Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2016:
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
———————
Crexendo,
Inc.
(Exact name of registrant as specified in its charter)
———————
Nevada
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001-32277
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87-0591719
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(State
or Other Jurisdiction
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(Commission
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(I.R.S.
Employer
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of
Incorporation or Organization)
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File
Number)
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Identification
No.)
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1615
South 52nd
Street, Tempe, AZ 85281
(Address of
Principal Executive Office) (Zip Code)
(602)
714-8500
(Registrant’s
telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
———————
Securities registered pursuant to Section 12(b) of the
Act:
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||
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Title of each class
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Name of each exchange on which registered
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Common
Stock, par value $0.001 per share
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OTCQX Marketplace
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Securities registered pursuant to Section 12(g) of the Act:
None
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———————
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes ☐
No ☒
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ☒
No ☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate website, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ☒
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act).
Yes ☐
No ☒
The
aggregate market value of the common stock held by non-affiliates
of the registrant as of December 31, 2016 was approximately
$5,541,000.
The
number of shares of the registrant’s common stock outstanding
as of February 16, 2017 was 13,653,556.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement for the Registrant’s 2017 Annual Meeting of
Stockholders are incorporated by reference in Part III of this
Annual Report on Form 10-K.
TABLE
OF CONTENTS
Part I
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ITEM
1. BUSINESS
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1
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ITEM
1A. RISK FACTORS
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5
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ITEM
2. PROPERTIES
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13
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ITEM
3. LEGAL
PROCEEDINGS
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13
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ITEM
4. MINE SAFETY
DISCLOSURES
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14
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PART II
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ITEM
5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
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14
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ITEM
6. SELECTED FINANCIAL
DATA
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15
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ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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15
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
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26
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ITEM
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
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27
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ITEM
9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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55
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ITEM
9A. CONTROLS AND PROCEDURES
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55
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ITEM
9B. OTHER INFORMATION
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55
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PART III
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
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55
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ITEM
11. EXECUTIVE
COMPENSATION
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61
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
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66
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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67
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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67
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PART IV
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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68
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PART
I
Throughout this
Annual Report, we refer to Crexendo, Inc., together with its
subsidiaries, as “we,” “us,” “our
Company,” “Crexendo®” or “the
Company.” As used in this Annual Report,
“StoresOnline™” and
“Ride The Cloud™” are
registered trademarks of our Company in the United States and other
countries. All other product names are or may be trademarks of, and
are used to identify the products and services of, their respective
owners.
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS “MAY,”
“WILL,” “SHOULD,” “EXPECT,”
“PLAN,” “INTEND,” “ANTICIPATE,”
“BELIEVE,” “ESTIMATE,”
“PROJECT,” “PREDICT,”
“POTENTIAL” OR “CONTINUE” (INCLUDING THE
NEGATIVE OF SUCH TERMS), OR OTHER SIMILAR TERMINOLOGY. THESE
STATEMENTS ARE ONLY ESTIMATIONS, AND ARE BASED UPON VARIOUS
ASSUMPTIONS THAT MAY NOT BE REALIZED. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD
SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED
TO, THE RISKS OUTLINED BELOW UNDER ITEM 1A. THESE FACTORS MAY CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENT.
ALTHOUGH WE BELIEVE
THAT THE ESTIMATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS
ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THE FORWARD-LOOKING STATEMENTS. WE DO NOT INTEND TO
UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO
CHANGES IN OUR EXPECTATIONS, UNLESS REQUIRED BY LAW.
ITEM 1.
BUSINESS
OVERVIEW
Crexendo is a CLEC
cloud services company that provides award winning cloud
telecommunications services, broadband Internet services and other
cloud business services. Our solutions are designed to provide
enterprise-class cloud services to any size businesses at
affordable monthly rates.
Cloud Telecommunications Services segment
- Our cloud telecommunications services transmit calls using
IP or cloud technology, which converts voice signals into digital
data packets for transmission over the Internet or cloud. Each of
our calling plans provides a number of basic features typically
offered by traditional telephone service providers, plus a wide
range of enhanced features that we believe offer an attractive
value proposition to our customers. This platform enables a user,
via a single “identity” or telephone number, to access
and utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device or a mobile device.
We
generate recurring revenue from our cloud telecommunications and
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We generate
product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the
sale of equipment, including those from sales-type leases, are
recognized at the time of sale or at the inception of the lease, as
appropriate.
Web Services segment - We generate
recurring revenue from website hosting and other professional
services.
OUR
SERVICES AND PRODUCTS
Our
goal is to provide a broad range of Cloud-based products and
services that nearly eliminate the cost of a businesses’
technology infrastructure and enable businesses of any size to more
efficiently run their business. By providing a variety of
comprehensive and scalable solutions, we are able to provide these
solutions on a monthly basis to businesses of all sizes without the
need for expensive capital investments, regardless of where their
business is in its lifecycle. Our products and services can be
categorized in the following offerings:
Cloud Telecommunications Services - Our
cloud telecommunications service offering includes hardware and
software and unified communication solutions for businesses using
IP or cloud technology over any high-speed Internet connection.
These services are rendered through a variety of devices and user
interfaces such as a Crexendo branded desktop phones, mobile and
desktop applications. Some examples of mobile devices are Android
cell phones, iPhones, iPads or Android tablets. These services
enable our customers to seamlessly communicate with others through
phone calls that originate/terminate on our network or PSTN
networks. Our cloud telecommunications services are powered by our
proprietary implementation of standard Internet, Web and IP or
cloud technologies. Our services also use our complex
infrastructure that we build and manage based on industry standard
best practices to achieve greater efficiencies and customer
satisfaction. Our infrastructure comprises of computing, storage,
network technologies, 3rd party products and
vendor relationships. We also develop end user portals for account
management, license management, billing and customer support and
adopt other cloud technologies through our
partnerships.
1
Crexendo’s
cloud telecommunication service offers a wide variety of essential
and advanced features for businesses of all sizes. Many of these
features included in the service offering are:
●
Business
Productivity Features such as dial-by extension and name, transfer,
conference, call recording, Unlimited calling to anywhere in the US
and Canada, International calling, Toll free (Inbound and
Outbound);
●
Individual
Productivity Features such as Caller ID, Call Waiting, Last Call
Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified
Messaging, Hot-Desking;
●
Group Productivity
Features such as Call Park, Call Pickup, Interactive Voice Response
(IVR), Individual and Universal Paging, Corporate Directory,
Multi-Party Conferencing, Group Mailboxes;
●
Call Center
Features such as Automated Call Distribution (ACD), Call Monitor,
Whisper and Barge, Automatic Call Recording;
●
Advanced Unified
Communication Features such as Find-Me-Follow-Me, Sequential Ring
and Simultaneous Ring;
●
Mobile Features
such as extension dialing, transfer and conference and seamless
hand-off from WiFi to/from 3G and 4G, LTE, as well as other data
services. These features are also available on CrexMo, an
intelligent mobile application for iPhones and Android smartphones,
as well as iPads and Android tablets;
●
Traditional PBX
Features such as Busy Lamp Fields, System Hold. 16-48 Port density
Analog Devices;
●
Expanded Desktop
Device Selection such as Entry Level Phone, Executive Desktop, DECT
Phone for roaming users;
●
Advanced Faxing
solution such as Cloud Fax (cFax) allowing customers to send and
receive Faxes from their Email Clients, Mobile Phones and Desktops
without having to use a Fax Machine simply by attaching a file;
and
●
Web based online
portal to administer, manage and provision the system.
Many of
these services are included in our basic offering to our customers
for a monthly recurring fee and do not require a capital expense.
Some of the advanced features such as Automatic Call Recording and
Call Center Features require additional monthly fees. Crexendo
continues to invest and develop its technology and SaaS offerings
to make them more competitive and profitable.
Website Services - Our website services
segment allows businesses to host their websites in our data center
for a recurring monthly fee. For additional fees, we also provide
professional web management services.
SEGMENT
INFORMATION
The
Company has two operating segments, which consist of Cloud
Telecommunications Services and Web Services. Segment revenue and
income (loss) before income tax provision was as follows (in
thousands):
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Year Ended December 31,
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2016
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2015
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Revenue:
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Cloud
Telecommunications Services
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$7,757
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$5,989
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Web
Services
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1,362
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1,834
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Consolidated
revenue
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$9,119
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$7,823
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Year Ended December 31,
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2016
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2015
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Income/(loss)
before income tax provision:
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Cloud
Telecommunications Services
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$(3,210)
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$(4,833)
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Web
Services
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430
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280
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Loss
before income tax
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$(2,780)
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$(4,553)
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2
TECHNOLOGY
We
believe our proprietary implementation of standard Web, IP, Cloud,
Mobile and Internet technologies represent a key component of our
business model. We believe these technologies and how we deliver
them to our customers distinguish our services and products from
the services and products offered by our competitors. Our
technology infrastructure and virtual network operation center, all
of which is built and managed on industry standard computing,
storage, data and platforms offers us greater efficiencies. The
synergies between Web and Telecommunication protocols such as
TCP/IP, HTTP, XML, SIP and innovations in computing, load
balancing, redundancy and high availability of Web and
Telecommunications technologies offers us a unique advantage in
delivering these services to our customers seamlessly from our data
center.
Our
Cloud Telecommunications technology is continuously being enhanced
with additional features and software functionality. Our current
functionality includes:
●
High-end desktop
telephony devices such as Gigabit, PoE, 6 Line Color Phone with 10
programmable buttons and lower end Monochrome 2 Line wall mountable
device;
●
Basic Business
Telephony Features such as those offered in a traditional private
branch exchange (“PBX”) systems like extension dialing,
Direct Inward Dialing (DID), Hold/Resume, Music-On-Hold, Call
Transfer (Attended and Unattended), Conferencing, Local, Long
Distance, Toll-Free and International Dialing, Voicemail,
Auto-Attendant and traditional faxing;
●
Advanced telephony
features such as Call Park, Call Pickup, Paging (through the
phones), Overhead paging, Call Recording;
●
Call Center
Functionality such as Agent Log In/Log Out, Whisper, Barge and Call
center reporting;
●
Unified
Communications features like Simultaneous Ring, Sequential Ring,
Status based Routing (Find-Me-Follow-Me), 10-party instant
conference, and Mobile application (CrexMo);
●
Crexendo Mobile
Application (CrexMo), which allows users to place and receive
extension calls using Crexendo’s network, transfer and
conference other users right from their mobile device as if they
were in the office. It also provided users instant access to visual
voicemail and call logs; and
●
End User Portal and
Unified Messaging with Voicemail, Call Recording and eFax
inbox.
Our
website software platform is continuously being enhanced and is an
innovative website-building environment. We continue to invest and
develop on our web platform to make it more easy-to-use, enable
larger mobile and 3rd party integration
features thus enabling our web customers to drive more traffic to
their web-sites.
RESEARCH
AND DEVELOPMENT
We
invested $826,000 and $779,000 for the years ended December 31,
2016 and 2015, respectively, in the research and development of our
technologies and data center. The majority of these expenditures
were for enhancements to our cloud telecommunications products and
services and website development software.
COMPETITION
Our
markets are increasingly competitive. Our competitors include, but
are not limited to, cloud telecommunications providers and
traditional telephone service providers, application service
providers, software vendors, systems integrators, direct providers,
and information technology consulting services providers, and cloud
service providers.
Most of
these competitors, however, do not offer their own suite of cloud
telecommunications services but rather sell third party solutions
and offerings. Many of our current and potential competitors have
longer operating histories, larger customer bases, and longer
relationships with customers as well as significantly greater
financial, technical, marketing and public relations resources than
we do.
Additionally,
should we determine to pursue acquisition opportunities, we may
compete with other companies with similar growth strategies. Some
of these competitors may be larger and have greater financial
resources than we do. Competition for these acquisition targets
could also result in increased prices of acquisition targets and a
diminished pool of companies available for
acquisition.
3
There are
relatively low barriers to entry into our business. Our proprietary
technology does not preclude or inhibit competitors from entering
our markets. In particular, we anticipate new entrants will attempt
to develop competing products and services or new forums for
conducting e-commerce and telecommunications services which could
be deemed competition.
Additionally, if
e-commerce or Internet based enterprises and telecommunications
service providers with more resources and name recognition were to
enter our markets, they may redefine our industry and make it
difficult for us to compete.
Expected technology
advances associated with the Cloud, increasing use of the Cloud,
and new software products are welcome advancements that we believe
will broaden the Cloud’s viability. We anticipate that we can
compete successfully by relying on our infrastructure, marketing
strategies and techniques, systems and procedures, and by adding
additional products and services in the future. We believe we can
continue the operation of our business by periodic review and
revision to our product offerings and marketing
approach.
INTELLECTUAL
PROPERTY
Our
success depends in part on using and protecting our proprietary
technology and other intellectual property. Furthermore, we must
conduct our operations without infringing on the proprietary rights
of third parties. We also rely upon trade secrets and the know-how
and expertise of our key employees. To protect our proprietary
technology and other intellectual property, we rely on a
combination of the protections provided by applicable copyright,
trademark and trade secret laws, as well as confidentiality
procedures and licensing arrangements. Although we believe we have
taken appropriate steps to protect our intellectual property
rights, including requiring employees and third parties who are
granted access to our intellectual property to enter into
confidentiality agreements, these measures may not be sufficient to
protect our rights against third parties. Others may independently
develop or otherwise acquire unpatented technologies or products
similar or superior to ours.
We
license from third parties certain software and Internet tools
which we include in our services and products. If any of these
licenses were terminated, we could be required to seek licenses for
similar software and Internet tools from other third parties or
develop these tools internally. We may not be able to obtain such
licenses or develop such tools in a timely fashion, on acceptable
terms, or at all.
Companies
participating in the software, Internet technology, and
telecommunication industries are frequently involved in disputes
relating to intellectual property. We may be required to defend our
intellectual property rights against infringement, duplication,
discovery and misappropriation by third parties or to defend
against third-party claims of infringement. Likewise, disputes may
arise in the future with respect to ownership of technology
developed by employees who were previously employed by other
companies. Any such litigation or disputes could be costly and
divert our attention from our business. An adverse determination
could subject us to significant liabilities to third parties,
require us to seek licenses from, or pay royalties to, third
parties, or require us to develop appropriate alternative
technology. Some or all of these licenses may not be available to
us on acceptable terms, or at all. In addition, we may be unable to
develop alternate technology at an acceptable price, or at all. Any
of these events could have a material adverse effect on our
business prospects, financial position, or results of
operations.
EMPLOYEES
As of
December 31, 2016, we had 53 employees; 50 full-time and 3
part-time, including 4 executives, 15 sales representatives and
sales management, 10 engineer and IT support in the development of
our cloud services solutions, 17 in operations and customer
support, 7 in finance, legal and business development, marketing,
and other general administration.
CORPORATE
INFORMATION
Crexendo, Inc. was
incorporated as a Nevada corporation under the name
“Netgateway, Inc.” on April 13, 1995. In
November 1999, we were reincorporated under the laws of
Delaware. In July 2002, we changed our corporate name to
“iMergent, Inc.” In May 2011, our stockholders approved
an amendment to our Certificate of Incorporation to change our name
from "iMergent, Inc." to "Crexendo, Inc." The name change was
effective May 18, 2011. Our ticker symbol "IIG" on the New York
Stock Exchange was changed to “EXE” on May 18, 2011. We
changed the name to better reflect the scope and direction of our
business activities of assisting and providing web-based technology
solutions to businesses of any size who are seeking to take
advantage of the benefits of conducting business on the cloud. On
January 13, 2015, the Company moved to the OTCQX Marketplace and
our ticker symbol was changed to “CXDO”. In November
2016, we were reincorporated as a Nevada corporation.
We are
headquartered at 1615 South 52nd Street, Tempe, AZ,
85281, and our telephone number is (602) 714-8500. Our website is
www.crexendo.com. Our website and the information contained therein
or connected thereto shall not be deemed to be incorporated into
this Annual Report.
4
We make available
free of charge on or through our Internet website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed
with or furnished to the Securities Exchange and Commission
(“SEC”).
You may
read and copy this Annual Report at the SEC’s public
reference room at 450 Fifth Street, NW, Washington D.C. 20549.
Information on the operation of the public reference room can be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information
statements and other information regarding our filings at
www.sec.gov.
GOVERNMENTAL
REGULATION
As a
provider of Internet communications services, we are subject to
regulation in the U.S. by the FCC. Some of these regulatory
obligations include contributing to the Federal Universal Service
Fund, Telecommunications Relay Service Fund and federal programs
related to number administration; providing access to E-911
services; protecting customer information; and porting phone
numbers upon a valid customer request. We are also required to pay
state and local 911 fees and contribute to state universal service
funds in those states that assess Internet voice communications
services.
We are
subject to regulations generally applicable to all businesses. We
are also subject to an increasing number of laws and regulations
directly applicable to telecommunication, Internet access and
commerce. The adoption of any such additional laws or regulations
may decrease the rate of growth of the Internet, which could in
turn decrease the demand for our products and services. Such laws
may also increase our costs of doing business or otherwise have an
adverse effect on our business prospects, financial position or
results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership,
libel, and personal privacy is uncertain. In particular, one
channel we use to initially contact our customers is e-mail. The
use of e-mail for this purpose has become the subject of a number
of recently adopted and proposed laws and regulations. Future
federal or state legislation or regulation could have a material
adverse effect on our business prospects, financial condition and
results of operations.
ITEM 1A.
RISK FACTORS.
In addition to factors discussed elsewhere in this Annual Report,
the following are important risks which could adversely affect our
future results. If any of the risks we describe below materialize,
or if any unforeseen risk develops, our operating results may
suffer, our financial condition may deteriorate, the trading price
of our common stock may decline and our investors could lose all or
part of their investment.
The
Company is operating essentially as a start-up company with the
inherent risks and uncertainties of funding operations until and if
profitability is achieved. After considering the Company’s
historical negative cash flow from operating activities as well as
a range of internal forecast outcomes, our cash and cash
equivalents of $619,000 at December 31, 2016 does not appear
adequate to meet our obligations as they become due within one year
following the date the financial statements are issued. Management
evaluated the significance of the potential negative cash flows and
determined that borrowing availability under an existing Loan
Agreement would be sufficient to alleviate concerns about the
Company’s ability to continue as a going concern, the Company
entered into an amendment to our Loan Agreement with Steven G.
Mihaylo, extending the ability of the Board of Directors to request
the remaining $1.0 million available under the Loan Agreement if
necessary to fund operations through May 30, 2018. Based on such
commitment, along with its cash resources and loan borrowing
availability, the Company believes it will have sufficient funds to
sustain its operations during the next twelve months as a result of
the sources of funding detailed above.
Changes in our business model and product strategies may adversely
impact revenue.
Revenues from the
discontinued seminar sales model continue to decrease. Almost all
Extended Payment Term Agreements (EPTA’s) have been
completed. Hosting fees from websites have continued to decline
since the cessation of direct seminar sales. The Company has not
actively marketed its website development software and new hosting
fees from websites have been minimal.
From time to time we had been the subject of governmental inquiries
and investigations related to our discontinued seminar sales model
and business practices that could require us to pay refunds,
damages or fines, which could negatively impact our financial
results or ability to conduct business. We have received customer
complaints and civil actions.
From
time to time, we received inquiries from federal, national, state,
city and local government officials in the various jurisdictions in
which we operated. These inquiries had historically been related to
our discontinued seminar sales practices. There is still the
potential of review of past sales and sales of our current web and
telecom services. We respond to these inquiries and have generally
been successful in addressing the concerns of these persons and
entities, without a formal complaint or charge being made, although
there is often no formal closing of the inquiry or investigation.
The ultimate resolution of these or other inquiries or
investigations may have a material adverse effect on our business
or operations, or a formal complaint could be initiated. During the
ordinary course of business, we also receive a number of complaints
and inquiries from customers, governmental and private entities. In
some cases, these complaints and inquiries from agencies and
customers have ended up in civil court. We may continue to receive
customer and agency claims and actions.
5
We face risks in our strategy of developing new desktop telephones
(”desktop devices”). Our telephony products are not
currently programed or intended to work with other
competitors’ service.
We
continue to primarily sell and provide service to Crexendo ®
branded end points. The Company also sells and provides service for
other manufactured phones although at present that is not the focus
of sales by the Company. The desktop devices are being manufactured
by third party vendors. The end points include Crexendo design,
firmware certain technology and processes. The technology is
dependent upon successful completion of the process by the
third-party vendor. If the phones are successfully manufactured
there is no assurance of the acceptance of the end points.
Successful roll out is not guaranteed and is contingent on factors
including but not limited to our meeting certain industry
standards, the availability of our vendors to meet agreed terms,
supply from vendors being sufficient to meet demand, industry
acceptance of the end points, end points meeting the needs of our
customers, competitive pricing of the end points, feature set of
the end points being up to competitive standards, regulatory
approval as required of the end points and competitor claims
relating to the end points. Our failure to be able to fully
implement the sale of the Crexendo end points or the inability to
have end points manufactured to meet our supply needs may cause us
damage as well as require us to have to purchase end points from
other suppliers at a higher price which could affect sales and
margins. Our VoIP telephony products are not currently intended to
work with other competitors’ or vendors' equipment. Our
inability to operate with competitor’s equipment or services
may impact our competitiveness and our ability to acquire
customers.
Changes in laws and regulations and the interpretation and
enforcement of such laws and regulations could adversely impact our
financial results or ability to conduct business.
We are
subject to a variety of federal and state laws and regulations as
well as oversight from a variety of governmental agencies and
public service commissions. The laws governing our business may
change in ways that harm our business. Federal or state
governmental agencies administering and enforcing such laws may
also choose to interpret and apply them in ways that harm our
business. These interpretations are also subject to change.
Regulatory action could materially impair or force us to change our
business model and may adversely affect our revenue, increase our
compliance costs, and reduce our profitability. In addition,
governmental agencies such as the Securities and Exchange
Commission (SEC), Internal Revenue Service (IRS), Federal Trade
Commission (FTC), Federal Communication Commission (FCC) and state
taxing authorities may conclude that we have violated federal laws,
state laws or other rules and regulations, and we could be subject
to fines, penalties or other actions that could adversely impact
our financial results or our ability to conduct
business.
Our Telecommunications services are
required to comply with industry standards, FCC regulations,
privacy laws as well as certain State and local jurisdiction
specific regulations failure to comply with those may subject us to
penalties and may also require us to modify existing products
and/or service.
The
acceptance of telephony services and network services are dependent
upon our meeting certain industry standards. We are required to
comply with certain rules and regulations of the FCC regarding
safety standards. Standards are continuously being modified and
replaced. As standards evolve, we may be required to modify our
existing products or develop and support new versions of our
products. We must comply with certain federal, state, and local
requirements regarding how we interact with our customers,
including marketing practices, consumer protection, privacy, and
billing issues, the provision of 9-1-1 emergency service and the
quality of service we provide to our customers. The failure of our
products and services to comply, or delays in compliance, with
various existing and evolving standards could delay future
offerings and impact our sales, margins, and profitability. Changes
to the Universal Service Funds by the FCC or various States may
require us to increase our costs which could negatively affect
revenue and margins.
We are subject to Federal laws and FCC regulations
that require us to protect customer information. While we have
protections in place to protect customer information there is no
assurance that our systems will not be subject to failure or
intentional fraudulent attack. The failure to protect required
information could subject us to penalties and diminish the
confidence our customers have in our systems which could negatively
affect results. While we try to comply with all applicable data
protection laws, regulations, standards, and codes of conduct, as
well as our own posted privacy policies and contractual commitments
to the extent possible, any failure by us to protect our
users’ privacy and data, including as a result of our systems
being compromised by hacking or other malicious or surreptitious
activity, could result in a loss of user confidence in our services
and ultimately in a loss of users, which could materially
and adversely affect our business as well as subject us to law
suits, civil fines and criminal penalties.
Governmental
entities, class action lawyers and consumer advocates are reviewing
the data collection and use by companies that must maintain such
data. Our own requirements as well as regulatory codes of conduct,
enforcement actions by regulatory agencies, and lawsuits by other
parties could impose additional compliance costs on us as well as
subject us to unknown potential liabilities. These evolving laws,
rules and practices may also curtail our current business
activities which may delay or affect our ability to become
profitable as well as affect customers and other business
opportunities.
6
We are also subject
to the privacy and data protection-related obligations in our
contracts with our customers and other third parties. Any failure,
or perceived failure, to comply with federal, state, or
international laws, or to comply with our contractual obligations
related to privacy, could result in proceedings or actions against
us which could result in significant liability to us as well as
harm to our reputation. Additionally, third parties with whom we
contract may violate or appear to violate laws or regulations which
could subject us to the same risks.
There
is considerable uncertainty with respect to the state of law
governing data transfers between the European Union ("EU"), and
other countries with similar data protection laws, and it remains
unclear what the final resolution will be for cross-border data
transfers of personal information. There may be risks associated
with data transfer and customers who use International
Locations.
States are adding regulation for VoIP
carriers which could increase our costs and change certain aspects
of our service.
Certain states take the position that offerings by
VoIP providers are intrastate and therefore subject to state
regulation. We have registered as a CLEC in most states, however
our rates are not regulated in the same manner as traditional
telephone service providers. Some states are also requiring that we
register as a seller of VoIP services even though we have
registered as a CLEC. Some states argue that if the beginning and
end points of communications are known, and if some of these
communications occur entirely within the boundaries of a state, the
state can regulate that offering and may therefore add additional
taxes or surcharges or regulate rates in a similar matter to
traditional telephone service providers. We believe that the FCC
has pre-empted states from regulating VoIP offerings in the same
manner as providers of traditional telecommunications services. We
cannot predict how this issue will be resolved or its impact
on our business at this time.
Our ability to offer services outside the U.S. is subject to
different regulations which may be unknown and
uncertain.
Regulatory
treatment of VoIP telephony outside
the United States varies from country to country, and local
jurisdictions. Many times, the laws are vague, unclear and
regulations are not enforced uniformly. We are licensed as a VoIP
seller in Canada, and are considering expanding to other countries.
We also cannot control if our customers take their devices out of
the United States and use them abroad. Our resellers may sell to
customers who maintain facilities outside the United States. The
failure by us or our customers and resellers to comply with laws
and regulations could reduce our revenue and profitability. As we
expand to additional Countries there may be additional regulations
that we are required to comply with, the failure to comply or
properly assess regulations may subject us to penalties, fines and
other actions which could materially affect our
business.
We have targeted sales to mid-market and larger enterprise
customers. Not properly managing these customers could negatively
affect our business, margins, cash flow and
operations.
Selling
to larger enterprise customers contains inherent risks and
uncertainties. Our sales cycle has become more time-consuming and
expensive. The delays associated with closing and installing larger
customers may impact results on a quarter to quarter basis. There
may be additional pricing pressure in this market which may affect
margins and profitability. Revenue recognition may be delayed for
some complex transactions, all of which could harm our business and
operating results. The loss of a large customer may have a material
negative impact in quarterly or annual results, and may delay or
prevent cash flow break even or profitability.
Multi
location users require additional and expensive customer service
which may require additional expense and impact margins on
enterprise sales. Enterprise customers may demand more features,
integration services and customization which require additional
engineering and operational time which could impact margins on an
enterprise sale. Multi location enterprise customer sales may have
different requirement in different locations which may be difficult
to fulfill or satisfy various interests which could result in
cancellations.
Enterprise
customers might demand we provide service locations internationally
where we may encounter technical, logistical, infrastructure and
regulatory limitations on our ability to implement or deliver our
services. This may result in service issues or cancellation of the
entire contract. Further with larger enterprise customer sales, the
risk of customers transporting desktop devices internationally
without our knowledge may increase.
Changes to rates by our suppliers, competitors and increasing
regulatory charges may require us to raise prices which could
impact results.
Pricing
in the telecommunications industry is very fluid and competitive.
Price is often a substantial motivation factor in a
customer’s decision to switch to our telephony products and
services. Our competitors may reduce their rates which may require
us to reduce our rates, which would affect our margins and
revenues, or otherwise make our pricing non-competitive. Our
upstream carriers, suppliers and vendors may increase their rates
thus directly impacting our cost of sales, which would affect our
margins. Competitor rate decreases could require us to lower our
rates to remain competitive, which could substantially reduce our
revenues and profitability. Interconnected VoIP traffic may be
subject to increased charges. Should this occur, the rates paid to
our underlying carriers may increase which could reduce our
profitability. Changes in our underlying costs of sales may
increase rates we charge our customers which could make us less
competitive and impact our sales and retention of existing
customers
7
The telecommunications industry is highly competitive. We face
intense competition from traditional telephone companies, wireless
companies, cable companies and alternative voice communication
providers and other VoIP companies.
Our
Cloud VoIP telecommunication product competes with other VoIP
providers. In addition, we also compete with traditional telephone
service providers which provide telephone service based on the
public switched telephone network. Our VoIP offering is not fully
compatible with such customers. Some of these traditional providers
have also added VoIP services. There is also competition from cable
providers, which have added VoIP service offerings in bundled
packages to their existing cable customers. The telecommunications
industry is highly competitive. We face intense competition from
traditional telephone companies, wireless companies, cable
companies, and alternative voice communication
providers.
Most
traditional wire line and wireless telephone service providers,
cable companies, and some VoIP providers are substantially larger
and better capitalized than we are and have the advantage of a
large existing customer base. Because most of our target customers
are already purchasing communications services from one or more of
these providers, our success is dependent upon our ability to
attract target customers away from their existing providers. Our
competitors’ financial resources may allow them to offer
services at prices below cost or even for free in order to maintain
and gain market share or otherwise improve their competitive
positions.
The
markets for our products and services are continuing to evolve and
are increasingly competitive. Demand and market acceptance for
recently introduced and proposed new products and services and
sales of such products and services are subject to a high level of
uncertainty and risk. Our business may suffer if the market
develops in an unexpected manner, develops more slowly than in the
past or becomes saturated with competitors, if any new products and
services do not sustain market acceptance. A number of very large,
well-capitalized, high profile companies serve the e-commerce, VoIP
and Cloud technology markets. If any of these companies entered our
markets in a focused and concentrated fashion, we could lose
customers, particularly more sophisticated and financially stable
customers.
Our VoIP service competes against established well financed
alternative voice communication providers, (such as 8x8 and Ring
Central) who may provide comparable services at comparable
pricing.
Pricing
in the telecommunications industry is very fluid and competitive.
Price is often a substantial motivation factor in a
customer’s decision to switch to our telephony products and
services. Our competitors may reduce their rates which may require
us to reduce our rates, which would affect our margins and
revenues, or otherwise make our pricing
non-competitive.
The FCC net neutrality rules may be subject to change. We cannot
predict the effect of this rulemaking or predict whether any new
rules will impact our business.
We
believe interference with access to
our products and services is unlikely, broadband Internet access
provider interference has occurred in limited circumstances in the
United States and could result in a loss of existing users and
increased costs, and could impair our ability to attract new users,
thereby negatively impacting our revenue and growth. The FCC has
implemented network neutrality rules in the past legal challenges
and congressional action may change current rules which could
result in, interference with our service or higher charges. If that
occurs it could cause us to lose existing customers, impair our
ability to attract new customers, and harm our revenue and growth.
These problems could also arise in international markets. Most
foreign countries have not adopted formal net neutrality
rules like those adopted by the FCC.
We have incurred operating losses.
We
sustained operating losses in the
current and prior years. Our ability to obtain positive cash flows
from operating activities will depend on many factors including,
but not limited to, our ability to (i) reduce costs, (ii) improve
sales and marketing efficiencies, (iii) reach more highly qualified
prospects, and (iv) achieve operational improvements. We have
incurred operating losses in each of the three prior years and may
incur operating losses in the foreseeable
future.
Our ability to use our net operating loss carry-forwards may be
reduced in the event of an ownership change, and could adversely
affect our financial results.
As of
December 31, 2016, we had net operating loss (“NOL”)
carry-forwards of approximately $24,325,000, of which $5,761,000 is
subject to Section 382 limitations. Section 382 of the
Internal Revenue Code, as amended (the “Code”) imposes
limitations on a corporation’s ability to utilize its NOL
carry-forwards. In general terms, an ownership change results from
transactions increasing the ownership of certain stockholders in
the stock of a corporation by more than 50% over a three-year
period. Since our formation, we have issued a significant number of
shares, and purchasers of those shares have sold some of them,
resulting in two ownership changes, as defined by Code
Section 382. As a result of the most recent ownership change,
utilization of our NOL is subject to an annual limitation
determined by multiplying the value of our stock at the time of the
ownership change by the applicable federal long-term tax-exempt
rate. The annual limitation is approximately $461,000. Any limited
amounts may be carried over into later years, and the amount of the
limitation may, under certain circumstances, be increased by the
“recognized built-in gains” that occur during the
five-year period after the ownership change (the recognition
period). Future changes in ownership of more than 50% may also
limit the use of these remaining NOL carry-forwards. Our earnings,
if any, and cash resources would be materially and adversely
affected if we cannot receive the full benefit of the remaining NOL
carry-forwards. An ownership change could occur as a result of
circumstances that are not within our control.
8
Fluctuations in our operating results may affect our stock price
and ability to raise capital.
Our
operating results for any given quarter or fiscal year should not
be relied upon as an indication of future performance. Quarter to
quarter comparisons of our results of operations may not be
meaningful as a result of (i) our limited operating history
relating to Web Services and Cloud Telecommunications Services and
(ii) the emerging nature of the markets in which we compete, and
(iii) our lack of profitability. Our future results will fluctuate,
and those results may fall below the expectations of investors and
may cause the trading price of our common stock to fall. This may
impair our ability to raise capital, should we seek to do so. Our
quarterly results may fluctuate based on, including but not limited
to our sales efforts and results, marketing, management, our
ability to compete, pricing and other risk factors contained in
this section.:
Our Chief Executive Officer owns a significant amount of our common
stock and could exercise substantial corporate control. There may
be limited ability to sell the company absent the consent of the
CEO.
Steven
G Mihaylo, our Chief Executive Officer
(“CEO”), owns 68% of the outstanding shares of our
common stock based on the number of shares outstanding as of
December 31, 2016. As a result, Mr. Mihaylo would have the ability
to determine the outcome of matters submitted to our stockholders
for approval, including the election of directors and any merger,
amalgamation, consolidation or sale of all or substantially all of
our assets. Mr. Mihaylo may have the ability to control the
management and affairs of our Company. As a “control
company” it may not be required that the company maintains an
independent board. As a director and officer, Mr. Mihaylo owes
a fiduciary duty to our stockholders. As a stockholder,
Mr. Mihaylo is entitled to vote his shares, in his own
interests, which may not always be in the interests of our
stockholders generally. Accordingly, even though certain
transactions may be in the best interests of other stockholders,
this concentration of ownership may harm the market price of our
common stock by, among other things, delaying, deferring or
preventing a change in control of our Company, impeding a merger,
amalgamation, consolidation, takeover or other business combination
involving our Company, or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of
our Company.
In
addition, sales or other dispositions of our shares by Mr. Mihaylo
may depress our stock price. Sales of a significant number of
shares of our common stock in the public market could harm the
market price of our common stock. As additional shares of our
common stock become available for resale in the public market, the
supply of our common stock will increase, which could result in a
decrease in the market price of our common stock.
Some of the provisions of our certificate of
incorporation and bylaws could make it more difficult for a third
party to acquire us, even if doing so might be beneficial to our
stockholders by providing them with the opportunity to sell their
shares at a premium to the then market price. Our bylaws contain
provisions regulating the introduction of business at annual
stockholders’ meetings by anyone other than the board of
directors. These provisions may have the effect of making it more
difficult, delaying, discouraging, preventing or rendering
costlier an acquisition or a change in control of our
Company.
Our securities have been thinly traded. An active trading market in
our equity securities may cease to exist, which would adversely
affect the market price and liquidity of our common stock, in
addition our stock price has been subject to fluctuating
prices.
Our
common stock is traded exclusively in
the over-the-counter market. We cannot predict the actions of
market makers, investors or other market participants, and can
offer no assurances that the market for our securities will be
stable. If there is no active trading market in our equity
securities, the market price and liquidity of the securities will
be adversely affected. The
market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market or
the perception that these sales could occur. These sales also might
make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. As of
February 16, 2017, we had outstanding 13,653,556 shares of common
stock.
Additional dilution will result if outstanding
options to acquire shares of our common stock are exercised. In
addition, in the event future financings are required they could be
convertible into or exchangeable for our equity securities,
investors may experience additional dilution.
Lack of sufficient stockholder equity or continued losses from
operations could subject us to fail to comply with the listing
requirements of the OTC.QX, if that occurred, the price of our
common stock and our ability to access the capital markets could be
negatively impacted, and our business will be harmed. We do not
meet the minimum listing requirement for the NYSE or
NASDAQ
Our
common stock is currently listed on
OTC.QX. We have had annual losses from continuing operations for
the last five years with the possibility of continued losses. While
at current such losses would not impact our listing with OTC.QX
regulations may change from time to time and it is possible we may
not remain in compliance with the minimum condition of OTC.QX
continued listing standards. Delisting from the OTC.QX could
negatively affect the trading price of our stock and could also
have other negative results, including the potential loss of
confidence by suppliers and employees, the failure to attract the
interest of institutional investors, and fewer business development
opportunities. At present we do not meet the minimum listing
requirements for the New York Stock Exchange (NYSE) or the NASDAQ
Stock Exchange (NASDAQ) which may make raising capital, issuing
additional securities or using the securities of the Company to
effect acquisitions or merger more difficult or
expensive.
9
If we do not successfully expand our sales including our partner
program, direct sales and sales channels, we may be unable to
substantially increase our sales.
We sell
our products primarily through direct sales, inside sales and our
telecommunications partner program, and we must substantially
expand the number of partners and producing direct sales personnel
to increase organic revenue substantially. If we are unable to
expand our partner network and the sales per partner and hire and
retain qualified sales personnel or if new sales personnel fail to
develop the necessary skills to be productive, or if they reach
productivity more slowly than anticipated, our ability to increase
our organic revenue and grow our business could be compromised. Our
sales personnel may require a long period of time to become
productive. The time required in achieving efficiency, as well as
the challenge of attracting, training, and retaining qualified
candidates, may make it difficult to grow revenue.
We face risks in our sales to certain market segments including but
not limited to sales subject to HIPPA Regulations.
We have
sold and will continue to attempt to sell to certain customer
segments which may have certain requirements for additional privacy
or security. In addition sales may be made to customers that are
subject to additional security requirements and or HIPPA
requirements. Selling into segments with additional requirements
increases potential liability which in some instances may be
unlimited. While the Company believes, it meets or exceeds all
requirements for sales into such segments there is no assurance
that the Company systems fully comply with all requirements. In
addition, there are risks associated with third party system
failure, or parties illegally hacking into the Company systems. Our
customers can use our services to store contact and other personal
or identifying information, and to process, transmit, receive,
store and retrieve a variety of communications and messages,
including information about their own customers and other contacts.
In addition, customers may use our services to store protected
health information, or PHI, that is protected under the Health
Insurance Portability and Accountability Act, or HIPAA,
Noncompliance with laws and regulations relating to privacy and
HIPAA may lead to significant fines, penalties or civil
liability.
If we do not successfully expand our infrastructure and build
diverse geo redundant locations which require large investments, we
may be unable to substantially increase our sales and retain
customers
Our
ability to provide telecommunications services are dependent upon
on Data center, facilities and equipment in our single Data Center.
While most of our equipment required for operating these services
are redundant in nature and offer high availability, certain types
of failures or malfunctioning of critical hardware/software
equipment, including but not limited to fire, water or other
physical damage may impact our ability to deliver continuous
service to our customers, which may impact our revenue,
profitability and retaining of customer and acquiring new
customers.
Our
ability to provide telecommunication services due to loss of
physical facilities in our only data center from act of God or
terrorism or vandalism or gross negligence of person(s) currently
or formerly associated with the company may result in loss of
revenue and future business.
Our
ability to recover from disasters, if and when they occur is
paramount to offer continued service to our existing customers.
While we have adequate equipment and procedures to handle disaster
recovery including but not limited to offsite data storage;
recovery from such scenarios may cause excessive delays in
restoration of service and may result in some data loss. This may
severely impact our revenue and may lead to loss of
customers.
Our ability to provide telecommunications services is dependent
upon third-party facilities and equipment, the failure of which
could cause delays or interruptions of our service and impact our
revenue and profitability.
Our ability to provide quality and reliable
telephony service is in part dependent upon the proper functioning
of facilities and equipment owned and operated by third parties and
is, therefore, beyond our control. Our VoIP service (and to a
lesser extend our e-commerce services) requires our customers to
have an operative broadband Internet connection and an electrical
power supply, which are provided by the customer’s Internet
service provider and electric utility company and not by us. The
quality of some broadband Internet connections may be too poor for
customers to use our services properly. In addition, if there is
any interruption to a customer’s broadband Internet service
or electrical power supply, that customer will be unable to make or
receive calls, including emergency calls (our E-911 service), using our service. We
outsource several of our network functions to third-party
providers. If our third-party service providers fail to maintain
these facilities properly, or fail to respond quickly to problems,
our customers may experience service interruptions. The failure of
any of these third party service providers to properly maintain
services may be subject to factors including but not limited to the
following: (i) cause a loss of customers, (ii) adversely affect our
reputation, (iii) cause negative publicity, (iv) negatively impact
our ability to acquire customers, (v) negatively impact our revenue
and profitability, (vi) potential law suits for not reaching E-911
services, and (vii) potential law suits for loss of business and
loss of reputation.
10
We rely on third parties to provide a portion of our customer
service responses, initiate local number portability for our
customers, deliver calls to and from PSTN and other public
telephone VoIP/Wireless service providers and provide aspects of
our E-911 service.
We offer our telephony customers support 24 hours
a day, seven days a week. We rely on third parties (sometimes
outside of the U.S) to provide some services that respond to
customer inquiries. These third-party providers generally represent
us without identifying themselves as independent parties. The
ability of third-party providers to provide these representatives
may be disrupted due to issues outside our
control.
We also
maintain an agreement with an E-911
provider to assist us in routing emergency calls directly to an
emergency service dispatcher at the PSAP in the area of the
customer’s registered location and terminating E-911 calls.
We also contract with a provider for the national call center that
operates 24 hours a day, seven days a week to receive certain
emergency calls and with several companies that maintain PSAP
databases for the purpose of deploying and operating E-911
services. The dispatcher will
have automatic access to the customer's telephone number and
registered location information. If a customer moves their Crexendo
service to a new location, the customer's registered location
information must be updated and verified by the customer. Until
that takes place, the customer will have to verbally advise the
emergency dispatcher of his or her actual location at the time of
an emergency 9-1-1 call. This can lead to delays in the
delivery of emergency services
Interruptions
in service from these vendors could
also cause failures in our customers’ access to E-911
services and expose us to liability.
We
also have agreements with companies
that initiate our local number portability, which allow new
customers to retain their existing telephone numbers when
subscribing to our services. We will need to work with these
companies to properly port numbers. The failure to port numbers may
subject us to loss of customers or regulatory
review.
If
any of these third parties do not provide reliable, high-quality
service, our reputation and our business will be harmed. In
addition, industry consolidation among providers of services to us
may impact our ability to obtain these services or increase our
expense for these services.
Our dependence on outside contractors and third-party agents for
fulfillment of certain items and critical manufacturing services
could result in product or delivery delays and/or damage our
customer relations.
We
outsource the manufacturing of certain products we sell and
products we provide. We submit purchase orders to agents or the
companies that manufacture the products. We describe, among other
things, the type and quantities of products or components to be
supplied or manufactured and the delivery date and other terms
applicable to the products or components. Our suppliers or
manufacturers potentially may not accept any purchase order that we
submit. Our reliance on outside parties involves a number of
potential risks, including: (i) the absence of adequate capacity,
(ii) the unavailability of, or interruptions in access to,
production or manufacturing processes, (iii) reduced control over
delivery schedules, (iv) errors in the product, and (v) claims of
third party intellectual infringement or defective merchandise. If
delays, problems or defects were to occur, it could adversely
affect our business, cause claims for damages to be filed against
us, and negatively impact our consolidated operations and cash
flows.
Our success depends in part upon the capacity, reliability, and
performance of our network infrastructure, including the capacity
provided by our Internet bandwidth suppliers.
We
depend on these companies to provide uninterrupted and error-free
service. Some of these providers are also our competitors. We do
not have control over these providers. We may be subject to
interruptions or delays in network service. If we fail to maintain
reliable bandwidth or performance that could significantly reduce
customer demand for our services and damage our
business.
Our success depends in part upon the capacity, reliability, and
performance of our telecom carriers, and their network
infrastructure, including the capacity provided by our Tier 1 and
non-Tier 1 Telecom suppliers for Telecom Origination and
Termination Services
We
depend on these companies to provide uninterrupted and error-free
service telecom services, sourcing of DIDs, porting of numbers and
delivering telephone calls from and to endpoints and devices on our
network. Some of these providers are also our competitors. We do
not have control over these providers. We may be subject to
interruptions or delays in their service. If we fail to maintain
reliable connectivity or performance with our upstream carriers it
could then significantly reduce customer demand for our services
and damage our business.
Errors in our technology or technological issues outside our
control could cause delays or interruptions to our
customers.
Our
services (including e-commerce and VoIP) may be disrupted by
problems with our technology and systems such as malfunctions in
our software or facilities. In addition there may be service
interruptions for reasons outside our control. Our customers and
potential customers subscribing to our services have experienced
interruptions in the past and may experience interruptions in the
future as a result of these types of problems. Interruptions could
cause us to lose customers and offer customer credits, which could
adversely affect our revenue and profitability. Network and
Telecommunication interruptions may also impair our ability to
sign-up new customers. In addition since our systems and our
customers’ ability to use our services are
Internet-dependent, our services may be subject to
“cyber-attacks” from the Internet, which could have a
significant impact on our systems and services. Our
customers’ ability to use our services is dependent on
third-party Internet providers which may suffer service
disruptions. If service interruptions adversely affect the
perceived reliability of our service, we may have difficulty
attracting and retaining customers and our growth may
suffer.
11
Our operations could be hurt by a natural disaster, network
security breach, or other catastrophic event.
We maintain a fully redundant network
infrastructure in our data center in Tempe, Arizona. Currently, we
do not have multiple site capacity if any catastrophic event
occurs, although we expect to attain multiple site redundancy
sometime in the future. This system does not guarantee continued
reliability if a catastrophic event occurs. Despite implementation
of network security measures, our servers may be vulnerable to
computer viruses, break-ins, and similar disruptions from
unauthorized tampering with our computer systems including, but not
limited to, denial of service attacks. In addition, if there is a
breach or alleged breach of security or privacy involving our
services including but not limited to data loss, or if any third
party undertakes illegal or harmful actions using our
communications or e-commerce services, our business and reputation
could suffer substantial adverse publicity and impairment. We have
experienced interruptions in service in the past. While we do not
believe that we have lost customers as a consequence, the harm to
our reputation is difficult to assess. We have taken and continue
to take steps to improve our infrastructure to prevent service
interruptions.
Failure in our data center or services could lead to significant
costs and disruptions.
All data centers, including ours, are subject to various
points of failure. Problems with cooling equipment, generators,
uninterruptible power supply, routers, switches, or other
equipment, whether or not within our control, could result in
service interruptions for our customers as well as equipment
damage. Any failure or downtime could affect a significant
percentage of our customers. The total destruction or severe
impairment of our data center facilities could result in
significant downtime of our services and the loss of customer
data.
Internet security issues and growing Cyber threats pose risks to
the development of e-commerce and our business.
Security and
privacy concerns may inhibit the growth of the Internet and other
online services generally, especially as a means of conducting
commercial transactions.
We could experience security breaches in the transmission and
analysis of confidential and proprietary information of the
consumer, the merchant, or both, as well as our own confidential
and proprietary information.
Anyone
able to circumvent security measures could misappropriate
proprietary information or cause interruptions in our operations,
as well as the operations of the merchant. We may be required to
expend significant capital and other resources to protect against
security breaches or to minimize problems caused by security
breaches. To the extent that we experience breaches in the security
of proprietary information which we store and transmit, our
reputation could be damaged and we could be exposed to a risk of
loss or litigation.
We depend on our senior management and other key personnel, and a
loss of these individuals could adversely impact our ability to
execute our business plan and grow our business.
We
depend on the continued services of our key personnel, including
our Officers and certain engineers. Each of these individuals has
acquired specialized knowledge and skills with respect to our
operations. The loss of one or more of these key personnel could
negatively impact our performance. In addition, we expect to hire
additional personnel as we continue to execute our strategic plan,
particularly if we are successful in expanding our operations.
Competition for the limited number of qualified personnel in our
industry is intense. At times, we have experienced difficulties in
hiring personnel with the necessary training or
experience.
We depend upon Industry standard protocols,
best practices, solutions, third-party software, technology, tools
including but not limited to Open Source
software.
We rely
on non-proprietary third party licensing and software some of which
may be Open Source and protected under various licensing
agreements. We may be subject to additional royalties, license or
trademark infringement costs or other unknown costs when one or
more of these third-party technologies are affected or need to be
replaced due to end-of-support or end-of-sale of such third
parties.
We may incur substantial expenses in defending against third-party
patent and trademark infringement claims regardless of their
merit.
From
time to time, parties may assert patent infringement claims against
us in the form of letters, lawsuits, and other forms of
communication. Third parties may also assert claims against us
alleging infringement of copyrights, trademark rights, trade secret
rights or other proprietary rights or alleging unfair competition.
If there is a determination that we have infringed third-party
proprietary rights, we could incur substantial monetary liability
and be prevented from using the rights in the future.
12
Our publicly filed SEC reports are reviewed by the SEC from time to
time and any significant changes required as a result of any such
review may result in material liability to us and have a material
adverse impact on the trading price of our common
stock.
Examinations by relevant tax authorities may result in material
changes in related tax reserves for tax positions taken in
previously filed tax returns or may impact the valuation of certain
deferred income tax assets, such as net operating loss
carry-forwards.
Based
on the outcome of examinations by relevant tax authorities, or as a
result of the expiration of statutes of limitations for specific
jurisdictions, it is reasonably possible that the related tax
reserves for tax positions taken regarding previously filed tax
returns will materially change from those recorded in our financial
statements. In addition, the outcome of examinations may impact the
valuation of certain deferred income tax assets (such as net
operating loss carry-forwards) in future periods. It is not
possible to estimate the impact of the amount of such changes, if
any, to previously recorded uncertain tax positions.
We may undertake acquisitions, mergers or change to our capital
structure to expand our business, which may pose risks to our
business and dilute the ownership of our existing
stockholders.
As part of a potential growth strategy, we may
attempt to acquire or merge with certain businesses. Whether we
realize benefits from any such transactions will depend in part
upon the integration of the acquired businesses; the performance of
the acquired products, services and capacities of the technologies
acquired, as well as the personnel hired in connection therewith.
Accordingly, our results of operations could be adversely affected
from transaction-related charges, amortization of intangible
assets, and charges for impairment of long-term assets. While we
believe that we have established appropriate and adequate
procedures and processes to mitigate these risks, there can
be no assurance that any potential transaction will be
successful.
In
addition, the financing of any
acquisition may require us to raise additional funds through public
or private sources. Additional funds may not be available on terms
that are favorable to us and, in the case of equity financings, may
result in dilution to our stockholders. Future acquisitions by us
could also result in large and immediate write-offs or assumptions
of debt and contingent liabilities, any of which may have a
material adverse effect on our consolidated financial position,
results of operations, and cash flows.
We collect personal and credit card information from our customers
and employees could misuse this information.
We
maintain credit card and other personal information in our systems.
Due to the sensitive nature of retaining such information we have
implemented policies and procedures to preserve and protect our
data and our customers’ data against loss, misuse,
corruption, misappropriation caused by systems failures,
unauthorized access, or misuse. Notwithstanding these policies, we
could be subject to liability claims by individuals and customers
whose data resides in our databases for the misuse of that
information. While the Company believes its systems meet or exceed
industry standards the Company does not believe it is required to
meet PCI level 1 compliance and has not recertified under that
level. Failure to meet PCI compliance levels could negatively
impact the Company’s ability to collect and store credit card
information which could cause substantial disruption to our
business.
ITEM 2.
PROPERTIES
Our
corporate offices consist of approximately 22,000 square feet of
office space in Tempe, Arizona owned by our CEO and approximately
1,300 square feet of office space in Reno, NV which is leased from
an unaffiliated third party. Our corporate office is located at
1615 South 52nd Street, Tempe,
Arizona 85281. We maintain property insurance on the corporate
office building as required by the lease and tenant fire and
casualty insurance on our assets located in these buildings in an
amount that we deem adequate.
ITEM 3.
LEGAL PROCEEDINGS
From
time to time we receive inquiries from federal, state, city and
local government officials as well as the FCC and taxing
authorities in the various jurisdictions in which we operate. These
inquiries and investigations related primarily to our discontinued
seminar operations and concern compliance with various city,
county, state, and/or federal regulations involving sales,
representations made, customer service, refund policies, services
and marketing practices. We respond to these inquiries and have
generally been successful in addressing the concerns of these
persons and entities, without a formal complaint or charge being
made, although there is often no formal closing of the inquiry or
investigation. There can be no assurance that the ultimate
resolution of these or other inquiries and investigations will not
have a material adverse effect on our business or operations, or
that a formal complaint will not be initiated. We also receive
complaints and inquiries in the ordinary course of our business
from both customers and governmental and non-governmental bodies on
behalf of customers, and in some cases these customer complaints
have risen to the level of litigation. There can be no assurance
that the ultimate resolution of these matters will not have a
material adverse effect on our business or results of
operations.
13
ITEM 4.
MINE SAFETY DISCLOSURES
The
disclosure required by this item is not applicable
PART
II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
Our
common stock began trading on the NYSE - MKT on August 16,
2004 under the symbol “IIG.” In May 2011, our
stockholders approved an amendment to our Certificate of
Incorporation to change our name from "iMergent, Inc." to
"Crexendo, Inc." The name change was effective May 18, 2011. Our
ticker symbol "IIG" on the New York Stock Exchange was changed to
“EXE” on May 18, 2011. On January 13, 2015, the Company
moved to the OTCQX Marketplace and our ticker symbol was changed to
“CXDO”. The following table sets forth the range of
high and low sales prices as reported on the OTCQX Marketplace for
the periods indicated.
|
High
|
Low
|
Year
Ended December 31, 2016
|
|
|
October to December 2016
|
$1.55
|
$1.36
|
July to September 2016
|
1.50
|
1.30
|
April to June 2016
|
1.55
|
1.21
|
January to March 2016
|
1.41
|
0.61
|
Year
Ended December 31, 2015
|
|
|
October to December 2015
|
$2.30
|
$1.10
|
July to September 2015
|
2.25
|
1.85
|
April to June 2015
|
2.33
|
1.82
|
January to March 2015
|
2.70
|
1.40
|
SECURITY
HOLDERS
There
were 137 holders of record of our shares of common stock as of
February 16, 2017. The number of holders does not include
individual participants in security positions
listings.
DIVIDENDS
There
were no dividends declared for the years ended December 31, 2016
and 2015.
ISSUER
PURCHASES OF EQUITY SEQURITIES
None
RECENT
SALES OF UNREGISTERED SECURITIES
On
December 30, 2015, Crexendo, Inc. (the "Company") entered into a
Term Loan Agreement (the "Loan Agreement"), with Steven G. Mihaylo,
as Trustee of The Steven G. Mihaylo Trust dated August 19, 1999
(the "Lender"). Mr. Mihaylo is the principal shareholder and Chief
Executive Officer of the Company. Pursuant to the Loan Agreement,
the Lender has agreed to make an unsecured loan to the Company in
the initial principal amount of $1,000,000 (the
“Loan”). The Loan Agreement contains a provision which
requires the Lender to increase the amount of the Loan by up to an
additional $1,000,000 on the same terms and conditions as the
initial advance if the independent directors of the Company, in
their reasonable discretion, determine such an increase is
necessary for the funding needs of the Company and that the terms
of the Loan are in the best interests of the Company and its
stockholders. The term of the Loan is five years, with simple
interest paid at 9% per annum until a balloon payment is due
December 30, 2020. The Loan Agreement provides for interest to be
paid in shares of common stock of the Company (the “Common
Stock”) at a stock price of $1.20 (which is the average of
the high and low adjust close price of the Common Stock of the
Company for each business day for the period starting December 23,
2015 and ending December 29, 2015). For the first two years of the
Loan term, interest will be paid in advance at the beginning of
each year; for the last three years of the Loan term, interest will
be paid at the end of each year. After the second year of the Loan
term, there is no pre-payment penalty for early repayment of the
outstanding principal amount of the Loan. If the Loan is repaid
within the first two years of the Loan term, the Company will
forfeit prepaid interest as a pre-payment penalty.
14
Contemporaneously
with the execution of the Loan Agreement, the Company granted to
the Lender a warrant to purchase 250,000 shares of Common Stock
(the “Warrant”). The Warrant has a five-year term from
the date of the Loan Agreement. The Warrant is exercisable by the
Lender, at any time, and from time to time, during its term at a
price of $1.20 per share of Common Stock. The initial 250,000
warrants were exercised during 2016 generating proceeds of
$300,000. In the event the principal amount of the Loan is
increased by an additional $1,000,000, as determined by the
independent directors of the Company, the Company has agreed to
issue to the Lender a warrant to purchase an additional 250,000
shares of Common Stock on the same terms and subject to the same
conditions set forth in the Warrant. Subsequent to December 31,
2016, the Company entered into an amendment to our Loan Agreement
with Steven G. Mihaylo. The amendment extends the ability of the
Board of Directors to request the remaining $1.0 million available
under the Loan Agreement if necessary to fund operations through
May 30, 2018.
The
securities were offered and sold to Steven G. Mihaylo an accredited
investor without registration under the Securities Act or state
securities laws, in reliance on the exemptions provided by Section
4(2) of the Securities Act and Regulation D promulgated thereunder
and in reliance on similar exemptions under applicable state
laws.
ITEM
6.
SELECTED
FINANCIAL DATA
Not
required.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE
HARBOR
In addition to historical information, this Annual Report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number
of factors, risks and uncertainties, including the risk factors set
forth in Item 1A. above and the risk factors set forth in this
Annual Report. Generally, the words “anticipate”,
“expect”, “intend”, “believe”
and similar expressions identify forward-looking statements. The
forward-looking statements made in this Annual Report are made as
of the filing date of this Annual Report with the SEC, and future
events or circumstances could cause results that differ
significantly from the forward-looking statements included here.
Accordingly, we caution readers not to place undue reliance on
these statements. We expressly disclaim any obligation to update or
alter our forward-looking statements, whether, as a result of new
information, future events or otherwise after the date of this
document.
OVERVIEW
Crexendo is a CLEC
cloud services company that provides award winning cloud
telecommunications services, broadband Internet services and other
cloud business services. Our solutions are designed to provide
enterprise-class cloud services to any size businesses at
affordable monthly rates.
Cloud Telecommunications Services - Our
cloud telecommunications services transmit calls using IP or cloud
technology, which converts voice signals into digital data packets
for transmission over the Internet or cloud. Each of our calling
plans provides a number of basic features typically offered by
traditional telephone service providers, plus a wide range of
enhanced features that we believe offer an attractive value
proposition to our customers. This platform enables a user, via a
single “identity” or telephone number, to access and
utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device or an application on a mobile device.
We
generate recurring revenue from our cloud telecommunications and
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We generate
product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the
sale of equipment, including those from sales-type leases, are
recognized at the time of sale or at the inception of the lease, as
appropriate.
15
Our
Cloud Telecommunications Services revenue increased 30% or
$1,768,000 to $7,757,000 for the year ended December 31, 2016 as
compared to $5,989,000 for the year ended December 31, 2015. As of
December 31, 2016 and 2015, our backlog was $15,921,000 and
$13,907,000, respectively.
Web Services – We generate recurring revenue from
website hosting and other professional services.
Our Web
Services revenue decreased 26% or $472,000 to $1,362,000 for the
year ended December 31, 2016 as compared to $1,834,000 for the year
ended December 31, 2015.
Use
of Non-GAAP Financial Measures
To
evaluate our business, we consider and use non-generally accepted
accounting principles (Non-GAAP) net income (loss) and Adjusted
EBITDA as a supplemental measure of operating performance. These
measures include the same adjustments that management takes into
account when it reviews and assesses operating performance on a
period-to-period basis. We consider Non-GAAP net income (loss) to
be an important indicator of overall business performance because
it allows us to evaluate results without the effects of share-based
compensation, rent expense paid with common stock, and amortization
of intangibles. We define EBITDA as U.S. GAAP net income (loss)
before interest income, interest expense, other income and expense,
provision for income taxes, and depreciation and amortization. We
believe EBITDA provides a useful metric to investors to compare us
with other companies within our industry and across industries. We
define Adjusted EBITDA as EBITDA adjusted for share-based
compensation, and rent expense paid with stock. We use Adjusted
EBITDA as a supplemental measure to review and assess operating
performance. We also believe use of Adjusted EBITDA facilitates
investors’ use of operating performance comparisons from
period to period, as well as across companies.
In our
March 7, 2017 earnings press release, as furnished on Form 8-K, we
included Non-GAAP net loss, EBITDA and Adjusted EBITDA. The terms
Non-GAAP net loss, EBITDA, and Adjusted EBITDA are not defined
under U.S. GAAP, and are not measures of operating income,
operating performance or liquidity presented in analytical tools,
and when assessing our operating performance, Non-GAAP net loss,
EBITDA, and Adjusted EBITDA should not be considered in isolation,
or as a substitute for net loss or other consolidated income
statement data prepared in accordance with U.S. GAAP. Some of these
limitations include, but are not limited to:
●
EBITDA and Adjusted
EBITDA do not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
●
they do not reflect
changes in, or cash requirements for, our working capital
needs;
●
they do not reflect
the interest expense, or the cash requirements necessary to service
interest or principal payments, on our debt that we may
incur;
●
they do not reflect
income taxes or the cash requirements for any tax
payments;
●
although
depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will be replaced sometime in the
future, and EBITDA and Adjusted EBITDA do not reflect any cash
requirements for such replacements;
●
while share-based
compensation is a component of operating expense, the impact on our
financial statements compared to other companies can vary
significantly due to such factors as the assumed life of the
options and the assumed volatility of our common stock;
and
●
other companies may
calculate EBITDA and Adjusted EBITDA differently than we do,
limiting their usefulness as comparative measures.
We
compensate for these limitations by relying primarily on our U.S.
GAAP results and using Non-GAAP net income (loss), EBITDA, and
Adjusted EBITDA only as supplemental support for management’s
analysis of business performance. Non-GAAP net income (loss),
EBITDA and Adjusted EBITDA are calculated as follows for the
periods presented.
Reconciliation
of Non-GAAP Financial Measures
In
accordance with the requirements of Regulation G issued by the SEC,
we are presenting the most directly comparable U.S. GAAP financial
measures and reconciling the unaudited Non-GAAP financial metrics
to the comparable U.S. GAAP measures.
16
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net
Loss
|
||
(Unaudited)
|
||
|
Year Ended December 31,
|
|
|
2016
|
2015
|
|
(In thousands)
|
|
U.S.
GAAP net loss
|
$(2,792)
|
$(4,541)
|
Share-based
compensation
|
653
|
1,306
|
Amortization
of rent expense paid in stock, net of deferred gain
|
229
|
228
|
Amortization
of intangible assets
|
131
|
210
|
Amortization
of interest expense paid in stock
|
101
|
-
|
Non-GAAP
net loss
|
$(1,678)
|
$(2,797)
|
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted
EBITDA
|
||
(Unaudited)
|
||
|
Year Ended December 31,
|
|
|
2016
|
2015
|
|
(In
thousands)
|
|
U.S.
GAAP net loss
|
$(2,792)
|
$(4,541)
|
Depreciation
and amortization
|
146
|
270
|
Interest
expense
|
138
|
28
|
Interest
and other (income)/expense
|
( 121)
|
( 314)
|
Income
tax provision/(benefit)
|
12
|
( 12)
|
EBITDA
|
(2,617)
|
(4,569)
|
Share-based
compensation
|
653
|
1,306
|
Amortization
of rent expense paid in stock, net of deferred gain
|
229
|
228
|
Adjusted
EBITDA
|
$(1,735)
|
$(3,035)
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
The following accounting policies are the most critical in
understanding our consolidated financial position, results of
operations or cash flows, and that may require management to make
subjective or complex judgments about matters that are inherently
uncertain.
Goodwill – Goodwill is tested for
impairment using a fair-value-based approach on an annual basis
(December 31) and between annual tests if indicators of potential
impairment exist.
Intangible Assets - Our intangible
assets consist primarily of customer relationships and developed
technology. The intangible assets are amortized following the
patterns in which the economic benefits are consumed. We
periodically review the estimated useful lives of our intangible
assets and review these assets for impairment whenever events or
changes in circumstances indicate that the carrying value of the
assets may not be recoverable. The determination of impairment is
based on estimates of future undiscounted cash flows. If an
intangible asset is considered to be impaired, the amount of the
impairment will be equal to the excess of the carrying value over
the fair value of the asset.
Contingent Liabilities - Contingent
liabilities require significant judgment in estimating potential
payouts. Contingent considerations arising from business
combinations require management to estimate future payouts based on
forecasted results, which are highly sensitive to the estimates of
discount rates and future revenues. These estimates can change
significantly from period to period and reviewed each reporting
period to establish the fair value of the contingent
liability.
For
additional information on use of estimates, see summary of
Significant Accounting Policies in the notes to the Consolidated
Financial Statements.
17
RESULTS
OF OPERATIONS
Results of Consolidated Operations
The
following discussion of financial condition and results of
operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial
information included herein this Annual Report.
Results
of Consolidated Operations (in thousands, except for per share
amounts)
|
Year Ended December 31,
|
|
Consolidated
|
2016
|
2015
|
Revenue
|
$9,119
|
$7,823
|
Loss
before income taxes
|
(2,780)
|
(4,553)
|
Income
tax (provision)/benefit
|
( 12)
|
12
|
Net
loss
|
(2,792)
|
(4,541)
|
Basic/diluted
net loss per share
|
$(0.21)
|
$(0.35)
|
Year Ended December 31, 2016 Compared to Year Ended December 31,
2015
Revenue
Total
revenue increased 17% or $1,296,000 to $9,119,000 for the year
ended December 31, 2016 as compared to $7,823,000 for the year
ended December 31, 2015. Cloud Telecommunications Services segment
revenue increased 30% or $1,768,000, to $7,757,000 for the year
ended December 31, 2016 as compared to $5,989,000 for the year
ended December 31, 2015. Web Services segment revenue decreased 26%
or $472,000, to $1,362,000 for the year ended December 31, 2016 as
compared to $1,834,000 for the year ended December 31,
2015.
Loss Before Income Taxes
Loss
before income tax decreased 39% or $1,773,000 to $2,780,000 for the
year ended December 31, 2016 as compared to $4,553,000 for the year
ended December 31, 2015 primarily due to an increase in revenue of $1,296,000
to $9,119,000 for the year ended December 31, 2016 compared to
$7,823,000 for the year ended December 31, 2015, coupled
with a decrease in total
operating expenses of $780,000 to $11,882,000 for the year ended
December 31, 2016 as compared to $12,662,000 for the year ended
December 31, 2015, offeset by a reduction of other income of
$303,000.
Income Tax Provision
We had
an income tax provision of $12,000 for the year ended December 31,
2016 compared to an income tax benefit of $12,000 for the year
ended December 31, 2015. We had a pre-tax loss for the years ended
December 31, 2016 and 2015 of $2,780,000 and $4,553,000,
respectively, and a full valuation allowance on all of our deferred
tax assets for the years ended December 31, 2016 and
2015.
Segment Operating Results
The
Company has two operating segments, which consist of Cloud
Telecommunications Services and Web Services. The information below
is organized in accordance with our two reportable segments.
Segment operating income (loss) is equal to segment net revenue
less segment cost of revenue, sales and marketing, research and
development, and general and administrative
expenses.
18
Operating Results of our Cloud Telecommunications Services Segment
(in thousands)
|
Year Ended December 31,
|
|
Cloud Telecommunications Services
|
2016
|
2015
|
Revenue
|
$7,757
|
$5,989
|
Operating
expenses:
|
|
|
Cost
of revenue
|
3,422
|
3,175
|
Research
and development
|
793
|
731
|
Selling
and marketing
|
2,531
|
2,429
|
General
and administrative
|
4,185
|
4,558
|
Total
operating expenses
|
10,931
|
10,893
|
Operating
loss
|
(3,174)
|
(4,904)
|
Other
income/(loss)
|
(36)
|
71
|
Loss
before tax provision
|
$(3,210)
|
$(4,833)
|
Quarterly Financial Information
|
Year ended December 31, 2016
|
|||
|
For the three months ended
|
|||
Cloud Telecommunications Services
|
March 31,
|
June 30,
|
September
30,
|
December
31,
|
|
2016
|
2016
|
2016
|
2016
|
Revenue
|
$1,778
|
$1,920
|
$2,013
|
$2,046
|
Operating
expenses:
|
|
|
|
|
Cost
of revenue
|
848
|
864
|
878
|
832
|
Research
and development
|
218
|
207
|
183
|
185
|
Selling
and marketing
|
610
|
636
|
681
|
604
|
General
and administrative
|
1,065
|
1,085
|
987
|
1,048
|
Total
operating expenses
|
2,741
|
2,792
|
2,729
|
2,669
|
Operating
loss
|
(963)
|
(872)
|
(716)
|
(623)
|
Other
expense
|
(7)
|
(3)
|
(11)
|
(15)
|
Loss
before tax provision
|
$(970)
|
$(875)
|
$(727)
|
$(638)
|
|
Year ended December 31, 2015
|
|||
|
For the three months ended
|
|||
Cloud Telecommunications Services
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
|
2016
|
2016
|
2016
|
2016
|
Revenue
|
$1,324
|
$1,421
|
$1,542
|
$1,702
|
Operating
expenses:
|
|
|
|
|
Cost
of revenue
|
744
|
745
|
799
|
887
|
Research
and development
|
186
|
155
|
197
|
193
|
Selling
and marketing
|
600
|
569
|
624
|
636
|
General
and administrative
|
1,144
|
1,043
|
1,041
|
1,330
|
Total
operating expenses
|
2,674
|
2,512
|
2,661
|
3,046
|
Operating
loss
|
(1,350)
|
(1,091)
|
(1,119)
|
(1,344)
|
Other
income
|
21
|
18
|
19
|
13
|
Loss
before tax provision
|
$(1,329)
|
$(1,073)
|
$(1,100)
|
$(1,331)
|
19
Year Ended December 31, 2016 Compared to Year Ended December 31,
2015
Revenue
Cloud
Telecommunications Services segment revenue increased 30% or
$1,768,000, to $7,757,000 for the year ended December 31, 2016 as
compared to $5,989,000 for the year ended December 31, 2015. A
substantial portion of Cloud Telecommunications Services segment
revenue is generated through 36 to 60 month service contracts. As
such, we believe growth in Cloud Telecommunications Services
segment will initially be seen through increases in our backlog.
Backlog represents future revenue on contracts signed with no
service or payment provided at December 31, 2016 and December 31,
2015.
Cloud Telecommunications Services backlog as of December 31,
2016
|
$15,921
|
Cloud Telecommunications Services backlog as of December 31,
2015
|
$13,907
|
Cost of Revenue
Cost of
revenue consists primarily of fees we pay to third-party
telecommunications and business Internet providers, costs related
to installations, customer service, and the costs associated with
the purchase of desktop devices and third party equipment. Cost of
revenue increased 8% or $247,000, to $3,422,000 for the year ended
December 31, 2016 as compared to $3,175,000 for the year ended
December 31, 2015. The cost of revenue increase is directly related
to the increase in revenue.
Research and Development
Research and
development expenses primarily consist of salaries and benefits,
and materials related to the development of new cloud
telecommunications products. Research and development expenses
increased 8% or $62,000, to $793,000 for the year ended December
31, 2016 as compared to $731,000 for the year ended December 31,
2015 due to fluctuations
in headcount.
Selling and Marketing
Selling
and marketing expenses consist primarily of direct sales
representative salaries and benefits, partner channel commissions,
and the production of marketing materials. Selling and marketing
expenses increased 4% or $102,000, to $2,531,000 for the year ended
December 31, 2016 as compared to $2,429,000 for the year ended
December 31, 2015. The increase was primarily attributable to an
increase in commission expenses of $235,000 directly related to
increase in revenue, offset by a decrease in CRM software expense
of $15,000 and a decrease in salaries and benefits of
$118,000.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, accounting and
other professional services, and other administrative corporate
expenses. General and administrative expenses decreased 8% or
$373,000, to $4,185,000 for the year ended December 31, 2016 as
compared to $4,558,000 for the year ended December 31, 2015. The
decrease in general and administrative expenses is primarily due to
a company-wide reduction in general and administrative expenses as
we continue to cut unnecessary expenses. Consolidated general and
administrative expenses decreased 16%, or $961,000 to $4,900,000
for the year ended December 31, 2016 compared to $5,861,000 for the
year ended December 31, 2015. As Cloud Telecommunications Service
revenue continues to grow and Web Services revenue decreases, we
allocated less of the general and administrative expenses to the
Web Services segment and more expenses to the Cloud
Telecommunications Services segment.
Other Income/(Expense)
Other
income/(expense) primarily relates to the allocated portions of
interest expense and sublease rental income. Other income/(expense)
decreased 151% or $107,000 to $(36,000) for the year ended December
31, 2016 as compared to $71,000 for the year ended December 31,
2015. The decrease is due to an increase in interest expense on
notes payable and sublease income ending November 2016 from the
expiration of the lease.
20
Operating Results of our Web Services Segment (in
thousands)
|
Year Ended December 31,
|
|
Web Services
|
2016
|
2015
|
Revenue
|
$1,362
|
$1,834
|
Operating
expenses:
|
|
|
Cost
of revenue
|
203
|
402
|
Research
and development
|
33
|
48
|
Selling
and marketing
|
-
|
16
|
General
and administrative
|
715
|
1,303
|
Total
operating expenses
|
951
|
1,769
|
Operating
income
|
411
|
65
|
Other
income
|
19
|
215
|
Income
before tax provision
|
$430
|
$280
|
Quarterly Financial Information
|
Year ended December 31, 2016
|
|||
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Web Services |
2016
|
2016
|
2016
|
2016
|
Revenue
|
$396
|
$347
|
$320
|
$299
|
Operating
expenses:
|
|
|
|
|
Cost
of revenue
|
65
|
53
|
54
|
31
|
Research
and development
|
11
|
9
|
6
|
7
|
General
and administrative
|
226
|
189
|
153
|
147
|
Total
operating expenses
|
302
|
251
|
213
|
185
|
Operating
income
|
94
|
96
|
107
|
114
|
Other
income
|
11
|
5
|
3
|
-
|
Income
before tax provision
|
$105
|
$101
|
$110
|
$114
|
|
Year ended December 31, 2015
|
|||
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Web Services
|
2015
|
2015
|
2015
|
2015
|
Revenue
|
$528
|
$469
|
$430
|
$407
|
Operating
expenses:
|
|
|
|
|
Cost
of revenue
|
117
|
110
|
83
|
92
|
Research
and development
|
17
|
10
|
12
|
9
|
Selling
and marketing
|
3
|
11
|
-
|
2
|
General
and administrative
|
416
|
332
|
268
|
287
|
Total
operating expenses
|
553
|
463
|
363
|
390
|
Operating
income/(loss)
|
(25)
|
6
|
67
|
17
|
Other
income
|
194
|
15
|
-
|
6
|
Income
before tax provision
|
$169
|
$21
|
$67
|
$23
|
Year Ended December 31, 2016 Compared to Year Ended December 31,
2015
Revenue
Revenue
from Web Services is generated primarily through website hosting,
professional web management services, and EPTAs. Web Services
segment revenue decreased 26% or $472,000, to $1,362,000 for the
year ended December 31, 2016 as compared to $1,834,000 for the year
ended December 31, 2015. The decrease in revenue is related to
$91,000 decrease in web management professional services, a
$127,000 decrease in EPTA revenue due to decrease in outstanding
receivables, and a $254,000 decrease in hosting
revenue.
21
Cost of Revenue
Cost of
revenue consists primarily of bandwidth, customer service costs,
and outsourcing fees related to fulfillment of our professional web
management services. Cost of revenue decreased 50% or $199,000, to
$203,000 for the year ended December 31, 2016 as compared to
$402,000 for the year ended December 31, 2015. The cost of revenue
decrease is directly related to the reduction in
revenue.
Research and Development
Research and
development expenses primarily consist of salaries and benefits,
and related expenses which are attributable to the development of
our website development software products. Research and development
expenses decreased 31% or $15,000, to $33,000 for the year ended
December 31, 2016 as compared to $48,000 for the year ended
December 31, 2015. The decrease was related to a reduction of
salaries and benefits expenses.
Selling and Marketing
Selling
and marketing expenses consist primarily of salaries and benefits,
commissions as well as production of marketing
materials. Selling and marketing expense decreased 100%
or $16,000, to $0 for the year ended December 31, 2016 compared to
$16,000 for the year ended December 31, 2015. The decrease is
attributed to our shift in focus to our cloud telecommunications
services segment.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, accounting and
other professional services, and other administrative corporate
expenses. General and administrative expenses decreased 45% or
$588,000, to $715,000 for the year ended December 31, 2016 as
compared to $1,303,000 for the year ended December 31, 2015. The
decrease in general and administrative expenses is primarily due to
less of an allocation of corporate general and administrative
expenses resulting from the 26% decrease in revenue for the year
ended December 31, 2016 compared to the year ended December 31,
2015, and a company-wide reduction in general and administrative
expenses as we continue to cut unnecessary expenses. Consolidated
general and administrative expenses decreased 16%, or $961,000 to
$4,900,000 for the year ended December 31, 2016 compared to
$5,861,000 for the year ended December 31, 2015.
Other Income
Other
income decreased 91% or $196,000, to $19,000 for the year ended
December 31, 2016 as compared to $215,000 for the year ended
December 31, 2015. This decrease is primarily related to the
reversal of certain legal accruals totaling $193,000 during the
year ended December 31, 2015 that were determined to no longer have
a reasonable possibility of being paid out.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company has transformed into a start-up company with the inherent
risks and uncertainties of funding operations until profitability
is achieved. After considering the Company’s historical
negative cash flow from operating activities as well as a range of
internal forecast outcomes, our cash and cash equivalents of
$619,000 at December 31, 2016 does not appear adequate to
meet our obligations as they become
due within one year following the date the financial statements are
issued. Management evaluated the significance of the
potential negative cash flows and determined that borrowing
availability under an existing Loan Agreement would be sufficient
to alleviate concerns about the Company’s ability to continue
as a going concern, the Company entered into an amendment to our
Loan Agreement with Steven G. Mihaylo, extending the ability of the
Board of Directors to request the remaining $1.0 million available
under the Loan Agreement if necessary to fund operations through
May 30, 2018.
Working Capital
Working
capital decreased 94% or $941,000 to $57,000 as of December 31,
2016 as compared to $998,000 as of December 31, 2015. The decrease
in working capital is primarily due to a decrease in cash and
restricted cash of $890,000, a decrease in prepaid expenses of
$360,000, and an increase in accrued expenses of $185,000.
Additionally, during the year ended December 31, 2016, the Company
adopted ASU 2015-17, Balance Sheet
Classification of Deferred Taxes, which requires entities to
present deferred tax assets and deferred tax liabilities as
non-current. As a result, we reclassified current deferred income
tax assets of $423,000 to non-current during 2016.
22
Cash and Cash Equivalents
Cash
and cash equivalents decreased 59% or $878,000, to $619,000 as of
December 31, 2016 as compared to $1,497,000 as of December 31,
2015. During the year ended December 31, 2016, we used cash flows
for operating activities of $1,126,000, offset by $11,000 provided
by investing activities and $237,000 provided by financing
activities.
Trade Receivables
Current
and long-term trade receivables, net of allowance for doubtful
accounts, decreased 13% or $56,000, to $389,000 as of December 31,
2016 as compared to $445,000 as of December 31, 2015. Long-term
trade receivables, net of allowance for doubtful accounts,
decreased 47% or $38,000, to $43,000 as of December 31, 2016 as
compared to $81,000 as of December 31, 2015. In prior years, we
offered our customers an installment contract with payment terms
between 24 and 36 months, as one of several payment options. The
payments that become due more than 12 months after the end of the
reporting period are classified as long-term trade receivables. The
decrease in our accounts receivable balance is primarily related to
outstanding balances with our third-party leasing companies at the
end of 2015, which have been collected.
Accounts Payable
Accounts payable
increased 53% or $40,000, to $116,000 as of December 31, 2016 as
compared to $76,000 as of December 31, 2015. The aging of accounts
payable as of December 31, 2016 and 2015 were generally within our
vendors’ terms of payment.
Notes Payable
Notes
payables increased 1% or $10,000, to $1,032,000 as of December 31,
2016 as compared to $1,022,000 at December 31, 2015. The increase
is primarily due to accreting the related party notes payable
balance up $23,000 from the note payable discount, offset by
payments on other notes payable balances (Note 10).
Capital
Total
stockholders’ equity decreased 77% or $1,689,000, to $515,000
as of December 31, 2016 as compared to $2,204,000 as of December
31, 2015. The decrease in total stockholders’ equity was
attributable to net loss of $2,792,000 offset by an increase in
additional paid-in capital of $653,000 for stock options issued to
employees, $300,000 for the exercise of warrants, $9,000 for the
exercise of employee stock options, $101,000 in common stock issued
for annual interest payment on note payable, and $40,000 issued to
settle contingent consideration obligations.
OFF
BALANCE SHEET ARRANGEMENTS
As of
December 31, 2016, we are not involved in any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
RELATED
PARTY TRANSACTIONS
Note Payable
On
December 30, 2015, Crexendo, Inc. (the "Company") entered into a
Term Loan Agreement (the "Loan Agreement"), with Steven G. Mihaylo,
as Trustee of The Steven G. Mihaylo Trust dated August 19, 1999
(the "Lender"). Mr. Mihaylo is the principal shareholder and Chief
Executive Officer of the Company. Pursuant to the Loan Agreement,
the Lender has agreed to make an unsecured loan to the Company in
the initial principal amount of $1,000,000 (the
“Loan”). The Loan Agreement contains a provision which
requires the Lender to increase the amount of the Loan by up to an
additional $1,000,000 on the same terms and conditions as the
initial advance if the independent directors of the Company, in
their reasonable discretion, determine such an increase is
necessary for the funding needs of the Company and that the terms
of the Loan are in the best interests of the Company and its
stockholders. The term of the Loan is five years, with simple
interest paid at 9% per annum until a balloon payment is due
December 30, 2020. The Loan Agreement provides for interest to be
paid in shares of common stock of the Company (the “Common
Stock”) at a stock price of $1.20 (which is the average of
the high and low adjust close price of the Common Stock of the
Company for each business day for the period starting December 23,
2015 and ending December 29, 2015). For the first two years of the
Loan term, interest will be paid in advance at the beginning of
each year; for the last three years of the Loan term, interest will
be paid at the end of each year. After the second year of the Loan
term, there is no pre-payment penalty for early repayment of the
outstanding principal amount of the Loan. If the Loan is repaid
within the first two years of the Loan term, the Company will
forfeit prepaid interest as a pre-payment penalty.
23
Contemporaneously with the execution of the Loan Agreement, the
Company granted to the Lender a warrant to purchase 250,000 shares
of Common Stock (the “Warrant”). The Warrant has a
five-year term from the date of the Loan Agreement. The Warrant is
exercisable by the Lender, at any time, and from time to time,
during its term at a price of $1.20 per share of Common Stock. The
initial 250,000 warrants were exercised during 2016 generating
proceeds of $300,000. In the event the principal amount of the Loan
is increased by an additional $1,000,000, as determined by the
independent directors of the Company, the Company has agreed to
issue to the Lender a warrant to purchase an additional 250,000
shares of Common Stock on the same terms and subject to the same
conditions set forth in the Warrant.
On June
28, 2016, the Company entered into an Amendment to the Loan
Agreement, extending the period which the Company can increase the
loan up to an additional $1,000,000 to May 30, 2017. All other
terms remain the same as initial loan agreement. Subsequent to
December 31, 2016, the Company entered into a second amendment to
our Loan Agreement with Steven G. Mihaylo. The amendment extends
the ability of the Board of Directors to request the remaining $1.0
million available under the Loan Agreement if necessary to fund
operations through May 30, 2018. All other terms remain the same as
initial Loan Agreement.
RECENT
ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Pronouncements
In
March 2016, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic
718), improvement to employee share-based payment
accounting. The new standard contains several amendments that will
simplify the accounting for employee share-based payment
transactions, including the accounting for income taxes,
forfeitures, statutory tax withholding requirements, classification
of awards as either equity or liabilities, and classification on
the statement of cash flows. The changes in the new standard
eliminate the accounting for excess tax benefits to be recognized
in additional paid-in capital and tax deficiencies recognized
either in the income tax provision or in additional paid-in
capital. The Company elected early adoption of ASU 2016-09 in 2016.
Due to the Company’s valuation allowance on its deferred tax
assets, no income tax benefit will be recognized in 2016 as a
result of the adoption of ASU 2016-09. There will be no change to
retained earnings with respect to excess tax benefits, as this is
not applicable to the Company. The treatment of forfeitures has not
changed as we are electing to continue our current process of
estimating the number of forfeitures. As such, this has no
cumulative effect on retained earnings. With the early adoption of
2016-09, we have elected to present the cash flow statement on a
prospective transition method and no prior periods have been
adjusted.
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred
Taxes, which will require entities to present deferred tax
assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in
a classified balance sheet. The ASU simplifies the current
guidance, which requires entities to separately present DTAs and
DTLs as current and noncurrent in a classified balance sheet. ASU
2015-17 is effective for financial statements issued for annual
periods beginning after December 15, 2016 (and interim periods
within those annual periods) and early adoption is permitted. ASU
2015-17 may be either applied prospectively to all deferred tax
assets and liabilities or retrospectively to all periods presented.
We have elected to early adopt ASU 2015-17 prospectively in the
fourth quarter of 2016. As a result, we have presented all deferred
tax assets and liabilities as noncurrent on our consolidated
balance sheet as of December 31, 2016, but have not reclassified
current deferred tax assets and liabilities on our consolidated
balance sheet as of December 31, 2015. There was no impact on our
results of operations as a result of the adoption of ASU
2015-17.
In
September 2015, the FASB issued ASU 2015-16, Business Combinations, which requires
that an acquirer recognize adjustments to provisional amounts that
are identified during the measurement period for a business
combination in the reporting period in which the adjustment amounts
are determined. Prior to the issuance of the standard, entities
were required to retrospectively apply adjustments made to
provisional amounts recognized in a business combination. We
adopted this guidance effective January 1, 2016. The adoption of
this guidance did not have a material impact on our consolidated
financial statements.
In
April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and
Other—Internal-Use Software, which provides guidance
to customers about whether a cloud computing arrangement includes a
software license. If a cloud computing arrangement includes a
software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition
of other software licenses. If a cloud computing arrangement does
not include a software license, the customer should account for the
arrangement as a service contract. The guidance will not change
U.S. generally accepted accounting principles ("GAAP") for a
customer's accounting for service contracts. We adopted this
guidance effective January 1, 2016. The adoption of this guidance
did not have a material impact on our consolidated financial
statements.
24
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern, which requires management to assess an
entity’s ability to continue as a going concern by
incorporating and expanding upon certain principles that are
currently in U.S. auditing standards. Specifically, the ASU (1)
provides a definition of the term substantial doubt, (2) requires
an evaluation every reporting period including interim periods, (3)
provides principles for considering the mitigating effect of
management’s plans, (4) requires certain disclosures when
substantial doubt is alleviated as a result of consideration of
management’s plans, (5) requires an express statement and
other disclosures when substantial doubt is not alleviated, and (6)
requires an assessment for a period of one year after the date that
the financial statements are issued (or available to be issued). We
adopted this guidance on December 31, 2016 and management assessed
the entity’s ability to continue as a going concern. After
considering the Company’s historical negative cash flow from
operating activities as well as a range of internal forecast
outcomes, our cash and cash equivalents of $619,000 at December 31,
2016 does not appear adequate to meet our obligations as they
become due within one year following the date the financial
statements are issued. Management evaluated the significance of the
potential negative cash flows and determined that borrowing
availability under an existing Loan Agreement would be sufficient
to alleviate concerns about the Company’s ability to continue
as a going concern, the Company entered into an amendment to our
Loan Agreement with Steven G. Mihaylo, extending the ability of the
Board of Directors to request the remaining $1.0 million available
under the Loan Agreement if necessary to fund operations through
May 30, 2018. Substantial doubt was alleviated as a result of
considerations of management’s plans. Certain disclosures
were added to comply with the disclosure requirements of the
ASU.
Recently
Issued Accounting Pronouncements
In August 2016, the FASB issued ASU
2016-15, Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments, which amends ASC
230, to clarify guidance on the classification of certain cash
receipts and payments in the statement of cash flows. The FASB
issued ASU 2016-15 with the intent of reducing diversity in
practice with respect to eight types of cash flows. This guidance
is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years.
Early adoption is permitted. We are in the process of
evaluating the adoption and potential impact of this
new ASU on our consolidated financial
statements.
In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope
Improvements and Practical Expedients, makes certain targeted amendments to Topic
606, Revenue from Contracts with
Customers:
●
Assessing
collectibility. The amendments
add a “substantially all” threshold to the
collectibility criterion, and also clarify that the objective of
the collectibility assessment is to determine whether the contract
is valid and represents a substantive transaction based on whether
a customer has the ability and intent to pay for the goods or
services that will be transferred to the customer, as opposed to
all of the goods or services promised in the contract. The ASU also
clarifies how an entity may recognize as revenue consideration
received in circumstances where a contract does not meet the
criteria required at inception to apply the recognition guidance
within the revenue standard.
●
Presenting sales taxes and
other similar taxes collected from customers. The amendments provide an accounting policy
election whereby an entity may exclude from the measurement of
transaction price all taxes assessed by a taxing authority related
to the specific transaction and that are collected from the
customer. Such amounts would be presented “net” under
this option.
●
Noncash
consideration. The amendments
clarify that the fair value of noncash consideration is measured at
contract inception, and specify how to account for subsequent
changes in the fair value of noncash
consideration.
●
Contract modifications at
transition. The amendments
provide a new practical expedient whereby an entity electing either
the full or modified retrospective method of transition is
permitted to reflect the aggregate effect of all prior period
modifications (using hindsight) when identifying satisfied and
unsatisfied performance obligations, determining the transaction
price, and allocating the transaction price to satisfied and
unsatisfied obligations.
●
Completed contracts at
transition. The amendments
include certain practical expedients in transition related to
completed contracts. The amendments also clarify the definition of
a completed contract.
●
Disclosing the accounting
change in the period of adoption. ASU 2016-12 provides an exception to the
requirement in Topic 250, Accounting Changes and Error
Corrections, to disclose the
effect on the current period of retrospectively adopting a new
accounting standard. As such, the disclosure requirement does not
apply to adoption of the new revenue standard with respect to the
year of adoption.
The
effective date and transition requirements for ASU 2016-12 are the
same as the effective date and transition requirements of ASU
2014-09 (Topic 606). The Company is currently in the process of
evaluating the impact of adoption of the ASU on its consolidated
financial statements.
In April 2016, the FASB issued ASU 2016-10,
Identifying
Performance Obligations and Licensing, more clearly articulates the guidance for
assessing whether promises are separately identifiable in the
overall context of the contract, which is one of two criteria for
determining whether promises are distinct. The ASU also clarifies
the factors an entity should consider when assessing whether two or
more promises are separately identifiable, and provides additional
examples within the implementation guidance for assessing these
factors. The ASU further clarifies that an entity is not required
to identify promised goods or services that are immaterial in the
context of the contract, although customer options to purchase
additional goods or services that represent a material right should
not be designated as immaterial in the context of the contract. The
ASU also provides an accounting policy election whereby an entity
may account for shipping and handling activities as a fulfillment
activity rather than as an additional promised service in certain
circumstances.
25
The ASU also clarifies whether a license of
intellectual property (IP) represents a right to use the IP (which
is satisfied at a point in time) or a right to access the IP (which
is satisfied over time) by categorizing the underlying IP as either
functional or symbolic. A promise to grant a license that is not a
separate performance obligation must be considered in the context
above (i.e., functional or symbolic), in order to determine whether
the combined performance obligation is satisfied at a point in time
or over time, and how to best measure progress toward completion if
recognized over time. Regardless of a license’s nature (i.e.,
functional or symbolic), an entity may not recognize revenue from a
license of IP before 1) it provides or otherwise makes available a
copy of the IP to the customer, and 2) the period during which the
customer is able to use and benefit from the license has begun
(i.e., the beginning of the license period). Additionally, the ASU clarifies that 1) an entity
should not split a sales-based or usage-based royalty into a
portion subject to the guidance on sales-based and usage-based
royalties and a portion that is not subject to that guidance; and
2) the guidance on sales-based and usage-based royalties applies
whenever the predominant item to which the royalty relates is a
license of IP. Lastly, the amendments distinguish contractual
provisions requiring the transfer of additional rights to use or
access IP that the customer does not already control from
provisions that are attributes of a license (e.g., restrictions of
time, geography, or use). License attributes define the scope of
the rights conveyed to the customer; they do not determine when the
entity satisfies a performance obligation. The effective date and transition requirements for
ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09 (Topic 606). The Company is currently
in the process of evaluating the impact of adoption of the ASU on
its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases, in order to increase
transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet for those
leases classified as operating leases under previous GAAP. The ASU
2016-02 requires that a lessee should recognize a liability to make
lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease
term on the balance sheet. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018 (including interim periods
within those periods) using a modified retrospective approach and
early adoption is permitted. The Company is currently in the
process of evaluating the impact of adoption of the ASU on its
consolidated financial statements.
In June
2014, the FASB issued ASU 2014-12, Compensation – Stock
Compensation, which requires that a performance target that
affects vesting and could be achieved after the requisite service
period be treated as a performance condition. A reporting entity
should apply existing guidance in ASC 718, Compensation-Stock
Compensation, as it relates to such awards. ASU 2014-12 is
effective for us in our first quarter of fiscal 2017 with early
adoption permitted using either of two methods: (i) prospective to
all awards granted or modified after the effective date; or (ii)
retrospective to all awards with performance targets that are
outstanding as of the beginning of the earliest annual period
presented in the financial statements and to all new or modified
awards thereafter, with the cumulative effect of applying ASU
2014-12 as an adjustment to the opening retained earnings balance
as of the beginning of the earliest annual period presented in the
financial statements. The Company will adopt the ASU effective
January 1, 2017. Adoption of this ASU will not impact our
consolidated financial statements as no outstanding awards contain
performance targets.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers,
which introduces a new five-step revenue recognition model in which
an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. This ASU also requires
disclosures sufficient to enable users to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers, including qualitative and
quantitative disclosures about contracts with customers,
significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a
contract.
In
August 2015, the FASB issued ASU 2015-14, which defers the
effective date of ASU 2014-09 for all entities by one year.
Accordingly, public business entities should apply the guidance in
ASU 2014-09 to annual reporting periods (including interim periods
within those periods) beginning after December 15, 2017. Early
adoption is permitted but not before annual periods beginning after
December 15, 2016. The standard permits the use of the
retrospective or the modified approach method. We have not yet
selected a transition method, and are currently in the process of
evaluating the impact of adoption of this ASU on our consolidated
financial statements and disclosures.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Not
required
26
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CREXENDO,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
PAGE
|
Reports
of Independent Registered Public Accounting Firms
|
28
|
|
|
Consolidated
Balance Sheets as of December 31, 2016 and 2015
|
30
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2016 and
2015
|
31
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2016 and 2015
|
32
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2016 and
2015
|
33
|
|
|
Notes
to Consolidated Financial Statements
|
34
|
|
|
Schedule II –
Valuation and Qualifying Accounts
|
54
|
|
|
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Crexendo,
Inc.
Tempe,
AZ
We have audited the accompanying consolidated
balance sheet of Crexendo, Inc. and subsidiaries (the
"Company") as of December 31, 2016,
and the related consolidated statement of operations,
stockholders’ equity, and cash flows for the year then
ended. Our audit also included the financial statement
schedule listed in the Index at Item 15. These financial statements and the financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements
and financial statement schedule of Crexendo, Inc. and
subsidiaries as of December 31, 2015,
and for the year then ended were audited by other auditors whose
report dated March 1, 2016, expressed an unqualified opinion on
those statements.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2016 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Crexendo, Inc. and
subsidiaries as of December 31, 2016,
and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our
opinion, the 2016 financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
/s/
Urish Popeck & Co., LLC
Pittsburgh,
PA
March
7, 2017
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of Crexendo, Inc.
We have
audited the accompanying consolidated balance sheet of Crexendo,
Inc. and subsidiaries (the "Company") as of December 31, 2015, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 2015. Our
audit also included the financial statement schedule listed in the
Index at Item 15 for the year ended December 31, 2015. These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the
financial statement schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Crexendo, Inc. and
subsidiaries at December 31, 2015, and the results of their
operations and their cash flows for the year ended December 31,
2015, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such
financial statement schedule for the year ended December 31, 2015,
when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/DELOITTE
& TOUCHE LLP
Salt
Lake City, Utah
March
1, 2016
29
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In
thousands, except par value and share data)
|
December
31,
|
|
|
2016
|
2015
|
Assets
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$619
|
$1,497
|
Restricted
cash
|
100
|
112
|
Trade
receivables, net of allowance for doubtful accounts of
$34
|
|
|
as
of December 31, 2016 and $35 as of December 31, 2015
|
346
|
364
|
Inventories
|
170
|
134
|
Equipment
financing receivables
|
121
|
131
|
Prepaid
expenses
|
686
|
1,046
|
Other
current assets
|
8
|
15
|
Total
current assets
|
2,050
|
3,299
|
|
|
|
Certificate
of deposit
|
252
|
251
|
Long-term
trade receivables, net of allowance for doubtful
accounts
|
|
|
of
$13 as December 31, 2016 and $24 as of December 31,
2015
|
43
|
81
|
Long-term
equipment financing receivables
|
176
|
319
|
Property
and equipment, net
|
18
|
33
|
Deferred
income tax assets, net
|
-
|
482
|
Intangible
assets, net
|
335
|
466
|
Goodwill
|
272
|
272
|
Long-term
prepaid expenses
|
251
|
288
|
Other
long-term assets
|
136
|
169
|
Total
Assets
|
$3,533
|
$5,660
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$116
|
$76
|
Accrued
expenses
|
997
|
812
|
Notes
payable, current portion
|
66
|
57
|
Income
taxes payable
|
5
|
-
|
Contingent
consideration
|
-
|
99
|
Deferred
income tax liability
|
-
|
482
|
Deferred
revenue, current portion
|
809
|
775
|
Total
current liabilities
|
1,993
|
2,301
|
Deferred
revenue, net of current portion
|
43
|
81
|
Notes
payable, net of current portion
|
966
|
965
|
Other
long-term liabilities
|
16
|
109
|
Total
liabilities
|
3,018
|
3,456
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
Preferred
stock, par value $0.001 per share - authorized 5,000,000 shares;
none issued
|
—
|
—
|
Common
stock, par value $0.001 per share - authorized 25,000,000 shares,
13,578,556
|
|
|
shares
issued and outstanding as of December 31, 2016 and 13,227,489
shares issued
|
|
|
and
outstanding as of December 31, 2015
|
14
|
13
|
Additional
paid-in capital
|
58,716
|
57,614
|
Accumulated
deficit
|
( 58,215)
|
( 55,423)
|
Total
stockholders' equity
|
515
|
2,204
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$3,533
|
$5,660
|
The accompanying notes are an integral part of the consolidated
financial statements.
30
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In
thousands, except per share and share data)
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Revenue
|
$9,119
|
$7,823
|
Operating
expenses:
|
|
|
Cost
of revenue
|
3,625
|
3,577
|
Selling
and marketing
|
2,531
|
2,444
|
General
and administrative
|
4,900
|
5,862
|
Research
and development
|
826
|
779
|
Total
operating expenses
|
11,882
|
12,662
|
|
|
|
Loss
from operations
|
( 2,763)
|
( 4,839)
|
|
|
|
Other
income/(expense):
|
|
|
Interest
income
|
15
|
24
|
Interest
expense
|
( 138)
|
( 28)
|
Other
income, net
|
106
|
290
|
Total
other income/(expense), net
|
( 17)
|
286
|
|
|
|
Loss
before income tax
|
( 2,780)
|
( 4,553)
|
|
|
|
Income
tax (provision)/benefit
|
( 12)
|
12
|
|
|
|
Net
loss
|
$(2,792)
|
$(4,541)
|
|
|
|
Net
loss per common share:
|
|
|
Basic
|
$(0.21)
|
$(0.35)
|
Diluted
|
$(0.21)
|
$(0.35)
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
Basic
|
13,358,311
|
12,960,625
|
Diluted
|
13,358,311
|
12,960,625
|
The accompanying notes are an integral part of the consolidated
financial statements.
31
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2016 and December 31, 2015
(In thousands, except share
data)
|
|
|
Additional |
|
Total
|
|
Common Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
Balance, January 1, 2015
|
12,681,617
|
$13
|
$55,413
|
$(50,882)
|
$4,544
|
Expense
for stock options granted to employees
|
-
|
-
|
1,306
|
-
|
1,306
|
Stock
issued under stock award plans
|
26,865
|
-
|
50
|
-
|
50
|
Issuance
of common stock in a business acquisition
|
19,007
|
-
|
40
|
-
|
40
|
Issuance
of common stock warrants in connection with note
payable
|
-
|
-
|
115
|
-
|
115
|
Issuance
of common stock for exercise of common stock warrants
|
500,000
|
-
|
690
|
-
|
690
|
Net
loss
|
-
|
-
|
-
|
(4,541)
|
(4,541)
|
Balance, December 31, 2015
|
13,227,489
|
13
|
57,614
|
(55,423)
|
2,204
|
Expense
for stock options granted to employees
|
-
|
-
|
653
|
-
|
653
|
Stock
issued under stock award plans
|
8,310
|
-
|
9
|
-
|
9
|
Issuance
of common stock in a business acquisition
|
17,757
|
-
|
40
|
-
|
40
|
Issuance
of common stock for interest on related party note
payable
|
75,000
|
-
|
101
|
-
|
101
|
Issuance
of common stock for exercise of common stock warrants
|
250,000
|
1
|
299
|
-
|
300
|
Net
loss
|
-
|
-
|
-
|
(2,792)
|
(2,792)
|
Balance, December 31, 2016
|
13,578,556
|
$14
|
$58,716
|
$(58,215)
|
$515
|
The accompanying notes are an integral part of the consolidated
financial statements.
32
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
|
Year Ended December 31,
|
|
|
2016
|
2015
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(2,792)
|
$(4,541)
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
Amortization
of prepaid rent
|
322
|
322
|
Depreciation
and amortization
|
146
|
270
|
Expense
for stock options issued to employees
|
653
|
1,306
|
Non-cash
interest expense
|
124
|
-
|
Amortization
of deferred gain
|
(93)
|
(94)
|
Change
in fair value of contingent consideration
|
-
|
(11)
|
Changes
in assets and liabilities, net of effects of
acquisitions:
|
|
|
Trade
receivables
|
56
|
162
|
Equipment
financing receivables
|
153
|
176
|
Inventories
|
(36)
|
(62)
|
Prepaid
expenses
|
75
|
(112)
|
Other
assets
|
40
|
(69)
|
Accounts
payable and accrued expenses
|
225
|
(380)
|
Income
tax payable
|
5
|
(7)
|
Deferred
revenue
|
(4)
|
66
|
Net
cash used for operating activities
|
(1,126)
|
(2,974)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase
of property and equipment
|
-
|
( 25)
|
Release
of restricted cash
|
12
|
21
|
Purchase
of long-term investment
|
(1)
|
-
|
Net
cash provided by/(used for) investing activities
|
11
|
( 4)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds
from notes payable
|
150
|
1,000
|
Repayments
made on notes payable
|
(163)
|
(110)
|
Proceeds
from exercise of options
|
9
|
50
|
Payment
of contingent consideration
|
(59)
|
(61)
|
Proceeds
from exercise of warrants
|
300
|
690
|
Net
cash provided by financing activities
|
237
|
1,569
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
( 878)
|
( 1,409)
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
|
1,497
|
2,906
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE END OF THE YEAR
|
$619
|
$1,497
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash
used during the year for:
|
|
|
Income
taxes, net
|
$(2)
|
$(1)
|
Supplemental
disclosure of non-cash investing and financing
information:
|
|
|
Issuance
of common stock for payment of interest on related-party note
payable
|
$101
|
$-
|
Issuance
of common stock for contingent consideration related to business
acquisition
|
$40
|
$40
|
Prepaid
assets financed through notes payable
|
$124
|
$137
|
Note
payable discount
|
$-
|
$115
|
The accompanying notes are an integral part of the consolidated
financial statements.
33
CREXENDO,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
1.
Description
of Business and Significant Accounting Policies
Description of Business - Crexendo, Inc.
is incorporated in the state of Nevada. As used hereafter in the
notes to consolidated financial statements, we refer to Crexendo,
Inc. and its wholly owned subsidiaries, as “we,”
“us,” or “our Company.” Crexendo is a CLEC
cloud services company that provides award winning cloud
telecommunications services, broadband Internet services and other
cloud business services. Our solutions are designed to provide
enterprise-class cloud services available to any size businesses at
affordable monthly rates. The Company has two operating segments,
which consist of Cloud Telecommunications Services and Web
Services.
The
Company has transformed into a start-up company with the inherent
risks and uncertainties of funding operations until profitability
is achieved. After considering the Company’s historical
negative cash flow from operating activities as well as a range of
internal forecast outcomes, our cash and cash equivalents of
$619,000 at December 31, 2016 does not appear adequate to meet our
obligations as they become due within one year following the date
the financial statements are issued. Management evaluated the
significance of the potential negative cash flows and determined
that borrowing availability under an existing Loan Agreement would
be sufficient to alleviate concerns about the Company’s
ability to continue as a going concern, the Company entered into an
amendment to our Loan Agreement with Steven G. Mihaylo, extending
the ability of the Board of Directors to request the remaining $1.0
million available under the Loan Agreement if necessary to fund
operations through May 30, 2018.
Basis of Presentation
– The consolidated financial statements include
the accounts and operations of Crexendo, Inc. and its wholly owned
subsidiaries, which include Crexendo Business Solutions, Inc.,
StoresOnline Inc., StoresOnline International Canada ULC, Avail
24/7 Inc., and Crexendo International, Inc. All intercompany
account balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been
prepared in accordance with U.S. GAAP and pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”). These consolidated financial statements
reflect the results of operations, financial position, changes in
stockholders’ equity, and cash flows of our
Company.
Certain
prior year amounts have been reclassified for consistency with the
current period presentation. These reclassifications had no effect
on the reported results of operations.
Cash and Cash
Equivalents -
We consider all highly liquid,
short-term investments with maturities of three months or less at
the time of purchase to be cash equivalents. As of December 31,
2016 and 2015, we had cash and cash equivalents in financial
institutions in excess of federally insured limits in the amount of
$413,000 and $1,384,000, respectively.
Restricted Cash – We classified
$100,000 and $112,000 as restricted cash as of December 31, 2016
and 2015, respectively. Cash is restricted for compensating balance
requirements on purchasing card agreements. As of December 31, 2016
and 2015, we had restricted cash in financial institutions in
excess of federally insured limits in the amount of $100,000 and
$112,000, respectively.
Trade Receivables – Trade
receivables from our cloud telecommunications and web services
segments are recorded at invoiced amounts. We have historically
offered to our web site development software customers the option
to finance, typically through 24 and 36-month extended payment term
agreements (“EPTAs”). EPTAs are reflected as short-term
and long-term trade receivables, as applicable, as we have the
intent and ability to hold the receivables for the foreseeable
future, until maturity or payoff. EPTAs are recorded on a
nonaccrual cash basis beginning on the contract date.
Allowance for Doubtful Accounts
–The allowance represents estimated losses resulting from
customers’ failure to make required payments. The allowance
estimate is based on historical collection experience, specific
identification of probable bad debts based on collection efforts,
aging of trade receivables, customer payment history, and other
known factors, including current economic conditions. We believe
that the allowance for doubtful accounts is adequate based on our
assessment to date, however, actual collection results may differ
materially from our expectations.
Inventory – Finished goods
telecommunications equipment inventory is stated at the lower of
cost or market (first-in, first-out method). In accordance with
applicable accounting guidance, we regularly evaluate whether
inventory is stated at the lower of cost or market.
Certificate of Deposit - We hold a
$252,000 certificate of deposit as collateral for merchant
accounts, which automatically renews every 12 months. The
certificate of deposit is classified as long-term in the
consolidated balance sheets.
34
Property and Equipment - Depreciation
and amortization expense is computed using the straight-line method
in amounts sufficient to allocate the cost of depreciable assets
over their estimated useful lives ranging from two to five years.
The cost of leasehold improvements is amortized using the
straight-line method over the shorter of the estimated useful life
of the asset or the term of the related lease. Depreciation expense
is included in general and administrative expenses and totaled
$15,000 and $60,000 for the years ended December 31, 2016 and 2015,
respectively. Depreciable lives by asset group are as
follows:
Computer
and office equipment
|
2
to 5 years
|
Computer
software
|
3
years
|
Furniture
and fixtures
|
4
years
|
Leasehold
improvements
|
2
to 5 years
|
Maintenance and
repairs are expensed as incurred. The cost and accumulated
depreciation of property and equipment sold or otherwise retired
are removed from the accounts and any related gain or loss on
disposition is reflected in net income or loss for the
year.
Goodwill – Goodwill is tested for
impairment using a fair-value-based approach on an annual basis
(December 31) and between annual tests if indicators of potential
impairment exist.
Intangible Assets - Our intangible
assets consist primarily of customer relationships and developed
technology. The intangible assets are amortized following the
patterns in which the economic benefits are consumed. We
periodically review the estimated useful lives of our intangible
assets and review these assets for impairment whenever events or
changes in circumstances indicate that the carrying value of the
assets may not be recoverable. The determination of impairment is
based on estimates of future undiscounted cash flows. If an
intangible asset is considered to be impaired, the amount of the
impairment will be equal to the excess of the carrying value over
the fair value of the asset.
Use of Estimates - In preparing the
consolidated financial statements, management makes assumptions,
estimates and judgments that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods. Specific estimates and judgments include
valuation of goodwill and intangible assets in connection with
business acquisitions, allowances for doubtful accounts,
uncertainties related to certain income tax benefits, valuation of
deferred income tax assets, valuations of share-based payments and
recoverability of long-lived assets. Management’s
estimates are based on historical experience and on our
expectations that are believed to be reasonable. The
combination of these factors forms the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may
differ from our current estimates and those differences may be
material.
Revenue Recognition - In general, we
recognize revenue when all of the following conditions are
satisfied: (1) there is persuasive evidence of an arrangement; (2)
the product or service has been provided to the customer; (3) the
amount of fees to be paid by the customer is fixed or determinable;
and (4) the collection of our fees is probable. We recognize
revenue from our Cloud Telecommunications Services and Web Services
segments on an accrual basis, with the exception of our extended
payment term agreement cash receipts which are recognized on a cash
basis. Specifics to revenue category are as follows:
We
enter into agreements where revenue is derived from multiple
deliverables including any mix of products and/or services. For
these arrangements, we determine whether the delivered item(s) has
value to the customer on a stand-alone basis, and in the event the
arrangement includes a general right of return relative to the
delivered item(s), whether the delivery or performance of the
undelivered item(s) is considered probable and substantially in our
control. If these criteria are met, the arrangement consideration
is allocated to the separate units of accounting based on each
unit’s relative selling price. If these criteria are not met,
the arrangement is accounted for as a single unit of accounting
which would result in revenue being recognized ratably over the
contract term or deferred until the earlier of when such criteria
are met or when the last undelivered element is delivered. The
amount of product and services revenue recognized for arrangements
with multiple deliverables is impacted by the allocation of
arrangement consideration to the deliverables in the arrangement
based on the relative selling prices. In determining our selling
prices, we apply the selling price hierarchy using vendor specific
objective evidence (“VSOE”) when available, third-party
evidence of selling price (“TPE”) if VSOE does not
exist, and best estimated selling price (“BESP”) if
neither VSOE nor TPE is available.
VSOE of
fair value for elements of an arrangement is based upon the normal
pricing and discounting practices for a deliverable when sold
separately. In determining VSOE, we require that a substantial
majority of the selling prices fall within a reasonably narrow
pricing range, generally evidenced by a substantial majority of
such historical stand-alone transactions falling within a
reasonably narrow range of the median rate. In addition, we
consider major service groups, geographies, customer
classifications, and other variables in determining
VSOE.
We are
typically not able to determine TPE for our products or services.
TPE is determined based on competitor prices for similar
deliverables when sold separately. Generally, our offerings contain
a significant level of differentiation such that the comparable
pricing of products with similar functionality is difficult to
obtain. Furthermore, we are unable to reliably determine what
similar competitor products’ selling prices are on a
stand-alone basis.
35
When we
are unable to establish the selling price using VSOE or TPE, we use
BESP in our allocation of arrangement consideration. The objective
of BESP is to determine the price at which we would transact a sale
if the product or service were sold on a stand-alone basis. We
determine BESP for a product or service by considering multiple
factors including, but not limited to, cost of products, gross
margin objectives, pricing practices, geographies, customer classes
and distribution channels.
We
recognize revenue for delivered elements only when we determine
there are no uncertainties regarding customer acceptance. Changes
in the allocation of the sales price between delivered and
undelivered elements can impact the timing of revenue recognized
but does not change the total revenue recognized on any
agreement.
Professional Services
Revenue - Fees collected for professional services,
including website design and development, search engine
optimization services, link-building, paid search management
services, and telecom installation services are recognized as
revenue, net of expected customer refunds, over the period during
which the services are performed, based upon the value for such
services.
Cloud Services Hosting and
Web Hosting Revenue - Fees collected for hosting revenue
are recognized ratably as services are provided. Customers are
billed for these services on a monthly or annual basis at the
customer’s option. We recognize revenue ratably over the
applicable service period. When we provide a free trial period, we
do not begin to recognize recurring revenue until the trial period
has ended and the customer has been billed for the
services.
Equipment Sales and
Financing Revenue -
Revenue generated from the sale of telecommunications equipment is
recognized when the devices are installed and cloud
telecommunications services begin.
Fees
generated from renting our cloud telecommunication equipment (IP or
cloud telephone devices) through leasing contracts are recognized
as revenue based on whether the lease qualifies as an operating
lease or sales-type lease. The two primary accounting provisions
which we use to classify transactions as sales-type or operating
leases are: 1) lease term to determine if it is equal to or greater
than 75% of the economic life of the equipment and 2) the present
value of the minimum lease payments to determine if they are equal
to or greater than 90% of the fair market value of the equipment at
the inception of the lease. The economic life of most of our
products is estimated to be three years, since this represents the
most frequent contractual lease term for our products, and there is
no residual value for used equipment. Residual values, if any, are
established at the lease inception using estimates of fair value at
the end of the lease term. The vast majority of our leases that
qualify as sales-type leases are non-cancelable and include
cancellation penalties approximately equal to the full value of the
lease receivables. Leases that do not meet the criteria for
sales-type lease accounting are accounted for as operating leases.
Revenue from sales-type leases is recognized upon installation and
the interest portion is deferred and recognized as earned. Revenue
from operating leases in recognized ratably over the applicable
service period.
Commission Revenue
- We have affiliate
agreements with third-party entities that are resellers of
satellite television services and Internet service providers. We
receive commissions when the services are bundled with our
offerings and we recognize commission revenue when
received.
Cost of Revenue – Cost of Cloud
Telecommunications Service revenue primarily consists of fees we
pay to third-party telecommunications and business Internet
providers, personnel and travel expenses related to system
implementation, customer service, and the costs associated with the
purchase of desktop devices and other third party equipment. Cost
of Web Services revenue consists primarily of customer service
costs and outsourcing fees related to fulfillment of our
professional web management services.
Prepaid Sales Commissions - For
arrangements where we recognize revenue over the relevant contract
period, we defer related commission payments to our direct sales
force and amortize these amounts over the same period that the
related revenues are recognized. This is done to match commissions
with the related revenues. Commission payments are nonrefundable
unless amounts due from a customer are determined to be
uncollectible or if the customer subsequently changes or terminates
the level of service, in which case commissions which were paid are
recoverable by us.
Research and Development - Research and
development costs are expensed as incurred. Costs related to
internally developed software are expensed as research and
development expense until technological feasibility has been
achieved, after which the costs are capitalized.
Fair Value Measurements - The fair value
of our financial assets and liabilities was determined based on
three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure
fair value which are the following:
36
Level 1 — Unadjusted quoted
prices that are available in active markets for the identical
assets or liabilities at the measurement date.
Level 2 — Other observable inputs
available at the measurement date, other than quoted prices
included in Level 1, either directly or indirectly,
including:
●
Quoted prices for similar assets or liabilities in active
markets;
●
Quoted prices for identical or similar assets in non-active
markets;
●
Inputs other than quoted prices that are observable for the asset
or liability; and
●
Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 — Unobservable inputs
that cannot be corroborated by observable market data and reflect
the use of significant management judgment. These values are
generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant
assumptions.
Notes Payable – We record notes
payable net of any discounts or premiums. Discounts and premiums
are amortized as interest expense or income over the life of the
note in such a way as to result in a constant rate of interest when
applied to the amount outstanding at the beginning of any given
period.
Income Taxes - We recognize a liability
or asset for the deferred tax consequences of all temporary
differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are
recovered or settled. Accruals for uncertain tax positions are
provided for in accordance with accounting guidance. Accordingly,
we may recognize the tax benefits from an uncertain tax position
only if it is more-likely-than-not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement. Accounting guidance is
also provided on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures. Judgment
is required in assessing the future tax consequences of events that
have been recognized in the financial statements or tax returns.
Variations in the actual outcome of these future tax consequences
could materially impact our financial position, results of
operations, and cash flows. In assessing the need for a valuation
allowance, we evaluate all significant available positive and
negative evidence, including historical operating results,
estimates of future taxable income and the existence of prudent and
feasible tax planning strategies. We have placed a full valuation
allowance on net deferred tax assets.
Interest and
penalties associated with income taxes are classified as income tax
expense in the condensed consolidated statements of
operations.
We do
not intend to indefinitely reinvest the undistributed earnings of
our United Kingdom subsidiary, therefore, we have provided for
U.S. deferred income taxes on such undistributed foreign
earnings. All other foreign subsidiaries are considered disregarded
foreign entities for US tax purposes.
Stock-Based Compensation - For equity-classified awards,
compensation expense is recognized over the requisite service
period based on the computed fair value on the grant date of the
award. Equity classified awards include the issuance of
stock options.
Comprehensive Loss – There were no
other components of comprehensive loss other than net loss for the
years ended December 31, 2016 and 2015.
Operating Segments
- Accounting guidance
establishes standards for the way public business enterprises are
to report information about operating segments in annual financial
statements and requires enterprises to report selected information
about operating segments in financial reports issued to
stockholders. The Company has two operating segments, which consist
of Cloud Telecommunications Services and Web Services. Research and
development expenses are allocated to Cloud Telecommunications
Services and Web Services segments based on the level of effort,
measured primarily by wages and benefits attributed to our
engineering department. Indirect sales and marketing expenses
are allocated to the Cloud Telecommunications Services and Web
Services segments based on level of effort, measured by
month-to-date contract bookings. General and
administrative expenses are
allocated to both segments based on revenue recognized for each
segment. Accounting guidance also establishes standards for related
disclosure about products and services, geographic areas and major
customers. We generate over 90% of our total revenue from customers
within North America (United States and Canada) and less than 10%
of our total revenues from customers in other parts of the
world.
37
Significant Customers
– No customer accounted for 10%
or more of our total revenue for the years ended December 31, 2016
and 2015. One Telecommunications Services customer accounted for
11% of total trade accounts receivable as of December 31, 2016, and
no customer accounted for 10% or more of our total trade accounts
receivable as of December 31, 2015.
Recently Adopted Accounting
Pronouncements - In March 2016,
the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718),
improvement to employee share-based payment accounting. The new
standard contains several amendments that will simplify the
accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, statutory tax
withholding requirements, classification of awards as either equity
or liabilities, and classification on the statement of cash flows.
The changes in the new standard eliminate the accounting for excess
tax benefits to be recognized in additional paid-in capital and tax
deficiencies recognized either in the income tax provision or in
additional paid-in capital. The Company elected early adoption of
ASU 2016-09 in 2016. Due to the Company’s valuation allowance
on its deferred tax assets, no income tax benefit will be
recognized in 2016 as a result of the adoption of ASU 2016-09.
There will be no change to retained earnings with respect to excess
tax benefits, as this is not applicable to the Company. The
treatment of forfeitures has not changed as we are electing to
continue our current process of estimating the number of
forfeitures. As such, this has no cumulative effect on retained
earnings. With the early adoption of 2016-09, we have elected to
present the cash flow statement on a prospective transition method
and no prior periods have been adjusted.
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred
Taxes, which will require entities to present deferred tax
assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in
a classified balance sheet. The ASU simplifies the current
guidance, which requires entities to separately present DTAs and
DTLs as current and noncurrent in a classified balance sheet. ASU
2015-17 is effective for financial statements issued for annual
periods beginning after December 15, 2016 (and interim periods
within those annual periods) and early adoption is permitted. ASU
2015-17 may be either applied prospectively to all deferred tax
assets and liabilities or retrospectively to all periods presented.
We have elected to early adopt ASU 2015-17 prospectively in the
fourth quarter of 2016. As a result, we have presented all deferred
tax assets and liabilities as noncurrent on our consolidated
balance sheet as of December 31, 2016, but have not reclassified
current deferred tax assets and liabilities on our consolidated
balance sheet as of December 31, 2015. There was no impact on our
results of operations as a result of the adoption of ASU
2015-17.
In
September 2015, the FASB issued ASU 2015-16, Business Combinations, which requires
that an acquirer recognize adjustments to provisional amounts that
are identified during the measurement period for a business
combination in the reporting period in which the adjustment amounts
are determined. Prior to the issuance of the standard, entities
were required to retrospectively apply adjustments made to
provisional amounts recognized in a business combination. We
adopted this guidance effective January 1, 2016. The adoption of
this guidance did not have an impact on our consolidated financial
statements.
In
April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and
Other—Internal-Use Software, which provides guidance
to customers about whether a cloud computing arrangement includes a
software license. If a cloud computing arrangement includes a
software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition
of other software licenses. If a cloud computing arrangement does
not include a software license, the customer should account for the
arrangement as a service contract. The guidance will not change
U.S. GAAP for a customer's accounting for service contracts. We
adopted this guidance effective January 1, 2016. The adoption of
this guidance did not have an impact on our consolidated financial
statements.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern, which requires management to assess an
entity’s ability to continue as a going concern by
incorporating and expanding upon certain principles that are
currently in U.S. auditing standards. Specifically, the ASU (1)
provides a definition of the term substantial doubt, (2) requires
an evaluation every reporting period including interim periods, (3)
provides principles for considering the mitigating effect of
management’s plans, (4) requires certain disclosures when
substantial doubt is alleviated as a result of consideration of
management’s plans, (5) requires an express statement and
other disclosures when substantial doubt is not alleviated, and (6)
requires an assessment for a period of one year after the date that
the financial statements are issued (or available to be issued). We
adopted this guidance on December 31, 2016 and management assessed
the entity’s ability to continue as a going concern. After
considering the Company’s historical negative cash flow from
operating activities as well as a range of internal forecast
outcomes, our cash and cash equivalents of $619,000 at December 31,
2016 does not appear adequate to meet our obligations as they
become due within one year following the date the financial
statements are issued. Management evaluated the significance of the
potential negative cash flows and determined that borrowing
availability under an existing Loan Agreement would be sufficient
to alleviate concerns about the Company’s ability to continue
as a going concern, the Company entered into an amendment to our
Loan Agreement with Steven G. Mihaylo, extending the ability of the
Board of Directors to request the remaining $1.0 million available
under the Loan Agreement if necessary to fund operations through
May 30, 2018. Substantial doubt was alleviated as a result of
considerations of management’s plans. Certain disclosures
were added to comply with the disclosure requirements of the
ASU.
38
Recently Issued Accounting
Pronouncements - In August
2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments,
which amends ASC 230, to clarify
guidance on the classification of certain cash receipts and
payments in the statement of cash flows. The FASB issued ASU
2016-15 with the intent of reducing diversity in practice with
respect to eight types of cash flows. This guidance is effective
for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is
permitted. We are in the process of evaluating the adoption
and potential impact of this new ASU on our
consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope
Improvements and Practical Expedients, makes certain targeted amendments to Topic
606, Revenue from Contracts with
Customers:
●
Assessing
collectibility. The amendments
add a “substantially all” threshold to the
collectibility criterion, and also clarify that the objective of
the collectibility assessment is to determine whether the contract
is valid and represents a substantive transaction based on whether
a customer has the ability and intent to pay for the goods or
services that will be transferred to the customer, as opposed to
all of the goods or services promised in the contract. The ASU also
clarifies how an entity may recognize as revenue consideration
received in circumstances where a contract does not meet the
criteria required at inception to apply the recognition guidance
within the revenue standard.
●
Presenting sales taxes and
other similar taxes collected from customers. The amendments provide an accounting policy
election whereby an entity may exclude from the measurement of
transaction price all taxes assessed by a taxing authority related
to the specific transaction and that are collected from the
customer. Such amounts would be presented “net” under
this option.
●
Noncash
consideration. The amendments
clarify that the fair value of noncash consideration is measured at
contract inception, and specify how to account for subsequent
changes in the fair value of noncash
consideration.
●
Contract modifications at
transition. The amendments
provide a new practical expedient whereby an entity electing either
the full or modified retrospective method of transition is
permitted to reflect the aggregate effect of all prior period
modifications (using hindsight) when identifying satisfied and
unsatisfied performance obligations, determining the transaction
price, and allocating the transaction price to satisfied and
unsatisfied obligations.
●
Completed contracts at
transition. The amendments
include certain practical expedients in transition related to
completed contracts. The amendments also clarify the definition of
a completed contract.
●
Disclosing the accounting
change in the period of adoption. ASU 2016-12 provides an exception to the
requirement in Topic 250, Accounting Changes and Error
Corrections, to disclose the
effect on the current period of retrospectively adopting a new
accounting standard. As such, the disclosure requirement does not
apply to adoption of the new revenue standard with respect to the
year of adoption.
The
effective date and transition requirements for ASU 2016-12 are the
same as the effective date and transition requirements of ASU
2014-09 (Topic 606). The Company is currently in the process of
evaluating the impact of adoption of the ASU on its consolidated
financial statements.
In April 2016, the FASB issued ASU 2016-10,
Identifying
Performance Obligations and Licensing, more clearly articulates the guidance for
assessing whether promises are separately identifiable in the
overall context of the contract, which is one of two criteria for
determining whether promises are distinct. The ASU also clarifies
the factors an entity should consider when assessing whether two or
more promises are separately identifiable, and provides additional
examples within the implementation guidance for assessing these
factors. The ASU further clarifies that an entity is not required
to identify promised goods or services that are immaterial in the
context of the contract, although customer options to purchase
additional goods or services that represent a material right should
not be designated as immaterial in the context of the contract. The
ASU also provides an accounting policy election whereby an entity
may account for shipping and handling activities as a fulfillment
activity rather than as an additional promised service in certain
circumstances.
The ASU also clarifies whether a license of
intellectual property (IP) represents a right to use the IP (which
is satisfied at a point in time) or a right to access the IP (which
is satisfied over time) by categorizing the underlying IP as either
functional or symbolic. A promise to grant a license that is not a
separate performance obligation must be considered in the context
above (i.e., functional or symbolic), in order to determine whether
the combined performance obligation is satisfied at a point in time
or over time, and how to best measure progress toward completion if
recognized over time. Regardless of a license’s nature (i.e.,
functional or symbolic), an entity may not recognize revenue from a
license of IP before 1) it provides or otherwise makes available a
copy of the IP to the customer, and 2) the period during which the
customer is able to use and benefit from the license has begun
(i.e., the beginning of the license period). Additionally, the ASU clarifies that 1) an entity
should not split a sales-based or usage-based royalty into a
portion subject to the guidance on sales-based and usage-based
royalties and a portion that is not subject to that guidance; and
2) the guidance on sales-based and usage-based royalties applies
whenever the predominant item to which the royalty relates is a
license of IP. Lastly, the amendments distinguish contractual
provisions requiring the transfer of additional rights to use or
access IP that the customer does not already control from
provisions that are attributes of a license (e.g., restrictions of
time, geography, or use). License attributes define the scope of
the rights conveyed to the customer; they do not determine when the
entity satisfies a performance obligation. The effective date and transition requirements for
ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09 (Topic 606). The Company is currently
in the process of evaluating the impact of adoption of the ASU on
its consolidated financial statements.
39
In
February 2016, the FASB issued ASU 2016-02, Leases, in order to increase
transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet for those
leases classified as operating leases under previous GAAP. The ASU
2016-02 requires that a lessee should recognize a liability to make
lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease
term on the balance sheet. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018 (including interim periods
within those periods) using a modified retrospective approach and
early adoption is permitted. The Company is currently in the
process of evaluating the impact of adoption of the ASU on its
consolidated financial statements.
In June
2014, the FASB issued ASU 2014-12, Compensation – Stock
Compensation, which requires that a performance target that
affects vesting and could be achieved after the requisite service
period be treated as a performance condition. A reporting entity
should apply existing guidance in ASC 718, Compensation-Stock
Compensation, as it relates to such awards. ASU 2014-12 is
effective for us in our first quarter of fiscal 2017 with early
adoption permitted using either of two methods: (i) prospective to
all awards granted or modified after the effective date; or (ii)
retrospective to all awards with performance targets that are
outstanding as of the beginning of the earliest annual period
presented in the financial statements and to all new or modified
awards thereafter, with the cumulative effect of applying ASU
2014-12 as an adjustment to the opening retained earnings balance
as of the beginning of the earliest annual period presented in the
financial statements. The Company will adopt the ASU effective
January 1, 2017. Adoption of this ASU will not impact our
consolidated financial statements as there are no performance
targets associated with outstanding awards.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers,
which introduces a new five-step revenue recognition model in which
an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. This ASU also requires
disclosures sufficient to enable users to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers, including qualitative and
quantitative disclosures about contracts with customers,
significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a
contract.
In
August 2015, the FASB issued ASU 2015-14, which defers the
effective date of ASU 2014-09 for all entities by one year.
Accordingly, public business entities should apply the guidance in
ASU 2014-09 to annual reporting periods (including interim periods
within those periods) beginning after December 15, 2017. Early
adoption is permitted but not before annual periods beginning after
December 15, 2016. The standard permits the use of the
retrospective or the modified approach method. We have not yet
selected a transition method, and are currently in the process of
evaluating the impact of adoption of this ASU on our consolidated
financial statements and disclosures.
2.
Net
Loss Per Common Share
Basic net loss per common share is computed by
dividing the net loss for the period by the weighted-average number
of common shares outstanding during the period. Diluted net loss
per common share is computed giving effect to all dilutive common
stock equivalents, consisting of common stock options and warrants.
Diluted net loss per common share for the year ended December 31,
2016 and 2015 is the same as basic net loss per common share as the
common share equivalents were anti-dilutive due to the net
loss. The following table sets forth the computation of
basic and diluted net loss per common share:
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Net
loss (in thousands)
|
$(2,792)
|
$(4,541)
|
|
|
|
Weighted-average
share reconciliation:
|
|
|
Weighted-average
shares outstanding
|
13,358,311
|
12,960,625
|
Weighted-average
basic shares outstanding
|
13,358,311
|
12,960,625
|
Diluted shares outstanding
|
13,358,311
|
12,960,625
|
|
|
|
Net
loss per common share:
|
|
|
Basic
|
$(0.21)
|
$(0.35)
|
Diluted
|
$(0.21)
|
$(0.35)
|
40
Common
stock equivalent shares are not included in the computation of
diluted loss per share, as the Company has a net loss and the
inclusion of such shares would be anti-dilutive due to the net
loss. At December 31, 2016 and 2015, the common stock equivalent
shares were, as follows:
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Shares
of common stock issuable under equity incentive plans
outstanding
|
3,932,114
|
4,380,698
|
Shares
of common stock issuable upon conversion of warrants
|
-
|
250,000
|
Common
stock equivalent shares excluded from diluted net loss per
share
|
3,932,114
|
4,630,698
|
3.
Trade
Receivables, net
Our
trade receivables balance consists of traditional trade receivables
and residual Extended Payment Term Agreements (EPTAs) sold prior to
July 2011. Below is an analysis of the days outstanding
of our trade receivables as shown on our balance sheet (in
thousands):
|
December 31,
|
|
|
2016
|
2015
|
Trade
receivables
|
$366
|
$378
|
Conforming
EPTAs
|
66
|
94
|
Non-Conforming
EPTAs:
|
|
|
1 -
30 days
|
4
|
11
|
31
- 60 days
|
-
|
4
|
61
- 90 days
|
-
|
17
|
Gross
trade receivables
|
436
|
504
|
Less:
allowance for doubtful accounts
|
(47)
|
(59)
|
Trade
receivables, net
|
$389
|
$445
|
|
|
|
Current
trade receivables, net
|
$346
|
$364
|
Long-term
trade receivables, net
|
43
|
81
|
Trade
receivables, net
|
$389
|
$445
|
All
current and long-term EPTAs in the table above had original
contract terms of greater than one year. The Company wrote off
$37,000 and $66,000 of EPTAs during the years ended December 31,
2016 and 2015, respectively, of which, all had original contract
terms of greater than one year.
4.
Equipment
Financing Receivables
We rent
certain cloud telecommunication equipment (IP desktop devices)
through leasing contracts that we classify as either operating
leases or sale-type leases. Equipment finance receivables are
expected to be collected over the next thirty-six to sixty months.
Equipment finance receivables arising from the rental of our cloud
telecommunications equipment through sales-type leases, were as
follows (in thousands):
|
December 31,
|
|
|
2016
|
2015
|
Gross
financing receivables
|
$573
|
$1,030
|
Less
unearned income
|
(276)
|
(580)
|
Financing
receivables, net
|
297
|
450
|
Less:
Current portion of finance receivables, net
|
(121)
|
(131)
|
Finance
receivables due after one year
|
$176
|
$319
|
5.
Prepaid
Expenses
Prepaid
expenses consisted of the following (in thousands):
41
|
December 31,
|
|
|
|