Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
———————
FORM 10-Q
———————
(Mark
One)
☑ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30,
2020
OR
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the transition period from ________ to ________.
Commission file number 001-32277
———————
Crexendo, Inc.
(Exact name of registrant as specified in its charter)
———————
Nevada
|
87-0591719
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
|
|
1615 South 52nd
Street, Tempe, AZ
|
85281
|
(Address of Principal Executive Offices)
|
(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)
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (check one).
Large accelerated filer
|
☐
|
|
|
Accelerated filer
|
☐
|
|
Non-accelerated filer
|
☐
|
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
☑
|
|
|
|
|
|
Emerging growth company
|
☐
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑.
The
number of shares outstanding of the registrant’s common stock
as of October 31, 2020 was 17,963,234.
INDEX
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3
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24
|
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37
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37
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|
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38
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38
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38
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39
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40
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PART I - FINANCIAL
INFORMATION
Item
1.
Financial
Statements.
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except par value and share
data)
|
September
30, 2020
|
December
31, 2019
|
Assets
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$15,353
|
$4,180
|
Restricted
cash
|
100
|
100
|
Trade
receivables, net of allowance for doubtful accounts of
$50
|
|
|
as
of September 30, 2020 and $14 as of December 31, 2019
|
632
|
380
|
Contract
assets
|
94
|
22
|
Inventories
|
263
|
382
|
Equipment
financing receivables
|
253
|
143
|
Contract
costs
|
403
|
379
|
Prepaid
expenses
|
332
|
141
|
Income
tax receivable
|
-
|
4
|
Total
current assets
|
17,430
|
5,731
|
|
|
|
Long-term
trade receivables, net of allowance for doubtful
accounts
|
|
|
of
$0 as of September 30, 2020 and December 31, 2019
|
2
|
6
|
Long-term
equipment financing receivables, net
|
846
|
561
|
Property
and equipment, net
|
2,772
|
155
|
Operating
lease right-of-use assets
|
1
|
51
|
Intangible
assets, net
|
275
|
465
|
Goodwill
|
272
|
272
|
Contract
costs, net of current portion
|
512
|
436
|
Other
long-term assets
|
152
|
106
|
Total
Assets
|
$22,262
|
$7,783
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$214
|
$86
|
Accrued
expenses
|
1,570
|
1,754
|
Finance
leases
|
31
|
30
|
Notes
payable
|
1,071
|
-
|
Operating
lease liabilities
|
-
|
50
|
Income
tax payable
|
5
|
-
|
Contigent
consideration
|
-
|
175
|
Contract
liabilities
|
783
|
791
|
Total
current liabilities
|
3,674
|
2,886
|
|
|
|
Contract
liabilities, net of current portion
|
450
|
423
|
Finance
leases, net of current portion
|
63
|
86
|
Notes
payable, net of current portion
|
1,891
|
-
|
Operating
lease liabilities, net of current portion
|
1
|
1
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Total
liabilities
|
6,079
|
3,396
|
|
|
|
Stockholders'
equity:
|
|
|
Preferred
stock, par value $0.001 per share - authorized 5,000,000 shares;
none issued
|
—
|
—
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Common
stock, par value $0.001 per share - authorized 25,000,000 shares,
17,536,891
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|
|
shares
issued and outstanding as of September 30, 2020 and 14,884,755
shares issued
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|
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and
outstanding as of December 31, 2019
|
18
|
15
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Additional
paid-in capital
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73,414
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62,400
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Accumulated
deficit
|
(57,249)
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(58,028)
|
Total
stockholders' equity
|
16,183
|
4,387
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$22,262
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$7,783
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share and share
data)
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
2020
|
2019
|
2020
|
2019
|
Service
revenue
|
$3,654
|
$3,259
|
$10,747
|
$9,414
|
Product
revenue
|
489
|
343
|
1,317
|
1,294
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Total
revenue
|
4,143
|
3,602
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12,064
|
10,708
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|
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Operating
expenses:
|
|
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|
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Cost
of service revenue
|
946
|
836
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2,824
|
2,587
|
Cost
of product revenue
|
314
|
172
|
797
|
664
|
Selling
and marketing
|
1,051
|
1,003
|
3,151
|
2,865
|
General
and administrative
|
1,351
|
1,040
|
3,585
|
3,051
|
Research
and development
|
326
|
215
|
840
|
624
|
Total
operating expenses
|
3,988
|
3,266
|
11,197
|
9,791
|
|
|
|
|
|
Income
from operations
|
155
|
336
|
867
|
917
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
Interest
income
|
1
|
1
|
3
|
4
|
Interest
expense
|
(23)
|
(1)
|
(54)
|
(9)
|
Other
income/(expense), net
|
1
|
(2)
|
(28)
|
6
|
Total
other income/(expense), net
|
(21)
|
(2)
|
(79)
|
1
|
|
|
|
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Income
before income tax
|
134
|
334
|
788
|
918
|
|
|
|
|
|
Income
tax provision
|
(3)
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0
|
(9)
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(7)
|
|
|
|
|
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Net
income
|
$131
|
$334
|
$779
|
$911
|
|
|
|
|
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Earnings
per common share:
|
|
|
|
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Basic
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$0.01
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$0.02
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$0.05
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$0.06
|
Diluted
|
$0.01
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$0.02
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$0.05
|
$0.06
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
Basic
|
15,244,804
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14,663,151
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15,058,192
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14,507,696
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Diluted
|
17,249,035
|
15,629,647
|
16,793,896
|
15,444,063
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders'
Equity
Nine Months Ended September 30, 2020 and 2019
(Unaudited, in thousands, except share data)
|
Common
Stock
|
|
|
|
|
|
Shares
|
Amount
|
Additional
Paid-in Capital
|
Accumulated
Deficit
|
Total
Stockholders' Equity
|
Balance, January 1, 2020
|
14,884,755
|
$15
|
$62,400
|
$(58,028)
|
$4,387
|
Share-based
compensation
|
-
|
-
|
105
|
-
|
105
|
Vesting
of restricted stock units
|
7,498
|
-
|
-
|
-
|
-
|
Issuance
of common stock for exercise of stock options
|
49,200
|
-
|
84
|
-
|
84
|
Net
income
|
-
|
-
|
-
|
140
|
140
|
Balance, March 31, 2020
|
14,941,453
|
$15
|
$62,589
|
$(57,888)
|
$4,716
|
Share-based
compensation
|
-
|
-
|
136
|
-
|
136
|
Vesting
of restricted stock units
|
15,363
|
-
|
-
|
-
|
-
|
Issuance
of common stock for exercise of stock options
|
143,448
|
-
|
414
|
-
|
414
|
Net
income
|
-
|
-
|
-
|
508
|
508
|
Balance, June 30, 2020
|
15,100,264
|
$15
|
$63,139
|
$(57,380)
|
$5,774
|
Share-based
compensation
|
-
|
-
|
136
|
-
|
136
|
Vesting
of restricted stock units
|
14,372
|
-
|
-
|
-
|
-
|
Issuance
of common stock for exercise of stock options
|
672,255
|
1
|
1,509
|
-
|
1,510
|
Issuance
of common stock in connection with an offering
|
1,750,000
|
2
|
8,631
|
-
|
8,633
|
Net
income
|
-
|
-
|
-
|
131
|
131
|
Balance, September 30, 2020
|
17,536,891
|
$18
|
$73,415
|
$(57,249)
|
$16,184
|
|
Common
Stock
|
|
|
|
|
|
Shares
|
Amount
|
Additional
Paid-in Capital
|
Accumulated
Deficit
|
Total
Stockholders' Equity
|
Balance, January 1, 2019
|
14,394,113
|
$14
|
$61,153
|
$(59,167)
|
$2,000
|
Share-based
compensation
|
-
|
-
|
91
|
-
|
91
|
Vesting
of restricted stock units
|
2,494
|
-
|
-
|
-
|
-
|
Net
income
|
-
|
-
|
-
|
239
|
239
|
Balance, March 31, 2019
|
14,396,607
|
$14
|
$61,244
|
$(58,928)
|
$2,330
|
Share-based
compensation
|
-
|
-
|
95
|
-
|
95
|
Vesting
of restricted stock units
|
7,498
|
-
|
-
|
-
|
-
|
Issuance
of common stock for exercise of stock options
|
177,379
|
1
|
271
|
-
|
272
|
Net
income
|
-
|
-
|
-
|
338
|
338
|
Balance, June 30, 2019
|
14,581,484
|
$15
|
$61,610
|
$(58,590)
|
$3,035
|
Share-based
compensation
|
-
|
-
|
107
|
-
|
107
|
Vesting
of restricted stock units
|
7,496
|
-
|
-
|
-
|
-
|
Issuance
of common stock for exercise of stock options
|
122,494
|
-
|
175
|
-
|
175
|
Net
income
|
-
|
-
|
-
|
334
|
334
|
Balance, September 30, 2019
|
14,711,474
|
$15
|
$61,892
|
$(58,256)
|
$3,651
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
Nine
Months Ended September 30,
|
|
|
2020
|
2019
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
income
|
$779
|
$911
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
Depreciation
and amortization
|
197
|
69
|
Share-based
compensation
|
377
|
293
|
Changes
in assets and liabilities:
|
|
|
Trade
receivables
|
(248)
|
(11)
|
Contract
assets
|
(72)
|
(2)
|
Equipment
financing receivables
|
(395)
|
(342)
|
Inventories
|
119
|
108
|
Contract
costs
|
(100)
|
(68)
|
Prepaid
expenses
|
(191)
|
(157)
|
Income
tax receivable
|
4
|
(2)
|
Other
assets
|
(46)
|
14
|
Accounts
payable and accrued expenses
|
(25)
|
224
|
Income
tax payable
|
5
|
-
|
Contract
liabilities
|
19
|
120
|
Net
cash provided by operating activities
|
423
|
1,157
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase
of property and equipment
|
(745)
|
(72)
|
Acquisition
of customer relationship assets
|
(176)
|
-
|
Net
cash used for investing activities
|
(921)
|
(72)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Payment
of contingent consideration
|
(54)
|
-
|
Repayments
made on finance leases
|
(22)
|
(21)
|
Proceeds
from notes payable
|
1,001
|
-
|
Repayments
made on notes payable
|
(39)
|
(52)
|
Proceeds
from exercise of options
|
2,007
|
447
|
Proceeds
from issuance of common stock in connection with an
offering
|
8,778
|
-
|
Net
cash provided by financing activities
|
11,671
|
374
|
|
|
|
NET
INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED
CASH
|
11,173
|
1,459
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT THE BEGINNING OF THE
PERIOD
|
4,280
|
1,949
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT THE END OF THE
PERIOD
|
$15,453
|
$3,408
|
|
|
|
Cash
used during the year for:
|
|
|
Income
taxes, net
|
$-
|
$(9)
|
Interest
expense
|
$(54)
|
$(9)
|
Supplemental
disclosure of non-cash investing and financing
information:
|
|
|
Purchase
of property and equipment with a note payable
|
$2,000
|
$-
|
Adjustment
to intangible assets and contingent consideration of customer
relationship asset acquisition
|
$(121)
|
$-
|
Deferred
offering costs, in accounts payable and accrued expenses but not
yet paid
|
$(145)
|
$-
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
CREXENDO, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (unaudited)
1.
Significant Accounting Policies
Description of Business
– Crexendo, Inc. 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 an
award-winning premier provider of cloud communications, UCaaS, call
center, collaboration services, and other cloud business services
that are designed to provide enterprise-class cloud services to any
size business 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.
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 September 30, 2020 and December 31, 2019, we had cash and cash
equivalents in financial institutions in excess of federally
insured limits in the amount of $15,414,000 and $4,004,000,
respectively.
Restricted Cash
– We classified
$100,000 and $100,000 as restricted cash as of September 30, 2020
and December 31, 2019, respectively. Cash is restricted for
compensating balance requirements on purchasing card agreements. As
of September 30, 2020 and December 31, 2019, we had restricted cash
in financial institutions in excess of federally insured limits in
the amount of $100,000 and $100,000,
respectively.
The
following table provides a reconciliation of cash and cash
equivalents and restricted cash reported on the balance sheet to
the cash, cash equivalents, and restricted cash shown in the
condensed consolidated statement of cash flows (in
thousands):
|
September
30,
|
September
30,
|
|
2020
|
2019
|
Cash
and cash equivalents
|
$15,353
|
$3,308
|
Restricted
cash
|
100
|
100
|
Total
cash, cash equivalents, and restricted cash shown in the
condensed
|
|
|
consolidated
statement of cash flows
|
$15,453
|
$3,408
|
Trade Receivables
– Trade receivables
from our cloud telecommunications and web services segments are
recorded at invoiced amounts.
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.
Contract Assets
– Contract assets
primarily relate to the Company’s rights to consideration for
work completed but not billed as of the reporting date. The
contract assets are transferred to receivables when the rights
become unconditional.
Contract Costs
– Contract costs
primarily relate to incremental commission costs paid to sales
representatives and sales leadership as a result of obtaining
telecommunications contracts which are recoverable. The Company
capitalized contract costs in the amount of $915,000 and $815,000
at September 30, 2020 and December 31, 2019, respectively.
Capitalized commission costs are amortized based on the transfer of
goods or services to which the assets relate which typically range
from thirty-six to sixty months, and are included in selling and
marketing expenses. During the three months ended September 30,
2020 and 2019, the Company amortized $123,000 and $127,000
respectively, and there was no impairment loss in relation to the
costs capitalized. During the nine months ended September 30, 2020
and 2019, the Company amortized $368,000 and $376,000 respectively,
and there was no impairment loss in relation to the costs
capitalized.
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.
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 thirty-nine 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. Land is not
depreciable. Depreciable lives by asset group are as
follows:
7
Computer and office equipment
|
2 to 5 years
|
Computer software
|
3 years
|
Furniture and fixtures
|
4 years
|
Building
|
39 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.
Asset Acquisitions
– Periodically we
acquire customer relationships that we account for as an asset
acquisition and record a corresponding intangible asset that is
amortized over its estimated useful life. Any excess of the fair
value of the purchase price over the fair value of the identifiable
assets and liabilities is allocated on a relative fair value basis.
No goodwill is recorded in an asset acquisition. If the fair value
of the assets acquired exceeds the initial consideration paid as of
the date of acquisition but includes a contingent consideration
arrangement and ASC 450 and ASC 815 do not apply to contingent
consideration, we analogize to the guidance in ASC 323 on
recognizing contingent consideration in the acquisition of an
equity method investment. The Company recognizes a liability equal
to the lesser of, the maximum amount of contingent consideration or
the excess of the fair value of the net assets acquired over the
initial cost measurement. In accordance with the requirements of
ASC 323 for equity method investments, the Company recognizes any
excess of the contingent consideration issued or issuable, over the
amount that was initially recognized as a liability, as an
additional cost of the asset acquisition. If the amount initially
recognized as a liability exceeds the contingent consideration
issued or issuable, the entity recognizes that amount as a
reduction of the cost of the asset acquisition. During the year
ended December 31, 2019, the Company acquired customer
relationships for an estimated aggregate purchase price of
$351,000. During the nine month period ended September 30, 2020,
the Company determined that the contingent consideration payable
was $121,000 less than initially recorded and recognized a
reduction in the cost of the asset acquired. The assets acquired
were not material to our consolidated financial
statements.
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 of customer relationships. 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.
Contract Liabilities
– Our contract
liabilities consist primarily of advance consideration received
from customers for telecommunications contracts. The product and
monthly service revenue is recognized on completion of the
implementation and the remaining activation fees are reclassified
as deferred revenue.
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 and asset acquisitions, allowances for
doubtful accounts, uncertainties related to certain income tax
benefits, valuation of deferred income tax assets, valuations of
share-based payments, annual incentive bonuses accrual,
recoverability of long-lived assets and product warranty
liabilities. 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.
Contingencies
– The Company
accrues for claims and contingencies when losses become probable
and reasonably estimable. As of the end of each applicable
reporting period, the Company reviews each of its matters and,
where it is probable that a liability has been or will be incurred,
it accrues for all probable and reasonably estimable losses. Where
the Company can reasonably estimate a range of losses it may incur
regarding such a matter, it records an accrual for the amount
within the range that constitutes its best estimate. If the Company
can reasonably estimate a range but no amount within the range
appears to be a better estimate than any other, it uses the amount
that is the low end of such range.
Product and Service Revenue
Recognition – Revenue is recognized upon transfer of control of
promised products or services to customers in an amount that
reflects the consideration we expect to receive in exchange for
those products or services and excludes any amounts collected on
behalf of third parties. We enter into contracts that can include
various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance
obligations. 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. Revenue is recognized net of any taxes collected from
customers, which are subsequently remitted to governmental
authorities. For more detailed information about revenue, see Note
2.
8
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
broadband 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.
Product Warranty
– We provide for the
estimated cost of product warranties at the time we recognize
revenue. We evaluate our warranty obligations on a product group
basis. Our standard product warranty terms generally include
post-sales support and repairs or replacement of a product at no
additional charge for a specified period of time. We base our
estimated warranty obligation upon warranty terms, ongoing product
failure rates, and current period product shipments. If actual
product failure rates, repair rates or any other post-sales support
costs were to differ from our estimates, we would be required to
make revisions to the estimated warranty liability. Warranty terms
generally last for the duration that the customer has
service.
Contingent Consideration
– Contingent
consideration represents deferred asset acquisition consideration
to be paid out at some point in the future, typically over a
one-year period or less from the acquisition date. Contingent
consideration is recorded at the asset acquisition date fair value.
Contingent consideration recorded in connection with an asset
acquisition is not derecognized until the related contingency is
resolved and the consideration is paid or becomes payable. If the
amount initially recorded as contingent consideration exceeds the
amount paid or payable, the Company recognizes that excess amount
as a reduction in the cost of the related intangible assets. During
the nine month period ended September 30, 2020, the Company
determined that the contingent consideration payable was $121,000
less than initially recorded and recognized a reduction in the cost
of the asset acquired.
Public Offering
– On September 28, 2020, the
Company completed a public offering in which it issued and sold
1,750,000 shares of common stock at a price to the public of $5.50
per share. The shares sold and issued in the public offering
resulted in an aggregate gross offering price of $9,625,000. The
Company received net proceeds of $8,633,000 after deducting
underwriting discounts and commissions of $674,000 and offering
expenses of $318,000.
Deferred Offering Costs
– Deferred offering
costs of $145,000, primarily consisting of certain legal,
accounting and other third-party fees that were directly associated
with the offering, were recorded in stockholders’ equity as a
reduction of additional paid-in capital generated upon closing of
the offering on September 28, 2020.
Research and Development
– Research and
development costs are expensed as incurred. Costs related to
internally developed software are expensed as research and
development expense until technological feasibility has been
achieved, after which the costs are
capitalized.
Fair Value Measurements
– The fair value of
our financial assets and liabilities was determined based on three
levels of inputs, of which the first two are considered observable
and the last unobservable, that may be used to measure fair value
which are the following:
Level 1 — Unadjusted quoted prices that are
available in active markets for the identical assets or liabilities
at the measurement date.
Level 2 — Other observable inputs available at the
measurement date, other than quoted prices included in Level 1,
either directly or indirectly, including:
·
Quoted prices for similar assets or liabilities in active
markets;
·
Quoted prices for identical or similar assets in non-active
markets;
·
Inputs other than quoted prices that are observable for the asset
or liability; and
·
Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 — Unobservable inputs that cannot be
corroborated by observable market data and reflect the use of
significant management judgment. These values are generally
determined using pricing models for which the assumptions utilize
management’s estimates of market participant
assumptions.
9
Lease Obligations
– We determine if an
agreement is a lease at inception. We evaluate the lease terms to
determine whether the lease will be accounted for as an operating
or finance lease. Operating leases are included in operating lease
right-of-use (“ROU”) assets, operating lease
liabilities, current portion, and operating lease liabilities, net
of current portion in our consolidated balance
sheets.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU
asset also includes any lease payments made and excludes lease
incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease
term.
A
lease that transfers substantially all of the benefits and risks
incidental to ownership of property are accounted for as finance
leases. At the inception of a finance lease, an asset and finance
lease obligation is recorded at an amount equal to the lesser of
the present value of the minimum lease payments and the
property’s fair market value. Finance lease obligations are
classified as either current or long-term based on the due dates of
future minimum lease payments, net of interest.
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 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 and
restricted stock units (“RSUs”).
Comprehensive Income
– There were no
other components of comprehensive income other than net income for
the three and nine months ended September 30, 2020 and
2019.
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 three and
nine months ended September 30, 2020 and 2019. No customer
accounted for 10% or more of our total trade accounts receivable as
of September 30, 2020 and one telecommunications services customer
accounted for 11% of total trade accounts receivable as of December
31, 2019.
Recently
Adopted Accounting Pronouncements – In
August 2018, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2018-13, which removes, modifies and adds to
the disclosure requirements on fair value measurements in Topic
820. The amendments on changes in unrealized gains and losses, the
range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. An entity is permitted to
early adopt any removed or modified disclosures upon issuance of
this updated guidance and delay adoption of the additional
disclosures until their effective date. We adopted this guidance
effective January 1, 2020. The adoption of this guidance did not
have a material impact on our consolidated financial statements and
related disclosures.
10
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. The Company adopted ASU 2017-04 effective January 1,
2020. The adoption of this ASU did not have an impact on our
condensed consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), and in December 2018, ASU No.
2018-20, Narrow-Scope Improvements for
Lessors, and in July 2018, ASU
No. 2018-10, Codification Improvements to
Topic 842, Leases, and ASU
2018-11, Leases (Topic 842) - Targeted
Improvements (collectively,
“the new lease standard” or “ASC 842”). The
new standard requires lessees to record assets and liabilities on
the balance sheet for all leases with terms longer than 12 months.
This ASU does not significantly change the previous lease guidance
for how a lessee should recognize, measure, and present expenses
and cash flows arising from a lease. Additionally, the criteria for
classifying a finance lease versus an operating lease are
substantially the same as the previous guidance.
We adopted Topic 842 as of January 1, 2019, using the alternative
transition method that allowed us to recognize a cumulative-effect
adjustment to the opening balance of retained earnings at the
beginning of the period of adoption. We used the package of
practical expedients permitted under the transition guidance that
allowed us to not reassess: (1) whether any expired or existing
contracts are or contain leases, (2) lease classification for any
expired or existing leases and (3) initial direct costs for any
expired or existing leases. We elected the practical expedient that
allows lessees to treat the lease and non-lease components of
leases as a single lease component. Additionally, we elected the
hindsight practical expedient to determine the reasonably certain
lease terms for existing leases. The adoption of Topic 842 did not
have a material adjustment to the opening balance of retained
earnings. The adoption of Topic
842 had a material impact on our condensed consolidated balance
sheet due to the recognition of right-of-use (“ROU”)
assets and lease liabilities. As a result of the adoption of the
standard, the Company recognized ROU assets and lease liabilities
of $1,088,000 as of January 1, 2019. The adoption of Topic 842 did
not have a material impact on our condensed consolidated statement
of operations or our condensed consolidated statement cash
flows.
In
August 2018, the FASB issued ASU 2018-07, to simplify the
accounting for share-based payments to nonemployees by aligning it
with the accounting for share-based payments to employees, with
certain exceptions. The new guidance expands the scope of
Accounting Standards Codification (ASC) 718 to include share-based
payments granted to nonemployees in exchange for goods or services
used or consumed in an entity’s own operations and supersedes
the guidance in ASC 505-50. The guidance also applies to awards
granted by an investor to employees and nonemployees of an equity
method investee for goods or services used or consumed in the
investee’s operations. The guidance in ASC 718 does not apply
to instruments issued to a lender or an investor in a financing
(e.g., in a capital raising) transaction. It also does not apply to
equity instruments granted when selling goods or services to
customers in the scope of ASC 606. However, the guidance states
that share-based payments granted to a customer in exchange for a
distinct good or service to be used or consumed in the
grantor’s own operations are accounted for under ASC 718. The
Company adopted ASU 2018-07 effective January 1, 2019. The adoption
of this ASU did not have an impact on our condensed consolidated
financial statements.
Recently
Issued Accounting Pronouncements – In
June 2016, the FASB issued ASU 2016-13, which requires measurement
and recognition of expected credit losses for financial assets
held. Following the effective date philosophy for all other
entities in ASU 2019-10, which includes smaller reporting companies
(SRCs), this guidance is effective for fiscal years beginning after
December 15, 2022 including interim periods within those fiscal
years. The standard is to be applied through a cumulative-effect
adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective. We do not plan
to early adopt this ASU. We are in the process of evaluating the
potential impact of adopting this new accounting standard on our
consolidated financial statements and related
disclosures.
In December 2019, the FASB issued ASU 2019-12 to
simplify the accounting in ASC 740, Income
Taxes. This guidance removes
certain exceptions related to the approach for intra-period tax
allocation, the methodology for calculating income taxes in an
interim period, and the recognition of deferred tax liabilities for
outside basis differences. This guidance also clarifies and
simplifies other areas of ASC 740. This ASU will be effective
beginning in the first quarter of the Company’s fiscal year
2021. Early adoption is permitted. Certain amendments in this
update must be applied on a prospective basis, certain amendments
must be applied on a retrospective basis, and certain amendments
must be applied on a modified retrospective basis through a
cumulative-effect adjustment to retained earnings/(deficit) in the
period of adoption. The Company is currently evaluating the impact
this ASU will have on the financial statements and related
disclosures, as well as the timing of adoption.
2.
Revenue
Revenue
is measured based on a consideration specified in a contract with a
customer, and excludes any sales incentives and amounts collected
on behalf of third parties. The Company recognizes revenue when it
satisfies a performance obligation by transferring control over a
product or service to a customer. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by the Company
from a customer, are excluded from revenue. The following is a
description of principal activities – separated by reportable
segments – from which the Company generates its revenue. For
more detailed information about reportable segments, see Note
15.
11
Cloud Telecommunications Segment
Products
and services may be sold separately or in bundled packages. The
typical length of a contract for service is thirty-six to sixty
months. Customers are billed for these services on a monthly basis.
For bundled packages, the Company accounts for individual products
and services separately if they are distinct – i.e. if a
product or service is separately identifiable from other items in
the bundled package and if a customer can benefit from it on its
own or with other resources that are readily available to the
customer. The consideration (including any discounts) is allocated
between separate products and services in a bundle based on their
relative stand-alone selling prices. The stand-alone selling prices
are determined based on the prices at which the Company separately
sells the desktop devices and telecommunication services. For items
that are not sold separately (e.g. additional features) the Company
estimates stand-alone selling prices using the adjusted market
assessment approach. 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.
Desktop Devices
– Revenue
generated from the sale of telecommunications equipment (desktop
devices) is recognized when the customer takes possession of the
devices and the cloud telecommunications services begin. The
Company typically bills and collects the fees for the equipment
upon entering into a contract with a customer. Cash receipts are
recorded as a contract liability until implementation is complete
and the services begin.
Equipment Financing
Revenue – 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.
Cloud Telecommunications
Services – Cloud
telecommunication services include voice, data, collaboration
software, broadband Internet access, and interest generated from
equipment financing revenue. The Company recognizes revenue as
services are provided in service revenue. Fees generated from
reselling broadband Internet access are recognized as revenue net
of the costs charged by the third-party service providers. Cloud
telecommunications services are billed and paid on a monthly basis.
Our telecommunications services contracts typically have a term of
thirty-six to sixty months.
Fees, Commissions, and Other,
Recognized over Time – Includes
contracted and non-contracted items such as:
●
Contracted
activation and flash fees – The Company generally allocates a
portion of the activation fees to the desktop devices, which is
recognized at the time of the installation or customer acceptance,
and a portion to the service, which is recognized over the contract
term using the straight-line method.
●
Non-contracted
carrier cost recovery fee – This fee recovers the various
costs and expenses that the Company incurs in connection with
complying with legal, regulatory, and other requirements, including
without limitation federal, state, and local reporting and filing
requirements. This fee is assessed as a set percentage of our
monthly billing and is recognized monthly.
●
Non-contracted
administrative fees – Administrative fees are recognized as
revenue on a monthly basis.
One-Time Fees, Commissions,
and Other – Includes
contracted and non-contracted items such as:
●
Contracted
professional service revenue – Professional service revenue
includes professional installation services, custom integration,
and other professional services. The Company typically bills and
collects professional service revenue upon entering into a contract
with a customer. Professional service revenue is recognized as
revenue when the performance obligations are
completed.
●
Non-contracted
cancellation fees – These cancellation fees relate to
remaining contractual term buyout payments in connection with early
cancellation and are billed and recognized as revenue upon
receipt.
●
Other
non-contracted fees – These fees include disconnect fees,
shipping fees, restocking fees, and porting fees. Other
non-contracted fees are recognized as revenue upon receipt of
payment.
Web Services Segment
Website Hosting Service
– Fees
generated from hosting customer websites are recognized as revenue
as the services are provided in service revenue. Website hosting
services are billed and collected on a monthly
basis.
Professional Website
Management Service and Other – Fees
generated from reselling professional website management services
are recognized as revenue net of the costs charged by the
third-party service providers. Professional website management
services are billed and paid on a monthly
basis.
12
Disaggregation of Revenue
In
the following table, revenue is disaggregated by primary major
product line, and timing of revenue recognition. The table also
includes a reconciliation of the disaggregated revenue with the
reportable segments.
Three Months Ended September 30, 2020
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
Telecommunications
Segment
|
Web
Services Segment
|
Total
Reportable Segments
|
Major products/services lines
|
|
|
|
Desktop
devices
|
$489
|
$-
|
$489
|
Equipment
financing revenue
|
59
|
-
|
59
|
Telecommunications
services
|
3,182
|
-
|
3,182
|
Fees,
commissions, and other, recognized over time
|
244
|
-
|
244
|
One
time fees, commissions and other
|
40
|
-
|
40
|
Website
hosting services
|
-
|
117
|
117
|
Website
management services and other
|
-
|
12
|
12
|
|
$4,014
|
$129
|
$4,143
|
Timing of revenue recognition
|
|
|
|
Products
and fees recognized at a point in time
|
$529
|
$-
|
$529
|
Services
and fees transferred over time
|
3,485
|
129
|
3,614
|
|
$4,014
|
$129
|
$4,143
|
Three Months Ended September 30, 2019
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
Telecommunications Segment
|
Web
Services Segment
|
Total
Reportable
Segments
|
Major products/services lines
|
|
|
|
Desktop
devices
|
$343
|
$-
|
$343
|
Equipment
financing revenue
|
30
|
-
|
30
|
Telecommunications
services
|
2,813
|
-
|
2,813
|
Fees,
commissions, and other, recognized over time
|
176
|
-
|
176
|
One
time fees, commissions and other
|
81
|
-
|
81
|
Website
hosting services
|
-
|
146
|
146
|
Website
management services and other
|
-
|
13
|
13
|
|
$3,443
|
$159
|
$3,602
|
Timing of revenue recognition
|
|
|
|
Products
and fees recognized at a point in time
|
$424
|
$-
|
$424
|
Services
and fees transferred over time
|
3,019
|
159
|
3,178
|
|
$3,443
|
$159
|
$3,602
|
13
Nine Months Ended September 30, 2020
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
Telecommunications
Segment
|
Web
Services Segment
|
Total
Reportable
Segments
|
Major products/services lines
|
|
|
|
Desktop
devices
|
$1,317
|
$-
|
$1,317
|
Equipment
financing revenue
|
156
|
-
|
156
|
Telecommunications
services
|
9,321
|
-
|
9,321
|
Fees,
commissions, and other, recognized over time
|
726
|
-
|
726
|
One
time fees, commissions and other
|
123
|
-
|
123
|
Website
hosting services
|
-
|
372
|
372
|
Website
management services and other
|
-
|
49
|
49
|
|
$11,643
|
$421
|
$12,064
|
Timing of revenue recognition
|
|
|
|
Products
and fees recognized at a point in time
|
$1,440
|
$-
|
$1,440
|
Services
and fees transferred over time
|
10,203
|
421
|
10,624
|
|
$11,643
|
$421
|
$12,064
|
Nine Months Ended September 30, 2019
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
Telecommunications
Segment
|
Web
Services Segment
|
Total
Reportable
Segments
|
Major products/services lines
|
|
|
|
Desktop
devices
|
$1,294
|
$-
|
$1,294
|
Equipment
financing revenue
|
79
|
-
|
79
|
Telecommunications
services
|
7,949
|
-
|
7,949
|
Fees,
commissions, and other, recognized over time
|
575
|
-
|
575
|
One
time fees, commissions and other
|
309
|
-
|
309
|
Website
hosting services
|
-
|
444
|
444
|
Website
management services and other
|
-
|
58
|
58
|
|
$10,206
|
$502
|
$10,708
|
Timing of revenue recognition
|
|
|
|
Products
and fees recognized at a point in time
|
$1,603
|
$-
|
$1,603
|
Services
and fees transferred over time
|
8,603
|
502
|
9,105
|
|
$10,206
|
$502
|
$10,708
|
14
Contract balances
The
following table provides information about receivables, contract
assets, and contract liabilities from contracts with
customers.
|
September
30,
|
December
31,
|
(In
thousands)
|
2020
|
2019
|
Receivables,
which are included in trade receivables, net of
allowance
|
|
|
for
doubtful accounts
|
$634
|
$386
|
Contract
assets
|
94
|
22
|
Contract
liabilities
|
1,233
|
1,214
|
Significant
changes in the contract assets and the contract liabilities
balances during the period are as follows:
|
Nine
Months Ended
|
For the
Year Ended
|
||
(In
thousands)
|
September
30, 2020
|
December
31, 2019
|
||
|
Contract
Assets
|
Contract
Liabilities
|
Contract
Assets
|
Contract
Liabilities
|
Revenue
recognized that was included in the contract liability balance at
the beginning of the period
|
$-
|
$(942)
|
$-
|
$(882)
|
Increase
due to cash received, excluding amounts recognized as revenue
during the period
|
-
|
923
|
-
|
1,033
|
Transferred
to receivables from contract assets recognized at the beginning of
the period
|
(12)
|
-
|
(13)
|
-
|
Increase
due to additional unamortized discounts
|
84
|
-
|
23
|
-
|
Transaction price allocated to the remaining performance
obligations
The
following table includes estimated revenue expected to be
recognized in the future related to performance obligations that
are unsatisfied (or partially unsatisfied) at the end of the
reporting period (in thousands):
|
2020
|
2021
|
2022
|
2023
|
2024
|
2025
|
Total
|
Desktop
devices
|
$304
|
-
|
-
|
-
|
-
|
-
|
$304
|
Telecommunications
service
|
$3,166
|
9,937
|
7,057
|
4,752
|
2,598
|
499
|
$28,009
|
All
consideration from contracts with customers is included in the
amounts presented above
|
|
|
|
|
|
|
|
3.
Earnings Per Common Share
Basic
net income per common share is computed by dividing the net income
for the period by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share
is computed giving effect to all dilutive common stock equivalents,
consisting of common stock options. The following table sets forth
the computation of basic and diluted net income per common
share:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
2020
|
2019
|
2020
|
2019
|
Net
income (in thousands) (A)
|
$131
|
$334
|
$779
|
$911
|
|
|
|
|
|
Weighted-average
share reconciliation:
|
|
|
|
|
Weighted-average
basic shares outstanding (B)
|
15,244,804
|
14,663,151
|
15,058,192
|
14,507,696
|
Dilutive
effect of stock-based awards
|
2,004,231
|
966,496
|
1,735,704
|
936,367
|
Diluted
weighted-average outstanding shares of common stock
(C)
|
17,249,035
|
15,629,647
|
16,793,896
|
15,444,063
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
Basic
(A/B)
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
Diluted
(A/C)
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
15
For
the three and nine months ended September 30, 2020 and 2019, the
following potentially dilutive common stock, including awards
granted under our equity incentive compensation plans, were
excluded from the computation of diluted net income per share
because including them would be anti-dilutive.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
2020
|
2019
|
2020
|
2019
|
Stock
options
|
18,685
|
1,271,559
|
91,845
|
1,662,311
|
4.
Acquisitions
DoubleHorn, LLC Asset Acquisition
On
December 31, 2019, the Company acquired certain assets from
DoubleHorn, LLC. The aggregate purchase price of approximately
$351,000 consisted of $176,000 of cash payable at closing and
$175,000 of contingent consideration it estimates will be paid
during the six month earn-out period. The Company concluded that
the DoubleHorn acquisition met the definition of an asset
acquisition under ASU 2017-01, "Clarifying the Definition of a
Business", and the cost was allocated to the individual assets
acquired and liabilities assumed based on their relative fair
values. The customer relationships intangible asset will be
amortized over a six year estimated useful life following the
pattern of the economic benefits.
During
the nine month period ended September 30, 2020, $54,000 of
contingent consideration was paid in cash and the Company
determined that the contingent consideration payable was $121,000
less than initially recorded and recognized a reduction in the cost
of the asset acquired. The following table presents the cost of the
acquisition and the allocation to assets acquired based upon their
relative fair value:
Consideration:
|
|
Cash
|
$230
|
Total
consideration
|
$230
|
|
|
Recognized amounts of identifiable assets acquired and liabilities
assumed:
|
|
Customer
relationships
|
$230
|
Net
assets acquired
|
$230
|
5.
Trade Receivables, net
Our
trade receivables balance consists of traditional trade
receivables. Below is an analysis of our trade
receivables as shown on our balance sheet (in
thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Gross
trade receivables
|
$684
|
$400
|
Less:
allowance for doubtful accounts
|
(50)
|
(14)
|
Trade
receivables, net
|
$634
|
$386
|
|
|
|
Current
trade receivables, net
|
$632
|
$380
|
Long-term
trade receivables, net
|
2
|
6
|
Trade
receivables, net
|
$634
|
$386
|
16
6.
Prepaid Expenses
Prepaid
expenses consisted of the following (in thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Prepaid
corporate insurance
|
$87
|
$48
|
Prepaid
software services and support
|
80
|
27
|
Prepaid
inventory deposits
|
90
|
-
|
Other
prepaid expenses
|
75
|
66
|
Total
prepaid expenses
|
$332
|
$141
|
7.
Property and Equipment
Property
and equipment consisted of the following (in
thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Building
|
$2,000
|
$-
|
Land
|
500
|
-
|
Computer
and office equipment
|
1,407
|
1,388
|
Computer
software
|
526
|
346
|
Internal
software
|
14
|
-
|
Furniture
and fixtures
|
29
|
-
|
Leasehold
improvements
|
-
|
85
|
Less:
accumulated depreciation
|
(1,704)
|
(1,664)
|
Total
property and equipment, net
|
$2,772
|
$155
|
Depreciation
and amortization expense is included in general and administrative
expenses and totaled $34,000 and $12,000 for the three months ended
September 30, 2020 and 2019, respectively and $128,000 and $29,000
for the nine months ended September 30, 2020 and 2019,
respectively.
8.
Intangible Assets
The net carrying amount of intangible assets are as follows (in
thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Customer
relationships
|
$1,171
|
$1,292
|
Less:
accumulated amortization
|
(896)
|
(827)
|
Total
|
$275
|
$465
|
Amortization
expense is included in general and administrative expenses and
totaled $23,000 and $13,000 for the three months ended September
30, 2020 and 2019, respectively, and $69,000 and $40,000 for the
nine months ended September 30, 2020 and 2019, respectively. During
the nine months ended September 30, 2020, we reduced customer
relationships by $121,000 due to an adjustment to the total
consideration payable under the DoubleHorn customer relationships
asset purchase agreement.
17
9.
Accrued Expenses
Accrued
expenses consisted of the following (in thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Accrued
wages and benefits
|
$384
|
$538
|
Accrued
accounts payable
|
607
|
566
|
Accrued
sales and telecommunication taxes
|
393
|
529
|
Product
warranty liability
|
47
|
37
|
Other
|
139
|
84
|
Total
accrued expenses
|
$1,570
|
$1,754
|
The
changes in aggregate product warranty liabilities for the year
ended December 31, 2019 and nine months ended September 30, 2020
were as follows (in thousands):
|
Warranty
Liabilities
|
Balance
at January 1, 2019
|
$16
|
Accrual
for warranties
|
37
|
Adjustments
related to pre-existing warranties
|
7
|
Warranty
settlements
|
(23)
|
Balance
at December 31, 2019
|
37
|
Accrual
for warranties
|
29
|
Warranty
settlements
|
(19)
|
Balance
at September 30, 2020
|
$47
|
Product
warranty expense is included in cost of product revenue expense and
totaled $11,000 and $4,000 for the three months ended September 30,
2020 and 2019, respectively, and $29,000 and $14,000 for the nine
months ended September 30, 2020 and 2019,
respectively.
10.
Notes Payable
Notes
payable consists of a short and long-term financing
arrangements:
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Notes
payable
|
$2,962
|
$-
|
Less:
current notes payable
|
(1,071)
|
-
|
Notes
payable, net of current portion
|
$1,891
|
$-
|
On
January 27, 2020, we entered into a Fixed Rate Term Loan Agreement
with Bank of America, N.A. to finance Two Million Dollars
($2,000,000) to purchase our corporate office building. The Loan
Agreement has a term of seven (7) years with monthly payments of
Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars
($11,841.15), including interest at 3.67%, beginning on March 1,
2020, secured by the office building.
On
April 21, 2020, we received a loan from Infinity Bank in the
aggregate principal amount of One Million, Six Hundred and
Twenty-Six Dollars ($1,000,626), pursuant to the Paycheck
Protection Program (the “PPP”) under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES
Act”), which was enacted March 27, 2020. The loan bears
interest at a rate of 1.00% per annum, payable monthly commencing
on November 21, 2020, following an initial deferral period as
specified under the PPP. The notes may be prepaid by the applicable
Borrower at any time prior to maturity with no prepayment
penalties. Proceeds from the loan will be available to fund
designated expenses, including certain payroll costs, group health
care benefits and other permitted expenses, in accordance with the
PPP. Under the terms of the PPP, up to the entire amount of
principal and accrued interest may be forgiven to the extent loan
proceeds are used for qualifying expenses as described in the CARES
Act and applicable implementing guidance issued by the U.S. Small
Business Administration under the PPP. The Company will use the
entire loan amount for designated qualifying expenses and believes
forgiveness will be granted of the respective loan in accordance
with the terms of the PPP.
18
As
of September 30, 2020, future principal payments are scheduled as
follows (in thousands):
Year ending December
31,
|
|
2020
remaining
|
$1,018
|
2021
|
71
|
2022
|
74
|
2023
|
76
|
2024
|
79
|
Thereafter
|
1,644
|
Total
|
$2,962
|
11.
Fair Value Measurements
We
have financial instruments as of September 30, 2020 and December
31, 2019 for which the fair value is summarized below (in
thousands):
|
September
30, 2020
|
December
31, 2019
|
||
|
Carrying
Value
|
Estimated
Fair Value
|
Carrying
Value
|
Estimated
Fair Value
|
Assets:
|
|
|
|
|
Trade
receivables, net
|
$634
|
$634
|
$386
|
$386
|
Equipment
financing receivables
|
1,099
|
1,099
|
704
|
704
|
Liabilities:
|
|
|
|
|
Finance
lease obligations
|
$94
|
$94
|
$116
|
$116
|
Notes
payable
|
2,962
|
2,962
|
-
|
-
|
Asset
acquisition contigent consideration
|
-
|
-
|
175
|
175
|
Liabilities
for which fair value is recognized in the balance sheet on a
recurring basis are summarized below as of September 30, 2020 and
December 31, 2019 (in thousands):
|
|
Fair
value measurement at reporting date
|
||
Description
|
As of
September 30,2020
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Asset
acquisition contingent consideration
|
$-
|
$-
|
$-
|
$-
|
Description
|
As of
December 31,2019
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Asset
acquisition contingent consideration
|
$175
|
$-
|
$-
|
$175
|
The
recurring Level 3 measurement of our asset acquisition contingent
consideration liability includes the following significant
unobservable inputs at December 31, 2019 (in
thousands):
Contingent
consideration liability
|
Fair
Value at December 31, 2019
|
Valuation
technique
|
Unobservable
inputs
|
Range
|
Revenue
- based payments
|
$175
|
Discounted
cash flow
|
Discount
Rate
|
3.67%
|
|
|
|
|
|
|
|
|
Probability
of milestone payment
|
100%
|
|
|
|
Projected
year of payments
|
2020
|
19
Level
3 instruments are valued based on unobservable inputs that are
supported by little or no market activity and reflect the
Company’s own assumptions in measuring fair value. Future
changes in fair value of the contingent financial milestone
consideration, as a result of changes in significant inputs such as
the discount rate and estimated probabilities of financial
milestone achievements, could have a material effect on the
statement of operations and balance sheet in the period of the
change.
During
the nine month period ended September 30, 2020, the Company reduced
the contingent consideration to be paid based on the completion of
the earn-out period by $121,000 and recognized a reduction in the
cost of the assets acquired. The progression of the Company’s
Level 3 instruments fair valued on a recurring basis for the nine
months ended September 30, 2020 and the year ended December 31,
2019 are shown in the table below (in thousands):
|
Asset
Acquisition Contingent Consideration
|
Balance
at January 1, 2019
|
$-
|
Additions
|
175
|
Balance
at December 31, 2019
|
$175
|
Cash
payments
|
(54)
|
Adjustment
|
(121)
|
Balance
at September 30, 2020
|
$-
|
12.
Income Taxes
Our
effective tax rate for the three months ended September 30, 2020
and 2019 was 2.2% and 0.1%, respectively, which resulted in an
income tax provision of $(3,000) and $0, respectively. Our
effective tax rate for the nine months ended September 30, 2020 and
2019 was 1.1% and 0.7%, respectively, which resulted in an income
tax provision of $(9,000) and $(7,000), respectively. The tax
provision is due to state tax payments made with extensions
filed.
Significant
management judgment is required in determining our provision for
income taxes and in determining whether deferred tax assets will be
realized in full or in part. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income in the periods in which those temporary differences become
deductible. We reduce the carrying amounts of deferred tax assets
by a valuation allowance if, based on the evidence available, it is
more-likely-than-not that such assets will not be realized. In
making the assessment under the more-likely-than-not standard,
appropriate consideration must be given to all positive and
negative evidence related to the realization of the deferred tax
assets. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts
of future profitability, the duration of statutory carry-forward
periods by jurisdiction, unitary versus stand-alone state tax
filings, our experience with loss carryforwards expiring
unutilized, and all tax planning alternatives that may be
available. Based on the significant negative evidence of cumulative
losses and history of loss carryforwards expiring unutilized, the
positive evidence of forecasts of future profitability was not
sufficient to overcome the negative evidence. As a result, we
determined it was more likely than not that the deferred tax assets
would not be realized as of September 30, 2020 and December 31,
2019; accordingly, we recorded a full valuation
allowance.
13.
Leases
Lessee Accounting
We
determine if an agreement is a lease at inception. We previously
leased our corporate office building and equipment under operating
leases. We lease data center equipment, including maintenance
contracts under finance leases.
Operating
leases are recorded as right-of-use (“ROU”) assets and
lease liabilities on the balance sheet. ROU assets represent our
right to use the leased asset for the lease term and lease
liabilities represent our obligation to make lease payments.
Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over
the lease term. As most of our leases do not provide an implicit
rate, we use our estimated incremental borrowing rate at the
commencement date to determine the present value of lease payments.
The operating lease ROU assets also include any lease payments made
and exclude lease incentives. The Company’s lease agreements
do not contain any variable lease payments, material residual value
guarantees or any restrictive covenants. Our lease terms may
include options, at our sole discretion, to extend or terminate the
lease. At the adoption date of ASC Topic 842, the Company was
reasonably certain that we would exercise our option to renew our
corporate office building operating lease. Lease expense is
recognized on a straight-line basis over the lease
term.
We
previously leased the corporate office building in Tempe, Arizona
from a Company that is owned by the major shareholder and CEO of
the Company. Effective March 1, 2017, the lease agreement was
renewed for a three year term with monthly rent payments of
$25,000. There was a renewal option for another three year term at
the end of the lease that was considered in valuing the ROU asset
as we were reasonably certain we would exercise the renewal option.
Amortization of the ROU assets and operating lease liabilities for
the three months ended September 30, 2020 and 2019 was $0 and
$59,000, respectively, and for the nine months ended September 30,
2020 and 2019 was $50,000 and $174,000, respectively. Rental
expense incurred on operating leases for the three months ended
September 30, 2020 and 2019 was approximately $0 and $75,000,
respectively, and for the nine months ended September 30, 2020 and
2019 was approximately $25,000 and $225,000,
respectively.
20
As
of December 31, 2019 we initiated the process to purchase the
corporate office building back from our lessor and gave notice that
we will not be exercising our option to renew for another three
year term. The ROU asset and associated lease liabilities were
revalued as of December 31, 2019 for the remaining two months of
the lease term. This resulted in an adjustment of approximately
$804,000 for the associated ROU, $250,000 for the operating lease
liability, current portion, and $554,000 for the operating lease
liability, net of current portion.
We
have lease agreements with lease and non-lease components, and we
account for the lease and non-lease components as a single lease
component. Our lease agreements do not contain any material
residual value guarantees or material restrictive covenants. The
Company leases equipment and support under a finance lease
agreement which extends through 2023. The outstanding balance for
finance leases was $94,000 and $116,000 as of September 30, 2020
and December 31, 2019, respectively. The Company recorded assets
classified as property and equipment under finance lease
obligations of $129,000 and $129,000 as of September 30, 2020 and
December 31, 2019, respectively. Related accumulated depreciation
totaled $60,000 and $34,000 as of September 30, 2020 and 2019,
respectively. The $25,000 support contract was classified as a
prepaid expense and is being amortized over the service period of 3
years. Amortization expense is included in general and
administrative expenses and totaled $2,000 and $2,000 for the three
months ended September 30, 2020 and 2019, respectively, and $6,000
and $6,000 for the nine months ended September 30, 2020 and 2019,
respectively. The interest rate on the finance lease obligation is
6.7% and interest expense was $2,000 and $1,000 for the three
months ended September 30, 2020 and 2019, respectively and $5,000
and $7,000 for the nine months ended September 30, 2020 and 2019,
respectively.
The
maturity of operating leases and finance lease liabilities as of
September 30, 2020 are as follows:
Year ending December
31,
|
Operating
Leases
|
Finance
Leases
|
2020
remaining
|
$-
|
$9
|
2021
|
1
|
36
|
2022
|
-
|
37
|
2023
|
-
|
21
|
Total
minimum lease payments
|
1
|
103
|
Less:
amount representing interest
|
-
|
(9)
|
Present
value of minimum lease payments
|
$1
|
$94
|
Lease term and discount
rate
|
September 30,
2020
|
Weighted-average remaining lease term (years)
|
|
Operating
leases
|
3.5
|
Finance
leases
|
2.8
|
Weighted-average discount rate
|
|
Operating
leases
|
6.7%
|
Finance
leases
|
6.7%
|
|
Nine Months Ended September
30,
2020
|
Cash paid for amounts included in the measurement of lease
liabilities:
|
|
Operating
cash flows from operating leases
|
$25
|
Operating
cash flows from finance leases
|
5
|
Financing
cash flows from finance leases
|
22
|
Lessor Accounting
Lessor
accounting remained substantially unchanged with the adoption of
ASC Topic 842. Crexendo offers its customers lease financing for
the lease of our cloud telecommunication equipment (IP or cloud
telephone desktop devices). We account for these transactions as
sales-type leases. 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 is recognized ratably over the applicable service
period.
21
Equipment
finance receivables arising from the rental of our cloud
telecommunications equipment through sales-type leases, were as
follows (in thousands):
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Gross
financing receivables
|
$1,650
|
$1,086
|
Less:
unearned income
|
(551)
|
(382)
|
Financing
receivables, net
|
1,099
|
|