and a portion to the service, which is recognized over the contract term using the straight-line method. We also charge other various contracted and non-contracted fees.

We generate product revenue and equipment financing revenue from the sale and lease of our cloud telecommunications equipment. Revenues from the sale of equipment, including those from sales-type leases, are recognized at the time of sale or at the inception of the lease, as appropriate.

Software Solutions – Our software solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

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We generate software license revenue from the sale of perpetual software licenses, term-based software licenses that expire, and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

We generate subscription and maintenance support revenue from customer support and other supportive services. The Company offers warranties on its products. The warranty period for our licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

We generate professional services and other revenue from consulting, technical support, resident engineer services, design services and installation services. Revenue for professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

OUR SERVICES AND PRODUCTS

Our solutions currently support over two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings:

Cloud Telecommunications Services – Our cloud telecommunications service offering includes hardware, software, and unified ng IP or cloud technology over any high-speed Internet connection. These services are rendered through a variety of devices and communication solutions for businesses using user interfaces such as a Crexendo branded desktop phones and/or mobile and desktop applications. Some examples of mobile devices are Android cell phones, iPhones, iPads or Android tablets. These services enable our customers to seamlessly communicate with others through phone calls that originate/terminate on our network or PSTN networks. Our cloud telecommunications services are powered by our proprietary implementation of standards based Web and VoIP cloud technologies. Our services use our highly scalable complex infrastructure that we build and manage based on industry standard best practices to achieve greater efficiencies, better quality of service (QoS) and customer satisfaction. Our infrastructure comprises of compute, storage, network technologies, 3^rd party products and vendor relationships. We also develop end user portals for account management, license management, billing and customer support and adopt other cloud technologies through our partnerships.

Crexendo’s cloud telecommunication service offers a wide variety of essential and advanced features for businesses of all sizes. Many of these features included in the service offering are:

· Business Productivity Features such as dial-by extension and name, transfer, conference, call recording, Unlimited calling to anywhere in the US and Canada, International calling, Toll free (Inbound and Outbound)

· Individual Productivity Features such as Caller ID, Call Waiting, Last Call Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified Messaging, Hot-Desking

· Group Productivity Features such as Call Park, Call Pickup, Interactive Voice Response (IVR), Individual and Universal Paging, Corporate Directory, Multi-Party Conferencing, Group Mailboxes, Web and mobile devices based collaboration applications

· Call Center Features such as Automated Call Distribution (ACD), Call Monitor, Whisper and Barge, Automatic Call Recording, One way call recording, Analytics

· Advanced Unified Communication Features such as Find-Me-Follow-Me, Sequential Ring and Simultaneous Ring, Voicemail transcription

· Mobile Features such as extension dialing, transfer and conference and seamless hand-off from WiFi to/from 3G and 4G, LTE, as well as other data services. These features are also available on CrexMo, an intelligent mobile application for iPhones and Android smartphones, as well as iPads and Android tablets

· Traditional PBX Features such as Busy Lamp Fields, System Hold. 16-48 Port density Analog Devices

· Expanded Desktop Device Selection such as Entry Level Phone, Executive Desktop, DECT Phone for roaming users

· Advanced Faxing solution such as Cloud Fax (cFax) allowing customers to send and receive Faxes from their Email Clients, Mobile Phones and Desktops without having to use a Fax Machine simply by attaching a file

· Web based online portal to administer, manage and provision the system.

· Asynchronous communication tools like SMS/MMS, chat and document sharing to keep in pace with emerging communication trends.

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Many of these services are included in our basic offering to our customers for a monthly recurring fee and do not require a capital expense. Some of the advanced features such as Automatic Call Recording and Call Center Features require additional monthly fees. Crexendo continues to invest and develop its technology and CPaaS offerings to make them more competitive and profitable.

Software Solutions – Our software solutions offering provides a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to over 190 service providers, servicing over two million users around the globe. Our platform enables its service provider partners to customize packages with unprecedented levels of flexibility, profitability, and ease of use.

Our software solutions offering are as follows:

· SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network.

· SNAPaccel – a Software-as-a-Service (“SaaS”) based software license referred to as subscription arrangements.

· Subscription Maintenance and Support - The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations and customer support. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches.

· Professional Services and Other - The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services.

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SEGMENT INFORMATION

The Company has two operating segments, which consist of cloud telecommunications services and software solutions. The information below is organized in accordance with our two reportable segments. Segment operating income is equal to segment net revenue less segment cost of service revenue, cost of product revenue, sales and marketing, research and development, and general and administrative expenses. Segment revenue and income before income tax benefit/(provision) was as follows (in thousands):

	Year Ended December 31,
	2021		2020
Revenue:
Cloud telecommunications services	$	19,426	$	16,387
Software solutions		8,666		-
Consolidated revenue	$	28,092	$	16,387

	Year Ended December 31,
	2021			2020
Income/(loss) before income tax benefit:
Cloud telecommunications services	$	(2,713	)	$	1,899
Software solutions		(197	)		-
Income/(loss) before income tax	$	(2,910	)	$	1,899

TECHNOLOGY

We believe our proprietary implementation of standard Web, IP, Cloud, Mobile and Internet technologies represent a key component of our business model. We believe these technologies and how we deliver them to our customers distinguish our services and products from the services and products offered by our competitors. Our technology infrastructure and virtual network operation center, all of which is built and managed on industry standard computers, storage, network, data and platforms offers us greater efficiencies while maintaining scalability and redundancy. The synergies between Web and Telecommunication protocols such as TCP/IP, HTTP, XML, SIP and innovations in computing, load balancing, redundancy and high availability of Web and Telecommunications technologies offers us a unique advantage in delivering these services to our customers seamlessly from our data center.

Our Cloud Telecommunications technology is continuously being enhanced with additional features and software functionality. Our current functionality includes:

· High-end desktop telephony devices such as Gigabit, PoE, 6 Line Color Phone with 10 programmable buttons and lower end Monochrome 2 Line wall mountable device.

· Basic Business Telephony Features such as those offered in a traditional PBX systems like extension dialing, Direct Inward Dialing (DID), Hold/Resume, Music-On-Hold, Call Transfer(Attended and Unattended), Conferencing, Local, Long Distance, Toll-Free and International Dialing, Voicemail, Auto-Attendant and traditional faxing.

· Advanced telephony features such as Call Park, Call Pickup, Paging (through the phones), Overhead paging, Call Recording.

· Call Center Functionality such as Agent Log In/Log Out, Whisper, Barge and Call center reporting.

· Unified Communications features like Simultaneous Ring, Sequential Ring, Status based Routing (Find-Me-Follow-Me), 10-party instant conference, and Mobile application (CrexMo).

· Crexendo Mobile Application (CrexMo), which allows users to place and receive extension calls using Crexendo’s network, transfer and conference other users right from their mobile deviceas if they were in the office. It also provided users instant access to visual voicemail and call logs.

· End User Portal and Unified Messaging with Voicemail, Call Recording and eFax inbox.

· Collaboration products like group chat, SMS/MMS, document sharing, video and web conferencing.

Our Software Solutions technology includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, built out either in a client’s own data centers, or on our Managed Infrastructure as a Service. Our current functionality includes:

· Carrier Grade with Geo-Redundant Reliability

· Scalability to support communications service providers of all sizes

· Video Conferencing and Collaboration

· Webinars

· Scheduling

· Meeting Recordings

· Content/Screen Sharing

· Chat

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· Multi Tenant Architecture to support multiple resellers, agents and retail clients

· Contact Center as a Service (CCaaS)

· All-in-One Cloud Native Contact Center

· Workforce Engagement

· Call Recording

· Employee Performance Management

· Quality Assurance & Monitoring

· Reporting, Analytics & Insights

· Unified Communications as a Service (UCaaS)

· PBX functionality in the Cloud

· Natively integrated with messaging, team collaboration, meetings and contact center

· Unified mobile and device experience

· Full integration with Microsoft Teams

· HD Audio

· Call Transcription

· Sentiment Analysis

· Customizable Emergency Notifications

· E911 Dynamic Routing

· Cradle to Grave Reporting

· Infrastructure as a Service

· Eliminate CAPEX and startup costs

· Slash time to market with immediacy of HW, resources, and expertise

· Client’s own SNAPsolution running in redundant Top-tier data centers both in the US and Europe

· Public vs Private Network Separation

· Multi-Layer Network Security

· Access Control Tracking and Change Control Procedures

· Offloads operations, upgrade and maintenance to Crexendo

· Disaster recovery and business continuity

· Operational flexibility with on-demand scaling

· 4 “9”s service uptime reliability

RESEARCH AND DEVELOPMENT

We invested $1,396,000 and $1,189,000 for the years ended December 31, 2021 and 2020, respectively, in the research and development of our technologies and data center. The majority of these expenditures were for enhancements to our cloud telecommunications products and services and continued development of our software solutions products.

COMPETITION

The market for cloud business communications services is large and increasingly competitive. We expect competition to continue to increase in the future. Some of these competitors include:

· traditional on-premise, hardware business communications providers such as Alcatel-Lucent, Avaya Inc., Cisco Systems, Inc., Mitel, NEC, and Siemens Enterprise Networks, LLC, any of which may now or in the future also host their solutions through the cloud;

· software providers such as Microsoft Corporation (Microsoft Teams (formerly Skype for Business)) and BroadSoft, Inc. (acquired by Cisco Systems, Inc.) that generally license their software and may now or in the future also host their solutions through the cloud, and their resellers including major carriers and cable companies;

· established communications providers that resell on-premise hardware, software, and hosted solutions, such as AT&T, Verizon Communications Inc., CenturyLink, Cox, Charter and Comcast Corporation in the United States, TELUS and others in Canada, and BT, Vodafone, and others in the United Kingdom, all of whom have significantly greater resources than us and do now or may in the future also develop and/or host their own or other solutions through the cloud;

· other cloud companies such as 8x8, Inc., RingCentral, Inc., Amazon.com, Inc., DialPad, Inc., Fusion, Fuze (formerly Thinking Phone Networks), StarBlue (merger of Star2Star and BlueFace), Intermedia.net, Inc., J2 Global, Inc., Jive Communications, Inc. (acquired by LogMeIn, Inc.), Microsoft Corporation (Microsoft Teams (formerly Skype for Business)), Mitel, Nextiva, Inc., Slack Technologies, Inc., Vonage Holdings Corp., and West Corporation;

· other large internet companies such as Alphabet Inc., Facebook, Inc., Oracle Corporation, Zoom, and Salesforce.com, Inc., any of which might launch its own cloud-based business communication services or acquire other cloud-based business communications companies in the future; and

· established contact center providers such as Amazon.com, Inc., Aspect Software, Inc., Avaya Inc., Five9, Inc., Genesys Telecommunications Laboratories, Inc., and NewVoiceMedia.

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The competitive landscape for our software solutions fall into two main categories, (1) other third party UCaaS platform vendors, such as Cisco, Mitel and Microsoft, and (2) third-party platforms hosted on service provider networks, e.g. 3CX, Ribbon, Avaya, NEC, Unify and Vodia. NetSapiens, along with the vendors in these two categories account for almost two thirds of the UCaaS seats in North America in 2020. The remaining seats are served by either open source-based platforms or service providers that host their own proprietary platform, including Ringcentral, 8x8 and Dialpad.

Additionally, should we determine to pursue acquisition opportunities, we may compete with other companies with similar growth strategies. Some of these competitors may be larger and have greater financial resources than we do. Competition for these acquisition targets could also result in increased prices of acquisition targets and a diminished pool of companies available for acquisition.

There are relatively low barriers to entry into our business. Our proprietary technology does not preclude or inhibit competitors from entering our markets. In particular, we anticipate new entrants will attempt to develop competing products and services or new forums for conducting e-commerce and telecommunications services which could be deemed competition. Additionally, if telecommunications service providers with more resources and name recognition were to enter our markets, they may redefine our industry and make it difficult for us to compete.

Expected technology advances associated with the Cloud, increasing use of the Cloud, and new software products are welcome advancements that we believe will broaden the Cloud’s viability. We anticipate that we can compete successfully by relying on our infrastructure, marketing strategies and techniques, systems and procedures, and by adding additional products and services in the future. We believe we can continue the operation of our business by periodic review and revision to our product offerings and marketing approach.

INTELLECTUAL PROPERTY

Our success depends in part on using and protecting our proprietary technology and other intellectual property. Furthermore, we must conduct our operations without infringing on the proprietary rights of third parties. We also rely upon trade secrets and the know-how and expertise of our key employees. To protect our proprietary technology and other intellectual property, we rely on a combination of the protections provided by applicable copyright, trademark and trade secret laws, as well as confidentiality procedures and licensing arrangements. Although we believe we have taken appropriate steps to protect our intellectual property rights, including requiring employees and third parties who are granted access to our intellectual property to enter into confidentiality agreements, these measures may not be sufficient to protect our rights against third parties. Unauthorized parties may still copy or otherwise obtain and use our software and technology, despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses and confidentiality agreements. Others may independently develop or otherwise acquire unpatented technologies or products similar or superior to ours.

We license from third parties certain software and Internet tools, which we include in our services and products. If any of these licenses were terminated, we could be required to seek licenses for similar software and Internet tools from other third parties or develop these tools internally. We may not be able to obtain such licenses or develop such tools in a timely fashion, on acceptable terms, or at all.

Companies participating in the software, Internet technology, and telecommunication industries are frequently involved in disputes relating to intellectual property. We may be required to defend our intellectual property rights against infringement, duplication, discovery and misappropriation by third parties or to defend against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies. Any such litigation or disputes could be costly and divert our attention from our business. An adverse determination could subject us to significant liabilities to third parties, require us to seek licenses from, or pay royalties to, third parties, or require us to develop appropriate alternative technology. Some or all of these licenses may not be available to us on acceptable terms, or at all. In addition, we may be unable to develop alternate technology at an acceptable price, or at all. Any of these events could have a material adverse effect on our business prospects, financial position, or results of operations.

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EMPLOYEES

As of December 31, 2021, we had 121 employees; 121 full-time and 0 part-time, including 8 executives, 32 sales representatives and sales management, 4 in marketing, 29 engineers and IT support, 35 in operations and customer support, 13 in accounting, finance, and legal.

 CORPORATE INFORMATION

Crexendo, Inc. was incorporated as a Nevada corporation under the name “Netgateway, Inc.” on April 13, 1995. In November 1999, we were reincorporated under the laws of Delaware. In July 2002, we changed our corporate name to “iMergent, Inc.” In May 2011, our stockholders approved an amendment to our Certificate of Incorporation to change our name from “iMergent, Inc.” to “Crexendo, Inc.” The name change was effective May 18, 2011. Our ticker symbol “IIG” on the New York Stock Exchange was changed to “EXE” on May 18, 2011. We changed the name to better reflect the scope and direction of our business activities of assisting and providing web-based technology solutions to any size business who are seeking to take advantage of the benefits of conducting business on the cloud. On January 13, 2015, the Company moved to the OTCQX Marketplace and our ticker symbol was changed to “CXDO”. In November 2016, we were reincorporated as a Nevada corporation. On July 8, 2020, the Company up listed to The Nasdaq Stock Market keeping our ticker symbol “CXDO”.

Our principal executive offices are located at 1615 S. 52nd Street, Tempe, AZ 85281. The telephone number of our principal executive offices is (602) 714-8500, and our main corporate website is www.crexendo.com. Information contained on, or that can be accessed through, our website, does not constitute part of this Annual Report on Form 10-K and inclusion of our website address in this Annual Report on Form 10-K is an inactive textual reference only.

We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website, www.crexendo.com/why-crexendo/sec-filings/ as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or the “SEC”. In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The Company announces material information to the public about the Company, its products and services and other matters through a variety of means, including the Company’s website (www.crexendo.com), the investor relations section of its website (www.crexendo.com/company/investors), press releases, filings with the SEC, and public conference calls, in order to achieve broad, non-exclusionary distribution of information to the public. The Company encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time.

GOVERNMENTAL REGULATION

As a provider of Internet communications services, we are subject to regulation in the U.S. by the FCC. Some of these regulatory obligations include contributing to the Federal Universal Service Fund, Telecommunications Relay Service Fund and federal programs related to number administration; providing access to E-911 services; protecting customer information; and porting phone numbers upon a valid customer request. We are also required to pay state and local 911 fees and contribute to state universal service funds in those states that assess Internet voice communications services. We are a competitive local exchange carrier (CLEC) in forty-seven states. We are subject to the same FCC regulations applicable to telecommunications companies, as well as regulation by the public utility commission in these states. Specific regulations vary on a state-by-state basis, but generally include the requirement to register or seek certification to provide its services, to file and update tariffs setting forth the terms, conditions and prices for our intrastate services and to comply with various reporting, record-keeping, surcharge collection, and consumer protection requirements.

We are subject to regulations generally applicable to all businesses. We are also subject to an increasing number of laws and regulations directly applicable to telecommunication, internet access and commerce. The adoption of any such additional laws or regulations may decrease the rate of growth of the Internet, which could in turn decrease the demand for our products and services. Such laws may also increase our costs of doing business or otherwise have an adverse effect on our business prospects, financial position or results of operations. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel, and personal privacy is uncertain. Future federal or state legislation or regulation could have a material adverse effect on our business prospects, financial condition and results of operations.

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ITEM 1A. RISK FACTORS.

The COVID-19 pandemic has had some adverse effect on our business and may continue to have increased adverse effects our business, results of operations, and financial condition.

The effects of the global spread of the disease caused by the COVID-19 pandemic on our business are evolving and difficult to predict. To date, the COVID-19 pandemic has significantly and negatively impacted the global economy and it is unclear how long the pandemic will continue to do so. To combat the spread of COVID-19, the United States and other foreign countries have imposed measures such as quarantines and “shelter-in-place” orders that are restricting business operations and travel and requiring individuals to Work from Home (“WFH”), which has impacted all aspects of our business as well as those of the third-parties we rely upon for our manufacturing, shipping and other operations. To date the COVID-19 outbreak has not had a material adverse impact on our operations. However, the continuation of WFH and other restrictions for an extended period of time may negatively impact our productivity, product development, operations, sales and support, business and financial results. Among other things, the continuation of the COVID-19 pandemic may result in:

● a decrease in demand and/or prices for our products and services;

● a prolonged economic recession or depression that could significantly reduce demand and/or prices for our products and services;

● reduced productivity in our product development, operations, marketing, sales and other activities;

● disruptions to our supply chain;

● increased costs resulting from our efforts to mitigate the impact of the COVID-19 pandemic;

● reduced access to financing to fund our operations due to a deterioration of credit and financial markets; or

● higher rate of losses on our accounts receivables due to credit defaults.

The COVID-19 pandemic has also caused significant uncertainty and volatility in global and domestic financial markets and the trading prices for the common stock of technology companies, including us. Due to such volatility, we may not be able to raise additional capital, if needed, on favorable terms, or at all. Further adverse economic events resulting from the COVID-19 pandemic, including a sustained economic downturn, could materially and adversely affect our business, access to capital markets and the value of our common stock.

In addition, given the inherent uncertainty surrounding COVID-19 due to rapidly changing governmental directives, public health challenges and economic disruption and the duration of the foregoing, the potential impact that the COVID-19 pandemic could have on the other risk factors described in this “Risk Factors” section remain unclear and evolving.

We have experienced and may continue to experience cancellations and greater delay and disruption in the demand for, our products and services. In addition, we believe the production capabilities of our suppliers have been, and may continue to be, impacted as a result of quarantines, closures of production facilities, lack of supplies, or delays caused by restrictions on travel or WFH orders. The continued disruption in the manufacture, shipment and sales of telephones and ancillary equipment may negatively and materially impact our operating and financial operating results, including revenue, gross margins, operating margins, cash flows and other operating results. The resumption of normal business operations after such disruptions may be delayed and a resurgence of COVID-19 on a large scale could occur resulting in continued disruption to us, our suppliers and/or our customers. As a result, the effects of the COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition for the remainder of 2021 and beyond.

A continued downturn in the worldwide or domestic economy may harm our business.

The COVID-19 pandemic has caused a downturn in the worldwide and domestic economy. As the pandemic and the economic downturn prolongs, this may continue to reduce demand for our products or our customers’ products, which could result in significant decreases in sales and margins for our products. In addition, the deterioration in credit markets could limit our ability to obtain external financing to fund our operations and capital expenditures. We may experience losses on our holdings of cash and investments due to failures of financial institutions and other parties. Adverse economic conditions may also result in a higher rate of losses on our accounts receivables due to credit defaults. As a result, a continued downturn in the worldwide or domestic economy could have a material adverse effect on our business, results of operations, or financial condition.

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Our quarterly and annual results of operations have fluctuated in the past and may continue to do so in the future. As a result, we may fail to meet or to exceed the expectations of research analysts or investors, which could cause our stock price to fluctuate and impair our ability to raise capital.

Our quarterly and annual results of operations have varied historically from period to period, and we expect that they will continue to fluctuate due to a variety of factors (including but not limited to COVID-19), some of which are outside of our control, including:

● our ability to retain existing customers and resellers, expand our existing customers’ user base, and attract new customers;

● our ability to introduce new solutions;

● the actions of our competitors, including pricing changes or the introduction of new solutions;

● our ability to effectively manage our growth;

● our ability to successfully penetrate the market for larger businesses;

● the mix of annual and multi-year subscriptions at any given time;

● the timing, cost, and effectiveness of our advertising and marketing efforts;

● the timing, operating cost, and capital expenditures related to the operation, maintenance and expansion of our business;

● service outages or information security breaches and any related impact on our reputation;

● our ability to accurately forecast revenues and appropriately plan our expenses;

● our ability to realize our deferred tax assets;

● costs associated with defending and resolving intellectual property infringement and other claims;

● changes in tax laws, regulations, or accounting rules;

● the timing and cost of developing or acquiring technologies, services or businesses, and our ability to successfully manage any such acquisitions;

● adverse weather conditions;

● the impact of worldwide economic, political, industry, and market conditions; and,

● our ability to maintain compliance with all regulatory requirements.

Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet the expectations of research analysts or investors for any period, which could cause our stock price to decline. We sustained operating losses in prior years and may experience losses in the future. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenues trends. Accordingly, in the event of revenue shortfalls, we may not be able to mitigate the negative impact on net income/(loss) and margins in the short term. If we fail to meet or exceed the expectations of research analysts or investors, the market price of our shares could fall substantially, and we could face costly lawsuits, including securities class-action suits. This may also impair our ability to raise capital, should we seek to do so.

Our growth and the evolving markets in which we operate make it difficult to evaluate our current business and future prospects, which may increase the risk of investing in our stock.

We have encountered and expect to continue to encounter risks and uncertainties as a growing company, the market for our products changes frequently. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully, our results of operations could differ materially from our expectations, and our business could suffer.

We may not remain profitable, and results may fluctuate.

We have in the past sustained losses and may have losses again in the future. We expect to invest in sales and marketing, and in research and development, among other areas of our business, in order to compete more successfully for the business of companies that are transitioning to cloud communications and otherwise position ourselves to take advantage of long-term revenue-generating opportunities.

The investments we have made and will continue to make may not generate the returns that we anticipate, which could adversely impact our financial condition and make it more difficult for us to grow revenue and/or maintain profitability. In order to continue and maintain profitability, we will need to manage our cost structure more efficiently, not incur significant liabilities, while continuing to grow our revenues. Despite these efforts, our revenue growth may slow, revenues may decline, or we may incur significant losses in the future due to economic and world conditions downturn in general economic conditions, increasing competition (including competitive pricing pressures), decrease in the adoption or sustained use of cloud communications market, exiting lines of business, or our inability to execute on business opportunities. We cannot be certain that we will be able to achieve or maintain operating profitability in the future.

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We expect to undertake additional acquisitions the cost of which may affect profitability in certain quarters and for periods after the closing of the acquisition.

Our future operating results, including revenues, expenses, losses and profits, may vary substantially from period to period and may be difficult to predict.

We recently announced a quarterly dividend there is no guarantee that dividends will continue to be paid

We may not be able to maintain paying dividends at current rates or at all. We recently announced a quarterly dividend. Any determination to pay dividends to the Company’s stockholders in the future will be at the discretion of the board of directors and will depend on the Company’s results of operations, financial condition and other factors deemed relevant by the board of directors. The ability to pay dividends depends largely on results of operations. In addition, the Company may choose to retain capital to support growth or further mitigate risk instead of returning capital to its shareholders. As a result, there can be no assurance that we will be able to maintain paying dividends.

We expect to undertake acquisitions, mergers or change to our capital structure to expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders. We may be required to acquire debt to fund acquisitions or mergers.

As part of a potential growth strategy, we expect to attempt to acquire or merge with certain businesses. Whether we realize benefits from any such transactions will depend in part upon the integration of the acquired businesses, the performance of the acquired products, services and capacities of the technologies acquired, as well as the personnel hired in connection therewith. Accordingly, our results of operations could be adversely affected from transaction-related charges, amortization of intangible assets, and charges for impairment of long-term assets. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there can be no assurance that any potential transaction will be successful.

In addition, the financing of any acquisition may require us to raise additional funds through public or private sources. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stockholders. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which may have a material adverse effect on our consolidated financial position, results of operations, and cash flows.

Acquiring debt to finance acquisitions would require paying down of principal and payment of interest, which requires the use of cash, and we may not have sufficient cash flow from our business to pay down substantial debt. The ability to make scheduled payments of principal or to pay interest on notes will depend on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations to service any acquired debt, including paying off the principal when due, and make necessary capital expenditures.

We may not be able to secure financing on favorable terms, or at all, to meet future needs.

We may need to pursue financing in the future to make expenditures or investments to support the growth of our business (whether through acquisitions or otherwise) and may require additional capital to pursue our business objectives, respond to new competitive pressures, service our debt, pay extraordinary expenses, or fund growth, including through acquisitions, among other potential uses. Additional funds, however, may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow and support our business and to respond to business challenges could be significantly limited.

Our strategy to expand through acquisitions or investments in, other companies, may divert our management’s attention, increase expenses, disrupt our operations and harm our results of operations.

Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses. We cannot assure you that we will successfully identify suitable acquisition candidates, integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize our business strategy or the expected return on our investment, or manage a geographically dispersed company. Our inability to successfully operate and integrate newly acquired businesses appropriately, effectively, and in a timely manner could impair our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenues, gross margins and expenses. Any such acquisition or investment could materially and adversely affect our results of operations. Acquisitions and other strategic investments involve significant risks and uncertainties, including: the potential failure to achieve the expected benefits of the combination or acquisition; unanticipated costs and liabilities; difficulties in integrating new products and services; software, businesses; operations and technology infrastructure in an efficient and effective manner; difficulties in maintaining customer relations; the potential loss of key employees of the acquired businesses; the diversion of the attention of our senior management from the operation of our daily business; the potential adverse effect on our cash position to the extent that we use cash for the purchase price; the potential significant increase of our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition; the potential to incur large and immediate write-offs and restructuring and other related expenses; and the inability to maintain uniform standards, controls, policies and procedures.

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Further, any acquisition may affect our ability to adequately maintain our internal control over financial reporting. If our internal control over financial reporting is not effective, it may adversely affect investor confidence in the Company.

Our ability to use our net operating loss carry-forwards may be reduced in the event of an ownership change and could adversely affect our financial results.

As of December 31, 2021, we had net operating loss (“NOL”) carry-forwards of approximately $27,013,000. Section 382 of the Internal Revenue Code, as amended (the “Code”) imposes limitations on a corporation’s ability to utilize its NOL carry-forwards. In general terms, an ownership change results from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. Any limited amounts may be carried over into later years, and the amount of the limitation may, under certain circumstances, be increased by the “recognized built-in gains” that occur during the five-year period after the ownership change (the recognition period). Future changes in ownership of more than 50% may also limit the use of these remaining NOL carry-forwards. Our earnings, if any, and cash resources would be materially and adversely affected if we cannot receive the full benefit of the remaining NOL carry-forwards. An ownership change could occur as a result of circumstances that are not within our control.

The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companies and alternative voice communication providers and other VoIP companies.

Our Cloud telecommunications services compete with other voice over internet protocol (“VoIP”) providers. In addition, we also compete with traditional telephone service providers which provide telephone service based on the public switched telephone network (“PSTN”). Our VoIP offering is not fully compatible with such customers. Some of these traditional providers have also added VoIP services. There is also competition from cable providers, which have added VoIP service offerings in bundled packages to their existing cable customers. The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companies, and alternative voice communication providers.

Most traditional wire line and wireless telephone service providers, cable companies, and some VoIP providers are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract target customers away from their existing providers.

The markets for our products and services are continuing to evolve and are increasingly competitive. Demand and market acceptance for recently introduced and proposed new products and services and sales of such products and services are subject to a high level of uncertainty and risk. Our business may suffer if the market develops in an unexpected manner, develops more slowly than in the past or becomes saturated with competitors, if any new products and services do not sustain market acceptance. A number of very large, well-capitalized, high profile companies serve the e-commerce, VoIP and Cloud technology markets. If any of these companies entered our markets in a focused and concentrated fashion, we could lose customers, particularly more sophisticated and financially stable customers.

Our VoIP or cloud telecommunications service competes against established well financed alternative voice communication providers (such as 8x8 and Ring Central), who may provide comparable services at comparable or lower pricing.

Pricing in the telecommunications industry is very fluid and competitive. Price is often a substantial motivation factor in a customer’s decision to switch to our telephony products and services. Our competitors may reduce their rates, which may require us to reduce our rates, which would affect our margins and revenues, or otherwise make our pricing non-competitive. We may be at a disadvantage compared with those competitors who have substantially greater resources than us or may otherwise be better positioned to withstand an extended period of downward pricing pressure.

Many of our current and potential competitors have longer operating histories, significantly greater resources and brand awareness, and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. Our competitors may also offer bundled service arrangements that present a more differentiated or better integrated product to customers. Announcements, or expectations, as to the introduction of new products and technologies by our competitors or us could cause customers to defer purchases of our existing products, which also could have a material adverse effect on our business, financial condition or operating results.

We face risks in our strategy of designing and developing our own desktop telephones (“desktop devices”).

We continue to primarily sell Crexendo ® branded desktop devices, although, the Company also supports third party devices manufactured by Yealink, Cisco, and Polycom. Our desktop devices are being manufactured by third party vendors in China. The current economic challenges in China and global economic ramifications of Chinese economic difficulties, the U.S. trade war with China, including trade protection measures such as tariffs, and the effects of any new wave of COVID-19 infections or another pandemic may cause potential supply-chain disruptions in obtaining our desktop devices. This may increase pricing, slow delivery times or may force us to find another third party manufacturer of our branded desktop devices.

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The Crexendo branded desktop devices include firmware specifically designed for our cloud telecommunications services and are not currently intended to work with other competitors’ or vendors’ services. If the desktop devices are successfully manufactured, there is no assurance of the acceptance of them by customers. Successful roll out is not guaranteed and is contingent on various factors including but not limited to: meeting certain industry standards, the availability of our vendors to meet agreed terms, supply from vendors being sufficient to meet demand, industry acceptance of the desktop devices, desktop devices meeting the needs of our customers, competitive pricing of the desktop devices, feature set of the desktop devices being up to competitive standards, regulatory approval as required of the desktop devices and competitor claims relating to the desktop devices. Our failure to be able to fully implement the sale of the Crexendo desktop devices or the inability to have desktop devices manufactured to meet our supply needs may cause us damage as well as require us to have to purchase desktop devices from other suppliers at a higher price which could affect sales and margins.

Errors in our technology or technological issues outside our control could cause delays or interruptions to our customers.

Our services (including cloud telecommunications and e-commerce) can be disrupted by problems with our technology and systems such as malfunctions in our servers, processes, software or facilities. In addition, there may be service interruptions for reasons outside our control. Our customers and potential customers subscribing to our services have experienced such interruptions in the past and may experience such interruptions in the future as a result of these types of problems or others which may or may not be in our control. Such Interruptions cause us to lose customers and offer customer credits, which could adversely affect our revenue and profitability. Network and telecommunication interruptions may also impair our ability to sign-up new customers. In addition, since our systems and our customers’ ability to use our services are Internet-dependent, our services may be subject to “cyber-attacks” from the Internet, which could have a significant impact on our systems and services.

If we do not successfully expand our physical infrastructure and build diverse geo redundant locations, which require large investments, we may be unable to substantially increase our sales and retain customers.

Our ability to provide cloud telecommunications services is dependent upon on our physical and cloud-based infrastructure. While most of our physical equipment required for providing these services is redundant in nature, certain types of failures or malfunctioning of critical hardware/software equipment, including but not limited to fire, water or other physical damage may impact our ability to deliver continuous service to our customers. Act of God or terrorism or vandalism or negligence or gross negligence including failure to properly update and maintain infrastructure of person(s) currently or formerly associated with the Company may result in loss of revenue, profitability and failure to retain and acquire new customers.

Our ability to recover from disasters or failures, if and when they occur, is paramount to offering continued service to our existing customers. We maintain a redundant physical infrastructure in our data center in Tempe, Arizona for disaster recovery. This system does not guarantee continued reliability if a catastrophic event occurs. Despite implementation of network security measures, our servers may be vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems including, but not limited to, denial of service attacks. In addition, if there is a breach or alleged breach of security or privacy involving our services including but not limited to data loss, or if any third party undertakes illegal or harmful actions using our communications or e-commerce services, our business and reputation could suffer substantial adverse publicity and impairment. We have experienced interruptions in service in the past. We have taken and continue to take steps to improve our infrastructure to prevent service interruptions.

In addition to our physical infrastructure, we have a cloud infrastructure deployment with Amazon Web Services (“AWS”) which is intended to provide continuous service to our customers in the event of a disaster or failure of our physical infrastructure. We have had failures in the automatic switch over to AWS which the Company and AWS have reviewed and are addressing and we expect to remediate that issue. If we fail to properly maintain our infrastructure or our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. The failure to properly maintain services may result in negative consequences to us including but not limited to: (i) cause a material loss of customers, (ii) adversely affect our reputation, (iii) cause negative publicity, (iv) negatively impact our ability to acquire customers, (v) negatively impact our revenue and profitability, (vi) potential law suits for not reaching E-911 services, and (vii) potential law suits for loss of business and loss of reputation.

Failure in our data center or services could lead to significant costs and disruptions.

All data centers, including ours, are subject to various points of failure. Problems with cooling equipment, generators, uninterruptible power supply, routers, switches, or other equipment, whether or not within our control, could result in service interruptions for our customers as well as equipment damage. Any failure or downtime could affect a significant percentage of our customers. The total destruction or severe impairment of our data center facilities could result in significant downtime of our services and the loss of customer data.

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We depend on our senior management and other key personnel, and a loss of these individuals could adversely impact our ability to execute our business plan and grow our business.

We depend on the continued services of our key personnel, including our officers and certain engineers. Each of these individuals has acquired specialized knowledge and skills with respect to our operations. The loss of one or more of these key personnel could negatively impact our performance. In addition, we expect to hire additional personnel as we continue to execute our strategic plan, particularly if we are successful in expanding our operations. Competition for the limited number of qualified personnel in our industry is intense. At times, we have experienced difficulties in hiring personnel with the necessary training or experience.

Changes in our business model and sales strategies may continue to adversely impact our website hosting revenue.

When the Company shifted away from a seminar sales model in 2011, our web services revenue was adversely impacted and has continued to decrease. Our website hosting revenue has continued to decline since we no longer sell our website development software through a seminar sales model. The Company is not actively marketing its website development software or website hosting services. Our website hosting revenue represents less than 1% of our total revenue for the year ended December 31, 2021 and may continue to decline over time as more competitors enter the website building and hosting industry.

We have targeted sales to mid-market and larger enterprise customers. Not properly managing these customers could negatively affect our business, margins, cash flow and operations.

Selling to larger enterprise customers contains inherent risks and uncertainties. Our sales cycle has become more time-consuming and expensive. The delays associated with closing and installing larger customers may impact results on a quarter-to-quarter basis. There may be additional pricing pressure in this market which may affect margins and profitability. Revenue recognition may be delayed for some complex transactions, all of which could harm our business and operating results. The loss of a large customer may have a material negative impact on quarterly or annual results.

Multi-location users require additional and expensive customer service which may require additional expense and impact margins on enterprise sales. Enterprise customers may demand more features, integration services and customization which require additional engineering and operational time which could impact margins on an enterprise sale. Multi-location enterprise customer sales may have different requirement in different locations which may be difficult to fulfill or satisfy various interests which could result in cancellations.

Enterprise customers might demand we provide service locations internationally where we may encounter technical, logistical, infrastructure and regulatory limitations on our ability to implement or deliver our services. Our inability to provide service in certain international locations may result in a cancellation of the entire contract. Further with larger enterprise customer sales, the risk of customers transporting desktop devices internationally without our knowledge may increase.

We have a limited history of selling our services to larger businesses and may experience challenges in configuring and providing ongoing support for the solutions we sell to large customers. Larger customers’ networks are often more complex than those of smaller customers, and the configuration of our services for these customers usually requires customer assistance. There is no guarantee that the customer will make available to us the necessary personnel and other resources for a successful configuration of services. Lack of assistance from the customers or lack of local resources may prevent us from properly configuring our services for the customers, which can in turn adversely impact the quality of services that we deliver over our customers’ networks, and/or may result in delays in the implementation of our services and impact the quality and ability to continue to provide the services. This could also create a public perception that we are unable to deliver high quality of service to our customers, which could harm our reputation. In addition to the foregoing, larger customers tend to require higher levels of customer service and individual attention, which may increase our costs for implementing and delivering services.

Sales to small and medium-sized businesses face risks as they may have fewer financial resources to weather an economic downturn.

A substantial percentage of our revenues come from small and medium-sized businesses. These customers may be more adversely affected by economic downturns than larger, more established businesses. The majority of our customers pay for our subscriptions with credit and debit cards. Weakness in certain segments of the credit markets and in the U.S. and global economies may result in increased numbers of rejected credit and debit card payments, which could negatively affect our business. If small and medium-sized businesses experience financial hardship as a result of a weak economy, industry consolidation, or any other reason, the overall demand for our subscriptions could be materially and adversely affected.

We must acquire new customers on an ongoing basis to maintain and increase our customers and revenues while the significant costs to acquire new customers may reduce our profitability.

We will have to acquire new customers in order to increase revenues. We incur significant costs to acquire new customers, and those costs are an important factor in determining our profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers beyond those budgeted, our revenue could decrease, which could prevent us from reaching profitability and have our net loss increase. Marketing expenditures are an ongoing requirement and will become a larger ongoing requirement of our business as we strive for acquiring new customers.

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If we do not successfully expand our sales, including our partner channel program and direct sales, we may be unable to increase our sales and that may affect our stock price.

We sell our products primarily through direct sales and our partner channel, and we must substantially expand the number of partners and producing direct sales personnel to increase organic revenue substantially. If we are unable to expand our partner channel network and hire and retain qualified sales personnel, our ability to increase our organic revenue and grow our business could be compromised. The challenge of attracting, training, and retaining qualified candidates, may make it difficult to grow revenue. Our direct sales are driven largely by inside sales who sell our services and products to customers. Our future growth depends on our ability to develop and maintain a successful direct sales organization that identifies and closes a significant portion of sales. If we or the agents fail to do so, we may be unable to meet our revenue growth targets. Our partner sales are generated through indirect channel sales. These channels consist of master agents’ independent agents (including master agents), value-added resellers, and service providers. We contract directly with the end customer. We may or may not have active involvement in the sale or may use these channel partners to identify, qualify and manage prospects throughout the sales cycle. These channels may generate an increasing portion of our revenue in the future. Our continued success requires continuing to develop and maintain successful relationships with these partners. If we fail to properly select and manage our partners, or they are not successful in their sales efforts, we may be unable to meet our revenue growth targets.

A substantial portion of our sales is dependent on partners, resellers, and master agents to sell our products and services; our failure to effectively develop, manage, and maintain our indirect sales channels could materially and adversely affect our revenues.

Our success depends on our continued ability to establish and maintain a network of channel relationships, including but not limited to strategic partners, agents, and master agents. We need to properly manage and expand these relationships. These relationships are essential both in targeting our strategic base and expanding into the enterprise market. We believe we will need to expand our network in order to grow our business. An increasing portion of our revenues are and maybe derived from our network of sales agents and resellers. We do not have long-term contracts with these resellers, nor do most of our contracts require minimum commitments on the part of resellers. The loss of or reduction in sales through these third parties could materially reduce our revenues. Many of our competitors also rely on resellers and there may be intense completion regarding their sales, attention, and commitment. Competitors may be able to transition some or all of those customers onto their competing solutions, which could materially and adversely affect our revenues.

Acquiring new resellers and retaining current resellers requires substantial training in our technology and subscription offerings which necessitates time and resources. To maintain and expand our indirect sales channels, we must continue to scale and improve our processes and procedures to support these channels, including investment in systems and training.

Our churn rate may increase in future periods due to customer cancellations or other factors, which may adversely impact our revenue or require us to spend more money to grow our customer base.

Our customers generally have initial service periods of between three and five years and may discontinue their subscriptions for our services after the expiration of their initial subscription period. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. We may not accurately predict cancellation rates for our customers. Our cancellation rates may increase or fluctuate because of a number of factors, including customer usage, pricing changes, number of applications used by our customers, customer satisfaction with our service, the acquisition of our customers by other companies and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or decrease the amount they spend with us, our revenue will decline, and our business will suffer.

Our rate of customer cancellations we believe has increased and may increase in future periods due to many factors, some of which are beyond our control, such as the financial condition of our customers or the state of credit markets, especially given the continued COVID-19 pandemic and its impact on the economy. In addition, a single protracted service outage or a series of service disruptions, whether due to our services or those of our bandwidth carriers, may result in a sharp increase in customer cancellations.

We may not be able to scale our business efficiently or quickly enough to meet our customers’ growing needs, in which case our operating results could be harmed.

As usage of our cloud telecommunications services by mid-market and larger distributed enterprises expands and as customers continue to integrate our services across their enterprises, we are required to devote additional resources to improving our application architecture, integrating our products and applications across our technology platform as well as expanding integration and performance. We will need to appropriately scale our internal business systems and our services organization, including customer support and services and regulatory compliance, to serve a growing customer base. Any failure of or delay in these efforts could impair our systems’ performance and reduce customer satisfaction, which could result in decreased sales to new customers and lower renewal rates by existing customers and eventually hurt our revenue growth and our reputation. We cannot guarantee that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all, which failure may reduce revenue and our margins and adversely impact our financial results.

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Our success depends in part upon our ability to provide customer service that effectively supports the needs of our customers.

Providing customer services effectively requires that our customer support personnel have industry-specific technical knowledge and expertise. It may be difficult and costly for us to hire qualified personnel, particularly in the strong labor market in Phoenix, Arizona where we are headquartered. Our support personnel require extensive training on our products and services, which may make it difficult to scale up our support operations rapidly or effectively. The importance of high-quality customer support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve post-implementation issues and provide effective ongoing support, our ability to sell additional features and services to existing customers will suffer and our reputation may be harmed.

Our success depends in part upon the capacity, reliability, and performance of our several third party providers and their network infrastructure, the failure of which could cause delays or interruptions of our service and impact our revenue and profitability.

We depend on several third-party providers to provide uninterrupted and error-free service to maintain our operations. We do not have control over these providers, and some of these providers may be our competitors. We may be subject to interruptions or delays in their service and our reputation and business may be harmed. The failure of any of these third party service providers to properly maintain services may result in negative consequences to us including but not limited to: (i) cause a loss of customers, (ii) adversely affect our reputation, (iii) cause negative publicity, (iv) negatively impact our ability to acquire customers, (v) negatively impact our revenue and profitability, (vi) potential law suits for not reaching E-911 services, and (vii) potential law suits for loss of business and loss of reputation. These third-party providers include:

● Internet Bandwidth Providers. We may be subject to interruptions or delays in network service. If we fail to maintain reliable bandwidth or performance that could significantly reduce customer demand for our services and damage our business. Our cloud telecommunications service (and to a lesser extent our e-commerce services) requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer’s Internet service provider and electric utility company and not by us. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In addition, if there is any interruption to a customer’s broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls (our E-911 service), using our service. In addition, internet backbone providers may be able to block, degrade or charge for access to, or the bandwidth use of certain of our products and services which could have a negative effect on our services and could lead to additional expenses and the loss of users. Our products and services depend on the ability of our users to access the Internet, and many of our services require significant bandwidth to work effectively. Further, customers who access our mobile application Crexmo© (or future application) through their smartphones must have a high-speed connection, to use our services. This access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace some of these providers offer products and services that directly compete with our own offerings, which give them a significant competitive advantage.

● Tier 1 and non-Tier 1 Telecom suppliers for Telecom Origination and Termination Services. We depend on these companies to provide service telecom services, sourcing of Direct Inward Dialing (DID), porting of numbers and delivering telephone calls from and to endpoints and devices on our network. If we fail to maintain reliable connectivity or performance with our upstream carriers it could then significantly reduce customer demand for our services and damage our business.

● A portion of our customer service responses, delivery of calls to and from PSTN and other public telephone VoIP/Wireless service providers and provision of aspects of our E-911 service. We offer our cloud telecommunications customers support 24 hours a day, seven days a week. We may rely on third parties (sometimes outside of the U.S) to respond to customer inquiries. These third-party providers generally represent us without identifying themselves as independent parties. The ability of third-party providers to provide these representatives may be disrupted due to issues outside our control. We also maintain an agreement with an E-911 provider to assist us in routing emergency calls directly to an emergency service dispatcher at the public-safety answering point (“PSAP”) in the area of the customer’s registered location and terminating E-911 calls. We also contract with a provider for the national call center that operates 24 hours a day, seven days a week to receive certain emergency calls and with several companies that maintain PSAP databases for the purpose of deploying and operating E-911 services. The dispatcher will have automatic access to the customer’s telephone number and registered location information. If a customer moves their Crexendo service to a new location, the customer’s registered location information must be updated and verified by the customer. Until that takes place, the customer will have to verbally advise the emergency dispatcher of his or her actual location at the time of an emergency 9-1-1 call. This can lead to delays in the delivery of emergency services. Interruptions in service from these vendors could also cause failures in our customers’ access to E-911 services and expose us to liability.

● Initiation of local number portability for our customers. We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services. We will need to work with these companies to properly port numbers. The failure to port numbers may subject us to loss of customers or regulatory review.

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● Outside contractors and third-party agents for fulfillment of certain items and critical manufacturing services. We outsource the manufacturing of certain products we sell and provide. We submit purchase orders to agents or the companies that manufacture the products. We describe, among other things, the type and quantities of products or components to be supplied or manufactured and the delivery date and other terms applicable to the products or components. Our suppliers or manufacturers potentially may not accept any purchase order that we submit. Our reliance on outside parties involves a number of potential risks, including: (i) the absence of adequate capacity, (ii) the unavailability of, or interruptions in access to, production or manufacturing processes, (iii) reduced control over delivery schedules, (iv) errors in the product, and (v) claims of third-party intellectual infringement or defective merchandise. If delays, problems or defects were to occur, it could adversely affect our business, cause claims for damages to be filed against us, and negatively impact our consolidated operations and cash flows.

We depend upon industry standard protocols, best practices, solutions, third-party software, technology, and tools, including but not limited to Open Source software.

We rely on non-proprietary third-party licensing and software, some of which may be Open Source and protected under various licensing agreements. We may be subject to additional royalties, license or trademark infringement costs or other unknown costs when one or more of these third-party technologies are affected or need to be replaced due to end-of-support or end-of-sale of such third parties.

Changes to rates by our suppliers and increasing regulatory charges or tariffs may require us to raise prices, which could impact results.

Our upstream carriers, suppliers and vendors may increase their rates thus directly impacting our cost of sales, which would affect our margins. Interconnected VoIP traffic may be subject to increased charges. Should this occur, the rates paid to our underlying carriers may increase which could reduce our profitability. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently un-tariffed products or services could affect the price and sales of our products for certain classes of customers. Changes in our underlying costs of sales may increase rates we charge our customers which could make us less competitive and impact our sales and retention of existing customers.

Changes in laws and regulations and the interpretation and enforcement of such laws and regulations could adversely impact our financial results or ability to conduct business.

We are subject to a variety of federal and state laws and regulations as well as oversight from a variety of governmental agencies and public service commissions. The laws governing our business may change in ways that harm our business. Federal or state governmental agencies administering and enforcing such laws may also choose to interpret and apply them in ways that harm our business. These interpretations are also subject to change. Regulatory action could materially impair or force us to change our business model and may adversely affect our revenue, increase our compliance costs, and reduce our profitability. In addition, governmental agencies such as the SEC, Internal Revenue Service (“IRS”), Federal Trade Commission (“FTC”), Federal Communication Commission (“FCC”) and state taxing authorities may conclude that we have violated federal laws, state laws or other rules and regulations, and we could be subject to fines, penalties or other actions that could adversely impact our financial results or our ability to conduct business.

Our telecommunications services are required to comply with industry standards, FCC regulations, privacy laws as well as certain state and local jurisdiction specific regulations. Failure to comply with existing laws and any new laws that may become applicable to us may subject us to penalties, increase our operation costs, and may also require us to modify existing products and/or service.

The acceptance of telecommunications services is dependent upon our meeting certain industry standards. We are required to comply with certain rules and regulations of the FCC regarding safety standards. Standards are continuously being modified and replaced. As standards evolve, we may be required to modify our existing products or develop and support new versions of our products. We must comply with certain federal, state, and local requirements regarding how we interact with our customers, including marketing practices, consumer protection, privacy, and billing issues, the provision of 9-1-1 emergency service and the quality of service we provide to our customers. The failure of our products and services to comply, or delays in compliance, with various existing and evolving standards could delay future offerings and impact our sales, margins, and profitability. Changes to the Universal Service Funds by the FCC or various states may require us to increase our costs which could negatively affect revenue and margins.

We are subject to Federal laws and FCC regulations that require us to protect customer information. While we have protections in place to protect customer information there is no assurance that our systems will not be subject to failure or intentional fraudulent attack. The failure to protect required information could subject us to penalties and diminish the confidence our customers have in our systems, which could negatively affect results. While we try to comply with all applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments to the extent possible, any failure by us to protect our users’ privacy and data, including as a result of our systems being compromised by hacking or other malicious or surreptitious activity, could result in a loss of user confidence in our services and ultimately in a loss of users, which could materially and adversely affect our business as well as subject us to law suits, civil fines and criminal penalties.

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Governmental entities, class action lawyers and consumer advocates are reviewing the data collection and use by companies that must maintain such data. Our own requirements as well as regulatory codes of conduct, enforcement actions by regulatory agencies, and lawsuits by other parties could impose additional compliance costs on us as well as subject us to unknown potential liabilities. These evolving laws, rules and practices may also curtail our current business activities, which may delay or affect our ability to become profitable as well as affect customers and other business opportunities.

In addition, several foreign countries and governmental bodies, including the E.U., Brazil and Canada, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents, including payment card information, which are often more restrictive than those in the U.S. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable information, including payment card information identifying, or which may be used to identify, an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol (IP) addresses, device identifiers and other data. Our phones may be moved to locations which could potentially subject us to jurisdiction. Also, websites we host may be available in these locations. As we conduct business or become deemed to conduct business in those foreign jurisdictions, we may become subject to those laws.

We are also subject to the privacy and data protection-related obligations in our contracts with our customers and other third parties. Any failure, or perceived failure, to comply with federal, state, or international laws, or to comply with our contractual obligations related to privacy, could result in proceedings or actions against us which could result in significant liability to us as well as harm to our reputation. Additionally, third parties with whom we contract may violate or appear to violate laws or regulations which could subject us to the same risks. Any new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations.

Our collection, processing, storage, use, and transmission of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements, differing views on data privacy, or security breaches.

We collect, process, store, use, and transmit personal data on a daily basis. Personal data is increasingly subject to legal and regulatory protections around the world, which vary widely in approach and which possibly conflict with one another. In recent years, for example, U.S. legislators and regulatory agencies, such as the Federal Trade Commission, as well as U.S. states have increased their focus on protecting personal data by law and regulation and have increased enforcement actions for violations of privacy and data protection requirements. California recently enacted legislation, the California Consumer Privacy Act (“CCPA”) that will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, which became effective January 1, 2020. While we believe that we are not a covered entity under the law, the effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to personal data by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices. Washington and Massachusetts have also introduced significant privacy bills and Congress is debating federal privacy legislation, which if passed, may restrict our business operations and require us to incur additional costs for compliance.

The European Commission also approved and adopted the General Data Protection Regulation (“GDPR”), its data protection law, which took effect in May 2018. A Data Protection Act substantially implementing the GDPR was enacted in the U.K., effective in May 2018. These data protection laws and regulations are intended to protect the privacy and security of personal data, including credit card information that is collected, processed, and transmitted in or from the relevant jurisdiction. We stopped hosting websites in GDPR-complaint countries or countries from which the bulk of business came from countries subject to GDPR. We also took steps to block those countries from accessing any other sites we host. While we do not currently provide services in countries where compliance would be required and are therefore not required to be compliant, if we did provide those services or otherwise were required to become complaint, implementation of and compliance with these laws and regulations may be more costly or take longer than we anticipate, or could otherwise adversely affect our business operations, which could negatively impact our financial position or cash flows.

Additionally, media coverage of data breaches has escalated, in part because of the increased number of enforcement actions, investigations, and lawsuits. As this focus and attention on privacy and data protection increases, we also risk exposure to potential liabilities and costs resulting from compliance with or any failure to comply with applicable legal requirements, conflicts among these legal requirements, or differences in approaches to privacy.

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We face risks in our sales to certain market segments including, but not limited to, sales subject to HIPAA Regulations.

We have sold and will continue to attempt to sell to certain customer segments which may have requirements for additional privacy or security. In addition, sales may be made to customers that are subject to additional security requirements. Selling into segments with additional requirements increases potential liability which in some instances may be unlimited. While the Company believes it meets or exceeds all requirements for sales into such segments, there is no assurance that the Company systems fully comply with all requirements. Our customers can use our services to store contact and other personal or identifying information, and to process, transmit, receive, store and retrieve a variety of communications and messages, including information about their own customers and other contacts. In addition, customers may use our services to store protected health information, or PHI, that is protected under the Health Insurance Portability and Accountability Act, or HIPAA. Noncompliance with laws and regulations relating to privacy and HIPAA may lead to significant fines, penalties or civil liability.

Our ability to offer services outside the U.S. is subject to different regulations which may be unknown and uncertain.

Regulatory treatment of VoIP providers outside the United States varies from country to country, and local jurisdictions. Many times, the laws are vague, unclear and regulations are not enforced uniformly. We are licensed as a VoIP seller in Canada and are considering expanding to other countries. We also cannot control if our customers take their devices out of the United States and use them abroad. Our resellers may sell to customers who maintain facilities outside the United States. The failure by us or our customers and resellers to comply with laws and regulations could reduce our revenue and profitability. As we expand to additional countries there may be additional regulations that we are required to comply with, the failure to comply or properly assess regulations may subject us to penalties, fines and other actions which could materially affect our business.

Examinations by relevant tax authorities may result in material changes in related tax reserves for tax positions taken in previously filed tax returns or may impact the valuation of certain deferred income tax assets, such as net operating loss carry-forwards.

Based on the outcome of examinations by relevant tax authorities, or as a result of the expiration of statutes of limitations for specific jurisdictions, it is reasonably possible that the related tax reserves for tax positions taken regarding previously filed tax returns will materially change from those recorded in our financial statements. In addition, the outcome of examinations may impact the valuation of certain deferred income tax assets (such as NOL carry-forwards) in future periods. It is not possible to estimate the impact of the amount of such changes, if any, to previously recorded uncertain tax positions.

The FCC net neutrality rules have changed. There may be a negative effect to our business going forward as a consequence of those changes.

On January 4, 2018, the FCC, released an order that largely repeals rules that the FCC had in place which prevented broadband internet access providers from degrading or otherwise disrupting a broad range of services provisioned over consumers’ and enterprises’ broadband internet access lines. There are efforts in Congress to prevent the order from becoming effective and a number of state attorneys general have filed an appeal of the FCC’s January 4, 2018 order. Many of the largest providers of broadband services, like cable companies and traditional telephone companies, have publicly stated that they will not degrade or disrupt their customers” use of applications and services, like ours. However, there is not guarantee that they will continue to do such. If such providers were to degrade, impair, or block our services, it would negatively impact our ability to provide services to our customers, likely result in lost revenue and profits, and we would incur legal fees in attempting to restore our customers’ access to our services. Broadband internet access providers may also attempt to charge us or our customers additional fees to access services like ours that may result in the loss of customers and revenue, decreased profitability, or increased costs to our offerings that may make our services less competitive. Following the adoption of the January 4, 2018 order, a number of states have passed laws establishing rules similar to those that existed prior to the effective date of the January 4, 2018 order. States have adopted a variety of approaches in attempting to preserve the rules in place prior to the order. We however cannot rely on those laws as there is legal uncertainty as to whether states that have passed such laws have the authority to do so if such laws as they could be interpreted to conflict with the January 4, 2018 order. The U.S. Department of Justice has taken the position that local authorities do not have the authority to contradict the FCC’s January 4, 2018 order. We cannot predict the ultimate outcome of these disputes. President Biden and numerous Senators have criticized the current status of net neutrality, at this time we are not aware if there will be legislation that might reimpose the prior regulations.

States are adding regulation for VoIP providers which could increase our costs and change certain aspects of our service.

Certain states take the position that offerings by VoIP providers are intrastate and therefore subject to state regulation. We have registered as a competitive local exchange carrier (“CLEC”) in most states; however, our rates are not regulated in the same manner as traditional telephone service providers. Some states are also requiring that we register as a seller of VoIP services even though we have registered as a CLEC. Some states argue that if the beginning and desktop devices of communications are known, and if some of these communications occur entirely within the boundaries of a state, the state can regulate that offering and may therefore add additional taxes or surcharges or regulate rates in a similar matter to traditional telephone service providers. We believe that the FCC has pre-empted states from regulating VoIP providers in the same manner as providers of traditional telecommunications services. We cannot predict how this issue will be resolved or its impact on our business at this time.

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Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added, or similar taxes, and any such assessments could adversely affect our business, financial condition, and results of operations.

Jurisdictions in which we do not collect sales, use, value added, or similar taxes on VoIP services or other products may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, interest, or future requirements would adversely affect our financial condition and results of operations. Further, in June 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state sellers even if those sellers lack any physical presence within the states imposing the sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after the publication of Wayfair) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state sellers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state sellers on sales that occurred in prior tax years, which could create additional administrative burdens for us, put us at a competitive disadvantage if such states do not impose similar obligations on our competitors, and decrease our future sales, which would adversely impact our business, financial condition, and results of operations.

We incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies, which could harm our future operating results.

As a public company we incur significant legal, accounting, and other expenses, including costs associated with public company reporting requirements. Our management team and other personnel devote a substantial amount of time complying with SEC, Nasdaq and other public company requirements.

The growth of our business may require that we strengthen our financial reporting systems and infrastructure if we fail to do so we may not remain in compliance with Section 404 of the Sarbanes-Oxley Act over internal control over financial reporting. If we fail to maintain compliance, we could be unable to report our financial results timely and accurately or prevent fraud. We may to incur significant expense and devote substantial management effort toward strengthening our systems.

From time to time we had been the subject of governmental inquiries and investigations related to our discontinued seminar sales model and business practices that could require us to pay refunds, damages or fines, which could negatively impact our financial results or ability to conduct business. We have received customer complaints and civil actions.

From time to time, we received inquiries from federal, national, state, city and local government officials in the various jurisdictions in which we operated. These inquiries had historically been related to our discontinued seminar sales practices. There is still the potential of review of past sales and sales of our current web and telecom services. We respond to these inquiries and have generally been successful in addressing the concerns of these persons and entities, without a formal complaint or charge being made, although there is often no formal closing of the inquiry or investigation. If the ultimate resolution of these or other inquiries or investigations is not in our favor, this may have a material adverse effect on our business or operations, or a formal complaint could be initiated. During the ordinary course of business, we also receive a number of complaints and inquiries from customers, governmental and private entities. In some cases, these complaints and inquiries from agencies and customers have ended up in civil court. We may continue to receive customer and agency claims and actions.

We could be liable for breaches of security on our website, fraudulent activities of our users, or the failure of third-party vendors to deliver credit card transaction processing services.

We engage in electronic billing and processing of our customers using secure transmission of sometimes confidential information over public networks. We have systems and processes in place that we deem sufficient and industry standard that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches. However, there is no guarantee that such systems and processes will not experience a failure. Our failure to protect against fraud or breaches may subject us to costly breach notification and other mitigation obligations, class action lawsuits, investigations, fines, forfeitures, or penalties from governmental agencies that could adversely affect our operating results. We may be unable to prevent our customers from fraudulently receiving goods and services. Our liability could also increase if a large fraction of transactions using our services involve fraudulent or disputed credit card transactions. We may also experience losses due to customer fraud and theft of service. Customers have, in the past, obtained access to our service without paying for monthly service and international toll calls by unlawfully using fraudulently obtained codes. If our existing anti-fraud procedures are not adequate or effective, consumer fraud and theft of service could have a material adverse effect on our business, financial condition, and operating results.

We could experience security breaches in the transmission and analysis of confidential and proprietary information of the consumer, the merchant, or both, as well as our own confidential and proprietary information.

Anyone able to circumvent security measures could misappropriate proprietary information or cause interruptions in our operations, as well as the operations of the merchant. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that we experience breaches in the security of proprietary information which we store and transmit, our reputation could be damaged, and we could be exposed to a risk of loss or litigation.

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We collect personal and credit card information from our customers and employees could misuse this information.

The PCI Data Security Standard (“PCI DSS”) is a specific set of comprehensive security standards required by credit card brands for enhancing payment account data security, including but not limited to requirements for security management, policies, procedures, network architecture, and software design. We maintain credit card and other personal information in our systems. Due to the sensitive nature of retaining such information we have implemented policies and procedures to preserve and protect our data and our customers’ data against loss, misuse, corruption, misappropriation caused by systems failures, unauthorized access, or misuse. Notwithstanding these policies, we could be subject to liability claims by individuals and customers whose data resides in our databases for the misuse of that information. While the Company believes its systems meet or exceed industry standards, the Company does not believe it is required to meet PCI level 1 compliance and has not certified under that level. Failure to meet PCI compliance levels could negatively impact the Company’s ability to collect and store credit card information which could cause substantial disruption to our business. Notwithstanding the results of this assessment there can be no assurance that payment card brands will not request further compliance assessments or set forth additional requirements to maintain access to credit card processing services, which could incur substantial additional costs and could have a material adverse effect on our business.

We may incur substantial expenses in defending against third-party patent and trademark infringement claims regardless of their merit.

From time to time, parties may assert patent infringement claims against us in the form of letters, lawsuits, and other forms of communication. Third parties may also assert claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights or alleging unfair competition. If there is a determination that we have infringed third-party proprietary rights, we could incur substantial monetary liability and be prevented from using the rights in the future.

Risks Related to Our Common Stock

Our stock price may be volatile and may decline,

The trading price and volume of our common stock is likely to be volatile and could fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

● actual or anticipated fluctuations in our results of operations due to, among other things, changes in customer demand, pricing, ordering patterns, and unforeseen operating costs;

● announcements with respect to developments, status, and impact on us, our competitors, our constituents, and our suppliers of the COVID-19 global pandemic;

● failure of research analysts to maintain coverage or the ability to get additional coverage, changes in financial estimates or ratings by any research analysts who follow us, or our failure to meet these estimates or the expectations of investors;

● announcements by us or our competitors of significant technical innovations, substantial promotions, price reductions, acquisitions, strategic partnerships or joint ventures.

● changes in operating performance and stock market valuations of other competitive companies generally, or those in the telecommunication and related services industry;

● cyclical fluctuations

● price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

● actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

● new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;

● any major change in our management;

● lawsuits threatened or filed against us; and

● other events or factors, including those resulting from war, incidents of terrorism, the COVID-19 pandemic or responses to these events.

In addition, the market for telecommunication stocks and the stock markets in general have experienced extreme price and volume fluctuations. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The COVID-19 pandemic has also caused significant uncertainty and volatility in global and domestic financial markets and the trading prices for the common stock of technology companies, including us. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, financial condition, and results of operations.

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Our securities have been thinly traded. An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common stock, in addition our stock price has been subject to fluctuating prices. Our stock price may also be affected by any merger, acquisition, or need for future sales of our common stock or equity-linked securities in the public market.

Our common stock is currently traded on the Nasdaq Capital Market. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected.

The market price of our common stock could decline as a result of a merger, acquisition, or sales of a large number of shares of our common stock in the market or the perception that these sales could occur. Such sales or offerings could lower the market price for our common stock and may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We may issue shares as part of a merger transaction, an acquisition or otherwise sell additional shares of our common stock or equity-linked securities to raise capital. A substantial number of shares of our common stock could be registered and issued. Furthermore, there are substantial amounts of vested stock options which are “in the money” which could be exercised and sold in public markets. The Company continues to expect to issue stock options as part of compensation. The Company further expects to request a new equity incentive plan be to accommodate additional stock options to allow the Company to properly incorporate any mergers or acquisitions. There may be further effect on our stock price upon the vesting and settlement of restricted stock units and performance units. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock or equity-linked securities as in this offering, or the perception that such issuances and sales may occur, could adversely affect the trading price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities. Additional dilution will also result as a consequence of shares of common stock sold pursuant to this offering and potential future offerings as well as if outstanding options to acquire shares of our common stock are exercised.

We are a “smaller reporting company,” and the reduced disclosure requirements applicable to us as such may make our common shares less attractive to our stockholders and investors.

We are a “smaller reporting company” under the federal securities laws and, as such, are subject to scaled disclosure requirements afforded to such companies. For example, as a smaller reporting company, we are subject to reduced executive compensation disclosure requirements. Our stockholders and investors may find our common shares less attractive as a result of our status as a “smaller reporting company” and our reliance on the reduced disclosure requirements afforded to these companies. If some of our stockholders or investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and the market price of our common shares may be more volatile.

Our actual operating results may not meet expectations, which could likely cause our stock price to decline.

We have historically not provided guidance in our earnings releases, earnings conference calls, or otherwise. Management in the future may change this policy and provide future guidance. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. With or without our guidance, analysts, and other third parties may publish expectations regarding our business, financial condition, and results of operations. We do not accept any responsibility for any projections or reports published by any such third parties. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or expectations, the trading price of our common stock is likely to decline.

Our stock price, volatility and acceptance of our securities may be influenced by the research and reports that securities or industry analysts may publish about us or our business.

The Company cannot guarantee if there will be research reports written on the Company. Our stock price may be affected by the ability to get coverage and/or sufficient coverage. If coverage is initiated and/or if one or more of current or future analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts after issuing coverage ceases coverage of the Company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline. Furthermore, such analysts publish their own projections regarding our actual results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet analysts’ projections.

Lack of sufficient stockholder equity or continued losses from operations could subject us to fail to comply with the listing requirements of the Nasdaq Capital Market, if that occurred, the price of our common stock and our ability to access the capital markets could be negatively impacted, and our business will be harmed.

Our common stock is currently listed on the Nasdaq Capital Market. Our stock was previously traded in the over-the-counter market prior to which it was traded on the New York Stock Exchange and failed to maintain the continued listing qualifications. We cannot guarantee that we will always meet Nasdaq listing qualifications. There remains the possibility of future losses. It is possible we may not remain in compliance with the minimum conditions of Nasdaq listing qualifications. Delisting from the Nasdaq Capital Market could negatively affect the trading price of our stock and could also have other negative results, including the potential loss of confidence by suppliers and employees, the failure to attract the interest of institutional investors, and fewer business development opportunities.

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We may invest or spend the proceeds of our cash both from operations and from past and future offerings in ways with which you may not agree or in ways which may not yield a favorable return.

Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase the value of our business, which could cause our stock price to decline. See the section of this prospectus titled “Use of Proceeds.”

  Future offerings, acquisitions or mergers could cause substantial dilution of their ownership interest.

If the Company undertakes future offerings, or the Company issues stock compensation in an acquisition or merger stockholders will have a dilution in their ownership percentage of stock which may be substantial depending upon the amount of shares which may be required.

Our Chief Executive Officer owns a significant amount of our common stock and could exercise substantial corporate control. There may be limited ability to sell the Company absent the consent of the CEO.

Steven G. Mihaylo, Chief Executive Officer (“CEO”) of Crexendo, Inc., owns approximately 47% of the outstanding shares of our common stock based on the number of shares outstanding as of December 31, 2021. Mr. Mihaylo has the ability to determine the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, amalgamation, consolidation or sale of all or substantially all of our assets. Mr. Mihaylo may have the ability to control the management and affairs of our Company. As a “control company” it may not be required that the Company maintains a board comprising a majority of independent directors. As a director and officer, Mr. Mihaylo owes a fiduciary duty to our stockholders. As a stockholder, Mr. Mihaylo is entitled to vote his shares, in his own interests, which may not always be in the interests of our stockholders generally. Accordingly, even though certain transactions may be in the best interests of other stockholders, this concentration of ownership may harm the market price of our common stock by, among other things, delaying, deferring or preventing a change in control of our Company, impeding a merger, amalgamation, consolidation, takeover or other business combination involving our Company, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company.

In addition, sales or other dispositions of our shares by Mr. Mihaylo may depress our stock price. Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock, as Mr. Mihaylo is doing in this offering. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase, which could result in a decrease in the market price of our common stock.

Some of the provisions of our articles of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares at a premium to the then market price. Our bylaws contain provisions regulating the introduction of business at annual stockholders’ meetings by anyone other than the board of directors. These provisions may have the effect of making it more difficult, delaying, discouraging, preventing or rendering costlier an acquisition or a change in control of our Company.

There is no guarantee that Crexendo and NetSapiens will fully integrate operations or that the merger will be accretive. Failure to properly manage the merger could impact our stock price and our future business and financial results.

The success of the Merger will depend, in part, on our ability to successfully integrate NetSapiens’ business and operations and fully realize the anticipated benefits and synergies from combining the businesses of Crexendo and NetSapiens. However, to realize these anticipated benefits and synergies, the businesses of Crexendo and NetSapiens must be successfully combined. If we are not able to achieve these objectives following the Merger, the anticipated benefits and synergies of the Merger may not be realized fully or at all or may take longer to realize than expected. Any failure to timely realize these anticipated benefits could have a material adverse effect on our revenues, expenses and operating results.

Crexendo and NetSapiens are in the process of combining operations and attempting to implement operational efficiencies, however for the time being the operations are not fully integrated and many facets of the businesses are still being run independently. It is possible that the ongoing integration process could result in the loss of key employees, loss of key customers, decreases in revenues, increases in operating costs, as well as the disruption of each company’s ongoing businesses, any or all of which could limit our ability to achieve the anticipated benefits and synergies of the Merger and have an adverse effect on our operating results. Integration efforts between the two companies could also divert management’s attention and resources, which could also adversely affect our operating results.

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We are planning to migrate most of Crexendo’s customers to the NetSapiens Communication Platform, the failure to do that efficiently and properly may impact our business revenue and stock price.

We are in the process of moving certain Crexendo customers to the NetSapiens communication platform while retaining the Crexendo Ride the Cloud® system. There can be significant cost savings associated with consolidating all customers on one communication platform while maintaining the Crexendo system for redundancies. The failure to properly migrate customers could cause customer service issues which could cause cancellations and loss of revenue. There may be expenses and other difficulties involved in migrating customers, which may cause substantial short-term expenses prior to realizing the anticipated cost savings from primarily operating one system. We may be unable to realize efficiencies of primarily maintaining one communication platform.

We have incurred and still have some continuing transaction costs in connection with the Merger. There may be difficulties in combining operations and employee benefits.

We have incurred significant costs in connection with the Merger including legal, accounting, financial consulting, and related fees. Certain of these costs may continue particularly in relation to combining benefit and employee programs. There will be costs associated with combining accounting systems, legal, compliance, and employee benefits. The employee benefits provided historically to NetSapiens employees are different than the benefits provided to Crexendo employees. There may be expenses and other difficulties involved in having one set of employee benefit programs. We may incur additional costs to retain key employees. We may lose certain employees who may perceive there is a diminution in value of benefits previously received under the NetSapiens benefits compared to Crexendo benefits. We may also incur fees and costs related to these integration plans. We may be unable to realize efficiencies with the Merger that would allow us, over time, to offset the costs incurred in connection with the Merger.

Crexendo and NetSapiens may have difficulty attracting, motivating and retaining executives and other key employees in light of the Merger.

While the Merger Agreement provided for covenants attempting to acknowledge NetSapiens employees’ pre-closing services to NetSapiens for benefits eligibility purposes and to provide a similar level of compensation accorded to the NetSapiens employees should they continue their employment with the post-closing business, uncertainty about the effect of the Merger on Crexendo and NetSapiens’ employees remains and may have an adverse effect on Crexendo and NetSapiens and consequently the combined business. This uncertainty may impair Crexendo and NetSapiens’ ability to attract, retain and motivate key personnel for the combined entity. NetSapiens employees may experience uncertainty about their future roles with the combined business. Additionally, NetSapiens officers and employees may own shares of NetSapiens’ common stock and/or have stock option grants and may have received both cash and Crexendo stock and Options to purchase common stock of Crexendo, the payment of which could provide sufficient financial incentive for certain officers and employees to no longer pursue employment with the combined business. If key employees of Crexendo or NetSapiens depart, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the Merger.

Crexendo’s and NetSapiens’ business relationships, including customer relationships, may be subject to disruption due to the Merger.

Parties with which Crexendo and NetSapiens do business with may experience uncertainty associated with the Transaction, including with respect to business relationships with Crexendo, NetSapiens or the combined business. Crexendo’s and NetSapiens’ business relationships may be subject to disruption as customers and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than Crexendo, NetSapiens or the combined business. These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects of the combined business.

Our public stockholders have and will continue to experience dilution as a consequence of, among other transactions, the issuance of Merger Shares and options to purchase Common Stock of Crexendo as consideration for the Merger. Having a minority share position may reduce the influence that our current stockholders have on the management of the post-closing business.

As a consequence of the merger, we have issued an aggregate of 6,462,036 shares of Common Stock and options of Crexendo (including those Common Stock underlying the Exchange Options to be registered on a Form S-8), to the equity holders of NetSapiens. The issuance of Common Stock to the equity holders of NetSapiens pursuant to the Merger Agreement may dilute the equity interests of our existing stockholders and may adversely affect prevailing market prices for our Common Stock. Such dilution could, among other things, limit the ability of our existing stockholders to influence the Company’s management through the election of directors following the closing of the Transaction.

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The market price of our Common Stock after the Merger may be affected by factors different from those affecting our Common Stock currently. The market price of our Common Stock may decline as a result of the Merger.

The businesses of Crexendo and NetSapiens differ and, accordingly, the results of operations and the market price of our Common Stock following the Merger and the combination of the two businesses may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of Crexendo and NetSapiens. The market price of our Common Stock may decline as a result of the Merger if, among other things, we are unable to achieve growth in earnings or, if we incur expenses in excess of what is anticipated, or we otherwise fail to achieve anticipated operational efficiencies. The market price also may decline if we do not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by the investment community or if the effect of the Merger on our financial results is not consistent with the expectations of the investment community. There may be substantial selling of stock by shareholders who received shares of Crexendo stock in the merger after the six month lock up period has expired, there may be substantial sale of shares by employees who received Options to purchase common stock in the merger all of which may negatively affect the market price of our Common Stock.

We expect to continue to undertake acquisitions, mergers or change to our capital structure to expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.

As part of a potential growth strategy, we expect to continue to attempt to acquire or merge with certain businesses. Whether we realize benefits from any such transactions will depend in part upon the integration of any acquired businesses, the performance of the acquired products, services and capacities of the technologies acquired, as well as the personnel hired in connection therewith. Accordingly, our results of operations could be adversely affected from transaction-related charges, amortization of intangible assets, and charges for impairment of long-term assets. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there can be no assurance that any potential transaction will be successful.

In addition, the financing of any acquisition may require us to raise additional funds through public or private sources. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stockholders. Future acquisitions by us could also result in large and immediate write-offs or assumptions of debt and contingent liabilities, any of which may have a material adverse effect on our consolidated financial position, results of operations, and cash flows.

ITEM 2. PROPERTIES

Our corporate office consists of approximately 22,000 square feet of office space located at 1615 South 52^nd Street, Tempe, Arizona 85281. We also have offices located in La Jolla, California and Reston, Virginia. Our La Jolla office space is located at 1200 Prospect St., Suite 200, La Jolla, California 92037 and our Virginia office space is located at 1875 Campus Commons Drive, Reston, Virginia 20191. We maintain property insurance on the corporate office building and tenant fire and casualty insurance on our assets located in the building in an amount that we deem adequate.

ITEM 3. LEGAL PROCEEDINGS

From time to time we receive inquiries from federal, state, city and local government officials as well as the FCC and taxing authorities in the various jurisdictions in which we operate. These inquiries and investigations related primarily to our discontinued seminar operations and concern compliance with various city, county, state, and/or federal regulations involving sales, representations made, customer service, refund policies, services and marketing practices. We respond to these inquiries and have generally been successful in addressing the concerns of these persons and entities, without a formal complaint or charge being made, although there is often no formal closing of the inquiry or investigation. There can be no assurance that the ultimate resolution of these or other inquiries and investigations will not have a material adverse effect on our business or operations, or that a formal complaint will not be initiated. We also receive complaints and inquiries in the ordinary course of our business from both customers and governmental and non-governmental bodies on behalf of customers, and in some cases these customer complaints have risen to the level of litigation. There can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on our business or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

 The disclosure required by this item is not applicable

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the NYSE - MKT on August 16, 2004 under the symbol “IIG.” In May 2011, our stockholders approved an amendment to our Certificate of Incorporation to change our name from “iMergent, Inc.” to “Crexendo, Inc.” The name change was effective May 18, 2011. Our ticker symbol “IIG” on the New York Stock Exchange was changed to “EXE” on May 18, 2011. On January 13, 2015, the Company moved to the OTCQX Marketplace and our ticker symbol was changed to “CXDO”. On July 8, 2020, the Company up listed to The Nasdaq Stock Market keeping our ticker symbol “CXDO”. The following table sets forth the range of high and low sales prices as reported on the OTCQX Marketplace or The Nasdaq Stock Market for the periods indicated.

	High		Low
Year Ended December 31, 2021
October to December 2021	$	6.20	$	4.39
July to September 2021		7.20		5.35
April to June 2021		6.93		4.90
January to March 2021		8.38		5.51
Year Ended December 31, 2020
October to December 2020	$	8.00	$	5.27
July to September 2020		12.78		5.25
April to June 2020		6.30		4.00
January to March 2020		4.75		3.00

SECURITY HOLDERS

As of December 31, 2021, there were 197 shareholders of record of our common stock. The majority of the shares are held by DTC FAST, a nominee of The Depository Trust Company. This number of record holders does not include beneficial holders whose shares are held in “street name,” meaning that the shares are held for their accounts by brokers or other nominees. In these instances, the brokers or other nominees are included in the number of record holders, but the underlying beneficial holders of the common stock held in “street name” are not.

DIVIDENDS

There were no dividends declared for the years ended December 31, 2021 and 2020. Subsequent to the year ended December 31, 2021, the Company declared a quarterly cash dividend of $0.005 per common share. The dividend was payable on the 28^th of February 2022 to stockholders of record at the close of business on the 18^th of February 2022.

ISSUER PURCHASES OF EQUITY SEQURITIES

None

RECENT SALES OF UNREGISTERED SECURITIES

 None

ITEM 6. SELECTED FINANCIAL DATA

Not required.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR

 In addition to historical information, this Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in Item 1A. above and the risk factors set forth in this Annual Report. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The forward-looking statements made in this Annual Report are made as of the filing date of this Annual Report with the SEC, and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.

OVERVIEW

Crexendo, Inc. is an award-winning premier provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. The Company has two operating segments, which consist of Cloud Telecommunications Services and Software Solutions.

Cloud Telecommunications Services – Our cloud telecommunications services transmit calls using IP or cloud technology, which converts voice signals into digital data packets for transmission over the Internet or cloud. Each of our calling plans provides a number of basic features typically offered by traditional telephone service providers, plus a wide range of enhanced features that we believe offer an attractive value proposition to our customers. This platform enables a user, via a single “identity” or telephone number, to access and utilize services and features regardless of how the user is connected to the Internet or cloud, whether it’s from a desktop device or an application on a mobile device.

We generate recurring revenue from our cloud telecommunications and broadband Internet services. Our cloud telecommunications contracts typically have a thirty-six to sixty month term. We may also charge activation and flash fees and the Company generally allocates a portion of the activation fees to the desktop devices, which is recognized at the time of the installation or customer acceptance, and a portion to the service, which is recognized over the contract term using the straight-line method. We also charge other various contracted and non-contracted fees.

We generate product revenue and equipment financing revenue from the sale and lease of our cloud telecommunications equipment. Revenues from the sale of equipment, including those from sales-type leases, are recognized at the time of sale or at the inception of the lease, as appropriate.

Our Cloud Telecommunications service revenue increased 18% or $2,558,000 to $17,102,000 for the year ended December 31, 2021 as compared to $14,544,000 for the year ended December 31, 2020. Our Cloud Telecommunications product revenue increased 26% or $481,000 to $2,324,000 for the year ended December 31, 2021 as compared to $1,843,000 for the year ended December 31, 2020.

Software Solutions – Our software solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

We generate software license revenue from the sale of perpetual software licenses, term-based software licenses that expire, and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

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We generate subscription and maintenance support revenue from customer support and other supportive services. The Company offers warranties on its products. The warranty period for our licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

We generate professional services and other revenue from consulting, technical support, resident engineer services, design services and installation services. Revenue for professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

Our Software Solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

Results of Consolidated Operations

The following discussion of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included herein this Annual Report.

Results of Consolidated Operations (in thousands, except for per share amounts)

	Year Ended December 31,
Consolidated	2021			2020
Service revenue	$	17,102		$	14,544
Software solutions revenue		8,666			-
Product revenue		2,324			1,843
Total revenue		28,092			16,387
Income/(loss) before income taxes		(2,910	)		1,899
Income tax benefit		465			6,041
Net income/(loss)		(2,445	)		7,940
Basic earnings per common share	$	(0.12	)	$	0.50
Diluted earnings per common share	$	(0.12	)	$	0.46

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2021			2021			2021			2021
Service revenue	$	4,139		$	4,327		$	4,325		$	4,311
Software solutions revenue		-			1,012			3,784			3,870
Product revenue		368			440			701			815
Total revenue		4,507			5,779			8,810			8,996
Income/(loss) before income taxes		(839	)		(1,263	)		12			(820	)
Income tax benefit/(provision)		124			260			(137	)		218
Net loss		(715	)		(1,003	)		(125	)		(602	)
Basic earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)
Diluted earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)

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	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2020			2020			2020			2020
Service revenue	$	3,488		$	3,605		$	3,654		$	3,797
Product revenue		379			449			489			526
Total revenue		3,867			4,054			4,143			4,323
Income before income taxes		143			511			134			1,111
Income tax benefit/(provision)		(3	)		(3	)		(3	)		6,050
Net income		140			508			131			7,161
Basic earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.40
Diluted earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.37

__________

(1) Earnings per common share is computed independently for each of the quarters presented. Therefore, the sums of quarterly earnings per common share amounts do not necessarily equal the total for the twelve month periods presented.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Total Revenue

Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Total revenue	$	28,092	$	16,387	$	11,705		71	%

The increase in total revenue for the year is mainly driven by a $8,666,000 contribution from our software solutions segment resulting from the June 1, 2021 acquisition of NetSapiens, Inc., an increase in service revenue of $2,558,000, and an increase in product revenue of $481,000.

Income Before Income Taxes

The following table reflects our income/(loss) before income taxes for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021			2020		Dollar Change			Percent Change
Income/(loss) before income taxes	$	(2,910	)	$	1,899	$	(4,809	)		-253	%

The decrease in income before income tax is primarily due to an increase in operating expenses of $15,506,000, offset by an increase in revenue of $11,705,000 and a decrease in interest expense and other expense of $1,008,000. The increase in operating expenses is primarily related to increases in salaries and benefits, stock compensation expense and acquisition related expenses. During the year ended December 31, 2021 the Company recognized $1,037,000 in one-time acquisition related expenses associated with the NetSapiens and Centric Telecom business acquisitions.

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Income Tax Benefit/(Provision)

The following table reflects our income tax benefit/(provision) for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31, 2021
	2021		2020		Dollar Change			Percent Change
Income tax benefit	$	465	$	6,041	$	(5,576	)		-92	%

We had pre-tax income/(loss) for the year ended December 31, 2021 and 2020 of $(2,910,000) and $1,899,000, respectively. For the year ended December 31, 2021, we recorded additional valuation allowance of $1,437,000 and for the year ended December 31, 2020, we recorded a valuation allowance release of $7,487,000.

Use of Non-GAAP Financial Measures

 To evaluate our business, we consider and use non-generally accepted accounting principles (“Non-GAAP”) net income and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis. We consider Non-GAAP net income to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation, acquisition related expenses, changes in fair value of contingent consideration and amortization of intangibles. We define EBITDA as U.S. GAAP net income/(loss) before interest income, interest expense, other income and expense, provision for income taxes, and depreciation and amortization. We believe EBITDA provides a useful metric to investors to compare us with other companies within our industry and across industries. We define Adjusted EBITDA as EBITDA adjusted for acquisition related expenses, changes in fair value of contingent consideration and share-based compensation. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. We also believe use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period, as well as across companies.

 In our March 21, 2022 earnings press release, as furnished on Form 8-K, we included Non-GAAP net income, EBITDA and Adjusted EBITDA. The terms Non-GAAP net income, EBITDA, and Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in analytical tools, and when assessing our operating performance, Non-GAAP net income, EBITDA, and Adjusted EBITDA should not be considered in isolation, or as a substitute for net income/(loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:

· EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

· they do not reflect changes in, or cash requirements for, our working capital needs;

· they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur;

· they do not reflect income taxes or the cash requirements for any tax payments;

· although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be replaced sometime in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

· while share-based compensation is a component of operating expense, the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock; and

· other companies may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income, EBITDA, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income, EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.

Reconciliation of Non-GAAP Financial Measures

In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly comparable U.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparable U.S. GAAP measures.

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Reconciliation of U.S. GAAP Net Income to Non-GAAP Net Income

(Unaudited)

	Three Months Ended December 31,					Year Ended December 31,
	2021			2020		2021			2020
	(In thousands)					(In thousands)
U.S. GAAP net income/(loss)	$	(602	)	$	7,161	$	(2,445	)	$	7,940
Share-based compensation		478			246		1,628			623
Acquisition related expenses		(28	)		-		1,037			-
Change in fair value of contigent consideration		126			-		126			-
Amortization of intangible assets		618			23		1,391			92
Non-GAAP net income	$	592		$	7,430	$	1,737		$	8,655
Non-GAAP net income per common share:
Basic	$	0.03		$	0.42	$	0.09		$	0.55
Diluted	$	0.02		$	0.39	$	0.07		$	0.50
Weighted-average common shares outstanding:
Basic		21,792,137			17,877,481		20,275,691			15,767,874
Diluted		26,068,825			19,251,448		23,408,162			17,420,476

 Reconciliation of U.S. GAAP Net Income to EBITDA to Adjusted EBITDA

(Unaudited)

	Three Months Ended December 31,						Year Ended December 31,
	2021			2020			2021			2020
	(In thousands)						(In thousands)
U.S. GAAP net income/(loss)	$	(602	)	$	7,161		$	(2,445	)	$	7,940
Depreciation and amortization		695			61			1,626			258
Interest expense		20			22			84			76
Interest and other expense/(income)		3			(1,009	)		16			(984	)
Income tax provision/(benefit)		(218	)		(6,050	)		(465	)		(6,041	)
EBITDA		(102	)		185			(1,184	)		1,249
Acquisition related expenses		(28	)		-			1,037			-
Change in fair value of contingent consideration		126			-			126			-
Share-based compensation		478			246			1,628			623
Adjusted EBITDA	$	474		$	431		$	1,607		$	1,872

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The following accounting policies are the most critical in understanding our consolidated financial position, results of operations or cash flows, and that may require management to make subjective or complex judgments about matters that are inherently uncertain.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement.

The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the products and services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. Professional services revenue includes activation fees and any professional installation services. Installation services are recognized as revenue when the services are completed. The Company generally allocates a portion of the activation fees to the desktop devices, which is recognized at the time of the installation or customer acceptance, and a portion to the service, which is recognized over the contract term using the straight-line method. Our telecommunications services contracts typically have a term of thirty-six to sixty months. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

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Goodwill

We have recorded goodwill related to various business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The estimated fair value of the reporting unit is determined using our market capitalization as of our annual impairment assessment date or more frequently if circumstances indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to: sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors; and decline in overall market or economic conditions leading to a decline in our stock price.

Intangible Assets

Our intangible assets consist of customer relationships, developed technologies, trademark and trade names. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.

Deferred Taxes

Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect during the years in which the differences are expected to reverse or the carryforwards are expected to be realized.

We currently have net deferred tax assets consisting of net operating loss carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. As a result of our recent three years of cumulative pretax income and the weight of all other positive and negative evidence, management determined that it is more likely than not that we will be able to realize $8,883,000 of our deferred tax assets. We released $7,487,000 of our valuation allowance at December 31, 2020. Forecasts and projections of future pretax income are inherently subjective and require management to make assumption or complex judgments about matters that are inherently uncertain.

Product Warranty

We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service.

Contingent Liabilities

Contingent liabilities require significant judgment in estimating potential payouts. Contingent considerations arising from business combinations and asset acquisitions require management to estimate future payouts based on forecasted results, which are highly sensitive to the estimates of discount rates and future revenues. These estimates can change significantly from period to period and are reviewed each reporting period to establish the fair value of the contingent liability.

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Share-Based Compensation

We account for our share-based compensation awards using the fair-value method. The grant date fair value was determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires us to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. Our expected volatility is derived from our volatility rate as a publicly traded company. The expected term is based on our historical experience. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. For the years ended December 31, 2021 and 2020, no dividends were declared or paid, therefore we have assumed a 0% dividend yield. In February 2022, we declared and paid a quarterly cash dividend of $0.005 per common share, therefore we will assume a dividend yield in future periods.

We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. We will continue to use judgment in evaluating the expected term, volatility, and forfeiture rate related to our own share-based awards on a prospective basis, and in incorporating these factors into the model. If our actual experience differs significantly from the assumptions used to compute our share-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little share-based compensation cost.

For additional information on use of estimates, see summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements.

Segment Operating Results

The Company has two operating segments, which consist of Cloud Telecommunications Services and Software Solutions. The information below is organized in accordance with our two reportable segments. Segment operating income is equal to segment net revenue less segment cost of service revenue, cost of software solution revenue, cost of product revenue, sales and marketing, research and development, and general and administrative expenses.

Operating Results of our Cloud Telecommunications Services Segment (in thousands):

	Year Ended December 31,
Cloud Telecommunications Services	2021			2020
Service revenue	$	17,102		$	14,544
Product revenue		2,324			1,843
Total revenue		19,426			16,387
Operating expenses:
Cost of service revenue		5,104			3,837
Cost of product revenue		1,525			1,110
Selling and marketing		5,915			4,153
General and administrative		8,129			5,107
Research and development		1,396			1,189
Total operating expenses		22,069			15,396
Operating income/(loss)		(2,643	)		991
Other income/(expense)		(70	)		908
Income/(loss) before tax benefit	$	(2,713	)	$	1,899

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Quarterly Financial Information

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Cloud Telecommunications Services	2021			2021			2021				2021
Service revenue	$	4,139		$	4,327		$	4,325		$	4,311
Product revenue		368			440			701			815
Total revenue		4,507			4,767			5,026			5,126
Operating expenses:
Cost of service revenue		1,259			1,347			1,210			1,288
Cost of product revenue		225			286			461			553
Selling and marketing		1,279			1,508			1,487			1,641
General and administrative		2,216			2,167			1,763			1,983
Research and development		350			388			358			300
Total operating expenses		5,329			5,696			5,279			5,765
Operating loss		(822	)		(929	)		(253	)		(639	)
Other expense		(17	)		(19	)		(22	)		(12	)
Loss before tax benefit/(provision)	$	(839	)	$	(948	)	$	(275	)	$	(651	)

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Cloud Telecommunications Services	2020			2020			2020				2020
Service revenue	$	3,488		$	3,605		$	3,654		$	3,797
Product revenue		379			449			489			526
Total revenue		3,867			4,054			4,143			4,323
Operating expenses:
Cost of service revenue		970			908			946			1,013
Cost of product revenue		220			263			314			313
Selling and marketing		1,038			1,062			1,051			1,002
General and administrative		1,188			1,046			1,351			1,522
Research and development		270			244			326			349
Total operating expenses		3,686			3,523			3,988			4,199
Operating income		181			531			155			124
Other income/(expense)		(38	)		(20	)		(21	)		987
Income before tax benefit/(provision)	$	143		$	511		$	134		$	1,111

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Service Revenue

Cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services, professional services, interest from sales-type leases, reselling broadband Internet services, administrative fees, website hosting, and web management services. The following table reflects our service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Service revenue	$	17,102	$	14,544	$	2,558		18	%

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The increase in service revenue is due to an increase in telecommunications services of $2,170,000, an increase in fees, commissions, and other, recognized over time of $196,000, an increase in one time fees, commissions and other of $149,000, and an increase in sales-type lease interest of $43,000. A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts.

Product Revenue

Product revenue consists primarily of fees collected from the sale of desktop phone devices and third-party equipment. The following table reflects our product revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Product revenue	$	2,324	$	1,843	$	481		26	%

Product revenue fluctuates from one period to the next based on timing of installations. Our typical customer installation is complete within 30-60 days. However, larger enterprise customers can take multiple months, depending on size and the number of locations. Product revenue is recognized when products have been installed and services commence. Additionally, product revenue can fluctuate due to the allocation of discounts or sales promotions across the performance obligations.

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of December 31, 2021 and 2020. Backlog increased 6%, or $1,610,000 to $30,189,000 as of December 31, 2021 as compared to $28,579,000 as of December 31, 2020. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of December 31, 2021 and 2020, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

Cloud Telecommunications Services backlog as of December 31, 2021	$	30,189
Cloud Telecommunications Services backlog as of December 31, 2020	$	28,579

Cost of Service Revenue

Cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers, broadband Internet providers, software providers, costs related to installations, customer support salaries and benefits, and share-based compensation. The following table reflects our cost of service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Cost of service revenue	$	5,104	$	3,837	$	1,267		33	%

The increase in cost of service revenue was primarily due to an increase in salaries, wages and benefits of $947,000 as a result of an increase in customer support and implementation specialist headcount, an increase in bandwidth costs of $119,000, an increase in professional consulting services of $105,000, an increase in credit card processing fees of $51,000, an increase in fees directly related to the implementation of the new Crexendo VIP platform of $27,000, and an increase in other cost of service revenue of $18,000.

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Cost of Product Revenue

Cost of product revenue consists of the costs associated with desktop phone devices and third-party equipment. The following table reflects our cost of product revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Cost of product revenue	$	1,525	$	1,110	$	415		37	%

The increase is primarily related to the increase in product revenue and an increase in device costs.

Selling and Marketing

Selling and marketing expenses consist primarily of direct and channel sales representative salaries and benefits, share-based compensation, partner channel commissions, amortization of costs to acquire contracts, travel expenses, lead generation services, trade shows, internal and third-party marketing costs, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Selling and marketing	$	5,915	$	4,153	$	1,762		42	%

The increase in selling and marketing expense is due to an increase in salaries, wages and benefits of $1,041,000 related to expansion of our sales team and the addition of our chief revenue officer, an increase in commission expense of $346,000 directly related to the increase in revenue, an increase of $147,000 in amortization expense directly related to the Centric Telecom business acquisition customer relationships intangible asset, an increase in travel related costs and tradeshows of $86,000, an increase in sales leads and marketing material fees of $74,000, we incurred $55,000 in marketing related expenses for the rollout of our new Crexendo VIP platform, and an increase in $13,000 of other sales and marketing expense.

General and Administrative

General and administrative expenses consist of salaries, benefits and stock compensation for executives, administrative personnel, legal, rent, equipment, accounting and other professional services, investor relations, depreciation, amortization of intangibles, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
General and administrative	$	8,129	$	5,107	$	3,022		59	%

The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages and benefits of $1,385,000 as a result of an increase in headcount, increase in stock compensation, and company-wide salary increases. We incurred $1,028,000 in acquisition related legal, accounting, and other professional services in connection with the NetSapiens acquisition. We invested $183,000 in costs related to maintaining and improving our data center, which includes outside consulting fees, new hardware and software licenses along with the associated depreciation, costs related to our disaster recovery failover solution, and other costs. We incurred $144,000 in costs related to the research and implementation of a new billing platform. There was an increase in the contingent consideration expense associated with the change in fair value of contingent consideration related to the earn-out for the Centric Telecom acquisition of $126,000. There was an increase in corporate insurance costs of $77,000, an increase in rent expense of $43,000, an increase in bank processing fees of $43,000, and an increase in other general and administrative expenses of $43,000, offset by a decrease in stock exchange listing fees of $50,000.

Research and Development

Research and development expenses primarily consist of salaries and benefits, share-based compensation, and outsourced engineering services related to the development of new cloud telecommunications features and products. The following table reflects our research and development expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Research and development	$	1,396	$	1,189	$	207		17	%

The increase in research and development expenses is due to an increase in salaries, wages and benefits of $188,000 as a result of an increase in headcount as we continue to invest in our solution. We also incurred increased costs for maintenance on our mobile applications and other development costs of $20,000.

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Other Income/(Expense)

Other expense primarily relates to interest expense and net foreign exchange gains or losses, offset by credit card cash back rewards. The following table reflects our other expense for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	2021			2020		Dollar Change			Percent Change
Other income/(expense)	$	(70	)	$	908	$	(978	)		-108	%

The decrease in other income is primarily related to the forgiveness of our PPP loan in 2020 of $1.0 million.

Operating Results of our Software Solutions Segment (in thousands):

	Year Ended December 31,
Software Solutions	2021			2020
Software solutions revenue	$	8,666		$	-
Operating expenses:
Cost of software solutions revenue		4,031			-
Selling and marketing		2,345
General and administrative		2,457			-
Research and development		-			-
Total operating expenses		8,833			-
Operating loss		(167	)		-
Other expense		(30	)		-
Loss before tax benefit	$	(197	)	$	-

Quarterly Financial Information

	For the three months ended
	March 31,		June 30,			September 30,			December 31,
Software Solutions	2021		2021			2021				2021
Software solutions revenue	$	-	$	1,012		$	3,784		$	3,870
Operating expenses:
Cost of software solutions revenue		-		526			1,675			1,830
Selling and marketing		-		389			798			1,158
General and administrative		-		412			1,005			1,040
Research and development		-		-			-			-
Total operating expenses		-		1,327			3,478			4,028
Operating income/(loss)		-		(315	)		306			(158	)
Other expense		-		-			(19	)		(11	)
Income/(loss) before tax benefit/(provision)	$	-	$	(315	)	$	287		$	(169	)

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Software Solutions Revenue

Software solutions revenue consists primarily of software license fees, subscription maintenance and support, and professional services. Software licenses are billed by the number of concurrent sessions a Partner has purchased or subscribes to. Subscription maintenance and support is ongoing and provides for software updates and improvements, support for add-on modules, bug fix, and other general maintenance items. Professional services and other revenues consist of professional services such as the installation of software and integration of other modules, training and implementation as well as custom mobile branding. The following table reflects our service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Software solutions revenue	$	8,666	$	-	$	8,666	$	-

Software solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

Cost of Software Solutions Revenue

Cost of software solutions revenue consists primarily of salaries and benefits, amortization expense related to the technology, cost of Data Center hosting, third-party software modules and outsourced services required to install and support software solutions. The following table reflects our cost of service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Cost of software solutions revenue	$	4,031	$	-	$	4,031	$	-

Cost of software solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of December 31, 2021 and 2020. Backlog increased 100%, or $11,528,000 to $11,528,000 as of December 31, 2021 as compared to $0 as of December 31, 2020. Below is a table which displays the Software Solutions segment revenue backlog as of December 31, 2021 and 2020, which we expect to recognize as revenue within the next thirty-six months (in thousands):

Software Solutions backlog as of December 31, 2021	$	11,528
Software Solutions backlog as of December 31, 2020	$	-

Selling and Marketing

Selling and marketing expenses consist primarily of sales and marketing salaries and benefits, commissions, share-based compensation, travel expenses, lead generation services, trade shows, third-party marketing services, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
Selling and marketing	$	2,345	$	-	$	2,345	$	-

Selling and marketing expense is included in the results of operations from the acquisition date of June 1, 2021.

General and Administrative

General and administrative expenses consist of salaries and benefits for executives, administrative personnel, amortization of intangible asset related to customer lists, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change		Percent Change
General and administrative	$	2,457	$	-	$	2,457	$	-

General and administrative expense is included in the results of operations from the acquisition date of June 1, 2021.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We finance our operations primarily through services, software solutions, and product sales to our customers. As of December 31, 2021 and 2020, we had cash and cash equivalents of $7,468,000 and $17,579,000, respectively. Changes in cash and cash equivalents are dependent upon changes in, among other things, working capital items such as contract liabilities, contract costs, accounts payable, accounts receivable, prepaid expenses, and various accrued expenses, as well as purchases of property and equipment, asset acquisitions, business combinations, and changes in our capital and financial structure due to debt repayments and issuances, stock option exercises, sales of equity investments and similar events. We believe that our operations along with existing liquidity sources will satisfy our cash requirements for at least the next 12 months.

During the year ended December 31, 2020, the Company completed a public offering in which it issued and sold 2,170,000 shares of common stock at a price to the public of $5.50 per share. The shares sold and issued in the public offering resulted in an aggregate gross offering price of $11,935,000 and net proceeds to the Company were $10,771,000 after deducting underwriting discounts and commissions. The Company intends to utilize the proceeds to fund acquisitions.

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period.

On June 1, 2021, the Company closed the Merger with NetSapiens, Inc. The transaction was valued at approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

Operating Activities

Cash provided by or used in operating activities is driven by our net loss, the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business. The following table reflects our net cash provided by/(used in) operating activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021			2020		Dollar Change			Percent Change
Net cash provided by/(used in) operating activities	$	(1,006	)	$	647	$	(1,653	)		-255	%

The net cash used for operations was primarily driven by our net loss for the year ended December 31, 2021 of $(2,664,000), of which $1,037,000 is associated with acquisition related expenses for the Centric Telecom and NetSapiens business acquisitions, an increase in prepaid expenses, an increase in income tax receivable, and a decrease in contract liabilities.

Investing Activities

Cash provided by or used in investing activities is driven by the purchase of property and equipment, business combinations, and asset acquisitions. The following table reflects our net cash provided by/(used in) investing activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021			2020			Dollar Change			Percent Change
Net cash used in investing activities	$	(9,867	)	$	(921	)	$	(8,946	)		971	%

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During the year ended December 31, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of contingent consideration, which was paid out after the earn-out period was over in the fourth quarter of 2021. On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two Million end users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

For the year ended December 31, 2020, net cash used in investing activities related to cash used for capital expenditures, primarily for the cash portion of the purchase of the Company’s corporate office building of $500,000. The remaining $2,000,000 of the purchase price was financed through a note payable with a bank. The Company also paid $176,000 under the DoubleHorn customer relationships asset purchase agreement during the year ended December 31, 2020.

Financing Activities

Cash provided by or used in financing activities is driven by the proceeds from the exercise of options, taxes paid on the net settlement of stock options and RSUs, payment of contingent consideration, proceeds from finance leases and notes payable, repayments made on finance leases and notes payable, and proceeds from the issuance of common stock in connection with an offering. The following table reflects our net cash provided by financing activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

	Year Ended December 31,
	2021		2020		Dollar Change			Percent Change
Net cash provided by financing activities	$	650	$	13,673	$	(13,023	)		-95	%

Net cash provided by financing activities in the year ended December 31, 2021, primarily relates to cash proceeds from the exercise of stock options of $1,729,000 offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of $163,000, and contingent consideration payment of $746,000 related to the Centric business acquisition. Net cash provided by financing activities in the nine months ended September 30, 2020, primarily relates to $8,778,000 of proceeds from the issuance of common stock in connection with an offering and $1,001,000 of cash received pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The loan was forgiven in December 2020. We also received cash from the exercise of stock options of $2,043,000.

OFF BALANCE SHEET ARRANGEMENTS

As of December 31, 2021, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

RELATED PARTY TRANSACTIONS

 On January 27, 2020, the Company entered into an agreement to purchase our corporate office building located at 1615 S 52nd St, Tempe, AZ 85281 from a Company that is owned by the major shareholder and CEO of the Company for $2,500,000. The fair value of the building was established by an independent appraisal.

RECENT ACCOUNTING PRONOUNCEMENTS

For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements, which is incorporated by reference herein.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Foreign Currency Risk

For all periods presented, our sales and operating expenses were predominately denominated in U.S. dollars. We therefore have not had material foreign currency risk associated with sales and cost-based activities. The functional currency of our material operating entities is the U.S. dollar.

For the periods presented, we believe the exposure to foreign currency fluctuation from operating expenses is immaterial as the related costs do not constitute a significant portion of our total expenses. As we grow operations, our exposure to foreign currency risk may become more significant.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CREXENDO, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

	PAGE
Report of Independent Registered Public Accounting Firm (Firm ID - 1013)	44
Consolidated Balance Sheets as of December 31, 2021 and 2020	46
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020	47
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020	48
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020	49
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020	50
Notes to Consolidated Financial Statements	51
Schedule II – Valuation and Qualifying Accounts	85

43

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Crexendo, Inc.

Tempe, AZ

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Crexendo, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition — Refer to Note 2 to the Financial Statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of products and services.

44

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

· Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as hard goods and related services that are sold with telephony contracts.

· Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

· The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:

· We gained an understanding of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the relative selling value.

· We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.

· We selected a sample of customer agreements and performed the following procedures:

o Obtained and read contract source documents for each selection and other documents that were part of the agreement, if applicable.

o Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and relative selling price.

o Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

o We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.

o We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.

Income Taxes — Valuation Allowances on Deferred Tax Assets — Refer to Note 14 to the Financial Statements

Critical Audit Matter Description

The Company’s consolidated net deferred tax asset historically included a full valuation allowance, primarily related to the deferred tax assets established for U.S. net operating loss carryforwards. Management records valuation allowances to reduce the carrying value of deferred tax assets to amounts that are more likely than not to be realized. Management assesses existing deferred tax assets by jurisdiction and expectations of the Company’s ability to utilize these tax attributes through a review of past, current and estimated future taxable income, reversals of temporary differences and establishment of tax planning strategies. For the year-ended December 31, 2021, the Company recorded a deferred tax asset of $7,001,000.

The principal considerations for our determination that performing procedures relating to the income tax valuation allowance on deferred tax assets is a critical audit matter as there was significant judgment by management when estimating future income. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence relating to future income. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate the valuation allowances on deferred tax assets, among others, included the following:

· We gained an understanding of internal controls related to the valuation allowances on deferred tax assets, including controls over the review of management’s analysis by jurisdiction of cumulative income (loss).

· We tested the underlying historical data used in calculating the cumulative income (loss).

· We assessed effects of other events, including past Company transactions.

· We tested management’s estimate of future taxable income, which included evaluating the reasonableness of significant assumptions and appropriateness of available tax planning strategies.

· Utilized professionals with specialized skill and knowledge to assist in evaluating management’s analysis, including cumulative income (loss) as well as the reasonableness of the estimates.

Business Combinations – Valuation of Intangible Assets — Refer to Note 4 to the Financial Statements

Critical Audit Matter Description

The Company completed the acquisitions of Centric Telecom, Inc. and NetSapiens, Inc. for $3,255,000 and $49,062,000, respectively, (collectively referred to as the “Acquisitions”) and accounted for as business combinations. The acquired intangible assets included trademarks, technology and customer relationships valued at $400,000, $4,900,000 and $18,000,000, respectively. The Company recorded the acquired intangible assets at fair value on the date of acquisition considering a discounted cash flow methodology, a cost approach and relief from royalty method. The methods used to estimate the fair value of acquired intangible assets involve assumptions. The assumptions applied by management in estimating the fair value of acquired intangible assets included income projections and discount rates.

The principal considerations for our determination that performing procedures relating to the valuation of intangible assets in the Acquisitions is a critical audit matter are (1) there was a degree in significant auditor judgement and subjectivity in applying procedures to the fair value of the intangible assets acquired due to the judgment by management when developing estimates and (2) audit effort was required relating to the estimates, projections, discount rates, and weighted average cost of capital utilized by the Company. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the conclusions.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate the valuation of intangible assets included the following:

· We read the purchase agreements used in the underlying acquisitions and utilized by the Company to allocate the purchase price.

· We obtained the valuation reports prepared by management’s third-party expert.

· Utilized professionals with specialized skill and knowledge to evaluate the reasonableness of the methodology, assumptions, including the discount rate and weighted average cost of capital, as compared to their experience and publically available market data.

· Considered the reasonableness of the overall allocation of the total purchase price.

/s/ Urish Popeck & Co., LLC

We have served as the Company’s auditor since 2016.

Pittsburgh, PA

March 21, 2022

45

CREXENDO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except par value and share data)

	December 31,
	2021				2020
Assets
Current assets:
Cash and cash equivalents	$	7,468		$	17,579
Restricted cash		-			100
Trade receivables, net of allowance for doubtful accounts of $72 as of December 31, 2021 and $21 as of December 31, 2020		2,177			538
Contract assets		261			159
Inventories		231			504
Equipment financing receivables		332			286
Contract costs		648			421
Prepaid expenses		358			190
Income tax receivable		11			4
Other current assets		74			-
Total current assets		11,560			19,781
Long-term equipment financing receivables, net		942			906
Property and equipment, net		2,989			2,734
Deferred income tax assets, net		986			6,054
Operating lease right-of-use assets		532			1
Intangible assets, net		22,161			252
Goodwill		36,972			272
Contract costs, net of current portion		697			549
Other long-term assets		313			156
Total Assets	$	77,152		$	30,705
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	476		$	56
Accrued expenses		4,904			1,628
Finance leases		110			29
Notes payable		1,873			71
Operating lease liabilities		447			1
Income tax payable		24			-
Contract liabilities		2,738			778
Total current liabilities		10,572			2,563
Contract liabilities, net of current portion		290			450
Finance leases, net of current portion		193			55
Notes payable, net of current portion		-			1,873
Operating lease liabilities, net of current portion		164			-
Total liabilities		11,219			4,941
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock, par value $0.001 per share - authorized 5,000,000 shares; none issued		—			—
Common stock, par value $0.001 per share - authorized 50,000,000 shares, 22,054,239 shares issued and outstanding as of December 31, 2021 and 17,983,177 shares issued and outstanding as of December 31, 2020		22			18
Additional paid-in capital		118,432			75,834
Accumulated deficit		(52,533	)		(50,088	)
Accumulated other comprehensive income		12			-
Total stockholders' equity		65,933			25,764
Total Liabilities and Stockholders' Equity	$	77,152		$	30,705

The accompanying notes are an integral part of the consolidated financial statements.

46

CREXENDO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share and share data)

	Year Ended December 31,
	2021			2020
Service revenue	$	17,102		$	14,544
Software solutions		8,666			-
Product revenue		2,324			1,843
Total revenue		28,092			16,387
Operating expenses:
Cost of service revenue		5,104			3,837
Cost of software solutions		4,031			-
Cost of product revenue		1,525			1,110
Selling and marketing		8,260			4,153
General and administrative		10,586			5,107
Research and development		1,396			1,189
Total operating expenses		30,902			15,396
Income/(loss) from operations		(2,810	)		991
Other income/(expense):
Interest income		1			3
Interest expense		(84	)		(76	)
Extinguishment of PPP debt		-			1,007
Other income/(expense), net		(17	)		(26	)
Total other income/(expense), net		(100	)		908
Income/(loss) before income tax		(2,910	)		1,899
Income tax benefit		465			6,041
Net income/(loss)	$	(2,445	)	$	7,940
Earnings per common share:
Basic	$	(0.12	)	$	0.50
Diluted	$	(0.12	)	$	0.46
Weighted-average common shares outstanding:
Basic		20,275,691			15,767,874
Diluted		20,275,691			17,420,476

The accompanying notes are an integral part of the consolidated financial statements.

47

CREXENDO, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	Year Ended December 31,
	2021			2020
Net income/(loss)	$	(2,445	)	$	7,940
Other comprehensive income/(loss), net of tax
Foreign currency translation gain		12			-
Total other comprehensive income		12			-
Comprehensive income/(loss)	$	(2,433	)	$	7,940

The accompanying notes are an integral part of the consolidated financial statements.

48

CREXENDO, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders'
	Shares		Amount		Capital			Deficit			Equity
Balance, January 1, 2020		14,884,755	$	15	$	62,400		$	(58,028	)		4,387
Share-based compensation		-		-		623			-			623
Vesting of restricted stock units		51,606		-		-			-			-
Issuance of common stock for exercise of stock options		876,816		1		2,042			-			2,043
Issuance of common stock in connection with an offering		2,170,000		2		10,769			-			10,771
Net income		-		-		-			7,940			7,940
Balance, December 31, 2020		17,983,177		18		75,834			(50,088	)		25,764
Share-based compensation		-		-		1,628			-			1,628
Vesting of restricted stock units		54,510		-		-			-			-
Foreign currency translation adjustment, net of tax		-		-		-			12			12
Issuance of common stock for exercise of stock options		872,581		1		1,728			-			1,729
Taxes paid on the net settlement of stock options		-		-		(163	)		-			(163	)
Issuance of common stock in connection with business acquisitions		3,143,971		3		39,405			-			39,408
Net loss		-		-		-			(2,445	)		(2,445	)
Balance, December 31, 2021		22,054,239	$	22	$	118,432		$	(52,521	)	$	65,933

The accompanying notes are an integral part of the consolidated financial statements.

49

CREXENDO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands) 

	Year Ended December 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)	$	(2,445	)	$	7,940
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,626			258
Deferred tax asset		(499	)		(6,054	)
Extinguishment of PPP debt		-			(1,001	)
Share-based compensation		1,628			623
Changes in assets and liabilities:
Trade receivables		(501	)		(152	)
Contract assets		(102	)		(137	)
Equipment financing receivables		(82	)		(488	)
Inventories		285			(122	)
Contract costs		(270	)		(155	)
Prepaid expenses		(92	)		(49	)
Income tax receivable		(7	)		-
Other assets		245			(50	)
Accounts payable and accrued expenses		(245	)		20
Income tax payable		24			-
Contract liabilities		(571	)		14
Net cash provided by/(used for) operating activities		(1,006	)		647
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(101	)		(745	)
Acquisition of customer relationships, developed technology, and trademarks and trade name		(9,766	)		(176	)
Net cash used for investing activities		(9,867	)		(921	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of contingent consideration		(746	)		(54	)
Repayments made on finance leases		(99	)		(32	)
Proceeds from notes payable		-			1,001
Repayments made on notes payable		(71	)		(56	)
Proceeds from exercise of options		1,729			2,043
Proceeds from issuance of common stock		-			10,771
Taxes paid on the net settlement of stock options		(163	)		-
Net cash provided by financing activities		650			13,673
Effect of exchange rate changes on cash		12			-
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH		(10,211	)		13,399
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE BEGINNING OF THE YEAR		17,679			4,280
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE END OF THE YEAR	$	7,468		$	17,679
Supplemental disclosure of cash flow information:
Cash used during the year for:
Income taxes, net	$	(15	)	$	(12	)
Interest expense	$	(84	)	$	(70	)
Supplemental disclosure of non-cash investing and financing information:
Stock issued for the acquisition of Centric Telecom	$	346		$	-
Stock issued in connection with the merger with NetSapiens	$	16,942		$	-
Stock options issued in connection with the merger with NetSapiens	$	22120		$	-
Property and equipment financed through finance leases	$	273		$	-
Prepaid assets financed through finance leases	$	14		$	-
Purchase of property and equipment with a note payable	$	-		$	2,000
Adjustment to intangible assets and contingent consideration of customer relationship asset acquisition	$	-		$	(121	)
Extinguishment of PPP debt	$	-		$	(1,001	)

The accompanying notes are an integral part of the consolidated financial statements.

50

CREXENDO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Description of Business and Significant Accounting Policies

Description of Business – Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo is an award-winning premier provider of cloud communications, UCaaS, call center, collaboration services, and other cloud business services that are designed to provide enterprise-class cloud services to any size business at affordable monthly rates. The Company has two operating segments, which consist of Cloud Telecommunications and Web Services.

Basis of Presentation – The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., NetSapiens, LLC, Crexendo Business Solutions of Virginia, Inc., NSHC, Inc., NetSapiens Canada, Inc., NetSapiens International Limited and Crexendo International, Inc. All intercompany account balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements reflect the results of operations, financial position, changes in stockholders’ equity, and cash flows of our Company.

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Foreign Currency Translation - The functional currency of our international subsidiaries is the local currency. We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During the year ended December 31, 2021 and 2020, we recorded foreign currency translation gains/(losses) of $12,000, and $0, respectively, in our statements of comprehensive income (loss).

 Cash and Cash Equivalents –  We consider all highly liquid, short-term investments with maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2021 and 2020, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $6,573,000 and $17,175,000, respectively.

Restricted Cash – We classified $0 and $100,000 as restricted cash as of December 31, 2021 and 2020, respectively. Cash is restricted for compensating balance requirements on purchasing card agreements. As of December 31, 2021 and 2020, we had restricted cash in financial institutions in excess of federally insured limits in the amount of $0 and $100,000, respectively.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported on the balance sheet to the cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows (in thousands):

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	7,468	$	17,579
Restricted cash		-		100
Total cash, cash equivalents, and restricted cash shown in the
consolidated statement of cash flows	$	7,468	$	17,679

Trade Receivables – Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance for Doubtful Accounts – The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

51

Contract Assets – Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs – Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $1,345,000 and $970,000 at December 31, 2021 and December 31, 2020, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the years ended December 31, 2021 and 2020, the Company amortized $869,000 and $505,000, respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory – Finished goods telecommunications equipment inventory is stated at the lower of cost or net realizable value (first-in, first-out method). In accordance with applicable accounting guidance, we regularly evaluate whether inventory is stated at the lower of cost or net realizable value. If net realizable value is less than cost, the write-down is recognized as a loss in earnings in the period in which the excess occurs.

Property and Equipment – Depreciation and amortization expense is computed using the straight-line method in amounts sufficient to allocate the cost of depreciable assets over their estimated useful lives ranging from two to thirty-nine years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Land is not depreciable. Depreciable lives by asset group are as follows:

Building	39 years
Land	Not depreciated
Computer and office equipment	2 to 5 years
Computer software	3 years
Internal-use software	3 years
Furniture and fixtures	4 years
Leasehold improvements	2 to 5 years

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions – Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

Business Acquisitions - We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expenses.

52

Goodwill – Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets – Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset. There was no impairment of intangible assets identified for the years ended December 31, 2021 and 2020.

Contract Liabilities – Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as deferred revenue.

Use of Estimates – In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies – The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

Service, Software Solutions and Product Revenue Recognition – Revenue is recognized upon transfer of control of promised services, software solutions or products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. For more detailed information about revenue, see Note 2.

Cost of Service Revenue – Cost of service revenue includes cloud telecommunications services. Cloud telecommunications cost of service revenue primarily consists of fees we pay to third-party telecommunications and broadband Internet providers, costs of other third-party services we resell, personnel and travel expenses related to system implementation, and customer service.

Cost of Software Solutions Revenue – Cost of software solutions revenue consists primarily of royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, direct costs to manufacture and distribute products, direct costs to provide product support and professional support services, direct costs associated with delivery of the Company’s software offerings, and amortization expense related to developed technology intangible assets.

Cost of Product Revenue – Cost of product revenue primarily consists of the costs associated with the purchase of desktop devices and other third-party equipment we purchase for resale.

Product Warranty – We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service. For the years ended December 31, 2021 and 2020, actual warranty costs were approximately 1.9% and 1.6% of prior year net product revenue, respectively. The annual warranty provision for the year ended December 31, 2021 and 2020 was approximately 1.9% and 1.8% of current year net product revenue, respectively.

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Contingent Consideration – Contingent consideration represents deferred business acquisition and asset acquisition consideration to be paid out at some point in the future, typically over a one-year period or less from the acquisition date. Contingent consideration is recorded at the asset acquisition date fair value. Contingent consideration recorded in connection with a business acquisition is reported at fair value each reporting period until the contingency is resolved. Any changes in fair value are recognized in earnings. Contingent consideration recorded in connection with an asset acquisition is not derecognized until the related contingency is resolved and the consideration is paid or becomes payable. If the amount initially recorded as contingent consideration exceeds the amount paid or payable, the Company recognizes that excess amount as a reduction in the cost of the related intangible assets.

Public Offering – On September 28, 2020, the Company completed a public offering in which it issued and sold 1,750,000 shares of common stock at a price to the public of $5.50 per share. The shares sold and issued in the public offering resulted in an aggregate gross offering price of $9,625,000. The Company received net proceeds of $8,623,000 after deducting underwriting discounts and commissions of $674,000 and offering expenses of $328,000.

On October 21, 2020, the underwriters of the Company’s public offering exercised their option to purchase additional shares of the Company’s common stock to cover sales by the underwriters of a greater number of shares than the total set forth in the filed prospectus for the public offering. The underwriters purchased an additional 420,000 shares of common stock from the Company. The gross proceeds to the Company of the issuance were $2,310,000, and the Company received net proceeds of $2,148,000 after deducting underwriting discounts and commissions.

Research and Development – Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation and the cost of certain third-party contractors. Research and development costs are expensed as incurred. Costs related to internally developed software are expensed as research and development expense until technological feasibility has been achieved, after which the costs are capitalized.

Fair Value Measurements – The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: 

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

· Quoted prices for similar assets or liabilities in active markets;

· Quoted prices for identical or similar assets in non-active markets;

· Inputs other than quoted prices that are observable for the asset or liability; and

· Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Lease Obligations – We determine if an agreement is a lease at inception. We evaluate the lease terms to determine whether the lease will be accounted for as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current portion, and operating lease liabilities, net of current portion in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

A lease that transfers substantially all of the benefits and risks incidental to ownership of property are accounted for as finance leases. At the inception of a finance lease, an asset and finance lease obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property’s fair market value. Finance lease obligations are classified as either current or long-term based on the due dates of future minimum lease payments, net of interest.

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Notes Payable – We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

Income Taxes – We recognize a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Accruals for uncertain tax positions are provided for in accordance with accounting guidance. Accordingly, we may recognize the tax benefits from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting guidance is also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, and cash flows. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. At December 31, 2020 we determined that we would be able to realize our deferred income tax assets in the future and released $7,487,000 of the valuation allowance.

Interest and penalties associated with income taxes are classified as income tax expense in the consolidated statements of operations.

Stock-Based Compensation – For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

Operating Segments – Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has reorganized into two operating segments, which consist of cloud telecommunications services and software solutions. The software solutions segment includes the results of operation of NetSapiens, LLC, NSHC, Inc., NetSapiens Canada, Inc., and NetSapiens International Limited. The cloud telecommunications segment includes the results of operations of Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers – No customer accounted for 10% or more of our total revenue for the years ended December 31, 2021 and 2020. No customer accounted for 10% or more of our total trade receivables as of December 31, 2021 and one telecommunications services customer accounted for 11% of total trade accounts receivable as of December 31, 2020.

Recently Adopted Accounting Pronouncements – In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

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In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is effective for our fiscal year beginning after December 15, 2021, including interim periods within this fiscal year. This guidance can be applied using either a modified or full retrospective approach. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

2. Revenue

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product, service, or software solution to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, see Note 18.

Cloud Telecommunications Services Segment

Products and services may be sold separately or in bundled packages. The typical length of a contract for service is thirty-six to sixty months. Customers are billed for these services on a monthly basis. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the desktop devices and telecommunication services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

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Desktop Devices – Revenue generated from the sale of telecommunications equipment (desktop devices) is recognized when the customer takes possession of the devices and the cloud telecommunications services begin. The Company typically bills and collects the fees for the equipment upon entering into a contract with a customer. Cash receipts are recorded as a contract liability until implementation is complete and the services begin.

Equipment Financing Revenue – Fees generated from renting our cloud telecommunication equipment (IP or cloud telephone desktop devices) through leasing contracts are recognized as revenue based on whether the lease qualifies as an operating lease or sales-type lease. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: 1) lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and 2) the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. The economic life of most of our products is estimated to be three years, since this represents the most frequent contractual lease term for our products, and there is no residual value for used equipment. Residual values, if any, are established at the lease inception using estimates of fair value at the end of the lease term. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases in recognized ratably over the applicable service period.

Cloud Telecommunications Services – Cloud telecommunication services include voice, data, collaboration software, broadband Internet access, interest generated from equipment financing revenue, and support for premise based PBX phone systems. The Company recognizes revenue as services are provided in service revenue. Fees generated from reselling broadband Internet access are recognized as revenue net of the costs charged by the third-party service providers. Cloud telecommunications services are billed and paid on a monthly basis. Our telecommunications services contracts typically have a term of thirty-six to sixty months.

Fees, Commissions, and Other, Recognized over Time – Includes contracted and non-contracted items such as:

· Contracted activation and flash fees – The Company generally allocates a portion of the activation fees to the desktop devices, which is recognized at the time of the installation or customer acceptance, and a portion to the service, which is recognized over the contract term using the straight-line method.

· Non-contracted carrier cost recovery fee – This fee recovers the various costs and expenses that the Company incurs in connection with complying with legal, regulatory, and other requirements, including without limitation federal, state, and local reporting and filing requirements. This fee is assessed as a set percentage of our monthly billing and is recognized monthly.

· Non-contracted administrative fees – Administrative fees are recognized as revenue on a monthly basis.

One-Time Fees, Commissions, and Other – Includes contracted and non-contracted items such as:

· Contracted professional service revenue – Professional service revenue includes professional installation services, custom integration, and other professional services. The Company typically bills and collects professional service revenue upon entering into a contract with a customer. Professional service revenue is recognized as revenue when the performance obligations are completed.

· Non-contracted cancellation fees – These cancellation fees relate to remaining contractual term buyout payments in connection with early cancellation and are billed and recognized as revenue upon receipt.

· Other non-contracted fees – These fees include disconnect fees, shipping fees, restocking fees, and porting fees. Other non-contracted fees are recognized as revenue upon receipt of payment.

Software Solutions Segment

The Software Solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

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Software Licenses - The Company’s software licenses typically provide a perpetual right to use the Company’s software. The Company also sells term-based software licenses that expire and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software is delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue could be recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. However, historical experience shows that customers regularly renegotiate the number of licenses during the installation process. Therefore, the Company recognizes revenue from software licenses when the setup is complete. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

· SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network. The Company recognizes one-time upfront software license revenue when the software setup is complete.

· SNAPaccel – a Software-as-a-Service (“SaaS”) based software license referred to as subscription arrangements. The Company recognizes revenue as subscriptions are provided in service revenue on a monthly basis.

Subscription Maintenance and Support - Subscription maintenance and support revenue includes revenue from maintenance service contracts, customer support, and other supportive services. The Company offers warranties on its products. The warranty period for the Company’s licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

Professional Services and Other - The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services. Revenue from professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

 Disaggregation of Revenue

In the following table, revenue is disaggregated by primary major product line, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.

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Year Ended December 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	2,324	$	-	$	2,324
Equipment financing revenue		266		-		266
Telecommunications services		14,764		-		14,764
Fees, commissions, and other, recognized over time		1,661		-		1,661
One time fees, commissions and other		411		-		411
Software licenses		-		2,712		2,712
Subscription maintenance and support		-		5,384		5,384
Professional services and other		-		570		570
	$	19,426	$	8,666	$	28,092
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	2,684	$	5,384	$	8,068
Products, services, and fees transferred over time		16,742		3,282		20,024
	$	19,426	$	8,666	$	28,092

Year Ended December 31, 2020	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	1,843	$	-	$	1,843
Equipment financing revenue		223		-		223
Telecommunications services		12,594		-		12,594
Fees, commissions, and other, recognized over time		1,523		-		1,523
One time fees, commissions and other		204		-		204
	$	16,387	$	-	$	16,387
Timing of revenue recognition
Products and fees recognized at a point in time	$	2,047	$	-	$	2,047
Services and fees transferred over time		14,340		-		14,340
	$	16,387	$	-	$	16,387

Contract balances

 The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.

	December 31,		December 31,
(In thousands)	2021		2020
Receivables, which are included in Trade receivables, net of allowance
for doubtful accounts	$	2,177	$	538
Contract assets		261		159
Contract liabilities		3,028		1,228

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Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

	For the Year Ended						For the Year Ended
(In thousands)	December 31, 2021						December 31, 2020
	Contract Assets			Contract Liabilities			Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-		$	(1,137	)	$	-		$	(976	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-			2,937			-			990
Transferred to receivables from contract assets recognized at the beginning of the period		(60	)		-			(21	)		-
Increase due to additional unamortized discounts		162			-			158			-

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	172		-		-		-		-	$	172
Telecommunications services	$	12,421		8,321		5,523		3,015		725	$	30,005
Software Solutions	$	6,789		3,266		1,056		417		-	$	11,528
All consideration from contracts with customers is included in the amounts presented above

3. Earnings Per Common Share

 Basic net income/(loss) per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. Diluted net loss per common share for the year ended December 31, 2021 is the same as basic net loss per common share because the common share equivalents were anti-dilutive due to the net loss. The following table sets forth the computation of basic and diluted net income per common share:

	Year Ended December 31,
	2021			2020
Net income/(loss) (in thousands) (A)	$	(2,445	)	$	7,940
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		20,275,691			15,767,874
Dilutive effect of stock-based awards		-			1,652,602
Diluted weighted-average outstanding shares of common stock (C)		20,275,691			17,420,476
Earnings per common share:
Basic (A/B)	$	(0.12	)	$	0.50
Diluted (A/C)	$	(0.12	)	$	0.46

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For the years ended December 31, 2021 and 2020, respectively, the following potentially dilutive common stock, including awards granted under our equity incentive compensation plans, were excluded from the computation of diluted earnings per share because including them would be anti-dilutive.

	Year Ended December 31,
	2021		2020
Stock options		924,742		186,811

4. Acquisitions

NetSapiens, Inc. Merger Agreement

On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two million users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

(in thousands)	Initial Valuation		Adjustments	December 31,  2021
Consideration:
Cash	$	10,000		$	10,000
Common stock		16,942			16,942
Stock options		22,120			22,120
Total consideration	$	49,062		$	49,062

The acquisition was accounted for under the acquisition method of accounting and the operating results of NetSapiens have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to NetSapiens net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships, developed technology, and trademark and trade name of the acquired business and expected synergies at the time of the acquisition.

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We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for NetSapiens and adjustments made during the period ended December 31, 2021 (in thousands):

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734	8,247			$	34,981

______________

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships, developed technology, and Trademarks and trade name intangible assets, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships, developed technology, and addition of trademarks and trade name intangible assets was a decrease in the fair value of the intangible asset of $420,000, and an increase to goodwill of $420,000.  As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $59,000 less amortization expense in cost of software solutions, $98,000 additional amortization expense in sales and marketing, and $37,000 additional amortization expense in general and administrative in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the delayed settlement of pre-acquisition liabilities resulted in an increase in opening balance sheet cash and accrued liabilities of $739,000, with no impact on goodwill.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our estimates for various assets acquired and liabilities assumed resulting in an increase of $9,000 to assets acquired and a increase in liabilities assumed of $147,000 and an increase to goodwill of $140,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in the reclassification of direct financing lease liabilities as operating lease liabilities, and an increase of $4,000 to the right to use assets balance and an increase of $1,000 to the operating lease liability and a decrease to goodwill of $3,000. 

(e) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our preliminary estimate of contract liabilities, net of current portion, which were determined to be current liabilities and have been reclassified as current contract liabilities with no impact on goodwill.

(f) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the retroactive adoption of ASC 606, resulting in the recording of contract cost of $105,000, an increase to current and long-term accounts receivables of $170,000, an increase in contract liabilities of $103,000 and a decrease to goodwill of $172,000.

(g) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of a valuation allowance on the deferred tax assets of $2,829,000, and recording a deferred tax liability of $5,033,000 for the intangible assets acquired and a increase to goodwill of $7,862,000.

The fair values of the customer relationships, developed technology, and trademark and trade name were established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

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The customer relationships was valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships, developed technology, and trademarks and trade names acquired are as follows: weighted average cost of capital of 11.0%, tax rate of 25.0%, and estimated economic life of 16 years.

The developed technology and trademarks and trade name were valued using the relief from royalty methodology. The relief-from-royalty method was used to value the developed technology and trademarks and trade name acquired from NetSapiens. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the completed technology. The market-derived royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the developed technology are as follows: royalty rate of 7%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 6 years. The key assumptions used in valuing the existing trademarks are as follows: royalty rate of 1.0%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 4 years.

The following unaudited pro forma information presents our consolidated results of operations as if NetSapiens, Inc. had been included in our consolidated results since January 1, 2020:

	For the Year Ended December 31, (Unaudited, in thousands)
	2021			2020
Revenues	$	33,408		$	27,837
Net income/(loss)		(13,692	)		7,761
Earnings per share	$	(0.64	)	$	0.41

The unaudited pro forma financial information is presented for informational purposes only, and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated NetSapiens, Inc. as of January 1, 2020.

Acquisition related expenses incurred by us in connection with the NetSapiens acquisition of $970,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

Centric Telecom, Inc. Business Acquisition

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period. The fair value of the common stock issued as consideration was determined based on the closing market price of the Company’s common stock on the date of the acquisition of $7.42. The aggregate purchase price is subject to customary upward or downward adjustments for Centric Telecom’s net working capital.

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

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The acquisition was accounted for under the acquisition method of accounting and the operating results of Centric Telecom have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to Centric Telecom’s net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships of the acquired business and expected synergies at the time of the acquisition.

We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for Centric Telecom and adjustments made during the period ended December 31, 2021 (in thousands):

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

_______________

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships intangible asset, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships intangible asset was a decrease in the fair value of the intangible asset of $38,000, and an increase to goodwill of $38,000. As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $16,000 less amortization expense in sales and marketing in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of pre-acquisition liabilities and resulted in an increase to accrued liabilities of $8,000 and an increase to goodwill of $8,000.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in an increase of $16,000 to the operating lease liability and an increase to goodwill of $16,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due recording a deferred tax liability of $534,000 for the intangible assets acquired and an increase to goodwill of $534,000.

The fair values of the customer relationships was established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

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The customer relationships was valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 14.0%, tax rate of 25.0%, and estimated economic life of 15 years.

Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition of $67,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

5. Trade Receivables, net

Our trade receivables balance consists of traditional trade receivables. Below is an analysis of our trade receivables as shown on our balance sheet (in thousands):

	December 31,
	2021			2020
Gross trade receivables	$	2,249		$	559
Less: allowance for doubtful accounts		(72	)		(21	)
Trade receivables, net	$	2,177		$	538
Current trade receivables, net	$	2,177		$	538
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,177		$	538

6. Prepaid Expenses

 Prepaid expenses consisted of the following (in thousands): 

	December 31,
	2021		2020
Prepaid corporate insurance	$	90	$	53
Prepaid software services and support		160		20
Prepaid employee insurance premiums		9		71
Nasdaq Listing Fee		15		-
Other prepaid expenses		84		46
Total prepaid assets	$	358	$	190

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7. Property and Equipment

Property and equipment consisted of the following (in thousands):

	2021			2020
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,854			1,407
Computer software		576			526
Internal-use software		14			14
Furniture and fixtures		75			29
Vehicles		74			-
Leasehold improvements		7			-
Less: accumulated depreciation		(2,111	)		(1,742	)
Total property and equipment, net	$	2,989		$	2,734

Depreciation expense is included in general and administrative expenses and totaled $235,000 and $166,000 for the years ended December 31, 2021 and 2020, respectively.

8. Intangible Assets and Goodwill

Acquired intangible assets subject to amortization consist of the following (in thousands):

	December 31, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,619	)	$	17,454	$	1,171	$	(919	)	$	252
Developed technologies		4,900		(528	)		4,372		-		-			-
Trademark and trade names		400		(65	)		335		-		-			-
Total acquired intangible assets	$	24,472	$	(2,311	)	$	22,161	$	1,171	$	(919	)	$	252

As of December 31, 2021, the weighted average remaining useful life for customer relationships was 15.1 years, developed technologies was 5.4 years, and trademarks and trade names was 3.4 years.

Amortization expense for customer relationships intangible assets is included in sales and marketing expenses and totaled $723,000 and $92,000 for the years ended December 31, 2021 and 2020, respectively. Amortization expense for developed technologies intangible assets is included in cost of software solutions revenue and totaled $528,000 and $0 for the years ended December 31, 2021 and 2020, respectively. Amortization expense for trademark and trade name intangible assets is included in general and administrative expenses and totaled $140,000 and $0 for the years ended December 31, 2021 and 2020, respectively.

On June 1, 2021, the Company acquired $21,100,000 in intangible assets in connection with the NetSapiens business acquisition. On January 14, 2021, the Company acquired $2,200,000 in intangible assets in connection with the Centric Telecom business acquisition. During the year ended December 31, 2020, we reduced our customer relationships intangible assets by $121,000 due to an adjustment to the total consideration payable under the DoubleHorn customer relationships asset purchase agreement.

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As of December 31, 2021, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

Year ending December 31,
2022	$	2,199
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,829
Total	$	22,161

The following table provides a summary of changes in the carrying amounts of goodwill (in thousands):

	Goodwill
Balance at December 31, 2020	$	272
Centric Telecom business acquisition		1,719
NetSapiens business acquisition		34,981
Balance at December 31, 2021	$	36,972

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	December 31,
	2021		2020
Accrued wages and benefits	$	1,188	$	513
Accrued accounts payable		609		505
Accrued sales and telecommunications taxes		2,487		438
Product warranty liability		50		33
Income tax payable		10		-
Other		560		139
Total accrued expenses	$	4,904	$	1,628

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The changes in aggregate product warranty liabilities for the years ended December 31, 2021 and 2020 were as follows (in thousands):

	Warranty  Liabilities
Balance at January 1, 2020	$	37
Accrual for warranties		33
Adjustments related to pre-existing warranties		(10	)
Warranty settlements		(27	)
Balance at December 31, 2020		33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021	$	50

Product warranty expense is included in cost of product revenue and totaled $51,000 and $23,000 for the years ended December 31, 2021 and 2020, respectively.

10. Notes Payable

Notes payable consists of a short and long-term financing arrangements:

	December 31,
	2021			2020
Notes payable	$	1,873		$	1,944
Less: current notes payable		(1,873	)		(71	)
Notes payable, net of current portion	$	-		$	1,873

On January 27, 2020, we entered into a Fixed Rate Term Loan Agreement with Bank of America, N.A. to finance Two Million Dollars ($2,000,000) to purchase our corporate office building. The Loan Agreement has a term of seven (7) years with monthly payments of Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars ($11,841.15), including interest at 3.67%, beginning on March 1, 2020, secured by the office building. At December 31, 2021, we were in default of our basic fixed charge coverage ratio and we have classified the note payable as current on our balance sheet.

As of December 31, 2021, future principal payments are scheduled as follows (in thousands):

Year ending December 31,
2022	$	1,873
2023		-
2024		-
2025		-
2026		-
Thereafter		-
Total	$	1,873

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11. Fair Value Measurements

We have financial instruments as of December 31, 2021 and 2020 for which the fair value is summarized below (in thousands):

	December 31, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,177	$	2,177	$	538	$	538
Equipment financing receivables		1,274		1,274		1,192		1,192
Liabilities:
Finance leases	$	303	$	303	$	84	$	84
Notes payable		1,873		1,873		1,944		1,944

We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of December 31, 2021 and 2020.

In January 2021, the Company recorded $746,000 of contingent consideration in connection with the Centric Telecom business acquisition, to be paid based on the completion of the earn-out period. Upon completion of the earn-out period in October 2021, the Company paid out $746,000 of contingent consideration and additional consideration of $126,000 based on revenue target achievements, which was recorded as general and administrative expenses for the year ended December 31, 2021. During the year ended December 31, 2020, the Company reduced the contingent consideration to be paid based on the completion of the earn-out period by $121,000 and recognized a reduction in the cost of the assets acquired in the DoubleHorn asset acquisition. The progression of the Company’s Level 3 instruments fair valued on a recurring basis for the year ended December 31, 2021 and 2020 are shown in the table below (in thousands):

	Asset and Business Acquisition Contingent Consideration
Balance at January 1, 2020	$	175
Cash payments		(54	)
Adjustment		(121	)
Balance at December 31, 2020	$	-
Additions		746
Cash payments		(746	)
Adjustment		-
Balance at December 31, 2021	$	-

12. Equity

Common Stock

Shares of common stock reserved for future issuance as of December 31, 2021 were as follows:

Stock-based compensation plans:
Outstanding option awards	7,047,550
Available for future grants	5,764,231
	12,811,781

13. Stock-Based Compensation

 We have various incentive stock-based compensation plans that provide for the grant of stock options, restricted stock units (RSUs), and other share-based awards of up to 12,811,781 shares to eligible employees, consultants, and directors. As of December 31, 2021, we had 5,764,231 shares remaining in the plans available to grant.

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Stock Options

The weighted-average fair value of stock options on the date of grant and the assumptions used to estimate the fair value of stock options granted during the years ended December 31, 2021 and 2020 using the Black-Scholes option-pricing model were as follows:

	Year Ended December 31,
	2021			2020
Weighted-average fair value of options granted	$	0.65		$	3.66
Expected volatility		13	%		84	%
Expected life (in years)		0.81			4.30
Risk-free interest rate		0.14	%		0.37	%
Expected dividend yield		0.00	%		0.00	%

The expected volatility of the options is determined using historical volatilities based on historical stock prices. The expected life of the options granted is based on our historical share option exercise experience. The risk-free interest rate is determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the option. The Company has not declared any dividends, therefore, it is assumed to be zero.

The following table summarizes the stock option activity under the plans for the years ended December 31, 2021 and 2020:

						Weighted-Average	Aggregate
	Number of			Weighted-Average		Remaining		Intrinsic Value
	Shares			Exercise Price		Contract Life		(in thousands)
Outstanding at January 1, 2020		3,189,160		$	2.60	3.5 years	$	1,007
Granted		612,000			5.91
Exercised		(884,974	)		2.35
Cancelled/forfeited		(30,725	)		4.43
Outstanding at December 31, 2020		2,885,461			3.36	3.0 years		10,310
Granted		5,349,828			-
Exercised		(1,142,330	)		-
Cancelled/forfeited		(104,116	)		-
Outstanding at December 31, 2021		6,988,843			2.40	4.5 years		19,829
Shares vested and expected to vest		6,836,480			2.40	4.5 years		19,819
Exercisable as of December 31, 2021		5,917,757			1.74	4.0 years		19,763
Exercisable as of December 31, 2020		2,242,314			2.74	2.1 years		9,400

The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020, was $2,894,000 and $3,061,000, respectively.

As of December 31, 2021, the total future compensation expense related to non-vested options not yet recognized in the consolidated statements of operations was approximately $3,987,000 and the weighted-average period over which these awards are expected to be recognized is approximately 2.3 years.

Restricted Stock Units:

The following table summarizes the RSUs outstanding:

	Years Ended December 31,
	2022		2023		2024
RSUs with service-based vesting conditions		32,071		7,067		-

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The following table summarizes the RSUs activity under the plans for the years ended December 31, 2021 and 2020:

	Number of			Weighted-Average
	Units				Fair Value
Outstanding at January 1, 2020		65,008		$	2.25
Granted		100,500			4.25
Vested/released		(51,606	)		3.16
Cancelled/forfeited		(13,391	)		3.38
Outstanding at December 31, 2020		100,511			3.63
Granted		-			-
Vested/released		(56,480	)		3.33
Cancelled/forfeited		(4,893	)		3.79
Outstanding at December 31, 2021		39,138			4.05

There were no RSUs granted during the year ended December 31, 2021 and the weighted-average grant-date fair value of RSUs granted year ended December 31, 2020 was $4.25.

The total intrinsic value of RSUs that vested and were released during the years ended December 31, 2021 and 2020 was $341,000 and $325,000 respectively.

As of December 31, 2021, the total future compensation expense related to non-vested RSUs not yet recognized in the consolidated statements of operations was approximately $150,000 and the weighted-average period over which these awards are expected to be recognized is approximately 1.2 years.

 The following table summarizes the statement of operations effect of stock-based compensation for the years ended December 31, 2021 and 2020 (in thousands):

	Year Ended December 31,
	2021		2020
Share-based compensation expense by type:
Stock options	$	1,441	$	453
Restricted stock units		187		170
Total cost related to share-based compensation expense	$	1,628	$	623
Share-based compensation expense by financial statement line item:
Cost of revenue	$	154	$	82
Research and development		125		71
Selling and marketing		271		88
General and administrative		1,078		382
Total cost related to share-based compensation expense	$	1,628	$	623

 The tax benefit related to stock compensation expense on net deferred tax assets at December 31, 2021 and 2020 was $178,000 and $507,000, respectively.

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14. Income Taxes

The income tax benefit/(expense) consisted of the following for the years ended December 31, 2021 and 2020 (in thousands):

	Year Ended December 31,
	2021			2020
Current income tax expense:
Federal	$	-		$	-
State and local		(35	)		(13	)
Current income tax expense		(35	)		(13	)
Deferred income tax benefit:
Federal		114			4,708
State and local		386			1,346
Deferred income tax benefit		500			6,054
Total income tax benefit/(provision)	$	465		$	6,041

The income tax provision attributable to income before income tax benefit for the years ended December 31, 2021 and 2020 differed from the amounts computed by applying the U.S. federal statutory tax rate of 21% and 21%, respectively, as a result of the following (in thousands):

	Year Ended December 31,
	2021			2020
U.S. federal statutory income tax benefit/(expense)	$	611		$	(399	)
Increase in income tax benefit resulting from:
State and local income tax benefit/(expense), net of federal effect		227			(1,878	)
Change in the valuation allowance for net deferred income tax assets		(231	)		7,487
Stock-based compensation		71			626
Other, net		(213	)		205
Income tax benefit	$	465		$	6,041

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As of December 31, 2021 and 2020, significant components of net deferred income tax assets and liabilities were as follows (in thousands):

	December 31,
	2021			2020
Deferred income tax assets:
Accrued expenses	$	242		$	110
Deferred revenue		722			318
Net operating loss carry-forwards		7,230			5,485
Stock-based compensation		178			507
Other		127			285
Subtotal		8,499			6,705
Valuation allowance		(1,498	)		(61	)
Total deferred income tax assets		7,001			6,644
Deferred income tax liabilities:
Property and equipment		(31	)		(6	)
Prepaid expenses and other		(445	)		(584	)
Intangible assets		(5,539	)		-
Total deferred income tax liabilities		(6,015	)		(590	)
Net deferred income tax assets (liabilities)	$	986		$	6,054

As of December 31, 2021, we had NOL and research credit carry-forwards for U.S. federal income tax reporting purposes of approximately $27,013,000 and $66,000, respectively. $18,394,000 of the NOLs will begin to expire in 2031 through 2037, and the remaining $8,619,000 of the NOLs will not expire.  The research tax credit will begin to expire in 2039 through 2040.  Approximately $5,323,000 of the NOL carryforwards and $66,000 of the research credit carryforwards relate to the NetSapiens and Centric acquisitions.  These NOLs and research credits carryforwards are subject to the change in ownership rules and limitations under Section 382 discussed below.  The Company is in the process of determining what, if any, of these NOL and research credit carryforwards will be available to offset future taxable income.  With this uncertainty into the utilization of these deferred tax assets we have recorded a valuation allowance of $1,184,000 related to the acquired NOLs and research credits. A valuation allowance of $1,498,000 and $61,000 was recorded against our gross deferred tax asset balance as of December 31, 2021 and 2020, respectively. For the year ended December 31, 2020, we recorded a release of the valuation allowance of $7,487,000, on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2021, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as achievement of three years of cumulative pretax income in the U.S. federal tax jurisdiction, projections of future pretax income and the duration of statutory carry-forward periods. As of December 31, 2021 the Company has three years of cumulative pretax income, the achievement of three years of cumulative pretax income is objectively verifiable positive evidence and is considered significant positive evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Management utilized historical objectively verifiable revenue growth trends and operating expense trends as assumptions for projections of future pretax income and determined that the Company would generate sufficient pre-tax income in future periods to utilize all of our deferred tax assets. Although historical trends utilized in our projections are objectively verifiable we assigned less weight to this positive evidence given the subjective nature of assumptions in projections. The combination of three years of cumulative pretax income and projections of future pretax income was considered significant positive evidence. Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2031 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $7,001,000 are realizable. 

We also have state NOL and research and development credit carry-forwards of approximately $25,505,000 and $61,000, which expire on specified dates as set forth in the rules of the various states to which the carry-forwards relate.  The company has recorded a valuation allowance of $61,000 against the research and development credit carryforward.  

73

We also have foreign NOL carryforwards of approximately $1,101,000 which will expire on various dates as set forth in the rules of the various countries to which the carryforwards relate.  Due to the uncertainty on the Company’s ability to utilize these NOL carryforwards the company has recorded a valuation allowance against these NOL carryovers of $253,000.

During the fiscal year ended June 30, 2002 (our fiscal year was subsequently changed to December 31), we experienced a change in ownership, as defined by the Internal Revenue Code, as amended (the “Code”) under Section 382. A change of ownership occurs when ownership of a company increases by more than 50 percentage points over a three-year testing period of certain stockholders. As a result of this ownership change we determined that our annual limitation on the utilization of our federal pre-ownership change net operating loss (“NOL”) carry-forwards is approximately $461,000 per year. We determined that the Company would only be able to utilize $4,760,000 of our pre-ownership change NOL carry-forwards and will forgo utilizing $14,871,000 of our pre-ownership change NOL carry-forwards as a result of this ownership change. We do not account for forgone NOL carryovers in our deferred tax assets and only account for the NOL carry-forwards that will not expire unutilized as a result of the restrictions of Code Section 382. 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The new law includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 34% to 21% effective January 1, 2018. As a result of the reduction of the corporate income tax rate to 21%, U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future. There was no charge to our income tax expense as a result of the reduction in corporate income tax rate.

Accounting guidance clarifies the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Although we believe our estimates are reasonable, there can be no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our income tax provision and operating results in the period in which it makes such determination.

The aggregate changes in the balance of unrecognized tax benefits during the years ended December 31, 2021 and 2020 were as follows (in thousands):

Balance as of January 1, 2020	$	-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2020		-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2021	$	-

Estimated interest and penalties related to the underpayment or late payment of income taxes are classified as a component of income tax provision in the consolidated statements of operations. There were no accrued interest and penalties as of December 31, 2021 and 2020, respectively.

Our U.S. federal income tax returns for fiscal 2018 through 2021 are open tax years. We also file in various states, with few exceptions, we are no longer subject to state income tax examinations by tax authorities for years prior to fiscal 2017.

15. Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease office space, data center colocation space, other assets, and office equipment under operating leases. We lease data center equipment, including maintenance contracts and vehicles under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet, excluding leases that are less than 12 months. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease. At the adoption date of ASC Topic 842, the Company was reasonably certain that we would exercise our option to renew our corporate office building operating lease. Lease expense is recognized on a straight-line basis over the lease term.

74

We previously leased our corporate office building in Tempe, Arizona from a Company that is owned by the major shareholder and CEO of the Company. The building was purchased on January 27, 2020 and the lease was cancelled. Amortization of the ROU assets and operating lease liabilities for the years ended December 31, 2021 and 2020 was $0 and $0, respectively. Rental expense incurred on operating leases for the years ended December 31, 2021 and 2020 was approximately $0 and $25,000, respectively.

We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on July 31, 2021. The operating lease contained customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $56,000 and $0, respectively.

We currently lease office space in Reston, Virginia under a non-cancelable operating lease agreement that expires in 2025. The operating lease contains customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $22,000 and $0, respectively.

We currently lease office space in La Jolla, California under a non-cancelable operating lease agreement that expires in 2022. The operating lease contains customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $210,000 and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2024 and the interest rates range from 2.81% to 13.00%. The expense is included in cost of product expenses and totaled approximately $63,000 and $0 for the years ended December 31, 2021 and 2020, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada and Dallas, Texas under non-cancelable operating lease agreements that expire in 2022. Rental expense for the years ended December 31, 2021 and 2020 was approximately $83,000 and $0, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under finance lease agreements which extends through 2026. The Company also leases three vehicles under financing agreements. One vehicle lease ended in 2021 and two vehicle leases extend through 2022. The outstanding balance for finance leases was $311,000 and $84,000 as of December 31, 2021 and 2020, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $129,000 as of December 31, 2021 and 2020, respectively. Related accumulated depreciation totaled $167,000 and $67,000 as of December 31, 2021 and 2020, respectively. The $40,000 in support contracts were classified as a prepaid expense and are being amortized over the service period of 3 years. One support contract expired in January 2021 and the other expires in June 2024. Amortization expense is included in general and administrative expenses and totaled $3,000 and $9,000 for the years ended December 31, 2021 and 2020, respectively. The interest rates on the finance lease obligations range from 1.37% and 6.7% and interest expense was $8,000 and $7,000 for the years ended December 31, 2021 and 2020, respectively.

The maturity of operating leases and finance lease liabilities as of December 31, 2021 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2022	$	462		$	114
2023		58			96
2024		44			76
2025		-			22
2026		-			3
Total minimum lease payments		564			311
Less: amount representing interest		(32	)		(8	)
Present value of minimum lease payments	$	532		$	303

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Lease term and discount rate	December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		3.0
Weighted-average discount rate
Operating leases		10.1	%
Finance leases		3.0	%

	Year Ended  December 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	95
Operating cash flows from finance leases		3
Financing cash flows from finance leases		99

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. Crexendo offers its customers lease financing for the lease of our cloud telecommunication equipment (IP or cloud telephone desktop devices). We account for these transactions as sales-type leases. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Operating lease revenue is classified as product revenue and totaled $204,000 and $0 for the years ended December 31, 2021 and 2020, respectively. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases is recognized ratably over the applicable service period.

Equipment finance receivables arising from the rental of our cloud telecommunications equipment through sales-type leases, were as follows (in thousands):

	December 31,			December 31,
	2021			2020
Gross financing receivables	$	1,822		$	1,774
Less: unearned income		(548	)		(582	)
Financing receivables, net		1,274			1,192
Less: current portion of finance receivables, net		(332	)		(286	)
Finance receivables due after one year	$	942		$	906

Future minimum lease payments as of December 31, 2021, consisted of the following:

Year ending December 31,	Lease Receivables
2022	$	669
2023		563
2024		381
2025		164
2026 and thereafter		43
Gross equipment financing receivables		1,820
Less: unearned income		(546	)
Equipment financing receivables, net	$	1,274

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16. Commitments and Contingencies

Annual Incentive Bonuses Accrual

We utilize incentive bonuses to reward performance achievements and have in place annual target incentive bonuses, payable either in whole or in part, depending on the extent to which the financial performance goals set by the Compensation Committee are achieved. Under our 2021 Profit Sharing Plan, incentive bonuses for all of the participants, including the participating officers excluding the CEO, are determinable based upon three measures of corporate financial performance. The three performance target are; (a) the revenue for the year ended December 31, 2021 must exceed the budgeted revenue approved by the Board; (b) Adjusted EBITDA must exceed the budgeted Adjusted EBITDA approved by the board; (c) the stock price as of December 31, 2021 must exceed target stock price approved by the board. Each performance target is equal to one-third of the annual incentive bonuses. For the year ended December 31, 2021, the Company achieved one of the three performance targets and $175,000 of the annual incentive bonuses was included in accrued expenses in the accompanying balance sheet as of December 31, 2021.

17. Employee Benefit Plan

We have established a retirement savings plan for eligible employees. The plan allows employees to contribute a portion of their pre-tax compensation in accordance with specified guidelines. For the years ended December 31, 2021 and 2020, we contributed approximately $178,000 and $156,000 to the retirement savings plan, respectively.

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18. Segments

Our chief operating decision maker (who is our Chief Executive Officer) reviews our financial information presented on an operating segment basis for purposes of allocating resources and evaluating our financial performance. Following the merger with NetSapiens, Inc., the Company reorganized into two operating segments, a software solutions operating segment and a cloud telecommunications services operating segment. The cloud telecommunications services segment generates revenue from selling cloud telecommunication services, products, and other internet services. The software solutions segment generates revenue from selling perpetual software licenses and software subscriptions, subscription maintenance and support, and professional services. The Company has two reportable operating segments, which consist of cloud telecommunications services and software solutions. Segment revenue, income/(loss) from operations, other income/(expense) and income/(loss) before income tax provision are as follows (in thousands):

	Year Ended December 31,
	2021			2020
Revenue:
Cloud telecommunications service	$	19,426		$	16,387
Software solutions		8,666			-
Consolidated revenue		28,092			16,387
Income/(loss) from operations:
Cloud telecommunications services		(2,643	)		991
Software solutions		(167	)		-
Total operating income/(loss)		(2,810	)		991
Other income/(expense), net:
Cloud telecommunications services		(70	)		908
Software solutions		(30	)		-
Total other income/(expense), net		(100	)		908
Income/(loss) before income tax benefit:
Cloud telecommunications services		(2,713	)		1,899
Software solutions		(197	)		-
Income/(loss) before income tax benefit	$	(2,910	)	$	1,899

Depreciation and amortization was $438,000 and $249,000 for the Cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Depreciation and amortization was $1,189,000 and $0 for the Software solutions segment for the years ended December 31, 2021 and 2020, respectively.

Interest income was $1,000 and $3,000 for the cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Interest income was $0 and $0 for the software solutions segment for the years ended December 31, 2021 and 2020, respectively.

Interest expense was $84,000 and $76,000 for the cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Interest expense was $0 and $0 for the software solutions segment for the years ended December 31, 2021 and 2020, respectively.

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19. Quarterly Financial Information (in thousands, unaudited)

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2021			2021			2021				2021
Service revenue	$	4,139		$	4,327		$	4,325		$	4,311
Software solutions revenue		-			1,012			3,784			3,870
Product revenue		368			440			701			815
Total revenue		4,507			5,779			8,810			8,996
Operating expenses:
Cost of service revenue		1,259			1,347			1,210			1,288
Cost of software solutions revenue		-			526			1,675			1,830
Cost of product revenue		225			286			461			553
Selling and marketing		1,279			1,897			2,285			2,799
General and administrative		2,216			2,579			2,768			3,023
Research and development		350			388			358			300
Total operating expenses		5,329			7,023			8,757			9,793
Income/(loss) from operations		(822	)		(1,244	)		53			(797	)
Total other income/(expense), net		(17	)		(19	)		(41	)		(23	)
Income/(loss) before income taxes		(839	)		(1,263	)		12			(820	)
Income tax benefit/(provision)		124			260			(137	)		218
Net loss	$	(715	)	$	(1,003	)	$	(125	)	$	(602	)
Basic earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)
Diluted earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)

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	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2020			2020			2020				2020
Service revenue	$	3,488		$	3,605		$	3,654		$	3,797
Product revenue		379			449			489			526
Total revenue		3,867			4,054			4,143			4,323
Operating expenses:
Cost of service revenue		970			908			946			1,013
Cost of product revenue		220			263			314			313
Selling and marketing		1,038			1,062			1,051			1,002
General and administrative		1,188			1,046			1,351			1,522
Research and development		270			244			326			349
Total operating expenses		3,686			3,523			3,988			4,199
Income from operations		181			531			155			124
Total other income/(expense), net		(38	)		(20	)		(21	)		987
Income before income taxes		143			511			134			1,111
Income tax benefit/(provision)		(3	)		(3	)		(3	)		6,050
Net income	$	140		$	508		$	131		$	7,161
Basic earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.40
Diluted earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.37

_________

(1) Earnings per common share is computed independently for each of the quarters presented. Therefore, the sums of quarterly earnings per common share amounts do not necessarily equal the total for the twelve month periods presented.

20. Subsequent Events

 None

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13(a)-15(b) under the Exchange Act, as the end of the period covered by this annual report on Form 10-K.

 Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2021 our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provided reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

 There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2021.

Limitations of Effectiveness of Control and Procedures

 In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

ITEM 9B. OTHER INFORMATION

None

81

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information with respect to this item will be set forth in the definitive proxy statement to be delivered to stockholders in connection with the 2022 Annual Meeting of Stockholders (the “Proxy Statement”). Such information is incorporated herein by reference.

We have adopted a code of ethics that applies to all employees, including employees of our subsidiaries, as well as each member of our Board of Directors. The code of ethics is available at our website at www.crexendo.com.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item will be set forth in the Proxy Statement under the heading “Executive Compensation and Other Matters,” and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

Information with respect to this item will be set forth in the Proxy Statement under the heading “Beneficial Ownership of Shares,” and is incorporated herein by reference.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information with respect to this item will be set forth in the Proxy Statement under the heading “Corporate Governance” and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect to this item will be set forth in the Proxy Statement under the headings “Fees of Independent Registered Public Accounting Firm” and “Pre-Approval Policies and Procedures,” and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Report:

1.	Financial Statements – consolidated financial statements of Crexendo, Inc. and subsidiaries as set forth under Item 8 of this Report.
2.	The Financial Statement Schedule on page 77 of this Annual Report.
3.	Exhibit Index as seen below.

EXHIBIT INDEX

Exhibit No.	Exhibit Description	Incorporated By Reference			Filed Herewith
		Form	Date	Number
2.1	Agreement and Plan of Merger and Reorganization, dated March 5, 2021, by and among Crexendo, Inc., Crexendo Merger Sub, Inc., Crexendo Merger Sub, LLC, NetSapiens, Inc. and David Wang as stockholder representative.	8-K	3/8/21	2.1
3.1	Articles of Incorporation	8-K	12/14/16	3.1
3.2	Bylaws	8-K	12/14/16	3.2
4.1	Description of Capital Stock	10-K	3/3/20	4.1	x
10.1*	2013 Long-Term Incentive Plan	14-A	4/30/13
10.2	Reincorporation in state of Nevada for Crexendo, Inc. (Nevada) Articles of Incorporation	8-K	12/14/16	3.1
10.3	Reincorporation in state of Nevada for Crexendo, Inc. (Nevada) bylaws	8-K	12/14/16	3.2
10.4	Loan Agreement between Bank of America, N.A. and Crexendo Business Solutions, Inc. dated January 22 2020, entered into on January 27, 2020.	8-K	1/29/2020	10.2
10.5	Voting and Support Agreement, dated March 5, 2021, by and among Crexendo, Inc., Anand Buch, David T.K. Wang and James Murphy.	8-K	3/8/21	10.1
10.6	Voting and Support Agreement, dated March 5, 2021, by and between NetSapiens, Inc. and Steven G. Mihaylo.	8-K	3/8/21	10.2
21.1	Subsidiaries of Crexendo, Inc.				x
23.1	Consent of Independent Registered Public Accounting Firm (Urish Popeck & Co., LLC)				x
31.1	Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended				x
31.2	Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended				x
32.1	Certification Pursuant to 18 U.S.C. Section 1350				x
32.2	Certification Pursuant to 18 U.S.C. Section 1350				x
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

____________

* Indicates a management contract or compensatory plan or arrangement.

83

SIGNATURES

 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Crexendo, Inc.
Date: March 21, 2022	By:	/s/ STEVEN G. MIHAYLO
		Steven G. Mihaylo Chief Executive Officer

 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: March 21, 2022	By:	/s/ STEVEN G. MIHAYLO
		Steven G. Mihaylo
		Chief Executive Officer, Chairman of the Board of Directors
Date: March 21, 2022	By:	/s/ RONALD VINCENT
		Ronald Vincent
		Chief Financial Officer

Date: March 21, 2022	By:	/s/ TODD GOERGEN
		Todd Goergen
		Director
Date: March 21, 2022	By:	/s/ JEFFREY P. BASH
		Jeffrey P. Bash
		Director
Date: March 21, 2022	By:	/s/ DAVID WILLIAMS
		David Williams
		Director

Date: March 21, 2022	By:	/s/ ANIL PURI
		Anil Puri
		Director

84

CREXENDO, INC. AND SUBSIDIARIES

Schedule II- Valuation and Qualifying Accounts

	Balance at							Balance at
	Beginning							End of
	of Year		Additions		Deductions			Year
			(in thousands)
Year ended December 31, 2021
Allowance for doubtful accounts receivable	$	21		51		-		$	72
Deferred income tax asset valuation allowance	$	61		1,437		-		$	1,498
Year ended December 31, 2020
Allowance for doubtful accounts receivable	$	14		7		-		$	21
Deferred income tax asset valuation allowance	$	7,548		-		(7,487	)	$	61

85

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

	State of their jurisdiction of	Other names under
	incorporation or	which subsidiary does
Name of subsidiary	organization	business
Crexendo Business Solutions, Inc.	Arizona	None
Crexendo International, Inc.	Arizona	None
Crexendo Business Solutions of Virginia, Inc.	Virginia	Centric Telecom
NetSapiens, LLC	Delaware	None
NetSapiens Canada, Inc.	Canada	None
NetSapiens International Limited	United Kingdom	None
NSHC, Inc.	Canada	None

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-120433 and No. 333-190636 on Form S-8 of our report dated March 21, 2022, relating to the consolidated financial statements and financial statement schedule of Crexendo, Inc. and subsidiaries appearing in this Annual Report on Form 10-K of Crexendo Inc. and subsidiaries for the year ended December 31, 2021.

/s/ URISH POPECK & CO., LLC

Pittsburgh, PA

March 21, 2022

EX-31.1

EXHIBIT 31.1

I, Steven G. Mihaylo, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Crexendo, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: March 21, 2022	/s/ STEVEN G. MIHAYLO
	Steven G. Mihaylo
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, Ronald Vincent, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Crexendo, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: March 21, 2022	/s/ RONALD VINCENT
	Ronald Vincent
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Crexendo, Inc. (the Company) Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven G. Mihaylo, Chief Executive Officer of the Company, do hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 21, 2022	/S/ STEVEN G. MIHAYLO
	Steven G. Mihaylo
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Crexendo, Inc. (the Company) Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ronald Vincent, Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 21, 2022	/s/ RONALD VINCENT
	Ronald Vincent
	Chief Financial Officer

XML

Cover - USD ($)	12 Months Ended
	Dec. 31, 2021	Feb. 28, 2022
Cover [Abstract]
Entity Registrant Name	Crexendo, Inc.
Entity Central Index Key	0001075736
Document Type	10-K
Amendment Flag	false
Entity Voluntary Filers	No
Current Fiscal Year End Date	--12-31
Entity Well Known Seasoned Issuer	No
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Dec. 31, 2021
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2021
Entity Common Stock Shares Outstanding		22,274,371
Entity Public Float	$ 50,029,600
Document Annual Report	true
Document Transition Report	false
Entity File Number	001-32277
Entity Incorporation State Country Code	NV
Entity Tax Identification Number	87-0591719
Entity Address Address Line 1	1615 South 52nd Street
Entity Address City Or Town	Tempe
Entity Address State Or Province	AZ
Entity Address Postal Zip Code	85281
City Area Code	602
Icfr Auditor Attestation Flag	true
Auditor Name	Urish Popeck & Co., LLC
Auditor Location	Pittsburgh, PA
Auditor Firm Id	1013
Local Phone Number	714-8500
Security 12b Title	Common Stock, par value $0.001 per share
Security Exchange Name	NASDAQ
No Trading Symbol Flag	true
Entity Interactive Data Current	Yes

XML

Consolidated Balance Sheets - USD ($)	Dec. 31, 2021	Dec. 31, 2020
Current assets:
Cash and cash equivalents	$ 7,468,000	$ 17,579,000
Restricted cash	0	100,000
Trade receivables, net of allowance for doubtful accounts of $72 as of December 31, 2021 and $21 as of December 31, 2020	2,177,000	538,000
Contract assets	261,000	159,000
Inventories	231,000	504,000
Equipment financing receivables	332,000	286,000
Contract costs	648,000	421,000
Prepaid expenses	358,000	190,000
Income tax receivable	11,000	4,000
Other current assets	74,000	0
Total current assets	11,560,000	19,781,000
Long-term equipment financing receivables, net	942,000	906,000
Property and equipment, net	2,989,000	2,734,000
Deferred income tax assets, net	986,000	6,054,000
Operating lease right-of-use assets	532,000	1,000
Intangible assets, net	22,161,000	252,000
Goodwill	36,972,000	272,000
Contract costs, net of current portion	697,000	549,000
Other long-term assets	313,000	156,000
Total Assets	77,152,000	30,705,000
Current liabilities:
Accounts payable	476,000	56,000
Accrued expenses	4,904,000	1,628,000
Finance leases	110,000	29,000
Notes payable	1,873,000	71,000
Operating lease liabilities	447,000	1,000
Income tax payable	24,000	0
Contract liabilities	2,738,000	778,000
Total current liabilities	10,572,000	2,563,000
Contract liabilities, net of current portion	290,000	450,000
Finance leases, net of current portion	193,000	55,000
Notes payable, net of current portion	0	1,873,000
Operating lease liabilities, net of current portion	164,000	0
Total liabilities	11,219,000	4,941,000
Stockholders' equity:
Preferred stock, par value $0.001 per share - authorized 5,000,000 shares; none issued	0	0
Common stock, par value $0.001 per share - authorized 50,000,000 shares, 22,054,239 shares issued and outstanding as of December 31, 2021 and 17,983,177 shares issued and outstanding as of December 31, 2020	22,000	18,000
Additional paid-in capital	118,432,000	75,834,000
Accumulated deficit	(52,533,000)	(50,088,000)
Accumulated other comprehensive income	12,000	0
Total stockholders' equity	65,933,000	25,764,000
Total Liabilities and Stockholders' Equity	$ 77,152,000	$ 30,705,000

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
Assets
Allowance for doubtful accounts - trade receivables	$ 72	$ 21
Stockholders equity
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized	5,000,000	5,000,000
Preferred stock, issued	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized	50,000,000	50,000,000
Common stock, issued	22,054,239	17,983,177
Common stock, outstanding	22,054,239	17,983,177

XML

Consolidated Statements of Operations - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Consolidated Statements of Operations
Service revenue	$ 17,102,000	$ 14,544,000
Software solutions	8,666,000	0
Product revenue	2,324,000	1,843,000
Total revenue	28,092,000	16,387,000
Operating expenses:
Cost of service revenue	5,104,000	3,837,000
Cost of software solutions	4,031,000	0
Cost of product revenue	1,525,000	1,110,000
Selling and marketing	8,260,000	4,153,000
General and administrative	10,586,000	5,107,000
Research and development	1,396,000	1,189,000
Total operating expenses	30,902,000	15,396,000
Income/(loss) from operations	(2,810,000)	991,000
Other income/(expense):
Interest income	1,000	3,000
Interest expense	(84,000)	(76,000)
Extinguishment of PPP debt	0	1,007,000
Other income/(expense), net	(17,000)	(26,000)
Total other income/(expense), net	(100,000)	908,000
Income/(loss) before income tax	(2,910,000)	1,899,000
Income tax benefit	(465,000)	(6,041,000)
Net income/(loss)	$ (2,445,000)	$ 7,940,000
Earnings per common share:
Basic	$ (0.12)	$ 0.50
Diluted	$ (0.12)	$ 0.46
Weighted-average common shares outstanding:
Basic	20,275,691	15,767,874
Diluted	20,275,691	17,420,476

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Consolidated Statements of Comprehensive Income
Net income/(loss)	$ (2,445)	$ 7,940
Other comprehensive income/(loss), net of tax
Foreign currency translation gain	12	0
Total other comprehensive income	12	0
Comprehensive income/(loss)	$ (2,433)	$ 7,940

XML

Consolidated Statement of Stockholders' Equity - USD ($)	Total	Common Stock	Additional Paid-In Capital	Accumulated Deficit
Balance, shares at Dec. 31, 2019		14,884,755
Balance, amount at Dec. 31, 2019	$ 4,387,000	$ 15,000	$ 62,400,000	$ (58,028,000)
Share-based compensation	623,000	$ 0	623,000	0
Vesting of restricted stock units, shares		51,606
Vesting of restricted stock units, amount	0	$ 0	0	0
Issuance of common stock for exercise of stock options, shares		876,816
Issuance of common stock for exercise of stock options, amount	2,043,000	$ 1,000	2,042,000	0
Issuance of common stock in connection with an offering, shares		2,170,000
Issuance of common stock in connection with an offering, amount	10,771,000	$ 2,000	10,769,000	0
Net income	7,940,000	$ 0	0	7,940,000
Balance, shares at Dec. 31, 2020		17,983,177
Balance, amount at Dec. 31, 2020	25,764,000	$ 18,000	75,834,000	(50,088,000)
Share-based compensation	1,628,000	$ 0	1,628,000	0
Vesting of restricted stock units, shares		54,510
Vesting of restricted stock units, amount	0	$ 0	0	0
Issuance of common stock for exercise of stock options, shares		872,581
Issuance of common stock for exercise of stock options, amount	1,729,000	$ 1,000	1,728,000	0
Net income	(2,445,000)	0	0	(2,445,000)
Foreign currency translation adjustment, net of tax	12,000	0	0	12,000
Taxes paid on the net settlement of stock options	(163,000)	$ 0	(163,000)	0
Issuance of common stock in connection with business acquisitions, shares		3,143,971
Issuance of common stock in connection with business acquisition, amount	39,408	$ 3	39,405	0
Balance, shares at Dec. 31, 2021		22,054,239
Balance, amount at Dec. 31, 2021	$ 65,933,000	$ 22,000	$ 118,432,000	$ (52,521,000)

XML

Consolidated Statements of Cash Flows - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ (2,445,000)	$ 7,940,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,626,000	258,000
Deferred tax asset	(499,000)	(6,054,000)
Extinguishment of PPP debt	0	(1,001,000)
Share-based compensation	1,628,000	623,000
Changes in assets and liabilities:
Trade receivables	(501,000)	(152,000)
Contract assets	(102,000)	(137,000)
Equipment financing receivables	(82,000)	(488,000)
Inventories	285,000	(122,000)
Contract costs	(270,000)	(155,000)
Prepaid expenses	(92,000)	(49,000)
Income tax receivable	(7,000)	0
Other assets	245,000	(50,000)
Accounts payable and accrued expenses	(245,000)	20,000
Income tax payable	24,000	0
Contract liabilities	(571,000)	14,000
Net cash provided by/(used for) operating activities	(1,006,000)	647,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(101,000)	(745,000)
Acquisition of customer relationships, developed technology, and trademarks and trade name	(9,766,000)	(176,000)
Net cash used for investing activities	(9,867,000)	(921,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of contingent consideration	(746,000)	(54,000)
Repayments made on finance leases	(99,000)	(32,000)
Proceeds from notes payable	0	1,001,000
Repayments made on notes payable	(71,000)	(56,000)
Proceeds from exercise of options	1,729,000	2,043,000
Proceeds from issuance of common stock	0	10,771,000
Taxes paid on the net settlement of stock options	(163,000)	0
Net cash provided by financing activities	650,000	13,673,000
Effect of exchange rate changes on cash	12,000	0
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(10,211,000)	13,399,000
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE BEGINNING OF THE YEAR	17,679,000	4,280,000
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE END OF THE YEAR	7,468,000	17,679,000
Cash used during the year for:
Income taxes, net	(15,000)	(12,000)
Interest expense	(84,000)	(70,000)
Supplemental disclosure of non-cash investing and financing information:
Stock issued for the acquisition of Centric Telecom	346,000	0
Stock issued in connection with the merger with NetSapiens	16,942,000	0
Stock options issued in connection with the merger with NetSapiens	22,120,000	0
Property and equipment financed through finance leases	273,000	0
Prepaid assets financed through finance leases	14,000	0
Purchase of property and equipment with a note payable	0	2,000,000
Adjustment to intangible assets and contingent consideration of customer relationship asset acquisition	0	(121,000)
Extinguishment of PPP debt	$ 0	$ (1,001,000)

XML

1. Description of Business and Significant Accounting Policies

12 Months Ended

Dec. 31, 2021

1. Description of Business and Significant Accounting Policies

1. Description of Business and Significant Accounting Policies

1. Description of Business and Significant Accounting Policies

Description of Business – Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo is an award-winning premier provider of cloud communications, UCaaS, call center, collaboration services, and other cloud business services that are designed to provide enterprise-class cloud services to any size business at affordable monthly rates. The Company has two operating segments, which consist of Cloud Telecommunications and Web Services.

Basis of Presentation – The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., NetSapiens, LLC, Crexendo Business Solutions of Virginia, Inc., NSHC, Inc., NetSapiens Canada, Inc., NetSapiens International Limited and Crexendo International, Inc. All intercompany account balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements reflect the results of operations, financial position, changes in stockholders’ equity, and cash flows of our Company.

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Foreign Currency Translation - The functional currency of our international subsidiaries is the local currency. We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During the year ended December 31, 2021 and 2020, we recorded foreign currency translation gains/(losses) of $12,000, and $0, respectively, in our statements of comprehensive income (loss).

 Cash and Cash Equivalents –  We consider all highly liquid, short-term investments with maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2021 and 2020, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $6,573,000 and $17,175,000, respectively.

Restricted Cash – We classified $0 and $100,000 as restricted cash as of December 31, 2021 and 2020, respectively. Cash is restricted for compensating balance requirements on purchasing card agreements. As of December 31, 2021 and 2020, we had restricted cash in financial institutions in excess of federally insured limits in the amount of $0 and $100,000, respectively.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported on the balance sheet to the cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows (in thousands):

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	7,468	$	17,579
Restricted cash		-		100
Total cash, cash equivalents, and restricted cash shown in the
consolidated statement of cash flows	$	7,468	$	17,679

Trade Receivables – Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance for Doubtful Accounts – The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

Contract Assets – Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs – Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $1,345,000 and $970,000 at December 31, 2021 and December 31, 2020, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the years ended December 31, 2021 and 2020, the Company amortized $869,000 and $505,000, respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory – Finished goods telecommunications equipment inventory is stated at the lower of cost or net realizable value (first-in, first-out method). In accordance with applicable accounting guidance, we regularly evaluate whether inventory is stated at the lower of cost or net realizable value. If net realizable value is less than cost, the write-down is recognized as a loss in earnings in the period in which the excess occurs.

Property and Equipment – Depreciation and amortization expense is computed using the straight-line method in amounts sufficient to allocate the cost of depreciable assets over their estimated useful lives ranging from two to thirty-nine years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Land is not depreciable. Depreciable lives by asset group are as follows:

Building	39 years
Land	Not depreciated
Computer and office equipment	2 to 5 years
Computer software	3 years
Internal-use software	3 years
Furniture and fixtures	4 years
Leasehold improvements	2 to 5 years

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions – Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

Business Acquisitions - We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expenses.

Goodwill – Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets – Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset. There was no impairment of intangible assets identified for the years ended December 31, 2021 and 2020.

Contract Liabilities – Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as deferred revenue.

Use of Estimates – In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies – The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

Service, Software Solutions and Product Revenue Recognition – Revenue is recognized upon transfer of control of promised services, software solutions or products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. For more detailed information about revenue, see Note 2.

Cost of Service Revenue – Cost of service revenue includes cloud telecommunications services. Cloud telecommunications cost of service revenue primarily consists of fees we pay to third-party telecommunications and broadband Internet providers, costs of other third-party services we resell, personnel and travel expenses related to system implementation, and customer service.

Cost of Software Solutions Revenue – Cost of software solutions revenue consists primarily of royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, direct costs to manufacture and distribute products, direct costs to provide product support and professional support services, direct costs associated with delivery of the Company’s software offerings, and amortization expense related to developed technology intangible assets.

Cost of Product Revenue – Cost of product revenue primarily consists of the costs associated with the purchase of desktop devices and other third-party equipment we purchase for resale.

Product Warranty – We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service. For the years ended December 31, 2021 and 2020, actual warranty costs were approximately 1.9% and 1.6% of prior year net product revenue, respectively. The annual warranty provision for the year ended December 31, 2021 and 2020 was approximately 1.9% and 1.8% of current year net product revenue, respectively.

Contingent Consideration – Contingent consideration represents deferred business acquisition and asset acquisition consideration to be paid out at some point in the future, typically over a one-year period or less from the acquisition date. Contingent consideration is recorded at the asset acquisition date fair value. Contingent consideration recorded in connection with a business acquisition is reported at fair value each reporting period until the contingency is resolved. Any changes in fair value are recognized in earnings. Contingent consideration recorded in connection with an asset acquisition is not derecognized until the related contingency is resolved and the consideration is paid or becomes payable. If the amount initially recorded as contingent consideration exceeds the amount paid or payable, the Company recognizes that excess amount as a reduction in the cost of the related intangible assets.

Public Offering – On September 28, 2020, the Company completed a public offering in which it issued and sold 1,750,000 shares of common stock at a price to the public of $5.50 per share. The shares sold and issued in the public offering resulted in an aggregate gross offering price of $9,625,000. The Company received net proceeds of $8,623,000 after deducting underwriting discounts and commissions of $674,000 and offering expenses of $328,000.

On October 21, 2020, the underwriters of the Company’s public offering exercised their option to purchase additional shares of the Company’s common stock to cover sales by the underwriters of a greater number of shares than the total set forth in the filed prospectus for the public offering. The underwriters purchased an additional 420,000 shares of common stock from the Company. The gross proceeds to the Company of the issuance were $2,310,000, and the Company received net proceeds of $2,148,000 after deducting underwriting discounts and commissions.

Research and Development – Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation and the cost of certain third-party contractors. Research and development costs are expensed as incurred. Costs related to internally developed software are expensed as research and development expense until technological feasibility has been achieved, after which the costs are capitalized.

Fair Value Measurements – The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: 

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

· Quoted prices for similar assets or liabilities in active markets;

· Quoted prices for identical or similar assets in non-active markets;

· Inputs other than quoted prices that are observable for the asset or liability; and

· Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Lease Obligations – We determine if an agreement is a lease at inception. We evaluate the lease terms to determine whether the lease will be accounted for as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current portion, and operating lease liabilities, net of current portion in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

A lease that transfers substantially all of the benefits and risks incidental to ownership of property are accounted for as finance leases. At the inception of a finance lease, an asset and finance lease obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property’s fair market value. Finance lease obligations are classified as either current or long-term based on the due dates of future minimum lease payments, net of interest.

Notes Payable – We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

Income Taxes – We recognize a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Accruals for uncertain tax positions are provided for in accordance with accounting guidance. Accordingly, we may recognize the tax benefits from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting guidance is also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, and cash flows. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. At December 31, 2020 we determined that we would be able to realize our deferred income tax assets in the future and released $7,487,000 of the valuation allowance.

Interest and penalties associated with income taxes are classified as income tax expense in the consolidated statements of operations.

Stock-Based Compensation – For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

Operating Segments – Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has reorganized into two operating segments, which consist of cloud telecommunications services and software solutions. The software solutions segment includes the results of operation of NetSapiens, LLC, NSHC, Inc., NetSapiens Canada, Inc., and NetSapiens International Limited. The cloud telecommunications segment includes the results of operations of Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers – No customer accounted for 10% or more of our total revenue for the years ended December 31, 2021 and 2020. No customer accounted for 10% or more of our total trade receivables as of December 31, 2021 and one telecommunications services customer accounted for 11% of total trade accounts receivable as of December 31, 2020.

Recently Adopted Accounting Pronouncements – In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is effective for our fiscal year beginning after December 15, 2021, including interim periods within this fiscal year. This guidance can be applied using either a modified or full retrospective approach. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

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2. Revenue

12 Months Ended

Dec. 31, 2021

2. Revenue

2. Revenue

2. Revenue

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product, service, or software solution to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, see Note 18.

Cloud Telecommunications Services Segment

Products and services may be sold separately or in bundled packages. The typical length of a contract for service is thirty-six to sixty months. Customers are billed for these services on a monthly basis. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the desktop devices and telecommunication services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

Desktop Devices – Revenue generated from the sale of telecommunications equipment (desktop devices) is recognized when the customer takes possession of the devices and the cloud telecommunications services begin. The Company typically bills and collects the fees for the equipment upon entering into a contract with a customer. Cash receipts are recorded as a contract liability until implementation is complete and the services begin.

Equipment Financing Revenue – Fees generated from renting our cloud telecommunication equipment (IP or cloud telephone desktop devices) through leasing contracts are recognized as revenue based on whether the lease qualifies as an operating lease or sales-type lease. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: 1) lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and 2) the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. The economic life of most of our products is estimated to be three years, since this represents the most frequent contractual lease term for our products, and there is no residual value for used equipment. Residual values, if any, are established at the lease inception using estimates of fair value at the end of the lease term. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases in recognized ratably over the applicable service period.

Cloud Telecommunications Services – Cloud telecommunication services include voice, data, collaboration software, broadband Internet access, interest generated from equipment financing revenue, and support for premise based PBX phone systems. The Company recognizes revenue as services are provided in service revenue. Fees generated from reselling broadband Internet access are recognized as revenue net of the costs charged by the third-party service providers. Cloud telecommunications services are billed and paid on a monthly basis. Our telecommunications services contracts typically have a term of thirty-six to sixty months.

Fees, Commissions, and Other, Recognized over Time – Includes contracted and non-contracted items such as:

· Contracted activation and flash fees – The Company generally allocates a portion of the activation fees to the desktop devices, which is recognized at the time of the installation or customer acceptance, and a portion to the service, which is recognized over the contract term using the straight-line method.

· Non-contracted carrier cost recovery fee – This fee recovers the various costs and expenses that the Company incurs in connection with complying with legal, regulatory, and other requirements, including without limitation federal, state, and local reporting and filing requirements. This fee is assessed as a set percentage of our monthly billing and is recognized monthly.

· Non-contracted administrative fees – Administrative fees are recognized as revenue on a monthly basis.

One-Time Fees, Commissions, and Other – Includes contracted and non-contracted items such as:

· Contracted professional service revenue – Professional service revenue includes professional installation services, custom integration, and other professional services. The Company typically bills and collects professional service revenue upon entering into a contract with a customer. Professional service revenue is recognized as revenue when the performance obligations are completed.

· Non-contracted cancellation fees – These cancellation fees relate to remaining contractual term buyout payments in connection with early cancellation and are billed and recognized as revenue upon receipt.

· Other non-contracted fees – These fees include disconnect fees, shipping fees, restocking fees, and porting fees. Other non-contracted fees are recognized as revenue upon receipt of payment.

Software Solutions Segment

The Software Solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

Software Licenses - The Company’s software licenses typically provide a perpetual right to use the Company’s software. The Company also sells term-based software licenses that expire and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software is delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue could be recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. However, historical experience shows that customers regularly renegotiate the number of licenses during the installation process. Therefore, the Company recognizes revenue from software licenses when the setup is complete. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

· SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network. The Company recognizes one-time upfront software license revenue when the software setup is complete.

· SNAPaccel – a Software-as-a-Service (“SaaS”) based software license referred to as subscription arrangements. The Company recognizes revenue as subscriptions are provided in service revenue on a monthly basis.

Subscription Maintenance and Support - Subscription maintenance and support revenue includes revenue from maintenance service contracts, customer support, and other supportive services. The Company offers warranties on its products. The warranty period for the Company’s licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

Professional Services and Other - The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services. Revenue from professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

 Disaggregation of Revenue

In the following table, revenue is disaggregated by primary major product line, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.

Year Ended December 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	2,324	$	-	$	2,324
Equipment financing revenue		266		-		266
Telecommunications services		14,764		-		14,764
Fees, commissions, and other, recognized over time		1,661		-		1,661
One time fees, commissions and other		411		-		411
Software licenses		-		2,712		2,712
Subscription maintenance and support		-		5,384		5,384
Professional services and other		-		570		570
	$	19,426	$	8,666	$	28,092
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	2,684	$	5,384	$	8,068
Products, services, and fees transferred over time		16,742		3,282		20,024
	$	19,426	$	8,666	$	28,092

Year Ended December 31, 2020	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	1,843	$	-	$	1,843
Equipment financing revenue		223		-		223
Telecommunications services		12,594		-		12,594
Fees, commissions, and other, recognized over time		1,523		-		1,523
One time fees, commissions and other		204		-		204
	$	16,387	$	-	$	16,387
Timing of revenue recognition
Products and fees recognized at a point in time	$	2,047	$	-	$	2,047
Services and fees transferred over time		14,340		-		14,340
	$	16,387	$	-	$	16,387

Contract balances

 The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.

	December 31,		December 31,
(In thousands)	2021		2020
Receivables, which are included in Trade receivables, net of allowance
for doubtful accounts	$	2,177	$	538
Contract assets		261		159
Contract liabilities		3,028		1,228

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

	For the Year Ended						For the Year Ended
(In thousands)	December 31, 2021						December 31, 2020
	Contract Assets			Contract Liabilities			Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-		$	(1,137	)	$	-		$	(976	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-			2,937			-			990
Transferred to receivables from contract assets recognized at the beginning of the period		(60	)		-			(21	)		-
Increase due to additional unamortized discounts		162			-			158			-

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	172		-		-		-		-	$	172
Telecommunications services	$	12,421		8,321		5,523		3,015		725	$	30,005
Software Solutions	$	6,789		3,266		1,056		417		-	$	11,528
All consideration from contracts with customers is included in the amounts presented above

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3. Earnings Per Common Share

12 Months Ended

Dec. 31, 2021

3. Earnings Per Common Share

3. Earnings Per Common Share

3. Earnings Per Common Share

 Basic net income/(loss) per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. Diluted net loss per common share for the year ended December 31, 2021 is the same as basic net loss per common share because the common share equivalents were anti-dilutive due to the net loss. The following table sets forth the computation of basic and diluted net income per common share:

	Year Ended December 31,
	2021			2020
Net income/(loss) (in thousands) (A)	$	(2,445	)	$	7,940
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		20,275,691			15,767,874
Dilutive effect of stock-based awards		-			1,652,602
Diluted weighted-average outstanding shares of common stock (C)		20,275,691			17,420,476
Earnings per common share:
Basic (A/B)	$	(0.12	)	$	0.50
Diluted (A/C)	$	(0.12	)	$	0.46

For the years ended December 31, 2021 and 2020, respectively, the following potentially dilutive common stock, including awards granted under our equity incentive compensation plans, were excluded from the computation of diluted earnings per share because including them would be anti-dilutive.

	Year Ended December 31,
	2021		2020
Stock options		924,742		186,811

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4. Acquisitions

12 Months Ended

Dec. 31, 2021

4. Acquisitions

4. Acquisitions

4. Acquisitions

NetSapiens, Inc. Merger Agreement

On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two million users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

(in thousands)	Initial Valuation		Adjustments	December 31,  2021
Consideration:
Cash	$	10,000		$	10,000
Common stock		16,942			16,942
Stock options		22,120			22,120
Total consideration	$	49,062		$	49,062

The acquisition was accounted for under the acquisition method of accounting and the operating results of NetSapiens have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to NetSapiens net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships, developed technology, and trademark and trade name of the acquired business and expected synergies at the time of the acquisition.

We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for NetSapiens and adjustments made during the period ended December 31, 2021 (in thousands):

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734	8,247			$	34,981

______________

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships, developed technology, and Trademarks and trade name intangible assets, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships, developed technology, and addition of trademarks and trade name intangible assets was a decrease in the fair value of the intangible asset of $420,000, and an increase to goodwill of $420,000.  As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $59,000 less amortization expense in cost of software solutions, $98,000 additional amortization expense in sales and marketing, and $37,000 additional amortization expense in general and administrative in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the delayed settlement of pre-acquisition liabilities resulted in an increase in opening balance sheet cash and accrued liabilities of $739,000, with no impact on goodwill.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our estimates for various assets acquired and liabilities assumed resulting in an increase of $9,000 to assets acquired and a increase in liabilities assumed of $147,000 and an increase to goodwill of $140,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in the reclassification of direct financing lease liabilities as operating lease liabilities, and an increase of $4,000 to the right to use assets balance and an increase of $1,000 to the operating lease liability and a decrease to goodwill of $3,000. 

(e) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our preliminary estimate of contract liabilities, net of current portion, which were determined to be current liabilities and have been reclassified as current contract liabilities with no impact on goodwill.

(f) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the retroactive adoption of ASC 606, resulting in the recording of contract cost of $105,000, an increase to current and long-term accounts receivables of $170,000, an increase in contract liabilities of $103,000 and a decrease to goodwill of $172,000.

(g) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of a valuation allowance on the deferred tax assets of $2,829,000, and recording a deferred tax liability of $5,033,000 for the intangible assets acquired and a increase to goodwill of $7,862,000.

The fair values of the customer relationships, developed technology, and trademark and trade name were established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The customer relationships was valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships, developed technology, and trademarks and trade names acquired are as follows: weighted average cost of capital of 11.0%, tax rate of 25.0%, and estimated economic life of 16 years.

The developed technology and trademarks and trade name were valued using the relief from royalty methodology. The relief-from-royalty method was used to value the developed technology and trademarks and trade name acquired from NetSapiens. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the completed technology. The market-derived royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the developed technology are as follows: royalty rate of 7%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 6 years. The key assumptions used in valuing the existing trademarks are as follows: royalty rate of 1.0%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 4 years.

The following unaudited pro forma information presents our consolidated results of operations as if NetSapiens, Inc. had been included in our consolidated results since January 1, 2020:

	For the Year Ended December 31, (Unaudited, in thousands)
	2021			2020
Revenues	$	33,408		$	27,837
Net income/(loss)		(13,692	)		7,761
Earnings per share	$	(0.64	)	$	0.41

The unaudited pro forma financial information is presented for informational purposes only, and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated NetSapiens, Inc. as of January 1, 2020.

Acquisition related expenses incurred by us in connection with the NetSapiens acquisition of $970,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

Centric Telecom, Inc. Business Acquisition

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period. The fair value of the common stock issued as consideration was determined based on the closing market price of the Company’s common stock on the date of the acquisition of $7.42. The aggregate purchase price is subject to customary upward or downward adjustments for Centric Telecom’s net working capital.

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

The acquisition was accounted for under the acquisition method of accounting and the operating results of Centric Telecom have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to Centric Telecom’s net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships of the acquired business and expected synergies at the time of the acquisition.

We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for Centric Telecom and adjustments made during the period ended December 31, 2021 (in thousands):

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

_______________

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships intangible asset, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships intangible asset was a decrease in the fair value of the intangible asset of $38,000, and an increase to goodwill of $38,000. As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $16,000 less amortization expense in sales and marketing in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of pre-acquisition liabilities and resulted in an increase to accrued liabilities of $8,000 and an increase to goodwill of $8,000.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in an increase of $16,000 to the operating lease liability and an increase to goodwill of $16,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due recording a deferred tax liability of $534,000 for the intangible assets acquired and an increase to goodwill of $534,000.

The fair values of the customer relationships was established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The customer relationships was valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 14.0%, tax rate of 25.0%, and estimated economic life of 15 years.

Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition of $67,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

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5. Trade Receivables, net

12 Months Ended

Dec. 31, 2021

5. Trade Receivables, net

5. Trade Receivables, net

5. Trade Receivables, net

Our trade receivables balance consists of traditional trade receivables. Below is an analysis of our trade receivables as shown on our balance sheet (in thousands):

	December 31,
	2021			2020
Gross trade receivables	$	2,249		$	559
Less: allowance for doubtful accounts		(72	)		(21	)
Trade receivables, net	$	2,177		$	538
Current trade receivables, net	$	2,177		$	538
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,177		$	538

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6. Prepaid Expenses

12 Months Ended

Dec. 31, 2021

6. Prepaid Expenses

6. Prepaid Expenses

6. Prepaid Expenses

 Prepaid expenses consisted of the following (in thousands): 

	December 31,
	2021		2020
Prepaid corporate insurance	$	90	$	53
Prepaid software services and support		160		20
Prepaid employee insurance premiums		9		71
Nasdaq Listing Fee		15		-
Other prepaid expenses		84		46
Total prepaid assets	$	358	$	190

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7. Property and Equipment

12 Months Ended

Dec. 31, 2021

7. Property and Equipment

7. Property and Equipment

7. Property and Equipment

Property and equipment consisted of the following (in thousands):

	2021			2020
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,854			1,407
Computer software		576			526
Internal-use software		14			14
Furniture and fixtures		75			29
Vehicles		74			-
Leasehold improvements		7			-
Less: accumulated depreciation		(2,111	)		(1,742	)
Total property and equipment, net	$	2,989		$	2,734

Depreciation expense is included in general and administrative expenses and totaled $235,000 and $166,000 for the years ended December 31, 2021 and 2020, respectively.

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8. Intangible Assets and Goodwill

12 Months Ended

Dec. 31, 2021

8. Intangible Assets and Goodwill

8. Intangible Assets and Goodwill

8. Intangible Assets and Goodwill

Acquired intangible assets subject to amortization consist of the following (in thousands):

	December 31, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,619	)	$	17,454	$	1,171	$	(919	)	$	252
Developed technologies		4,900		(528	)		4,372		-		-			-
Trademark and trade names		400		(65	)		335		-		-			-
Total acquired intangible assets	$	24,472	$	(2,311	)	$	22,161	$	1,171	$	(919	)	$	252

As of December 31, 2021, the weighted average remaining useful life for customer relationships was 15.1 years, developed technologies was 5.4 years, and trademarks and trade names was 3.4 years.

Amortization expense for customer relationships intangible assets is included in sales and marketing expenses and totaled $723,000 and $92,000 for the years ended December 31, 2021 and 2020, respectively. Amortization expense for developed technologies intangible assets is included in cost of software solutions revenue and totaled $528,000 and $0 for the years ended December 31, 2021 and 2020, respectively. Amortization expense for trademark and trade name intangible assets is included in general and administrative expenses and totaled $140,000 and $0 for the years ended December 31, 2021 and 2020, respectively.

On June 1, 2021, the Company acquired $21,100,000 in intangible assets in connection with the NetSapiens business acquisition. On January 14, 2021, the Company acquired $2,200,000 in intangible assets in connection with the Centric Telecom business acquisition. During the year ended December 31, 2020, we reduced our customer relationships intangible assets by $121,000 due to an adjustment to the total consideration payable under the DoubleHorn customer relationships asset purchase agreement.

As of December 31, 2021, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

Year ending December 31,
2022	$	2,199
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,829
Total	$	22,161

The following table provides a summary of changes in the carrying amounts of goodwill (in thousands):

	Goodwill
Balance at December 31, 2020	$	272
Centric Telecom business acquisition		1,719
NetSapiens business acquisition		34,981
Balance at December 31, 2021	$	36,972

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9. Accrued Expenses

12 Months Ended

Dec. 31, 2021

9. Accrued Expenses

9. Accrued Expenses

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	December 31,
	2021		2020
Accrued wages and benefits	$	1,188	$	513
Accrued accounts payable		609		505
Accrued sales and telecommunications taxes		2,487		438
Product warranty liability		50		33
Income tax payable		10		-
Other		560		139
Total accrued expenses	$	4,904	$	1,628

The changes in aggregate product warranty liabilities for the years ended December 31, 2021 and 2020 were as follows (in thousands):

	Warranty  Liabilities
Balance at January 1, 2020	$	37
Accrual for warranties		33
Adjustments related to pre-existing warranties		(10	)
Warranty settlements		(27	)
Balance at December 31, 2020		33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021	$	50

Product warranty expense is included in cost of product revenue and totaled $51,000 and $23,000 for the years ended December 31, 2021 and 2020, respectively.

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10. Notes Payable

12 Months Ended

Dec. 31, 2021

10. Notes Payable

10. Notes Payable

10. Notes Payable

Notes payable consists of a short and long-term financing arrangements:

	December 31,
	2021			2020
Notes payable	$	1,873		$	1,944
Less: current notes payable		(1,873	)		(71	)
Notes payable, net of current portion	$	-		$	1,873

On January 27, 2020, we entered into a Fixed Rate Term Loan Agreement with Bank of America, N.A. to finance Two Million Dollars ($2,000,000) to purchase our corporate office building. The Loan Agreement has a term of seven (7) years with monthly payments of Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars ($11,841.15), including interest at 3.67%, beginning on March 1, 2020, secured by the office building. At December 31, 2021, we were in default of our basic fixed charge coverage ratio and we have classified the note payable as current on our balance sheet.

As of December 31, 2021, future principal payments are scheduled as follows (in thousands):

Year ending December 31,
2022	$	1,873
2023		-
2024		-
2025		-
2026		-
Thereafter		-
Total	$	1,873

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11. Fair Value Measurements

12 Months Ended

Dec. 31, 2021

11. Fair Value Measurements

11. Fair Value Measurements

11. Fair Value Measurements

We have financial instruments as of December 31, 2021 and 2020 for which the fair value is summarized below (in thousands):

	December 31, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,177	$	2,177	$	538	$	538
Equipment financing receivables		1,274		1,274		1,192		1,192
Liabilities:
Finance leases	$	303	$	303	$	84	$	84
Notes payable		1,873		1,873		1,944		1,944

We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of December 31, 2021 and 2020.

In January 2021, the Company recorded $746,000 of contingent consideration in connection with the Centric Telecom business acquisition, to be paid based on the completion of the earn-out period. Upon completion of the earn-out period in October 2021, the Company paid out $746,000 of contingent consideration and additional consideration of $126,000 based on revenue target achievements, which was recorded as general and administrative expenses for the year ended December 31, 2021. During the year ended December 31, 2020, the Company reduced the contingent consideration to be paid based on the completion of the earn-out period by $121,000 and recognized a reduction in the cost of the assets acquired in the DoubleHorn asset acquisition. The progression of the Company’s Level 3 instruments fair valued on a recurring basis for the year ended December 31, 2021 and 2020 are shown in the table below (in thousands):

	Asset and Business Acquisition Contingent Consideration
Balance at January 1, 2020	$	175
Cash payments		(54	)
Adjustment		(121	)
Balance at December 31, 2020	$	-
Additions		746
Cash payments		(746	)
Adjustment		-
Balance at December 31, 2021	$	-

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12. Equity

12 Months Ended

Dec. 31, 2021

12. Equity

12. Equity

12. Equity

Common Stock

Shares of common stock reserved for future issuance as of December 31, 2021 were as follows:

Stock-based compensation plans:
Outstanding option awards	7,047,550
Available for future grants	5,764,231
	12,811,781

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13. Stock-Based Compensation

12 Months Ended

Dec. 31, 2021

13. Stock-Based Compensation

13. Stock-Based Compensation

13. Stock-Based Compensation

 We have various incentive stock-based compensation plans that provide for the grant of stock options, restricted stock units (RSUs), and other share-based awards of up to 12,811,781 shares to eligible employees, consultants, and directors. As of December 31, 2021, we had 5,764,231 shares remaining in the plans available to grant.

Stock Options

The weighted-average fair value of stock options on the date of grant and the assumptions used to estimate the fair value of stock options granted during the years ended December 31, 2021 and 2020 using the Black-Scholes option-pricing model were as follows:

	Year Ended December 31,
	2021			2020
Weighted-average fair value of options granted	$	0.65		$	3.66
Expected volatility		13	%		84	%
Expected life (in years)		0.81			4.30
Risk-free interest rate		0.14	%		0.37	%
Expected dividend yield		0.00	%		0.00	%

The expected volatility of the options is determined using historical volatilities based on historical stock prices. The expected life of the options granted is based on our historical share option exercise experience. The risk-free interest rate is determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the option. The Company has not declared any dividends, therefore, it is assumed to be zero.

The following table summarizes the stock option activity under the plans for the years ended December 31, 2021 and 2020:

						Weighted-Average	Aggregate
	Number of			Weighted-Average		Remaining		Intrinsic Value
	Shares			Exercise Price		Contract Life		(in thousands)
Outstanding at January 1, 2020		3,189,160		$	2.60	3.5 years	$	1,007
Granted		612,000			5.91
Exercised		(884,974	)		2.35
Cancelled/forfeited		(30,725	)		4.43
Outstanding at December 31, 2020		2,885,461			3.36	3.0 years		10,310
Granted		5,349,828			-
Exercised		(1,142,330	)		-
Cancelled/forfeited		(104,116	)		-
Outstanding at December 31, 2021		6,988,843			2.40	4.5 years		19,829
Shares vested and expected to vest		6,836,480			2.40	4.5 years		19,819
Exercisable as of December 31, 2021		5,917,757			1.74	4.0 years		19,763
Exercisable as of December 31, 2020		2,242,314			2.74	2.1 years		9,400

The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020, was $2,894,000 and $3,061,000, respectively.

As of December 31, 2021, the total future compensation expense related to non-vested options not yet recognized in the consolidated statements of operations was approximately $3,987,000 and the weighted-average period over which these awards are expected to be recognized is approximately 2.3 years.

Restricted Stock Units:

The following table summarizes the RSUs outstanding:

	Years Ended December 31,
	2022		2023		2024
RSUs with service-based vesting conditions		32,071		7,067		-

The following table summarizes the RSUs activity under the plans for the years ended December 31, 2021 and 2020:

	Number of			Weighted-Average
	Units				Fair Value
Outstanding at January 1, 2020		65,008		$	2.25
Granted		100,500			4.25
Vested/released		(51,606	)		3.16
Cancelled/forfeited		(13,391	)		3.38
Outstanding at December 31, 2020		100,511			3.63
Granted		-			-
Vested/released		(56,480	)		3.33
Cancelled/forfeited		(4,893	)		3.79
Outstanding at December 31, 2021		39,138			4.05

There were no RSUs granted during the year ended December 31, 2021 and the weighted-average grant-date fair value of RSUs granted year ended December 31, 2020 was $4.25.

The total intrinsic value of RSUs that vested and were released during the years ended December 31, 2021 and 2020 was $341,000 and $325,000 respectively.

As of December 31, 2021, the total future compensation expense related to non-vested RSUs not yet recognized in the consolidated statements of operations was approximately $150,000 and the weighted-average period over which these awards are expected to be recognized is approximately 1.2 years.

 The following table summarizes the statement of operations effect of stock-based compensation for the years ended December 31, 2021 and 2020 (in thousands):

	Year Ended December 31,
	2021		2020
Share-based compensation expense by type:
Stock options	$	1,441	$	453
Restricted stock units		187		170
Total cost related to share-based compensation expense	$	1,628	$	623
Share-based compensation expense by financial statement line item:
Cost of revenue	$	154	$	82
Research and development		125		71
Selling and marketing		271		88
General and administrative		1,078		382
Total cost related to share-based compensation expense	$	1,628	$	623

 The tax benefit related to stock compensation expense on net deferred tax assets at December 31, 2021 and 2020 was $178,000 and $507,000, respectively.

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14. Income Taxes

12 Months Ended

Dec. 31, 2021

14. Income Taxes

14. Income Taxes

14. Income Taxes

The income tax benefit/(expense) consisted of the following for the years ended December 31, 2021 and 2020 (in thousands):

	Year Ended December 31,
	2021			2020
Current income tax expense:
Federal	$	-		$	-
State and local		(35	)		(13	)
Current income tax expense		(35	)		(13	)
Deferred income tax benefit:
Federal		114			4,708
State and local		386			1,346
Deferred income tax benefit		500			6,054
Total income tax benefit/(provision)	$	465		$	6,041

The income tax provision attributable to income before income tax benefit for the years ended December 31, 2021 and 2020 differed from the amounts computed by applying the U.S. federal statutory tax rate of 21% and 21%, respectively, as a result of the following (in thousands):

	Year Ended December 31,
	2021			2020
U.S. federal statutory income tax benefit/(expense)	$	611		$	(399	)
Increase in income tax benefit resulting from:
State and local income tax benefit/(expense), net of federal effect		227			(1,878	)
Change in the valuation allowance for net deferred income tax assets		(231	)		7,487
Stock-based compensation		71			626
Other, net		(213	)		205
Income tax benefit	$	465		$	6,041

As of December 31, 2021 and 2020, significant components of net deferred income tax assets and liabilities were as follows (in thousands):

	December 31,
	2021			2020
Deferred income tax assets:
Accrued expenses	$	242		$	110
Deferred revenue		722			318
Net operating loss carry-forwards		7,230			5,485
Stock-based compensation		178			507
Other		127			285
Subtotal		8,499			6,705
Valuation allowance		(1,498	)		(61	)
Total deferred income tax assets		7,001			6,644
Deferred income tax liabilities:
Property and equipment		(31	)		(6	)
Prepaid expenses and other		(445	)		(584	)
Intangible assets		(5,539	)		-
Total deferred income tax liabilities		(6,015	)		(590	)
Net deferred income tax assets (liabilities)	$	986		$	6,054

As of December 31, 2021, we had NOL and research credit carry-forwards for U.S. federal income tax reporting purposes of approximately $27,013,000 and $66,000, respectively. $18,394,000 of the NOLs will begin to expire in 2031 through 2037, and the remaining $8,619,000 of the NOLs will not expire.  The research tax credit will begin to expire in 2039 through 2040.  Approximately $5,323,000 of the NOL carryforwards and $66,000 of the research credit carryforwards relate to the NetSapiens and Centric acquisitions.  These NOLs and research credits carryforwards are subject to the change in ownership rules and limitations under Section 382 discussed below.  The Company is in the process of determining what, if any, of these NOL and research credit carryforwards will be available to offset future taxable income.  With this uncertainty into the utilization of these deferred tax assets we have recorded a valuation allowance of $1,184,000 related to the acquired NOLs and research credits. A valuation allowance of $1,498,000 and $61,000 was recorded against our gross deferred tax asset balance as of December 31, 2021 and 2020, respectively. For the year ended December 31, 2020, we recorded a release of the valuation allowance of $7,487,000, on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2021, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as achievement of three years of cumulative pretax income in the U.S. federal tax jurisdiction, projections of future pretax income and the duration of statutory carry-forward periods. As of December 31, 2021 the Company has three years of cumulative pretax income, the achievement of three years of cumulative pretax income is objectively verifiable positive evidence and is considered significant positive evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Management utilized historical objectively verifiable revenue growth trends and operating expense trends as assumptions for projections of future pretax income and determined that the Company would generate sufficient pre-tax income in future periods to utilize all of our deferred tax assets. Although historical trends utilized in our projections are objectively verifiable we assigned less weight to this positive evidence given the subjective nature of assumptions in projections. The combination of three years of cumulative pretax income and projections of future pretax income was considered significant positive evidence. Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2031 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $7,001,000 are realizable. 

We also have state NOL and research and development credit carry-forwards of approximately $25,505,000 and $61,000, which expire on specified dates as set forth in the rules of the various states to which the carry-forwards relate.  The company has recorded a valuation allowance of $61,000 against the research and development credit carryforward.  

We also have foreign NOL carryforwards of approximately $1,101,000 which will expire on various dates as set forth in the rules of the various countries to which the carryforwards relate.  Due to the uncertainty on the Company’s ability to utilize these NOL carryforwards the company has recorded a valuation allowance against these NOL carryovers of $253,000.

During the fiscal year ended June 30, 2002 (our fiscal year was subsequently changed to December 31), we experienced a change in ownership, as defined by the Internal Revenue Code, as amended (the “Code”) under Section 382. A change of ownership occurs when ownership of a company increases by more than 50 percentage points over a three-year testing period of certain stockholders. As a result of this ownership change we determined that our annual limitation on the utilization of our federal pre-ownership change net operating loss (“NOL”) carry-forwards is approximately $461,000 per year. We determined that the Company would only be able to utilize $4,760,000 of our pre-ownership change NOL carry-forwards and will forgo utilizing $14,871,000 of our pre-ownership change NOL carry-forwards as a result of this ownership change. We do not account for forgone NOL carryovers in our deferred tax assets and only account for the NOL carry-forwards that will not expire unutilized as a result of the restrictions of Code Section 382. 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The new law includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 34% to 21% effective January 1, 2018. As a result of the reduction of the corporate income tax rate to 21%, U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future. There was no charge to our income tax expense as a result of the reduction in corporate income tax rate.

Accounting guidance clarifies the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Although we believe our estimates are reasonable, there can be no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our income tax provision and operating results in the period in which it makes such determination.

The aggregate changes in the balance of unrecognized tax benefits during the years ended December 31, 2021 and 2020 were as follows (in thousands):

Balance as of January 1, 2020	$	-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2020		-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2021	$	-

Estimated interest and penalties related to the underpayment or late payment of income taxes are classified as a component of income tax provision in the consolidated statements of operations. There were no accrued interest and penalties as of December 31, 2021 and 2020, respectively.

Our U.S. federal income tax returns for fiscal 2018 through 2021 are open tax years. We also file in various states, with few exceptions, we are no longer subject to state income tax examinations by tax authorities for years prior to fiscal 2017.

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15. Leases

12 Months Ended

Dec. 31, 2021

15. Leases

15. Leases

15. Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease office space, data center colocation space, other assets, and office equipment under operating leases. We lease data center equipment, including maintenance contracts and vehicles under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet, excluding leases that are less than 12 months. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease. At the adoption date of ASC Topic 842, the Company was reasonably certain that we would exercise our option to renew our corporate office building operating lease. Lease expense is recognized on a straight-line basis over the lease term.

We previously leased our corporate office building in Tempe, Arizona from a Company that is owned by the major shareholder and CEO of the Company. The building was purchased on January 27, 2020 and the lease was cancelled. Amortization of the ROU assets and operating lease liabilities for the years ended December 31, 2021 and 2020 was $0 and $0, respectively. Rental expense incurred on operating leases for the years ended December 31, 2021 and 2020 was approximately $0 and $25,000, respectively.

We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on July 31, 2021. The operating lease contained customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $56,000 and $0, respectively.

We currently lease office space in Reston, Virginia under a non-cancelable operating lease agreement that expires in 2025. The operating lease contains customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $22,000 and $0, respectively.

We currently lease office space in La Jolla, California under a non-cancelable operating lease agreement that expires in 2022. The operating lease contains customary escalation clauses. Rental expense for the years ended December 31, 2021 and 2020 was approximately $210,000 and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2024 and the interest rates range from 2.81% to 13.00%. The expense is included in cost of product expenses and totaled approximately $63,000 and $0 for the years ended December 31, 2021 and 2020, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada and Dallas, Texas under non-cancelable operating lease agreements that expire in 2022. Rental expense for the years ended December 31, 2021 and 2020 was approximately $83,000 and $0, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under finance lease agreements which extends through 2026. The Company also leases three vehicles under financing agreements. One vehicle lease ended in 2021 and two vehicle leases extend through 2022. The outstanding balance for finance leases was $311,000 and $84,000 as of December 31, 2021 and 2020, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $129,000 as of December 31, 2021 and 2020, respectively. Related accumulated depreciation totaled $167,000 and $67,000 as of December 31, 2021 and 2020, respectively. The $40,000 in support contracts were classified as a prepaid expense and are being amortized over the service period of 3 years. One support contract expired in January 2021 and the other expires in June 2024. Amortization expense is included in general and administrative expenses and totaled $3,000 and $9,000 for the years ended December 31, 2021 and 2020, respectively. The interest rates on the finance lease obligations range from 1.37% and 6.7% and interest expense was $8,000 and $7,000 for the years ended December 31, 2021 and 2020, respectively.

The maturity of operating leases and finance lease liabilities as of December 31, 2021 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2022	$	462		$	114
2023		58			96
2024		44			76
2025		-			22
2026		-			3
Total minimum lease payments		564			311
Less: amount representing interest		(32	)		(8	)
Present value of minimum lease payments	$	532		$	303

Lease term and discount rate	December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		3.0
Weighted-average discount rate
Operating leases		10.1	%
Finance leases		3.0	%

	Year Ended  December 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	95
Operating cash flows from finance leases		3
Financing cash flows from finance leases		99

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. Crexendo offers its customers lease financing for the lease of our cloud telecommunication equipment (IP or cloud telephone desktop devices). We account for these transactions as sales-type leases. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Operating lease revenue is classified as product revenue and totaled $204,000 and $0 for the years ended December 31, 2021 and 2020, respectively. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases is recognized ratably over the applicable service period.

Equipment finance receivables arising from the rental of our cloud telecommunications equipment through sales-type leases, were as follows (in thousands):

	December 31,			December 31,
	2021			2020
Gross financing receivables	$	1,822		$	1,774
Less: unearned income		(548	)		(582	)
Financing receivables, net		1,274			1,192
Less: current portion of finance receivables, net		(332	)		(286	)
Finance receivables due after one year	$	942		$	906

Future minimum lease payments as of December 31, 2021, consisted of the following:

Year ending December 31,	Lease Receivables
2022	$	669
2023		563
2024		381
2025		164
2026 and thereafter		43
Gross equipment financing receivables		1,820
Less: unearned income		(546	)
Equipment financing receivables, net	$	1,274

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16. Commitments and Contingencies

12 Months Ended

Dec. 31, 2021

16. Commitments and Contingencies

16. Commitments and Contingencies

16. Commitments and Contingencies

Annual Incentive Bonuses Accrual

We utilize incentive bonuses to reward performance achievements and have in place annual target incentive bonuses, payable either in whole or in part, depending on the extent to which the financial performance goals set by the Compensation Committee are achieved. Under our 2021 Profit Sharing Plan, incentive bonuses for all of the participants, including the participating officers excluding the CEO, are determinable based upon three measures of corporate financial performance. The three performance target are; (a) the revenue for the year ended December 31, 2021 must exceed the budgeted revenue approved by the Board; (b) Adjusted EBITDA must exceed the budgeted Adjusted EBITDA approved by the board; (c) the stock price as of December 31, 2021 must exceed target stock price approved by the board. Each performance target is equal to one-third of the annual incentive bonuses. For the year ended December 31, 2021, the Company achieved one of the three performance targets and $175,000 of the annual incentive bonuses was included in accrued expenses in the accompanying balance sheet as of December 31, 2021.

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17. Employee Benefit Plan

12 Months Ended

Dec. 31, 2021

17. Employee Benefit Plan

17. Employee Benefit Plan

17. Employee Benefit Plan

We have established a retirement savings plan for eligible employees. The plan allows employees to contribute a portion of their pre-tax compensation in accordance with specified guidelines. For the years ended December 31, 2021 and 2020, we contributed approximately $178,000 and $156,000 to the retirement savings plan, respectively.

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18. Segments

12 Months Ended

Dec. 31, 2021

18. Segments

18. Segments

18. Segments

Our chief operating decision maker (who is our Chief Executive Officer) reviews our financial information presented on an operating segment basis for purposes of allocating resources and evaluating our financial performance. Following the merger with NetSapiens, Inc., the Company reorganized into two operating segments, a software solutions operating segment and a cloud telecommunications services operating segment. The cloud telecommunications services segment generates revenue from selling cloud telecommunication services, products, and other internet services. The software solutions segment generates revenue from selling perpetual software licenses and software subscriptions, subscription maintenance and support, and professional services. The Company has two reportable operating segments, which consist of cloud telecommunications services and software solutions. Segment revenue, income/(loss) from operations, other income/(expense) and income/(loss) before income tax provision are as follows (in thousands):

	Year Ended December 31,
	2021			2020
Revenue:
Cloud telecommunications service	$	19,426		$	16,387
Software solutions		8,666			-
Consolidated revenue		28,092			16,387
Income/(loss) from operations:
Cloud telecommunications services		(2,643	)		991
Software solutions		(167	)		-
Total operating income/(loss)		(2,810	)		991
Other income/(expense), net:
Cloud telecommunications services		(70	)		908
Software solutions		(30	)		-
Total other income/(expense), net		(100	)		908
Income/(loss) before income tax benefit:
Cloud telecommunications services		(2,713	)		1,899
Software solutions		(197	)		-
Income/(loss) before income tax benefit	$	(2,910	)	$	1,899

Depreciation and amortization was $438,000 and $249,000 for the Cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Depreciation and amortization was $1,189,000 and $0 for the Software solutions segment for the years ended December 31, 2021 and 2020, respectively.

Interest income was $1,000 and $3,000 for the cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Interest income was $0 and $0 for the software solutions segment for the years ended December 31, 2021 and 2020, respectively.

Interest expense was $84,000 and $76,000 for the cloud telecommunications services segment for the years ended December 31, 2021 and 2020, respectively. Interest expense was $0 and $0 for the software solutions segment for the years ended December 31, 2021 and 2020, respectively.

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19. Quarterly Financial Information (unaudited)

12 Months Ended

Dec. 31, 2021

19. Quarterly Financial Information (unaudited)

19. Quarterly Financial Information (unaudited)

19. Quarterly Financial Information (in thousands, unaudited)

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2021			2021			2021				2021
Service revenue	$	4,139		$	4,327		$	4,325		$	4,311
Software solutions revenue		-			1,012			3,784			3,870
Product revenue		368			440			701			815
Total revenue		4,507			5,779			8,810			8,996
Operating expenses:
Cost of service revenue		1,259			1,347			1,210			1,288
Cost of software solutions revenue		-			526			1,675			1,830
Cost of product revenue		225			286			461			553
Selling and marketing		1,279			1,897			2,285			2,799
General and administrative		2,216			2,579			2,768			3,023
Research and development		350			388			358			300
Total operating expenses		5,329			7,023			8,757			9,793
Income/(loss) from operations		(822	)		(1,244	)		53			(797	)
Total other income/(expense), net		(17	)		(19	)		(41	)		(23	)
Income/(loss) before income taxes		(839	)		(1,263	)		12			(820	)
Income tax benefit/(provision)		124			260			(137	)		218
Net loss	$	(715	)	$	(1,003	)	$	(125	)	$	(602	)
Basic earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)
Diluted earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2020			2020			2020				2020
Service revenue	$	3,488		$	3,605		$	3,654		$	3,797
Product revenue		379			449			489			526
Total revenue		3,867			4,054			4,143			4,323
Operating expenses:
Cost of service revenue		970			908			946			1,013
Cost of product revenue		220			263			314			313
Selling and marketing		1,038			1,062			1,051			1,002
General and administrative		1,188			1,046			1,351			1,522
Research and development		270			244			326			349
Total operating expenses		3,686			3,523			3,988			4,199
Income from operations		181			531			155			124
Total other income/(expense), net		(38	)		(20	)		(21	)		987
Income before income taxes		143			511			134			1,111
Income tax benefit/(provision)		(3	)		(3	)		(3	)		6,050
Net income	$	140		$	508		$	131		$	7,161
Basic earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.40
Diluted earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.37

_________

(1) Earnings per common share is computed independently for each of the quarters presented. Therefore, the sums of quarterly earnings per common share amounts do not necessarily equal the total for the twelve month periods presented.

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20. Subsequent Events

12 Months Ended

Dec. 31, 2021

20. Subsequent Events

20. Subsequent Events

20. Subsequent Events

 None

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Schedule II- Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2021

Schedule II- Valuation and Qualifying Accounts

Schedule II- Valuation and Qualifying Accounts

Schedule II- Valuation and Qualifying Accounts

	Balance at							Balance at
	Beginning							End of
	of Year		Additions		Deductions			Year
			(in thousands)
Year ended December 31, 2021
Allowance for doubtful accounts receivable	$	21		51		-		$	72
Deferred income tax asset valuation allowance	$	61		1,437		-		$	1,498
Year ended December 31, 2020
Allowance for doubtful accounts receivable	$	14		7		-		$	21
Deferred income tax asset valuation allowance	$	7,548		-		(7,487	)	$	61

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1. Description of Business and Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2021

1. Description of Business and Significant Accounting Policies

Description of Business

Description of Business – Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo is an award-winning premier provider of cloud communications, UCaaS, call center, collaboration services, and other cloud business services that are designed to provide enterprise-class cloud services to any size business at affordable monthly rates. The Company has two operating segments, which consist of Cloud Telecommunications and Web Services.

Basis of Presentation

Basis of Presentation – The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., NetSapiens, LLC, Crexendo Business Solutions of Virginia, Inc., NSHC, Inc., NetSapiens Canada, Inc., NetSapiens International Limited and Crexendo International, Inc. All intercompany account balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements reflect the results of operations, financial position, changes in stockholders’ equity, and cash flows of our Company.

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Foreign Currency Translation

Foreign Currency Translation - The functional currency of our international subsidiaries is the local currency. We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During the year ended December 31, 2021 and 2020, we recorded foreign currency translation gains/(losses) of $12,000, and $0, respectively, in our statements of comprehensive income (loss).

Cash and Cash Equivalents

 Cash and Cash Equivalents –  We consider all highly liquid, short-term investments with maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2021 and 2020, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $6,573,000 and $17,175,000, respectively.

Restricted Cash

Restricted Cash – We classified $0 and $100,000 as restricted cash as of December 31, 2021 and 2020, respectively. Cash is restricted for compensating balance requirements on purchasing card agreements. As of December 31, 2021 and 2020, we had restricted cash in financial institutions in excess of federally insured limits in the amount of $0 and $100,000, respectively.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported on the balance sheet to the cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows (in thousands):

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	7,468	$	17,579
Restricted cash		-		100
Total cash, cash equivalents, and restricted cash shown in the
consolidated statement of cash flows	$	7,468	$	17,679

Trade Receivables

Trade Receivables – Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts – The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

Contract Assets

Contract Assets – Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs

Contract Costs – Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $1,345,000 and $970,000 at December 31, 2021 and December 31, 2020, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the years ended December 31, 2021 and 2020, the Company amortized $869,000 and $505,000, respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory

Inventory – Finished goods telecommunications equipment inventory is stated at the lower of cost or net realizable value (first-in, first-out method). In accordance with applicable accounting guidance, we regularly evaluate whether inventory is stated at the lower of cost or net realizable value. If net realizable value is less than cost, the write-down is recognized as a loss in earnings in the period in which the excess occurs.

Property and Equipment

Property and Equipment – Depreciation and amortization expense is computed using the straight-line method in amounts sufficient to allocate the cost of depreciable assets over their estimated useful lives ranging from two to thirty-nine years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Land is not depreciable. Depreciable lives by asset group are as follows:

Building	39 years
Land	Not depreciated
Computer and office equipment	2 to 5 years
Computer software	3 years
Internal-use software	3 years
Furniture and fixtures	4 years
Leasehold improvements	2 to 5 years

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions

Asset Acquisitions – Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

Business Acquisition

Business Acquisitions - We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expenses.

Goodwill

Goodwill – Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets

Intangible Assets – Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset. There was no impairment of intangible assets identified for the years ended December 31, 2021 and 2020.

Contract Liabilities

Contract Liabilities – Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as deferred revenue.

Use of Estimates

Use of Estimates – In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies

Contingencies – The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

Service, Software Solutions and Product Revenue Recognition

Service, Software Solutions and Product Revenue Recognition – Revenue is recognized upon transfer of control of promised services, software solutions or products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. For more detailed information about revenue, see Note 2.

Cost of Service Revenue

Cost of Service Revenue – Cost of service revenue includes cloud telecommunications services. Cloud telecommunications cost of service revenue primarily consists of fees we pay to third-party telecommunications and broadband Internet providers, costs of other third-party services we resell, personnel and travel expenses related to system implementation, and customer service.

Cost of Software Solutions Revenue

Cost of Software Solutions Revenue – Cost of software solutions revenue consists primarily of royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, direct costs to manufacture and distribute products, direct costs to provide product support and professional support services, direct costs associated with delivery of the Company’s software offerings, and amortization expense related to developed technology intangible assets.

Cost of Product Revenue

Cost of Product Revenue – Cost of product revenue primarily consists of the costs associated with the purchase of desktop devices and other third-party equipment we purchase for resale.

Product Warranty

Product Warranty – We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service. For the years ended December 31, 2021 and 2020, actual warranty costs were approximately 1.9% and 1.6% of prior year net product revenue, respectively. The annual warranty provision for the year ended December 31, 2021 and 2020 was approximately 1.9% and 1.8% of current year net product revenue, respectively.

Contingent Consideration

Contingent Consideration – Contingent consideration represents deferred business acquisition and asset acquisition consideration to be paid out at some point in the future, typically over a one-year period or less from the acquisition date. Contingent consideration is recorded at the asset acquisition date fair value. Contingent consideration recorded in connection with a business acquisition is reported at fair value each reporting period until the contingency is resolved. Any changes in fair value are recognized in earnings. Contingent consideration recorded in connection with an asset acquisition is not derecognized until the related contingency is resolved and the consideration is paid or becomes payable. If the amount initially recorded as contingent consideration exceeds the amount paid or payable, the Company recognizes that excess amount as a reduction in the cost of the related intangible assets.

Public Offering

Public Offering – On September 28, 2020, the Company completed a public offering in which it issued and sold 1,750,000 shares of common stock at a price to the public of $5.50 per share. The shares sold and issued in the public offering resulted in an aggregate gross offering price of $9,625,000. The Company received net proceeds of $8,623,000 after deducting underwriting discounts and commissions of $674,000 and offering expenses of $328,000.

On October 21, 2020, the underwriters of the Company’s public offering exercised their option to purchase additional shares of the Company’s common stock to cover sales by the underwriters of a greater number of shares than the total set forth in the filed prospectus for the public offering. The underwriters purchased an additional 420,000 shares of common stock from the Company. The gross proceeds to the Company of the issuance were $2,310,000, and the Company received net proceeds of $2,148,000 after deducting underwriting discounts and commissions.

Research and Development

Research and Development – Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation and the cost of certain third-party contractors. Research and development costs are expensed as incurred. Costs related to internally developed software are expensed as research and development expense until technological feasibility has been achieved, after which the costs are capitalized.

Fair Value Measurements

Fair Value Measurements – The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: 

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

· Quoted prices for similar assets or liabilities in active markets;

· Quoted prices for identical or similar assets in non-active markets;

· Inputs other than quoted prices that are observable for the asset or liability; and

· Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Lease Obligations

Lease Obligations – We determine if an agreement is a lease at inception. We evaluate the lease terms to determine whether the lease will be accounted for as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current portion, and operating lease liabilities, net of current portion in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

A lease that transfers substantially all of the benefits and risks incidental to ownership of property are accounted for as finance leases. At the inception of a finance lease, an asset and finance lease obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property’s fair market value. Finance lease obligations are classified as either current or long-term based on the due dates of future minimum lease payments, net of interest.

Notes Payable

Notes Payable – We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

Income Taxes

Income Taxes – We recognize a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Accruals for uncertain tax positions are provided for in accordance with accounting guidance. Accordingly, we may recognize the tax benefits from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting guidance is also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, and cash flows. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. At December 31, 2020 we determined that we would be able to realize our deferred income tax assets in the future and released $7,487,000 of the valuation allowance.

Interest and penalties associated with income taxes are classified as income tax expense in the consolidated statements of operations.

Stock-Based Compensation

Stock-Based Compensation – For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

Operating Segments

Operating Segments – Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has reorganized into two operating segments, which consist of cloud telecommunications services and software solutions. The software solutions segment includes the results of operation of NetSapiens, LLC, NSHC, Inc., NetSapiens Canada, Inc., and NetSapiens International Limited. The cloud telecommunications segment includes the results of operations of Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers

Significant Customers – No customer accounted for 10% or more of our total revenue for the years ended December 31, 2021 and 2020. No customer accounted for 10% or more of our total trade receivables as of December 31, 2021 and one telecommunications services customer accounted for 11% of total trade accounts receivable as of December 31, 2020.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements – In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is effective for our fiscal year beginning after December 15, 2021, including interim periods within this fiscal year. This guidance can be applied using either a modified or full retrospective approach. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

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1. Description of Business and Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2021

1. Description of Business and Significant Accounting Policies (Tables)

Restricted cash

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	7,468	$	17,579
Restricted cash		-		100
Total cash, cash equivalents, and restricted cash shown in the
consolidated statement of cash flows	$	7,468	$	17,679

Property and equipment

Building	39 years
Land	Not depreciated
Computer and office equipment	2 to 5 years
Computer software	3 years
Internal-use software	3 years
Furniture and fixtures	4 years
Leasehold improvements	2 to 5 years

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2. Revenue (Tables)

12 Months Ended

Dec. 31, 2021

2. Revenue

Disaggregation of revenue

Year Ended December 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	2,324	$	-	$	2,324
Equipment financing revenue		266		-		266
Telecommunications services		14,764		-		14,764
Fees, commissions, and other, recognized over time		1,661		-		1,661
One time fees, commissions and other		411		-		411
Software licenses		-		2,712		2,712
Subscription maintenance and support		-		5,384		5,384
Professional services and other		-		570		570
	$	19,426	$	8,666	$	28,092
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	2,684	$	5,384	$	8,068
Products, services, and fees transferred over time		16,742		3,282		20,024
	$	19,426	$	8,666	$	28,092

Year Ended December 31, 2020	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	1,843	$	-	$	1,843
Equipment financing revenue		223		-		223
Telecommunications services		12,594		-		12,594
Fees, commissions, and other, recognized over time		1,523		-		1,523
One time fees, commissions and other		204		-		204
	$	16,387	$	-	$	16,387
Timing of revenue recognition
Products and fees recognized at a point in time	$	2,047	$	-	$	2,047
Services and fees transferred over time		14,340		-		14,340
	$	16,387	$	-	$	16,387

Contract balances

	December 31,		December 31,
(In thousands)	2021		2020
Receivables, which are included in Trade receivables, net of allowance
for doubtful accounts	$	2,177	$	538
Contract assets		261		159
Contract liabilities		3,028		1,228

Significant changes in the contract assets and liabilities

	For the Year Ended						For the Year Ended
(In thousands)	December 31, 2021						December 31, 2020
	Contract Assets			Contract Liabilities			Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-		$	(1,137	)	$	-		$	(976	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-			2,937			-			990
Transferred to receivables from contract assets recognized at the beginning of the period		(60	)		-			(21	)		-
Increase due to additional unamortized discounts		162			-			158			-

Performance obligations

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	172		-		-		-		-	$	172
Telecommunications services	$	12,421		8,321		5,523		3,015		725	$	30,005
Software Solutions	$	6,789		3,266		1,056		417		-	$	11,528
All consideration from contracts with customers is included in the amounts presented above

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3. Earnings Per Common Share (Tables)

12 Months Ended

Dec. 31, 2021

3. Earnings Per Common Share

Basic and diluted net income per common share

	Year Ended December 31,
	2021			2020
Net income/(loss) (in thousands) (A)	$	(2,445	)	$	7,940
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		20,275,691			15,767,874
Dilutive effect of stock-based awards		-			1,652,602
Diluted weighted-average outstanding shares of common stock (C)		20,275,691			17,420,476
Earnings per common share:
Basic (A/B)	$	(0.12	)	$	0.50
Diluted (A/C)	$	(0.12	)	$	0.46

Common stock not included in the computation of diluted income per share

	Year Ended December 31,
	2021		2020
Stock options		924,742		186,811

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4. Acquisitions (Tables)

12 Months Ended

Dec. 31, 2021

Cost of acquisition

(in thousands)	Initial Valuation		Adjustments	December 31,  2021
Consideration:
Cash	$	10,000		$	10,000
Common stock		16,942			16,942
Stock options		22,120			22,120
Total consideration	$	49,062		$	49,062

Schedule of recognized identified assets acquired and liabilities assumed

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734	8,247			$	34,981

Pro forma information

	For the Year Ended December 31, (Unaudited, in thousands)
	2021			2020
Revenues	$	33,408		$	27,837
Net income/(loss)		(13,692	)		7,761
Earnings per share	$	(0.64	)	$	0.41

Centric Telecom, Inc.

Cost of acquisition

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

Schedule of recognized identified assets acquired and liabilities assumed

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

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5. Trade Receivables, net (Tables)

12 Months Ended

Dec. 31, 2021

5. Trade Receivables, net

Trade receivables, net

	December 31,
	2021			2020
Gross trade receivables	$	2,249		$	559
Less: allowance for doubtful accounts		(72	)		(21	)
Trade receivables, net	$	2,177		$	538
Current trade receivables, net	$	2,177		$	538
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,177		$	538

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6. Prepaid Expenses (Tables)

12 Months Ended

Dec. 31, 2021

6. Prepaid Expenses

Prepaid expenses

	December 31,
	2021		2020
Prepaid corporate insurance	$	90	$	53
Prepaid software services and support		160		20
Prepaid employee insurance premiums		9		71
Nasdaq Listing Fee		15		-
Other prepaid expenses		84		46
Total prepaid assets	$	358	$	190

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7. Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2021

7. Property and Equipment

Property and equipment

	2021			2020
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,854			1,407
Computer software		576			526
Internal-use software		14			14
Furniture and fixtures		75			29
Vehicles		74			-
Leasehold improvements		7			-
Less: accumulated depreciation		(2,111	)		(1,742	)
Total property and equipment, net	$	2,989		$	2,734

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8. Intangible Assets and Goodwill (Tables)

12 Months Ended

Dec. 31, 2021

8. Intangible Assets and Goodwill

Intangible assets

	December 31, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,619	)	$	17,454	$	1,171	$	(919	)	$	252
Developed technologies		4,900		(528	)		4,372		-		-			-
Trademark and trade names		400		(65	)		335		-		-			-
Total acquired intangible assets	$	24,472	$	(2,311	)	$	22,161	$	1,171	$	(919	)	$	252

Amortization of intangible assets

Year ending December 31,
2022	$	2,199
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,829
Total	$	22,161

Goodwill carrying amount

	Goodwill
Balance at December 31, 2020	$	272
Centric Telecom business acquisition		1,719
NetSapiens business acquisition		34,981
Balance at December 31, 2021	$	36,972

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9. Accrued Expenses (Tables)

12 Months Ended

Dec. 31, 2021

9. Accrued Expenses

Accrued expenses

	December 31,
	2021		2020
Accrued wages and benefits	$	1,188	$	513
Accrued accounts payable		609		505
Accrued sales and telecommunications taxes		2,487		438
Product warranty liability		50		33
Income tax payable		10		-
Other		560		139
Total accrued expenses	$	4,904	$	1,628

Product warranty liabilities

	Warranty  Liabilities
Balance at January 1, 2020	$	37
Accrual for warranties		33
Adjustments related to pre-existing warranties		(10	)
Warranty settlements		(27	)
Balance at December 31, 2020		33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021	$	50

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10. Notes Payable (Tables)

12 Months Ended

Dec. 31, 2021

10. Notes Payable (Tables)

Notes payable

	December 31,
	2021			2020
Notes payable	$	1,873		$	1,944
Less: current notes payable		(1,873	)		(71	)
Notes payable, net of current portion	$	-		$	1,873

Principal payments of notes payable

Year ending December 31,
2022	$	1,873
2023		-
2024		-
2025		-
2026		-
Thereafter		-
Total	$	1,873

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11. Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2021

11. Fair Value Measurements

Financial instruments

	December 31, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,177	$	2,177	$	538	$	538
Equipment financing receivables		1,274		1,274		1,192		1,192
Liabilities:
Finance leases	$	303	$	303	$	84	$	84
Notes payable		1,873		1,873		1,944		1,944

Liabilities for which fair value is recognized

	Asset and Business Acquisition Contingent Consideration
Balance at January 1, 2020	$	175
Cash payments		(54	)
Adjustment		(121	)
Balance at December 31, 2020	$	-
Additions		746
Cash payments		(746	)
Adjustment		-
Balance at December 31, 2021	$	-

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12. Equity (Tables)

12 Months Ended

Dec. 31, 2021

12. Equity

Shares of common stock reserved for future issuance

Stock-based compensation plans:
Outstanding option awards	7,047,550
Available for future grants	5,764,231
	12,811,781

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13. Stock-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2021

13. Stock-Based Compensation

Fair value of stock options granted

	Year Ended December 31,
	2021			2020
Weighted-average fair value of options granted	$	0.65		$	3.66
Expected volatility		13	%		84	%
Expected life (in years)		0.81			4.30
Risk-free interest rate		0.14	%		0.37	%
Expected dividend yield		0.00	%		0.00	%

Stock option activity

						Weighted-Average	Aggregate
	Number of			Weighted-Average		Remaining		Intrinsic Value
	Shares			Exercise Price		Contract Life		(in thousands)
Outstanding at January 1, 2020		3,189,160		$	2.60	3.5 years	$	1,007
Granted		612,000			5.91
Exercised		(884,974	)		2.35
Cancelled/forfeited		(30,725	)		4.43
Outstanding at December 31, 2020		2,885,461			3.36	3.0 years		10,310
Granted		5,349,828			-
Exercised		(1,142,330	)		-
Cancelled/forfeited		(104,116	)		-
Outstanding at December 31, 2021		6,988,843			2.40	4.5 years		19,829
Shares vested and expected to vest		6,836,480			2.40	4.5 years		19,819
Exercisable as of December 31, 2021		5,917,757			1.74	4.0 years		19,763
Exercisable as of December 31, 2020		2,242,314			2.74	2.1 years		9,400

RSUs outstanding

	Years Ended December 31,
	2022		2023		2024
RSUs with service-based vesting conditions		32,071		7,067		-

RSUs activity

	Number of			Weighted-Average
	Units				Fair Value
Outstanding at January 1, 2020		65,008		$	2.25
Granted		100,500			4.25
Vested/released		(51,606	)		3.16
Cancelled/forfeited		(13,391	)		3.38
Outstanding at December 31, 2020		100,511			3.63
Granted		-			-
Vested/released		(56,480	)		3.33
Cancelled/forfeited		(4,893	)		3.79
Outstanding at December 31, 2021		39,138			4.05

Statement of operations effect of stock-based compensation

	Year Ended December 31,
	2021		2020
Share-based compensation expense by type:
Stock options	$	1,441	$	453
Restricted stock units		187		170
Total cost related to share-based compensation expense	$	1,628	$	623
Share-based compensation expense by financial statement line item:
Cost of revenue	$	154	$	82
Research and development		125		71
Selling and marketing		271		88
General and administrative		1,078		382
Total cost related to share-based compensation expense	$	1,628	$	623

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14. Income Taxes (Tables)

12 Months Ended

Dec. 31, 2021

14. Income Taxes

Iincome tax benefit/(expense)

	Year Ended December 31,
	2021			2020
Current income tax expense:
Federal	$	-		$	-
State and local		(35	)		(13	)
Current income tax expense		(35	)		(13	)
Deferred income tax benefit:
Federal		114			4,708
State and local		386			1,346
Deferred income tax benefit		500			6,054
Total income tax benefit/(provision)	$	465		$	6,041

Reconciliation of federal statutory income tax rate to our effective income tax rate

	Year Ended December 31,
	2021			2020
U.S. federal statutory income tax benefit/(expense)	$	611		$	(399	)
Increase in income tax benefit resulting from:
State and local income tax benefit/(expense), net of federal effect		227			(1,878	)
Change in the valuation allowance for net deferred income tax assets		(231	)		7,487
Stock-based compensation		71			626
Other, net		(213	)		205
Income tax benefit	$	465		$	6,041

Net deferred income tax assets and liabilities

	December 31,
	2021			2020
Deferred income tax assets:
Accrued expenses	$	242		$	110
Deferred revenue		722			318
Net operating loss carry-forwards		7,230			5,485
Stock-based compensation		178			507
Other		127			285
Subtotal		8,499			6,705
Valuation allowance		(1,498	)		(61	)
Total deferred income tax assets		7,001			6,644
Deferred income tax liabilities:
Property and equipment		(31	)		(6	)
Prepaid expenses and other		(445	)		(584	)
Intangible assets		(5,539	)		-
Total deferred income tax liabilities		(6,015	)		(590	)
Net deferred income tax assets (liabilities)	$	986		$	6,054

Changes in unrecognized tax benefits

Balance as of January 1, 2020	$	-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2020		-
Reductions due to lapsed statute of limitations		-
Balance as of December 31, 2021	$	-

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15. Leases (Tables)

12 Months Ended

Dec. 31, 2021

15. Leases

Maturity of finance lease liabilities

Year ending December 31,	Operating Leases			Finance Leases
2022	$	462		$	114
2023		58			96
2024		44			76
2025		-			22
2026		-			3
Total minimum lease payments		564			311
Less: amount representing interest		(32	)		(8	)
Present value of minimum lease payments	$	532		$	303

Lease term and discount

Lease term and discount rate	December 31, 2021
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		3.0
Weighted-average discount rate
Operating leases		10.1	%
Finance leases		3.0	%

Cash paid for amounts included in the measurement of lease liabilities

	Year Ended  December 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	95
Operating cash flows from finance leases		3
Financing cash flows from finance leases		99

Equipment finance receivables

	December 31,			December 31,
	2021			2020
Gross financing receivables	$	1,822		$	1,774
Less: unearned income		(548	)		(582	)
Financing receivables, net		1,274			1,192
Less: current portion of finance receivables, net		(332	)		(286	)
Finance receivables due after one year	$	942		$	906

Future aggregate minimum lease obligations under operating leases

Year ending December 31,	Lease Receivables
2022	$	669
2023		563
2024		381
2025		164
2026 and thereafter		43
Gross equipment financing receivables		1,820
Less: unearned income		(546	)
Equipment financing receivables, net	$	1,274

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18. Segments (Tables)

12 Months Ended

Dec. 31, 2021

18. Segments

Information on reportable segments and reconciliation to condensed consolidated net (loss) income

	Year Ended December 31,
	2021			2020
Revenue:
Cloud telecommunications service	$	19,426		$	16,387
Software solutions		8,666			-
Consolidated revenue		28,092			16,387
Income/(loss) from operations:
Cloud telecommunications services		(2,643	)		991
Software solutions		(167	)		-
Total operating income/(loss)		(2,810	)		991
Other income/(expense), net:
Cloud telecommunications services		(70	)		908
Software solutions		(30	)		-
Total other income/(expense), net		(100	)		908
Income/(loss) before income tax benefit:
Cloud telecommunications services		(2,713	)		1,899
Software solutions		(197	)		-
Income/(loss) before income tax benefit	$	(2,910	)	$	1,899

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19. Quarterly Financial Information (unaudited) (Tables)

12 Months Ended

Dec. 31, 2021

19. Quarterly Financial Information (unaudited)

Quarterly financial information

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2021			2021			2021				2021
Service revenue	$	4,139		$	4,327		$	4,325		$	4,311
Software solutions revenue		-			1,012			3,784			3,870
Product revenue		368			440			701			815
Total revenue		4,507			5,779			8,810			8,996
Operating expenses:
Cost of service revenue		1,259			1,347			1,210			1,288
Cost of software solutions revenue		-			526			1,675			1,830
Cost of product revenue		225			286			461			553
Selling and marketing		1,279			1,897			2,285			2,799
General and administrative		2,216			2,579			2,768			3,023
Research and development		350			388			358			300
Total operating expenses		5,329			7,023			8,757			9,793
Income/(loss) from operations		(822	)		(1,244	)		53			(797	)
Total other income/(expense), net		(17	)		(19	)		(41	)		(23	)
Income/(loss) before income taxes		(839	)		(1,263	)		12			(820	)
Income tax benefit/(provision)		124			260			(137	)		218
Net loss	$	(715	)	$	(1,003	)	$	(125	)	$	(602	)
Basic earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)
Diluted earnings per common share (1)	$	(0.04	)	$	(0.05	)	$	(0.01	)	$	(0.03	)

	For the three months ended
	March 31,			June 30,			September 30,			December 31,
Consolidated	2020			2020			2020				2020
Service revenue	$	3,488		$	3,605		$	3,654		$	3,797
Product revenue		379			449			489			526
Total revenue		3,867			4,054			4,143			4,323
Operating expenses:
Cost of service revenue		970			908			946			1,013
Cost of product revenue		220			263			314			313
Selling and marketing		1,038			1,062			1,051			1,002
General and administrative		1,188			1,046			1,351			1,522
Research and development		270			244			326			349
Total operating expenses		3,686			3,523			3,988			4,199
Income from operations		181			531			155			124
Total other income/(expense), net		(38	)		(20	)		(21	)		987
Income before income taxes		143			511			134			1,111
Income tax benefit/(provision)		(3	)		(3	)		(3	)		6,050
Net income	$	140		$	508		$	131		$	7,161
Basic earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.40
Diluted earnings per common share (1)	$	0.01		$	0.03		$	0.01		$	0.37

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Description of Business and Significant Accounting Policies (Details) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020	Dec. 31, 2019
1. Description of Business and Significant Accounting Policies
Cash and cash equivalents	$ 7,468	$ 17,579
Restricted cash	0	100
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows	$ 7,468	$ 17,679	$ 4,280

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Description of Business and Significant Accounting Policies (Details 1)	12 Months Ended
	Dec. 31, 2021
Land
Depreciable lives	Not depreciated
Computer Software
Depreciable lives	3 years
Furniture and Fixtures
Depreciable lives	4 years
Building
Depreciable lives	39 years
Computer and Office Equipment
Depreciable lives	2 to 5 years
Internal-use Software
Depreciable lives	3 years
Leasehold Improvements
Depreciable lives	2 to 5 years

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Description of Business and Significant Accounting Policies (Details Narrative) - USD ($)	1 Months Ended		12 Months Ended
	Oct. 21, 2020	Sep. 28, 2020	Dec. 31, 2021	Dec. 31, 2020	Sep. 30, 2021
1. Description of Business and Significant Accounting Policies (Tables)
Underwriting discounts comminsssions	$ 2,148,000	$ 674,000
Actual warranty cost, percentage			1.90%	1.60%
Annual warranty provision			1.90%	1.80%
Offering expenses		$ 328,000
Shares of common stock, sold		1,750,000
Foreign currency translation gains/(losses)			$ 12,000	$ 0
Cash and Cash Equivalents				17,175,000	$ 6,573,000
Restricted Cash				100,000	0
Amortization in relation to costs capitalized			$ 869,000,000	505,000,000
Common stock price per share		$ 5.50
Offering price		$ 9,625,000
Restricted cash excess of federally insured limits				100,000	0
Net proceeds		$ 8,623,000
Additional shares of common stock	420,000
Additional shares of common stock, amount	$ 2,310,000
Capitalized contract costs				$ 970,000	$ 1,345,000
Trade account payable rate			10.00%	11.00%
Change in the valuation allowance for net deferred income tax assets			$ 7,487,000

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Revenue (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2021	Dec. 31, 2020
Major product services lines
Desktop services									$ 2,324,000	$ 1,843,000
Equipment financing revenue									266,000	223,000
Telecommunications services									14,764,000	12,594,000
Revenue	$ 8,996,000	$ 8,810,000	$ 5,779,000	$ 4,507,000	$ 4,323,000	$ 4,143,000	$ 4,054,000	$ 3,867,000	28,092,000	16,387,000
Fees, commissions and other recognized over time									1,661,000	1,523
One time fees , commissions and other									411,000	204,000
Software Licenses									2,712,000
Subscription maintenance and support									5,384,000
Professional servicing and other									570,000
Service lines									28,092,000	16,387,000
Time of revenue recognition
Products services and fees recognized at a point in time									8,068,000	2,047,000
Products services and fees transferred over time									20,024,000	16,387,000
Cloud Telecommunications Service
Major product services lines
Desktop services									2,324,000	1,843,000
Equipment financing revenue									266,000	223,000
Telecommunications services									14,764,000	12,594,000
Revenue									19,426,000	16,387,000
Fees, commissions and other recognized over time									1,661,000	1,523,000
One time fees , commissions and other									411,000	204,000
Software Licenses									0
Subscription maintenance and support									0
Professional servicing and other									0
Service lines									19,426,000	16,387,000
Time of revenue recognition
Products services and fees recognized at a point in time									2,684	2,047,000
Products services and fees transferred over time									16,742,000	14,340,000
Software Solution Segment
Major product services lines
Desktop services									0	0
Equipment financing revenue									0	0
Telecommunications services									0	0
Revenue									8,666,000	0
Fees, commissions and other recognized over time									0	0
Software Licenses									2,712,000	0
Subscription maintenance and support									5,384,000	0
Professional servicing and other									570,000	0
Service lines									8,666,000	0
Time of revenue recognition
Products services and fees recognized at a point in time									5,384,000	0
Products services and fees transferred over time									$ 3,282,000	$ 0

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Revenue (Details 1) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
2. Revenue
Receivables, which are included in trade receivables, net of allowance for doubtful accounts	$ 2,177	$ 538
Contract assets	261	159
Contract liabilities	$ 3,028	$ 1,228

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Revenue (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Contract Assets
Revenue recognized that was included in the contract liability balance at the beginning of the period	$ 0	$ 0
Increase due to cash received, excluding amounts recognized as revenue during the period	0	0
Transferred to receivables from contract assets recognized at the beginning of the period	(60)	(21)
Increase due to additional unamortized discounts	162	158
Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	(1,137)	(976)
Increase due to cash received, excluding amounts recognized as revenue during the period	2,937	990
Transferred to receivables from contract assets recognized at the beginning of the period	0	0
Increase due to additional unamortized discounts	$ 0	$ 0

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Revenue (Details 3)	Dec. 31, 2021 USD ($)
Desktop Devices
2022	$ 172,000
2023	0
2024	0
2025	0
2026 and thereafter	0
Total	172,000
Telecommunications Services
2022	12,421,000
2023	8,321,000
2024	5,523,000
2025	3,015,000
2026 and thereafter	725,000
Total	30,005,000
Software Solutions
2022	6,789,000
2023	3,266,000
2024	1,056,000
2025	417,000
2026 and thereafter	0
Total	$ 11,528,000

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Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2021	Dec. 31, 2020
3. Earnings Per Common Share
Net income	$ (602)	$ (125)	$ (1,003)	$ (715)	$ 7,161	$ 131	$ 508	$ 140	$ (2,445)	$ 7,940
Weighted-average share reconciliation:
Basic									20,275,691	15,767,874
Dilutive effect of stock-based awards									0	1,652,602
Diluted shares outstanding									20,275,691	17,420,476
Earnings per common share:
Basic	$ (0.03)	$ (0.01)	$ 0.05	$ (0.04)	$ 0.40	$ 0.01	$ 0.03	$ 0.01	$ (0.12)	$ 0.50
Diluted	$ (0.03)	$ 0.01	$ 0.05	$ (0.04)	$ 0.37	$ 0.01	$ 0.03	$ 0.01	$ (0.12)	$ 0.46

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Earnings Per Common Share (Details 1) - shares	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Stock Options
Securities excluded from earnings	924,742	186,811

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Acquisitions (Details) - NetSapiens, Inc.	12 Months Ended
	Dec. 31, 2021 USD ($)
Consideration
Cash	$ 10,000,000
Common Stock	16,942
Stock options	22,120,000
Total consideration	49,062,000
Initial Valuation
Cash Initial Valuation	10,000,000
Common stock Initial Valuation	16,942,000
Stock options Initial Valuation	22,120,000
Total consideration Initial Valuation	$ 49,062,000

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Acquisitions (Details 1) $ in Thousands	Dec. 31, 2021 USD ($)
4. Acquisitions (Tables)
Total purchase price	$ 49,062
Cash	2,397
Accounts receivables	953
Prepaid expense	57
Contract cost	105
Other assets	323
Property and equipment net	60
Right of use assets	555
Deferred tax assets	0
Intangible Assets Acquired (FV)	21,100
Long-term trade receivables, net of current	63
Other long-term assets	89
Total identifiable assets	25,702
Account payable	(507)
Accrued expenses	(3,229)
Contract liability	2,207
Operating lease liabilities	396
Direct Financing Liability	0
Contract liabilities net of current portion	0
Direct Financing Liability, net of current portion	0
Operating lease liabilities net of current portion	249
Deferred tax liability	5,033
Total liabilities assumed	11,621
Total goodwill	34,981
Initial Valuation
Total Purchase Price, Initial valuation	49,062
Cash, Initial valuation	1,658
Accounts receivables, Initial valuation	846
Prepaid expenses, Initial valuation	57
Contract cost, Initial valuation	0
Other assets, Initial valuation	319
Property, Plant & Equipment, Initial valuation	62
Right to use assets, Initial valuation	551
Deferred tax assets, Initial valuation	2,829
Intangible Assets Acquired, Initial valuation	21,520
Long-term trade receivables, net of current, Initial valuation	0
Other long-term assets, Initial valuation	84
Total identifiable assets, Initial valuation	27,926
Accounts Payable, Initial valuation	438
Accrued Expenses, Initial valuation	2,412
Contract Liability, Initial valuation	1,475
Operating Lease Liability, Initial valuation	379
Direct Financing Liability, Initial valuation	17
Contract liability, net of current portion, Initial valuation	629
Direct Financing Liability, net of current portion, Initial valuation	29
Operating Lease Liability, net of current portion, Initial valuation	219
Deferred tax liability, Initial Valuation	0
Total liabilities assumed, Initial valuation	5,598
Total Goodwill, Initial valuation	26,734
Adjustments
Cash, Adjustments	739
Accounts receivables, Adjustments	107
Contract cost, Adjustments	105
Other assets, Adjustments	4
Property, Plant & Equipment, Adjustments	(2)
Right to use assets, Adjustments	4
Deferred tax assets, Adjustments	2,829
Intangible Assets Acquired, Adjustments	(420)
Long-term trade receivables, net of current, Adjustments	63
Other long-term assets, Adjustments	5
Accounts Payable, Adjustments	69
Accrued Expenses, Adjustments	817
Contract Liability, Adjustments	732
Operating Lease Liability, Adjustments	17
Direct Financing Liability, Adjustments	(17)
Contract liability, net of current portion, Adjustments	(629)
Direct Financing Liability, net of current portion, Adjustments	(29)
Operating Lease Liability, net of current portion, Adjustments	30
Deferred tax liability, Adjustments	5,033
Total Goodwill, Adjustments	$ 8,247

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Acquisitions (Details 2) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
4. Acquisitions (Tables)
Revenues	$ 33,408	$ 27,837
Net income (loss) operations	$ (13,692)	$ 7,761
Earning per share	$ (0.64)	$ 0.41

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Acquisitions (Details 3) - Centric Telecom, Inc.	12 Months Ended
	Dec. 31, 2021 USD ($)
Consideration
Cash	$ 2,163,000
Common stock	346
Stock options	746,000
Total consideration	3,255,000
Initial Valuation
Cash Initial Valuation	2,163,000
Common stock Initial Valuation	346,000
Stock options Initial Valuation	746,000
Total consideration Initial Valuation	$ 3,255,000

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Acquisitions (Details 4) $ in Thousands	Dec. 31, 2021 USD ($)
Total purchase price	$ 49,062
Intangible Assets Acquired (FV)	21,100
Operating lease liability	532
Deferred tax liability	5,033
Goodwill	34,981
Initial Valuation
Total Purchase Price, Initial Valuation	49,062
Cash, Initial Valuation	1,658
Accounts Receivables, Initial Valuation	846
Prepaid expenses, Initial Valuation	57
Other assets, Initial Valuation	319
Property, Plant & Equipment, Initial Valuation	62
Right to use assets, Initial Valuation	551
Intangible Assets Acquired, Initial Valuation	21,520
Other long-term assets, Initial Valuation	84
Total identifiable assets, Initial Valuation	27,926
Accrued Expenses, Initial Valuation	2,412
Operating Lease Liability, Initial Valuation	379
Direct Financing Liability, Initial Valuation	17
Deferred tax liability, Initial Valuation	0
Total liabilities assumed, Initial Valuation	5,598
Total Goodwill, Initial Valuation	26,734
Adjustments
Intangible Assets Acquired, Adjustments	(420)
Accrued Expenses, Adjustments	817
Operating Lease Liability, Adjustments	17
Deferred tax liability, Adjustments	5,033
Total goodwill, Adjustments	8,247
Centric Telecom, Inc.
Total purchase price	3,255
Cash	7
Accounts receivables	122
Prepaid expenses	4
Inventory	12
Other assets	12
Property and equipment	57
Right to use assets	134
Intangible Assets Acquired (FV)	2,200
Other long-term assets	44
Total assets acquired	2,592
Accounts payable	26
Accrued expenses	195
Contract liability	147
Operating lease liability	134
Direct financing liability	20
Deferred tax liability	534
Total liabilities assumed	1,056
Goodwill	1,719
Initial Valuation
Total Purchase Price, Initial Valuation	3,255
Cash, Initial Valuation	7
Accounts Receivables, Initial Valuation	122
Prepaid expenses, Initial Valuation	4
Inventory, Initial Valuation	12
Other assets, Initial Valuation	12
Property, Plant & Equipment, Initial Valuation	57
Right to use assets, Initial Valuation	134
Intangible Assets Acquired, Initial Valuation	2,238
Other long-term assets, Initial Valuation	44
Total identifiable assets, Initial Valuation	2,630
Accounts Payable, Initial Valuation	26
Accrued Expenses, Initial Valuation	187
Contract Liability, Initial Valuation	147
Operating Lease Liability, Initial Valuation	118
Direct Financing Liability, Initial Valuation	20
Deferred tax liability, Initial Valuation	0
Total liabilities assumed, Initial Valuation	498
Total Goodwill, Initial Valuation	1,123
Adjustments
Intangible Assets Acquired, Adjustments	(38)
Accrued Expenses, Adjustments	8
Operating Lease Liability, Adjustments	16
Deferred tax liability, Adjustments	534
Total goodwill, Adjustments	$ 596

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Acquisitions (Details Narrative) - USD ($)		3 Months Ended	12 Months Ended
	Jan. 14, 2021	Dec. 31, 2021	Dec. 31, 2021	Dec. 31, 2020
Business Acquisition description	the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing
Aggregate purchase price		$ 49,100,000	$ 49,100,000
Comon stock shares for services			4,482,328
Consideration amount			$ 16,900,000
Aggregate vaue of comon stock			22,100,000
Decrease in the fair value of the intangible asset		420,000
Less amortization expense in cost of software solutions		59,000
Additional amortization expense in sales and marketing		98,000
Additional amortization expense in general and administrative		37,000
Increase in opening balance sheet cash and accrued liabilities		739,000
Increase of assets acquired		9,000
Increase in liabilities assumed		147,000
Increase to goodwill Adjustment		140,000
Increase of right to use assets balance		4,000
Increase of operating lease liability		1,000
Deferred tax assets, Initial Valuation		2,829,000	2,829,000
Decrease to goodwill		3,000
Deferred tax liability		$ 5,033,000	$ 5,033,000
Weighted-average tax rate		25.00%	25.00%
Contract cost		$ 105,000
Increase to current and long-term accounts receivables		170,000
Increase in contract liabilities		103,000
Decrease to goodwill Adjustment		$ 172,000
Estimated economic life			16 years
weighted average cost of capital, Rate		11.00%	11.00%
Description of key assumptions used in valuing the developed technology			The key assumptions used in valuing the developed technology are as follows: royalty rate of 7%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 6 years. The key assumptions used in valuing the existing trademarks are as follows: royalty rate of 1.0%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 4 years
Acquisition related expenses incurred			$ 970,000
Estimated contingent consideration		$ 746,000	746,000
Stock options			1,441,000	$ 453,000
Centric Telecom, Inc.
Deferred tax liability		534,000	$ 534,000
Description of key assumptions used in valuing the developed technology			The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 14.0%, tax rate of 25.0%, and estimated economic life of 15 years
Acquisition related expenses incurred			$ 67,000
Intangible assets acauired, Adjustments		38,000	38,000
Increase to accrued liabilities		8,000	8,000
Decrease in amortization expense		16,000
Increase to goodwill		38,000	38,000
Increase to Goodwill due to recording of pre-acquisition liabilities		8,000	8,000
Increase in operating lease liability due to adoption of ASC 842		16,000	16,000
Increase to Goodwill due to adoption of ASC 842		16,000	16,000
Increase to Goodwill due to recording of Deferred Tax Liability		534,000	$ 534,000
Merger [Member] | June 1, 2021 [Member]
Comon stock shares for services			3,097,309
Cash amount		$ 10,000,000	$ 10,000,000
Stock options			$ 39,000,000
Common stock price per share	$ 7.42	$ 5.47	$ 5.47
Aggregate exercise price			$ 5,600,000

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Trade Receivables net (Details) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
5. Trade Receivables, net
Gross trade receivables	$ 2,249	$ 559
Less allowance for doubtful accounts	(72)	(21)
Trade receivables, net	2,177	538
Current trade receivables, net	2,177	538
Long-term trade receivables, net	$ 0	$ 0

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Prepaid Expenses (Details) - USD ($)	Dec. 31, 2021	Dec. 31, 2020
6. Prepaid Expenses
Prepaid corporate insurance	$ 90,000	$ 53,000
Prepaid software services and support	160,000	20,000
Prepaid employee insurance premiums	9,000	71,000
Nasdaq Listing Fee	15	0
Other prepaid expenses	84,000	46,000
Total prepaid assets	$ 358,000	$ 190,000

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Property and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
Less: accumulated depreciation	$ (2,111)	$ (1,742)
Total property and equipment, net	2,989	2,734
Land
Property and equipment, gross	500	500
Building
Property and equipment, gross	2,000	2,000
Vehicles [Member]
Property and equipment, gross	74	0
Computer and Office Equipment
Property and equipment, gross	1,854	1,407
Computer Software
Property and equipment, gross	576	526
Internal-use Software
Property and equipment, gross	14	14
Furniture and Fixtures
Property and equipment, gross	75	29
Leasehold Improvements
Property and equipment, gross	$ 7	$ 0

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Property and Equipment (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
7. Property and Equipment
Depreciation and amortization expense	$ 235,000	$ 166,000

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Intangible Assets and Goodwill (Details) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
Carrying amount of intangible, gross	$ 24,472	$ 1,171
Less: accumulated amortization	(2,311)	(919)
Carrying amount of intangible, net	22,161	252
Customer Relationships
Carrying amount of intangible, gross	19,073	1,171
Less: accumulated amortization	(1,619)	(919)
Carrying amount of intangible, net	17,454	252
Trademark and trade names [Member]
Carrying amount of intangible, gross	400	0
Less: accumulated amortization	(65)	0
Carrying amount of intangible, net	335	0
Devloped Technologies
Carrying amount of intangible, gross	4,900	0
Less: accumulated amortization	(528)	0
Carrying amount of intangible, net	$ 4,372	$ 0

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Intangible Assets and Goodwill (Details 1) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
8. Intangible Assets and Goodwill
2022	$ 2,199
2023	2,147
2024	2,057
2025	1,929
2026 and thereafter	13,829
Total	$ 22,161	$ 252

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Intangible Assets and Goodwill (Details 2)	12 Months Ended
	Dec. 31, 2021 USD ($)
8. Intangible Assets and Goodwill
Goodwill, Beginning Balance	$ 272,000
Centric telecom business acquisition	1,719,000
NetSapiens business acquisition	34,981,000
Goodwill, Ending Balance	$ 36,972

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Intangible Assets and Goodwill (Details Narrative) - USD ($)		3 Months Ended	12 Months Ended
	Jan. 14, 2021	Jun. 30, 2021	Dec. 31, 2021	Dec. 31, 2020
8. Intangible Assets and Goodwill
Software solution revenue			$ 528,000	$ 0
Sales and marketing expenses			$ 723,000	92,000
Devloped technologies			5 years 4 months 24 days
Trademarks and trade names			3 years 4 months 24 days
Weighted average remaining useful life for customer relationships			15 years 1 month 6 days
Acquired of intangible assets	$ 2,200,000	$ 21,100,000		121,000
General and administrative expenses			$ 140,000	$ 0

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Accrued Expenses (Details) - USD ($)	Dec. 31, 2021	Sep. 30, 2021	Dec. 31, 2020	Dec. 31, 2019
Accrued Expenses (Details)
Accrued wages and benefits	$ 1,188,000		$ 513,000
Accrued accounts payable	609,000		505,000
Accrued sales and telecommunications taxes	2,487,000		438,000
Product warranty liability	50,000	$ 34,000	33,000	$ 37,000
Income tax payable	10		0
Other accrued expenses	560,000		139,000
Total accrued expenses	$ 4,904,000		$ 1,628,000

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Accrued Expenses (Details 1) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
9. Accrued Expenses
Ending balance	$ 50,000	$ 33,000
Accrual for warranties	50,000	33,000
Adjustments related to pre-existing warranties	1	(10,000)
Warranty settlements	$ (34,000)	$ (27,000)

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Accrued Expenses (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Accrued Expenses (Details)
Product warranty expense	$ 51,000	$ 23,000

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Notes Payable (Details) - USD ($)	Dec. 31, 2021	Dec. 31, 2020
10. Notes Payable (Tables)
Notes payable	$ 1,873,000	$ 1,944,000
Less: current notes payable	(1,873,000)	(71,000)
Notes payable, net of current portion	$ 0	$ 1,873,000

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Notes Payable (Details 1)	Dec. 31, 2021 USD ($)
10. Notes Payable (Tables)
2022	$ 1,873,000
2023	0
2024	0
2025	0
2026	0
Thereafter	0
Total	$ 1,873,000

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Notes Payable (Details Narrative)	12 Months Ended
	Dec. 31, 2021 USD ($)
10. Notes Payable (Tables)
Agreement term	7 years
Purchase of building	$ 2,000,000
Interest rate	3.67%
Monthly payment	$ 11,841

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Fair Value Measurements (Details) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
Liabilities:
Notes payable	$ 1,873	$ 1,944
Carrying Value
Liabilities:
Notes payable	1,873	1,944
Trade receivables, net	2,177	538
Equipment financing receivables	1,274	1,192
Finance leases	303	84
Estimated Fair Value
Liabilities:
Notes payable	1,873	1,944
Trade receivables, net	2,177	538
Equipment financing receivables	1,274	1,192
Finance leases	$ 303	$ 84

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Fair Value Measurements (Details 1) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
11. Fair Value Measurements
Asset acquisition contingent consideration, beginning	$ 0	$ 175,000
Additions	746,000
Cash payments	746,000	54,000
Adjustment	0	(121,000)
Asset acquisition contingent consideration, ending	$ 0	$ 0

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Fair Value Measurements (Details Narrative) - USD ($)	1 Months Ended		12 Months Ended
	Oct. 31, 2021	Jan. 31, 2021	Dec. 31, 2021	Dec. 31, 2020
Fair Value Measurements (Details)
Continguent consideration	$ 746,000		$ 746,000	$ 121,000
General and administrative expenses		$ 126,000,000	$ 10,586,000	$ 5,107,000

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Equity (Details)	Dec. 31, 2021 shares
Stock-based compensation plans:
Outstanding option awards	7,047,550
Available for future grants	5,764,231
Total	12,811,781

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Stock-Based Compensation (Details) - $ / shares	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
13. Stock-Based Compensation
Weighted-average fair value of options and warrants granted	$ 0.65	$ 3.66
Expected volatility	13.00%	84.00%
Expected life (in years)	9 months 21 days	4 years 3 months 18 days
Risk-free interest rate	0.14%	0.37%
Expected dividend yield	0.00%	0.00%

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Stock-Based Compensation (Details 1) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020	Dec. 31, 2019
Number of Shares
Outstanding, Beginning	2,885,461	3,189,160	3,664,000
Granted	5,349,828	612,000
Exercised	(1,142,330)	(884,974)
Cancelled/forfeited	(104,116)	(30,725)
Outstanding, ending	6,988,843	2,885,461	3,189,160
Shares vested and expected to vest	6,836,480
Exercisable	5,917,757	2,242,314
Weighted-Average Exercise Price
Outstanding, beginning	$ 3.36	$ 2.60	$ 2.71
Granted	0	5.91
Exercised	0	2.35
Cancelled/forfeited	0	4.43
Outstanding, ending	2.40	3.36	$ 2.60
Shares vested and expected to vest	2.40
Exercisable	$ 1.74	$ 2.74
Weighted-Average Remaining Contract Life
Outstanding, beginning	4 years 6 months	3 years	3 years 6 months
Shares vested and expected to vest	4 years 6 months
Exercisable	4 years	2 years 1 month 6 days
Aggregate Intrinsic Value
Outstanding, beginning	$ 10,310,000	$ 1,007,000	$ 1,007,000
Outstanding, ending	19,829,000	10,310,000	$ 1,007,000
Shares vested and expected to vest	19,819
Exercisable	$ 19,763	$ 9,400

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Stock-Based Compensation (Details 2) - $ / shares	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Number of restricted stock units outstanding, beginning	100,511	65,008
Number of restricted stock units granted	0	100,500
Number of restricted stock units vested/released	(56,480)	(51,606)
Number of restricted stock units cancelled/forfeited	(4,893)	(13,391)
Number of restricted stock units outstanding, ending	39,138	100,511
Weighted average exercise price outstanding, beginning	$ 3.63	$ 2.25
Weighted average exercise price granted	0	4.25
Weighted average exercise price vested/released	3.33	3.16
Weighted average exercise price cancelled/forfeited	3.79	3.38
Weighted average exercise price outstanding, ending	$ 4.05	$ 3.63
2022
RSU's with service-based vesting conditions	32,071
2023
RSU's with service-based vesting conditions	7,067
2024
RSU's with service-based vesting conditions	0

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Stock-Based Compensation (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Share-based compensation expense by type:
Stock options	$ 1,441	$ 453
Restricted stock units	187	170
Share-based compensation	1,628	623
Share-based compensation expense by financial statement line item:
Total cost related to share-based compensation expense	1,628	623
Cost of Revenue
Share-based compensation expense by type:
Share-based compensation	154	82
Research and Development
Share-based compensation expense by type:
Share-based compensation	125	71
Selling and Marketing
Share-based compensation expense by type:
Share-based compensation	271	88
General and Administrative
Share-based compensation expense by type:
Share-based compensation	$ 1,078	$ 382

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Stock-Based Compensation (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Intrinsic value of options exercised	$ 2,894,000	$ 3,061,000
Weighted-average grant-date fair value of RSUs granted	$ 0	$ 4.25
Intrinsic value of RSUs vested	$ 341,000	$ 325,000
Shares remaining in the plans available to grant	5,764,231
Incentive stock-based compensation plans granted	12,811,781
Tax benefit related to stock compensation expense on net deferred tax assets	$ 178,000	$ 507,000
Share-based Payment Arrangement, Option [Member]
Total future compensation expense related to non-vested options not yet recognized	$ 3,987,000
Total future compensation expense related to non-vested options not yet recognized, period	2 years 3 months 18 days
Restricted Stock Units (RSUs) [Member]
Total future compensation expense related to non-vested options not yet recognized	$ 150,000
Total future compensation expense related to non-vested options not yet recognized, period	1 year 2 months 12 days

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Income Taxes (Details) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Current income tax expense:
Federal	$ 0	$ 0
State and local	(35,000)	(13,000)
Current income tax (expense)	35,000	13,000
Deferred income tax benefit:
Federal	114,000	4,708,000
State and local	386,000	1,346,000
Deferred income tax benefit	500,000	6,054,000
Total income tax benefit/(provision)	$ 465	$ 6,041

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Income Taxes (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
14. Income Taxes
U.S. federal statutory income tax benefit/(expense)	$ 611	$ (399)
Increase in income tax benefit resulting from:
State and local income tax benefit /(expense), net of federal effect	227	(1,878)
Change in the valuation allowance for net deferred income tax assets	(231)	7,487
Stock-based compensation	71	626
Other, net	(213)	205
Income tax benefit	$ (465)	$ (6,041)

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Income Taxes (Details 2) - USD ($)	Dec. 31, 2021	Dec. 31, 2020
Deferred income tax assets:
Accrued expenses	$ 242,000	$ 110,000
Deferred revenue	722,000	318,000
Net operating loss carry-forwards	7,230,000	5,485,000
Stock-based compensation	178,000	507,000
Other	127,000	285,000
Subtotal	8,499,000	6,705,000
Valuation allowance	(1,498,000)	(61,000)
Total deferred income tax assets	7,001,000	6,644,000
Deferred income tax liabilities:
Property and equipment	(31,000)	(6,000)
Prepaid expenses and other	(445,000)	(584,000)
Intangible assets	(5,539)	0
Total deferred income tax liabilities	(6,015,000)	(590,000)
Net deferred income tax assets (liabilities)	$ 986,000	$ 6,054,000

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Income Taxes (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
14. Income Taxes
Unrecognized tax benefits, beginning	$ 0	$ 0
Reductions due to lapsed statute of limitations	0	0
Unrecognized tax benefits, ending	$ 0	$ 0

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Income Taxes (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020	Dec. 31, 2018	Dec. 31, 2017	Jun. 30, 2002
U.S. federal statutory tax rate	21.00%	21.00%	21.00%	34.00%
Valuation allowance	$ 1,498,000	$ 61,000
Deferred taxes, realizable amount	7,001,000
NOL carry-forwards, utilization limit, amount					$ 461,000
Pre-ownership change, NOL carry-forwards, utilized amount					4,760,000
Pre-ownership change, NOL carry-forwards, unutilized amount					$ 14,871,000
Release of valuation allowance		7,487,000
NOL carry-forwards	7,230,000	5,485,000
Valuation allowance	1,498,000	$ 61,000
Net Sapiens, Inc. and Centric Telecom, Inc.
NOL carry-forwards	5,323,000
Tax credit carry-forwards, research	66,000
Valuation allowance	1,184,000
Federal
NOL carry-forwards	27,013,000
Tax credit carry-forwards, research	66,000
NOL carry-forwards, subject to expiration	$ 18,394,000
NOL carry-forwards, expiration year	2037
Tax credit carry-forwards, research, expiration year	2040
NOL carryforwards, not subject to expiration	$ 8,619,000
Foreign
NOL carry-forwards	1,101,000
NOL carry-forwards, valuation allowance	253,000
State
NOL carry-forwards	25,505,000
Tax credit carry-forwards, research	61,000
Tax credit carry-forward, research and development, valuation allowance	$ 61,000

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Leases (Details)	Dec. 31, 2021 USD ($)
Operating Leases
2022	$ 462,000
2023	58,000
2024	44
2025	0
2026	0
Total minimum lease payment	564,000
Less: amount representing interest	(32,000)
Present value of minimum lease payments	532,000
Finance Leases
2022	114,000
2023	96,000
2024	76,000
2025	22,000
2026	3,000
Total minimum lease payment	311,000
Less: amount representing interest	(8,000)
Present value of minimum lease payments	$ 303,000

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Leases (Details 1)	12 Months Ended
	Dec. 31, 2021
15. Leases
Weighted-average remaining lease term - operating leases	1 year 7 months 6 days
Weighted-average remaining lease term - finance leases	3 years
Weighted-average discount rate - operating leases	10.10%
Weighted-average discount rate- finance leases	3.00%

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Leases (Details 2) $ in Thousands	12 Months Ended
	Dec. 31, 2021 USD ($)
15. Leases
Operating cash flows from operating leases	$ 95
Operating cash flows from finance leases	3
Financing cash flows from finance leases	$ 99

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Leases (Details 3) - USD ($) $ in Thousands	Dec. 31, 2021	Dec. 31, 2020
15. Leases
Gross financing receivables	$ 1,822	$ 1,774
Less unearned income	548	582
Financing receivables, net	1,274	1,192
Less: current portion of finance receivables, net	332	286
Finance receivables due after one year	$ 942	$ 906

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Leases (Details 4) $ in Thousands	Dec. 31, 2021 USD ($)
15. Leases
2022	$ 669
2023	563
2024	381
2025	164
2026 and thereafter	43
Gross equipment financing receivables	1,820
Less: unearned income	546
Equipment financing receivables, net	$ 1,274

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Leases (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Amortization of the ROU assets and operating lease liabilities	$ 0	$ 0
Rental expense incurred on operating leases	0	25,000,000
Amortized expenses	$ 40,000,000
Service period	3 years
Rent expense	$ 83,000,000	0
Description ofLease expiry date	operating lease agreements that expire in 2022
Product revenue services	$ 204,000,000	0
Amortization expense included in general and administrative expenses	$ 3,000,000	$ 9,000,000
Weighted-average discount rate- finance leases	1.37%	6.70%
Product expense	$ 63,000,000	$ 0
Interest expenses	$ 8,000,000	7,000,000
Lease description	The outstanding balance for finance leases was $311,000 and $84,000 as of December 31, 2021 and 2020, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $129,000 as of December 31, 2021 and 2020, respectively. Related accumulated depreciation totaled $167,000 and $67,000 as of December 31, 2021 and 2020, respectively
Lease expiry date	June 2024
Interest rate	3.67%
Maximum [Member]
Interest rate	13.00%
Minimum [Member]
Interest rate	2.81%
Non-cancelable operating lease agreement [Member]
Rental expense incurred on operating leases	$ 22,000,000	0
Description ofLease expiry date	lease agreement that expires in 2025
Virginias [Member]
Rental expense incurred on operating leases	$ 56,000,000	0
Lease expiry date	July 31, 2021
Californias [Member]
Rental expense incurred on operating leases	$ 210,000,000	$ 0
Description ofLease expiry date	operating lease agreement that expires in 2022

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Commitments and Contingencies (Details Narrative)	Dec. 31, 2021 USD ($)
Commitments and Contingencies (Details Narrative)
Annual bonus	$ 175,000

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Employee Benefit Plan (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
17. Employee Benefit Plan
Employer contributions to employee benefit plan	$ 178,000	$ 156,000

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Segments (Details) - USD ($)	3 Months Ended								9 Months Ended	12 Months Ended
	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2020	Dec. 31, 2021	Dec. 31, 2020
Income/(loss) before income tax benefit
Cloud telecommunications services									$ 1,899,000	$ 2,713,000
Software solutions									0	197,000
Total other income expense net									1,899,000	(2,910,000)
Total other income expense net	$ (23,000)	$ (41,000)	$ (19,000)	$ (17,000)	$ 987,000	$ (21,000)	$ (20,000)	$ (38,000)		(100,000)	$ 908,000
Cloud Telecommunications Service 2
Income/(loss) before income tax benefit
Cloud telecommunications services									(908,000)	(70,000)
Software solutions									0	(30,000)
Total other income expense net									(908,000)	(100,000)
Cloud Telecommunications Service 1
Income/(loss) before income tax benefit
Cloud telecommunications services									991,000	2,643,000
Software solutions									0	(167,000)
Total operating income loss									991	(2,810,000)
Cloud Telecommunications Service
Income/(loss) before income tax benefit
Cloud telecommunications services									16,387,000	19,426,000
Software solutions									0	8,666,000
Consolidated revenue									$ 16,387,000	$ 28,092,000

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Segments (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Depreciation and amortization	$ 1,626,000	$ 258,000
Interest expense	84,000	76,000
Software Solutions Segment [Member]
Depreciation and amortization	1,189,000,000	0
Interest income	0	0
Interest expense	0	0
Cloud Telecommunications Service
Depreciation and amortization	438,000,000	249,000,000
Interest income	1,000,000	3,000,000
Interest expense	84,000,000	76,000,000
Cloud Telecommunications Service 1
Interest income	$ 1,000,000	$ 3,000,000

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Quarterly Financial Information (unaudited) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2021	Dec. 31, 2020
Total revenue	$ 8,996	$ 8,810	$ 5,779	$ 4,507	$ 4,323	$ 4,143	$ 4,054	$ 3,867	$ 28,092	$ 16,387
Operating expenses:
Selling and marketing	2,799	2,285	1,897	1,279	1,002	1,051	1,062	1,038	8,260	4,153
General and administrative	3,023	2,768	2,579	2,216	1,522	1,351	1,046	1,188
Research and development	300	358	388	350	349	326	244	270	1,396	1,189
Total operating expenses	9,793	8,757	7,023	5,329	4,199	3,988	3,523	3,686	30,902	15,396
Income from operations	(797)	53	1,244	822	124	155	531	181	(2,810)	991
Total other income/(expense), net	(23)	(41)	(19)	(17)	987	(21)	(20)	(38)	(100)	908
Income before income tax	820	12	1,263	839	1,111	134	511	143	(2,910)	1,899
Income tax benefit/(provision)	218	137	260	124	(6,050)	3	3	3	465	6,041
Net income	$ (602)	$ (125)	$ (1,003)	$ (715)	$ 7,161	$ 131	$ 508	$ 140	$ (2,445)	$ 7,940
Basic earnings per common share	$ (0.03)	$ (0.01)	$ 0.05	$ (0.04)	$ 0.40	$ 0.01	$ 0.03	$ 0.01	$ (0.12)	$ 0.50
Diluted earnings per common share	$ (0.03)	$ 0.01	$ 0.05	$ (0.04)	$ 0.37	$ 0.01	$ 0.03	$ 0.01	$ (0.12)	$ 0.46
Service
Total revenue	$ 4,311	$ 4,325	$ 4,327	$ 4,139	$ 3,797	$ 3,654	$ 3,605	$ 3,488
Operating expenses:
Cost of revenue	1,288	1,210	1,347	1,259	1,013	946	908	970
Product
Total revenue	815	701	440	368	526	489	449	379
Operating expenses:
Cost of revenue	553	461	286	225	$ 313	$ 314	$ 263	$ 220
Software Solutions
Total revenue	3,870	3,784	1,012	0
Operating expenses:
Cost of revenue	$ 1,830	$ 1,675	$ 526	$ 0

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Valuation and Qualifying Accounts (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2021	Dec. 31, 2020
Allowance for doubtful accounts receivable [Member]
Balance at Beginning of Year	$ 21	$ 14
Additions	51	7
Deductions	0	0
Balance at End of Year	72	21
Deferred income tax asset valuation allowance [Member]
Balance at Beginning of Year	61	7,548
Additions	1,437	0
Deductions	0	(7,487)
Balance at End of Year	$ 1,498	$ 61