UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from ________ to ________.
Commission file number
(Exact name of registrant as specified in its charter) |
| ||
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
|
|
| ||
(Address of Principal Executive Offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one).
Large accelerated filer | ☐ |
| 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 Exchange Act). Yes
The number of shares outstanding of the registrant’s common stock as of October 31, 2022 was
INDEX
PART I – FINANCIAL INFORMATION
2 |
Table of Contents |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Crexendo, Inc. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except par value and share data)
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Trade receivables, net of allowance for doubtful accounts of $ |
|
|
|
|
|
| ||
Contract assets |
|
|
|
|
|
| ||
Inventories |
|
|
|
|
|
| ||
Equipment financing receivables |
|
|
|
|
|
| ||
Contract costs |
|
|
|
|
|
| ||
Prepaid expenses |
|
|
|
|
|
| ||
Income tax receivable |
|
|
|
|
|
| ||
Other current assets |
|
|
|
|
|
| ||
Total current assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Long-term equipment financing receivables, net |
|
|
|
|
|
| ||
Property and equipment, net |
|
|
|
|
|
| ||
Deferred income tax assets, net |
|
|
|
|
|
| ||
Operating lease right-of-use assets |
|
|
|
|
|
| ||
Intangible assets, net |
|
|
|
|
|
| ||
Goodwill |
|
|
|
|
|
| ||
Contract costs, net of current portion |
|
|
|
|
|
| ||
Income tax receivable, net of current portion |
|
|
|
|
|
| ||
Other long-term assets |
|
|
|
|
|
| ||
Total Assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ |
|
| $ |
| ||
Accrued expenses |
|
|
|
|
|
| ||
Finance leases |
|
|
|
|
|
| ||
Notes payable |
|
|
|
|
|
| ||
Operating lease liabilities |
|
|
|
|
|
| ||
Income tax payable |
|
|
|
|
|
| ||
Contract liabilities |
|
|
|
|
|
| ||
Total current liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Contract liabilities, net of current portion |
|
|
|
|
|
| ||
Finance leases, net of current portion |
|
|
|
|
|
| ||
Notes payable, net of current portion |
|
| 1,742 |
|
|
| - |
|
Operating lease liabilities, net of current portion |
|
|
|
|
|
| ||
Total liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $ |
|
|
|
|
|
| ||
Common stock, par value $ |
|
|
|
|
|
| ||
Additional paid-in capital |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Accumulated other comprehensive income |
|
|
|
|
|
| ||
Total stockholders' equity |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
| $ |
|
| $ |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share and share data)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Service revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Software solutions revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of software solutions revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of product revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing |
|
|
|
|
|
|
|
|
|
|
|
| ||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Other expense, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total other expense, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income tax |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit/(provision) |
|
|
|
|
| ( | ) |
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2022 and 2021
(Unaudited, in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
| Total |
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| Accumulated |
|
| Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Deficit |
|
| Equity |
| ||||||
Balance, January 1, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | |||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Dividends declared |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, March 31, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Dividends declared |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, June 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Dividends declared |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, September 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
6 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2022 and 2021
(Unaudited, in thousands, except share data)
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| |||||||||
|
|
|
|
|
| Additional |
|
| other |
|
|
|
| Total |
| |||||||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| Accumulated |
|
| Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Deficit |
|
| Equity |
| ||||||
Balance, January 1, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Issuance of common stock in connection with a business acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, March 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Issuance of common stock in connection with a business acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Share-based compensation |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment, net of tax |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxes paid on the net settlement of stock options |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, September 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
7 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
| Nine Months Ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile net loss to net cash used for operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Share-based compensation |
|
|
|
|
|
| ||
Non-cash operating lease amortization |
|
| ( | ) |
|
| ( | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
| ( | ) |
|
|
| |
Contract assets |
|
| ( | ) |
|
| ( | ) |
Equipment financing receivables |
|
| ( | ) |
|
|
| |
Inventories |
|
|
|
|
|
| ||
Contract costs |
|
| ( | ) |
|
| ( | ) |
Prepaid expenses |
|
| ( | ) |
|
| ( | ) |
Income tax receivable |
|
| ( | ) |
|
| ( | ) |
Other assets |
|
|
|
|
|
| ||
Accounts payable and accrued expenses |
|
| ( | ) |
|
|
| |
Income tax payable |
|
| ( | ) |
|
|
| |
Contract liabilities |
|
|
|
|
| ( | ) | |
Net cash used for operating activities |
|
| ( | ) |
|
| ( | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| ( | ) |
|
| ( | ) |
Acquisitions of assets and businesses, net of cash received |
|
|
|
|
| ( | ) | |
Net cash used for investing activities |
|
| ( | ) |
|
| ( | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Repayments made on finance leases |
|
| ( | ) |
|
| ( | ) |
Repayments made on notes payable |
|
| ( | ) |
|
| ( | ) |
Proceeds from exercise of options |
|
|
|
|
|
| ||
Dividend payments |
|
| ( | ) |
|
|
| |
Taxes paid on the net settlement of stock options and RSUs |
|
| ( | ) |
|
| ( | ) |
Net cash provided by/(used for) financing activities |
|
| ( | ) |
|
|
| |
Effect of exchange rate changes on cash |
|
|
|
|
|
| ||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
| ( | ) |
|
| ( | ) |
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD |
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD |
| $ |
|
| $ |
| ||
Cash used during the year for: |
|
|
|
|
|
|
|
|
Income taxes, net |
| $ | ( | ) |
| $ | ( | ) |
Interest expense |
| $ | ( | ) |
| $ | ( | ) |
Supplemental disclosure of non-cash investing and financing information: |
|
|
|
|
|
|
|
|
Stock issued for the acquisition of Centric Telecom |
| $ |
|
| $ |
| ||
Contingent consideration related to the acquisition of Centric Telecom |
| $ |
|
| $ |
| ||
Stock issued in connection with the merger with NetSapiens |
| $ |
|
| $ |
| ||
Stock options issued in connection with the merger with NetSapiens |
| $ |
|
| $ |
| ||
Property and equipment financed through finance leases |
| $ |
|
| $ |
| ||
Prepaid assets financed through finance leases |
| $ |
|
| $ |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
8 |
Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. 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, 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 2.5 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.
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 three months ended September 30, 2022 and 2021, the Company recorded foreign currency translation gains of $
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 September 30, 2022 and December 31, 2021, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $
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 $
9 |
Table of Contents |
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 | |
Land | |
Computer and office equipment | |
Computer software | |
Internal-use software | |
Furniture and fixtures | |
Leasehold improvements | |
Vehicles |
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.
10 |
Table of Contents |
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.
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.
11 |
Table of Contents |
Research and Development–Research and development costs consist primarily of payroll and related personnel costs for the design, development, deployment, testing, operation, and enhancement of our products, services, and network. Costs incurred in the development of our products and services are expensed as incurred.
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.
12 |
Table of Contents |
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 99% of our total revenue from customers within North America (United States and Canada) and 1% of our total revenues from customers in other parts of the world.
Significant Customers–No customer accounted for
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 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 adopted ASU 2020-06 effective January 1, 2022. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements–In September 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.
13 |
Table of Contents |
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 15.
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. |
14 |
Table of Contents |
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 – aSoftware-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.
15 |
Table of Contents |
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.
Three Months Ended September 30, 2022 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Desktop devices |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products, services, and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Products, services, and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
|
Three Months Ended September 30, 2021 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Desktop devices |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products, services, and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Products, services, and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
|
Nine Months Ended September 30, 2022 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Desktop devices |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Services and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
|
16 |
Table of Contents |
Nine Months Ended September 30, 2021 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Desktop devices |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Services and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
|
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
| September 30, |
|
| December 31, |
| |||
(In thousands) |
| 2022 |
|
| 2021 |
| ||
Receivables, which are included in trade receivables, net of allowance for doubtful accounts |
| $ |
|
| $ |
| ||
Contract assets |
|
|
|
|
|
| ||
Contract liabilities |
|
|
|
|
|
|
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
|
| For the Nine Months Ended |
|
| For the Year Ended |
| ||||||||||
(In thousands) |
| September 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Contract Assets |
|
| Contract Liabilities |
|
| Contract Assets |
|
| Contract Liabilities |
| ||||
Revenue recognized that was included in the contract liability balance at the beginning of the period |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Transferred to receivables from contract assets recognized at the beginning of the period |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Increase due to additional unamortized discounts |
|
|
|
|
|
|
|
|
|
|
|
|
17 |
Table of Contents |
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 from the cloud telecommunications services segment (in thousands):
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 and thereafter |
|
| Total |
| ||||||
Desktop devices |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
Telecommunications services |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
Software Solutions |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
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/(loss) 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 three and nine months ended September 30, 2022 and 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:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net loss (in thousands) (A) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average share reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares outstanding (B) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive effect of stock-based awards |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Diluted weighted-average outstanding shares of common stock (C) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (A/B) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Diluted (A/C) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
For the three and nine months ended September 30, 2022 and 2021, the following potentially dilutive common stock, including awards granted under our equity incentive compensation plans, were excluded from the computation of diluted net income per share because including them would be anti-dilutive:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
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 $
18 |
Table of Contents |
(in thousands) |
| Initial Valuation |
|
| Adjustments |
| December 31, 2021 |
| ||
Consideration: |
|
|
|
|
|
|
|
| ||
Cash |
| $ |
|
|
|
| $ |
| ||
Common stock |
|
|
|
|
|
|
|
| ||
Stock options |
|
|
|
|
|
|
|
| ||
Total consideration |
| $ |
|
|
|
| $ |
|
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 |
| $ |
|
|
|
|
| $ |
| |||
Cash |
|
|
|
|
| (b) |
|
|
| |||
Accounts receivables |
|
|
|
|
| (f) |
|
|
| |||
Prepaid expenses |
|
|
|
|
|
|
|
|
|
| ||
Contract cost |
|
|
|
|
| (f) |
|
|
| |||
Other assets |
|
|
|
|
| (c) |
|
|
| |||
Property, plant & equipment |
|
|
|
|
| ( | )(c) |
|
|
| ||
Right to use assets |
|
|
|
|
| (d) |
|
|
| |||
Deferred tax assets |
|
|
|
|
| ( | )(g) |
|
|
| ||
Intangible assets acquired (FV) |
|
|
|
|
| ( | )(a) |
|
|
| ||
Long-term trade receivables, net of current |
|
|
|
|
| (f) |
|
|
| |||
Other long-term assets |
|
|
|
|
| (c) |
|
|
| |||
Total identifiable assets |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
| (c) |
|
|
| |||
Accrued expenses |
|
|
|
|
| (b)(c) |
|
|
| |||
Contract liability |
|
|
|
|
| (e)(f) |
|
|
| |||
Operating lease liability |
|
|
|
|
| (d) |
|
|
| |||
Direct financing liability |
|
|
|
|
| ( | )(d) |
|
|
| ||
Contract liability, net of current portion |
|
|
|
|
| ( | )(e) |
|
|
| ||
Direct financing liability, net of current portion |
|
|
|
|
| ( | )(d) |
|
|
| ||
Operating lease liability, net of current portion |
|
|
|
|
| (d) |
|
|
| |||
Deferred tax liability |
|
|
|
|
| (g) |
|
|
| |||
Total liabilities assumed |
|
|
|
|
|
|
|
|
|
| ||
Total goodwill |
| $ |
|
|
|
|
| $ |
|
___________________
(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 $
(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 $
19 |
Table of Contents |
(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 $
(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 $
(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 $
(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 $
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 were 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
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 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 Nine Months Ended September 30, (Unaudited, in thousands) |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Revenues |
| $ |
|
| $ |
| ||
Net loss |
|
| ( | ) |
|
| ( | ) |
Earnings per share |
| $ | ( | ) |
| $ | ( | ) |
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, 2021.
20 |
Table of Contents |
Acquisition related expenses incurred by us in connection with the NetSapiens acquisition are recorded within general and administrative expenses in our consolidated statements of operations and totaled $
Centric Telecom, Inc. Business Acquisition
On January 14, 2021,
(in thousands) |
| Initial Valuation |
|
| Adjustments |
| December 31, 2021 |
| ||
Consideration: |
|
|
|
|
|
|
|
| ||
Cash |
| $ |
|
|
|
| $ |
| ||
Common stock |
|
|
|
|
|
|
|
| ||
Contingent consideration |
|
|
|
|
|
|
|
| ||
Total consideration |
| $ |
|
|
|
| $ |
|
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 |
| $ |
|
|
|
|
| $ |
| |||
Cash |
|
|
|
|
|
|
|
|
| |||
Accounts receivables |
|
|
|
|
|
|
|
|
| |||
Prepaid expenses |
|
|
|
|
|
|
|
|
| |||
Inventory |
|
|
|
|
|
|
|
|
| |||
Other assets |
|
|
|
|
|
|
|
|
| |||
Property, plant & equipment |
|
|
|
|
|
|
|
|
| |||
Right to use assets |
|
|
|
|
|
|
|
|
| |||
Intangible assets acquired (FV) |
|
|
|
|
| ( | )(a) |
|
|
| ||
Other long-term assets |
|
|
|
|
|
|
|
|
|
| ||
Total identifiable assets |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
|
| ||
Accrued expenses |
|
|
|
|
| (b) |
|
|
| |||
Contract liability |
|
|
|
|
|
|
|
|
|
| ||
Operating lease liability |
|
|
|
|
| (c) |
|
|
| |||
Direct financing liability |
|
|
|
|
|
|
|
|
|
| ||
Deferred tax liability |
|
|
|
|
| (d) |
|
|
| |||
Total liabilities assumed |
|
|
|
|
|
|
|
|
|
| ||
Total goodwill |
| $ |
|
|
|
|
| $ |
|
_______________
(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 $
21 |
Table of Contents |
(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 $
(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 $
(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 $
The fair values of the customer relationships 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 were 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.
Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition are recorded within general and administrative expenses in our consolidated statements of operations and totaled $
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):
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Gross trade receivables |
| $ |
|
| $ |
| ||
Less: allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Trade receivables, net |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Current trade receivables, net |
| $ |
|
| $ |
| ||
Long-term trade receivables, net |
|
|
|
|
|
| ||
Trade receivables, net |
| $ |
|
| $ |
|
6. Prepaid Expenses
Prepaid expenses consisted of the following (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Prepaid corporate insurance |
| $ |
|
| $ |
| ||
Prepaid software services and support |
|
|
|
|
|
| ||
Prepaid employee insurance premiums |
|
|
|
|
|
| ||
Prepaid Nasdaq listing fee |
|
|
|
|
|
| ||
Deposits |
|
|
|
|
|
| ||
Other prepaid expenses |
|
|
|
|
|
| ||
Total prepaid expenses |
| $ |
|
| $ |
|
22 |
Table of Contents |
7. Property and Equipment
Property and equipment consisted of the following (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Building |
| $ |
|
| $ |
| ||
Land |
|
|
|
|
|
| ||
Computer and office equipment |
|
|
|
|
|
| ||
Computer software |
|
|
|
|
|
| ||
Internal-use software |
|
|
|
|
|
| ||
Furniture and fixtures |
|
|
|
|
|
| ||
Vehicles |
|
|
|
|
|
| ||
Leasehold improvements |
|
|
|
|
|
| ||
Building Improvments |
|
|
|
|
|
| ||
Less: accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Total property and equipment, net |
|
|
|
|
|
|
Depreciation and amortization expense is included in general and administrative expenses and totaled $
8. Intangible Assets and Goodwill
Acquired intangible assets subject to amortization consist of the following (in thousands):
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
| ||||||
Customer relationships |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||
Developed technologies |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||
Trademark and trade names |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||
Total acquired intangible assets |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
|
As of September 30, 2022, the weighted average remaining useful life for customer relationships was
Amortization expense for customer relationships intangible assets is included in sales and marketing expenses and totaled $
23 |
Table of Contents |
As of September 30, 2022, 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 remaining |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
|
The following table provides a summary of changes in the carrying amounts of goodwill (in thousands):
|
| Goodwill |
| |
Balance at December 31, 2021 |
| $ |
| |
Additions |
|
|
| |
Balance at September 30, 2022 |
| $ |
|
9. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Accrued wages and benefits |
| $ |
|
| $ |
| ||
Accrued accounts payable |
|
|
|
|
|
| ||
Accrued sales and telecommunications taxes |
|
|
|
|
|
| ||
Product warranty liability |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
Total accrued expenses |
| $ |
|
| $ |
|
The changes in aggregate product warranty liabilities for the year ended December 31, 2021 and the nine months ended September 30, 2022 were as follows (in thousands):
|
| Warranty Liabilities |
| |
Balance at January 1, 2021 |
| $ |
| |
Accrual for warranties |
|
|
| |
Adjustments related to pre-existing warranties |
|
|
| |
Warranty settlements |
|
| ( | ) |
Balance at December 31, 2021 |
|
|
| |
Accrual for warranties |
|
|
| |
Warranty settlements |
|
| ( | ) |
Balance at September 30, 2022 |
| $ |
|
Product warranty expense is included in cost of product revenue expense and totaled $
24 |
Table of Contents |
10.Notes Payable
Notes payable consists of a short and long-term financing arrangements:
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Notes payable |
| $ |
|
| $ |
| ||
Less: current notes payable |
|
| ( | ) |
|
| ( | ) |
Notes payable, net of current portion |
| $ |
|
| $ |
|
On January 27, 2020, we entered into a Fixed Rate Term Loan Agreement with Bank of America, N.A. to finance Two Million Dollars ($
As of September 30, 2022, future principal payments are scheduled as follows (in thousands):
Year ending December 31, |
|
|
| |
2022 remaining |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
|
11. Fair Value Measurements
We have financial instruments as of September 30, 2022 and December 31, 2021 for which the fair value is summarized below (in thousands):
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Carrying Value |
|
| Estimated Fair Value |
|
| Carrying Value |
|
| Estimated Fair Value |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trade receivables, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equipment financing receivables |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of September 30, 2022 and December 31, 2021.
In January 2021, the Company recorded $
|
| Asset and Business Acquisition Contingent Consideration |
| |
Balance at January 1, 2021 |
| $ |
| |
Additions |
|
|
| |
Cash payments |
|
| ( | ) |
Balance at December 31, 2021 |
| $ |
| |
Additions |
|
|
| |
Cash payments |
|
|
| |
Balance at September 30, 2022 |
| $ |
|
25 |
Table of Contents |
12. Income Taxes
Our effective tax rate for the three months ended September 30, 2022 and 2021 was (
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 $
13. Leases
Lessee Accounting
We determine if an agreement is a lease at inception. We lease office 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.
26 |
Table of Contents |
We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on
We currently lease office space in Reston, Virginia under a non-cancelable operating
We currently lease office space in La Jolla, California under a non-cancelable operating
We currently lease other assets under multiple operating leases. The leases expire on various dates through 2027 and the interest rates range from
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 2024. Rental expense for the three months ended September 30, 2022 and 2021 was approximately $
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 maturity of operating leases and finance lease liabilities as of September 30, 2022 are as follows:
Year ending December 31, |
| Operating Leases |
|
| Finance Leases |
| ||
2022 remaining |
| $ |
|
| $ |
| ||
2023 |
|
|
|
|
|
| ||
2024 |
|
|
|
|
|
| ||
2025 |
|
|
|
|
|
| ||
2026 |
|
|
|
|
|
| ||
2027 |
|
|
|
|
|
| ||
Total minimum lease payments |
|
|
|
|
|
| ||
Less: amount representing interest |
|
| ( | ) |
|
| ( | ) |
Present value of minimum lease payments |
| $ |
|
| $ |
|
27 |
Table of Contents |
Lease term and discount rate |
| September 30, 2022 |
| |
Weighted-average remaining lease term (years) |
|
|
| |
Operating leases |
|
|
| |
Finance leases |
|
|
| |
Weighted-average discount rate |
|
|
|
|
Operating leases |
|
| % | |
Finance leases |
|
| % |
|
| Nine Months Ended September 30, 2022 |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
| |
Operating cash flows from operating leases |
| $ |
| |
Operating cash flows from finance leases |
|
|
| |
Financing cash flows from finance leases |
|
| ( | ) |
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 $
Equipment finance receivables arising from the rental of our cloud telecommunications equipment through sales-type leases, were as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Gross financing receivables |
| $ |
|
| $ |
| ||
Less: unearned income |
|
| ( | ) |
|
| ( | ) |
Financing receivables, net |
|
|
|
|
|
| ||
Less: current portion of finance receivables, net |
|
| ( | ) |
|
| ( | ) |
Finance receivables due after one year |
| $ |
|
| $ |
|
Future minimum lease payments as of September 30, 2022, consisted of the following:
Year ending December 31, |
| Lease Receivables |
| |
2022, remaining |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Thereafter |
|
|
| |
Gross equipment financing receivables |
|
|
| |
Less: unearned income |
|
| ( | ) |
Equipment financing receivables, net |
| $ |
|
28 |
Table of Contents |
14. Commitments and Contingencies
Annual Incentive Bonuses Accrual
We utilize incentive bonuses to reward performance achievements which provides for potential annual cash bonus awards to Company executives and other non-executive officers and employees. Under the Bonus Plan, the Compensation Committee of the Board of Directors of the Company (the “Board”) has established bonus pools of $
Legal Proceedings
In the ordinary course of business, the Company may be involved in a variety of claims, lawsuits, investigations, and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters, and contractual disputes, that can arise in the normal course of the Company’s operations. The Company recognizes a provision when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts the amount of the provision to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. As of September 30, 2022, the Company does not have a recorded liability for estimated losses. Legal costs are expensed as incurred.
15. Segment Reporting
Our chief operating decision maker (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):
29 |
Table of Contents |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cloud telecommunications services |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Software solutions |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidated revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud telecommunications services |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Software solutions |
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
Total operating income/(loss) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud telecommunications services |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Software solutions |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total other expense, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Income/(loss) before income tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud telecommunications services |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Software solutions |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Income/(loss) before income tax provision |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
Depreciation and amortization for the cloud telecommunications services segment was $
Interest income for the cloud telecommunications services segment was $
Interest expense for the cloud telecommunications services segment was $
16. Subsequent Events
Business Combination
Acquisition of Allegiant Networks, LLC
On October 17, 2022, the Company entered into an Acquisition Agreement with Allegiant Networks, LLC, a Kansas limited liability company (the “Allegiant Networks”). The Company shall acquire from Seller one hundred percent (
Because the acquisition occurred subsequent to September 30, 2022, no results of operations of Allegiant Networks are included in our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022. The Company incurred $
30 |
Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2020 Form 10-K”) filed with the SEC and the Condensed Consolidated Financial Statements and notes thereto included in the 2022 Form 10-Qs and elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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 2.5 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.
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.
31 |
Table of Contents |
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 2.5 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, 3rd 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. |
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 200 service providers, servicing over 2.5 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.
32 |
Table of Contents |
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. |
RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto and other financial information included elsewhere in this Form 10-Q.
Results of Consolidated Operations (in thousands, except for per share amounts):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Service revenue |
| $ | 4,473 |
|
| $ | 4,325 |
|
| $ | 13,427 |
|
| $ | 12,791 |
|
Software solutions revenue |
|
| 3,875 |
|
|
| 3,784 |
|
|
| 10,741 |
|
|
| 4,796 |
|
Product revenue |
|
| 760 |
|
|
| 701 |
|
|
| 1,944 |
|
|
| 1,509 |
|
Total revenue |
| $ | 9,108 |
|
| $ | 8,810 |
|
| $ | 26,112 |
|
| $ | 19,096 |
|
Income/(loss) before income taxes |
|
| (728 | ) |
|
| 12 |
|
|
| (3,127 | ) |
|
| (2,090 | ) |
Income tax benefit/(provision) |
|
| 32 |
|
|
| (137 | ) |
|
| 315 |
|
|
| 247 |
|
Net loss |
|
| (696 | ) |
|
| (125 | ) |
|
| (2,812 | ) |
|
| (1,843 | ) |
Basic earnings per share |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
| $ | (0.13 | ) |
| $ | (0.09 | ) |
Diluted earnings per share |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
| $ | (0.13 | ) |
| $ | (0.09 | ) |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Total Revenue
Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Total revenue |
| $ | 9,108 |
|
| $ | 8,810 |
|
| $ | 298 |
|
|
| 3 | % |
33 |
Table of Contents |
The increase in total revenue is due to an increase in service revenue of $147,000, an increase in software solutions revenue of $91,000, and an increase in product revenue of $59,000.
Income/(Loss) Before Income Taxes
The following table reflects our income/(loss) before income taxes for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Income/(loss) before income taxes |
| $ | (728 | ) |
| $ | 12 |
|
| $ | (740 | ) |
|
| -6167 | % |
The increased loss before income tax is primarily due to an increase in operating expenses of $895,000 and an increase in other expense of $143,000. The increase in operating expenses is primarily related to increases in salaries and benefits and stock compensation expense, offset by an increase in revenue of $298,000.
Income Tax Benefit/(Provision)
The following table reflects our income tax benefit for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Income tax benefit/(provision) |
| $ | 32 |
|
| $ | (137 | ) |
| $ | 169 |
|
|
| -123 | % |
We had an income tax benefit of $32,000 for the three months ended September 30, 2022 compared to an income tax provision of $(137,000) for the three months ended September 30, 2021. We had income/(loss) before income tax for the three months ended September 30, 2022 and 2021 of $(728,000) and $12,000, respectively.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Total Revenue
Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our service revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Total revenue |
| $ | 26,112 |
|
| $ | 19,096 |
|
| $ | 7,016 |
|
|
| 37 | % |
The increase in total revenue is due to an increase in service revenue of $636,000, an increase in software solutions revenue of $5,945,000, and an increase in product revenue of $435,000. The significant increase in software solutions revenue is primarily related to nine months of revenue for 2022 compared to only four months of revenue for the nine months end September 31, 2021.
Loss Before Income Taxes
The following table reflects our loss before income taxes for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Loss before income taxes |
| $ | (3,127 | ) |
| $ | (2,090 | ) |
| $ | (1,037 | ) |
|
| 50 | % |
34 |
Table of Contents |
The increase in the loss before income tax is primarily due to an increase in revenue of $7,016,000, offset by an increase in operating expenses of $7,792,000 and an increase in other expense of $261,000. The increase in operating expenses is primarily related to increases in salaries and benefits, stock compensation expense, and nine months of software solutions operating expenses compared to only four month in the prior period.
Income Tax Benefit
The following table reflects our income tax benefit for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Income tax benefit |
| $ | 315 |
|
| $ | 247 |
|
| $ | 68 |
|
|
| 28 | % |
We had an income tax benefit of $315,000 for the nine months ended September 30, 2022 compared to an income tax benefit of $247,000 for the nine months ended September 30, 2021. We had a loss before income tax for the nine months ended September 30, 2022 and 2021 of $(3,127,000) and $(2,090,000), respectively.
USE OF NON-GAAP FINANCIAL MEASURES
To evaluate our business, we consider and use non-generally accepted accounting principles (“Non-GAAP”) net income/(loss) 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/(loss) 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 November 10, 2022 earnings press release, as furnished on Form 8-K, we included Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA. The terms Non-GAAP net income/(loss), 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/(loss), 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/(loss), EBITDA, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.
35 |
Table of Contents |
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.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income | ||||||||||||||||
(Unaudited, in thousands, except for per share and share data) | ||||||||||||||||
| ||||||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
U.S. GAAP net loss |
| $ | (696 | ) |
| $ | (125 | ) |
| $ | (2,812 | ) |
| $ | (1,843 | ) |
Share-based compensation |
|
| 851 |
|
|
| 415 |
|
|
| 2,762 |
|
|
| 1,150 |
|
Acquisition related expenses |
|
| 8 |
|
|
| 4 |
|
|
| 31 |
|
|
| 1,065 |
|
Amortization of intangible assets |
|
| 550 |
|
|
| 506 |
|
|
| 1,649 |
|
|
| 773 |
|
Non-GAAP net income |
| $ | 713 |
|
| $ | 800 |
|
| $ | 1,630 |
|
| $ | 1,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.03 |
|
| $ | 0.04 |
|
| $ | 0.07 |
|
| $ | 0.06 |
|
Diluted |
| $ | 0.03 |
|
| $ | 0.03 |
|
| $ | 0.06 |
|
| $ | 0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 22,620,703 |
|
|
| 21,596,415 |
|
|
| 22,439,575 |
|
|
| 19,757,658 |
|
Diluted |
|
| 25,285,848 |
|
|
| 26,196,240 |
|
|
| 25,491,062 |
|
|
| 22,481,104 |
|
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA | ||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
| ||||||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
U.S. GAAP net loss |
| $ | (696 | ) |
| $ | (125 | ) |
| $ | (2,812 | ) |
| $ | (1,843 | ) |
Depreciation and amortization |
|
| 623 |
|
|
| 569 |
|
|
| 1,862 |
|
|
| 931 |
|
Interest expense |
|
| 19 |
|
|
| 24 |
|
|
| 57 |
|
|
| 64 |
|
Interest and other expense |
|
| 165 |
|
|
| 17 |
|
|
| 281 |
|
|
| 13 |
|
Income tax provision/(benefit) |
|
| (32 | ) |
|
| 137 |
|
|
| (315 | ) |
|
| (247 | ) |
EBITDA |
|
| 79 |
|
|
| 622 |
|
|
| (927 | ) |
|
| (1,082 | ) |
Acquisition related expenses |
|
| 8 |
|
|
| 4 |
|
|
| 31 |
|
|
| 1,065 |
|
Share-based compensation |
|
| 851 |
|
|
| 415 |
|
|
| 2,762 |
|
|
| 1,150 |
|
Adjusted EBITDA |
| $ | 938 |
|
| $ | 1,041 |
|
| $ | 1,866 |
|
| $ | 1,133 |
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. Please see Note 1 of Part I, Item 1 of this quarterly report on Form 10-Q for a summary of significant accounting policies. In addition, the estimates, assumptions and judgments involved in our accounting policies described in critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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 product revenue, sales and marketing, research and development, and general and administrative expenses.
36 |
Table of Contents |
Operating Results of our Cloud Telecommunications Services Segment (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Cloud Telecommunications Services |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Service revenue |
| $ | 4,473 |
|
| $ | 4,325 |
|
| $ | 13,427 |
|
| $ | 12,791 |
|
Product revenue |
|
| 760 |
|
|
| 701 |
|
|
| 1,944 |
|
|
| 1,509 |
|
Total revenue |
| $ | 5,233 |
|
| $ | 5,026 |
|
| $ | 15,371 |
|
| $ | 14,300 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue |
| $ | 1,375 |
|
| $ | 1,210 |
|
| $ | 4,249 |
|
| $ | 3,816 |
|
Cost of product revenue |
|
| 453 |
|
|
| 461 |
|
|
| 1,142 |
|
|
| 972 |
|
Selling and marketing |
|
| 1,704 |
|
|
| 1,487 |
|
|
| 4,963 |
|
|
| 4,274 |
|
General and administrative |
|
| 2,056 |
|
|
| 1,763 |
|
|
| 6,355 |
|
|
| 6,146 |
|
Research and development |
|
| 284 |
|
|
| 358 |
|
|
| 898 |
|
|
| 1,096 |
|
Total operating expenses |
|
| 5,872 |
|
|
| 5,279 |
|
|
| 17,607 |
|
|
| 16,304 |
|
Operating loss |
|
| (639 | ) |
|
| (253 | ) |
|
| (2,236 | ) |
|
| (2,004 | ) |
Other expense |
|
| (17 | ) |
|
| (22 | ) |
|
| (52 | ) |
|
| (58 | ) |
Loss before tax benefit/(provision) |
| $ | (656 | ) |
| $ | (275 | ) |
| $ | (2,288 | ) |
| $ | (2,062 | ) |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Service revenue |
| $ | 4,473 |
|
| $ | 4,325 |
|
| $ | 148 |
|
|
| 3 | % |
The increase in service revenue is due to an increase in telecommunications services of $113,000, an increase in sales-type lease interest of $24,000, an increase in one-time fees, commissions and other of $7,000, and an increase in fees, commissions, and other, recognized over time of $4,000, 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Product revenue |
| $ | 760 |
|
| $ | 701 |
|
| $ | 59 |
|
|
| 8 | % |
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.
37 |
Table of Contents |
Backlog
Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog decreased 2%, or $660,000 to $30,063,000 as of September 30, 2022 as compared to $30,723,000 as of September 30, 2021. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of July 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Cloud Telecommunications backlog as of July 1, 2022 |
| $ | 29,452 |
|
Cloud Telecommunications backlog as of September 30, 2022 |
| $ | 30,063 |
|
|
|
|
|
|
Cloud Telecommunications backlog as of July 1, 2021 |
| $ | 27,227 |
|
Cloud Telecommunications backlog as of September 30, 2021 |
| $ | 30,723 |
|
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, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of service revenue |
| $ | 1,375 |
|
| $ | 1,210 |
|
| $ | 165 |
|
|
| 14 | % |
The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in $165,000 in additional costs, an increase of $60,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of $26,000, offset by an $85,000 decrease in third-party telecommunications carrier costs.
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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of product revenue |
| $ | 453 |
|
| $ | 461 |
|
| $ | (8 | ) |
|
| -2 | % |
The decrease in cost of product revenue was primarily due to negotiating lower costs on our desktop phone devices.
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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Selling and marketing |
| $ | 1,704 |
|
| $ | 1,487 |
|
| $ | 217 |
|
|
| 15 | % |
The increase in selling and marketing expense is due to an increase in commission expense of $121,000 directly related to the increase in revenue, an increase in salaries, wages and benefits of $88,000 related to expansion of our sales team, an increase in travel related costs and tradeshows of $30,000, offset by a decrease in sales leads and marketing material costs of $20,000 and a decrease in other sales and marketing expense of $2,000.
General and Administrative
General and administrative expenses consist of salaries, wages and benefits, share-based 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
General and administrative |
| $ | 2,056 |
|
| $ | 1,763 |
|
| $ | 293 |
|
|
| 17 | % |
38 |
Table of Contents |
The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages, and benefits of $375,000 related to an increase in headcount and company-wide salary increases, offset by a decrease in corporate insurance of $37,000 due to an allocation of cost to the software solutions segment, a decrease in bank processing fees of $13,000, and a decrease in other general and administrative expense of $32,000.
Research and Development
Research and development expenses primarily consist of salaries, wages 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Research and development |
| $ | 284 |
|
| $ | 358 |
|
| $ | (74 | ) |
|
| -21 | % |
The decrease in research and development expenses is primarily related to a decrease in costs for maintenance on our mobile applications and other development costs of $47,000 and a decrease in salaries, wages and benefits of $27,000.
Other 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Other expense |
| $ | (17 | ) |
| $ | (22 | ) |
| $ | 5 |
|
|
| -23 | % |
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Service revenue |
| $ | 13,427 |
|
| $ | 12,791 |
|
| $ | 636 |
|
|
| 5 | % |
The increase in service revenue is due to an increase in telecommunications service revenue of $397,000, an increase in one time fees, commissions and other of $182,000, an increase in sales-type lease interest of $40,000, and an increase in fees, commissions, and other, recognized over time of $17,000. A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts.
39 |
Table of Contents |
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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Product revenue |
| $ | 1,944 |
|
| $ | 1,509 |
|
| $ | 435 |
|
|
| 29 | % |
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 September 30, 2022 and 2021. Backlog decreased 2%, or $660,000 to $30,063,000 as of September 30, 2022 as compared to $30,723,000 as of September 30, 2021. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of January 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Cloud Telecommunications backlog as of January 1, 2022 |
| $ | 30,190 |
|
Cloud Telecommunications backlog as of September 30, 2022 |
| $ | 30,063 |
|
|
|
|
|
|
Cloud Telecommunications backlog as of January 1, 2021 |
| $ | 28,551 |
|
Cloud Telecommunications backlog as of September 30, 2021 |
| $ | 30,723 |
|
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, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of service revenue |
| $ | 4,249 |
|
| $ | 3,816 |
|
| $ | 433 |
|
|
| 11 | % |
The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in $513,000 in additional costs, an increase of $178,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of $44,000, offset by a $302,000 decrease in telecommunication carrier costs as we’ve eliminated costs by migrating customers to our VIP platform and as we’ve switched to lower cost telecommunication carriers.
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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of product revenue |
| $ | 1,142 |
|
| $ | 972 |
|
| $ | 170 |
|
|
| 17 | % |
The increase in cost of product revenue is primarily due to an increase in product revenue.
40 |
Table of Contents |
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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Selling and marketing |
| $ | 4,963 |
|
| $ | 4,274 |
|
| $ | 689 |
|
|
| 16 | % |
The increase in selling and marketing expense is due to an increase in salaries, wages and benefits of $366,000 related to expansion of our sales team, an increase in commission expense of $193,000 directly related to the increase in revenue, and an increase in travel related costs and tradeshows of $161,000, offset by a decrease in other selling and marketing expenses of $31,000.
General and Administrative
General and administrative expenses consist of salaries, wages and benefits, share-based 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
General and administrative |
| $ | 6,355 |
|
| $ | 6,146 |
|
| $ | 209 |
|
|
| 3 | % |
The increase in general and administrative expenses is primarily due an increase in administrative salaries, wages and benefits of $1,207,000 related to an increase in share-based compensation as a result of a company-wide employee retention grant, an increase in headcount, and company-wide salary increases, and an increase in telecommunication fees of $53,000, offset by a decrease in acquisition related expenses of $1,050,000, related to the 2021 acquisitions of Centric Telecom and NetSapiens, and a decrease in other general and administrative expenses of $1,000.
Research and Development
Research and development expenses primarily consist of salaries, wages 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Research and development |
| $ | 898 |
|
| $ | 1,096 |
|
| $ | (198 | ) |
|
| -18 | % |
The decrease in research and development expenses is primarily related to a decrease in costs for maintenance on our mobile applications and other development costs of $105,000, and a decrease in salaries, wages and benefits of $96,000, offset by a $3,000 increase in product testing expense.
Other 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Other expense |
| $ | (52 | ) |
| $ | (58 | ) |
| $ | 6 |
|
|
| -10 | % |
41 |
Table of Contents |
Operating Results of Software Solutions segment (in thousands):
In connection with the merger with NetSapiens, Inc., on June 1, 2021, the following Software Solutions operating segment was created. The operating results for the Software Solutions segment are included in our consolidated results of operations from the acquisition date of June 1, 2021.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Software Solutions |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Software solutions revenue |
| $ | 3,875 |
|
| $ | 3,784 |
|
| $ | 10,741 |
|
| $ | 4,796 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software solutions revenue |
|
| 1,170 |
|
|
| 1,675 |
|
|
| 3,987 |
|
|
| 2,201 |
|
Selling and marketing |
|
| 1,028 |
|
|
| 798 |
|
|
| 3,124 |
|
|
| 1,187 |
|
General and administrative |
|
| 744 |
|
|
| 1,005 |
|
|
| 2,451 |
|
|
| 1,417 |
|
Research and development |
|
| 838 |
|
|
| - |
|
|
| 1,732 |
|
|
| - |
|
Total operating expenses |
|
| 3,780 |
|
|
| 3,478 |
|
|
| 11,294 |
|
|
| 4,805 |
|
Operating income/(loss) |
|
| 95 |
|
|
| 306 |
|
|
| (553 | ) |
|
| (9 | ) |
Other expense |
|
| (167 | ) |
|
| (19 | ) |
|
| (286 | ) |
|
| (19 | ) |
Income/(loss) before tax benefit/(provision) |
| $ | (72 | ) |
| $ | 287 |
|
| $ | (839 | ) |
| $ | (28 | ) |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
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 fixes, 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Software solutions revenue |
| $ | 3,875 |
|
| $ | 3,784 |
|
| $ | 91 |
|
|
| 2 | % |
The increase is primarily related to a $546,000 increase in recurring software license and maintenance and support subscriptions, an increase in professional services of $33,000, offset by a decrease in perpetual software licenses of $488,000.
Backlog
Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog increased 6%, or $786,000 to $13,334,000 as of September 30, 2022 as compared to $12,558,000 as of September 30, 2021 as a result of our June 1, 2021 acquisition. Below is a table which displays the software solutions segment revenue backlog as of July 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Software solutions backlog as of July 1, 2022 |
| $ | 12,669 |
|
Software solutions backlog as of September 30, 2022 |
| $ | 13,344 |
|
|
|
|
|
|
Software solutions backlog as of July 1, 2021 |
| $ | 12,828 |
|
Software solutions backlog as of September 30, 2021 |
| $ | 12,558 |
|
Cost of Software Solutions Revenue
Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of software solutions revenue |
| $ | 1,170 |
|
| $ | 1,675 |
|
| $ | (505 | ) |
|
| -30 | % |
42 |
Table of contents |
The decrease in cost of service revenue is primarily related to the reclassification of $738,000 of research and development expenses out of cost of service revenue after carefully reviewing operating expenses that qualify as research and development operating expenses, a $50,000 decrease in amortization expense related to the technology, offset by an increase in cost of service revenue of $284,000 related to the company-wide salary increases that resulted in $158,000 of additional costs, an increase of $67,000 in data center hosting related to data center expansion and increased activity, an increase of $41,000 in third-party software modules and outsourced services required to install and support software solutions also due to increased activity, and a $18,000 increase in share-based compensation.
Selling and Marketing
Selling and marketing expenses consist primarily of sales and marketing salaries, wages and benefits, commissions, share-based compensation, travel expenses, lead generation services, trade shows, third-party marketing services, the production of marketing materials, amortization expense related to customer relationships intangible asset, and sales support software. The following table reflects our selling and marketing expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Selling and marketing |
| $ | 1,028 |
|
| $ | 798 |
|
| $ | 230 |
|
|
| 29 | % |
The increase in selling and marketing expenses is primarily related to an increase in commissions of $99,000, an increase in salaries, wages and benefits of $76,000, an increase in share-based compensation of $29,000, an increase in customer relationships intangible asset amortization expense of $74,000, an increase in sales support software of $17,000, and a $20,000 increase in other selling and marketing expenses, offset by a decrease of $85,000 in third-party marketing services.
General and Administrative
General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, administrative personnel, amortization of intangible asset related to trademarks and trade names, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
General and administrative |
| $ | 744 |
|
| $ | 1,005 |
|
| $ | (261 | ) |
|
| -26 | % |
The decrease in general and administrative expenses is primarily related to the reclassification of $100,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses, and a reduction in professional service fees of $117,000, a decrease in equipment of $38,000, and a $6,000 decrease in other administrative corporate expenses.
Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Research and development |
| $ | 838 |
|
| $ | - |
|
| $ | 838 |
|
|
| - |
|
43 |
Table of contents |
The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of $738,000 and general and administrative expenses of $100,000 after carefully reviewing operating expenses that qualify as research and development operating expenses.
Other Expense
Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2022 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Other expense |
| $ | (167 | ) |
| $ | (19 | ) |
| $ | (148 | ) |
|
| 779 | % |
The increase in other expense primarily related to net foreign exchange losses during the period.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
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 fixes, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Software solutions revenue |
| $ | 10,741 |
|
| $ | 4,796 |
|
| $ | 5,945 |
|
|
| 124 | % |
The increase is primarily related to nine months of revenue for the nine months ended September 30, 2022, compared to only four months of revenue for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date.
Backlog
Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog increased 6%, or $786,000 to $13,334,000 as of September 30, 2022 as compared to $12,558,000 as of September 30, 2021. Below is a table which displays the software solutions segment revenue backlog as of January 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Software solutions backlog as of January 1, 2022 |
| $ | 13,034 |
|
Software solutions backlog as of September 30, 2022 |
| $ | 13,344 |
|
|
|
|
|
|
Software solutions backlog as of January 1, 2021 |
| $ | - |
|
Software solutions backlog as of September 30, 2021 |
| $ | 12,558 |
|
44 |
Table of contents |
Cost of Software Solutions Revenue
Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Cost of software solutions revenue |
| $ | 3,987 |
|
| $ | 2,201 |
|
| $ | 1,786 |
|
|
| 81 | % |
The increase in cost of service revenue is primarily related to nine months of costs for the nine months ended September 30, 2022, compared to only four months of costs for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date, and the reclassification of $1,530,000 in research and development expenses out of cost of service revenue for the nine months ended September 30, 2022, after carefully reviewing operating expenses that qualify as research and development operating expenses.
Selling and Marketing
Selling and marketing expenses consist primarily of sales and marketing salaries, wages 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Selling and marketing |
| $ | 3,124 |
|
| $ | 1,187 |
|
| $ | 1,937 |
|
|
| 163 | % |
The increase in selling and marketing expenses is primarily related to nine months of expenses for the nine months ended September 30, 2022, compared to only four months of expenses for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date.
General and Administrative
General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
General and administrative |
| $ | 2,451 |
|
| $ | 1,417 |
|
| $ | 1,034 |
|
|
| 73 | % |
The increase in general and administrative expenses is primarily related to nine months of expenses for the nine months ended September 30, 2022, compared to only four months of expenses for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date, and the reclassification of $202,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses.
Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Research and development |
| $ | 1,732 |
|
| $ | - |
|
| $ | 1,732 |
|
|
| - |
|
The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of $1,530,000 and general and administrative expenses of $202,000 after carefully reviewing operating expenses that qualify as research and development operating expenses.
45 |
Table of contents |
Other Expense
Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, | |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change | ||||
Other expense |
| $ | (286 | ) |
| $ | (19 | ) |
| $ | (267 | ) |
| 1405% |
The increase in other expenses is primarily related to net foreign exchange losses during the nine months ended September 30, 2022.
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 September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $4,821,000 and $7,468,000, 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 twelve months.
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 used in operating activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Net cash used in operating activities |
| $ | (2,665 | ) |
| $ | (473 | ) |
| $ | (2,192 | ) |
|
| 463 | % |
The net cash used for operations was primarily driven by our net loss for the nine months ended September 30, 2022 of $696,000, an increase in accounts receivable, an increase in equipment financing receivables, an increase in contract costs, an increase in prepaid expenses, an increase in income tax receivable, a decrease in accounts payable and accrued expenses, and a decrease in contract liabilities, offset by non-cash expenses for depreciation and amortization and share-based compensation.
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 used in investing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Net cash used in investing activities |
| $ | (192 | ) |
| $ | (10,596 | ) |
| $ | 10,404 |
|
|
| -98 | % |
Net cash used for investing activities in the nine months ended September 30, 2022, primarily relates to the purchase of property and equipment.
Net cash used for investing activities for the nine months ended September 30, 2021, primarily relates to cash paid for a business combination. During the nine months ended September 30, 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 September 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 1.7M 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.
46 |
Table of contents |
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, dividend payments, and proceeds from the issuance of common stock in connection with an offering. The following table reflects our net cash provided by/(used in) financing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| Dollar Change |
|
| Percent Change |
| ||||
Net cash provided by/(used in) financing activities |
| $ | (36 | ) |
| $ | 1,081 |
|
| $ | (1,117 | ) |
|
| -103 | % |
Net cash used in financing activities in the nine months ended September 30, 2022, primarily relates to cash proceeds from the exercise of stock options of $576,000, offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of $135,000, dividend payments of $336,000, and repayments of notes payable and finance leases of $141,000.
Net cash provided by financing activities in the nine months ended September 30, 2021, primarily relates to cash proceeds from the exercise of stock options of $1,177,000 offset by the payments of employee tax withholdings related to the net settlement of stock options of $155,000.
Contractual Obligations and Commitments
Except as set forth in Notes 4, 10, and 13 in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no significant changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Off Balance Sheet Arrangements
As of, September 30, 2022, 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
None
Impact of Recent Accounting Pronouncements
The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Recent Accounting Pronouncements” is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report, have concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
47 |
Table of contents |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending or threatened that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
Item 1A. Risk Factors
There are many risk factors that may affect our business and the results of our operations, many of which are beyond our control. Information on certain risks that we believe are material to our business is set forth in “Part I – Item 1A. Risk Factors” of the 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. |
| Exhibit Description |
| Incorporated By Reference | Filed | |||||
|
|
|
| Form |
| Date |
| Number |
| Herewith |
|
|
|
|
|
|
|
|
| ||
| Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended |
|
|
|
|
|
|
| X | |
| Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended |
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
| X | ||
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
———————
* |
| In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. |
48 |
Table of contents |
SIGNATURES
Pursuant to the requirements 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. |
| ||
| |||
November 10, 2022 | By: | /s/ Steven G. Mihaylo |
|
Steven G. Mihaylo Chief Executive Officer |
|
November 10, 2022 | By: | /s/ Ronald Vincent |
|
|
| Ronald Vincent Chief Financial Officer |
|
49 |