# Crexendo, Inc. (CXDO) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Crexendo, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1075736/000165495422003516/cxdo_10k.htm
Accession: 0001654954-22-003516
Filing date: 2022-03-21
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CXDO/
All MD&A years: /company/CXDO/mda/
Next year: /company/CXDO/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR

 In addition to historical information, this Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in Item 1A. above and the risk factors set forth in this Annual Report. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The forward-looking statements made in this Annual Report are made as of the filing date of this Annual Report with the SEC, and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.

OVERVIEW

Crexendo, Inc. is an award-winning premier provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. The Company has two operating segments, which consist of Cloud Telecommunications Services and Software Solutions.

Cloud Telecommunications Services – Our cloud telecommunications services transmit calls using IP or cloud technology, which converts voice signals into digital data packets for transmission over the Internet or cloud. Each of our calling plans provides a number of basic features typically offered by traditional telephone service providers, plus a wide range of enhanced features that we believe offer an attractive value proposition to our customers. This platform enables a user, via a single “identity” or telephone number, to access and utilize services and features regardless of how the user is connected to the Internet or cloud, whether it’s from a desktop device or an application on a mobile device.

We generate recurring revenue from our cloud telecommunications and broadband Internet services. Our cloud telecommunications contracts typically have a thirty-six to sixty month term. We may also charge activation and flash fees and 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. We also charge other various contracted and non-contracted fees.

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 18% or $2,558,000 to $17,102,000 for the year ended December 31, 2021 as compared to $14,544,000 for the year ended December 31, 2020. Our Cloud Telecommunications product revenue increased 26% or $481,000 to $2,324,000 for the year ended December 31, 2021 as compared to $1,843,000 for the year ended December 31, 2020.

Software Solutions – Our software solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. 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 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 software licenses and professional 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.

We generate software license revenue from the sale of perpetual software licenses, term-based software licenses that expire, and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

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We generate subscription and maintenance support revenue from customer support and other supportive services. The Company offers warranties on its products. The warranty period for our licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

We generate professional services and other revenue from consulting, technical support, resident engineer services, design services and installation services. Revenue for professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

Our Software Solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

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)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Consolidated","","2021","","","2020"],["Service revenue","","$","17,102","","","$","14,544"],["Software solutions revenue","","","8,666","","","","-"],["Product revenue","","","2,324","","","","1,843"],["Total revenue","","","28,092","","","","16,387"],["Income/(loss) before income taxes","","","(2,910",")","","","1,899"],["Income tax benefit","","","465","","","","6,041"],["Net income/(loss)","","","(2,445",")","","","7,940"],["Basic earnings per common share","","$","(0.12",")","","$","0.50"],["Diluted earnings per common share","","$","(0.12",")","","$","0.46"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the three months ended"],["","","March 31,","","","June 30,","","","September 30,","","","December 31,"],["Consolidated","","2021","","","2021","","","2021","","","2021"],["Service revenue","","$","4,139","","","$","4,327","","","$","4,325","","","$","4,311"],["Software solutions revenue","","","-","","","","1,012","","","","3,784","","","","3,870"],["Product revenue","","","368","","","","440","","","","701","","","","815"],["Total revenue","","","4,507","","","","5,779","","","","8,810","","","","8,996"],["Income/(loss) before income taxes","","","(839",")","","","(1,263",")","","","12","","","","(820",")"],["Income tax benefit/(provision)","","","124","","","","260","","","","(137",")","","","218"],["Net loss","","","(715",")","","","(1,003",")","","","(125",")","","","(602",")"],["Basic earnings per common share (1)","","$","(0.04",")","","$","(0.05",")","","$","(0.01",")","","$","(0.03",")"],["Diluted earnings per common share (1)","","$","(0.04",")","","$","(0.05",")","","$","(0.01",")","","$","(0.03",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["29"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the three months ended"],["","","March 31,","","","June 30,","","","September 30,","","","December 31,"],["Consolidated","","2020","","","2020","","","2020","","","2020"],["Service revenue","","$","3,488","","","$","3,605","","","$","3,654","","","$","3,797"],["Product revenue","","","379","","","","449","","","","489","","","","526"],["Total revenue","","","3,867","","","","4,054","","","","4,143","","","","4,323"],["Income before income taxes","","","143","","","","511","","","","134","","","","1,111"],["Income tax benefit/(provision)","","","(3",")","","","(3",")","","","(3",")","","","6,050"],["Net income","","","140","","","","508","","","","131","","","","7,161"],["Basic earnings per common share (1)","","$","0.01","","","$","0.03","","","$","0.01","","","$","0.40"],["Diluted earnings per common share (1)","","$","0.01","","","$","0.03","","","$","0.01","","","$","0.37"]]
[[/GREPCENT_TABLE]]

__________

(1) Earnings per common share is computed independently for each of the quarters presented. Therefore, the sums of quarterly earnings per common share amounts do not necessarily equal the total for the twelve month periods presented.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Total Revenue

Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Total revenue","","$","28,092","","","$","16,387","","","$","11,705","","","","71","%"]]
[[/GREPCENT_TABLE]]

The increase in total revenue for the year is mainly driven by a $8,666,000 contribution from our software solutions segment resulting from the June 1, 2021 acquisition of NetSapiens, Inc., an increase in service revenue of $2,558,000, and an increase in product revenue of $481,000.

Income Before Income Taxes

The following table reflects our income/(loss) before income taxes for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Income/(loss) before income taxes","","$","(2,910",")","","$","1,899","","","$","(4,809",")","","","-253","%"]]
[[/GREPCENT_TABLE]]

The decrease in income before income tax is primarily due to an increase in operating expenses of $15,506,000, offset by an increase in revenue of $11,705,000 and a decrease in interest expense and other expense of $1,008,000. The increase in operating expenses is primarily related to increases in salaries and benefits, stock compensation expense and acquisition related expenses. During the year ended December 31, 2021 the Company recognized $1,037,000 in one-time acquisition related expenses associated with the NetSapiens and Centric Telecom business acquisitions.

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[["30"],["Table of Contents"]]
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Income Tax Benefit/(Provision)

The following table reflects our income tax benefit/(provision) for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Income tax benefit","","$","465","","","$","6,041","","","$","(5,576",")","","","-92","%"]]
[[/GREPCENT_TABLE]]

We had pre-tax income/(loss) for the year ended December 31, 2021 and 2020 of $(2,910,000) and $1,899,000, respectively. For the year ended December 31, 2021, we recorded additional valuation allowance of $1,437,000 and for the year ended December 31, 2020, we recorded a valuation allowance release of $7,487,000.

Use of Non-GAAP Financial Measures

 To evaluate our business, we consider and use non-generally accepted accounting principles (“Non-GAAP”) net income 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 to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation, acquisition related expenses, changes in fair value of contingent consideration 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 acquisition related expenses, changes in fair value of contingent consideration and share-based compensation. 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 21, 2022 earnings press release, as furnished on Form 8-K, we included Non-GAAP net income, EBITDA and Adjusted EBITDA. The terms Non-GAAP net income, 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 income, EBITDA, and Adjusted EBITDA should not be considered in isolation, or as a substitute for net income/(loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:

[[GREPCENT_TABLE]]
[["","\u00b7","EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;"],["","\u00b7","they do not reflect changes in, or cash requirements for, our working capital needs;"],["","\u00b7","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;"],["","\u00b7","they do not reflect income taxes or the cash requirements for any tax payments;"],["","\u00b7","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;"],["","\u00b7","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"],["","\u00b7","other companies may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures."]]
[[/GREPCENT_TABLE]]

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income, EBITDA, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income, 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.

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[["31"],["Table of Contents"]]
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Reconciliation of U.S. GAAP Net Income to Non-GAAP Net Income

(Unaudited)

[[GREPCENT_TABLE]]
[["","","Three Months Ended December 31,","","","Year Ended December 31,"],["","","2021","","","2020","","","2021","","","2020"],["","","(In thousands)","","","(In thousands)"],["U.S. GAAP net income/(loss)","","$","(602",")","","$","7,161","","","$","(2,445",")","","$","7,940"],["Share-based compensation","","","478","","","","246","","","","1,628","","","","623"],["Acquisition related expenses","","","(28",")","","","-","","","","1,037","","","","-"],["Change in fair value of contigent consideration","","","126","","","","-","","","","126","","","","-"],["Amortization of intangible assets","","","618","","","","23","","","","1,391","","","","92"],["Non-GAAP net income","","$","592","","","$","7,430","","","$","1,737","","","$","8,655"],["Non-GAAP net income per common share:"],["Basic","","$","0.03","","","$","0.42","","","$","0.09","","","$","0.55"],["Diluted","","$","0.02","","","$","0.39","","","$","0.07","","","$","0.50"],["Weighted-average common shares outstanding:"],["Basic","","","21,792,137","","","","17,877,481","","","","20,275,691","","","","15,767,874"],["Diluted","","","26,068,825","","","","19,251,448","","","","23,408,162","","","","17,420,476"]]
[[/GREPCENT_TABLE]]

 Reconciliation of U.S. GAAP Net Income to EBITDA to Adjusted EBITDA

(Unaudited)

[[GREPCENT_TABLE]]
[["","","Three Months Ended December 31,","","","Year Ended December 31,"],["","","2021","","","2020","","","2021","","","2020"],["","","(In thousands)","","","(In thousands)"],["U.S. GAAP net income/(loss)","","$","(602",")","","$","7,161","","","$","(2,445",")","","$","7,940"],["Depreciation and amortization","","","695","","","","61","","","","1,626","","","","258"],["Interest expense","","","20","","","","22","","","","84","","","","76"],["Interest and other expense/(income)","","","3","","","","(1,009",")","","","16","","","","(984",")"],["Income tax provision/(benefit)","","","(218",")","","","(6,050",")","","","(465",")","","","(6,041",")"],["EBITDA","","","(102",")","","","185","","","","(1,184",")","","","1,249"],["Acquisition related expenses","","","(28",")","","","-","","","","1,037","","","","-"],["Change in fair value of contingent consideration","","","126","","","","-","","","","126","","","","-"],["Share-based compensation","","","478","","","","246","","","","1,628","","","","623"],["Adjusted EBITDA","","$","474","","","$","431","","","$","1,607","","","$","1,872"]]
[[/GREPCENT_TABLE]]

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.

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.

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 products and 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. Professional services revenue includes activation fees and any professional installation services. Installation services are recognized as revenue when the services are completed. 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. Our telecommunications services contracts typically have a term of thirty-six to sixty months. 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.

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[[/GREPCENT_TABLE]]

Goodwill

We have recorded goodwill related to various business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The estimated fair value of the reporting unit is determined using our market capitalization as of our annual impairment assessment date or more frequently if circumstances indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to: sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors; and decline in overall market or economic conditions leading to a decline in our stock price.

Intangible Assets

Our intangible assets consist of customer relationships, developed technologies, trademark and trade names. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. 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.

Deferred Taxes

Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect during the years in which the differences are expected to reverse or the carryforwards are expected to be realized.

We currently have net deferred tax assets consisting of net operating loss carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. As a result of our recent three years of cumulative pretax income and the weight of all other positive and negative evidence, management determined that it is more likely than not that we will be able to realize $8,883,000 of our deferred tax assets. We released $7,487,000 of our valuation allowance at December 31, 2020. Forecasts and projections of future pretax income are inherently subjective and require management to make assumption or complex judgments about matters that are inherently uncertain.

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 Liabilities

Contingent liabilities require significant judgment in estimating potential payouts. Contingent considerations arising from business combinations and asset acquisitions 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 are reviewed each reporting period to establish the fair value of the contingent liability.

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[["33"],["Table of Contents"]]
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Share-Based Compensation

We account for our share-based compensation awards using the fair-value method. The grant date fair value was determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires us to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. Our expected volatility is derived from our volatility rate as a publicly traded company. The expected term is based on our historical experience. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. For the years ended December 31, 2021 and 2020, no dividends were declared or paid, therefore we have assumed a 0% dividend yield. In February 2022, we declared and paid a quarterly cash dividend of $0.005 per common share, therefore we will assume a dividend yield in future periods.

We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. We will continue to use judgment in evaluating the expected term, volatility, and forfeiture rate related to our own share-based awards on a prospective basis, and in incorporating these factors into the model. If our actual experience differs significantly from the assumptions used to compute our share-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little share-based compensation cost.

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 Services and Software Solutions. The information below is organized in accordance with our two reportable segments. Segment operating income is equal to segment net revenue less segment cost of service revenue, cost of software solution revenue, cost of product revenue, sales and marketing, research and development, and general and administrative expenses.

Operating Results of our Cloud Telecommunications Services Segment (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["34"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Quarterly Financial Information

[[GREPCENT_TABLE]]
[["","","For the three months ended"],["","","March 31,","","","June 30,","","","September 30,","","","December 31,"],["Cloud Telecommunications Services","","2021","","","2021","","","2021","","","","2021"],["Service revenue","","$","4,139","","","$","4,327","","","$","4,325","","","$","4,311"],["Product revenue","","","368","","","","440","","","","701","","","","815"],["Total revenue","","","4,507","","","","4,767","","","","5,026","","","","5,126"],["Operating expenses:"],["Cost of service revenue","","","1,259","","","","1,347","","","","1,210","","","","1,288"],["Cost of product revenue","","","225","","","","286","","","","461","","","","553"],["Selling and marketing","","","1,279","","","","1,508","","","","1,487","","","","1,641"],["General and administrative","","","2,216","","","","2,167","","","","1,763","","","","1,983"],["Research and development","","","350","","","","388","","","","358","","","","300"],["Total operating expenses","","","5,329","","","","5,696","","","","5,279","","","","5,765"],["Operating loss","","","(822",")","","","(929",")","","","(253",")","","","(639",")"],["Other expense","","","(17",")","","","(19",")","","","(22",")","","","(12",")"],["Loss before tax benefit/(provision)","","$","(839",")","","$","(948",")","","$","(275",")","","$","(651",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the three months ended"],["","","March 31,","","","June 30,","","","September 30,","","","December 31,"],["Cloud Telecommunications Services","","2020","","","2020","","","2020","","","","2020"],["Service revenue","","$","3,488","","","$","3,605","","","$","3,654","","","$","3,797"],["Product revenue","","","379","","","","449","","","","489","","","","526"],["Total revenue","","","3,867","","","","4,054","","","","4,143","","","","4,323"],["Operating expenses:"],["Cost of service revenue","","","970","","","","908","","","","946","","","","1,013"],["Cost of product revenue","","","220","","","","263","","","","314","","","","313"],["Selling and marketing","","","1,038","","","","1,062","","","","1,051","","","","1,002"],["General and administrative","","","1,188","","","","1,046","","","","1,351","","","","1,522"],["Research and development","","","270","","","","244","","","","326","","","","349"],["Total operating expenses","","","3,686","","","","3,523","","","","3,988","","","","4,199"],["Operating income","","","181","","","","531","","","","155","","","","124"],["Other income/(expense)","","","(38",")","","","(20",")","","","(21",")","","","987"],["Income before tax benefit/(provision)","","$","143","","","$","511","","","$","134","","","$","1,111"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Service Revenue

Cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services, professional services, interest from sales-type leases, reselling broadband Internet services, administrative fees, website hosting, and web management services. The following table reflects our service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Service revenue","","$","17,102","","","$","14,544","","","$","2,558","","","","18","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["35"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

The increase in service revenue is due to an increase in telecommunications services of $2,170,000, an increase in fees, commissions, and other, recognized over time of $196,000, an increase in one time fees, commissions and other of $149,000, and an increase in sales-type lease interest of $43,000. A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts.

Product Revenue

Product revenue consists primarily of fees collected from the sale of desktop phone devices and third-party equipment. The following table reflects our product revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Product revenue","","$","2,324","","","$","1,843","","","$","481","","","","26","%"]]
[[/GREPCENT_TABLE]]

Product revenue fluctuates from one period to the next based on timing of installations. Our typical customer installation is complete within 30-60 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. Additionally, product revenue can fluctuate due to the allocation of discounts or sales promotions across the performance obligations.

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of December 31, 2021 and 2020. Backlog increased 6%, or $1,610,000 to $30,189,000 as of December 31, 2021 as compared to $28,579,000 as of December 31, 2020. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of December 31, 2021 and 2020, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

[[GREPCENT_TABLE]]
[["Cloud Telecommunications Services backlog as of December 31, 2021","","$","30,189"],["Cloud Telecommunications Services backlog as of December 31, 2020","","$","28,579"]]
[[/GREPCENT_TABLE]]

Cost of Service Revenue

Cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers, broadband Internet providers, software providers, costs related to installations, customer support salaries and benefits, and share-based compensation. The following table reflects our cost of service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Cost of service revenue","","$","5,104","","","$","3,837","","","$","1,267","","","","33","%"]]
[[/GREPCENT_TABLE]]

The increase in cost of service revenue was primarily due to an increase in salaries, wages and benefits of $947,000 as a result of an increase in customer support and implementation specialist headcount, an increase in bandwidth costs of $119,000, an increase in professional consulting services of $105,000, an increase in credit card processing fees of $51,000, an increase in fees directly related to the implementation of the new Crexendo VIP platform of $27,000, and an increase in other cost of service revenue of $18,000.

[[GREPCENT_TABLE]]
[["36"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Cost of Product Revenue

Cost of product revenue consists of the costs associated with desktop phone devices and third-party equipment. The following table reflects our cost of product revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Cost of product revenue","","$","1,525","","","$","1,110","","","$","415","","","","37","%"]]
[[/GREPCENT_TABLE]]

The increase is primarily related to the increase in product revenue and an increase in device costs.

Selling and Marketing

Selling and marketing expenses consist primarily of direct and channel sales representative salaries and benefits, share-based compensation, partner channel commissions, amortization of costs to acquire contracts, travel expenses, lead generation services, trade shows, internal and third-party marketing costs, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Selling and marketing","","$","5,915","","","$","4,153","","","$","1,762","","","","42","%"]]
[[/GREPCENT_TABLE]]

The increase in selling and marketing expense is due to an increase in salaries, wages and benefits of $1,041,000 related to expansion of our sales team and the addition of our chief revenue officer, an increase in commission expense of $346,000 directly related to the increase in revenue, an increase of $147,000 in amortization expense directly related to the Centric Telecom business acquisition customer relationships intangible asset, an increase in travel related costs and tradeshows of $86,000, an increase in sales leads and marketing material fees of $74,000, we incurred $55,000 in marketing related expenses for the rollout of our new Crexendo VIP platform, and an increase in $13,000 of other sales and marketing expense.

General and Administrative

General and administrative expenses consist of salaries, benefits and stock compensation for executives, administrative personnel, legal, rent, equipment, accounting and other professional services, investor relations, depreciation, amortization of intangibles, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["General and administrative","","$","8,129","","","$","5,107","","","$","3,022","","","","59","%"]]
[[/GREPCENT_TABLE]]

The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages and benefits of $1,385,000 as a result of an increase in headcount, increase in stock compensation, and company-wide salary increases. We incurred $1,028,000 in acquisition related legal, accounting, and other professional services in connection with the NetSapiens acquisition. We invested $183,000 in costs related to maintaining and improving our data center, which includes outside consulting fees, new hardware and software licenses along with the associated depreciation, costs related to our disaster recovery failover solution, and other costs. We incurred $144,000 in costs related to the research and implementation of a new billing platform. There was an increase in the contingent consideration expense associated with the change in fair value of contingent consideration related to the earn-out for the Centric Telecom acquisition of $126,000. There was an increase in corporate insurance costs of $77,000, an increase in rent expense of $43,000, an increase in bank processing fees of $43,000, and an increase in other general and administrative expenses of $43,000, offset by a decrease in stock exchange listing fees of $50,000.

Research and Development

Research and development expenses primarily consist of salaries and benefits, share-based compensation, and outsourced engineering services related to the development of new cloud telecommunications features and products. The following table reflects our research and development expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Research and development","","$","1,396","","","$","1,189","","","$","207","","","","17","%"]]
[[/GREPCENT_TABLE]]

The increase in research and development expenses is due to an increase in salaries, wages and benefits of $188,000 as a result of an increase in headcount as we continue to invest in our solution. We also incurred increased costs for maintenance on our mobile applications and other development costs of $20,000.

[[GREPCENT_TABLE]]
[["37"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Other Income/(Expense)

Other expense primarily relates to interest expense and net foreign exchange gains or losses, offset by credit card cash back rewards. The following table reflects our other expense for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Other income/(expense)","","$","(70",")","","$","908","","","$","(978",")","","","-108","%"]]
[[/GREPCENT_TABLE]]

The decrease in other income is primarily related to the forgiveness of our PPP loan in 2020 of $1.0 million.

Operating Results of our Software Solutions Segment (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Software Solutions","","2021","","","2020"],["Software solutions revenue","","$","8,666","","","$","-"],["Operating expenses:"],["Cost of software solutions revenue","","","4,031","","","","-"],["Selling and marketing","","","2,345"],["General and administrative","","","2,457","","","","-"],["Research and development","","","-","","","","-"],["Total operating expenses","","","8,833","","","","-"],["Operating loss","","","(167",")","","","-"],["Other expense","","","(30",")","","","-"],["Loss before tax benefit","","$","(197",")","","$","-"]]
[[/GREPCENT_TABLE]]

Quarterly Financial Information

[[GREPCENT_TABLE]]
[["","","For the three months ended"],["","","March 31,","","","June 30,","","","September 30,","","","December 31,"],["Software Solutions","","2021","","","2021","","","2021","","","","2021"],["Software solutions revenue","","$","-","","","$","1,012","","","$","3,784","","","$","3,870"],["Operating expenses:"],["Cost of software solutions revenue","","","-","","","","526","","","","1,675","","","","1,830"],["Selling and marketing","","","-","","","","389","","","","798","","","","1,158"],["General and administrative","","","-","","","","412","","","","1,005","","","","1,040"],["Research and development","","","-","","","","-","","","","-","","","","-"],["Total operating expenses","","","-","","","","1,327","","","","3,478","","","","4,028"],["Operating income/(loss)","","","-","","","","(315",")","","","306","","","","(158",")"],["Other expense","","","-","","","","-","","","","(19",")","","","(11",")"],["Income/(loss) before tax benefit/(provision)","","$","-","","","$","(315",")","","$","287","","","$","(169",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["38"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Software Solutions Revenue

Software solutions revenue consists primarily of software license fees, subscription maintenance and support, and professional services. Software licenses are billed by the number of concurrent sessions a Partner has purchased or subscribes to. Subscription maintenance and support is ongoing and provides for software updates and improvements, support for add-on modules, bug fix, and other general maintenance items. Professional services and other revenues consist of professional services such as the installation of software and integration of other modules, training and implementation as well as custom mobile branding. The following table reflects our service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Software solutions revenue","","$","8,666","","","$","-","","","$","8,666","","","$","-"]]
[[/GREPCENT_TABLE]]

Software solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

Cost of Software Solutions Revenue

Cost of software solutions revenue consists primarily of salaries and benefits, amortization expense related to the technology, cost of Data Center hosting, third-party software modules and outsourced services required to install and support software solutions. The following table reflects our cost of service revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Cost of software solutions revenue","","$","4,031","","","$","-","","","$","4,031","","","$","-"]]
[[/GREPCENT_TABLE]]

Cost of software solutions revenue is included in the results of operations from the acquisition date of June 1, 2021.

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of December 31, 2021 and 2020. Backlog increased 100%, or $11,528,000 to $11,528,000 as of December 31, 2021 as compared to $0 as of December 31, 2020. Below is a table which displays the Software Solutions segment revenue backlog as of December 31, 2021 and 2020, which we expect to recognize as revenue within the next thirty-six months (in thousands):

[[GREPCENT_TABLE]]
[["Software Solutions backlog as of December 31, 2021","","$","11,528"],["Software Solutions backlog as of December 31, 2020","","$","-"]]
[[/GREPCENT_TABLE]]

Selling and Marketing

Selling and marketing expenses consist primarily of sales and marketing salaries and benefits, commissions, share-based compensation, travel expenses, lead generation services, trade shows, third-party marketing services, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Selling and marketing","","$","2,345","","","$","-","","","$","2,345","","","$","-"]]
[[/GREPCENT_TABLE]]

Selling and marketing expense is included in the results of operations from the acquisition date of June 1, 2021.

General and Administrative

General and administrative expenses consist of salaries and benefits for executives, administrative personnel, amortization of intangible asset related to customer lists, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["General and administrative","","$","2,457","","","$","-","","","$","2,457","","","$","-"]]
[[/GREPCENT_TABLE]]

General and administrative expense is included in the results of operations from the acquisition date of June 1, 2021.

[[GREPCENT_TABLE]]
[["39"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We finance our operations primarily through services, software solutions, and product sales to our customers. As of December 31, 2021 and 2020, we had cash and cash equivalents of $7,468,000 and $17,579,000, respectively. Changes in cash and cash equivalents are dependent upon changes in, among other things, working capital items such as contract liabilities, contract costs, accounts payable, accounts receivable, prepaid expenses, and various accrued expenses, as well as purchases of property and equipment, asset acquisitions, business combinations, and changes in our capital and financial structure due to debt repayments and issuances, stock option exercises, sales of equity investments and similar events. We believe that our operations along with existing liquidity sources will satisfy our cash requirements for at least the next 12 months.

During the year ended December 31, 2020, the Company completed a public offering in which it issued and sold 2,170,000 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 $11,935,000 and net proceeds to the Company were $10,771,000 after deducting underwriting discounts and commissions. The Company intends to utilize the proceeds to fund acquisitions.

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period.

On June 1, 2021, the Company closed the Merger with NetSapiens, Inc. The transaction was valued at approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

Operating Activities

Cash provided by or used in operating activities is driven by our net loss, the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business. The following table reflects our net cash provided by/(used in) operating activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Net cash provided by/(used in) operating activities","","$","(1,006",")","","$","647","","","$","(1,653",")","","","-255","%"]]
[[/GREPCENT_TABLE]]

The net cash used for operations was primarily driven by our net loss for the year ended December 31, 2021 of $(2,664,000), of which $1,037,000 is associated with acquisition related expenses for the Centric Telecom and NetSapiens business acquisitions, an increase in prepaid expenses, an increase in income tax receivable, and a decrease in contract liabilities.

Investing Activities

Cash provided by or used in investing activities is driven by the purchase of property and equipment, business combinations, and asset acquisitions. The following table reflects our net cash provided by/(used in) investing activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Net cash used in investing activities","","$","(9,867",")","","$","(921",")","","$","(8,946",")","","","971","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["40"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of contingent consideration, which was paid out after the earn-out period was over in the fourth quarter of 2021. On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two Million end users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

For the year ended December 31, 2020, net cash used in investing activities related to cash used for capital expenditures, primarily for the cash portion of the purchase of the Company’s corporate office building of $500,000. The remaining $2,000,000 of the purchase price was financed through a note payable with a bank. The Company also paid $176,000 under the DoubleHorn customer relationships asset purchase agreement during the year ended December 31, 2020.

Financing Activities

Cash provided by or used in financing activities is driven by the proceeds from the exercise of options, taxes paid on the net settlement of stock options and RSUs, payment of contingent consideration, proceeds from finance leases and notes payable, repayments made on finance leases and notes payable, and proceeds from the issuance of common stock in connection with an offering. The following table reflects our net cash provided by financing activities for the year ended December 31, 2021, compared to the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020","","","Dollar Change","","","Percent Change"],["Net cash provided by financing activities","","$","650","","","$","13,673","","","$","(13,023",")","","","-95","%"]]
[[/GREPCENT_TABLE]]

Net cash provided by financing activities in the year ended December 31, 2021, primarily relates to cash proceeds from the exercise of stock options of $1,729,000 offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of $163,000, and contingent consideration payment of $746,000 related to the Centric business acquisition. Net cash provided by financing activities in the nine months ended September 30, 2020, primarily relates to $8,778,000 of proceeds from the issuance of common stock in connection with an offering and $1,001,000 of cash received pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The loan was forgiven in December 2020. We also received cash from the exercise of stock options of $2,043,000.

OFF BALANCE SHEET ARRANGEMENTS

As of December 31, 2021, 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

 On January 27, 2020, the Company entered into an agreement to purchase our corporate office building located at 1615 S 52nd St, Tempe, AZ 85281 from a Company that is owned by the major shareholder and CEO of the Company for $2,500,000. The fair value of the building was established by an independent appraisal.

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.

[[GREPCENT_TABLE]]
[["41"],["Table of Contents"]]
[[/GREPCENT_TABLE]]