PART I [Business](index=3&type=section&id=ITEM%201.%20BUSINESS) Crexendo, Inc. provides Unified Communications as a Service (UCaaS) and Call Center as a Service (CCaaS) solutions through its Cloud Telecommunications Services and Software Solutions segments, achieving $28.1 million in total revenue in 2021, largely driven by the NetSapiens acquisition - Crexendo provides UCaaS, CCaaS, and other collaboration services through two main offerings: Cloud Telecommunications Services and Software Solutions[18](index=18&type=chunk) - The company's solutions support over **two million** end-users globally and have been recognized as the fastest-growing UCaaS platform in the United States[18](index=18&type=chunk)[26](index=26&type=chunk) - Research and development expenses increased to **$1,396,000** in 2021 from **$1,189,000** in 2020, focusing on enhancements to cloud products and software solutions[38](index=38&type=chunk) - As of December 31, 2021, the company had **121** full-time employees[48](index=48&type=chunk) Segment Financial Performance (2021 vs. 2020) | Metric | Segment | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | **Revenue** | Cloud telecommunications services | $19,426 | $16,387 | | | Software solutions | $8,666 | $0 | | | **Consolidated Total** | **$28,092** | **$16,387** | | **Income/(Loss) Before Tax** | Cloud telecommunications services | $(2,713) | $1,899 | | | Software solutions | $(197) | $0 | | | **Consolidated Total** | **$(2,910)** | **$1,899** | [Risk Factors](index=9&type=section&id=ITEM%201A.RISK%20FACTORS.) The company faces significant risks from the COVID-19 pandemic, intense competition, acquisition integration challenges, reliance on third-party infrastructure, financial volatility, regulatory changes, and substantial CEO ownership - The COVID-19 pandemic poses risks of decreased demand, supply chain disruptions, and a prolonged economic recession[57](index=57&type=chunk)[58](index=58&type=chunk) - The company faces risks related to its acquisition strategy, particularly the integration of NetSapiens, which could lead to loss of key employees, disruption of business, and failure to realize anticipated synergies[202](index=202&type=chunk)[203](index=203&type=chunk)[209](index=209&type=chunk) - The ability to utilize approximately **$27.0 million** in Net Operating Loss (NOL) carry-forwards may be limited by ownership changes under Section 382 of the Internal Revenue Code[85](index=85&type=chunk) - The telecommunications industry is highly competitive, with rivals including traditional hardware providers (Cisco, Avaya), other cloud companies (8x8, RingCentral), and large internet companies (Microsoft, Amazon)[39](index=39&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) - The company is subject to extensive regulation by the FCC and state authorities, and changes in laws, such as net neutrality rules, could adversely impact the business[54](index=54&type=chunk)[144](index=144&type=chunk)[162](index=162&type=chunk) - The CEO, Steven G. Mihaylo, owns approximately **47%** of the outstanding common stock, giving him substantial control over corporate matters, including the election of directors and major transactions[198](index=198&type=chunk) [Properties](index=26&type=section&id=ITEM%202.%20PROPERTIES) Crexendo's principal corporate office is a 22,000 square foot space in Tempe, Arizona, supplemented by additional offices in La Jolla, California, and Reston, Virginia - The principal corporate office is located at 1615 South 52nd Street, Tempe, Arizona 85281[221](index=221&type=chunk) - The company also has offices in La Jolla, California and Reston, Virginia[221](index=221&type=chunk) [Legal Proceedings](index=26&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company periodically receives government inquiries, primarily concerning discontinued seminar operations, which have generally been resolved without formal complaints, though future resolutions are not guaranteed to be without material adverse effect - The company receives inquiries from federal, state, and local government officials, mainly concerning its discontinued seminar operations regarding sales practices and customer service[222](index=222&type=chunk) - While most inquiries have been resolved without formal charges, the company cannot guarantee that the ultimate resolution of these matters will not have a material adverse effect on its business or operations[223](index=223&type=chunk) [Mine Safety Disclosures](index=27&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This disclosure item is not applicable to the company - The disclosure required by this item is not applicable[224](index=224&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=27&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Crexendo's common stock trades on Nasdaq under 'CXDO', with 197 shareholders of record as of December 31, 2021, and a quarterly cash dividend of $0.005 per share declared post-year-end - The company's common stock is listed on The Nasdaq Stock Market under the ticker symbol 'CXDO'[225](index=225&type=chunk) - As of December 31, 2021, there were **197** shareholders of record[227](index=227&type=chunk) - Subsequent to year-end 2021, the company declared a quarterly cash dividend of **$0.005** per common share, payable on February 28, 2022[228](index=228&type=chunk) Quarterly Stock Price Range (2021-2020) | Period | 2021 High | 2021 Low | 2020 High | 2020 Low | | :--- | :--- | :--- | :--- | :--- | | Q1 | $8.38 | $5.51 | $4.75 | $3.00 | | Q2 | $6.93 | $4.90 | $6.30 | $4.00 | | Q3 | $7.20 | $5.35 | $12.78 | $5.25 | | Q4 | $6.20 | $4.39 | $8.00 | $5.27 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2021, Crexendo's total revenue increased by 71% to $28.1 million, primarily due to the NetSapiens acquisition, yet the company reported a pre-tax loss of $2.9 million driven by a $15.5 million increase in operating expenses and a significant decrease in cash and cash equivalents [Results of Consolidated Operations](index=29&type=section&id=Results%20of%20Consolidated%20Operations) For fiscal year 2021, consolidated revenue grew 71% to $28.1 million, driven by the new Software Solutions segment and increased Cloud Telecommunications service revenue, but a $2.9 million pre-tax loss resulted from a $15.5 million surge in operating expenses - The **71%** increase in total revenue was mainly driven by an **$8,666,000** contribution from the new software solutions segment following the NetSapiens acquisition[249](index=249&type=chunk) - The decrease in income before tax was primarily due to a **$15,506,000** increase in operating expenses, which included **$1,037,000** in one-time acquisition-related expenses[250](index=250&type=chunk) Consolidated Financial Highlights (2021 vs. 2020) | Metric (in thousands, except EPS) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $28,092 | $16,387 | | Income/(Loss) Before Income Taxes | $(2,910) | $1,899 | | Net Income/(Loss) | $(2,445) | $7,940 | | Diluted EPS | $(0.12) | $0.46 | [Use of Non-GAAP Financial Measures](index=30&type=section&id=Use%20of%20Non-GAAP%20Financial%20Measures) The company uses Non-GAAP financial measures, including Non-GAAP net income and Adjusted EBITDA, to provide a clearer view of operating performance by excluding items like share-based compensation and acquisition-related expenses, reporting $1.7 million in Non-GAAP net income and $1.6 million in Adjusted EBITDA for 2021 Reconciliation of GAAP Net Income to Non-GAAP Net Income (FY 2021 vs. 2020) | Metric (in thousands) | Year Ended 2021 | Year Ended 2020 | | :--- | :--- | :--- | | U.S. GAAP net income/(loss) | $(2,445) | $7,940 | | Share-based compensation | $1,628 | $623 | | Acquisition related expenses | $1,037 | $0 | | Amortization of intangible assets | $1,391 | $92 | | **Non-GAAP net income** | **$1,737** | **$8,655** | Reconciliation of GAAP Net Income to Adjusted EBITDA (FY 2021 vs. 2020) | Metric (in thousands) | Year Ended 2021 | Year Ended 2020 | | :--- | :--- | :--- | | U.S. GAAP net income/(loss) | $(2,445) | $7,940 | | Depreciation and amortization | $1,626 | $258 | | Income tax provision/(benefit) | $(465) | $(6,041) | | **EBITDA** | **$(1,184)** | **$1,249** | | Acquisition related expenses | $1,037 | $0 | | Share-based compensation | $1,628 | $623 | | **Adjusted EBITDA** | **$1,607** | **$1,872** | [Segment Operating Results](index=33&type=section&id=Segment%20Operating%20Results) The company's two segments, Cloud Telecommunications Services and Software Solutions, reported varied performance in 2021, with the former seeing revenue growth but an operating loss, and the latter, established mid-year, generating $8.7 million in revenue with a minimal operating loss [Cloud Telecommunications Services Segment](index=34&type=section&id=Cloud%20Telecommunications%20Services%20Segment) The Cloud Telecommunications segment's total revenue increased to $19.4 million in 2021, driven by growth in service and product revenue, but reported an operating loss of $2.6 million due to significantly increased costs, while its backlog grew 6% to $30.2 million - Service revenue increased by **18%** (**$2,558,000**) and product revenue increased by **26%** (**$481,000**) year-over-year[281](index=281&type=chunk)[283](index=283&type=chunk) - Backlog for the segment increased by **6%** to **$30,189,000** as of December 31, 2021[284](index=284&type=chunk) Cloud Telecommunications Segment Performance (2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $19,426 | $16,387 | | Total Operating Expenses | $22,069 | $15,396 | | Operating Income/(Loss) | $(2,643) | $991 | [Software Solutions Segment](index=37&type=section&id=Software%20Solutions%20Segment) The Software Solutions segment, formed after the June 1, 2021 NetSapiens acquisition, generated $8.7 million in revenue from software licenses, maintenance, and professional services for its seven months of operation, incurring an operating loss of $167,000 and ending the year with an $11.5 million revenue backlog - The segment's revenue of **$8,666,000** is included in results from the acquisition date of June 1, 2021[296](index=296&type=chunk) - The segment's revenue backlog was **$11,528,000** as of December 31, 2021[298](index=298&type=chunk) Software Solutions Segment Performance (2021) | Metric (in thousands) | 2021 (from June 1) | | :--- | :--- | | Total Revenue | $8,666 | | Total Operating Expenses | $8,833 | | Operating Loss | $(167) | [Liquidity and Capital Resources](index=39&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company's cash and cash equivalents significantly decreased from $17.6 million to $7.5 million in 2021, primarily due to $12.16 million in cash used for the NetSapiens and Centric Telecom acquisitions, though management believes current liquidity is sufficient for the next 12 months - Cash and cash equivalents decreased to **$7,468,000** at Dec 31, 2021 from **$17,579,000** at Dec 31, 2020[303](index=303&type=chunk) - The company used **$10 million** in cash for the NetSapiens merger and **$2.16 million** in cash for the Centric Telecom acquisition during 2021[305](index=305&type=chunk)[306](index=306&type=chunk) Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $(1,006) | $647 | | Net cash used in investing activities | $(9,867) | $(921) | | Net cash provided by financing activities | $650 | $13,673 | [Quantitative and Qualitative Disclosures About Market Risks](index=40&type=section&id=ITEM%207A.QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) The company reports minimal market risk exposure, with foreign currency risk deemed immaterial due to predominantly U.S. dollar-denominated transactions, and no material effect from inflation on its financial results - Foreign currency risk is not considered material as the company's sales and expenses are primarily in U.S. dollars[316](index=316&type=chunk) - The company does not believe inflation has had a material effect on its business, financial condition, or results of operations[319](index=319&type=chunk) [Financial Statements and Supplementary Data](index=41&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the company's audited consolidated financial statements for 2021 and 2020, including balance sheets, statements of operations, and cash flows, with the auditor's report highlighting critical audit matters related to revenue recognition, deferred tax assets, and intangible asset valuation from business combinations - The Report of Independent Registered Public Accounting Firm identified three Critical Audit Matters: Revenue Recognition, Income Taxes (Valuation Allowances on Deferred Tax Assets), and Business Combinations (Valuation of Intangible Assets)[326](index=326&type=chunk)[331](index=331&type=chunk)[334](index=334&type=chunk) - The company acquired NetSapiens, Inc. on June 1, 2021, for a total consideration of approximately **$49.1 million**, consisting of **$10 million** in cash and **$39.1 million** in stock and options[434](index=434&type=chunk) - The company acquired Centric Telecom, Inc. on January 14, 2021, for an aggregate purchase price of **$3.255 million**, including cash, stock, and contingent consideration[452](index=452&type=chunk) Consolidated Balance Sheet Highlights (As of Dec 31) | Account (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $7,468 | $17,579 | | Goodwill | $36,972 | $272 | | Intangible assets, net | $22,161 | $252 | | **Total Assets** | **$77,152** | **$30,705** | | Total liabilities | $11,219 | $4,941 | | Total stockholders' equity | $65,933 | $25,764 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenue | $28,092 | $16,387 | | Total operating expenses | $30,902 | $15,396 | | Income/(loss) from operations | $(2,810) | $991 | | **Net income/(loss)** | **$(2,445)** | **$7,940** | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=73&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) No changes in or disagreements with accountants on accounting and financial disclosure were reported for the period - None[530](index=530&type=chunk) [Controls and Procedures](index=73&type=section&id=ITEM%209A.CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the fourth quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[531](index=531&type=chunk) - Management's report on internal control over financial reporting concluded that it was effective as of December 31, 2021, based on the COSO 2013 framework[533](index=533&type=chunk) - No changes in internal control over financial reporting occurred during the year that materially affected, or are reasonably likely to materially affect, internal controls[532](index=532&type=chunk) [Other Information](index=73&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) No other information is reported for this period - None[535](index=535&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=73&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Annual Meeting of Stockholders proxy statement, and the company maintains a code of ethics on its website - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[536](index=536&type=chunk) [Executive Compensation](index=73&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information concerning executive compensation is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information regarding executive compensation is incorporated by reference from the 2022 Proxy Statement[538](index=538&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters](index=74&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDERS%20MATTERS) Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information regarding security ownership is incorporated by reference from the 2022 Proxy Statement[539](index=539&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=74&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information concerning related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[540](index=540&type=chunk) [Principal Accountant Fees and Services](index=74&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information regarding principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[541](index=541&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=74&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section details the documents filed as part of the Annual Report, including consolidated financial statements, a financial statement schedule, and an index of exhibits such as the NetSapiens merger agreement and corporate governance documents - This section contains the list of financial statements, the financial statement schedule, and the exhibit index for documents filed with the report[543](index=543&type=chunk) - Key exhibits listed include the Agreement and Plan of Merger with NetSapiens, Inc., Articles of Incorporation, Bylaws, and certifications by the CEO and CFO[545](index=545&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 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 001-32277 Crexendo, Inc. (Exact name of registrant as specified in its charter) | --- | --- | |------------- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 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 001-32277 Crexendo, Inc. (Exact name of registrant as specified in its charter) | --- | --- | |------------------ ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ——————— ——————— ——————— FORM 10-Q ——————— (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 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 001-32277 Crexendo, Inc. (Exact name of registrant as specified in its charter) ...

Financial Data and Key Metrics Changes - Consolidated revenue for Q4 2020 was $4.3 million, a 16% increase from $3.7 million in Q4 2019 [20] - Net income for Q4 2020 was $7.2 million, or $0.40 per basic share, compared to $228,000, or $0.02 per basic share, in Q4 2019 [22] - Non-GAAP net income for Q4 2020 was $7.4 million, or $0.42 per basic share, compared to $347,000, or $0.02 per basic share, in the same period of the prior year [23] - Consolidated revenue for the year 2020 was $16.4 million, a 14% increase from $14.4 million in 2019 [24] - Net income for the year 2020 was $7.9 million, or $0.50 per basic share, compared to $1.1 million, or $0.08 per basic share, in 2019 [27] Business Line Data and Key Metrics Changes - UCaaS service revenue for 2020 increased 16% compared to 2019 [19] - Cloud Telecommunications Segment service revenue for Q4 2020 increased 16% to $3.7 million, while Web Services Segment service revenue decreased 21% to $121,000 [21] - Product revenue for Q4 2020 increased 32% to $526,000 compared to $397,000 in Q4 2019 [21] - Cloud Telecommunications Segment generated revenue of $15.8 million for the year, a 15% increase from $13.8 million in 2019 [24] Market Data and Key Metrics Changes - The Telecommunications segment backlog increased 9% to $28.6 million at December 31, 2020, compared to $26.1 million at the end of 2019 [26] - Approximately 60% of businesses have not yet migrated to the cloud for their communication needs, indicating significant market opportunity [34] Company Strategy and Development Direction - The company announced a merger agreement with NetSapiens, which is expected to be accretive and provide multiple synergies [9][11] - The acquisition aims to enhance Crexendo's offerings and expand its market presence, particularly in the cloud communications sector [35][38] - The company plans to rationalize data centers and accounting to reduce costs post-acquisition [45] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to continue profitable growth despite pandemic-related challenges [30] - The merger with NetSapiens is seen as a strategic move to accelerate growth and enhance product offerings [36][38] - Management highlighted the importance of cloud communications and the ongoing demand for flexible solutions in the current market [34] Other Important Information - The company completed an equity offering in September 2020, which contributed to a cash position of $17.7 million at the end of 2020, up from $4.3 million at the end of 2019 [28][33] - The company has been consistently profitable, achieving both GAAP and non-GAAP profitability [16] Q&A Session Summary Question: Can you comment on the growth, profitability trajectory, and margin profile of NetSapiens? - Management indicated that detailed information will be available in the upcoming proxy statement, as they cannot disclose specifics until the merger is approved [41][42] Question: Can you discuss the integration timeline and potential cost synergies? - Management mentioned plans to rationalize data centers and accounting, which should lead to cost reductions [45] Question: What is the pricing model and economics for Crexendo given that NetSapiens does not charge per seat? - Management explained that NetSapiens operates on a different model, selling platform applications to resellers, which presents significant growth opportunities [49][52] Question: What type of customers make up the 1.7 million users on the NetSapiens platform? - The user base consists of small to mid-sized enterprises, similar to Crexendo's customer demographics [53] Question: Can you explain the income tax benefit provision of $6 million? - Management clarified that the tax benefit resulted from a reassessment of deferred tax assets due to profitability [66][67] Question: Will there be challenges in converting customers to the new platform? - Management assured that the transition would be seamless for customers, as both platforms will run concurrently [70]

Part I [Business](index=4&type=section&id=ITEM%201.%20BUSINESS) Crexendo, Inc. provides cloud communications (UCaaS) and web services, primarily through its recurring revenue Cloud Telecommunications segment - The company operates through two segments: **Cloud Telecommunications**, the primary segment offering UCaaS, call center, and collaboration services, and Web Services[14](index=14&type=chunk) - Cloud telecommunications contracts typically span **36 to 60 months**, generating recurring service revenue, alongside product revenue from equipment sales and leases[16](index=16&type=chunk) Segment Revenue and Income | | Year Ended December 31, 2020 (in thousands) | Year Ended December 31, 2019 (in thousands) | | :--- | :--- | :--- | | **Revenue** | | | | Cloud telecommunications | $15,845 | $13,780 | | Web services | $542 | $656 | | **Consolidated revenue** | **$16,387** | **$14,436** | | **Income before income tax** | | | | Cloud telecommunications | $1,788 | $862 | | Web services | $111 | $283 | | **Consolidated income before tax** | **$1,899** | **$1,145** | - Research and development investment increased to **$1.189 million in 2020** from **$853,000 in 2019**, primarily for cloud telecommunications product enhancements[38](index=38&type=chunk) - As of December 31, 2020, the company employed **58 full-time individuals**[47](index=47&type=chunk) [Risk Factors](index=12&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces significant risks from the COVID-19 pandemic, intense competition, technological disruptions, regulatory changes, and substantial CEO ownership - The **COVID-19 pandemic** poses significant risks, including decreased demand, supply chain disruptions, and negative impacts on productivity and financial results[56](index=56&type=chunk)[57](index=57&type=chunk) - The company faces intense competition from traditional telecom providers, hardware providers, and other cloud companies[39](index=39&type=chunk)[76](index=76&type=chunk) - The utilization of approximately **$20.5 million in net operating loss (NOL) carry-forwards** may be limited by an ownership change under Section 382 of the Internal Revenue Code[74](index=74&type=chunk) - The business is subject to extensive government regulation by the FCC and state public utility commissions, including obligations for E-911 services and Universal Service Fund contributions[52](index=52&type=chunk)[127](index=127&type=chunk) - The CEO, Steven G. Mihaylo, holds approximately **56% of outstanding common stock**, granting substantial control over corporate matters[181](index=181&type=chunk) [Properties](index=29&type=section&id=ITEM%202.%20PROPERTIES) The company's principal property is its 22,000 square foot corporate office in Tempe, Arizona, acquired from its CEO in January 2020 - The company's principal property is its corporate office, an approximately **22,000 square foot building** in Tempe, Arizona[185](index=185&type=chunk) - In January 2020, the company purchased its corporate office building from a company owned by its CEO[185](index=185&type=chunk) [Legal Proceedings](index=29&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company periodically receives government inquiries, primarily related to discontinued seminar operations, generally resolved without formal charges - The company receives inquiries from government officials regarding discontinued seminar operations' sales and marketing practices, generally resolved without formal complaints[186](index=186&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section is not applicable to the company's operations - Disclosure required by this item is not applicable[187](index=187&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The company's common stock, ticker CXDO, uplisted to Nasdaq on July 8, 2020, with no dividends declared in 2019 or 2020 - On July 8, 2020, the company's stock uplisted from the OTCQX Marketplace to **The Nasdaq Stock Market** under ticker symbol **CXDO**[189](index=189&type=chunk) Quarterly Stock Price Range | Period | 2020 High | 2020 Low | 2019 High | 2019 Low | | :--- | :--- | :--- | :--- | :--- | | Q1 | $4.75 | $3.00 | $3.00 | $1.76 | | Q2 | $6.30 | $4.00 | $4.00 | $2.60 | | Q3 | $12.78 | $5.25 | $3.54 | $3.00 | | Q4 | $8.00 | $5.27 | $4.70 | $3.05 | - No dividends were declared for the years ended December 31, 2020 and 2019[192](index=192&type=chunk) [Selected Financial Data](index=30&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section is not required for the company as a smaller reporting entity - This section is not required[193](index=193&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Total revenue grew 13.5% to $16.4 million in 2020, driving a 66% increase in pre-tax income and a substantial improvement in liquidity to $17.6 million cash [Results of Consolidated Operations](index=31&type=section&id=Results%20of%20Consolidated%20Operations) Total revenue increased 13.5% to $16.39 million in 2020, leading to a 66% rise in pre-tax income and a net income of $7.94 million due to a significant tax benefit Consolidated Operations Summary | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Total revenue | $16,387 | $14,436 | | Income before income taxes | $1,899 | $1,145 | | Income tax benefit/(provision) | $6,041 | $(6) | | Net income | $7,940 | $1,139 | | Diluted earnings per common share | $0.46 | $0.07 | - The increase in income before tax was primarily due to a **$1.95 million increase in revenue** and a **$1.01 million gain from PPP debt extinguishment**, partially offset by a **$2.10 million increase in operating expenses**[208](index=208&type=chunk) - The company recorded a significant income tax benefit of **$6.04 million in 2020**, primarily due to a **$7.49 million valuation allowance release**[209](index=209&type=chunk) [Use of Non-GAAP Financial Measures](index=33&type=section&id=Use%20of%20Non-GAAP%20Financial%20Measures) The company utilizes Non-GAAP net income and Adjusted EBITDA as supplemental performance measures, showing **Non-GAAP net income of $8.66 million** and **Adjusted EBITDA of $1.87 million** in 2020 Reconciliation of U.S. GAAP Net Income to Non-GAAP Net Income | | Year Ended Dec 31, 2020 (in thousands) | Year Ended Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | U.S. GAAP net income | $7,940 | $1,139 | | Share-based compensation | $623 | $399 | | Amortization of intangible assets | $92 | $53 | | **Non-GAAP net income** | **$8,655** | **$1,591** | Reconciliation of U.S. GAAP Net Income to Adjusted EBITDA | | Year Ended Dec 31, 2020 (in thousands) | Year Ended Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | U.S. GAAP net income | $7,940 | $1,139 | | Adjustments (Depreciation, Interest, Taxes) | $(5,807) | $12 | | **EBITDA** | **$1,249** | **$1,229** | | Share-based compensation | $623 | $399 | | **Adjusted EBITDA** | **$1,872** | **$1,628** | [Segment Operating Results](index=36&type=section&id=Segment%20Operating%20Results) Cloud Telecommunications revenue grew 15% to $15.8 million, with backlog increasing 9% to $28.6 million, while Web Services revenue declined 17% to $542,000 - Cloud Telecommunications service revenue increased **16% to $14.0 million in 2020**, driven by growth in contracted service revenue and usage charges[236](index=236&type=chunk) - The Cloud Telecommunications services backlog increased by **9% to $28.6 million** at the end of 2020 from **$26.1 million** in 2019[238](index=238&type=chunk) - Web Services revenue decreased **17% to $542,000 in 2020**, primarily due to a **$109,000 decrease in hosting revenue** as the company is not actively marketing these services[248](index=248&type=chunk)[95](index=95&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) The company's financial position strengthened in 2020, with cash increasing to **$17.6 million** and working capital to **$17.2 million**, primarily due to a **$10.8 million public stock offering** Cash and Stockholders' Equity | Metric | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $17,579 | $4,180 | | Working Capital | $17,218 | $2,845 | | Total stockholders' equity | $25,764 | $4,387 | - Cash provided by financing activities totaled **$13.7 million**, primarily from a **$10.8 million public offering**, **$2.0 million from option exercises**, and a **$1.0 million PPP loan** (later forgiven)[257](index=257&type=chunk) - In January 2020, the company purchased its corporate office building from a CEO-owned company for **$2.5 million**, partially financed by a **$2.0 million note payable**[271](index=271&type=chunk)[263](index=263&type=chunk) [Quantitative and Qualitative Disclosures About Market Risks](index=45&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) This section is not required for the company as a smaller reporting entity - This section is not required[273](index=273&type=chunk) [Financial Statements and Supplementary Data](index=46&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) Audited financial statements for 2020 and 2019 are presented, highlighting critical audit matters, key financial results, and subsequent acquisitions of Centric Telecom and NetSapiens Key Financial Statement Data | Metric | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | **Balance Sheet** | | | | Total Assets | $30,705 | $7,783 | | Total Liabilities | $4,941 | $3,396 | | Total Stockholders' Equity | $25,764 | $4,387 | | **Statement of Operations** | | | | Total Revenue | $16,387 | $14,436 | | Income from Operations | $991 | $1,135 | | Net Income | $7,940 | $1,139 | - The independent auditor identified **Revenue Recognition** and **Valuation Allowances on Deferred Tax Assets** as critical audit matters, due to significant judgment in performance obligations and future income estimation[282](index=282&type=chunk)[283](index=283&type=chunk)[288](index=288&type=chunk) - The company released **$7.487 million of its valuation allowance on deferred tax assets in 2020**, based on achieving three years of cumulative pretax income and projections of future profitability[407](index=407&type=chunk)[408](index=408&type=chunk) - Subsequent Event: On January 14, 2021, the company acquired Centric Telecom, Inc. for approximately **$2.2 million in cash** and **46,662 shares of common stock**, plus potential contingent consideration[439](index=439&type=chunk) - Subsequent Event: On March 5, 2021, the company entered into a merger agreement with NetSapiens, Inc. for approximately **$50 million** total consideration, comprising **$10 million in cash** and **$40 million in stock and stock options**[441](index=441&type=chunk) [Controls and Procedures](index=79&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes reported - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective at a reasonable assurance level[444](index=444&type=chunk) - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[447](index=447&type=chunk) - No material changes in internal control over financial reporting occurred during the year ended December 31, 2020[445](index=445&type=chunk) [Other Information](index=80&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) No information is reported under this item - None[449](index=449&type=chunk) Part III Part III incorporates information from the 2021 Proxy Statement regarding directors, executive officers, compensation, security ownership, related transactions, and accountant fees [Directors, Executive Officers and Corporate Governance](index=81&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[451](index=451&type=chunk) [Executive Compensation](index=81&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[453](index=453&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters](index=81&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDERS%20MATTERS) Information regarding security ownership of beneficial owners and management is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[454](index=454&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=81&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information regarding related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[455](index=455&type=chunk) [Principal Accountant Fees and Services](index=81&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[456](index=456&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=82&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists documents filed as part of the annual report, including financial statements, schedules, and an index of exhibits like the NetSapiens merger agreement - This section includes the financial statements from Item 8, the financial statement schedule, and an index of all exhibits filed with the report[459](index=459&type=chunk) - A key exhibit filed is the Agreement and Plan of Merger and Reorganization with NetSapiens, Inc., dated March 5, 2021[461](index=461&type=chunk)

Financial Data and Key Metrics Changes - Consolidated revenue for Q3 2020 increased 15% to $4.1 million compared to $3.6 million in Q3 2019 [13] - Service revenue for Q3 2020 increased 12% to $3.7 million compared to $3.3 million in Q3 2019 [13] - Net income for Q3 2020 was $131,000 or $0.01 per share, down from $334,000 or $0.02 per share in Q3 2019 [15] - Gross margin for Q3 2020 decreased to 70% from 72% in Q3 2019 [15] - Consolidated operating expenses for Q3 2020 increased 22% to $4 million compared to $3.3 million in Q3 2019 [15] Business Line Data and Key Metrics Changes - Cloud Telecommunications segment service revenue for Q3 2020 increased 14% to $3.5 million compared to $3.1 million in Q3 2019 [14] - Web Service segment service revenue for Q3 2020 decreased 19% to $130,000 compared to $160,000 in Q3 2019 [14] - Product revenue for Q3 2020 increased 43% to $489,000 compared to $343,000 in Q3 2019 [14] Market Data and Key Metrics Changes - For the nine-month period, consolidated revenue increased 13% to $12.1 million compared to $10.7 million for the same period in 2019 [16] - Service revenue for the nine-month period increased 14% to $10.7 million compared to $9.4 million in the same period of 2019 [16] - Telecom backlog grew by $1 million to $28.3 million, indicating strong demand for cloud migration [24][45] Company Strategy and Development Direction - The company is focused on growth, both organic and through acquisitions, with a strong emphasis on increasing sales and marketing investments [12][26] - The successful uplisting to NASDAQ and capital raise have positioned the company to pursue accretive acquisitions [11][26] - The company aims to maintain profitability while expanding its footprint in the UCaaS industry [27] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing the ongoing digital transformation accelerated by the COVID-19 pandemic [22][26] - The company has seen a decrease in customer churn, returning to pre-COVID levels, which is a positive sign for future growth [34] - Management believes that businesses are now better prepared for potential future COVID waves, which may sustain sales momentum [41] Other Important Information - The company raised $11.7 million in cash through financing activities, enhancing its cash position to $15.5 million [19] - The company received the 2020 Internet Telephony Excellence Award, recognizing its remote work capabilities [25] Q&A Session Summary Question: How many companies did you end the quarter with and hiring plans for the next 12 months? - Management indicated that hiring is critical, with plans to add channel managers and salespeople to support growth [29] Question: Actions on the bar business and timeline for revenue growth? - Management noted that 70% of businesses have yet to migrate to the cloud, indicating significant growth potential [31] Question: Current churn levels and customer performance? - Churn rates have returned to pre-COVID levels, which is promising for future stability [34] Question: Current M&A environment and potential opportunities? - Management reported increased M&A discussions and opportunities, with hopes for announcements within six months [36] Question: Trends in gross margins and revenue linearity through the quarter? - Management noted that promotional offers impacted product gross margins but expect a return to normal levels soon [39] Question: Marketing initiatives to offset pandemic headwinds? - The company launched a new website and initiated paid search and social media campaigns to drive lead generation [42]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ——————— ——————— ——————— Emerging growth company ☐ FORM 10-Q ——————— (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 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 001-32277 Crexendo, Inc. (Exact name of registrant ...

Crexendo Inc (NASDAQ:CXDO) Q2 2020 Results Conference Call August 10, 2020 4:30 PM ET Company Participants Steve Mihaylo - Chairman and Chief Executive Officer Doug Gaylor - President and Chief Operating Officer Ron Vincent - Chief Financial Officer Jeffrey Korn - Chief Legal Officer Conference Call Participants Andrew King - Dougherty & Company Joshua Nichols - B. Riley FBR, inc Kevin Dede - H.C. Wainwright & Co Arham Khan - Eden Capital Investment Group Edward Gilmore - Little Grapevine Michael Kaufman - ...

Revenue Performance - Cloud Telecommunications service revenue increased 16% or $487,000 to $3,469,000 for the three months ended June 30, 2020 compared to $2,982,000 for the same period in 2019[137]. - Total revenue for the three months ended June 30, 2020 was $4,054,000, an increase of 12% or $440,000 from $3,614,000 for the same period in 2019[147]. - Net income for the three months ended June 30, 2020 was $508,000, up 50% from $338,000 for the same period in 2019[147]. - For the six months ended June 30, 2020, service revenue increased 15% or $938,000 to $7,093,000 compared to $6,155,000 for the same period in 2019[152]. - Non-GAAP net income for Q2 2020 was $660,000, a 47% increase from $447,000 in Q2 2019[163]. - Total revenue for the Cloud Telecommunications segment was $3,918,000 in Q2 2020, up from $3,449,000 in Q2 2019, representing a 14% increase[168]. - Service revenue for Cloud Telecommunications increased 17% or $989,000, to $6,801,000 for the six months ended June 30, 2020 compared to $5,812,000 for the same period in 2019[179]. Product Revenue - Cloud Telecommunications product revenue decreased 4% or $18,000 to $449,000 for the three months ended June 30, 2020 compared to $467,000 for the same period in 2019[137]. - Product revenue for the six months ended June 30, 2020 decreased 13% or $123,000 to $828,000 compared to $951,000 for the same period in 2019[154]. - Product revenue decreased by 4% or $18,000 to $449,000 for Q2 2020, influenced by the timing of installations[170]. Backlog and Future Prospects - As of June 30, 2020, the backlog was $27,349,000, an increase from $24,772,000 as of June 30, 2019[137]. - Backlog increased by 10% or $2,577,000 to $27,349,000 as of June 30, 2020, compared to $24,772,000 as of June 30, 2019[172]. - Backlog increased 10% or $2,577,000 to $27,349,000 as of June 30, 2020 compared to $24,772,000 as of June 30, 2019[181]. Expenses - Research and development expenses rose by 26% or $49,000 to $236,000 for Q2 2020, driven by increased costs for customer interface maintenance and mobile application development[174]. - Selling and marketing expenses increased by 10% or $99,000 to $1,062,000 for Q2 2020, primarily due to higher salaries and commissions[175]. - General and administrative expenses increased 11% or $209,000, to $2,105,000 for the six months ended June 30, 2020 compared to $1,896,000 for the same period in 2019[187]. - Research and development expenses increased 27% or $105,000, to $498,000 for the six months ended June 30, 2020 compared to $393,000 for the same period in 2019[185]. - Selling and marketing expenses increased 13% or $238,000, to $2,100,000 for the six months ended June 30, 2020 compared to $1,862,000 for the same period in 2019[186]. Cost of Service Revenue - Cost of service revenue increased by 3% or $22,000 to $883,000 for Q2 2020, attributed to higher salaries and bandwidth costs[172]. - Cost of service revenue increased 7% or $124,000, to $1,828,000 for the six months ended June 30, 2020 compared to $1,704,000 for the same period in 2019[183]. - Cost of service revenue for Web Services increased 92% or $12,000, to $25,000 for the three months ended June 30, 2020 compared to $13,000 for the same period in 2019[192]. - Cost of service revenue increased by 6% or $3,000, to $50,000 for the six months ended June 30, 2020, primarily due to increased customer service salaries and benefits[199]. Financial Position - Working capital increased by 29% or $813,000, to $3,658,000 as of June 30, 2020, compared to $2,845,000 at December 31, 2019[205]. - Cash, cash equivalents, and restricted cash increased by 19% or $809,000, to $5,089,000 at June 30, 2020, compared to $4,280,000 at December 31, 2019[206]. - Total stockholders' equity increased by 32% or $1,387,000, to $5,774,000 as of June 30, 2020, compared to $4,387,000 at December 31, 2019[218]. - Notes payable increased to $2,979,000 at June 30, 2020, compared to $0 at December 31, 2019, due to financing for the corporate office building purchase and a Paycheck Protection Program loan[213]. - Inventories increased by 17% or $66,000, to $448,000 at June 30, 2020, compared to $382,000 at December 31, 2019[207]. - Prepaid expenses increased by 128% or $181,000, to $322,000 at June 30, 2020, compared to $141,000 at December 31, 2019[208]. Other Income and Expenses - Income before income taxes increased 49% or $169,000 to $511,000 for the three months ended June 30, 2020 compared to $342,000 for the same period in 2019[150]. - Net other expense increased 575% or $23,000, to $27,000 for the six months ended June 30, 2020 compared to $4,000 for the same period in 2019[189]. - Net other income decreased by 543% or $38,000, to $(31,000) for the six months ended June 30, 2020, due to increased foreign exchange losses[202]. Web Services Performance - Web Services revenue decreased 18% or $29,000 to $136,000 for the three months ended June 30, 2020 compared to $165,000 for the same period in 2019[138]. - Service revenue decreased by 15% or $51,000, to $292,000 for the six months ended June 30, 2020, compared to $343,000 for the same period in 2019[198].