Crexendo(CXDO) - 2021 Q4 - Annual Report

PART I Business 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] - 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][26] - 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] - As of December 31, 2021, the company had 121 full-time employees[48] 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 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][58] - 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][203][209] - 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] - 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][86][87] - 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][144][162] - 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] Properties 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] - The company also has offices in La Jolla, California and Reston, Virginia[221] Legal Proceedings 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] - 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] Mine Safety Disclosures This disclosure item is not applicable to the company - The disclosure required by this item is not applicable[224] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - As of December 31, 2021, there were 197 shareholders of record[227] - Subsequent to year-end 2021, the company declared a quarterly cash dividend of $0.005 per common share, payable on February 28, 2022[228] 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 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 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] - 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] 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 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 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 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][283] - Backlog for the segment increased by 6% to $30,189,000 as of December 31, 2021[284] 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 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] - The segment's revenue backlog was $11,528,000 as of December 31, 2021[298] 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 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] - 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][306] 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 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] - The company does not believe inflation has had a material effect on its business, financial condition, or results of operations[319] Financial Statements and Supplementary Data 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][331][334] - 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] - 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] 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 No changes in or disagreements with accountants on accounting and financial disclosure were reported for the period - None[530] Controls and Procedures 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] - 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] - 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] Other Information No other information is reported for this period - None[535] PART III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accountant Fees and Services 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] PART IV Exhibits and Financial Statement Schedules 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] - 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]