Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
☑ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31,
2017
OR
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the transition period from ________ to ________.
Commission file number 001-32277
Crexendo, Inc.
(Exact name of registrant as specified in its charter)
Nevada
|
87-0591719
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
|
|
1615 South 52nd
Street, Tempe, AZ
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85281
|
(Address of Principal Executive Offices)
|
(Zip Code)
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(602) 714-8500
(Registrant’s telephone number, including area
code)
(Former name, former address and former fiscal year, if
changed since last report)
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 web site, 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
Non-accelerated
filer
|
☐
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
☒
|
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑.
The
number of shares outstanding of the registrant’s common stock
as of April 30, 2017 was 13,803,556.
INDEX
Item 1. Financial
Statements
|
3
|
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
|
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
|
28
|
Item 4. Controls and
Procedures
|
28
|
PART II – OTHER INFORMATION
|
|
Item 1. Legal
Proceedings
|
29
|
Item 1A. Risk Factors
|
29
|
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
Item
6. Exhibits
|
29
|
Signatures
|
30
|
2
Item
1.
Financial
Statements.
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
(unaudited)
|
March 31,
2017
|
December 31,
2016
|
Assets
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$968
|
$619
|
Restricted
cash
|
100
|
100
|
Trade
receivables, net of allowance for doubtful accounts of
$43
|
|
|
as
of March 31, 2017 and $34 as of December 31, 2016
|
399
|
346
|
Inventories
|
294
|
170
|
Equipment
financing receivables
|
126
|
121
|
Prepaid
expenses
|
626
|
686
|
Other
current assets
|
8
|
8
|
Total
current assets
|
2,521
|
2,050
|
|
|
|
Certificate
of deposit
|
-
|
252
|
Long-term
trade receivables, net of allowance for doubtful
accounts
|
|
|
of
$11 as of March 31, 2017 and $13 as of December 31,
2016
|
41
|
43
|
Long-term
equipment financing receivables
|
140
|
176
|
Property
and equipment, net
|
15
|
18
|
Intangible
assets, net
|
311
|
335
|
Goodwill
|
272
|
272
|
Long-term
prepaid expenses
|
205
|
251
|
Other
long-term assets
|
120
|
136
|
Total
assets
|
$3,625
|
$3,533
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$173
|
$116
|
Accrued
expenses
|
926
|
997
|
Notes
payable, current portion
|
62
|
66
|
Income
taxes payable
|
9
|
5
|
Deferred
revenue, current portion
|
948
|
809
|
Total
current liabilities
|
2,118
|
1,993
|
|
|
|
Deferred
revenue, net of current portion
|
41
|
43
|
Notes
payable, net of current portion
|
959
|
966
|
Other
long-term liabilities
|
-
|
16
|
Total
liabilities
|
3,118
|
3,018
|
|
|
|
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,
13,803,556
|
|
|
shares
issued and outstanding as of March 31, 2017 and 13,578,556 shares
issued and
|
|
|
outstanding
as of December 31, 2016
|
14
|
14
|
Additional
paid-in capital
|
59,251
|
58,716
|
Accumulated
deficit
|
(58,758)
|
(58,215)
|
Total
stockholders' equity
|
507
|
515
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$3,625
|
$3,533
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share and share data)
(unaudited)
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Revenue
|
$2,344
|
$2,174
|
Operating
expenses:
|
|
|
Cost
of revenue
|
802
|
913
|
Selling
and marketing
|
690
|
610
|
General
and administrative
|
1,171
|
1,291
|
Research
and development
|
190
|
229
|
Total
operating expenses
|
2,853
|
3,043
|
|
|
|
Loss
from operations
|
(509)
|
(869)
|
|
|
|
Other
income/(expense):
|
|
|
Interest
income
|
3
|
4
|
Interest
expense
|
(35)
|
(35)
|
Other
income, net
|
2
|
35
|
Total
other income/(expense), net
|
(30)
|
4
|
|
|
|
Loss
before income tax
|
(539)
|
(865)
|
|
|
|
Income
tax provision
|
(4)
|
(3)
|
|
|
|
Net
loss
|
$(543)
|
$(868)
|
|
|
|
Net
loss per common share:
|
|
|
Basic
|
$(0.04)
|
$(0.07)
|
Diluted
|
$(0.04)
|
$(0.07)
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
Basic
|
13,699,389
|
13,243,880
|
Diluted
|
13,699,389
|
13,243,880
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders'
Equity
For the Three Months Ended March 31, 2017
(In thousands, except share data)
(unaudited)
|
|
|
Additional
|
|
Total
|
|
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
Balance, January 1, 2017
|
13,578,556
|
$14
|
$58,716
|
$(58,215)
|
$515
|
Expense
for stock options granted to employees
|
-
|
-
|
260
|
-
|
260
|
Stock
issued under stock award plans
|
150,000
|
-
|
166
|
-
|
166
|
Issuance
of common stock for interest on related party note
payable
|
75,000
|
-
|
109
|
-
|
109
|
Net
loss
|
-
|
-
|
-
|
(543)
|
(543)
|
Balance, March 31, 2017
|
13,803,556
|
$14
|
$59,251
|
$(58,758)
|
$507
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(543)
|
$(868)
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
Amortization
of prepaid rent
|
54
|
81
|
Depreciation
and amortization
|
27
|
39
|
Non-cash
interest expense
|
33
|
29
|
Expense
for stock options issued to employees
|
260
|
193
|
Amortization
of deferred gain
|
(16)
|
(23)
|
Changes
in assets and liabilities:
|
|
|
Trade
receivables
|
(51)
|
(112)
|
Equipment
financing receivables
|
31
|
37
|
Inventories
|
(124)
|
5
|
Prepaid
expenses
|
134
|
41
|
Other
assets
|
16
|
22
|
Accounts
payable and accrued expenses
|
(14)
|
330
|
Income
tax payable
|
4
|
-
|
Deferred
revenue
|
137
|
(35)
|
Net
cash used for operating activities
|
(52)
|
(261)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Sale
of long-term investment
|
252
|
-
|
Release
of restricted cash
|
-
|
12
|
Net
cash provided by investing activities
|
252
|
12
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds
from notes payable
|
25
|
-
|
Repayments
made on notes payable
|
(42)
|
(38)
|
Proceeds
from exercise of options
|
166
|
-
|
Payment
of contingent consideration
|
-
|
(59)
|
Net
cash provided by/(used for) financing activities
|
149
|
(97)
|
|
|
|
NET
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
349
|
(346)
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
|
619
|
1,497
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE END OF THE PERIOD
|
$968
|
$1,151
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash
used during the period for:
|
|
|
Income
taxes, net
|
$-
|
$(2)
|
Supplemental
disclosure of non-cash investing and financing
information:
|
|
|
Issuance
of common stock for prepayment of interest on related-party note
payable
|
$109
|
$-
|
Issuance
of common stock for contingent consideration related to business
acquisition
|
$-
|
$40
|
Prepaid
assets financed through notes payable
|
$25
|
$23
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
CREXENDO, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Significant Accounting Policies
Description of Business
- Crexendo, Inc. (CXDO) is
incorporated in the state of Nevada. As used hereafter in the notes
to condensed consolidated financial statements, we refer to
Crexendo, Inc. and its wholly owned subsidiaries, as
“we,” “us,” “the Company,” or
“our Company”. We are 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
$968,000 at March 31, 2017 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 condensed
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
accompanying unaudited interim consolidated financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) and pursuant to the
rules and regulations of the Securities and Exchange Commission
(“SEC”), consistent in all material respects with those
applied in our consolidated financial statements included in our
Annual Report on Form 10-K for the fiscal year ended
December 31, 2016. Because these financial statements address
interim periods, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements.
Such interim financial information is unaudited but reflects all
adjustments that in the opinion of management are necessary for the
fair presentation of the interim periods presented. The results of
operations presented in this Quarterly Report on Form 10-Q are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2017 or for any future periods. This
Quarterly Report on Form 10-Q should be read in conjunction with
the Company’s audited consolidated financial statements and
footnotes included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016.
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 March 31, 2017
and December 31, 2016, we had cash and cash equivalents in
financial institutions in excess of federally insured limits in the
amount of $741,000 and $413,000, respectively.
Restricted Cash
– We classified $100,000 and
$100,000 as restricted cash as of March 31, 2017 and December 31,
2016, respectively. Cash is restricted for compensating balance
requirements on purchasing card agreements. As of March 31, 2017
and December 31, 2016, we had restricted cash in financial
institutions in excess of federally insured limits in the amount of
$100,000 and $100,000, 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.
7
Inventory – Finished goods telecommunications
equipment inventory is stated at the lower of cost or net
realizable value (first-in, first-out method). In accordance with
applicable accounting guidance, we regularly evaluate whether
inventory is stated at the lower of cost or net realizable value.
If net realizable value is less than cost, the difference is
recognized as a loss in earnings in the period in which it
occurs.
Certificate of Deposit
- Certificate of Deposit
(“CD”) is collateral for merchant accounts. The CD was
classified as long-term in the consolidated balance sheets at
December 31, 2016. During March 2017, the bank removed the
collateral requirement therefore we sold the CD and transferred the
proceeds to our cash and cash equivalents.
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 are 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 $3,000 and $6,000
for the three months ended March 31, 2017 and 2016, 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.
8
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.
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.
9
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:
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.
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 three months
ended March 31, 2017 and 2016.
10
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.
Significant Customers
– No customer accounted for 10%
or more of our total revenue for the three months ended March 31,
2017 and 2016. One telecom customer accounted for 10% of our total
trade accounts receivable as of March 31, 2017 and one telecom
customer accounted for 11% of total trade accounts receivable as of
December 31, 2016.
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 was recognized in
2016 as a result of the adoption of ASU 2016-09. There was 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 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 March 31,
2017 and December 31, 2016. 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 July 2015, the FASB issued ASU 2015-11,
Inventory, which will require an entity to measure in scope
inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of
completion, disposal, and transportation. Subsequent measurement is
unchanged for inventory measured using LIFO or the retail inventory
method. The amendments do not apply to inventory that is measured
using last-in, first-out (LIFO) or the retail inventory method. The
amendments apply to all other inventory, which includes inventory
that is measured using first-in, first-out (FIFO) or average cost.
We adopted this guidance effective January 1, 2017. 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.
11
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.
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 adopted ASU 2014-12 effective
January 1, 2017. The adoption of this ASU did not impact our
condensed consolidated financial statements for the three months
ended March 31, 2017, as there are no performance targets
associated with outstanding awards.
Recently Issued Accounting
Pronouncements – In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which eliminates
Step 2 from the goodwill impairment test. The annual, or interim,
goodwill impairment test is performed by comparing the fair value
of a reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. In addition, income tax effects from any
tax deductible goodwill on the carrying amount of the reporting
unit should be considered when measuring the goodwill impairment
loss, if applicable. The amendments also eliminate the requirements
for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is
necessary. This guidance is effective for annual or any interim
goodwill impairment tests in fiscal years beginning after December
15, 2019. Early adoption is permitted. ASU 2017-04 should be
adopted on a prospective basis. We are in the process of evaluating
the adoption and potential impact of this new ASU on our
consolidated financial statements.
In November 2016, the FASB issued ASU
2016-18, Statement of Cash Flows (Topic
230): Restricted Cash, which
requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. As a result, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows.
The amendments do not provide a definition of restricted cash or
restricted cash equivalents. This guidance is effective for fiscal
years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. The
amendments should be applied using a retrospective transition
method to each period presented. We are in the process of
evaluating the adoption and potential impact of this new ASU on our
consolidated financial statements.
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.
12
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.
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.
13
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 three months ended March 31, 2017 and 2016
is the same as basic net loss per common share because 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:
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
|
|
|
Net
loss (in thousands)
|
$(543)
|
$(868)
|
|
|
|
Weighted-average
share reconciliation:
|
|
|
Weighted-average
basic shares outstanding
|
13,699,389
|
13,243,880
|
Diluted
shares outstanding
|
13,699,389
|
13,243,880
|
|
|
|
Net
loss per common share:
|
|
|
Basic
|
$(0.04)
|
$(0.07)
|
Diluted
|
$(0.04)
|
$(0.07)
|
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 March 31, 2017 and 2016, the common stock equivalent
shares were, as follows:
|
March 31,
|
March 31,
|
|
2017
|
2016
|
|
|
|
Shares
of common stock issuable under equity incentive plans
outstanding
|
4,020,050
|
4,176,986
|
Shares
of common stock issuable upon conversion of warrants
|
-
|
250,000
|
Common
stock equivalent shares excluded from diluted net loss per
share
|
4,020,050
|
4,426,986
|
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):
14
|
March 31,
|
December 31,
|
|
2017
|
2016
|
|
|
|
Trade
receivables
|
$430
|
$366
|
Conforming
EPTAs
|
57
|
66
|
Non-Conforming
EPTAs:
|
|
|
1 -
30 days
|
4
|
4
|
31
- 60 days
|
-
|
-
|
61
- 90 days
|
3
|
-
|
Gross
trade receivables
|
494
|
436
|
Less:
allowance for doubtful accounts
|
(54)
|
(47)
|
Trade
receivables, net
|
$440
|
$389
|
|
|
|
Current
trade receivables, net
|
$399
|
$346
|
Long-term
trade receivables, net
|
41
|
43
|
Trade
receivables, net
|
$440
|
$389
|
All
current and long-term EPTAs in the table above had original
contract terms of greater than one year. The Company wrote off
$7,000 of EPTAs during the three months ended March 31, 2017 and
$37,000 during the year ended December 31, 2016, of which, all had
original contract terms of greater than one year.
4.
Equipment Financing Receivables
We
rent certain cloud telecommunication equipment (IP telephone
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 telecommunication equipment through sales-type leases,
were as follows (in thousands):
|
March 31,
|
December 31,
|
|
2017
|
2016
|
|
|
|
Gross
financing receivables
|
$486
|
$573
|
Less
unearned income
|
(220)
|
(276)
|
Financing
receivables, net
|
266
|
297
|
Less:
Current portion of finance receivables, net
|
(126)
|
(121)
|
Finance
receivables due after one year
|
$140
|
$176
|
5.
Prepaid Expenses
Prepaid
expenses consisted of the following (in thousands):
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Prepaid
commissions
|
$457
|
$503
|
Prepaid
interest on related-party note payable
|
82
|
-
|
Prepaid
inventory deposits
|
34
|
156
|
Other
prepaid expenses
|
258
|
278
|
Total
prepaid assets
|
$831
|
$937
|
Included in the
totals above is $205,000 of long-term prepaid commissions as of
March 31, 2017 and $251,000 of long-term prepaid commissions as of
December 31, 2016.
15
6.
Intangible Assets
The
net carrying amount of intangible assets are as follows (in
thousands):
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Customer
relationships
|
$941
|
$941
|
Developed
technology
|
198
|
198
|
Less
accumulated amortization
|
|
|
Customer
relationships
|
(631)
|
(607)
|
Developed
technology
|
(197)
|
(197)
|
Total
|
$311
|
$335
|
Amortization
expense is included in general and administrative expenses and
totaled $24,000 and $33,000 for the three months ended March 31,
2017 and 2016, respectively.
7.
Accrued Expenses
Accrued
expenses consisted of the following (in thousands):
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Accrued
wages and benefits
|
$410
|
$369
|
Accrued
accounts payable
|
191
|
230
|
Accrued
sales and telecommunications taxes
|
269
|
310
|
Other
|
56
|
88
|
Total
accrued expenses
|
$926
|
$997
|
8.
Notes Payable
Related-Party Note Payable
On
December 30, 2015, 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.
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.
16
During
the three months ended March 31, 2017, 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. All other terms
remain the same as initial loan agreement.
Other Notes Payable
Other
notes payable consists of short and long-term financing
arrangements for software licenses, subscriptions, support and
corporate insurance.
The
Company’s outstanding balances under its note payable
agreements were as follows (in thousands):
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Related-party
note payable
|
$1,000
|
$1,000
|
Other
notes payable
|
108
|
124
|
|
1,108
|
1,124
|
Less:
notes payable discount
|
(87)
|
(92)
|
Net
carrying value of notes payable
|
1,021
|
1,032
|
Less:
current portion of long-term notes payable
|
(62)
|
(66)
|
Long-term
notes payable
|
$959
|
$966
|
As
of March 31, 2017, future principal payments are scheduled as
follows (in thousands):
Year ending December 31,
|
|
2017
|
$45
|
2018
|
57
|
2019
|
6
|
2020
|
1,000
|
Total
|
$1,108
|
9.
Fair Value Measurements
We
have financial instruments as of March 31, 2017 and December 31,
2016 for which the fair value is summarized below (in
thousands):
|
March 31, 2017
|
December 31, 2016
|
||
|
Carrying Value
|
Estimated Fair Value
|
Carrying Value
|
Estimated Fair Value
|
Assets:
|
|
|
|
|
Trade
receivables, net
|
$440
|
$440
|
$389
|
$389
|
Equipment
financing receivables
|
266
|
266
|
297
|
297
|
Certificate
of deposit
|
—
|
—
|
252
|
252
|
Liabilities:
|
|
|
|
|
Notes
payable including discount from warrant grant
|
1,021
|
1,117
|
1,032
|
1,133
|
Assets
for which fair value is recognized in the balance sheet on a
recurring basis are summarized below as of March 31, 2017 and
December 31, 2016 (in thousands):
17
|
|
Fair value measurement at reporting date
|
||
Description
|
March 31,
2017
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
Assets:
|
|
|
|
|
Certificate
of deposit
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
Description
|
December 31,
2016
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
Assets:
|
|
|
|
|
Certificate
of deposit
|
$252
|
$-
|
$252
|
$-
|
The
carrying amount of certificates of deposit approximates fair value,
as determined by certificates of deposit with similar terms and
conditions.
10.
Income Taxes
Our
effective tax rate for the three months ended March 31, 2017 and
2016 was (0.7)% and (0.3)%, respectively, which resulted in an
income tax provision of $(4,000) and $(3,000), respectively. The
tax provision is due to state tax payments made with extensions
filed.
Significant
management judgment is required in determining our provision for
income taxes and in determining whether deferred tax assets will be
realized in full or in part. In assessing the recovery of the
deferred tax assets, we considered whether it is more likely than
not that some portion or all of our deferred tax assets will not be
realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income in
the periods in which those temporary differences become
deductible. We considered the scheduled reversals of
future deferred tax assets, projected future taxable income, the
suspension of the sale of product and services through the seminar
sales channel, and tax planning strategies in making this
assessment. As a result, we determined it was more
likely than not that the deferred tax assets would not be realized;
accordingly, we recorded a full valuation allowance. Subsequent to
placing a full valuation allowance on our net deferred tax assets,
adjustments impacting our tax rate have been and are expected to
continue to be insignificant.
11.
Commitments and Contingencies
Operating Leases
We
lease certain of our corporate offices under non-cancelable
operating lease agreements expiring at various dates in 2018 and
2020. The operating leases for our Reno, NV office contains
customary escalation clauses. Rental expense for the three months
ended March 31, 2017 and 2016 was approximately $30,000 and
$30,000, respectively.
Sale-Leaseback
On
February 28, 2014, the Company sold and leased back the land,
building and furniture associated with the corporate headquarters
in Tempe, Arizona to a Company that is owned by the major
shareholder and CEO of the Company for $2.0 million in cash. The
Company recognized a deferred gain of $281,000 on sale-leaseback,
which will be amortized over the initial lease term of 36 months to
offset rent expense. Deferred gain amortization for the three
months ended March 31, 2017 and 2016 was $16,000 and $23,000,
respectively.
Rent
expense incurred on the sale-leaseback during the three months
ended March 31, 2017 and 2016 was $38,000 and $57,000,
respectively.
Future
aggregate minimum lease obligations under the operating lease as of
March 31, 2017, exclusive of taxes and insurance, are as follows
(in thousands):
18
Year ending December
31,
|
|
2017
|
$240
|
2018
|
315
|
2019
|
300
|
2020
|
50
|
Total
|
$905
|
12.
Segments
Management
has chosen to organize the Company around differences based on its
products and services. Cloud Telecommunications Services segment
generates revenue from selling cloud telecommunication services and
broadband internet services. Web Services segment generates revenue
from website hosting and search engine optimization/management. 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):
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Revenue:
|
|
|
Cloud
telecommunications services
|
$2,061
|
$1,778
|
Web
services
|
283
|
396
|
Consolidated
revenue
|
2,344
|
2,174
|
|
|
|
Income/(loss)
from operations:
|
|
|
Cloud
telecommunications services
|
(616)
|
(963)
|
Web
services
|
107
|
94
|
Total
operating loss
|
(509)
|
(869)
|
Other
income/(expense), net:
|
|
|
Cloud
telecommunications services
|
(30)
|
(7)
|
Web
services
|
-
|
11
|
Total
other income/(expense), net
|
(30)
|
4
|
Income/(loss)
before income tax provision
|
|
|
Cloud
telecommunications services
|
(646)
|
(970)
|
Web
services
|
107
|
105
|
Loss
before income tax provision
|
$(539)
|
$(865)
|
Depreciation
and amortization was $24,000 and $33,000 for the Cloud
Telecommunications Services segment for the three months ended
March 31, 2017 and 2016, respectively. Depreciation and
amortization was $3,000 and $6,000 for the Web Services segment for
the three months ended March 31, 2017 and 2016,
respectively.
Interest
income was $3,000 and $4,000 for the Web Services segment for the
three months ended March 31, 2017 and 2016,
respectively.
Interest
expense was $31,000 and $29,000 for the Cloud Telecommunications
Services segment for the three months ended March 31, 2017 and
2016, respectively. Interest expense was $4,000 and $6,000 for the
Web Services segment for the three months ended March 31, 2017 and
2016, respectively.
19
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This section and other parts of this Form 10-Q contain
forward-looking statements that involve risks and uncertainties.
Forward-looking statements can be identified by words such as
“anticipates,” “expects,”
“believes,” “plans,”
“predicts,” and similar terms. Forward-looking
statements are not guarantees of future performance and our
Company’s actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those
discussed in Part II, Item 1A, “Risk Factors,”
which are incorporated herein by reference. The following
discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2016 (the “2016
Form 10-K”) filed with the SEC and the Condensed Consolidated
Financial Statements and notes thereto included in the 2017 Form
10-Qs and elsewhere in this Form 10-Q. We assume no obligation to
revise or update any forward-looking statements for any reason,
except as required by law.
OVERVIEW
We
are a CLEC cloud telecom-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.
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.
Our
Cloud Telecommunications Services revenue increased 16% or $283,000
to $2,061,000 for the three months ended March 31, 2017 as compared
to $1,778,000 for the three months ended March 31, 2016. As of
March 31, 2017 and 2016, our backlog was $16,888,000 and
$14,723,000, respectively.
Web Services segment
- We generate recurring revenue from
website hosting and other professional
services.
Our
Web Services revenue decreased 29% or $113,000 to $283,000 for the
three months ended March 31, 2017 as compared to $396,000 for the
three months ended March 31, 2016.
20
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 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.
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-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 extension dialing, transfer and conference and
seamless hand-off from Wifi to/from 3G and 4G, 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
●
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.
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, interest 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.
21
In
our May 3, 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.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net
Loss
|
||
(Unaudited)
|
||
|
Three
Months Ended March 31,
|
|
|
2017
|
2016
|
|
(In
thousands)
|
|
U.S.
GAAP net loss
|
$(543)
|
$(868)
|
Share-based
compensation
|
260
|
193
|
Amortization
of rent expense paid in stock, net of deferred gain
|
38
|
57
|
Amortization
of intangible assets
|
24
|
33
|
Non-cash
interest expense
|
33
|
29
|
Non-GAAP
net loss
|
$(188)
|
$(556)
|
22
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted
EBITDA
|
||
(Unaudited)
|
||
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
|
(In
thousands)
|
|
U.S.
GAAP net loss
|
$(543)
|
$(868)
|
Depreciation
and amortization
|
27
|
39
|
Interest
expense
|
35
|
35
|
Interest
and other income
|
(5)
|
(39)
|
Income
tax provision
|
4
|
3
|
EBITDA
|
(482)
|
(830)
|
Share-based
compensation
|
260
|
193
|
Amortization
of rent expense paid in stock, net of deferred gain
|
38
|
57
|
Adjusted
EBITDA
|
$(184)
|
$(580)
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In
preparing our financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our revenue,
operating income or loss and net income or loss, as well as on the
value of certain assets and liabilities on our balance sheet. We
believe that the estimates, assumptions and judgments involved in
our accounting policies described in Management’s Discussion
and Analysis of Financial Condition and Results of Operations in
Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2016 have the greatest potential impact on our
financial statements, so we consider them to be our critical
accounting policies and estimates. Our senior management has
reviewed the development and selection of our critical accounting
policies and estimates and their disclosure in this Form 10-Q with
the Audit Committee of our Board of Directors.
RESULTS OF OPERATIONS
The
following discussion of financial condition and results of
operations should be read in conjunction with our condensed
consolidated financial statements and notes thereto and other
financial information included elsewhere in this Form
10-Q.
Results of Consolidated Operations (in
thousands):
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Revenue
|
$2,344
|
$2,174
|
Loss
before income taxes
|
(539)
|
(865)
|
Income
tax provision
|
(4)
|
(3)
|
Net
loss
|
(543)
|
(868)
|
Basic
net loss per share
|
$(0.04)
|
$(0.07)
|
Diluted
net loss per share
|
$(0.04)
|
$(0.07)
|
Three months ended March 31, 2017 compared to three months ended
March 31, 2016
Revenue
Total
revenue increased 8% or $170,000, to $2,344,000 for the three
months ended March 31, 2017 as compared to $2,174,000 for the three
months ended March 31, 2016. Cloud Telecommunications Services
segment revenue increased 16% or $283,000, to $2,061,000 for the
three months ended March 31, 2017 as compared to $1,778,000 for the
three months ended March 31, 2016. Web Services segment revenue
decreased 29% or $113,000, to $283,000 for the three months ended
March 31, 2017 as compared to $396,000 for the three months ended
March 31, 2016.
23
Loss Before Income Taxes
Loss
before income tax decreased 38% or $326,000, to $539,000 for the
three months ended March 31, 2017 as compared to loss before income
tax of $865,000 for the three months ended March 31, 2016. The
decrease in loss before income tax is primarily due to the increase
in revenue of $170,000, a decrease in operating expenses of
$190,000, offset by a decrease in other income of
$34,000.
Income Tax Provision
We
had an income tax provision of $4,000 for the three months ended
March 31, 2017 compared to an income tax provision of $3,000 for
the three months ended March 31, 2016. We had a pre-tax loss for
the three months ended March 31, 2017 and 2016 of $539,000 and
$865,000, respectively, and a full valuation allowance on all of
our deferred tax assets for the three months ended March 31, 2017
and 2016.
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.
Operating Results of our Cloud Telecommunications Services Segment
(in thousands):
|
Three Months Ended March 31,
|
|
Cloud Telecommunications Services
|
2017
|
2016
|
Revenue
|
$2,061
|
$1,778
|
Operating
expenses:
|
|
|
Cost
of revenue
|
769
|
848
|
Research
and development
|
184
|
218
|
Selling
and marketing
|
690
|
610
|
General
and administrative
|
1,034
|
1,065
|
Total
operating expenses
|
2,677
|
2,741
|
Operating
loss
|
(616)
|
(963)
|
Other
expense
|
(30)
|
(7)
|
Loss
before tax provision
|
$(646)
|
$(970)
|
Three months ended March 31, 2017 compared to three
months ended March 31, 2016
Revenue
Cloud
Telecommunications Services segment revenue increased 16% or
$283,000, to $2,061,000 for the three months ended March 31, 2017
as compared to $1,778,000 for the three months ended March 31,
2016. Revenue from recurring and one-time services increased
$383,000 and equipment sales decreased $72,000. Sales-type
lease and associated interest revenue decreased $28,000 as the
Company no longer provides equipment leasing for customers.
Customers either purchase devices or lease them through a
third-party leasing company. A substantial portion of Cloud
Telecommunications Services segment revenue is generated through
thirty-six to sixty month service contracts. As such, we
believe growth in Cloud Telecommunications Services segment will
initially be seen through increases in our backlog. Backlog
represents the total contract value of all contracts signed, less
revenue recognized from those contracts as of March 31, 2017 and
2016.
24
Below
is a table which displays the Cloud Telecommunications Services
segment revenue backlog as of January 1, 2017 and 2016, and March
31, 2017 and 2016, which we expect to recognize as revenue within
the next thirty-six to sixty months (in thousands):
Cloud Telecommunications Services backlog as of January 1,
2017
|
$15,921
|
Cloud Telecommunications Services backlog as of March 31,
2017
|
$16,888
|
|
|
Cloud Telecommunications Services backlog as of January 1,
2016
|
$13,907
|
Cloud Telecommunications Services backlog as of March 31,
2016
|
$14,723
|
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 phones and third party
equipment. Cost of revenue decreased 9% or $79,000, to
$769,000 for the three months ended March 31, 2017 as compared to
$848,000 for the three months ended March 31, 2016. The
decrease in cost of revenue was primarily due to a decrease in
salary and benefits of $46,000 associated with customer service and
installation expenses and a decrease in equipment costs of $43,000
resulting from a decrease in equipment sales, offset by an increase
in bandwidth costs of $10,000.
Research and Development
Research
and development expenses primarily consist of payroll and related
expenses, related to the development of new cloud
telecommunications features and products. Research and
development salary expenses decreased 16% or $34,000, to $184,000
for the three months ended March 31, 2017 as compared to $218,000
for the three months ended March 31, 2016 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 13% or $80,000, to $690,000 for the three months
ended March 31, 2017 as compared to $610,000 for the three months
ended March 31, 2016. The increase in selling and marketing expense
was due an increase in salary and benefits of $62,000 from an
increase in headcount and an increase in commission expenses of
$76,000 directly related to an increase in revenue, offset by a
decrease in business development costs of $58,000 primarily related
to the discontinuance of the annual Partner Channel
Conference.
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 3% or
$31,000, to $1,034,000 for the three months ended March 31, 2017 as
compared to $1,065,000 for the three months ended March 31, 2016.
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 9%, or $120,000 to
$1,171,000 for the three months ended March 31, 2017 compared to
$1,291,000 for the three months ended March 31, 2016. As Web
Services revenue decreased significantly for the three months ended
March 31, 2017, we allocated less of the general and administrative
expenses to the Web Services segment and more expenses to the Cloud
Telecommunications Services segment.
Other Expense
Other
expense primarily relates to the allocated portions of interest
expense, offset by sublease rental income. Net other expense
increased 329% or $23,000, to $30,000 for the three months ended
March 31, 2017 as compared to $7,000 for the three months ended
March 31, 2016. The increase is due to a decrease in sublease
income as the sublease rental agreement expired in fourth quarter
2016 and was not renewed.
25
Operating Results of Web Services segment (in
thousands):
|
Three Months Ended March 31,
|
|
Web Services
|
2017
|
2016
|
Revenue
|
$283
|
$396
|
Operating
expenses:
|
|
|
Cost
of revenue
|
33
|
65
|
Research
and development
|
6
|
11
|
General
and administrative
|
137
|
226
|
Total
operating expenses
|
176
|
302
|
Operating
income
|
107
|
94
|
Other
income
|
-
|
11
|
Income
before tax provision
|
$107
|
$105
|
Three months ended March 31, 2017 compared to three months ended
March 31, 2016
Revenue
Revenue
from Web Services is generated primarily through website hosting,
professional web management services, and EPTAs. Web Services
segment revenue decreased 29% or $113,000, to $283,000 for the
three months ended March 31, 2017 as compared to $396,000 for the
three months ended March 31, 2016. The decrease in revenue from the
prior year is primarily related to a $41,000 decrease in EPTA
revenue due to a decrease in outstanding receivables, a decrease of
$17,000 from web management professional services, and a decrease
in hosting revenue of $55,000.
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 49% or $32,000, to
$33,000 for the three months ended March 31, 2017 as compared to
$65,000 for the three months ended March 31, 2016. The cost of
revenue decrease is primarily related to a reduction in customer
service costs.
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 45% or $5,000, to $6,000 for the
three months ended March 31, 2017 as compared to $11,000 for the
three months ended March 31, 2016. The decrease was related to a
reduction of salaries and benefits expenses.
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 39% or
$89,000, to $137,000 for the three months ended March 31, 2017 as
compared to $226,000 for the three months ended March 31, 2016. The
decrease in general and administrative expenses is primarily due to
less of an allocation of corporate general and administrative
expenses resulting from the 29% decrease in revenue for the period,
and a company-wide reduction in general and administrative expenses
as we continue to cut unnecessary expenses. Consolidated general
and administrative expenses decreased 9%, or $120,000 to $1,171,000
for the three months ended March 31, 2017 compared to $1,291,000
for the three months ended March 31, 2016.
Other Income
Other
income primarily relates to the allocated portions of interest
expense and sublease rental income. Other income decreased $11,000,
to $0 for the three months ended March 31, 2017 as compared to
$11,000 for the three months ended March 31, 2016. The decrease is
due to a decrease in sublease income as the sublease rental
agreement expired in fourth quarter 2016 and was not
renewed.
26
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
$968,000 at March 31, 2017 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 increased 607% or $346,000, to $403,000 as of March 31,
2017 as compared to $57,000 at December 31, 2016. The
increase in working capital was primarily related to the increase
in cash and cash equivalents of $349,000, an increase in trade
receivables, net of allowance for doubtful accounts of $53,000, an
increase in inventories of $124,000, and a decrease in accrued
expenses of $71,000, offset by an increase in deferred revenue,
current portion of $139,000, a decrease in prepaid expenses of
$60,000, and an increase in accounts payable of $57,000 during the
three months ended March 31, 2017.
Cash and Cash Equivalents
Cash
and cash equivalents increased 56% or $349,000, to $968,000 at
March 31, 2017 as compared to $619,000 at December 31, 2016. During
the three months ended March 31, 2017, we used cash flows for
operating activities of $52,000, offset by $252,000 provided by
investing activities from the sale of our long-term CD, and
$149,000 provided by financing activities primarily related to
proceeds from stock option exercises of $166,000 during the
period.
Trade Receivables
Current
and long-term trade receivables, net of allowance for doubtful
accounts, increased 13% or $51,000, to $440,000 at March 31, 2017
as compared to $389,000 at December 31, 2016. The increase in
current trade receivables can be attributed to an outstanding
balance on a large customer account being funded by a third-party
leasing company and from outstanding down payment invoices on new
bookings. Long-term trade receivables, net of allowance for
doubtful accounts, decreased 5% or $2,000, to $41,000 at March 31,
2017 as compared to $43,000 at December 31, 2016. 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. As
these agreements reach their terms, the long-term portion
decreases.
Accounts Payable
Accounts
payable increased 49% or $57,000, to $173,000 at March 31, 2017 as
compared to $116,000 at December 31, 2016. Our accounts payable as
of March 31, 2017 were generally within our vendors’ terms of
payment. The increase is primarily related to the timing of check
processing schedule.
Notes Payable
Notes
payables decreased 1% or $11,000, to $1,021,000 at March 31, 2017
as compared to $1,032,000 at December 31, 2016. The decrease
is primarily related to payments on annual financing contracts and
amortization of debt discounts.
Capital
Total
stockholders’ equity decreased 2% or $8,000, to $507,000 at
March 31, 2017 as compared to $515,000 at December 31, 2016. The
significant changes in stockholders’ equity during the three
months ended March 31, 2017 included net loss of $543,000, offset
by an increase of additional paid-in capital of $260,000 for stock
options issued to employees, $166,000 for the exercise of employee
stock options, and $109,000 in common stock issued for annual
interest payment on note payable.
Off Balance Sheet Arrangements
As
of March 31, 2017, we are not involved in any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
27
Impact of Recent Accounting Pronouncements
The
information set forth under Note 1 to the condensed consolidated
financial statements under the caption “Recent Accounting
Pronouncements” is incorporated herein by
reference.
Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition
With
the exception of historical facts, the statements contained in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations are “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, which reflect our current
expectations and beliefs regarding our future results of
operations, performance and achievements. These statements are
subject to risks and uncertainties and are based upon assumptions
and beliefs that may or may not materialize. These forward-looking
statements include, but are not limited to, statements
concerning:
●
our belief that our
target market will increasingly look to Internet solutions
providers who leverage industry and customer practices, increase
predictability of success of their Internet initiatives and
decrease implementation risks by providing low-cost, scalable
solutions with minimal lead time;
●
our belief that we
can compete successfully by relying on our infrastructure and
marketing strategies as well as techniques, systems and procedures,
and by adding additional products and services in the
future;
●
our belief that we
can continue our success by periodic review and revision of our
methods of doing business and by continuing our expansion into
domestic and international markets;
●
our belief that a
key component of our success comes from a number of new, recently
developed proprietary technologies and that these technologies and
advances distinguish our services and products from our competitors
and further help to substantially reduce our operating costs and
expenses;
●
our contention that
we do not offer our customers a “business opportunity”
or a “franchise” as those terms are defined in
applicable statutes of the states in which we operate;
●
our belief that
there is a large, fragmented and under-served population of small
businesses and entrepreneurs searching for professional services
firms that offer business-to-consumer e-commerce solutions coupled
with support and continuing education;
●
our expectation
that our offering of products and services will evolve as some
products are replaced by new and enhanced products intended to help
our customers achieve success with their Internet-related
businesses; and
●
our expectation
that the costs and expenses we incur will be insignificant as
deferred revenue amounts are recognized as product and other
revenues when cash is collected.
We
caution readers that our operating results are subject to various
risks and uncertainties that could cause our actual results and
outcomes to differ materially from those discussed or anticipated,
including changes in economic conditions and internet technologies,
interest rate fluctuations, and the factors set forth in the
section entitled, “Risk Factors,” under
Part I, Item 1A of the 2016 Form 10-K. We also advise readers
not to place any undue reliance on the forward-looking statements
contained in this Form 10-Q, which reflect our beliefs and
expectations only as of the date of this Report. We assume no
obligation to update or revise these forward-looking statements to
reflect new events or circumstances or any changes in our beliefs
or expectations, other than as required by law.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
Not
required
Item
4.
Controls
and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
28
Our
Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this Report,
have concluded that, based on the evaluation of these controls and
procedures, our disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the three months ended March 31, 2017 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item
1.
Legal
Proceedings
From
time to time, we are involved in lawsuits, claims, investigations
and proceedings that arise in the ordinary course of business.
There are no matters pending or threatened that we expect to have a
material adverse impact on our business, results of operations,
financial condition or cash flows.
Item
1A.
Risk
Factors
There
are many risk factors that may affect our business and the results
of our operations, many of which are beyond our control.
Information on certain risks that we believe are material to our
business is set forth in “Part I – Item 1A.
Risk Factors” of the 2016 Form 10-K.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item
6.
Exhibits
Exhibits
|
Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities and Exchange Act of
1934, as amended
|
|
|
Certification of Chief Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities and Exchange Act of
1934, as amended
|
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
|
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
|
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
|
|
XBRL
INSTANCE DOCUMENT
XBRL
TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL
TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
|
*
|
|
In accordance with Rule 406T of Regulation S-T, these
XBRL (eXtensible Business Reporting Language) documents are
furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933 or Section 18 of the Securities Exchange Act of
1934 and otherwise are not subject to liability under these
sections.
|
29
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Crexendo, Inc.
|
|
|
|
|
|
|
|
May 3,
2017
|
By:
|
/s/ Steven G.
Mihaylo
|
|
|
Steven G. Mihaylo
Chief Executive Officer
|
May 3,
2017
|
By:
|
/s/ Ronald
Vincent
|
|
|
Ronald Vincent
Chief Financial Officer
|
30