Crexendo(CXDO) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Crexendo, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements. This section presents Crexendo, Inc.'s unaudited condensed consolidated financial statements and comprehensive notes Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and stockholders' equity Assets (in thousands) | Assets (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $4,821 | $7,468 | | Trade receivables, net | $4,028 | $2,177 | | Total current assets | $11,595 | $11,560 | | Total Assets | $76,343 | $77,152 | Liabilities and Stockholders' Equity (in thousands) | Liabilities and Stockholders' Equity (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------------- | :----------- | :----------- |\ | Total current liabilities | $7,923 | $10,572 | | Total liabilities | $10,109 | $11,219 | | Total stockholders' equity | $66,234 | $65,933 | | Total Liabilities and Stockholders' Equity | $76,343 | $77,152 | Condensed Consolidated Statements of Operations This section presents the company's revenues, expenses, and net loss for the reported periods Three Months Ended September 30 (in thousands, except per share) | (in thousands, except per share) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :------------------------------- | :------------------------------ | :------------------------------ | | Service revenue | $4,473 | $4,325 | | Software solutions revenue | $3,875 | $3,784 | | Product revenue | $760 | $701 | | Total revenue | $9,108 | $8,810 | | Income/(loss) from operations | $(544) | $53 | | Net loss | $(696) | $(125) | | Basic EPS | $(0.03) | $(0.01) | | Diluted EPS | $(0.03) | $(0.01) | Nine Months Ended September 30 (in thousands, except per share) | (in thousands, except per share) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------- | :----------------------------- | :----------------------------- | | Service revenue | $13,427 | $12,791 | | Software solutions revenue | $10,741 | $4,796 | | Product revenue | $1,944 | $1,509 | | Total revenue | $26,112 | $19,096 | | Income/(loss) from operations | $(2,789) | $(2,013) | | Net loss | $(2,812) | $(1,843) | | Basic EPS | $(0.13) | $(0.09) | | Diluted EPS | $(0.13) | $(0.09) | Condensed Consolidated Statements of Comprehensive Income This section details the company's net loss and other comprehensive income, including foreign currency translation gains Three Months Ended September 30 (in thousands) | (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :------------- | :------------------------------ | :------------------------------ | | Net loss | $(696) | $(125) | | Foreign currency translation gain | $164 | $9 | | Comprehensive loss | $(532) | $(116) | Nine Months Ended September 30 (in thousands) | (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------- | :----------------------------- | :----------------------------- | | Net loss | $(2,812) | $(1,843) | | Foreign currency translation gain | $246 | $10 | | Comprehensive loss | $(2,566) | $(1,833) | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in equity accounts, including common shares, paid-in capital, and accumulated deficit Stockholders' Equity (in thousands, except share data) - January 1 to September 30, 2022 | (in thousands, except share data) | Balance, Jan 1, 2022 | Balance, Sep 30, 2022 | | :-------------------------------- | :------------------- | :-------------------- | | Common Shares | 22,054,239 | 22,686,911 | | Common Stock Amount | $22 | $23 | | Additional Paid-in Capital | $118,432 | $121,298 | | Accumulated Other Comprehensive Income | $12 | $258 | | Accumulated Deficit | $(52,533) | $(55,345) | | Total Stockholders' Equity | $65,933 | $66,234 | Stockholders' Equity (in thousands, except share data) - January 1 to September 30, 2021 | (in thousands, except share data) | Balance, Jan 1, 2021 | Balance, Sep 30, 2021 | | :-------------------------------- | :------------------- | :-------------------- | | Common Shares | 17,983,177 | 21,667,628 | | Common Stock Amount | $18 | $22 | | Additional Paid-in Capital | $75,834 | $117,593 | | Accumulated Other Comprehensive Income | $0 | $10 | | Accumulated Deficit | $(50,088) | $(51,931) | | Total Stockholders' Equity | $25,764 | $65,694 | Condensed Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities for the nine-month periods Nine Months Ended September 30 (in thousands) | (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------- | :----------------------------- | :----------------------------- | | Net cash used for operating activities | $(2,665) | $(473) | | Net cash used for investing activities | $(192) | $(10,596) | | Net cash provided by/(used for) financing activities | $(36) | $1,081 | | Effect of exchange rate changes on cash | $246 | $10 | | NET DECREASE IN CASH AND CASH EQUIVALENTS | $(2,647) | $(9,978) | | CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD | $4,821 | $7,701 | Notes to Condensed Consolidated Financial Statements (unaudited) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Significant Accounting Policies This section outlines the company's significant accounting policies, from revenue recognition to recent pronouncements - Crexendo, Inc. is a premier provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services, supporting over 2.5 million end users globally[30] - The Company has two operating segments: cloud telecommunications services and software solutions. Approximately 99% of total revenue is generated from North America[30][72] - Foreign currency translation gains were $164,000 for the three months ended September 30, 2022 (vs. $9,000 in 2021) and $246,000 for the nine months ended September 30, 2022 (vs. $10,000 in 2021)[34] - Capitalized contract costs were $1,869,000 as of September 30, 2022, an increase from $1,345,000 as of December 31, 2021. Amortization of these costs was $391,000 for the three months ended September 30, 2022 (vs. $201,000 in 2021) and $939,000 for the nine months ended September 30, 2022 (vs. $444,000 in 2021)[39] - The Company adopted ASU 2021-08 (Business Combinations) in October 2021, ASU 2019-12 (Income Taxes) effective January 1, 2021, and ASU 2020-06 (Convertible Instruments) effective January 1, 2022. None had a material impact on consolidated financial statements[74][75][76] - The Company does not plan to early adopt ASU 2016-13 (Expected Credit Losses), effective for fiscal years beginning after December 15, 2022, and is evaluating its potential impact[77] 2. Revenue This note details revenue recognition policies across segments, disaggregated by product line and timing - Cloud Telecommunications Services revenue is derived from desktop devices, equipment financing, telecommunications services, and various fees. Contracts typically range from 36 to 60 months[81][82][83][84][85][86] - Software Solutions revenue comes from software licenses (perpetual, term-based, SaaS like SNAPaccel), subscription maintenance and support (including SNAPsolution®), and professional services[88][89][90][91][92] Revenue Disaggregation (in thousands) - Three Months Ended September 30 | Revenue Disaggregation (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Cloud Telecommunications Segment | | | | Desktop devices | $760 | $701 | | Equipment financing revenue | $87 | $63 | | Telecommunications services | $3,831 | $3,718 | | Fees, commissions, and other, recognized over time | $423 | $419 | | One time fees, commissions and other | $132 | $125 | | Software Solutions Segment | | | | Software licenses | $985 | $1,473 | | Software license and maintenance and support subscriptions | $2,759 | $2,213 | | Professional services and other | $131 | $98 | | Total Revenue | $9,108 | $8,810 | Revenue Disaggregation (in thousands) - Nine Months Ended September 30 | Revenue Disaggregation (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Cloud Telecommunications Segment | | | | Desktop devices | $1,944 | $1,509 | | Equipment financing revenue | $238 | $198 | | Telecommunications services | $11,392 | $10,995 | | Fees, commissions, and other, recognized over time | $1,269 | $1,252 | | One time fees, commissions and other | $528 | $346 | | Software Solutions Segment | | | | Software licenses | $2,394 | $2,210 | | Software license and maintenance and support subscriptions | $7,950 | $2,451 | | Professional services and other | $397 | $135 | | Total Revenue | $26,112 | $19,096 | Contract Balances (in thousands) | Contract Balances (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------- | :----------- | :----------- | | Receivables, net | $4,028 | $2,177 | | Contract assets | $265 | $261 | | Contract liabilities | $3,028 | $3,028 | Transaction Price Allocated to Remaining Performance Obligations (in thousands) | Transaction Price Allocated to Remaining Performance Obligations (in thousands) | 2022 (remaining) | 2023 | 2024 | 2025 | 2026 and thereafter | | :-------------------------------------------------------------- | :--------------- | :------ | :------ | :------ | :------------------ | | Desktop devices | $249 | | | | | | Telecommunications services | $4,138 | $11,444 | $7,549 | $4,588 | $2,095 | | Software Solutions | $3,796 | $6,105 | $2,315 | $1,107 | $21 | 3. Earnings Per Common Share This note details basic and diluted net income/(loss) per common share, noting anti-dilutive common share equivalents Earnings Per Common Share (in thousands, except per share) - Three Months Ended September 30 | (in thousands, except per share) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :------------------------------- | :------------------------------ | :------------------------------ | | Net loss | $(696) | $(125) | | Basic EPS | $(0.03) | $(0.01) | | Diluted EPS | $(0.03) | $(0.01) | | Weighted-average basic shares outstanding | 22,620,703 | 21,596,415 | Earnings Per Common Share (in thousands, except per share) - Nine Months Ended September 30 | (in thousands, except per share) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(2,812) | $(1,843) | | Basic EPS | $(0.13) | $(0.09) | | Diluted EPS | $(0.13) | $(0.09) | | Weighted-average basic shares outstanding | 22,439,575 | 19,757,658 | - Potentially dilutive common stock, including stock options, were excluded from diluted EPS computation for both periods as they were anti-dilutive due to net losses[101][102] 4. Acquisitions This note details the NetSapiens and Centric Telecom acquisitions, including purchase price and goodwill - On June 1, 2021, Crexendo acquired NetSapiens, Inc. for approximately $49.1 million, consisting of $10 million in cash, $16.9 million in common stock (3,097,309 shares), and $22.1 million in stock options (4,482,328 options)[103][104] - The NetSapiens acquisition resulted in goodwill of $34,981,000 as of December 31, 2021, primarily attributable to customer relationships, developed technology, trademark, and expected synergies[104][106] - On January 14, 2021, Crexendo acquired Centric Telecom, Inc. for $3,255,000, comprising $2,163,000 cash, 46,662 shares of common stock ($346,000), and $746,000 in estimated contingent consideration[119][121][122] - The Centric Telecom acquisition resulted in goodwill of $1,719,000 as of December 31, 2021, primarily due to customer relationships and expected synergies[122][123] - Acquisition-related expenses for NetSapiens were $24,000 for the nine months ended September 30, 2022 (vs. $1,015,000 in 2021) and $0 for Centric Telecom for the nine months ended September 30, 2022 (vs. $50,000 in 2021)[118][130] 5. Trade Receivables, net This note provides an analysis of the company's trade receivables, net of allowance for doubtful accounts Trade Receivables, net (in thousands) | (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------- | :----------- | :----------- | | Gross trade receivables | $4,086 | $2,249 | | Less: allowance for doubtful accounts | $(58) | $(72) | | Trade receivables, net | $4,028 | $2,177 | 6. Prepaid Expenses This note details the composition of prepaid expenses, including corporate insurance, software services, and deposits Prepaid Expenses (in thousands) | (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------- | :----------- | :----------- | | Prepaid corporate insurance | $159 | $90 | | Prepaid software services and support | $291 | $160 | | Deposits | $437 | $0 | | Total prepaid expenses | $996 | $358 | 7. Property and Equipment This note provides a breakdown of property and equipment, net of accumulated depreciation, and associated expenses Property and Equipment, net (in thousands) | (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------- | :----------- | :----------- | | Building | $2,000 | $2,000 | | Land | $500 | $500 | | Computer and office equipment | $2,041 | $1,854 | | Less: accumulated depreciation | $(2,324) | $(2,111) | | Total property and equipment, net | $2,968 | $2,989 | - Depreciation and amortization expense for property and equipment was $74,000 for the three months ended September 30, 2022 (vs. $63,000 in 2021) and $213,000 for the nine months ended September 30, 2022 (vs. $158,000 in 2021)[135] 8. Intangible Assets and Goodwill This note details acquired intangible assets subject to amortization, their useful lives, and changes in goodwill Acquired Intangible Assets (in thousands) | Acquired Intangible Assets (in thousands) | Gross Carrying Amount (Sep 30, 2022) | Accumulated Amortization (Sep 30, 2022) | Net Carrying Amount (Sep 30, 2022) | | :---------------------------------------- | :----------------------------------- | :-------------------------------------- | :--------------------------------- | | Customer relationships | $19,073 | $(2,515) | $16,558 | | Developed technologies | $4,900 | $(1,190) | $3,710 | | Trademark and trade names | $400 | $(156) | $244 | | Total acquired intangible assets | $24,373 | $(3,861) | $20,512 | - Weighted average remaining useful life for customer relationships was 14.4 years, developed technologies 4.9 years, and trademarks/trade names 2.9 years as of September 30, 2022[136] Amortization Expense (in thousands) - Three Months Ended September 30 | Amortization Expense (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | | Customer relationships | $299 | $236 | | Developed technologies | $221 | $270 | | Trademark and trade name | $31 | $33 | Amortization Expense (in thousands) - Nine Months Ended September 30 | Amortization Expense (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | | Customer relationships | $896 | $412 | | Developed technologies | $662 | $361 | | Trademark and trade name | $91 | $33 | Estimated Annual Amortization (in thousands) | Estimated Annual Amortization (in thousands) | Amount | | :------------------------------------------- | :----- | | 2022 remaining | $550 | | 2023 | $2,147 | | 2024 | $2,057 | | 2025 | $1,929 | | 2026 | $1,750 | | Thereafter | $12,079| | Total | $20,512| Goodwill (in thousands) | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | Balance at December 31, 2021 | $36,972| | Additions | $0 | | Balance at September 30, 2022 | $36,972| 9. Accrued Expenses This note provides a detailed breakdown of accrued expenses, including wages, taxes, and product warranty liabilities Accrued Expenses (in thousands) | Accrued Expenses (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------ | :----------- | :----------- | | Accrued wages and benefits | $1,117 | $1,188 | | Accrued accounts payable | $828 | $609 | | Accrued sales and telecommunications taxes | $1,844 | $2,487 | | Product warranty liability | $71 | $50 | | Total accrued expenses | $4,222 | $4,904 | Product Warranty Liabilities (in thousands) | Product Warranty Liabilities (in thousands) | Amount | | :------------------------------------------ | :----- | | Balance at January 1, 2021 | $33 | | Accrual for warranties | $50 | | Warranty settlements | $(34) | | Balance at December 31, 2021 | $50 | | Accrual for warranties | $43 | | Warranty settlements | $(22) | | Balance at September 30, 2022 | $71 | - Product warranty expense was $15,000 for the three months ended September 30, 2022 (vs. $15,000 in 2021) and $43,000 for the nine months ended September 30, 2022 (vs. $27,000 in 2021)[141] 10. Notes Payable This note details the company's notes payable, primarily a fixed-rate term loan, and future principal payments Notes Payable (in thousands) | Notes Payable (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------- | :----------- | :----------- | | Notes payable | $1,818 | $1,873 | | Less: current notes payable | $(76) | $(1,873) | | Notes payable, net of current portion | $1,742 | $0 | - The company's $2,000,000 fixed-rate term loan (3.67% interest) with Bank of America, N.A. was reclassified from current to long-term as of September 30, 2022, after the bank waived all financial covenants[142] Future Principal Payments (in thousands) | Future Principal Payments (in thousands) | Amount | | :--------------------------------------- | :----- | | 2022 remaining | $19 | | 2023 | $77 | | 2024 | $79 | | 2025 | $82 | | 2026 | $85 | | Thereafter | $1,476 | | Total | $1,818 | 11. Fair Value Measurements This note provides fair value measurements for financial assets and liabilities, including contingent consideration Financial Instruments (in thousands) | Financial Instruments (in thousands) | Carrying Value (Sep 30, 2022) | Estimated Fair Value (Sep 30, 2022) | Carrying Value (Dec 31, 2021) | Estimated Fair Value (Dec 31, 2021) | | :----------------------------------- | :---------------------------- | :---------------------------------- | :---------------------------- | :---------------------------------- | | Assets: | | | | | | Trade receivables, net | $4,028 | $4,028 | $2,177 | $2,177 | | Equipment financing receivables | $1,699 | $1,699 | $1,274 | $1,274 | | Liabilities: | | | | | | Finance lease obligations | $217 | $217 | $303 | $303 | | Notes payable | $1,818 | $1,818 | $1,873 | $1,873 | - The company had no liabilities for which fair value is recognized on a recurring basis as of September 30, 2022, and December 31, 2021[145] - Contingent consideration of $746,000 related to the Centric Telecom acquisition was recorded in January 2021 and fully paid out by October 2021, with an additional $126,000 paid based on revenue target achievements[146] 12. Income Taxes This note discusses the company's effective tax rates and the assessment of deferred tax assets for realizability Effective Tax Rate - Three Months Ended September 30 | Effective Tax Rate | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :----------------- | :-------------------------- | :-------------------------- | | Effective tax rate | (4.4%) | 1,141.4% | | Income tax benefit/(provision) | $32 | $(137) | Effective Tax Rate - Nine Months Ended September 30 | Effective Tax Rate | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------- | :-------------------------- | :-------------------------- | | Effective tax rate | (10.1%) | (11.8%) | | Income tax benefit | $315 | $247 | - Management determined that deferred tax assets of $7,001,000 are realizable, supported by three years of cumulative pretax income in the U.S. federal tax jurisdiction and projections of future pretax income[149] 13. Leases This note details the company's lessee and lessor accounting for operating and finance leases, including ROU assets - The company leases office space and other assets under operating leases, and data center equipment, maintenance contracts, and vehicles under finance leases[150] - Operating lease ROU assets and liabilities are recognized at commencement based on the present value of lease payments, using the incremental borrowing rate when an implicit rate is not provided[151] Rental Expense (in thousands) - Three Months Ended September 30 | Rental Expense (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :---------------------------- | :-------------------------- | :-------------------------- | | Reston, Virginia office space | $13 | $9 | | La Jolla, California office space | $90 | $94 | | Other assets operating leases | $21 | $20 | | Data center colocation space | $36 | $13 | Maturity of Lease Liabilities (in thousands) | Maturity of Lease Liabilities (in thousands) | Operating Leases (Sep 30, 2022) | Finance Leases (Sep 30, 2022) | | :------------------------------------------- | :------------------------------ | :---------------------------- | | 2022 remaining | $139 | $24 | | 2023 | $115 | $98 | | 2024 | $96 | $77 | | 2025 | $1 | $22 | | 2026 | $1 | $3 | | 2027 | $1 | $0 | | Total minimum lease payments | $353 | $224 | | Less: amount representing interest | $(8) | $(7) | | Present value of minimum lease payments | $345 | $217 | Equipment Finance Receivables (in thousands) | Equipment Finance Receivables (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------------- | :----------- | :----------- | | Gross financing receivables | $2,392 | $1,822 | | Less: unearned income | $(693) | $(548) | | Financing receivables, net | $1,699 | $1,274 | | Less: current portion | $(542) | $(332) | | Finance receivables due after one year | $1,157 | $942 | 14. Commitments and Contingencies This note outlines the company's annual incentive bonus plan and its approach to legal proceedings and contingencies - The company has an annual incentive bonus plan for fiscal 2022 with pools of $390,000 for executives and $350,000 for non-executives. Bonus awards for executives are weighted 30% on annual revenue, 30% on Adjusted EBITDA, 20% on cash balance, and 20% on Company stock price[167] - As of September 30, 2022, none of the performance targets for bonuses were achieved, but it is estimated that approximately $492,000 may be earned during the three months ended December 31, 2022[167] - The company accrues for claims and contingencies when losses are probable and reasonably estimable, but as of September 30, 2022, no liability for estimated losses from legal proceedings was recorded[168][169] 15. Segment Reporting This note provides financial information disaggregated by Cloud Telecommunications Services and Software Solutions segments Segment Reporting (in thousands) - Three Months Ended September 30 | (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :------------- | :-------------------------- | :-------------------------- | | Revenue: | | | | Cloud telecommunications services | $5,233 | $5,026 | | Software solutions | $3,875 | $3,784 | | Consolidated revenue | $9,108 | $8,810 | | Income/(loss) from operations: | | | | Cloud telecommunications services | $(639) | $(253) | | Software solutions | $95 | $306 | | Total operating income/(loss) | $(544) | $53 | | Income/(loss) before income tax provision: | | | | Cloud telecommunications services | $(656) | $(275) | | Software solutions | $(72) | $287 | | Total income/(loss) before income tax provision | $(728) | $12 | Segment Reporting (in thousands) - Nine Months Ended September 30 | (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------- | :-------------------------- | :-------------------------- | | Revenue: | | | | Cloud telecommunications services | $15,371 | $14,300 | | Software solutions | $10,741 | $4,796 | | Consolidated revenue | $26,112 | $19,096 | | Income/(loss) from operations: | | | | Cloud telecommunications services | $(2,236) | $(2,004) | | Software solutions | $(553) | $(9) | | Total operating income/(loss) | $(2,789) | $(2,013) | | Income/(loss) before income tax provision: | | | | Cloud telecommunications services | $(2,288) | $(2,062) |\ | Software solutions | $(839) | $(28) | | Total income/(loss) before income tax provision | $(3,127) | $(2,090) | - Depreciation and amortization for the cloud telecommunications services segment was $115,000 (3 months 2022) and $344,000 (9 months 2022). For the software solutions segment, it was $509,000 (3 months 2022) and $1,518,000 (9 months 2022)[170] 16. Subsequent Events This note discloses a significant business combination: the acquisition of Allegiant Networks, LLC in October 2022 - On October 17, 2022, Crexendo entered into an agreement to acquire Allegiant Networks, LLC for approximately $9.4 million. The transaction closed on November 1, 2022[174] - The purchase price for Allegiant Networks included $2.0 million cash, a $1.1 million three-year promissory note, and 2,461,538 shares of common stock valued at $2.57 per share[174] - Acquisition-related costs of $8,000 for Allegiant Networks were incurred for both the three and nine months ended September 30, 2022, and are reflected in general and administrative costs[175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operating results, and liquidity OVERVIEW This section provides an overview of Crexendo's business as a leading UCaaS/CCaaS provider and its service offerings - Crexendo is a leading provider of UCaaS, CCaaS, communication platform software, and collaboration services, supporting over 2.5 million end users globally and recognized as the fastest-growing UCaaS platform in the US[178][186] - The company offers Cloud Telecommunications Services (recurring revenue from voice, data, collaboration, broadband, and support, typically 36-60 month contracts) and Software Solutions (software licenses, maintenance, and professional services)[178][179][180][181][182][183][185] OUR SERVICES AND PRODUCTS This section details the features and offerings within Cloud Telecommunications Services and Software Solutions segments - Cloud Telecommunications Services include a wide array of business and individual productivity features (e.g., call recording, unlimited calling in US/Canada, voicemail, unified messaging), group productivity features (e.g., IVR, multi-party conferencing), call center features (e.g., ACD, call monitor), advanced UC features (e.g., Find-Me-Follow-Me), mobile features, traditional PBX features, expanded desktop device selection, advanced faxing, and web-based management portals[186][187][188] - Software Solutions include SNAPsolution® (an IP-based UC platform licensed by concurrent sessions), SNAPaccel (SaaS-based subscription), Subscription Maintenance and Support (software updates, bug fixes, customer support), and Professional Services (consulting, technical support, design, installation)[190][192] RESULTS OF OPERATIONS This section analyzes the company's total revenue, net loss, and EPS for the three and nine months ended September 30, 2022 and 2021 Results of Operations (in thousands, except per share) - Three Months Ended September 30 | (in thousands, except per share) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Dollar Change | Percent Change | | :------------------------------- | :-------------------------- | :-------------------------- | :------------ | :------------- | | Total revenue | $9,108 | $8,810 | $298 | 3% | | Income/(loss) before income taxes | $(728) | $12 | $(740) | -6167% | | Income tax benefit/(provision) | $32 | $(137) | $169 | -123% | | Net loss | $(696) | $(125) | $(571) | 457% | | Basic earnings per share | $(0.03) | $(0.01) | $(0.02) | 200% | Results of Operations (in thousands, except per share) - Nine Months Ended September 30 | (in thousands, except per share) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Dollar Change | Percent Change | | :------------------------------- | :-------------------------- | :-------------------------- | :------------ | :------------- | | Total revenue | $26,112 | $19,096 | $7,016 | 37% | | Loss before income taxes | $(3,127) | $(2,090) | $(1,037) | 50% | | Income tax benefit | $315 | $247 | $68 | 28% | | Net loss | $(2,812) | $(1,843) | $(969) | 53% | | Basic earnings per share | $(0.13) | $(0.09) | $(0.04) | 44% | - The increase in total revenue for the nine months was primarily driven by a $5,945,000 increase in software solutions revenue, largely due to nine months of revenue in 2022 compared to only four months in 2021 following the June 1, 2021 acquisition[198] - The increased loss before income tax for both periods was mainly due to higher operating expenses, particularly increases in salaries and benefits, and stock compensation expense[196][201] USE OF NON-GAAP FINANCIAL MEASURES This section explains the company's use of Non-GAAP net income/(loss) and Adjusted EBITDA as supplemental performance measures - The company uses Non-GAAP net income/(loss) and Adjusted EBITDA as supplemental measures of operating performance, excluding share-based compensation, acquisition-related expenses, changes in fair value of contingent consideration, and amortization of intangibles[203] - EBITDA is defined as U.S. GAAP net income/(loss) before interest income, interest expense, other income and expense, provision for income taxes, and depreciation and amortization[203] - Adjusted EBITDA further adjusts EBITDA for acquisition-related expenses, changes in fair value of contingent consideration, and share-based compensation[203] - These non-GAAP measures have limitations, such as not reflecting cash expenditures for capital, working capital, debt service, or taxes, and may not be comparable to other companies' calculations[204] RECONCILIATION OF NON-GAAP FINANCIAL MEASURES This section provides a reconciliation of U.S. GAAP net loss to Non-GAAP net income and Adjusted EBITDA Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (in thousands) - Three Months Ended September 30 | Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :--------------------------------------------------------- | :-------------------------- | :-------------------------- | | U.S. GAAP net loss | $(696) | $(125) | | Share-based compensation | $851 | $415 | | Acquisition related expenses | $8 | $4 | | Amortization of intangible assets | $550 | $506 | | Non-GAAP net income | $713 | $800 | | Non-GAAP basic earnings per common share | $0.03 | $0.04 | | Non-GAAP diluted earnings per common share | $0.03 | $0.03 | Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (in thousands) - Nine Months Ended September 30 | Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------------------------------- | :-------------------------- | :-------------------------- | | U.S. GAAP net loss | $(2,812) | $(1,843) | | Share-based compensation | $2,762 | $1,150 | | Acquisition related expenses | $31 | $1,065 | | Amortization of intangible assets | $1,649 | $773 | | Non-GAAP net income | $1,630 | $1,145 | | Non-GAAP basic earnings per common share | $0.07 | $0.06 | | Non-GAAP diluted earnings per common share | $0.06 | $0.05 | Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA (in thousands) - Three Months Ended September 30 | Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :--------------------------------------------------------------- | :-------------------------- | :-------------------------- | | U.S. GAAP net loss | $(696) | $(125) | | Depreciation and amortization | $623 | $569 | | Interest expense | $19 | $24 | | Interest and other expense | $165 | $17 | | Income tax provision/(benefit) | $(32) | $137 | | EBITDA | $79 | $622 | | Acquisition related expenses | $8 | $4 | | Share-based compensation | $851 | $415 | | Adjusted EBITDA | $938 | $1,041 | Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA (in thousands) - Nine Months Ended September 30 | Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------------------------------------- | :-------------------------- | :-------------------------- | | U.S. GAAP net loss | $(2,812) | $(1,843) | | Depreciation and amortization | $1,862 | $931 | | Interest expense | $57 | $64 | | Interest and other expense | $281 | $13 | | Income tax provision/(benefit) | $(315) | $(247) | | EBITDA | $(927) | $(1,082) | | Acquisition related expenses | $31 | $1,065 | | Share-based compensation | $2,762 | $1,150 | | Adjusted EBITDA | $1,866 | $1,133 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section highlights key accounting policies and estimates that significantly impact the company's financial statements - The company's financial statements involve estimates, assumptions, and judgments that significantly impact reported revenue, operating income/loss, net income/loss, and asset/liability values. Key areas include valuation of goodwill and intangible assets, allowances for doubtful accounts, income tax benefits, deferred income tax assets, share-based payments, and long-lived asset recoverability[210] Segment Operating Results This section provides a detailed analysis of the operating performance for each of the company's reportable segments Operating Results of our Cloud Telecommunications Services Segment This section analyzes the Cloud Telecommunications Services segment's revenue, backlog, and operating expenses Cloud Telecommunications Services (in thousands) - Three Months Ended September 30 | Cloud Telecommunications Services (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Dollar Change | Percent Change | | :----------------------------------------------- | :-------------------------- | :-------------------------- | :------------ | :------------- | | Total revenue | $5,233 | $5,026 | $207 | 4% | | Operating loss | $(639) | $(253) | $(386) | 152% | | Loss before tax benefit/(provision) | $(656) | $(275) | $(381) | 139% | Cloud Telecommunications Services (in thousands) - Nine Months Ended September 30 | Cloud Telecommunications Services (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Dollar Change | Percent Change | | :----------------------------------------------- | :-------------------------- | :-------------------------- | :------------ | :------------- | | Total revenue | $15,371 | $14,300 | $1,071 | 7% | | Operating loss | $(2,236) | $(2,004) | $(232) | 12% | | Loss before tax benefit/(provision) | $(2,288) | $(2,062) | $(226) | 11% | - Service revenue increased by $148,000 (3%) for the three months and $636,000 (5%) for the nine months, driven by telecommunications services, sales-type lease interest, and various fees[213][224] - Product revenue increased by $59,000 (8%) for the three months and $435,000 (29%) for the nine months, fluctuating with installation timing and discount allocations[214][226] - Backlog for the Cloud Telecommunications segment decreased by 2% to $30,063,000 as of September 30, 2022, from $30,723,000 in 2021[217][227] - Cost of service revenue increased by 14% for the three months and 11% for the nine months, primarily due to increased headcount, salary increases, and third-party installation services, partially offset by decreased telecommunication carrier costs[217][227] - Selling and marketing expenses increased by 15% for the three months and 16% for the nine months, driven by higher commissions, sales team expansion, and travel costs[219][229] - General and administrative expenses increased by 17% for the three months and 3% for the nine months, mainly due to increased administrative salaries and headcount, partially offset by decreased acquisition-related expenses in the nine-month period[221][222][230] - Research and development expenses decreased by 21% for the three months and 18% for the nine months, due to lower maintenance costs for mobile applications and reduced salaries/benefits[223][231] Operating Results of Software Solutions segment This section analyzes the Software Solutions segment's revenue, backlog, and operating expenses post-June 2021 acquisition Software Solutions (in thousands) - Three Months Ended September 30 | Software Solutions (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Software solutions revenue | $3,875 | $3,784 | | Operating income/(loss) | $95 | $306 | | Income/(loss) before tax benefit/(provision) | $(72) | $287 | Software Solutions (in thousands) - Nine Months Ended September 30 | Software Solutions (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Software solutions revenue | $10,741 | $4,796 | | Operating income/(loss) | $(553) | $(9) | | Income/(loss) before tax benefit/(provision) | $(839) | $(28) | - Software solutions revenue increased by 2% for the three months and 124% for the nine months, primarily due to the NetSapiens acquisition on June 1, 2021, providing nine months of revenue in 2022 compared to four months in 2021[235][246] - Backlog for the Software Solutions segment increased by 6% to $13,334,000 as of September 30, 2022, from $12,558,000 in 2021[236][247] - Cost of software solutions revenue decreased by 30% for the three months but increased by 81% for the nine months. The nine-month increase is mainly due to the full nine months of costs post-acquisition and reclassification of R&D expenses[239][243][249] - Selling and marketing expenses increased by 29% for the three months and 163% for the nine months, largely due to the full nine months of expenses post-acquisition, higher commissions, and increased salaries[240][250] - General and administrative expenses decreased by 26% for the three months but increased by 73% for the nine months, primarily due to the full nine months of expenses post-acquisition and reclassification of R&D expenses[241][251] - Research and development expenses significantly increased for both periods, primarily due to the reclassification of R&D expenses from cost of service revenue and general and administrative expenses[242][244][252] - Other expense increased significantly for both periods, primarily due to net foreign exchange losses[245][254] Liquidity and Capital Resources This section discusses the company's cash position, cash flow activities, and ability to meet future cash requirements - Cash and cash equivalents decreased to $4,821,000 as of September 30, 2022, from $7,468,000 as of December 31, 2021[255] - Net cash used in operating activities increased significantly to $(2,665,000) for the nine months ended September 30, 2022, from $(473,000) in the prior year, driven by net loss and changes in working capital[256] - Net cash used in investing activities decreased to $(192,000) for the nine months ended September 30, 2022, from $(10,596,000) in the prior year, as 2021 included significant cash outlays for the NetSapiens and Centric Telecom acquisitions[257][258] - Net cash used in financing activities was $(36,000) for the nine months ended September 30, 2022, compared to $1,081,000 provided in the prior year, primarily due to dividend payments and net settlement of stock options[261][262] - The company believes existing liquidity sources and operations will satisfy cash requirements for at least the next twelve months[255] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section addresses the company's exposure to market risks, primarily foreign currency risk, and its immaterial impact - The company's sales and operating expenses are primarily denominated in U.S. dollars, leading to immaterial foreign currency risk for the periods presented[266][267] - As operations grow, the company's exposure to foreign currency risk may become more significant[267] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[268] - There have been no material changes in internal control over financial reporting during the three months ended September 30, 2022[270] PART II - OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section states that routine legal matters are not expected to materially impact the company's financial condition - The company is involved in routine lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business[271] - No matters are pending or threatened that are expected to have a material adverse impact on the company's business, results of operations, financial condition, or cash flows[271] Item 1A. Risk Factors This section refers to the Annual Report on Form 10-K for detailed information on material business risk factors - Information on material risk factors affecting the business and operations is incorporated by reference from the 2021 Annual Report on Form 10-K[272] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates no unregistered sales of equity securities or use of proceeds to report for the period - There were no unregistered sales of equity securities and use of proceeds to report[273] Item 6. Exhibits This section provides a list of exhibits filed with the Form 10-Q, including certifications and XBRL documents Exhibits | Exhibit No. | Exhibit Description | | :---------- | :------------------------------------------------------------------------------- | | 31.1 | Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended | | 31.2 | Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended | | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350 | | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350 | | 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 | Signatures This section contains the required signatures for the Form 10-Q, confirming its submission by the CEO and CFO - The report was signed by Steven G. Mihaylo, Chief Executive Officer, and Ronald Vincent, Chief Financial Officer, on November 10, 2022[276][277][278]