SEC Info - Crexendo, Inc. - ‘10-Q’ for 9/30/22

Page	(sequential)		(alphabetic)	↑Top
		Alternative Formats (Word, et al.) Controls and Procedures Exhibits Financial Information Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Other Information Part I -- Financial Information Part Ii -- Other Information Quantitative and Qualitative Disclosures about Market Risk Risk Factors Signatures Table of Contents Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Table of Contents
"	Part I -- Financial Information
"	Item 1. Financial Statements
"	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Item 3. Quantitative and Qualitative Disclosures about Market Risk
"	Item 4. Controls and Procedures
"	Part Ii -- Other Information
"	Item 1. Legal Proceedings
"	Item 1A. Risk Factors
"	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
"	Item 6. Exhibits
"	Signatures

i 0001075736 i false i --12-31 i Q3 i 2022 i 0.001 i 5000000 i 0 i 0 i 0.001 i 50000000 i 22686911 i 22054239 i 0 i 0 i 0 i 0 i 37000 i 34000 i 51000 i 0 i 0 i 0 i 0 i 0 i 000010757362022-01-012022-09-3000010757362022-10-252022-11-0100010757362022-10-1700010757362022-10-012022-10-1700010757362022-11-010001075736cxdo:SoftwareSolutionsMember2021-01-012021-09-300001075736cxdo:SoftwareSolutionsMember2021-07-012021-09-300001075736cxdo:SoftwareSolutionsMember2022-07-012022-09-300001075736cxdo:SoftwareSolutionsMember2022-01-012022-09-300001075736cxdo:HostedTelecommunicationsServicesMember2021-01-012021-09-300001075736cxdo:HostedTelecommunicationsServicesMember2021-07-012021-09-300001075736cxdo:HostedTelecommunicationsServicesMember2022-07-012022-09-300001075736cxdo:HostedTelecommunicationsServicesMember2022-01-012022-09-300001075736cxdo:CloudTelecommunicationsServicewoMember2021-01-012021-09-300001075736cxdo:CloudTelecommunicationsServicewoMember2021-07-012021-09-300001075736cxdo:CloudTelecommunicationsServicewoMember2022-07-012022-09-300001075736cxdo:CloudTelecommunicationsServicewoMember2022-01-012022-09-300001075736cxdo:CloudTelecommunicationsServiceOneMember2021-01-012021-09-300001075736cxdo:CloudTelecommunicationsServiceOneMember2021-07-012021-09-300001075736cxdo:CloudTelecommunicationsServiceOneMember2022-07-012022-09-300001075736cxdo:CloudTelecommunicationsServiceOneMember2022-01-012022-09-300001075736cxdo:BonusPlanMember2022-10-012022-12-310001075736cxdo:BonusPlanMember2022-01-012022-09-300001075736cxdo:BonusPlanMember2022-09-300001075736cxdo:CaliforniasMember2021-07-012021-09-300001075736cxdo:CaliforniasMember2021-01-012021-09-300001075736cxdo:CaliforniasMember2022-07-012022-09-300001075736cxdo:CaliforniasMember2022-01-012022-09-300001075736cxdo:NonCancelableOperatingLeaseAgreementMember2021-07-012021-09-300001075736cxdo:NonCancelableOperatingLeaseAgreementMember2021-01-012021-09-300001075736cxdo:NonCancelableOperatingLeaseAgreementMember2022-07-012022-09-300001075736cxdo:NonCancelableOperatingLeaseAgreementMember2022-01-012022-09-300001075736cxdo:VirginiasMember2021-07-012021-09-300001075736cxdo:VirginiasMember2021-01-012021-09-300001075736cxdo:VirginiasMember2022-07-012022-09-300001075736cxdo:VirginiasMember2022-01-012022-09-3000010757362021-01-310001075736cxdo:EstimateOfFairValueFairValueDisclosuresMember2021-12-310001075736cxdo:EstimateOfFairValueFairValueDisclosuresMember2022-09-300001075736cxdo:CarryingReportedAmountsFairValueDisclosureMember2021-12-310001075736cxdo:CarryingReportedAmountsFairValueDisclosureMember2022-09-3000010757362021-01-012021-12-3100010757362019-12-310001075736cxdo:TrademarkAndTradeNamesMember2021-12-310001075736cxdo:TotalacquiredintangibleassetsMember2021-12-310001075736cxdo:TotalacquiredintangibleassetsMember2022-09-300001075736cxdo:TrademarkAndTradeNamesMember2022-09-300001075736cxdo:DevelopedTechnologiesMember2021-12-310001075736cxdo:DevelopedTechnologiesMember2022-09-300001075736us-gaap:CustomerRelationshipsMember2021-12-310001075736us-gaap:CustomerRelationshipsMember2022-09-300001075736us-gaap:BuildingImprovementsMember2021-12-310001075736us-gaap:BuildingImprovementsMember2022-09-300001075736us-gaap:LeaseholdImprovementsMember2021-12-310001075736us-gaap:LeaseholdImprovementsMember2022-09-300001075736us-gaap:VehiclesMember2021-12-310001075736us-gaap:VehiclesMember2022-09-300001075736us-gaap:FurnitureAndFixturesMember2021-12-310001075736us-gaap:FurnitureAndFixturesMember2022-09-300001075736cxdo:InternalUseComputerSoftwareMember2021-12-310001075736cxdo:InternalUseComputerSoftwareMember2022-09-300001075736cxdo:ComputerSoftwareIntangibleAssetsMember2021-12-310001075736cxdo:ComputerSoftwareIntangibleAssetsMember2022-09-300001075736us-gaap:OfficeEquipmentMember2021-12-310001075736us-gaap:OfficeEquipmentMember2022-09-300001075736cxdo:LandsMember2021-12-310001075736cxdo:LandsMember2022-09-300001075736us-gaap:BuildingMember2021-12-310001075736us-gaap:BuildingMember2022-09-300001075736cxdo:CentricTelecomIncMember2021-10-012021-12-310001075736cxdo:MergerMembercxdo:JuneOneTwoThousandTwentyOneMember2021-01-140001075736cxdo:MergerMembercxdo:JuneOneTwoThousandTwentyOneMember2022-09-300001075736cxdo:CentricTelecomIncMember2021-01-012021-09-300001075736cxdo:CentricTelecomIncMember2021-07-012021-09-300001075736cxdo:CentricTelecomIncMember2022-07-012022-09-3000010757362021-10-012021-12-310001075736cxdo:MergerMembercxdo:JuneOneTwoThousandTwentyOneMember2022-01-012022-09-300001075736cxdo:CentricTelecomIncMember2021-01-012021-01-140001075736cxdo:CentricTelecomIncMember2021-12-310001075736cxdo:CentricTelecomIncMember2022-01-012022-09-300001075736cxdo:NetSapiensIncMember2022-01-012022-09-300001075736cxdo:OptionsMember2021-01-012021-09-300001075736cxdo:OptionsMember2022-01-012022-09-300001075736cxdo:OptionsMember2021-07-012021-09-300001075736cxdo:OptionsMember2022-07-012022-09-300001075736cxdo:SoftwareSolutionsMember2022-09-300001075736cxdo:TelecommunicationsServicesMember2022-09-300001075736cxdo:DesktopDevicesMember2022-09-300001075736cxdo:ContractLiabilitiesMember2021-01-012021-12-310001075736cxdo:ContractAssetsMember2021-01-012021-12-310001075736cxdo:ContractLiabilitiesMember2022-01-012022-09-300001075736cxdo:ContractAssetsMember2022-01-012022-09-300001075736cxdo:CloudTelecommunicationsServiceMember2021-01-012021-09-300001075736cxdo:CloudTelecommunicationsServiceMember2021-07-012021-09-300001075736cxdo:CloudTelecommunicationsServiceMember2022-07-012022-09-300001075736cxdo:CloudTelecommunicationsServiceMember2022-01-012022-09-300001075736cxdo:SoftwareSolutionSegmentMember2021-01-012021-09-300001075736cxdo:SoftwareSolutionSegmentMember2021-07-012021-09-300001075736cxdo:SoftwareSolutionSegmentMember2022-07-012022-09-300001075736cxdo:SoftwareSolutionSegmentMember2022-01-012022-09-300001075736us-gaap:VehiclesMember2022-01-012022-09-300001075736us-gaap:LeaseholdImprovementsMember2022-01-012022-09-300001075736us-gaap:FurnitureAndFixturesMember2022-01-012022-09-300001075736cxdo:InternalUseComputerSoftwareMember2022-01-012022-09-300001075736cxdo:ComputerSoftwareIntangibleAssetsMember2022-01-012022-09-300001075736us-gaap:OfficeEquipmentMember2022-01-012022-09-300001075736cxdo:LandsMember2022-01-012022-09-300001075736us-gaap:CommonStockMember2022-01-012022-09-300001075736us-gaap:RetainedEarningsMember2022-09-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-09-300001075736us-gaap:AdditionalPaidInCapitalMember2022-09-300001075736us-gaap:CommonStockMember2022-09-300001075736us-gaap:RetainedEarningsMember2022-07-012022-09-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-07-012022-09-300001075736us-gaap:AdditionalPaidInCapitalMember2022-07-012022-09-300001075736us-gaap:CommonStockMember2022-07-012022-09-3000010757362022-06-300001075736us-gaap:RetainedEarningsMember2022-06-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-300001075736us-gaap:AdditionalPaidInCapitalMember2022-06-300001075736us-gaap:CommonStockMember2022-06-3000010757362022-04-012022-06-300001075736us-gaap:RetainedEarningsMember2022-04-012022-06-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-012022-06-300001075736us-gaap:AdditionalPaidInCapitalMember2022-04-012022-06-300001075736us-gaap:CommonStockMember2022-04-012022-06-3000010757362022-03-310001075736us-gaap:RetainedEarningsMember2022-03-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-310001075736us-gaap:AdditionalPaidInCapitalMember2022-03-310001075736us-gaap:CommonStockMember2022-03-3100010757362022-01-012022-03-310001075736us-gaap:RetainedEarningsMember2022-01-012022-03-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-03-310001075736us-gaap:AdditionalPaidInCapitalMember2022-01-012022-03-310001075736us-gaap:CommonStockMember2022-01-012022-03-310001075736us-gaap:RetainedEarningsMember2021-12-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310001075736us-gaap:AdditionalPaidInCapitalMember2021-12-310001075736us-gaap:CommonStockMember2021-12-3100010757362021-09-300001075736us-gaap:RetainedEarningsMember2021-09-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-09-300001075736us-gaap:AdditionalPaidInCapitalMember2021-09-300001075736us-gaap:CommonStockMember2021-09-300001075736us-gaap:RetainedEarningsMember2021-07-012021-09-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-07-012021-09-300001075736us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001075736us-gaap:CommonStockMember2021-07-012021-09-3000010757362021-06-300001075736us-gaap:RetainedEarningsMember2021-06-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-300001075736us-gaap:AdditionalPaidInCapitalMember2021-06-300001075736us-gaap:CommonStockMember2021-06-3000010757362021-04-012021-06-300001075736us-gaap:RetainedEarningsMember2021-04-012021-06-300001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-012021-06-300001075736us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300001075736us-gaap:CommonStockMember2021-04-012021-06-3000010757362021-03-310001075736us-gaap:RetainedEarningsMember2021-03-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001075736us-gaap:AdditionalPaidInCapitalMember2021-03-310001075736us-gaap:CommonStockMember2021-03-3100010757362021-01-012021-03-310001075736us-gaap:RetainedEarningsMember2021-01-012021-03-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310001075736us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001075736us-gaap:CommonStockMember2021-01-012021-03-3100010757362020-12-310001075736us-gaap:RetainedEarningsMember2020-12-310001075736us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001075736us-gaap:AdditionalPaidInCapitalMember2020-12-310001075736us-gaap:CommonStockMember2020-12-3100010757362021-01-012021-09-3000010757362021-07-012021-09-3000010757362022-07-012022-09-3000010757362021-12-3100010757362022-09-3000010757362022-10-31iso4217:USDxbrli:sharesiso4217:USDxbrli:sharesxbrli:pure

(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. i 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). i 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).

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 i ☐ No ☒.

The accompanying notes are an integral part of the condensed consolidated financial statements.

Interest and penalties associated with income taxes are classified as income tax expense in the consolidated statements of operations.

The 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 (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 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.

Software Licenses-The Company’s software licenses typically provide a perpetual right to use the Company’s software. The Company also sells 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 customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software is delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue could be recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. However, historical experience shows that customers regularly renegotiate the number of licenses during the installation process. Therefore, the Company recognizes revenue from software licenses when the setup is complete. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

Subscription Maintenance and Support -Subscription maintenance and support revenue includes revenue from maintenance service contracts, customer support, and other supportive services. The Company offers warranties on its products. The warranty period for the Company’s 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.

Professional Services and Other -The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services. Revenue from professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

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 from the cloud telecommunications services segment (in thousands):

The acquisition was accounted for under the acquisition method of accounting and the operating results of NetSapiens have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to NetSapiens net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships, developed technology, and trademark and trade name of the acquired business and expected synergies at the time of the acquisition.

We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for NetSapiens and adjustments made during the period ended December 31, 2021 (in thousands):

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships, developed technology, and Trademarks and trade name intangible assets, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships, developed technology, and addition of trademarks and trade name intangible assets was a decrease in the fair value of the intangible asset of $ i 420,000, and an increase to goodwill of $420,000. As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $ i 59,000 less amortization expense in cost of software solutions, $ i 98,000 additional amortization expense in sales and marketing, and $ i 37,000 additional amortization expense in general and administrative in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the delayed settlement of pre-acquisition liabilities resulted in an increase in opening balance sheet cash and accrued liabilities of $ i 739,000, with no impact on goodwill.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our estimates for various assets acquired and liabilities assumed resulting in an increase of $ i 9,000 to assets acquired and a increase in liabilities assumed of $ i 147,000 and an increase to goodwill of $ i 140,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in the reclassification of direct financing lease liabilities as operating lease liabilities, and an increase of $ i 4,000 to the right to use assets balance and an increase of $ i 1,000 to the operating lease liability and a decrease to goodwill of $ i 3,000.

(e) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our preliminary estimate of contract liabilities, net of current portion, which were determined to be current liabilities and have been reclassified as current contract liabilities with no impact on goodwill.

(f) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the retroactive adoption of ASC 606, resulting in the recording of contract cost of $ i 105,000, an increase to current and long-term accounts receivables of $ i 170,000, an increase in contract liabilities of $ i 103,000 and a decrease to goodwill of $ i 172,000.

(g) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of a valuation allowance on the deferred tax assets of $ i 2,829,000, and recording a deferred tax liability of $ i 5,033,000 for the intangible assets acquired and a increase to goodwill of $7,862,000.

The fair values of the customer relationships, developed technology, and trademark and trade name were established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The customer relationships were valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships, developed technology, and trademarks and trade names acquired are as follows: weighted average cost of capital of i 11.0%, tax rate of i 25.0%, and estimated economic life of i 16 years.

The developed technology and trademarks and trade name were valued using the relief from royalty methodology. The relief-from-royalty method was used to value the developed technology and trademarks and trade name acquired from NetSapiens. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the completed technology. The market-derived royalty rate is then applied to estimate the royalty savings. i The key assumptions used in valuing the developed technology are as follows: royalty rate of 7%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 6 years. The key assumptions used in valuing the existing trademarks are as follows: royalty rate of 1.0%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 4 years.

The following unaudited pro forma information presents our consolidated results of operations as if NetSapiens, Inc. had been included in our consolidated results since January 1, 2020:

The unaudited pro forma financial information is presented for informational purposes only and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated NetSapiens, Inc. as of January 1, 2021.

Acquisition related expenses incurred by us in connection with the NetSapiens acquisition are recorded within general and administrative expenses in our consolidated statements of operations and totaled $ i 0 and $ i 4,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 24,000 and $ i 1,015,000 for the nine months ended September 30, 2022 and 2021, respectively.

On January 14, 2021, i 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 $ i 746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period / . The fair value of the common stock issued as consideration was determined based on the closing market price of the Company’s common stock on the date of the acquisition of $ i 7.42. The aggregate purchase price is subject to customary upward or downward adjustments for Centric Telecom’s net working capital.

The acquisition was accounted for under the acquisition method of accounting and the operating results of Centric Telecom have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to Centric Telecom’s net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the customer relationships of the acquired business and expected synergies at the time of the acquisition.

We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for Centric Telecom and adjustments made during the period ended December 31, 2021 (in thousands):

(a) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the customer relationships intangible asset, with the assistance of an independent third-party valuation firm based on facts and circumstances that existed as of the acquisition date. The adjustment to customer relationships intangible asset was a decrease in the fair value of the intangible asset of $ i 38,000, and an increase to goodwill of $ i 38,000. As a result of the adjustments to the provisional amounts and estimated useful lives of intangible assets, during the fourth quarter the Company recognized $ i 16,000 less amortization expense in sales and marketing in the current period related to the effects that would have been recognized in previous quarters if the measurement period adjustment was recognized as of the date of acquisition.

(b) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to recording of pre-acquisition liabilities and resulted in an increase to accrued liabilities of $ i 8,000 and an increase to goodwill of $ i 8,000.

(c) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the adoption of ASC 842, resulting in an increase of $ i 16,000 to the operating lease liability and an increase to goodwill of $ i 16,000.

(d) During the fourth quarter of 2021, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due recording a deferred tax liability of $ i 534,000 for the intangible assets acquired and an increase to goodwill of $ i 534,000.

The fair values of the customer relationships were established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The customer relationships were valued using the multi-period excess earnings method. The Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. i The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 14.0%, tax rate of 25.0%, and estimated economic life of 15 years.

Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition are recorded within general and administrative expenses in our consolidated statements of operations and totaled $ i 0 and $ i 0 for the three months ended September 30, 2022 and 2021, respectively and $ i 0 and $ i 50,000 for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

The following table provides a summary of changes in the carrying amounts of goodwill (in thousands):

We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on i July 31, 2021. The operating lease contained customary escalation clauses. Rental expense for the three months ended September 30, 2022 and 2021 was approximately $ i 0 and $ i 9,000 respectively, and for the nine months ended September 30, 2022 and 2021 was $ i 0 and $ i 56,000, respectively.

We currently lease office space in Reston, Virginia under a non-cancelable operating i lease agreement that expires in 2025. The operating lease contains customary escalation clauses. Rental expense for the three months ended September 30, 2022 and 2021 was approximately $ i 13,000 and $ i 9,000 respectively and for the nine months ended September 30, 2022 and 2021 was $ i 37,000 and $ i 9,000 respectively.

We currently lease office space in La Jolla, California under a non-cancelable operating i lease agreement that expires in 2022. The operating lease contains customary escalation clauses. Rental expense for the three months ended September 30, 2022 and 2021 was approximately $ i 90,000 and $ i 94,000, respectively and for the nine months ended September 30, 2022 and 2021 was $ i 269,000 and $ i 124,000 respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2027 and the interest rates range from i 1.37% to i 15.74%. The expense is included in cost of product expenses and totaled approximately $ i 21,000 and $ i 20,000 for the three months ended September 30, 2022 and 2021, respectively and for the nine months ended September 30, 2022 and 2021 was $ i 58,000 and $ i 48,000, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada and Dallas, Texas under non-cancelable operating lease agreements that expire in 2024. Rental expense for the three months ended September 30, 2022 and 2021 was approximately $ i 36,000 and $ i 13,000, respectively and for the nine months ended September 30, 2022 and 2021 was $ i 107,000 and $ i 21,000, respectively.

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 finance lease agreements which extends through 2026. The Company also leases three vehicles under financing agreements. One vehicle lease ended in 2021 and two vehicle leases extend through 2022. i The outstanding balance for finance leases was $225,000 and $311,000 as of September 30, 2022 and December 31, 2021, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $486,000 as of September 30, 2022 and December 31, 2021, respectively. Related accumulated depreciation totaled $ i 236,000 and $ i 167,000 as of September 30, 2022 and December 31, 2021, respectively. The $ i 40,000 in support contracts were classified as a prepaid expense and are being amortized over the service period of i 3 years. One support contract expired in January 2021 and the other expires in September 2024. Amortization expense is included in general and administrative expenses and totaled $ i 1,000 and $ i 1,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 4,000 and $ i 4,000 for the nine months ended September 30, 2022 and 2021, respectively. The interest rates on the finance lease obligations range from i 1.37% and i 15.74% and interest expense was $ i 2,000 and $ i 2,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 6,000 and $ i 5,000 for the nine months ended September 30, 2022 and 2021, respectively.

The maturity of operating leases and finance lease liabilities as of September 30, 2022 are as follows:

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. Operating lease revenue is classified as product revenue and totaled $ i 70,000 and $ i 54,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 200,000 and $ i 148,000 for the nine months ended September 30, 2022 and 2021, respectively. 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.

Equipment finance receivables arising from the rental of our cloud telecommunications equipment through sales-type leases, were as follows (in thousands):

Future minimum lease payments as of September 30, 2022, consisted of the following:

Depreciation and amortization for the cloud telecommunications services segment was $ i 115,000 and $ i 60,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 344,000 and $ i 152,000 for the nine months ended September 30, 2022 and 2021, respectively. Depreciation and amortization for the software solutions segment was $ i 509,000 and $ i 6,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 1,518,000 and $ i 7,000 for the nine months ended September 30, 2022 and 2021, respectively.

Interest income for the cloud telecommunications services segment was $ i 0 and $ i 0 for the three months ended September 30, 2022 and 2021, respectively and $ i 0 and $ i 1,000 for the nine months ended September 30 2022 and 2021, respectively. Interest income for the software solutions segment was $ i 0 for the three and nine months ended September 30, 2022 and 2021, respectively.

Interest expense for the cloud telecommunications services segment was $ i 19,000 and $ i 24,000 for the three months ended September 30, 2022 and 2021, respectively and $ i 57,000 and $ i 64,000 for the nine months ended September 30, 2022 and 2021, respectively. Interest expense for the software solutions segment was $ i 0 for the three and nine months ended September 30, 2022 and 2021, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2020 Form 10-K”) filed with the SEC and the Condensed Consolidated Financial Statements and notes thereto included in the 2022 Form 10-Qs and elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

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 2.5 million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings:

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.

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.

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 solutions currently support over 2.5 million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings:

Cloud Telecommunications Services – Our cloud telecommunications service offering includes hardware, software, and unified ng IP or cloud technology over any high-speed Internet connection. These services are rendered through a variety of devices and communication solutions for businesses using user interfaces such as a Crexendo branded desktop phones and/or mobile and desktop applications. Some examples of mobile devices are Android cell phones, iPhones, iPads or Android tablets. These services enable our customers to seamlessly communicate with others through phone calls that originate/terminate on our network or PSTN networks. Our cloud telecommunications services are powered by our proprietary implementation of standards based Web and VoIP cloud technologies. Our services use our highly scalable complex infrastructure that we build and manage based on industry standard best practices to achieve greater efficiencies, better quality of service (QoS) and customer satisfaction. Our infrastructure comprises of compute, storage, network technologies, 3^rd party products and vendor relationships. We also develop end user portals for account management, license management, billing and customer support and adopt other cloud technologies through our partnerships.

Crexendo’s cloud telecommunication service offers a wide variety of essential and advanced features for businesses of all sizes. Many of these features included in the service offering are:

Many of these services are included in our basic offering to our customers for a monthly recurring fee and do not require a capital expense. Some of the advanced features such as Automatic Call Recording and Call Center Features require additional monthly fees. Crexendo continues to invest and develop its technology and CPaaS offerings to make them more competitive and profitable.

Software Solutions – Our software solutions offering provides a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to over 200 service providers, servicing over 2.5 million users around the globe. Our platform enables its service provider partners to customize packages with unprecedented levels of flexibility, profitability, and ease of use.

The following discussion of financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto and other financial information included elsewhere in this Form 10-Q.

Results of Consolidated Operations (in thousands, except for per share amounts):

Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in total revenue is due to an increase in service revenue of $147,000, an increase in software solutions revenue of $91,000, and an increase in product revenue of $59,000.

The following table reflects our income/(loss) before income taxes for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increased loss before income tax is primarily due to an increase in operating expenses of $895,000 and an increase in other expense of $143,000. The increase in operating expenses is primarily related to increases in salaries and benefits and stock compensation expense, offset by an increase in revenue of $298,000.

The following table reflects our income tax benefit for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

We had an income tax benefit of $32,000 for the three months ended September 30, 2022 compared to an income tax provision of $(137,000) for the three months ended September 30, 2021. We had income/(loss) before income tax for the three months ended September 30, 2022 and 2021 of $(728,000) and $12,000, respectively.

Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our service revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in total revenue is due to an increase in service revenue of $636,000, an increase in software solutions revenue of $5,945,000, and an increase in product revenue of $435,000. The significant increase in software solutions revenue is primarily related to nine months of revenue for 2022 compared to only four months of revenue for the nine months end September 31, 2021.

The following table reflects our loss before income taxes for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in the loss before income tax is primarily due to an increase in revenue of $7,016,000, offset by an increase in operating expenses of $7,792,000 and an increase in other expense of $261,000. The increase in operating expenses is primarily related to increases in salaries and benefits, stock compensation expense, and nine months of software solutions operating expenses compared to only four month in the prior period.

The following table reflects our income tax benefit for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

We had an income tax benefit of $315,000 for the nine months ended September 30, 2022 compared to an income tax benefit of $247,000 for the nine months ended September 30, 2021. We had a loss before income tax for the nine months ended September 30, 2022 and 2021 of $(3,127,000) and $(2,090,000), respectively.

To evaluate our business, we consider and use non-generally accepted accounting principles (“Non-GAAP”) net income/(loss) and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis. We consider Non-GAAP net income/(loss) to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation, 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 November 10, 2022 earnings press release, as furnished on Form 8-K, we included Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA. The terms Non-GAAP net income/(loss), EBITDA, and Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in analytical tools, and when assessing our operating performance, Non-GAAP net income/(loss), 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:

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income/(loss), EBITDA, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.

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.

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. Please see Note 1 of Part I, Item 1 of this quarterly report on Form 10-Q for a summary of significant accounting policies. In addition, the estimates, assumptions and judgments involved in our accounting policies described in critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 product revenue, sales and marketing, research and development, and general and administrative expenses.

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

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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in service revenue is due to an increase in telecommunications services of $113,000, an increase in sales-type lease interest of $24,000, an increase in one-time fees, commissions and other of $7,000, and an increase in fees, commissions, and other, recognized over time of $4,000, A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts.

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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

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 represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog decreased 2%, or $660,000 to $30,063,000 as of September 30, 2022 as compared to $30,723,000 as of September 30, 2021. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of July 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

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, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in $165,000 in additional costs, an increase of $60,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of $26,000, offset by an $85,000 decrease in third-party telecommunications carrier costs.

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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The decrease in cost of product revenue was primarily due to negotiating lower costs on our desktop phone devices.

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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in selling and marketing expense is due to an increase in commission expense of $121,000 directly related to the increase in revenue, an increase in salaries, wages and benefits of $88,000 related to expansion of our sales team, an increase in travel related costs and tradeshows of $30,000, offset by a decrease in sales leads and marketing material costs of $20,000 and a decrease in other sales and marketing expense of $2,000.

General and administrative expenses consist of salaries, wages and benefits, share-based 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages, and benefits of $375,000 related to an increase in headcount and company-wide salary increases, offset by a decrease in corporate insurance of $37,000 due to an allocation of cost to the software solutions segment, a decrease in bank processing fees of $13,000, and a decrease in other general and administrative expense of $32,000.

Research and development expenses primarily consist of salaries, wages 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The decrease in research and development expenses is primarily related to a decrease in costs for maintenance on our mobile applications and other development costs of $47,000 and a decrease in salaries, wages and benefits of $27,000.

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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in service revenue is due to an increase in telecommunications service revenue of $397,000, an increase in one time fees, commissions and other of $182,000, an increase in sales-type lease interest of $40,000, and an increase in fees, commissions, and other, recognized over time of $17,000. A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts.

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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog decreased 2%, or $660,000 to $30,063,000 as of September 30, 2022 as compared to $30,723,000 as of September 30, 2021. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of January 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

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, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in $513,000 in additional costs, an increase of $178,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of $44,000, offset by a $302,000 decrease in telecommunication carrier costs as we’ve eliminated costs by migrating customers to our VIP platform and as we’ve switched to lower cost telecommunication carriers.

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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in cost of product revenue is primarily due to an increase in product revenue.

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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in selling and marketing expense is due to an increase in salaries, wages and benefits of $366,000 related to expansion of our sales team, an increase in commission expense of $193,000 directly related to the increase in revenue, and an increase in travel related costs and tradeshows of $161,000, offset by a decrease in other selling and marketing expenses of $31,000.

General and administrative expenses consist of salaries, wages and benefits, share-based 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in general and administrative expenses is primarily due an increase in administrative salaries, wages and benefits of $1,207,000 related to an increase in share-based compensation as a result of a company-wide employee retention grant, an increase in headcount, and company-wide salary increases, and an increase in telecommunication fees of $53,000, offset by a decrease in acquisition related expenses of $1,050,000, related to the 2021 acquisitions of Centric Telecom and NetSapiens, and a decrease in other general and administrative expenses of $1,000.

Research and development expenses primarily consist of salaries, wages 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The decrease in research and development expenses is primarily related to a decrease in costs for maintenance on our mobile applications and other development costs of $105,000, and a decrease in salaries, wages and benefits of $96,000, offset by a $3,000 increase in product testing 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

In connection with the merger with NetSapiens, Inc., on June 1, 2021, the following Software Solutions operating segment was created. The operating results for the Software Solutions segment are included in our consolidated results of operations from the acquisition date of June 1, 2021.

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 fixes, 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase is primarily related to a $546,000 increase in recurring software license and maintenance and support subscriptions, an increase in professional services of $33,000, offset by a decrease in perpetual software licenses of $488,000.

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog increased 6%, or $786,000 to $13,334,000 as of September 30, 2022 as compared to $12,558,000 as of September 30, 2021 as a result of our June 1, 2021 acquisition. Below is a table which displays the software solutions segment revenue backlog as of July 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, 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 three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The decrease in cost of service revenue is primarily related to the reclassification of $738,000 of research and development expenses out of cost of service revenue after carefully reviewing operating expenses that qualify as research and development operating expenses, a $50,000 decrease in amortization expense related to the technology, offset by an increase in cost of service revenue of $284,000 related to the company-wide salary increases that resulted in $158,000 of additional costs, an increase of $67,000 in data center hosting related to data center expansion and increased activity, an increase of $41,000 in third-party software modules and outsourced services required to install and support software solutions also due to increased activity, and a $18,000 increase in share-based compensation.

Selling and marketing expenses consist primarily of sales and marketing salaries, wages and benefits, commissions, share-based compensation, travel expenses, lead generation services, trade shows, third-party marketing services, the production of marketing materials, amortization expense related to customer relationships intangible asset, and sales support software. The following table reflects our selling and marketing expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in selling and marketing expenses is primarily related to an increase in commissions of $99,000, an increase in salaries, wages and benefits of $76,000, an increase in share-based compensation of $29,000, an increase in customer relationships intangible asset amortization expense of $74,000, an increase in sales support software of $17,000, and a $20,000 increase in other selling and marketing expenses, offset by a decrease of $85,000 in third-party marketing services.

General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, administrative personnel, amortization of intangible asset related to trademarks and trade names, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The decrease in general and administrative expenses is primarily related to the reclassification of $100,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses, and a reduction in professional service fees of $117,000, a decrease in equipment of $38,000, and a $6,000 decrease in other administrative corporate expenses.

Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of $738,000 and general and administrative expenses of $100,000 after carefully reviewing operating expenses that qualify as research and development operating expenses.

Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:

The increase in other expense primarily related to net foreign exchange losses during the period.

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 fixes, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase is primarily related to nine months of revenue for the nine months ended September 30, 2022, compared to only four months of revenue for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date.

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of September 30, 2022 and 2021. Backlog increased 6%, or $786,000 to $13,334,000 as of September 30, 2022 as compared to $12,558,000 as of September 30, 2021. Below is a table which displays the software solutions segment revenue backlog as of January 1, 2022 and 2021, and September 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in cost of service revenue is primarily related to nine months of costs for the nine months ended September 30, 2022, compared to only four months of costs for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date, and the reclassification of $1,530,000 in research and development expenses out of cost of service revenue for the nine months ended September 30, 2022, after carefully reviewing operating expenses that qualify as research and development operating expenses.

Selling and marketing expenses consist primarily of sales and marketing salaries, wages 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in selling and marketing expenses is primarily related to nine months of expenses for the nine months ended September 30, 2022, compared to only four months of expenses for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date.

General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, 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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in general and administrative expenses is primarily related to nine months of expenses for the nine months ended September 30, 2022, compared to only four months of expenses for the nine months end September 30, 2021, due to the June 1, 2021 acquisition date, and the reclassification of $202,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses.

Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of $1,530,000 and general and administrative expenses of $202,000 after carefully reviewing operating expenses that qualify as research and development operating expenses.

Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The increase in other expenses is primarily related to net foreign exchange losses during the nine months ended September 30, 2022.

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 September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $4,821,000 and $7,468,000, 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 twelve months.

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 used in operating activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

The net cash used for operations was primarily driven by our net loss for the nine months ended September 30, 2022 of $696,000, an increase in accounts receivable, an increase in equipment financing receivables, an increase in contract costs, an increase in prepaid expenses, an increase in income tax receivable, a decrease in accounts payable and accrued expenses, and a decrease in contract liabilities, offset by non-cash expenses for depreciation and amortization and share-based compensation.

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 used in investing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

Net cash used for investing activities in the nine months ended September 30, 2022, primarily relates to the purchase of property and equipment.

Net cash used for investing activities for the nine months ended September 30, 2021, primarily relates to cash paid for a business combination. During the nine months ended September 30, 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 September 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 1.7M 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.

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, dividend payments, and proceeds from the issuance of common stock in connection with an offering. The following table reflects our net cash provided by/(used in) financing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

Net cash used in financing activities in the nine months ended September 30, 2022, primarily relates to cash proceeds from the exercise of stock options of $576,000, offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of $135,000, dividend payments of $336,000, and repayments of notes payable and finance leases of $141,000.

Net cash provided by financing activities in the nine months ended September 30, 2021, primarily relates to cash proceeds from the exercise of stock options of $1,177,000 offset by the payments of employee tax withholdings related to the net settlement of stock options of $155,000.

Except as set forth in Notes 4, 10, and 13 in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no significant changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

As of, September 30, 2022, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Recent Accounting Pronouncements” is incorporated herein by reference.

For all periods presented, our sales and operating expenses were predominately denominated in U.S. dollars. We therefore have not had material foreign currency risk associated with sales and cost-based activities. The functional currency of our material operating entities is the U.S. dollar.

For the periods presented, we believe the exposure to foreign currency fluctuation from operating expenses is immaterial as the related costs do not constitute a significant portion of our total expenses. As we grow operations, our exposure to foreign currency risk may become more significant.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report, have concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending or threatened that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

There are many risk factors that may affect our business and the results of our operations, many of which are beyond our control. Information on certain risks that we believe are material to our business is set forth in “Part I – Item 1A. Risk Factors” of the 2021 Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

i Nevada		i 87-0591719
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

i 1615 South 52nd Street, i Tempe, i AZ		i 85281
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☐		Accelerated filer	☐
i Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	i ☒
			Emerging growth company	i ☐

	September 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	i 4,821		$	i 7,468
Trade receivables, net of allowance for doubtful accounts of $ i 58 as of September 30, 2022 and $ i 72 as of December 31, 2021		i 4,028			i 2,177
Contract assets		i 265			i 261
Inventories		i 178			i 231
Equipment financing receivables		i 542			i 332
Contract costs		i 735			i 648
Prepaid expenses		i 996			i 358
Income tax receivable		i -			i 11
Other current assets		i 30			i 74
Total current assets		i 11,595			i 11,560

Long-term equipment financing receivables, net		i 1,157			i 942
Property and equipment, net		i 2,968			i 2,989
Deferred income tax assets, net		i 986			i 986
Operating lease right-of-use assets		i 379			i 570
Intangible assets, net		i 20,512			i 22,161
Goodwill		i 36,972			i 36,972
Contract costs, net of current portion		i 1,134			i 697
Income tax receivable, net of current portion		i 386			i -
Other long-term assets		i 254			i 275
Total Assets	$	i 76,343		$	i 77,152

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	i 416		$	i 476
Accrued expenses		i 4,222			i 4,904
Finance leases		i 100			i 110
Notes payable		i 76			i 1,873
Operating lease liabilities		i 258			i 447
Income tax payable		i -			i 24
Contract liabilities		i 2,851			i 2,738
Total current liabilities		i 7,923			i 10,572

Contract liabilities, net of current portion		i 177			i 290
Finance leases, net of current portion		i 117			i 193
Notes payable, net of current portion		1,742			-
Operating lease liabilities, net of current portion		i 150			i 164
Total liabilities		i 10,109			i 11,219

Stockholders' equity:
Preferred stock, par value $ i 0.001 per share - authorized i 5,000,000 shares; none issued		i —			i —
Common stock, par value $ i 0.001 per share - authorized i 50,000,000 shares, i 22,686,911 shares issued and outstanding as of September 30, 2022 and i 22,054,239 shares issued and outstanding as of December 31, 2021		i 23			i 22
Additional paid-in capital		i 121,298			i 118,432
Accumulated deficit		( i 55,345	)		( i 52,533	)
Accumulated other comprehensive income		i 258			i 12
Total stockholders' equity		i 66,234			i 65,933

Total Liabilities and Stockholders' Equity	$	i 76,343		$	i 77,152

	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	( i 2,812	)	$	( i 1,843	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		i 1,862			i 931
Share-based compensation		i 2,762			i 1,150
Non-cash operating lease amortization		( i 12	)		( i 4	)
Changes in assets and liabilities:
Trade receivables		( i 1,851	)		i 199
Contract assets		( i 4	)		( i 50	)
Equipment financing receivables		( i 425	)		i 31
Inventories		i 53			i 37
Contract costs		( i 524	)		( i 245	)
Prepaid expenses		( i 638	)		( i 384	)
Income tax receivable		( i 375	)		( i 263	)
Other assets		i 65			i 335
Accounts payable and accrued expenses		( i 742	)		i 228
Income tax payable		( i 24	)		i -
Contract liabilities		i -			( i 595	)
Net cash used for operating activities		( i 2,665	)		( i 473	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		( i 192	)		( i 91	)
Acquisitions of assets and businesses, net of cash received		i -			( i 10,505	)
Net cash used for investing activities		( i 192	)		( i 10,596	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments made on finance leases		( i 86	)		( i 71	)
Repayments made on notes payable		( i 55	)		( i 53	)
Proceeds from exercise of options		i 576			i 1,365
Dividend payments		( i 336	)		i -
Taxes paid on the net settlement of stock options and RSUs		( i 135	)		( i 160	)
Net cash provided by/(used for) financing activities		( i 36	)		i 1,081
Effect of exchange rate changes on cash		i 246			i 10
NET DECREASE IN CASH AND CASH EQUIVALENTS		( i 2,647	)		( i 9,978	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD		i 7,468			i 17,679
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	i 4,821		$	i 7,701
Cash used during the year for:
Income taxes, net	$	( i 96	)	$	( i 15	)
Interest expense	$	( i 57	)	$	( i 64	)
Supplemental disclosure of non-cash investing and financing information:
Stock issued for the acquisition of Centric Telecom	$	i -		$	i 346
Contingent consideration related to the acquisition of Centric Telecom	$	i -		$	i 746
Stock issued in connection with the merger with NetSapiens	$	i -		$	i 16,942
Stock options issued in connection with the merger with NetSapiens	$	i -		$	i 22,120
Property and equipment financed through finance leases	$	i -		$	i 273
Prepaid assets financed through finance leases	$	i -		$	i 14

Building	i 39 years
Land	i Not depreciated
Computer and office equipment	i 2 to 5 years
Computer software	i 3 years
Internal-use software	i 3 years
Furniture and fixtures	i 4 years
Leasehold improvements	i 2 to 5 years
Vehicles	i 5 years

Crexendo, Inc. – ‘10-Q’ for 9/30/22

On: Thursday, 11/10/22, at 5:16pm ET · For: 9/30/22 · Accession #: 1654954-22-15034 · File #: 1-32277

Previous ‘10-Q’: ‘10-Q’ on 8/9/22 for 6/30/22 · Next: ‘10-Q’ on 5/9/23 for 3/31/23 · Latest: ‘10-Q’ on 5/7/24 for 3/31/24

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

Item 1. Financial Statements.		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3. Quantitative and Qualitative Disclosures about Market Risk		47
Item 4. Controls and Procedures		47

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		48
Item 1A. Risk Factors		48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 6. Exhibits		48
Signatures		49

	·	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.

	·	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.

	·	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.

	·	SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network. The Company recognizes one-time upfront software license revenue when the software setup is complete.
	·	SNAPaccel – aSoftware-as-a-Service (“SaaS”) based software license referred to as subscription arrangements. The Company recognizes revenue as subscriptions are provided in service revenue on a monthly basis.

	September 30,		December 31,
(In thousands)	2022		2021
Receivables, which are included in trade receivables, net of allowance for doubtful accounts	$	i 4,028	$	i 2,177
Contract assets		i 265		i 261
Contract liabilities		i 3,028		i 3,028

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	i 10,000		$	i 10,000
Common stock		i 16,942			i 16,942
Stock options		i 22,120			i 22,120
Total consideration	$	i 49,062		$	i 49,062

	For the Nine Months Ended September 30, (Unaudited, in thousands)
	2022			2021
Revenues	$	i 26,112		$	i 24,123
Net loss		( i 2,812	)		( i 12,963	)
Earnings per share	$	( i 0.12	)	$	( i 0.65	)

Year ending December 31,
2022 remaining	$	i 550
2023		i 2,147
2024		i 2,057
2025		i 1,929
2026		i 1,750
Thereafter		i 12,079
Total	$	i 20,512

	Goodwill
Balance at December 31, 2021	$	i 36,972
Additions		i -
Balance at September 30, 2022	$	i 36,972

	Warranty Liabilities
Balance at January 1, 2021	$	i 33
Accrual for warranties		i 50
Adjustments related to pre-existing warranties		i 1
Warranty settlements		( i 34	)
Balance at December 31, 2021		i 50
Accrual for warranties		i 43
Warranty settlements		( i 22	)
Balance at September 30, 2022	$	i 71

Year ending December 31,
2022 remaining	$	i 19
2023		i 77
2024		i 79
2025		i 82
2026		i 85
Thereafter		i 1,476
Total	$	i 1,818

	Asset and Business Acquisition Contingent Consideration
Balance at January 1, 2021	$	i -
Additions		i 746
Cash payments		( i 746	)
Balance at December 31, 2021	$	i -
Additions		i -
Cash payments		i -
Balance at September 30, 2022	$	i -

Year ending December 31,	Operating Leases			Finance Leases
2022 remaining	$	i 139		$	i 24
2023		i 115			i 98
2024		i 96			i 77
2025		i 1			i 22
2026		i 1			i 3
2027		i 1			i -
Total minimum lease payments		i 353			i 224
Less: amount representing interest		( i 8	)		( i 7	)
Present value of minimum lease payments	$	i 345		$	i 217

Lease term and discount rate	September 30, 2022
Weighted-average remaining lease term (years)
Operating leases		i 1.5
Finance leases		i 2.4
Weighted-average discount rate
Operating leases		i 5.9	%
Finance leases		i 2.6	%

	Nine Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	i 445
Operating cash flows from finance leases		i 8
Financing cash flows from finance leases		( i 86	)

Year ending December 31,	Lease Receivables
2022, remaining	$	i 239
2023		i 887
2024		i 693
2025		i 376
2026		i 197
Thereafter		i -
Gross equipment financing receivables		i 2,392
Less: unearned income		( i 693	)
Equipment financing receivables, net	$	i 1,699

	·	Business Productivity Features such as dial-by extension and name, transfer, conference, call recording, Unlimited calling to anywhere in the US and Canada, International calling, Toll free (Inbound and Outbound)
	·	Individual Productivity Features such as Caller ID, Call Waiting, Last Call Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified Messaging, Hot-Desking
	·	Group Productivity Features such as Call Park, Call Pickup, Interactive Voice Response (IVR), Individual and Universal Paging, Corporate Directory, Multi-Party Conferencing, Group Mailboxes, Web and mobile devices based collaboration applications
	·	Call Center Features such as Automated Call Distribution (ACD), Call Monitor, Whisper and Barge, Automatic Call Recording, One way call recording, Analytics
	·	Advanced Unified Communication Features such as Find-Me-Follow-Me, Sequential Ring and Simultaneous Ring, Voicemail transcription
	·	Mobile Features such as extension dialing, transfer and conference and seamless hand-off from WiFi to/from 3G and 4G, LTE, as well as other data services. These features are also available on CrexMo, an intelligent mobile application for iPhones and Android smartphones, as well as iPads and Android tablets
	·	Traditional PBX Features such as Busy Lamp Fields, System Hold. 16-48 Port density Analog Devices
	·	Expanded Desktop Device Selection such as Entry Level Phone, Executive Desktop, DECT Phone for roaming users
	·	Advanced Faxing solution such as Cloud Fax (cFax) allowing customers to send and receive Faxes from their Email Clients, Mobile Phones and Desktops without having to use a Fax Machine simply by attaching a file
	·	Web based online portal to administer, manage and provision the system.
	·	Asynchronous communication tools like SMS/MMS, chat and document sharing to keep in pace with emerging communication trends.

	·	SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network.
	·	SNAPaccel – a Software-as-a-Service (“SaaS”) based software license referred to as subscription arrangements.
	·	Subscription Maintenance and Support - The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations and customer support. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches.
	·	Professional Services and Other - The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Service revenue	$	4,473		$	4,325		$	13,427		$	12,791
Software solutions revenue		3,875			3,784			10,741			4,796
Product revenue		760			701			1,944			1,509
Total revenue	$	9,108		$	8,810		$	26,112		$	19,096
Income/(loss) before income taxes		(728	)		12			(3,127	)		(2,090	)
Income tax benefit/(provision)		32			(137	)		315			247
Net loss		(696	)		(125	)		(2,812	)		(1,843	)
Basic earnings per share	$	(0.03	)	$	(0.01	)	$	(0.13	)	$	(0.09	)
Diluted earnings per share	$	(0.03	)	$	(0.01	)	$	(0.13	)	$	(0.09	)