Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-K
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☒ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017:
Or
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
———————
Crexendo, Inc.
(Exact name of registrant as specified in its charter)
———————
Nevada
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001-32277
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87-0591719
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(State
or Other Jurisdiction
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(Commission
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(I.R.S.
Employer
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of
Incorporation or Organization)
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File
Number)
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Identification
No.)
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1615 South 52nd Street, Tempe, AZ
85281
(Address
of Principal Executive Office) (Zip Code)
(602) 714-8500
(Registrant’s
telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
———————
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common
Stock, par value $0.001 per share
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OTCQX
Marketplace
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Securities registered pursuant to Section 12(g) of the Act:
None
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———————
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes ☒
No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
☒
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth
company.
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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(Do not
check if a smaller reporting company)
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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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 Act).
Yes ☐
No ☒
The
aggregate market value of the common stock held by non-affiliates
of the registrant as of December 31, 2017 was approximately
$7,716,764.
The
number of shares of the registrant’s common stock outstanding
as of February 19, 2018 was 14,287,556.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement for the Registrant’s 2018 Annual Meeting of
Stockholders are incorporated by reference in Part III of this
Annual Report on Form 10-K.
TABLE
OF CONTENTS
Part I
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ITEM
1. BUSINESS
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1
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ITEM
1A. RISK FACTORS
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6
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ITEM
2. PROPERTIES
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16
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ITEM
3. LEGAL
PROCEEDINGS
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16
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ITEM
4. MINE SAFETY
DISCLOSURES
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16
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PART II
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ITEM
5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
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16
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ITEM
6. SELECTED FINANCIAL
DATA
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17
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ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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17
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
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27
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ITEM
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
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28
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ITEM
9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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56
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ITEM
9A. CONTROLS AND PROCEDURES
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56
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ITEM
9B. OTHER INFORMATION
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56
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PART III
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
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57
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ITEM
11. EXECUTIVE
COMPENSATION
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57
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
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57
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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57
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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57
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PART IV
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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60
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PART I
Throughout this
Annual Report, we refer to Crexendo, Inc., together with its
subsidiaries, as “we,” “us,” “our
Company,” “Crexendo®” or “the
Company.” As used in this Annual Report, “Ride The
Cloud™” is a
registered trademark of our Company in the United States and other
countries. All other product names are or may be trademarks of, and
are used to identify the products and services of, their respective
owners.
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS “MAY,”
“WILL,” “SHOULD,” “EXPECT,”
“PLAN,” “INTEND,” “ANTICIPATE,”
“BELIEVE,” “ESTIMATE,”
“PROJECT,” “PREDICT,”
“POTENTIAL” OR “CONTINUE” (INCLUDING THE
NEGATIVE OF SUCH TERMS), OR OTHER SIMILAR TERMINOLOGY. THESE
STATEMENTS ARE ONLY ESTIMATIONS, AND ARE BASED UPON VARIOUS
ASSUMPTIONS THAT MAY NOT BE REALIZED. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD
SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED
TO, THE RISKS OUTLINED BELOW UNDER ITEM 1A. THESE FACTORS MAY CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENT.
ALTHOUGH WE BELIEVE
THAT THE ESTIMATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS
ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THE FORWARD-LOOKING STATEMENTS. WE DO NOT INTEND TO
UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO
CHANGES IN OUR EXPECTATIONS, UNLESS REQUIRED BY LAW.
ITEM 1.
BUSINESS
OVERVIEW
Crexendo, Inc. is a
next-generation CLEC and an award-winning leader and provider of
unified communications cloud telecom services, broadband internet
services, and other cloud business services that are designed to
provide enterprise-class cloud services to any size businesses at
affordable monthly rates.
Cloud Telecommunications segment - Our
cloud telecommunications services transmit calls using IP or cloud
technology, which converts voice signals into digital data packets
for transmission over the Internet or cloud. Each of our calling
plans provides a number of basic features typically offered by
traditional telephone service providers, plus a wide range of
enhanced features that we believe offer an attractive value
proposition to our customers. This platform enables a user, via a
single “identity” or telephone number, to access and
utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device or a mobile device.
We
generate recurring revenue from our cloud telecommunications and
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We generate
product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the
sale of equipment, including those from sales-type leases, are
recognized at the time of sale or at the inception of the lease, as
appropriate.
Web Services segment - We generate
recurring revenue from website hosting and other professional
services.
OUR SERVICES AND PRODUCTS
Our
goal is to provide a broad range of cloud-based products and
services that nearly eliminate the cost of a businesses’
technology infrastructure and enable businesses of any size to more
efficiently run their business. By providing a variety of
comprehensive and scalable solutions, we are able to cater to
businesses of all sizes on a monthly subscription basis 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:
1
Cloud Telecommunications Services - Our
cloud telecommunications service offering includes hardware,
software, and unified communication solutions for businesses using
IP or cloud technology over any high-speed internet connection.
These services are rendered through a variety of devices and user
interfaces such as a Crexendo branded desktop phones and/or 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 standards based Web and VoIP cloud
technologies. Our services use our highly scalable complex
infrastructure that we build and manage based on industry standard
best practices to achieve greater efficiencies, better quality of
service (QoS) and customer satisfaction. Our infrastructure
comprises of compute, 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/Message-On-Hold, Voicemail, Unified
Messaging, Hot-Desking
●
Group Productivity
Features such as Call Park, Call Pickup, Interactive Voice Response
(IVR), Individual and Universal Paging, Corporate Directory,
Multi-Party Conferencing, Group Mailboxes, Web and mobile devices
based collaboration applications
●
Call Center
Features such as Automated Call Distribution (ACD), Call Monitor,
Whisper and Barge, Automatic Call Recording, One way call
recording, Analytics
●
Advanced Unified
Communication Features such as Find-Me-Follow-Me, Sequential Ring
and Simultaneous Ring, Voicemail transcription
●
Mobile Features
such as extension dialing, transfer and conference and seamless
hand-off from WiFi to/from 3G and 4G, LTE, as well as other data
services. These features are also available on CrexMo, an
intelligent mobile application for iPhones and Android smartphones,
as well as iPads and Android tablets
●
Traditional PBX
Features such as Busy Lamp Fields, System Hold. 16-48 Port density
Analog Devices
●
Expanded Desktop
Device Selection such as Entry Level Phone, Executive Desktop, DECT
Phone for roaming users
●
Advanced Faxing
solution such as Cloud Fax (cFax) allowing customers to send and
receive Faxes from their Email Clients, Mobile Phones and Desktops
without having to use a Fax Machine simply by attaching a
file
●
Web based online
portal to administer, manage and provision the system.
●
Asynchronous
communication tools like SMS/MMS, chat and document sharing to keep
in pace with emerging communication trends.
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 CPaaS 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.
SEGMENT INFORMATION
The
Company has two operating segments, which consist of Cloud
Telecommunications and Web Services. Segment revenue and income
(loss) before income tax provision was as follows (in
thousands):
2
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Year Ended December 31,
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2017
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2016
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Revenue:
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Cloud
Telecommunications
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$9,320
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$7,757
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Web
Services
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1,057
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1,362
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Consolidated
revenue
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$10,377
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$9,119
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Year Ended December 31,
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2017
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2016
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Income/(loss)
before income tax provision:
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Cloud
Telecommunications
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$(1,514)
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$(3,210)
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Web
Services
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501
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430
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Loss
before income tax
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$(1,013)
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$(2,780)
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TECHNOLOGY
We
believe our proprietary implementation of standard Web, IP, Cloud,
Mobile and Internet technologies represent a key component of our
business model. We believe these technologies and how we deliver
them to our customers distinguish our services and products from
the services and products offered by our competitors. Our
technology infrastructure and virtual network operation center, all
of which is built and managed on industry standard computers,
storage, network, data and platforms offers us greater efficiencies
while maintaining scalability and redundancy. The synergies between
Web and Telecommunication protocols such as TCP/IP, HTTP, XML, SIP
and innovations in computing, load balancing, redundancy and high
availability of Web and Telecommunications technologies offers us a
unique advantage in delivering these services to our customers
seamlessly from our data center.
Our
Cloud Telecommunications technology is continuously being enhanced
with additional features and software functionality. Our current
functionality includes:
●
High-end desktop
telephony devices such as Gigabit, PoE, 6 Line Color Phone with 10
programmable buttons and lower end Monochrome 2 Line wall mountable
device;
●
Basic Business
Telephony Features such as those offered in a traditional private
branch exchange (“PBX”) systems like extension dialing,
Direct Inward Dialing (DID), Hold/Resume, Music-On-Hold, Call
Transfer (Attended and Unattended), Conferencing, Local, Long
Distance, Toll-Free and International Dialing, Voicemail,
Auto-Attendant and traditional faxing;
●
Advanced telephony
features such as Call Park, Call Pickup, Paging (through the
phones), Overhead paging, Call Recording;
●
Call Center
Functionality such as Agent Log In/Log Out, Whisper, Barge and Call
center reporting;
●
Unified
Communications features like Simultaneous Ring, Sequential Ring,
Status based Routing (Find-Me-Follow-Me), 10-party instant
conference, and Mobile application (CrexMo);
●
Crexendo Mobile
Application (CrexMo), which allows users to place and receive
extension calls using Crexendo’s network, transfer and
conference other users right from their mobile device as if they
were in the office. It also provided users instant access to visual
voicemail and call logs;
●
End User Portal and
Unified Messaging with Voicemail, Call Recording and eFax
inbox.
●
Collaboration
products like group chat, SMS/MMS, document sharing, video and web
conferencing
Our
website software platform is continuously being enhanced and is an
innovative website-building environment. We continue to invest and
develop on our Web platform to make it more easy-to-use, enable
larger mobile and 3rd party integration features thus enabling our
web customers to drive more traffic to their
web-sites.
3
RESEARCH AND DEVELOPMENT
We
invested $750,000 and $826,000 for the years ended December 31,
2017 and 2016, respectively, in the research and development of our
technologies and data center. The majority of these expenditures
were for enhancements to our cloud telecommunications products and
services and website development software.
COMPETITION
The
market for cloud business communications services is large and
increasingly competitive. We expect competition to continue to
increase in the future. Some of these competitors
include:
●
traditional
on-premise, hardware business communications providers such as
Alcatel-Lucent Enterprise, Avaya Inc., Cisco Systems, Inc., and
Siemens Enterprise Networks, LLC, any of which may now or in the
future also host their solutions through the cloud;
●
software providers
such as Microsoft Corporation (Microsoft Teams (formerly Skype for
Business)) and BroadSoft, Inc. (which recently announced an
agreement to be acquired by Cisco Systems, Inc.) that generally
license their software and may now or in the future also host their
solutions through the cloud, and their resellers including major
carriers and cable companies;
●
established
communications providers that resell on-premise hardware, software,
and hosted solutions, such as AT&T, Verizon Communications
Inc., and Comcast Corporation in the United States, TELUS and
others in Canada, and BT, Vodafone, and others in the U.K., all of
whom have significantly greater resources than us and do now or may
in the future also develop and/or host their own or other solutions
through the cloud;
●
other cloud
companies such as 8x8, Inc., RingCentral, Inc., Amazon.com, Inc.,
DialPad, Inc., Fuze (formerly Thinking Phone Networks), StarBlue
(merger of Star2Star and BlueFace), Intermedia.net, Inc., J2
Global, Inc., Jive Communications, Inc. (which recently announced
an agreement to be acquired by LogMeIn, Inc.), Microsoft
Corporation (Microsoft Teams (formerly Skype for Business)),
Nextiva, Inc., Slack Technologies, Inc., Vonage Holdings Corp., and
West Corporation;
●
other large
internet companies such as Alphabet Inc., Facebook, Inc., Oracle
Corporation, and Salesforce.com, Inc., any of which might launch
its own cloud-based business communication services or acquire
other cloud-based business communications companies in the future;
and
●
established contact
center providers such as Amazon.com, Inc., Aspect Software, Inc.,
Avaya Inc., Five9, Inc., Genesys Telecommunications Laboratories,
Inc.), and NewVoiceMedia.
Additionally,
should we determine to pursue acquisition opportunities, we may
compete with other companies with similar growth strategies. Some
of these competitors may be larger and have greater financial
resources than we do. Competition for these acquisition targets
could also result in increased prices of acquisition targets and a
diminished pool of companies available for
acquisition.
There
are relatively low barriers to entry into our business. Our
proprietary technology does not preclude or inhibit competitors
from entering our markets. In particular, we anticipate new
entrants will attempt to develop competing products and services or
new forums for conducting e-commerce and telecommunications
services which could be deemed competition. Additionally, if
telecommunications service providers with more resources and name
recognition were to enter our markets, they may redefine our
industry and make it difficult for us to compete.
Expected technology
advances associated with the Cloud, increasing use of the Cloud,
and new software products are welcome advancements that we believe
will broaden the Cloud’s viability. We anticipate that we can
compete successfully by relying on our infrastructure, marketing
strategies and techniques, systems and procedures, and by adding
additional products and services in the future. We believe we can
continue the operation of our business by periodic review and
revision to our product offerings and marketing
approach.
4
INTELLECTUAL PROPERTY
Our
success depends in part on using and protecting our proprietary
technology and other intellectual property. Furthermore, we must
conduct our operations without infringing on the proprietary rights
of third parties. We also rely upon trade secrets and the know-how
and expertise of our key employees. To protect our proprietary
technology and other intellectual property, we rely on a
combination of the protections provided by applicable copyright,
trademark and trade secret laws, as well as confidentiality
procedures and licensing arrangements. Although we believe we have
taken appropriate steps to protect our intellectual property
rights, including requiring employees and third parties who are
granted access to our intellectual property to enter into
confidentiality agreements, these measures may not be sufficient to
protect our rights against third parties. Others may independently
develop or otherwise acquire unpatented technologies or products
similar or superior to ours.
We
license from third parties certain software and Internet tools
which we include in our services and products. If any of these
licenses were terminated, we could be required to seek licenses for
similar software and Internet tools from other third parties or
develop these tools internally. We may not be able to obtain such
licenses or develop such tools in a timely fashion, on acceptable
terms, or at all.
Companies
participating in the software, Internet technology, and
telecommunication industries are frequently involved in disputes
relating to intellectual property. We may be required to defend our
intellectual property rights against infringement, duplication,
discovery and misappropriation by third parties or to defend
against third-party claims of infringement. Likewise, disputes may
arise in the future with respect to ownership of technology
developed by employees who were previously employed by other
companies. Any such litigation or disputes could be costly and
divert our attention from our business. An adverse determination
could subject us to significant liabilities to third parties,
require us to seek licenses from, or pay royalties to, third
parties, or require us to develop appropriate alternative
technology. Some or all of these licenses may not be available to
us on acceptable terms, or at all. In addition, we may be unable to
develop alternate technology at an acceptable price, or at all. Any
of these events could have a material adverse effect on our
business prospects, financial position, or results of
operations.
EMPLOYEES
As of
December 31, 2017, we had 54 employees; 51 full-time and 3
part-time, including 3 executives, 15 sales representatives and
sales management, 10 engineers and IT support, 18 in operations and
customer support, 8 in finance, legal, and other general
administration.
CORPORATE
INFORMATION
Crexendo, Inc. was
incorporated as a Nevada corporation under the name
“Netgateway, Inc.” on April 13, 1995. In
November 1999, we were reincorporated under the laws of
Delaware. In July 2002, we changed our corporate name to
“iMergent, Inc.” In May 2011, our stockholders approved
an amendment to our Certificate of Incorporation to change our name
from "iMergent, Inc." to "Crexendo, Inc." The name change was
effective May 18, 2011. Our ticker symbol "IIG" on the New York
Stock Exchange was changed to “EXE” on May 18, 2011. We
changed the name to better reflect the scope and direction of our
business activities of assisting and providing web-based technology
solutions to any size businesses who are seeking to take advantage
of the benefits of conducting business on the cloud. On January 13,
2015, the Company moved to the OTCQX Marketplace and our ticker
symbol was changed to “CXDO”. In November 2016, we were
reincorporated as a Nevada corporation.
We are
headquartered at 1615 South 52nd Street, Tempe, AZ,
85281, and our telephone number is (602) 714-8500. Our website is
www.crexendo.com. Our website and the information contained therein
or connected thereto shall not be deemed to be incorporated into
this Annual Report.
We make
available free of charge on or through our Internet website our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as
soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities Exchange
and Commission (“SEC”).
You may
read and copy this Annual Report at the SEC’s public
reference room at 450 Fifth Street, NW, Washington D.C. 20549.
Information on the operation of the public reference room can be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information
statements and other information regarding our filings at
www.sec.gov.
5
GOVERNMENTAL REGULATION
As a
provider of Internet communications services, we are subject to
regulation in the U.S. by the FCC. Some of these regulatory
obligations include contributing to the Federal Universal Service
Fund, Telecommunications Relay Service Fund and federal programs
related to number administration; providing access to E-911
services; protecting customer information; and porting phone
numbers upon a valid customer request. We are also required to pay
state and local 911 fees and contribute to state universal service
funds in those states that assess Internet voice communications
services. We are a competitive local exchange carrier (CLEC) in
forty-seven states. We are subject to the same FCC regulations
applicable to telecommunications companies, as well as regulation
by the public utility commission in these states. Specific
regulations vary on a state-by-state basis, but generally include
the requirement to register or seek certification to provide its
services, to file and update tariffs setting forth the terms,
conditions and prices for our intrastate services and to comply
with various reporting, record-keeping, surcharge collection, and
consumer protection requirements.
We are
subject to regulations generally applicable to all businesses. We
are also subject to an increasing number of laws and regulations
directly applicable to telecommunication, internet access and
commerce. The adoption of any such additional laws or regulations
may decrease the rate of growth of the Internet, which could in
turn decrease the demand for our products and services. Such laws
may also increase our costs of doing business or otherwise have an
adverse effect on our business prospects, financial position or
results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership,
libel, and personal privacy is uncertain. Future federal or state
legislation or regulation could have a material adverse effect on
our business prospects, financial condition and results of
operations.
ITEM 1A.
RISK FACTORS.
Our quarterly and annual results of operations have fluctuated in
the past and may continue to do so in the future. As a result, we
may fail to meet or to exceed the expectations of research analysts
or investors, which could cause our stock price to
fluctuate.
Our
quarterly and annual results of operations have varied historically
from period to period, and we expect that they will continue to
fluctuate due to a variety of factors, many of which are outside of
our control, including:
●
our ability to
retain existing customers and resellers, expand our existing
customers’ user base, and attract new customers;
●
our
ability to introduce new solutions;
●
the
actions of our competitors, including pricing changes or the
introduction of new solutions;
●
our
ability to effectively manage our growth;
●
our
ability to successfully penetrate the market for larger
businesses;
●
the mix
of annual and multi-year subscriptions at any given
time;
●
the
timing, cost, and effectiveness of our advertising and marketing
efforts;
●
the timing,
operating cost, and capital expenditures related to the operation,
maintenance and expansion of our business;
●
service
outages or information security breaches and any related impact on
our reputation;
●
our
ability to accurately forecast revenues and appropriately plan our
expenses;
●
our
ability to realize our deferred tax assets;
●
costs
associated with defending and resolving intellectual property
infringement and other claims;
●
changes
in tax laws, regulations, or accounting rules;
●
the timing and cost
of developing or acquiring technologies, services or businesses,
and our ability to successfully manage any such
acquisitions;
●
adverse weather
conditions; and.
●
the impact of
worldwide economic, political, industry, and market
conditions.
Any one
of the factors above, or the cumulative effect of some or all of
the factors referred to above, may result in significant
fluctuations in our quarterly and annual results of operations.
This variability and unpredictability could result in our failure
to meet the expectations of securities analysts or investors for
any period, which could cause our stock price to decline. In
addition, a significant percentage of our operating expenses is
fixed in nature and is based on forecasted revenues trends.
Accordingly, in the event of revenue shortfalls, we may not be able
to mitigate the negative impact on net income (loss) and margins in
the short term. If we fail to meet or exceed the expectations of
research analysts or investors, the market price of our shares
could fall substantially, and we could face costly lawsuits,
including securities class-action suits.
6
We have incurred operating losses in current and prior
periods.
We
sustained operating losses in the
current and prior years. Our ability to obtain positive cash flows
from operating activities will depend on many factors including,
but not limited to, our ability to (i) improve sales and marketing
efficiencies, (ii) reduce costs, (iii) reach more highly qualified
prospects, and (iv) achieve operational improvements. We have
incurred operating losses in each of the three prior years and may
incur operating losses in the foreseeable
future
Fluctuations in our operating results may affect our stock price
and ability to raise capital.
Our
operating results for any given quarter or fiscal year should not
be relied upon as an indication of future performance. Our future
results will fluctuate, and those results may fall below the
expectations of investors and may cause the trading price of our
common stock to fall. This may impair our ability to raise capital,
should we seek to do so. Our quarterly results may fluctuate based
on, including but not limited to our sales results, marketing,
management, our ability to compete, pricing, and other risk factors
contained in this section.
Our Chief Executive Officer owns a significant amount of our common
stock and could exercise substantial corporate control. There may
be limited ability to sell the company absent the consent of the
CEO.
Steven
G. Mihaylo, Chief Executive Officer
(“CEO”) of Crexendo, Inc., owns 74% of the outstanding
shares of our common stock based on the number of shares
outstanding as of December 31, 2017. As a result, Mr. Mihaylo would
have the ability to determine the outcome of matters submitted to
our stockholders for approval, including the election of directors
and any merger, amalgamation, consolidation or sale of all or
substantially all of our assets. Mr. Mihaylo may have the ability
to control the management and affairs of our Company. As a
“control company” it may not be required that the
company maintains an independent board. As a director and officer,
Mr. Mihaylo owes a fiduciary duty to our stockholders. As a
stockholder, Mr. Mihaylo is entitled to vote his shares, in
his own interests, which may not always be in the interests of our
stockholders generally. Accordingly, even though certain
transactions may be in the best interests of other stockholders,
this concentration of ownership may harm the market price of our
common stock by, among other things, delaying, deferring or
preventing a change in control of our Company, impeding a merger,
amalgamation, consolidation, takeover or other business combination
involving our Company, or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of
our Company.
In
addition, sales or other dispositions of our shares by Mr. Mihaylo
may depress our stock price. Sales of a significant number of
shares of our common stock in the public market could harm the
market price of our common stock. As additional shares of our
common stock become available for resale in the public market, the
supply of our common stock will increase, which could result in a
decrease in the market price of our common stock.
Some of the provisions of our certificate of
incorporation and bylaws could make it more difficult for a third
party to acquire us, even if doing so might be beneficial to our
stockholders by providing them with the opportunity to sell their
shares at a premium to the then market price. Our bylaws contain
provisions regulating the introduction of business at annual
stockholders’ meetings by anyone other than the board of
directors. These provisions may have the effect of making it more
difficult, delaying, discouraging, preventing or rendering
costlier an acquisition or a change in control of our
Company.
Our securities have been thinly traded. An active trading market in
our equity securities may cease to exist, which would adversely
affect the market price and liquidity of our common stock, in
addition our stock price has been subject to fluctuating
prices.
Our
common stock is traded exclusively in
the over-the-counter market. We cannot predict the actions of
market makers, investors or other market participants, and can
offer no assurances that the market for our securities will be
stable. If there is no active trading market in our equity
securities, the market price and liquidity of the securities will
be adversely affected. The
market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market or
the perception that these sales could occur. These sales also might
make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. As of
February 19, 2018, we had outstanding 14,287,556 shares of common
stock.
Additional dilution will result if outstanding
options to acquire shares of our common stock are exercised. In
addition, in the event future financings are required they could be
convertible into or exchangeable for our equity securities,
investors may experience additional dilution.
Lack of sufficient stockholder equity or continued losses from
operations could subject us to fail to comply with the listing
requirements of the OTCQX, if that occurred, the price of our
common stock and our ability to access the capital markets could be
negatively impacted, and our business will be harmed. We currently
do not meet the minimum listing requirement for the NYSE or
NASDAQ.
7
Our
common stock is currently listed on
OTCQX. We have had annual losses from continuing operations for the
last five years with the possibility of continued losses. While at
current such losses would not impact our listing with OTCQX
requirement may change from time to time and it is possible we may
not remain in compliance with the minimum condition of OTCQX
listing standards. Delisting from the OTCQX could negatively affect
the trading price of our stock and could also have other negative
results, including the potential loss of confidence by suppliers
and employees, the failure to attract the interest of institutional
investors, and fewer business development opportunities. At present
we do not meet the minimum listing requirements for the New York
Stock Exchange (NYSE) or the NASDAQ Stock Exchange (NASDAQ) which
may make raising capital, issuing additional securities or using
the securities of the Company to effect acquisitions or merger more
difficult or expensive.
We may undertake acquisitions, mergers or change to our capital
structure to expand our business, which may pose risks to our
business and dilute the ownership of our existing
stockholders.
As part of a potential growth strategy, we may
attempt to acquire or merge with certain businesses. Whether we
realize benefits from any such transactions will depend in part
upon the integration of the acquired businesses; the performance of
the acquired products, services and capacities of the technologies
acquired, as well as the personnel hired in connection therewith.
Accordingly, our results of operations could be adversely affected
from transaction-related charges, amortization of intangible
assets, and charges for impairment of long-term assets. While we
believe that we have established appropriate and adequate
procedures and processes to mitigate these risks, there can
be no assurance that any potential transaction will be
successful.
In
addition, the financing of any
acquisition may require us to raise additional funds through public
or private sources. Additional funds may not be available on terms
that are favorable to us and, in the case of equity financings, may
result in dilution to our stockholders. Future acquisitions by us
could also result in large and immediate write-offs or assumptions
of debt and contingent liabilities, any of which may have a
material adverse effect on our consolidated financial position,
results of operations, and cash flows.
Our ability to use our net
operating loss carry-forwards may be reduced in the event of an
ownership change, and could adversely affect our financial
results.
As of
December 31, 2017, we had net operating loss (“NOL”)
carry-forwards of approximately $24,401,000, of which $5,761,000 is
subject to Section 382 limitations. Section 382 of the
Internal Revenue Code, as amended (the “Code”) imposes
limitations on a corporation’s ability to utilize its NOL
carry-forwards. In general terms, an ownership change results from
transactions increasing the ownership of certain stockholders in
the stock of a corporation by more than 50% over a three-year
period. Since our formation, we have issued a significant number of
shares, and purchasers of those shares have sold some of them,
resulting in two ownership changes, as defined by Code
Section 382. As a result of the last ownership change,
utilization of our NOL is subject to an annual limitation
determined by multiplying the value of our stock at the time of the
ownership change by the applicable federal long-term tax-exempt
rate. The annual limitation is approximately $461,000. Any limited
amounts may be carried over into later years, and the amount of the
limitation may, under certain circumstances, be increased by the
“recognized built-in gains” that occur during the
five-year period after the ownership change (the recognition
period). Future changes in ownership of more than 50% may also
limit the use of these remaining NOL carry-forwards. Our earnings,
if any, and cash resources would be materially and adversely
affected if we cannot receive the full benefit of the remaining NOL
carry-forwards. An ownership change could occur as a result of
circumstances that are not within our control.
The telecommunications industry is highly competitive. We face
intense competition from traditional telephone companies, wireless
companies, cable companies and alternative voice communication
providers and other VoIP companies.
Our
Cloud telecommunications services compete with other voice over
internet protocol (VoIP) providers. In addition, we also compete
with traditional telephone service providers which provide
telephone service based on the public switched telephone network
(PSTN). Our VoIP offering is not fully compatible with such
customers. Some of these traditional providers have also added VoIP
services. There is also competition from cable providers, which
have added VoIP service offerings in bundled packages to their
existing cable customers. The telecommunications industry is highly
competitive. We face intense competition from traditional telephone
companies, wireless companies, cable companies, and alternative
voice communication providers.
Most
traditional wire line and wireless telephone service providers,
cable companies, and some VoIP providers are substantially larger
and better capitalized than we are and have the advantage of a
large existing customer base. Because most of our target customers
are already purchasing communications services from one or more of
these providers, our success is dependent upon our ability to
attract target customers away from their existing providers. Our
competitors’ financial resources may allow them to offer
services at prices below cost or even for free in order to maintain
and gain market share or otherwise improve their competitive
positions.
8
The
markets for our products and services are continuing to evolve and
are increasingly competitive. Demand and market acceptance for
recently introduced and proposed new products and services and
sales of such products and services are subject to a high level of
uncertainty and risk. Our business may suffer if the market
develops in an unexpected manner, develops more slowly than in the
past or becomes saturated with competitors, if any new products and
services do not sustain market acceptance. A number of very large,
well-capitalized, high profile companies serve the e-commerce, VoIP
and Cloud technology markets. If any of these companies entered our
markets in a focused and concentrated fashion, we could lose
customers, particularly more sophisticated and financially stable
customers.
Our VoIP or cloud telecommunications service competes against
established well financed alternative voice communication
providers, (such as 8x8 and Ring Central) who may provide
comparable services at comparable or lower pricing.
Pricing in the telecommunications industry is very
fluid and competitive. Price is often a substantial motivation
factor in a customer’s decision to switch to our telephony
products and services. Our competitors may reduce their rates which
may require us to reduce our rates, which would affect our margins
and revenues, or otherwise make our pricing
non-competitive. We may
be at a disadvantage compared with those competitors who have
substantially greater resources than us or may otherwise be better
positioned to withstand an extended period of downward pricing
pressure.
Many of
our current and potential competitors have longer operating
histories, significantly greater resources and brand awareness, and
a larger base of customers than we have. As a result, these
competitors may have greater credibility with our existing and
potential customers. Our competitors may also offer bundled service
arrangements that present a more differentiated or better
integrated product to customers. Announcements, or expectations, as
to the introduction of new products and technologies by our
competitors or us could cause customers to defer purchases of our
existing products, which also could have a material adverse effect
on our business, financial condition or operating
results.
Changes to rates by our suppliers, competitors and increasing
regulatory charges may require us to raise prices which could
impact results.
Pricing
in the telecommunications industry is very fluid and competitive.
Price is often a substantial motivating factor in a
customer’s decision to switch to our cloud telecommunications
products and services. Our competitors may reduce their rates which
may require us to reduce our rates, which would affect our margins
and revenues, or otherwise make our pricing non-competitive. Our
upstream carriers, suppliers and vendors may increase their rates
thus directly impacting our cost of sales, which would affect our
margins. Interconnected VoIP traffic may be subject to increased
charges. Should this occur, the rates paid to our underlying
carriers may increase which could reduce our profitability. Changes
in our underlying costs of sales may increase rates we charge our
customers which could make us less competitive and impact our sales
and retention of existing customers.
We have targeted sales to mid-market and larger enterprise
customers. Not properly managing these customers could negatively
affect our business, margins, cash flow and
operations.
Selling
to larger enterprise customers contains inherent risks and
uncertainties. Our sales cycle has become more time-consuming and
expensive. The delays associated with closing and installing larger
customers may impact results on a quarter to quarter basis. There
may be additional pricing pressure in this market which may affect
margins and profitability. Revenue recognition may be delayed for
some complex transactions, all of which could harm our business and
operating results. The loss of a large customer may have a material
negative impact on quarterly or annual results.
Multi-location
users require additional and expensive customer service which may
require additional expense and impact margins on enterprise sales.
Enterprise customers may demand more features, integration services
and customization which require additional engineering and
operational time which could impact margins on an enterprise sale.
Multi-location enterprise customer sales may have different
requirement in different locations which may be difficult to
fulfill or satisfy various interests which could result in
cancellations.
Enterprise
customers might demand we provide service locations internationally
where we may encounter technical, logistical, infrastructure and
regulatory limitations on our ability to implement or deliver our
services. Our inability to provide service in certain international
locations may result in a cancellation of the entire contract.
Further with larger enterprise customer sales, the risk of
customers transporting desktop devices internationally without our
knowledge may increase.
We must acquire new customers on an ongoing basis to maintain and
increase our customers and revenues.
We will
have to acquire new customers in order to increase revenues. We
incur significant costs to acquire new customers, and those costs
are an important factor in determining our profitability.
Therefore, if we are unsuccessful in retaining customers or are
required to spend significant amounts to acquire new customers
beyond those budgeted, our revenue could decrease, which could
prevent us from reaching profitability and have our net loss
increase. Marketing expenditures are an ongoing requirement and
will become a larger ongoing requirement of our
business.
9
If we do not successfully expand our sales including our partner
channel program and direct sales, we may be unable to substantially
increase our sales.
We sell
our products primarily through direct sales and our partner
channel, and we must substantially expand the number of partners
and producing direct sales personnel to increase organic revenue
substantially. If we are unable to expand our partner channel
network and hire and retain qualified sales personnel, our ability
to increase our organic revenue and grow our business could be
compromised. The challenge of attracting, training, and retaining
qualified candidates, may make it difficult to grow revenue.
We face risks in our sales to certain market segments including,
but not limited to, sales subject to HIPPA
Regulations.
We have
sold and will continue to attempt to sell to certain customer
segments which may have requirements for additional privacy or
security. In addition sales may be made to customers that are
subject to additional security requirements and or HIPPA
requirements. Selling into segments with additional requirements
increases potential liability which in some instances may be
unlimited. While the Company believes it meets or exceeds all
requirements for sales into such segments, there is no assurance
that the Company systems fully comply with all requirements. Our
customers can use our services to store contact and other personal
or identifying information, and to process, transmit, receive,
store and retrieve a variety of communications and messages,
including information about their own customers and other contacts.
In addition, customers may use our services to store protected
health information, or PHI, that is protected under the Health
Insurance Portability and Accountability Act, or HIPAA,
Noncompliance with laws and regulations relating to privacy and
HIPAA may lead to significant fines, penalties or civil
liability.
We face risks in our strategy of designing and developing our own
desktop telephones (”desktop devices”).
We
continue to primarily sell Crexendo ® branded desktop devices,
although, the Company also supports third party devices
manufactured by Yealink, Cisco, and Polycom. Our desktop devices
are being manufactured by third party vendors in China. The
Crexendo branded desktop devices include firmware specifically
designed for our cloud telecommunications services. If the phones
are successfully manufactured there is no assurance of the
acceptance of the desktop devices. Successful roll out is not
guaranteed and is contingent on various factors including but not
limited to; meeting certain industry standards, the availability of
our vendors to meet agreed terms, supply from vendors being
sufficient to meet demand, industry acceptance of the desktop
devices, desktop devices meeting the needs of our customers,
competitive pricing of the desktop devices, feature set of the
desktop devices being up to competitive standards, regulatory
approval as required of the desktop devices and competitor claims
relating to the desktop devices. Our failure to be able to fully
implement the sale of the Crexendo desktop devices or the inability
to have desktop devices manufactured to meet our supply needs may
cause us damage as well as require us to have to purchase desktop
devices from other suppliers at a higher price which could affect
sales and margins. Our desktop devices come preloaded with our
firmware and are not currently intended to work with other
competitors’ or vendors' services.
Our churn rate may increase in future periods due to customer
cancellations or other factors, which may adversely impact our
revenue or require us to spend more money to grow our customer
base.
Our
customers generally have initial service periods of between three
and five year and may discontinue their subscriptions for our
services after the expiration of their initial subscription period.
In addition, our customers may renew for lower subscription amounts
or for shorter contract lengths. We may not accurately predict
cancellation rates for our customers. Our cancellation rates may
increase or fluctuate because of a number of factors, including
customer usage, pricing changes, number of applications used by our
customers, customer satisfaction with our service, the acquisition
of our customers by other companies and deteriorating general
economic conditions. If our customers do not renew their
subscriptions for our service or decrease the amount they spend
with us, our revenue will decline, and our business will
suffer.
Our
rate of customer cancellations may increase in future periods due
to many factors, some of which are beyond our control, such as the
financial condition of our customers or the state of credit
markets. In addition, a single, protracted service outage or a
series of service disruptions, whether due to our services or those
of our bandwidth carriers, may result in a sharp increase in
customer cancellations.
If we do not successfully expand our physical infrastructure and
build diverse geo redundant locations, which require large
investments, we may be unable to substantially increase our sales
and retain customers
Our
ability to provide cloud telecommunications services is dependent
upon on Data Center, facilities and equipment in our single Data
Center. While most of our equipment required for providing these
services are redundant in nature and offer high availability,
certain types of failures or malfunctioning of critical
hardware/software equipment, including but not limited to fire,
water or other physical damage may impact our ability to deliver
continuous service to our customers, which may impact our revenue,
profitability and retaining of customer and acquiring new
customers.
10
Our
ability to provide telecommunication services due to loss of
physical facilities in our only data center from act of God or
terrorism or vandalism or gross negligence of person(s) currently
or formerly associated with the company may result in loss of
revenue and future business.
Our
ability to recover from disasters, if and when they occur is
paramount to offer continued service to our existing customers.
While we have adequate equipment and procedures to handle disaster
recovery including but not limited to offsite data storage;
recovery from such scenarios may cause excessive delays in
restoration of service and may result in some data loss. This may
lead to loss of customers and may severely impact our
revenue.
We may
not be able to scale our business efficiently or quickly enough to
meet our customers' growing needs, in which case our operating
results could be harmed.
As
usage of our cloud telecommunications services by mid-market and
larger distributed enterprises expands and as customers continue to
integrate our services across their enterprises, we are required to
devote additional resources to improving our application
architecture, integrating our products and applications across our
technology platform as well as expanding integration and
performance. We will need to appropriately scale our internal
business systems and our services organization, including customer
support and services and regulatory compliance, to serve a growing
customer base. Any failure of or delay in these efforts could cause
to prevent acquisition of customers, impaired system performance
and reduced customer satisfaction. These issues could result in
decreased sales to new customers, lower renewal rates by existing
customers, which could hurt our revenue growth and our reputation.
We cannot be sure that the expansion and improvements to our
infrastructure and systems will be fully or effectively implemented
on a timely basis, if at all. These efforts may reduce revenue and
our margins and adversely impact our financial
results.
Our success depends in part upon the capacity, reliability, and
performance of our network infrastructure, including the capacity
provided by our Internet bandwidth suppliers.
We
depend on these companies to provide uninterrupted and error-free
service. Some of these providers are also our competitors. We do
not have control over these providers. We may be subject to
interruptions or delays in network service. If we fail to maintain
reliable bandwidth or performance that could significantly reduce
customer demand for our services and damage our
business.
Our success depends in part upon the capacity, reliability, and
performance of our telecom carriers, and their network
infrastructure, including the capacity provided by our Tier 1 and
non-Tier 1 Telecom suppliers for Telecom Origination and
Termination Services
We
depend on these companies to provide uninterrupted and error-free
service telecom services, sourcing of DIDs, porting of numbers and
delivering telephone calls from and to endpoints and devices on our
network. Some of these providers are also our competitors. We do
not have control over these providers. We may be subject to
interruptions or delays in their service. If we fail to maintain
reliable connectivity or performance with our upstream carriers it
could then significantly reduce customer demand for our services
and damage our business.
Our ability to provide telecommunications services is dependent
upon third-party facilities and equipment, the failure of which
could cause delays or interruptions of our service and impact our
revenue and profitability.
Our ability to provide quality and reliable cloud
telecommunications service is in part dependent upon the proper
functioning of facilities and equipment owned and operated by third
parties and is, therefore, beyond our control. Our cloud
telecommunications service (and to a lesser extend our e-commerce
services) requires our customers to have an operative broadband
Internet connection and an electrical power supply, which are
provided by the customer’s Internet service provider and
electric utility company and not by us. The quality of some
broadband Internet connections may be too poor for customers to use
our services properly. In addition, if there is any interruption to
a customer’s broadband Internet service or electrical power
supply, that customer will be unable to make or receive calls,
including emergency calls (our
E-911 service), using our service. We outsource several of our
network functions to third-party providers. If our third-party
service providers fail to maintain these facilities properly, or
fail to respond quickly to problems, our customers may experience
service interruptions. The failure of any of these third party
service providers to properly maintain services may be subject to
factors including but not limited to the following: (i) cause a
loss of customers, (ii) adversely affect our reputation, (iii)
cause negative publicity, (iv) negatively impact our ability to
acquire customers, (v) negatively impact our revenue and
profitability, (vi) potential law suits for not reaching E-911
services, and (vii) potential law suits for loss of business and
loss of reputation.
11
We rely on third parties to provide a portion of our customer
service responses, initiate local number portability for our
customers, deliver calls to and from PSTN and other public
telephone VoIP/Wireless service providers and provide aspects of
our E-911 service.
We offer our cloud telecommunications customers
support 24 hours a day, seven days a week. We may rely on third
parties (sometimes outside of the U.S) to respond to customer
inquiries. These third-party providers generally represent us
without identifying themselves as independent parties. The ability
of third-party providers to provide these representatives may be
disrupted due to issues outside our control.
We also
maintain an agreement with an E-911
provider to assist us in routing emergency calls directly to an
emergency service dispatcher at the PSAP in the area of the
customer’s registered location and terminating E-911 calls.
We also contract with a provider for the national call center that
operates 24 hours a day, seven days a week to receive certain
emergency calls and with several companies that maintain PSAP
databases for the purpose of deploying and operating E-911
services. The dispatcher will
have automatic access to the customer's telephone number and
registered location information. If a customer moves their Crexendo
service to a new location, the customer's registered location
information must be updated and verified by the customer. Until
that takes place, the customer will have to verbally advise the
emergency dispatcher of his or her actual location at the time of
an emergency 9-1-1 call. This can lead to delays in the
delivery of emergency services
Interruptions
in service from these vendors could
also cause failures in our customers’ access to E-911
services and expose us to liability.
We
also have agreements with companies
that initiate our local number portability, which allow new
customers to retain their existing telephone numbers when
subscribing to our services. We will need to work with these
companies to properly port numbers. The failure to port numbers may
subject us to loss of customers or regulatory
review.
If
any of these third parties do not provide reliable, high-quality
service, our reputation and our business will be harmed. In
addition, industry consolidation among providers of services to us
may impact our ability to obtain these services or increase our
expense for these services.
Our dependence on outside contractors and third-party agents for
fulfillment of certain items and critical manufacturing services
could result in product or delivery delays and/or damage our
customer relations.
We
outsource the manufacturing of certain products we sell and
products we provide. We submit purchase orders to agents or the
companies that manufacture the products. We describe, among other
things, the type and quantities of products or components to be
supplied or manufactured and the delivery date and other terms
applicable to the products or components. Our suppliers or
manufacturers potentially may not accept any purchase order that we
submit. Our reliance on outside parties involves a number of
potential risks, including: (i) the absence of adequate capacity,
(ii) the unavailability of, or interruptions in access to,
production or manufacturing processes, (iii) reduced control over
delivery schedules, (iv) errors in the product, and (v) claims of
third party intellectual infringement or defective merchandise. If
delays, problems or defects were to occur, it could adversely
affect our business, cause claims for damages to be filed against
us, and negatively impact our consolidated operations and cash
flows.
Errors in our technology or technological issues outside our
control could cause delays or interruptions to our
customers.
Our
services (including cloud telecommunications and e-commerce) may be
disrupted by problems with our technology and systems such as
malfunctions in our software or facilities. In addition there may
be service interruptions for reasons outside our control. Our
customers and potential customers subscribing to our services have
experienced interruptions in the past and may experience
interruptions in the future as a result of these types of problems.
Interruptions could cause us to lose customers and offer customer
credits, which could adversely affect our revenue and
profitability. Network and Telecommunication interruptions may also
impair our ability to sign-up new customers. In addition since our
systems and our customers’ ability to use our services are
Internet-dependent, our services may be subject to
“cyber-attacks” from the Internet, which could have a
significant impact on our systems and services. Our
customers’ ability to use our services is dependent on
third-party internet providers which may suffer service
disruptions. If service interruptions adversely affect the
perceived reliability of our service, we may have difficulty
attracting and retaining customers and our growth may
suffer.
Our operations could be hurt by a natural disaster, network
security breach, or other catastrophic event.
We maintain a fully redundant network
infrastructure in our data center in Tempe, Arizona. Currently, we
do not have multiple site capacity if any catastrophic event
occurs, although we expect to attain multiple site redundancy
sometime in the future. This system does not guarantee continued
reliability if a catastrophic event occurs. Despite implementation
of network security measures, our servers may be vulnerable to
computer viruses, break-ins, and similar disruptions from
unauthorized tampering with our computer systems including, but not
limited to, denial of service attacks. In addition, if there is a
breach or alleged breach of security or privacy involving our
services including but not limited to data loss, or if any third
party undertakes illegal or harmful actions using our
communications or e-commerce services, our business and reputation
could suffer substantial adverse publicity and impairment. We have
experienced interruptions in service in the past. While we do not
believe that we have lost customers as a consequence, the harm to
our reputation is difficult to assess. We have taken and continue
to take steps to improve our infrastructure to prevent service
interruptions.
12
Failure in our data center or services could lead to significant
costs and disruptions.
All data centers, including ours, are subject to various
points of failure. Problems with cooling equipment, generators,
uninterruptible power supply, routers, switches, or other
equipment, whether or not within our control, could result in
service interruptions for our customers as well as equipment
damage. Any failure or downtime could affect a significant
percentage of our customers. The total destruction or severe
impairment of our data center facilities could result in
significant downtime of our services and the loss of customer
data.
Internet security issues and growing Cyber threats pose risks to
the development of e-commerce and our business.
Security and
privacy concerns may inhibit the growth of the Internet and other
online services generally, especially as a means of conducting
commercial transactions.
We could experience security breaches in the transmission and
analysis of confidential and proprietary information of the
consumer, the merchant, or both, as well as our own confidential
and proprietary information.
Anyone
able to circumvent security measures could misappropriate
proprietary information or cause interruptions in our operations,
as well as the operations of the merchant. We may be required to
expend significant capital and other resources to protect against
security breaches or to minimize problems caused by security
breaches. To the extent that we experience breaches in the security
of proprietary information which we store and transmit, our
reputation could be damaged and we could be exposed to a risk of
loss or litigation.
We collect personal and credit card information from our customers
and employees could misuse this information.
We
maintain credit card and other personal information in our systems.
Due to the sensitive nature of retaining such information we have
implemented policies and procedures to preserve and protect our
data and our customers’ data against loss, misuse,
corruption, misappropriation caused by systems failures,
unauthorized access, or misuse. Notwithstanding these policies, we
could be subject to liability claims by individuals and customers
whose data resides in our databases for the misuse of that
information. While the Company believes its systems meet or exceed
industry standards the Company does not believe it is required to
meet PCI level 1 compliance and has not certified under that level.
Failure to meet PCI compliance levels could negatively impact the
Company’s ability to collect and store credit card
information which could cause substantial disruption to our
business.
We depend upon industry standard protocols, best practices,
solutions, third-party software, technology, tools including but
not limited to Open Source software.
We rely
on non-proprietary third party licensing and software some of which
may be Open Source and protected under various licensing
agreements. We may be subject to additional royalties, license or
trademark infringement costs or other unknown costs when one or
more of these third-party technologies are affected or need to be
replaced due to end-of-support or end-of-sale of such third
parties.
We may incur substantial expenses in defending against third-party
patent and trademark infringement claims regardless of their
merit.
From
time to time, parties may assert patent infringement claims against
us in the form of letters, lawsuits, and other forms of
communication. Third parties may also assert claims against us
alleging infringement of copyrights, trademark rights, trade secret
rights or other proprietary rights or alleging unfair competition.
If there is a determination that we have infringed third-party
proprietary rights, we could incur substantial monetary liability
and be prevented from using the rights in the future.
We depend on our senior management and other key personnel, and a
loss of these individuals could adversely impact our ability to
execute our business plan and grow our business.
We
depend on the continued services of our key personnel, including
our Officers and certain engineers. Each of these individuals has
acquired specialized knowledge and skills with respect to our
operations. The loss of one or more of these key personnel could
negatively impact our performance. In addition, we expect to hire
additional personnel as we continue to execute our strategic plan,
particularly if we are successful in expanding our operations.
Competition for the limited number of qualified personnel in our
industry is intense. At times, we have experienced difficulties in
hiring personnel with the necessary training or
experience.
13
Our public filings are subject to review by the Securities and
Exchange Commission (SEC)
Our SEC
filings are reviewed by the SEC from time to time and any
significant changes required as a result of any such review may
result in material liability to us and have a material adverse
impact on the trading price of our common stock.
Examinations by relevant tax authorities may result in material
changes in related tax reserves for tax positions taken in
previously filed tax returns or may impact the valuation of certain
deferred income tax assets, such as net operating loss
carry-forwards.
Based
on the outcome of examinations by relevant tax authorities, or as a
result of the expiration of statutes of limitations for specific
jurisdictions, it is reasonably possible that the related tax
reserves for tax positions taken regarding previously filed tax
returns will materially change from those recorded in our financial
statements. In addition, the outcome of examinations may impact the
valuation of certain deferred income tax assets (such as net
operating loss carry-forwards) in future periods. It is not
possible to estimate the impact of the amount of such changes, if
any, to previously recorded uncertain tax positions.
Changes in our business model and sales strategies may adversely
impact revenue.
When
the Company shifted away from a seminar sales model, our web
services revenue was adversely impacted. Our website hosting
revenue has continued to decline since we no longer sell our
website development software through a seminar sales model. The
Company is not actively marketing its website development software
or website hosting services. Our web services segment revenue may
continue to decline over time as more competitors enter the website
building and hosting industry.
From time to time we had been the subject of governmental inquiries
and investigations related to our discontinued seminar sales model
and business practices that could require us to pay refunds,
damages or fines, which could negatively impact our financial
results or ability to conduct business. We have received customer
complaints and civil actions.
From
time to time, we received inquiries from federal, national, state,
city and local government officials in the various jurisdictions in
which we operated. These inquiries had historically been related to
our discontinued seminar sales practices. There is still the
potential of review of past sales and sales of our current web and
telecom services. We respond to these inquiries and have generally
been successful in addressing the concerns of these persons and
entities, without a formal complaint or charge being made, although
there is often no formal closing of the inquiry or investigation.
The ultimate resolution of these or other inquiries or
investigations may have a material adverse effect on our business
or operations, or a formal complaint could be initiated. During the
ordinary course of business, we also receive a number of complaints
and inquiries from customers, governmental and private entities. In
some cases, these complaints and inquiries from agencies and
customers have ended up in civil court. We may continue to receive
customer and agency claims and actions.
Changes in laws and regulations and the interpretation and
enforcement of such laws and regulations could adversely impact our
financial results or ability to conduct business.
We are
subject to a variety of federal and state laws and regulations as
well as oversight from a variety of governmental agencies and
public service commissions. The laws governing our business may
change in ways that harm our business. Federal or state
governmental agencies administering and enforcing such laws may
also choose to interpret and apply them in ways that harm our
business. These interpretations are also subject to change.
Regulatory action could materially impair or force us to change our
business model and may adversely affect our revenue, increase our
compliance costs, and reduce our profitability. In addition,
governmental agencies such as the Securities and Exchange
Commission (SEC), Internal Revenue Service (IRS), Federal Trade
Commission (FTC), Federal Communication Commission (FCC) and state
taxing authorities may conclude that we have violated federal laws,
state laws or other rules and regulations, and we could be subject
to fines, penalties or other actions that could adversely impact
our financial results or our ability to conduct
business.
The FCC net neutrality rules have changed. We cannot predict the
effect of this, nor the impact of this change on our
business.
We could face interference with our services,
lower speed of bandwidth for our services and/or higher costs.
While we believe interference with access to our
products and services remains unlikely, broadband Internet access
provider interference has occurred, and could increase in frequency
due to the termination of the network neutrality rules. This could
cause us to lose existing customers, impair our ability to attract
new customers, and harm our revenue and growth. These problems
could also arise in international markets.
14
Our Telecommunications services are
required to comply with industry standards, FCC regulations,
privacy laws as well as certain State and local jurisdiction
specific regulations failure to comply with those may subject us to
penalties and may also require us to modify existing products
and/or service.
The
acceptance of telecommunications services is dependent upon our
meeting certain industry standards. We are required to comply with
certain rules and regulations of the FCC regarding safety
standards. Standards are continuously being modified and replaced.
As standards evolve, we may be required to modify our existing
products or develop and support new versions of our products. We
must comply with certain federal, state, and local requirements
regarding how we interact with our customers, including marketing
practices, consumer protection, privacy, and billing issues, the
provision of 9-1-1 emergency service and the quality of service we
provide to our customers. The failure of our products and services
to comply, or delays in compliance, with various existing and
evolving standards could delay future offerings and impact our
sales, margins, and profitability. Changes to the Universal Service
Funds by the FCC or various States may require us to increase our
costs which could negatively affect revenue and
margins.
We are subject to Federal laws and FCC regulations
that require us to protect customer information. While we have
protections in place to protect customer information there is no
assurance that our systems will not be subject to failure or
intentional fraudulent attack. The failure to protect required
information could subject us to penalties and diminish the
confidence our customers have in our systems which could negatively
affect results. While we try to comply with all applicable data
protection laws, regulations, standards, and codes of conduct, as
well as our own posted privacy policies and contractual commitments
to the extent possible, any failure by us to protect our
users’ privacy and data, including as a result of our systems
being compromised by hacking or other malicious or surreptitious
activity, could result in a loss of user confidence in our services
and ultimately in a loss of users, which could materially
and adversely affect our business as well as subject us to law
suits, civil fines and criminal penalties.
Governmental
entities, class action lawyers and consumer advocates are reviewing
the data collection and use by companies that must maintain such
data. Our own requirements as well as regulatory codes of conduct,
enforcement actions by regulatory agencies, and lawsuits by other
parties could impose additional compliance costs on us as well as
subject us to unknown potential liabilities. These evolving laws,
rules and practices may also curtail our current business
activities which may delay or affect our ability to become
profitable as well as affect customers and other business
opportunities.
We are
also subject to the privacy and data protection-related obligations
in our contracts with our customers and other third parties. Any
failure, or perceived failure, to comply with federal, state, or
international laws, or to comply with our contractual obligations
related to privacy, could result in proceedings or actions against
us which could result in significant liability to us as well as
harm to our reputation. Additionally, third parties with whom we
contract may violate or appear to violate laws or regulations which
could subject us to the same risks.
There
is considerable uncertainty with respect to the state of law
governing data transfers between the European Union ("EU"), and
other countries with similar data protection laws, and it remains
unclear what the final resolution will be for cross-border data
transfers of personal information. There may be risks associated
with data transfer and customers who use International
Locations.
States are adding regulation for VoIP
providers which could increase our costs and change certain aspects
of our service.
Certain states take the position that offerings by
VoIP providers are intrastate and therefore subject to state
regulation. We have registered as a CLEC in most states, however
our rates are not regulated in the same manner as traditional
telephone service providers. Some states are also requiring that we
register as a seller of VoIP services even though we have
registered as a CLEC. Some states argue that if the beginning and
desktop devices of communications are known, and if some of these
communications occur entirely within the boundaries of a state, the
state can regulate that offering and may therefore add additional
taxes or surcharges or regulate rates in a similar matter to
traditional telephone service providers. We believe that the FCC
has pre-empted states from regulating VoIP providers in the same
manner as providers of traditional telecommunications services. We
cannot predict how this issue will be resolved or its impact
on our business at this time.
Our ability to offer services outside the U.S. is subject to
different regulations which may be unknown and
uncertain.
Regulatory
treatment of VoIP providers outside
the United States varies from country to country, and local
jurisdictions. Many times, the laws are vague, unclear and
regulations are not enforced uniformly. We are licensed as a VoIP
seller in Canada, and are considering expanding to other countries.
We also cannot control if our customers take their devices out of
the United States and use them abroad. Our resellers may sell to
customers who maintain facilities outside the United States. The
failure by us or our customers and resellers to comply with laws
and regulations could reduce our revenue and profitability. As we
expand to additional Countries there may be additional regulations
that we are required to comply with, the failure to comply or
properly assess regulations may subject us to penalties, fines and
other actions which could materially affect our
business.1
15
ITEM 2.
PROPERTIES
Our
corporate office consists of approximately 22,000 square feet of
office space in Tempe, Arizona owned by our CEO. Our corporate
office is located at 1615 South 52nd Street, Tempe,
Arizona 85281. We maintain property insurance on the corporate
office building as required by the lease and tenant fire and
casualty insurance on our assets located in these buildings in an
amount that we deem adequate.
ITEM 3.
LEGAL PROCEEDINGS
From
time to time we receive inquiries from federal, state, city and
local government officials as well as the FCC and taxing
authorities in the various jurisdictions in which we operate. These
inquiries and investigations related primarily to our discontinued
seminar operations and concern compliance with various city,
county, state, and/or federal regulations involving sales,
representations made, customer service, refund policies, services
and marketing practices. We respond to these inquiries and have
generally been successful in addressing the concerns of these
persons and entities, without a formal complaint or charge being
made, although there is often no formal closing of the inquiry or
investigation. There can be no assurance that the ultimate
resolution of these or other inquiries and investigations will not
have a material adverse effect on our business or operations, or
that a formal complaint will not be initiated. We also receive
complaints and inquiries in the ordinary course of our business
from both customers and governmental and non-governmental bodies on
behalf of customers, and in some cases these customer complaints
have risen to the level of litigation. There can be no assurance
that the ultimate resolution of these matters will not have a
material adverse effect on our business or results of
operations.
ITEM 4.
MINE SAFETY DISCLOSURES
The
disclosure required by this item is not applicable
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our
common stock began trading on the NYSE - MKT on August 16,
2004 under the symbol “IIG.” In May 2011, our
stockholders approved an amendment to our Certificate of
Incorporation to change our name from "iMergent, Inc." to
"Crexendo, Inc." The name change was effective May 18, 2011. Our
ticker symbol "IIG" on the New York Stock Exchange was changed to
“EXE” on May 18, 2011. On January 13, 2015, the Company
moved to the OTCQX Marketplace and our ticker symbol was changed to
“CXDO”. The following table sets forth the range of
high and low sales prices as reported on the OTCQX Marketplace for
the periods indicated.
16
|
High
|
Low
|
Year
Ended December 31, 2017
|
|
|
October to December 2017
|
$2.71
|
$1.46
|
July to September 2017
|
1.95
|
1.45
|
April to June 2017
|
1.84
|
1.45
|
January to March 2017
|
1.60
|
1.45
|
Year
Ended December 31, 2016
|
|
|
October to December 2016
|
$1.55
|
$1.36
|
July to September 2016
|
1.50
|
1.30
|
April to June 2016
|
1.55
|
1.21
|
January to March 2016
|
1.41
|
0.61
|
SECURITY HOLDERS
There
were approximately 1,191 holders of record of our shares of common
stock as of December 31, 2017. The number of holders does not
include individual participants in security positions
listings.
DIVIDENDS
There
were no dividends declared for the years ended December 31, 2017
and 2016.
ISSUER PURCHASES OF EQUITY SEQURITIES
None
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM
6.
SELECTED
FINANCIAL DATA
Not
required.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR
In addition to historical information, this Annual Report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number
of factors, risks and uncertainties, including the risk factors set
forth in Item 1A. above and the risk factors set forth in this
Annual Report. Generally, the words “anticipate”,
“expect”, “intend”, “believe”
and similar expressions identify forward-looking statements. The
forward-looking statements made in this Annual Report are made as
of the filing date of this Annual Report with the SEC, and future
events or circumstances could cause results that differ
significantly from the forward-looking statements included here.
Accordingly, we caution readers not to place undue reliance on
these statements. We expressly disclaim any obligation to update or
alter our forward-looking statements, whether, as a result of new
information, future events or otherwise after the date of this
document.
17
OVERVIEW
Crexendo, Inc. is a
next-generation CLEC and an award-winning leader and provider of
unified communications cloud telecom services, broadband internet
services, and other cloud business services that are designed to
provide enterprise-class cloud services to any size businesses at
affordable monthly rates. The Company has two operating segments,
which consist of Cloud Telecommunications and Web
Services.
Cloud Telecommunications - Our cloud
telecommunications services transmit calls using IP or cloud
technology, which converts voice signals into digital data packets
for transmission over the Internet or cloud. Each of our calling
plans provides a number of basic features typically offered by
traditional telephone service providers, plus a wide range of
enhanced features that we believe offer an attractive value
proposition to our customers. This platform enables a user, via a
single “identity” or telephone number, to access and
utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device or an application on a mobile device.
We
generate recurring revenue from our cloud telecommunications and
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We generate
product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the
sale of equipment, including those from sales-type leases, are
recognized at the time of sale or at the inception of the lease, as
appropriate.
Our
Cloud Telecommunications service revenue increased 27% or
$1,691,000 to $7,973,000 for the year ended December 31, 2017 as
compared to $6,282,000 for the year ended December 31, 2016. Our
Cloud Telecommunications product revenue decreased 9% or $128,000
to $1,347,000 for the year ended December 31, 2017 as compared to
$1,475,000 for the year ended December 31, 2016. As of December 31,
2017 and 2016, our backlog was $19,871,000 and $15,921,000,
respectively.
Web Services – We generate recurring revenue from
website hosting and other professional services.
Our Web
Services revenue decreased 22% or $305,000 to $1,057,000 for the
year ended December 31, 2017 as compared to $1,362,000 for the year
ended December 31, 2016.
Results of Consolidated Operations
The
following discussion of financial condition and results of
operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial
information included herein this Annual Report.
Results of Consolidated Operations (in thousands, except for per
share amounts)
|
Year Ended December 31,
|
|
Consolidated
|
2017
|
2016
|
Service
revenue
|
$9,030
|
$7,644
|
Product
revenue
|
$1,347
|
$1,475
|
Total
revenue
|
$10,377
|
$9,119
|
Loss
before income taxes
|
(1,013)
|
(2,780)
|
Income
tax provision
|
(7)
|
(12)
|
Net
loss
|
(1,020)
|
(2,792)
|
Basic/diluted
net loss per share
|
$(0.07)
|
$(0.21)
|
Year Ended December 31, 2017 Compared to Year Ended December 31,
2016
Service Revenue
Service
revenue consists primarily of fees collected for cloud
telecommunications services, professional services, interest from
sales-type leases, broadband Internet services, website hosting,
and web management services. Service revenue increased 18% or
$1,386,000, to $9,030,000 for the year ended December 31, 2017 as
compared to $7,644,000 for the year ended December 31, 2016. Cloud
Telecommunications service revenue increased 27% or $1,691,000, to
$7,973,000 for the year ended December 31, 2017 as compared to
$6,282,000 for the year ended December 31, 2016. Web service
revenue decreased 22% or $305,000, to $1,057,000 for the year ended
December 31, 2017 as compared to $1,362,000 for the year ended
December 31, 2016.
18
Product Revenue
Product
revenue consists primarily of fees collected for the sale of
desktop phone devices and third party equipment. Product revenue
decreased by 9% or $128,000, to $1,347,000 for the year ended
December 31, 2017 as compared to $1,475,000 for the year ended
December 31, 2016. Product revenue fluctuates from one period to
the next based on timing of installations. Our typical customer
installation is complete within 30 days. However, larger enterprise
customers can take multiple months, depending on size and the
number of locations. Product revenue is recognized when products
have been installed and services commence. We believe growth will
initially be seen through increase in our backlog.
Loss Before Income Taxes
Loss
before income tax decreased 64% or $1,767,000 to $1,013,000 for the
year ended December 31, 2017 as compared to $2,780,000 for the year
ended December 31, 2016. The decrease in loss before income tax is
primarily due to an increase in revenue of $1,258,000 and a
decrease in total operating expenses of $680,000, offset by an
increase in other expense of $171,000 related to interest expense
from the related party note payable and decrease in sublease income
of $97,000 from fulfillment of our lease obligations.
Income Tax Provision
We had
an income tax provision of $7,000 for the year ended December 31,
2017 compared to an income tax provision of $12,000 for the year
ended December 31, 2016. We had a pre-tax loss for the years ended
December 31, 2017 and 2016 of $1,013,000 and $2,780,000,
respectively, and a full valuation allowance on all of our deferred
tax assets for the years ended December 31, 2017 and
2016.
Use of Non-GAAP Financial Measures
To
evaluate our business, we consider and use non-generally accepted
accounting principles (Non-GAAP) net income (loss) and Adjusted
EBITDA as a supplemental measure of operating performance. These
measures include the same adjustments that management takes into
account when it reviews and assesses operating performance on a
period-to-period basis. We consider Non-GAAP net income (loss) to
be an important indicator of overall business performance because
it allows us to evaluate results without the effects of share-based
compensation, rent expense paid with common stock, and amortization
of intangibles. We define EBITDA as U.S. GAAP net income (loss)
before interest income, interest expense, other income and expense,
provision for income taxes, and depreciation and amortization. We
believe EBITDA provides a useful metric to investors to compare us
with other companies within our industry and across industries. We
define Adjusted EBITDA as EBITDA adjusted for share-based
compensation, and rent expense paid with stock. We use Adjusted
EBITDA as a supplemental measure to review and assess operating
performance. We also believe use of Adjusted EBITDA facilitates
investors’ use of operating performance comparisons from
period to period, as well as across companies.
In our
March 6, 2018 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.
19
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
Income/(Loss)
(Unaudited)
|
Three Months Ended December 31,
|
Year Ended December 31,
|
||
|
2017
|
2016
|
2017
|
2016
|
|
(In
thousands)
|
(In
thousands)
|
||
U.S.
GAAP net loss
|
$(7)
|
$(525)
|
$(1,020)
|
$(2,792)
|
Share-based
compensation
|
92
|
149
|
573
|
653
|
Amortization
of rent expense paid in stock, net of deferred gain
|
-
|
57
|
38
|
229
|
Amortization
of intangible assets
|
23
|
33
|
96
|
131
|
Non-cash
interest expense
|
3
|
30
|
201
|
124
|
Non-GAAP
net income/(loss)
|
$111
|
$(256)
|
$(112)
|
$(1,655)
|
|
|
|
|
|
Non-GAAP
net income/(loss) per common share:
|
|
|
|
|
Basic
|
$0.01
|
$(0.02)
|
$(0.01)
|
$(0.12)
|
Diluted
|
$0.01
|
$(0.02)
|
$(0.01)
|
$(0.12)
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
Basic
|
14,276,729
|
13,483,502
|
13,938,342
|
13,358,311
|
Diluted
|
14,732,765
|
13,483,502
|
13,938,342
|
13,358,311
|
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted
EBITDA
(Unaudited)
|
Three Months Ended December 31,
|
Year Ended December 31,
|
||
|
2017
|
2016
|
2017
|
2016
|
|
(In
thousands)
|
(In
thousands)
|
||
U.S.
GAAP net loss
|
$(7)
|
$(525)
|
$(1,020)
|
$(2,792)
|
Depreciation
and amortization
|
25
|
36
|
106
|
146
|
Interest
expense
|
3
|
33
|
209
|
138
|
Interest
and other income
|
(4)
|
(18)
|
(21)
|
(121)
|
Income
tax provision/(benefit)
|
(9)
|
1
|
7
|
12
|
EBITDA
|
8
|
(473)
|
(719)
|
(2,617)
|
Share-based
compensation
|
92
|
149
|
573
|
653
|
Amortization
of rent expense paid in stock, net of deferred gain
|
-
|
57
|
38
|
229
|
Adjusted
EBITDA
|
$100
|
$(267)
|
$(108)
|
$(1,735)
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
The following accounting policies are the most critical in
understanding our consolidated financial position, results of
operations or cash flows, and that may require management to make
subjective or complex judgments about matters that are inherently
uncertain.
20
Goodwill – Goodwill is tested for
impairment using a fair-value-based approach on an annual basis
(December 31) and between annual tests if indicators of potential
impairment exist.
Intangible Assets - Our intangible
assets consist primarily of customer relationships and developed
technology. The intangible assets are amortized following the
patterns in which the economic benefits are consumed. We
periodically review the estimated useful lives of our intangible
assets and review these assets for impairment whenever events or
changes in circumstances indicate that the carrying value of the
assets may not be recoverable. The determination of impairment is
based on estimates of future undiscounted cash flows. If an
intangible asset is considered to be impaired, the amount of the
impairment will be equal to the excess of the carrying value over
the fair value of the asset.
Contingent liabilities - Contingent
liabilities require significant judgment in estimating potential
payouts. Contingent considerations arising from business
combinations require management to estimate future payouts based on
forecasted results, which are highly sensitive to the estimates of
discount rates and future revenues. These estimates can change
significantly from period to period and reviewed each reporting
period to establish the fair value of the contingent
liability.
For
additional information on use of estimates, see summary of
Significant Accounting Policies in the notes to the Consolidated
Financial Statements.
Segment Operating Results
The
Company has two operating segments, which consist of Cloud
Telecommunications 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 service revenue, cost of product revenue, sales and
marketing, research and development, and general and administrative
expenses.
Operating Results of our Cloud Telecommunications Segment (in
thousands)
|
Year Ended December 31,
|
|
Cloud Telecommunications
|
2017
|
2016
|
Service
revenue
|
$7,973
|
$6,282
|
Product
revenue
|
1,347
|
1,475
|
Total
revenue
|
9,320
|
7,757
|
Operating
expenses:
|
|
|
Cost
of service revenue
|
2,791
|
2,790
|
Cost
of product revenue
|
549
|
632
|
Research
and development
|
726
|
793
|
Selling
and marketing
|
2,924
|
2,531
|
General
and administrative
|
3,661
|
4,185
|
Total
operating expenses
|
10,651
|
10,931
|
Operating
loss
|
(1,331)
|
(3,174)
|
Other
expense
|
(183)
|
(36)
|
Loss
before tax provision
|
$(1,514)
|
$(3,210)
|
21
Quarterly Financial Information
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Cloud
Telecommunications
|
2017
|
2017
|
2017
|
2017
|
Service
revenue
|
1,782
|
1,913
|
2,042
|
2,236
|
Product
revenue
|
279
|
303
|
385
|
380
|
Total
revenue
|
2,061
|
2,216
|
2,427
|
2,616
|
Operating
expenses:
|
|
|
|
|
Cost
of service revenue
|
661
|
675
|
683
|
772
|
Cost
of product revenue
|
108
|
124
|
152
|
165
|
Research
and development
|
184
|
179
|
188
|
175
|
Selling
and marketing
|
690
|
709
|
734
|
791
|
General
and administrative
|
1,034
|
902
|
866
|
859
|
Total
operating expenses
|
2,677
|
2,589
|
2,623
|
2,762
|
Operating
loss
|
(616)
|
(373)
|
(196)
|
(146)
|
Other
income/(expense)
|
(30)
|
(32)
|
(122)
|
1
|
Loss
before tax provision
|
$(646)
|
$(405)
|
$(318)
|
$(145)
|
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Cloud
Telecommunications
|
2016
|
2016
|
2016
|
2016
|
Service
revenue
|
1,427
|
1,490
|
1,626
|
1,739
|
Product
revenue
|
351
|
430
|
387
|
307
|
Total
revenue
|
1,778
|
1,920
|
2,013
|
2,046
|
Operating
expenses:
|
|
|
|
|
Cost
of service revenue
|
697
|
688
|
722
|
683
|
Cost
of product revenue
|
151
|
176
|
156
|
149
|
Research
and development
|
218
|
207
|
183
|
185
|
Selling
and marketing
|
610
|
636
|
681
|
604
|
General
and administrative
|
1,065
|
1,085
|
987
|
1,048
|
Total
operating expenses
|
2,741
|
2,792
|
2,729
|
2,669
|
Operating
loss
|
(963)
|
(872)
|
(716)
|
(623)
|
Other
expense
|
(7)
|
(3)
|
(11)
|
(15)
|
Loss
before tax provision
|
$(970)
|
$(875)
|
$(727)
|
$(638)
|
22
Year Ended December 31, 2017 Compared to Year Ended December 31,
2016
Service Revenue
Cloud
Telecommunications service revenue consists primarily of fees
collected for cloud telecommunications services, professional
services, interest from sales-type leases, and broadband Internet
services. Service revenue increased 27% or $1,691,000, to
$7,973,000 for the year ended December 31, 2017 as compared to
$6,282,000 for the year ended December 31, 2016. The increase in
service revenue is due to an increase in contracted service
revenue, usage charges, and professional services revenue of
$1,822,000, offset by a decrease in equipment lease interest of
$106,000 and a decrease in broadband Internet services revenue of
$25,000. A substantial portion of Cloud Telecommunications segment
revenue is generated through thirty-six to sixty month service
contracts. As such, we believe growth in Cloud Telecommunications
segment will initially be seen through increases in our
backlog.
Product Revenue
Product
revenue consists primarily of fees collected for the sale of
desktop phone devices and third party equipment. Product revenue
decreased 9% or $128,000, to $1,347,000 for the year ended December
31, 2017 as compared to $1,475,000 for the year ended December 31,
2016. Product revenue fluctuates from one period to the next based
on timing of installations, as we recognize revenue when the
installation is complete. Our typical customer installation is
complete within 30 days. However, larger enterprise customers can
take multiple months, depending on size and the number of
locations. Product revenue is recognized when products have been
installed and services commence. We believe growth will initially
be seen through increases in our backlog.
Backlog
Backlog
represents the total contract value of all contracts signed, less
revenue recognized from those contracts as of December 31, 2017 and
2016. Below is a table which displays the Cloud Telecommunications
segment revenue backlog as of December 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 December 31,
2017
|
$19,871
|
Cloud Telecommunications Services backlog as of December 31,
2016
|
$15,921
|
Cost of Service Revenue
Cost of
service revenue consists primarily of fees we pay to third-party
telecommunications, broadband internet, and software providers,
costs related to installations, and customer support. Cost of
service revenue increased $1,000, to $2,791,000 for the year ended
December 31, 2017 as compared to $2,790,000 for the year ended
December 31, 2016. The increase in cost of service revenue was
primarily due to an increase in bandwidth costs of $178,000
directly related to the growth in monthly recurring revenue. The
increase was offset by a decrease in salary and benefits of
$122,000, a $36,000 decrease in broadband Internet costs directly
related to a decline in broadband Internet revenue, and a $19,000
decrease in costs related to installations.
Cost of Product Revenue
Cost of
product revenue consists of the costs associated with the purchase
of desktop phone devices and third party equipment. Cost of product
revenue decreased 13% or $83,000, to $549,000 for the year ended
December 31, 2017 as compared to $632,000 for the year ended
December 31, 2016 consistent with the decrease in product sales for
the period.
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
expenses decreased 8% or $67,000, to $726,000 for the year ended
December 31, 2017 as compared to $793,000 for the year ended
December 31, 2016 due to
fluctuations in salary and benefits.
Selling and Marketing
Selling
and marketing expenses consist primarily of direct sales
representative salaries and benefits, partner channel commissions,
the production of marketing materials and sales support software.
Selling and marketing expenses increased 16% or $393,000, to
$2,924,000 for the year ended December 31, 2017 as compared to
$2,531,000 for the year ended December 31, 2016. The increase in
selling and marketing expense was due to an increase in salary and
benefits of $328,000 resulting from hiring additional sales
representatives to support our partner channel, and an increase in
commission expenses of $311,000 directly related to overall
increase in sales and revenue, offset by a decrease in sales
support software costs of $125,000, a decrease in business
development costs of $87,000, and a decrease in bad debt expense of
$34,000.
23
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, accounting,
other professional services, and other administrative corporate
expenses. General and administrative expenses decreased 13% or
$524,000, to $3,661,000 for the year ended December 31, 2017 as
compared to $4,185,000 for the year ended December 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. Salary and benefits
decreased $179,000 resulting from a decrease in headcount, software
support decreased $153,000 resulting from utilizing more affordable
software, Delaware franchise fee tax decreased $61,000 due to
reincorporating in Nevada, computer equipment decreased $50,000
primarily due to a one-time charge in 2016, corporate audit and tax
fees decreased $44,000 due to reduced audit fees resulting from a
change in auditors, depreciation and amortization expense decreased
$30,000 due to certain intangible assets and fixed assets becoming
fully amortized, and a decrease of $37,000 in IT consulting fees,
offset by a $30,000 increase in legal fees. Consolidated general
and administrative expenses decreased 17%, or $829,000 to
$4,071,000 for the year ended December 31, 2017 compared to
$4,900,000 for the year ended December 31, 2016.
Other Expense
Other
expense primarily consists of interest expense, offset by sublease
rental income. Net other expense increased 408% or $147,000 to
$183,000 for the year ended December 31, 2017 as compared to
$36,000 for the year ended December 31, 2016. We incurred interest
expense on our related party note payable and a decrease in
sublease income resulting from completion of our lease agreement
obligation in the fourth quarter of 2016 and related
sub-lease.
Operating Results of our Web Services Segment (in
thousands)
|
Year Ended December 31,
|
|
Web Services
|
2017
|
2016
|
Service
revenue
|
$1,057
|
$1,362
|
Operating
expenses:
|
|
|
Cost
of service revenue
|
117
|
203
|
Research
and development
|
24
|
33
|
General
and administrative
|
410
|
715
|
Total
operating expenses
|
551
|
951
|
Operating
loss
|
506
|
411
|
Other
income/(expense)
|
(5)
|
19
|
Income
before tax provision
|
$501
|
$430
|
24
Quarterly Financial Information
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Web
Services
|
2017
|
2017
|
2017
|
2017
|
Service
revenue
|
$283
|
$269
|
$263
|
$242
|
Operating
expenses:
|
|
|
|
|
Cost
of service revenue
|
33
|
28
|
26
|
30
|
Research
and development
|
6
|
6
|
6
|
6
|
General
and administrative
|
137
|
107
|
89
|
77
|
Total
operating expenses
|
176
|
141
|
121
|
113
|
Operating
loss
|
107
|
128
|
142
|
129
|
Other
expense
|
-
|
-
|
(5)
|
-
|
Income
before tax provision
|
$107
|
$128
|
$137
|
$129
|
|
For the three months ended
|
|||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Web
Services
|
2016
|
2016
|
2016
|
2016
|
Service
revenue
|
$396
|
$347
|
$320
|
$299
|
Operating
expenses:
|
|
|
|
|
Cost
of service revenue
|
65
|
53
|
54
|
31
|
Research
and development
|
11
|
9
|
6
|
7
|
General
and administrative
|
226
|
189
|
153
|
147
|
Total
operating expenses
|
302
|
251
|
213
|
185
|
Operating
loss
|
94
|
96
|
107
|
114
|
Other
income
|
11
|
5
|
3
|
-
|
Income
before tax provision
|
$105
|
$101
|
$110
|
$114
|
Year Ended December 31, 2017 Compared to Year Ended December 31,
2016
Service Revenue
Service
revenue from Web Services is generated primarily through website
hosting, professional web management services, and extended payment
term agreements (EPTAs). Web services revenue decreased 22% or
$305,000, to $1,057,000 for the year ended December 31, 2017 as
compared to $1,362,000 for the year ended December 31, 2016. The
decrease in service revenue is primarily due to a decrease in
hosting revenue of $208,000, a $59,000 decrease in EPTA revenue due
to decrease in outstanding receivables, and a decrease of $38,000
from a decline in web management professional
services.
Cost of Service Revenue
Cost of
service revenue consists primarily of bandwidth, customer service
costs, and outsourcing fees related to fulfillment of our
professional web management services. Cost of service revenue
decreased 42% or $86,000, to $117,000 for the year ended December
31, 2017 as compared to $203,000 for the year ended December 31,
2016. The cost of service revenue decrease is primarily related to
cost savings from bringing customer support in house at the end of
2016.
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 27% or $9,000, to $24,000 for the year ended
December 31, 2017 as compared to $33,000 for the year ended
December 31, 2016. The decrease was primarily related to a
reduction of salaries and benefits expenses.
25
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, accounting,
other professional services, and other administrative corporate
expenses. General and administrative expenses decreased 43% or
$305,000, to $410,000 for the year ended December 31, 2017 as
compared to $715,000 for the year ended December 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 22% decrease in service revenue for the
year ended December 31, 2017 compared to the year ended December
31, 2016, and a company-wide reduction in general and
administrative expenses as we continue to cut unnecessary expenses.
Consolidated general and administrative expenses decreased 17%, or
$829,000 to $4,071,000 for the year ended December 31, 2017
compared to $4,900,000 for the year ended December 31,
2016.
Other Income/(Expense)
Other
income/(expense) primarily relates to interest income from the
collection of EPTA receivables and the allocated portions of
interest expense and sublease rental income. Other income/(expense)
decreased 126% or $24,000, to $(5,000) for the year ended December
31, 2017 as compared to income of $19,000 for the year ended
December 31, 2016. The decrease is due to a decrease in interest
income related to the decrease in EPTA revenue, an increase in
interest expense on our related party note payable, and a decrease
in sublease income resulting from completion of our lease agreement
obligation in the fourth quarter of 2016 and related
sub-lease.
LIQUIDITY AND CAPITAL RESOURCES
As of
December 31, 2017 and 2016, we had cash and cash equivalents of
$1,282,000 and $619,000, respectively. Changes in cash and cash
equivalents are dependent upon changes in, among other things,
working capital items such as deferred revenues, accounts payable,
accounts receivable, and various accrued expenses, as well as
purchases of property and equipment and changes in our capital and
financial structure due to debt repayments and issuances, stock
option exercises, sales of equity investments and similar events.
Our operations for the third and fourth quarters of 2017 generated
positive cash flows and we believe this trend will continue. We
believe that our operations along with existing liquidity sources
will satisfy our cash requirements for at least the next 12 months.
If the assumptions underlying our business plan regarding future
revenue and expenses change or if unexpected opportunities or needs
arise, we may seek to raise additional cash by selling equity or
debt securities.
Working Capital
Working
capital increased 739% or $421,000 to $478,000 as of December 31,
2017 as compared to $57,000 as of December 31, 2016. The increase
in working capital is primarily related to an increase in cash and
cash equivalents of $663,000, a decrease in accounts payable of
$37,000, a decrease in accrued expenses of $36,000, an increase in
trade receivables, net of allowance for doubtful accounts, of
$29,000, a decrease in income taxes payable of $5,000, and an
increase in other current assets of $2,000, offset by a decrease in
prepaid expenses of $156,000, an increase in deferred revenue,
current portion, of $148,000, a decrease in inventories of $39,000,
a decrease in equipment financing receivables of $5,000, and an
increase in notes payable, current portion of $3,000.
Cash and Cash Equivalents
Cash
and cash equivalents increased 107% or $663,000, to $1,282,000 as
of December 31, 2017 as compared to $619,000 as of December 31,
2016. During the year ended December 31, 2017, there was an
increase of $294,000 provided by operating activities. Investing
activities provided $252,000 from the sale of our long-term CD.
Financing activities provided $117,000; primarily related to
proceeds from stock option exercises of $1,162,000 and proceeds
from notes payable of $111,000, offset by repayments on notes
payable of $1,156,000.
Trade Receivables
Current
and long-term trade receivables, net of allowance for doubtful
accounts, increased 4% or $17,000, to $406,000 as of December 31,
2017 as compared to $389,000 as of December 31, 2016. The increase
in current trade receivables can be attributed to the balances of
three customers that typically pay by the end of the month.
Long-term trade receivables, net of allowance for doubtful
accounts, decreased 28% or $12,000, to $31,000 as of December 31,
2017 as compared to $43,000 as of 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 end of term, the
long-term portion decreases.
26
Accounts Payable
Accounts payable
decreased 32% or $37,000, to $79,000 as of December 31, 2017 as
compared to $116,000 as of December 31, 2016. The aging of accounts
payable as of December 31, 2017 and 2016 were generally within our
vendors’ terms of payment. The decrease is primarily related
to the timing of the check processing schedule.
Notes Payable
Notes
payables decreased 92% or $953,000, to $79,000 as of December 31,
2017 as compared to $1,032,000 at December 31, 2016. The decrease
in notes payable can be primarily attributed to the $996,000
repayment of the related party note payable. The remainder of the
difference is made up of payments of $118,000, offset by additional
financing arrangements entered into during the period.
Capital
Total
stockholders’ equity increased 160% or $824,000, to
$1,339,000 as of December 31, 2017 as compared to $515,000 as of
December 31, 2016. The increase in total stockholders’ equity
was attributable to an increase in additional paid-in capital of
$1,162,000 for proceeds from the exercise of options, $530,000 for
stock options issued to employees, $43,000 for the vesting of
restricted stock units, and $109,000 in common stock issued for
annual interest payment on note payable, offset by a net loss of
$1,020,000.
OFF BALANCE SHEET ARRANGEMENTS
As of
December 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.
RELATED PARTY TRANSACTIONS
None
RECENT ACCOUNTING PRONOUNCEMENTS
For a
summary of recent accounting pronouncements and the anticipated
effects on our consolidated financial statements, see Note 1 to the
consolidated financial statements, which is incorporated by
reference herein.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Not
required
27
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CREXENDO,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
PAGE
|
Reports
of Independent Registered Public Accounting Firms
|
29
|
|
|
Consolidated
Balance Sheets as of December 31, 2017 and 2016
|
30
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2017 and
2016
|
31
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2017 and 2016
|
32
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017 and
2016
|
33
|
|
|
Notes
to Consolidated Financial Statements
|
34
|
|
|
Schedule II –
Valuation and Qualifying Accounts
|
66
|
|
|
28
Report of Independent Registered Public Accounting
Firm
To
the Board of Directors and Stockholders of
Crexendo,
Inc.
Tempe, AZ
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Crexendo, Inc. and subsidiaries (the "Company") as of December 31,
2017 and 2016, the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then
ended, and the related notes and financial statement schedule
listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all
material respects, the financial position of the Company and
subsidiaries at December 31, 2017 and 2016, and the results of
their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Urish Popeck & Co., LLC
We have served as the Company's auditor since 2016.
Pittsburgh, PA
March 6, 2018
29
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value and share data)
|
December
31,
|
|
|
2017
|
2016
|
Assets
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$1,282
|
$619
|
Restricted
cash
|
100
|
100
|
Trade
receivables, net of allowance for doubtful accounts of
$19
|
|
|
as
of December 31, 2017 and $34 as of December 31, 2016
|
375
|
346
|
Inventories
|
131
|
170
|
Equipment
financing receivables
|
116
|
121
|
Prepaid
expenses
|
530
|
686
|
Other
current assets
|
10
|
8
|
Total
current assets
|
2,544
|
2,050
|
|
|
|
Certificate
of deposit
|
-
|
252
|
Long-term
trade receivables, net of allowance for doubtful
accounts
|
|
|
of
$10 as December 31, 2017 and $13 as of December 31,
2016
|
31
|
43
|
Long-term
equipment financing receivables
|
58
|
176
|
Property
and equipment, net
|
8
|
18
|
Intangible
assets, net
|
239
|
335
|
Goodwill
|
272
|
272
|
Long-term
prepaid expenses
|
173
|
251
|
Other
long-term assets
|
121
|
136
|
Total
Assets
|
$3,446
|
$3,533
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$79
|
$116
|
Accrued
expenses
|
961
|
997
|
Notes
payable, current portion
|
69
|
66
|
Income
taxes payable
|
-
|
5
|
Deferred
revenue, current portion
|
957
|
809
|
Total
current liabilities
|
2,066
|
1,993
|
|
|
|
Deferred
revenue, net of current portion
|
31
|
43
|
Notes
payable, net of current portion
|
10
|
966
|
Other
long-term liabilities
|
-
|
16
|
Total
liabilities
|
2,107
|
3,018
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
Preferred
stock, par value $0.001 per share - authorized 5,000,000 shares;
none issued
|
—
|
—
|
Common
stock, par value $0.001 per share - authorized 25,000,000 shares,
14,287,556
|
|
|
shares
issued and outstanding as of December 31, 2017 and 13,578,556
shares issued
|
|
|
and
outstanding as of December 31, 2016
|
14
|
14
|
Additional
paid-in capital
|
60,560
|
58,716
|
Accumulated
deficit
|
(59,235)
|
(58,215)
|
Total
stockholders' equity
|
1,339
|
515
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$3,446
|
$3,533
|
The accompanying notes are an integral part of the consolidated
financial statements.
30
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share and share data)
|
Year Ended December 31,
|
|
|
2017
|
2016
|
Service
revenue
|
$9,030
|
$7,644
|
Product
revenue
|
1,347
|
1,475
|
Total
revenue
|
10,377
|
9,119
|
|
|
|
Operating
expenses:
|
|
|
Cost
of service revenue
|
2,908
|
2,993
|
Cost
of product revenue
|
549
|
632
|
Selling
and marketing
|
2,924
|
2,531
|
General
and administrative
|
4,071
|
4,900
|
Research
and development
|
750
|
826
|
Total
operating expenses
|
11,202
|
11,882
|
|
|
|
Loss
from operations
|
(825)
|
(2,763)
|
|
|
|
Other
income/(expense):
|
|
|
Interest
income
|
10
|
15
|
Interest
expense
|
(209)
|
( 138)
|
Other
income, net
|
11
|
106
|
Total
other expense, net
|
(188)
|
( 17)
|
|
|
|
Loss
before income tax
|
(1,013)
|
(2,780)
|
|
|
|
Income
tax provision
|
(7)
|
(12)
|
|
|
|
Net
loss
|
$(1,020)
|
$(2,792)
|
|
|
|
Net
loss per common share:
|
|
|
Basic
|
$(0.07)
|
$(0.21)
|
Diluted
|
$(0.07)
|
$(0.21)
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
Basic
|
13,938,342
|
13,358,311
|
Diluted
|
13,938,342
|
13,358,311
|
The accompanying notes are an integral part of the consolidated
financial statements.
31
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
|
|
|
Additional
|
|
Total
|
|
Common Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
Balance, January 1, 2016
|
13,227,489
|
$13
|
$57,614
|
$(55,423)
|
$2,204
|
Share-based
compensation
|
-
|
-
|
653
|
-
|
653
|
Issuance
of common stock for exercise of stock options
|
8,310
|
-
|
9
|
-
|
9
|
Issuance
of common stock in a business acquisition
|
17,757
|
-
|
40
|
-
|
40
|
Issuance
of common stock for interest on related party note
payable
|
75,000
|
-
|
101
|
-
|
101
|
Issuance
of common stock for exercise of common stock warrants
|
250,000
|
1
|
299
|
-
|
300
|
Net
loss
|
-
|
-
|
-
|
(2,792)
|
(2,792)
|
Balance, December 31, 2016
|
13,578,556
|
14
|
58,716
|
(58,215)
|
515
|
Share-based
compensation
|
-
|
-
|
530
|
-
|
530
|
Vesting
of restricted stock units
|
27,000
|
-
|
43
|
-
|
43
|
Issuance
of common stock for exercise of stock options
|
607,000
|
-
|
1,162
|
-
|
1,162
|
Issuance
of common stock for interest on related party note
payable
|
75,000
|
-
|
109
|
-
|
109
|
Net
loss
|
-
|
-
|
-
|
(1,020)
|
(1,020)
|
Balance, December 31, 2017
|
14,287,556
|
$14
|
$60,560
|
$(59,235)
|
$1,339
|
The accompanying notes are an integral part of the consolidated
financial statements.
32
CREXENDO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
|
Year Ended December 31,
|
|
|
2017
|
2016
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(1,020)
|
$(2,792)
|
Adjustments
to reconcile net loss to net cash provided by/(used for)
operating activities:
|
|
|
Amortization
of prepaid rent
|
54
|
322
|
Depreciation
and amortization
|
106
|
146
|
Non-cash
interest expense
|
201
|
124
|
Share-based
compensation
|
573
|
653
|
Amortization
of deferred gain
|
(16)
|
(93)
|
Changes
in assets and liabilities:
|
|
|
Trade
receivables
|
(17)
|
56
|
Equipment
financing receivables
|
123
|
153
|
Inventories
|
39
|
(36)
|
Prepaid
expenses
|
180
|
75
|
Other
assets
|
13
|
40
|
Accounts
payable and accrued expenses
|
(73)
|
225
|
Income
tax payable
|
(5)
|
5
|
Deferred
revenue
|
136
|
(4)
|
Net
cash provided by/(used for) operating activities
|
294
|
(1,126)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Sale
of certificate of deposit
|
252
|
-
|
Purchase
of long-term investment
|
-
|
(1)
|
Release
of restricted cash
|
-
|
12
|
Net
cash provided by investing activities
|
252
|
11
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds
from notes payable
|
111
|
150
|
Repayments
made on notes payable
|
(1,156)
|
(163)
|
Proceeds
from exercise of options
|
1,162
|
9
|
Proceeds
from exercise of warrants
|
-
|
300
|
Payment
of contingent consideration
|
-
|
(59)
|
Net
cash provided by financing activities
|
117
|
237
|
|
|
|
NET
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
663
|
( 878)
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
|
619
|
1,497
|
|
|
|
CASH
AND CASH EQUIVALENTS AT THE END OF THE YEAR
|
$1,282
|
$619
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash
used during the year for:
|
|
|
Income
taxes, net
|
$(12)
|
$(2)
|
Supplemental
disclosure of non-cash investing and financing
information:
|
|
|
Issuance
of common stock for payment of interest on related-party note
payable
|
$109
|
$101
|
Issuance
of common stock for contingent consideration related to business
acquisition
|
$-
|
$40
|
Prepaid
assets financed through notes payable
|
$111
|
$124
|
The accompanying notes are an integral part of the consolidated
financial statements.
33
CREXENDO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1.
Description
of Business and Significant Accounting Policies
Description of Business - Crexendo, Inc.
is incorporated in the state of Nevada. As used hereafter in the
notes to consolidated financial statements, we refer to Crexendo,
Inc. and its wholly owned subsidiaries, as “we,”
“us,” or “our Company.” Crexendo is a
next-generation CLEC and an award-winning leader and provider of
unified communications cloud telecom services, broadband internet
services, and other cloud business services that are designed to
provide enterprise-class cloud services to any size businesses at
affordable monthly rates. The Company has two operating segments,
which consist of Cloud Telecommunications and Web
Services.
Basis of Presentation
– The consolidated financial statements include
the accounts and operations of Crexendo, Inc. and its wholly owned
subsidiaries, which include Crexendo Business Solutions, Inc. and
Crexendo International, Inc. All intercompany account balances and
transactions have been eliminated in consolidation. The
consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (“US
GAAP”) and pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). These
consolidated financial statements reflect the results of
operations, financial position, changes in stockholders’
equity, and cash flows of our Company.
Certain
prior year amounts have been reclassified for consistency with the
current period presentation. These reclassifications had no effect
on the reported results of operations.
Cash and Cash
Equivalents -
We consider all highly liquid,
short-term investments with maturities of three months or less at
the time of purchase to be cash equivalents. As of December 31,
2017 and 2016, we had cash and cash equivalents in financial
institutions in excess of federally insured limits in the amount of
$1,038,000 and $413,000, respectively.
Restricted Cash – We classified
$100,000 and $100,000 as restricted cash as of December 31, 2017
and 2016, respectively. Cash is restricted for compensating balance
requirements on purchasing card agreements. As of December 31, 2017
and 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.
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
write-down is recognized as a loss in earnings in the period in
which the excess occurs.
Certificate of Deposit - Certificate of
Deposit (“CD”) is collateral for merchant accounts. The
CD was classified as long-term in the condensed consolidated
balance sheet at December 31, 2016. In 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 is amortized using the
straight-line method over the shorter of the estimated useful life
of the asset or the term of the related lease. Depreciation expense
is included in general and administrative expenses and totaled
$10,000 and $15,000 for the years ended December 31, 2017 and 2016,
respectively. Depreciable lives by asset group are as
follows:
34
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 the statement of
operations.
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.
Service and Product 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
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.
We
enter into agreements where revenue is derived from multiple
deliverables including any mix of products and/or services. For
these arrangements, we determine whether the delivered item(s) has
value to the customer on a stand-alone basis, and in the event the
arrangement includes a general right of return relative to the
delivered item(s), whether the delivery or performance of the
undelivered item(s) is considered probable and substantially in our
control. If these criteria are met, the arrangement consideration
is allocated to the separate units of accounting based on each
unit’s relative selling price. If these criteria are not met,
the arrangement is accounted for as a single unit of accounting
which would result in revenue being recognized ratably over the
contract term or deferred until the earlier of when such criteria
are met or when the last undelivered element is delivered. The
amount of product and services revenue recognized for arrangements
with multiple deliverables is impacted by the allocation of
arrangement consideration to the deliverables in the arrangement
based on the relative selling prices. In determining our selling
prices, we apply the selling price hierarchy using vendor specific
objective evidence (“VSOE”) when available, third-party
evidence of selling price (“TPE”) if VSOE does not
exist, and best estimated selling price (“BESP”) if
neither VSOE nor TPE is available.
VSOE of
fair value for elements of an arrangement is based upon the normal
pricing and discounting practices for a deliverable when sold
separately. In determining VSOE, we require that a substantial
majority of the selling prices fall within a reasonably narrow
pricing range, generally evidenced by a substantial majority of
such historical stand-alone transactions falling within a
reasonably narrow range of the median rate. In addition, we
consider major service groups, geographies, customer
classifications, and other variables in determining
VSOE.
We are
typically not able to determine TPE for our products or services.
TPE is determined based on competitor prices for similar
deliverables when sold separately. Generally, our offerings contain
a significant level of differentiation such that the comparable
pricing of products with similar functionality is difficult to
obtain. Furthermore, we are unable to reliably determine what
similar competitor products’ selling prices are on a
stand-alone basis.
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.
35
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 such as
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 Telecommunications
and Web Service Revenue - Fees collected for cloud
telecommunications and website hosting services are recognized as
revenue 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 desktop 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 Service Revenue – Cost of
service includes Cloud Telecommunications and Web Services cost of
service revenue. Cloud Telecommunications cost of service revenue
primarily consists of fees we pay to third-party telecommunications
and business Internet providers, costs of other third party
services we resell, personnel and travel expenses related to system
implementation, and customer service. Web Services cost of service
revenue consists primarily of customer service costs and
outsourcing fees related to fulfillment of our professional web
management services.
Cost of Product Revenue – Cost of
product revenue primarily consists of the costs associated with the
purchase of desktop devices and other third party equipment we
purchase for resale.
Prepaid Sales Commissions - For
arrangements where we recognize revenue over the relevant contract
period, we defer related commission payments to our direct sales
force and amortize these amounts over the same period that the
related revenues are recognized. This is done to match commissions
with the related revenues. Commission payments are nonrefundable
unless amounts due from a customer are determined to be
uncollectible or if the customer subsequently changes or terminates
the level of service, in which case commissions which were paid are
recoverable by us.
Research and Development - Research and
development costs are expensed as incurred. Costs related to
internally developed software are expensed as research and
development expense until technological feasibility has been
achieved, after which the costs are capitalized.
Fair Value Measurements - The fair value
of our financial assets and liabilities was determined based on
three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure
fair value which are the following:
36
Level 1 — Unadjusted quoted
prices that are available in active markets for the identical
assets or liabilities at the measurement date.
Level 2 — Other observable inputs
available at the measurement date, other than quoted prices
included in Level 1, either directly or indirectly,
including:
·
Quoted prices for similar assets or liabilities in active
markets;
·
Quoted prices for identical or similar assets in non-active
markets;
·
Inputs other than quoted prices that are observable for the asset
or liability; and
·
Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 — Unobservable inputs
that cannot be corroborated by observable market data and reflect
the use of significant management judgment. These values are
generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant
assumptions.
Notes Payable – We record notes
payable net of any discounts or premiums. Discounts and premiums
are amortized as interest expense or income over the life of the
note in such a way as to result in a constant rate of interest when
applied to the amount outstanding at the beginning of any given
period.
Income Taxes - We recognize a liability
or asset for the deferred tax consequences of all temporary
differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are
recovered or settled. Accruals for uncertain tax positions are
provided for in accordance with accounting guidance. Accordingly,
we may recognize the tax benefits from an uncertain tax position
only if it is more-likely-than-not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement. Accounting guidance is
also provided on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures. Judgment
is required in assessing the future tax consequences of events that
have been recognized in the financial statements or tax returns.
Variations in the actual outcome of these future tax consequences
could materially impact our financial position, results of
operations, and cash flows. In assessing the need for a valuation
allowance, we evaluate all significant available positive and
negative evidence, including historical operating results,
estimates of future taxable income and the existence of prudent and
feasible tax planning strategies. We have placed a full valuation
allowance on net deferred tax assets.
Interest and
penalties associated with income taxes are classified as income tax
expense in the condensed consolidated statements of
operations.
Stock-Based Compensation - For equity-classified awards,
compensation expense is recognized over the requisite service
period based on the computed fair value on the grant date of the
award. Equity classified awards include the issuance of
stock options.
Comprehensive Loss – There were no
other components of comprehensive loss other than net loss for the
years ended December 31, 2017 and 2016.
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 and Web Services. Research and
development expenses are allocated to Cloud Telecommunications 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 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 years ended December 31, 2017
and 2016. One telecommunications services customer accounted for
11% and 11% of total trade accounts receivable as of December 31,
2017 and 2016, respectively.
37
Recently Adopted
Accounting Pronouncements - In March 2016, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards
Update (ASU) 2016-09, Compensation
- Stock Compensation (Topic 718), improvement to employee
share-based payment accounting. The new standard contains several
amendments that will simplify the accounting for employee
share-based payment transactions, including the accounting for
income taxes, forfeitures, statutory tax withholding requirements,
classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The changes in the
new standard eliminate the accounting for excess tax benefits to be
recognized in additional paid-in capital and tax deficiencies
recognized either in the income tax provision or in additional
paid-in capital. The Company elected early adoption of ASU 2016-09
in 2016. Due to the Company’s valuation allowance on its
deferred tax assets, no income tax benefit will be recognized in
2016 as a result of the adoption of ASU 2016-09. There will be no
change to retained earnings with respect to excess tax benefits, as
this is not applicable to the Company. The treatment of forfeitures
has not changed as we are electing to continue our current process
of estimating the number of forfeitures. As such, this has no
cumulative effect on retained earnings. With the early adoption of
2016-09, we have elected to present the cash flow statement on a
prospective transition method and no prior periods have been
adjusted.
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred
Taxes, which will require entities to present deferred tax
assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in
a classified balance sheet. The ASU simplifies the current
guidance, which requires entities to separately present DTAs and
DTLs as current and noncurrent in a classified balance sheet. ASU
2015-17 is effective for financial statements issued for annual
periods beginning after December 15, 2016 (and interim periods
within those annual periods) and early adoption is permitted. ASU
2015-17 may be either applied prospectively to all deferred tax
assets and liabilities or retrospectively to all periods presented.
We have elected to early adopt ASU 2015-17 prospectively in the
fourth quarter of 2016. As a result, we have presented all deferred
tax assets and liabilities as noncurrent on our consolidated
balance sheet as of December 31, 2016, but have not reclassified
current deferred tax assets and liabilities on our consolidated
balance sheet as of December 31, 2015. There was no impact on our
results of operations as a result of the adoption of ASU
2015-17.
In
September 2015, the FASB issued ASU No. 2015-16, Business Combinations, which requires
that an acquirer recognize adjustments to provisional amounts that
are identified during the measurement period for a business
combination in the reporting period in which the adjustment amounts
are determined. Prior to the issuance of the standard, entities
were required to retrospectively apply adjustments made to
provisional amounts recognized in a business combination. We
adopted this guidance effective January 1, 2016. The adoption of
this guidance did not have a material impact on our consolidated
financial statements.
In 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. 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 a material impact on our consolidated
financial statements.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern, which requires management to assess an
entity’s ability to continue as a going concern by
incorporating and expanding upon certain principles that are
currently in U.S. auditing standards. Specifically, the ASU (1)
provides a definition of the term substantial doubt, (2) requires
an evaluation every reporting period including interim periods, (3)
provides principles for considering the mitigating effect of
management’s plans, (4) requires certain disclosures when
substantial doubt is alleviated as a result of consideration of
management’s plans, (5) requires an express statement and
other disclosures when substantial doubt is not alleviated, and (6)
requires an assessment for a period of one year after the date that
the financial statements are issued (or available to be issued).
The adoption of this guidance did not have a material impact on our
consolidated financial statements.
38
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 and nine months ended September 30, 2017,
as there are no performance targets associated with outstanding
awards.
Recently Issued
Accounting Pronouncements - In
May 2017, the FASB issued ASU 2017-09, Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting, the
amendments provide guidance on determining which changes to the
terms and conditions of share-based payment awards require an
entity to apply modification accounting under Topic 718. Effective
for all entities for annual periods, including interim periods
within those annual periods, beginning after December 15, 2017.
Early adoption is permitted. The adoption of this new ASU will not
have a material impact on our consolidated financial
statements.
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
January 2017, the FASB issued ASU 2017-01, Business Combinations
(Topic 805) Clarifying the Definition of a Business, that provides
guidance to assist entities with evaluating when a set of
transferred assets and activities (set) is a