Crexendo(CXDO) - 2020 Q4 - Annual Report

Part I Business 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] - Cloud telecommunications contracts typically span 36 to 60 months, generating recurring service revenue, alongside product revenue from equipment sales and leases[16] 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] - As of December 31, 2020, the company employed 58 full-time individuals[47] Risk Factors 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][57] - The company faces intense competition from traditional telecom providers, hardware providers, and other cloud companies[39][76] - 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] - 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][127] - The CEO, Steven G. Mihaylo, holds approximately 56% of outstanding common stock, granting substantial control over corporate matters[181] Properties 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] - In January 2020, the company purchased its corporate office building from a company owned by its CEO[185] Legal Proceedings 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] Mine Safety Disclosures This section is not applicable to the company's operations - Disclosure required by this item is not applicable[187] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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] Selected Financial Data This section is not required for the company as a smaller reporting entity - This section is not required[193] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] Use of Non-GAAP Financial Measures 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 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] - The Cloud Telecommunications services backlog increased by 9% to $28.6 million at the end of 2020 from $26.1 million in 2019[238] - 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][95] Liquidity and Capital Resources 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] - 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][263] Quantitative and Qualitative Disclosures About Market Risks This section is not required for the company as a smaller reporting entity - This section is not required[273] Financial Statements and Supplementary Data 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][283][288] - 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][408] - 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] - 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] Controls and Procedures 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] - 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] - No material changes in internal control over financial reporting occurred during the year ended December 31, 2020[445] Other Information No information is reported under this item - None[449] 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 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accountant Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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] - A key exhibit filed is the Agreement and Plan of Merger and Reorganization with NetSapiens, Inc., dated March 5, 2021[461]