Notes to Condensed Consolidated
Financial Statements (unaudited)
1.
Significant Accounting Policies
Description of Business
– Crexendo, Inc. is
incorporated in the state of Nevada. As used hereafter in the notes
to consolidated financial statements, we refer to Crexendo, Inc.
and its wholly owned subsidiaries, as “we,”
“us,” or “our Company.” Crexendo is an
award-winning premier provider of cloud communications, UCaaS, call
center, collaboration services, and other cloud business services
that are designed to provide enterprise-class cloud services to any
size business at affordable monthly rates. The Company has two
operating segments, which consist of Cloud Telecommunications and
Web Services.
Basis of Presentation
– The consolidated
financial statements include the accounts and operations of
Crexendo, Inc. and its wholly owned subsidiaries, which include
Crexendo Business Solutions, Inc. and Crexendo International, Inc.
All intercompany account balances and transactions have been
eliminated in consolidation. The consolidated financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles (“US GAAP”) and pursuant to the
rules and regulations of the Securities and Exchange Commission
(“SEC”). These consolidated financial statements
reflect the results of operations, financial position, changes in
stockholders’ equity, and cash flows of our
Company.
Cash and Cash Equivalents
– We consider all
highly liquid, short-term investments with maturities of three
months or less at the time of purchase to be cash equivalents. As
of September 30, 2020 and December 31, 2019, we had cash and cash
equivalents in financial institutions in excess of federally
insured limits in the amount of $15,414,000 and $4,004,000,
respectively.
Restricted Cash
– We classified
$100,000 and $100,000 as restricted cash as of September 30, 2020
and December 31, 2019, respectively. Cash is restricted for
compensating balance requirements on purchasing card agreements. As
of September 30, 2020 and December 31, 2019, we had restricted cash
in financial institutions in excess of federally insured limits in
the amount of $100,000 and $100,000,
respectively.
The
following table provides a reconciliation of cash and cash
equivalents and restricted cash reported on the balance sheet to
the cash, cash equivalents, and restricted cash shown in the
condensed consolidated statement of cash flows (in
thousands):
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$15,353
|
$3,308
|
|
Restricted
cash
|
100
|
100
|
|
Total
cash, cash equivalents, and restricted cash shown in the
condensed
|
|
|
|
consolidated
statement of cash flows
|
$15,453
|
$3,408
|
Trade Receivables
– Trade receivables
from our cloud telecommunications and web services segments are
recorded at invoiced amounts.
Allowance for Doubtful Accounts
– The allowance
represents estimated losses resulting from customers’ failure
to make required payments. The allowance estimate is based on
historical collection experience, specific identification of
probable bad debts based on collection efforts, aging of trade
receivables, customer payment history, and other known factors,
including current economic conditions. We believe that the
allowance for doubtful accounts is adequate based on our assessment
to date, however, actual collection results may differ materially
from our expectations.
Contract Assets
– Contract assets
primarily relate to the Company’s rights to consideration for
work completed but not billed as of the reporting date. The
contract assets are transferred to receivables when the rights
become unconditional.
Contract Costs
– Contract costs
primarily relate to incremental commission costs paid to sales
representatives and sales leadership as a result of obtaining
telecommunications contracts which are recoverable. The Company
capitalized contract costs in the amount of $915,000 and $815,000
at September 30, 2020 and December 31, 2019, respectively.
Capitalized commission costs are amortized based on the transfer of
goods or services to which the assets relate which typically range
from thirty-six to sixty months, and are included in selling and
marketing expenses. During the three months ended September 30,
2020 and 2019, the Company amortized $123,000 and $127,000
respectively, and there was no impairment loss in relation to the
costs capitalized. During the nine months ended September 30, 2020
and 2019, the Company amortized $368,000 and $376,000 respectively,
and there was no impairment loss in relation to the costs
capitalized.
Inventory
– Finished goods
telecommunications equipment inventory is stated at the lower of
cost or net realizable value (first-in, first-out method). In
accordance with applicable accounting guidance, we regularly
evaluate whether inventory is stated at the lower of cost or net
realizable value. If net realizable value is less than cost, the
write-down is recognized as a loss in earnings in the period in
which the excess occurs.
Property and Equipment
– Depreciation and
amortization expense is computed using the straight-line method in
amounts sufficient to allocate the cost of depreciable assets over
their estimated useful lives ranging from two to thirty-nine years.
The cost of leasehold improvements is amortized using the
straight-line method over the shorter of the estimated useful life
of the asset or the term of the related lease. Land is not
depreciable. Depreciable lives by asset group are as
follows:
|
Computer and office equipment
|
2 to 5 years
|
|
Computer software
|
3 years
|
|
Furniture and fixtures
|
4 years
|
|
Building
|
39 years
|
|
Leasehold improvements
|
2 to 5 years
|
Maintenance
and repairs are expensed as incurred. The cost and accumulated
depreciation of property and equipment sold or otherwise retired
are removed from the accounts and any related gain or loss on
disposition is reflected in the statement of
operations.
Asset Acquisitions
– Periodically we
acquire customer relationships that we account for as an asset
acquisition and record a corresponding intangible asset that is
amortized over its estimated useful life. Any excess of the fair
value of the purchase price over the fair value of the identifiable
assets and liabilities is allocated on a relative fair value basis.
No goodwill is recorded in an asset acquisition. If the fair value
of the assets acquired exceeds the initial consideration paid as of
the date of acquisition but includes a contingent consideration
arrangement and ASC 450 and ASC 815 do not apply to contingent
consideration, we analogize to the guidance in ASC 323 on
recognizing contingent consideration in the acquisition of an
equity method investment. The Company recognizes a liability equal
to the lesser of, the maximum amount of contingent consideration or
the excess of the fair value of the net assets acquired over the
initial cost measurement. In accordance with the requirements of
ASC 323 for equity method investments, the Company recognizes any
excess of the contingent consideration issued or issuable, over the
amount that was initially recognized as a liability, as an
additional cost of the asset acquisition. If the amount initially
recognized as a liability exceeds the contingent consideration
issued or issuable, the entity recognizes that amount as a
reduction of the cost of the asset acquisition. During the year
ended December 31, 2019, the Company acquired customer
relationships for an estimated aggregate purchase price of
$351,000. During the nine month period ended September 30, 2020,
the Company determined that the contingent consideration payable
was $121,000 less than initially recorded and recognized a
reduction in the cost of the asset acquired. The assets acquired
were not material to our consolidated financial
statements.
Goodwill
– Goodwill is tested
for impairment using a fair-value-based approach on an annual basis
(December 31) and between annual tests if indicators of potential
impairment exist.
Intangible Assets
– Our intangible
assets consist of customer relationships. The intangible assets are
amortized following the patterns in which the economic benefits are
consumed. We periodically review the estimated useful lives of our
intangible assets and review these assets for impairment whenever
events or changes in circumstances indicate that the carrying value
of the assets may not be recoverable. The determination of
impairment is based on estimates of future undiscounted cash flows.
If an intangible asset is considered to be impaired, the amount of
the impairment will be equal to the excess of the carrying value
over the fair value of the asset.
Contract Liabilities
– Our contract
liabilities consist primarily of advance consideration received
from customers for telecommunications contracts. The product and
monthly service revenue is recognized on completion of the
implementation and the remaining activation fees are reclassified
as deferred revenue.
Use of Estimates
– In preparing the
consolidated financial statements, management makes assumptions,
estimates and judgments that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods. Specific estimates and judgments include
valuation of goodwill and intangible assets in connection with
business acquisitions and asset acquisitions, allowances for
doubtful accounts, uncertainties related to certain income tax
benefits, valuation of deferred income tax assets, valuations of
share-based payments, annual incentive bonuses accrual,
recoverability of long-lived assets and product warranty
liabilities. Management’s estimates are based on historical
experience and on our expectations that are believed to be
reasonable. The combination of these factors forms the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other
sources. Actual results may differ from our current
estimates and those differences may be
material.
Contingencies
– The Company
accrues for claims and contingencies when losses become probable
and reasonably estimable. As of the end of each applicable
reporting period, the Company reviews each of its matters and,
where it is probable that a liability has been or will be incurred,
it accrues for all probable and reasonably estimable losses. Where
the Company can reasonably estimate a range of losses it may incur
regarding such a matter, it records an accrual for the amount
within the range that constitutes its best estimate. If the Company
can reasonably estimate a range but no amount within the range
appears to be a better estimate than any other, it uses the amount
that is the low end of such range.
Product and Service Revenue
Recognition – Revenue is recognized upon transfer of control of
promised products or services to customers in an amount that
reflects the consideration we expect to receive in exchange for
those products or services and excludes any amounts collected on
behalf of third parties. We enter into contracts that can include
various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance
obligations. We recognize revenue for delivered elements only when
we determine there are no uncertainties regarding customer
acceptance. Changes in the allocation of the sales price between
delivered and undelivered elements can impact the timing of revenue
recognized but does not change the total revenue recognized on any
agreement. Revenue is recognized net of any taxes collected from
customers, which are subsequently remitted to governmental
authorities. For more detailed information about revenue, see Note
2.
Cost of Service Revenue
– Cost of service
includes Cloud Telecommunications and Web Services cost of service
revenue. Cloud Telecommunications cost of service revenue primarily
consists of fees we pay to third-party telecommunications and
broadband Internet providers, costs of other third-party services
we resell, personnel and travel expenses related to system
implementation, and customer service. Web Services cost of service
revenue consists primarily of customer service costs and
outsourcing fees related to fulfillment of our professional web
management services.
Cost of Product Revenue
– Cost of product
revenue primarily consists of the costs associated with the
purchase of desktop devices and other third-party equipment we
purchase for resale.
Product Warranty
– We provide for the
estimated cost of product warranties at the time we recognize
revenue. We evaluate our warranty obligations on a product group
basis. Our standard product warranty terms generally include
post-sales support and repairs or replacement of a product at no
additional charge for a specified period of time. We base our
estimated warranty obligation upon warranty terms, ongoing product
failure rates, and current period product shipments. If actual
product failure rates, repair rates or any other post-sales support
costs were to differ from our estimates, we would be required to
make revisions to the estimated warranty liability. Warranty terms
generally last for the duration that the customer has
service.
Contingent Consideration
– Contingent
consideration represents deferred asset acquisition consideration
to be paid out at some point in the future, typically over a
one-year period or less from the acquisition date. Contingent
consideration is recorded at the asset acquisition date fair value.
Contingent consideration recorded in connection with an asset
acquisition is not derecognized until the related contingency is
resolved and the consideration is paid or becomes payable. If the
amount initially recorded as contingent consideration exceeds the
amount paid or payable, the Company recognizes that excess amount
as a reduction in the cost of the related intangible assets. During
the nine month period ended September 30, 2020, the Company
determined that the contingent consideration payable was $121,000
less than initially recorded and recognized a reduction in the cost
of the asset acquired.
Public Offering
– On September 28, 2020, the
Company completed a public offering in which it issued and sold
1,750,000 shares of common stock at a price to the public of $5.50
per share. The shares sold and issued in the public offering
resulted in an aggregate gross offering price of $9,625,000. The
Company received net proceeds of $8,633,000 after deducting
underwriting discounts and commissions of $674,000 and offering
expenses of $318,000.
Deferred Offering Costs
– Deferred offering
costs of $145,000, primarily consisting of certain legal,
accounting and other third-party fees that were directly associated
with the offering, were recorded in stockholders’ equity as a
reduction of additional paid-in capital generated upon closing of
the offering on September 28, 2020.
Research and Development
– Research and
development costs are expensed as incurred. Costs related to
internally developed software are expensed as research and
development expense until technological feasibility has been
achieved, after which the costs are
capitalized.
Fair Value Measurements
– The fair value of
our financial assets and liabilities was determined based on three
levels of inputs, of which the first two are considered observable
and the last unobservable, that may be used to measure fair value
which are the following:
Level 1 — Unadjusted quoted prices that are
available in active markets for the identical assets or liabilities
at the measurement date.
Level 2 — Other observable inputs available at the
measurement date, other than quoted prices included in Level 1,
either directly or indirectly, including:
·
Quoted prices for similar assets or liabilities in active
markets;
·
Quoted prices for identical or similar assets in non-active
markets;
·
Inputs other than quoted prices that are observable for the asset
or liability; and
·
Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 — Unobservable inputs that cannot be
corroborated by observable market data and reflect the use of
significant management judgment. These values are generally
determined using pricing models for which the assumptions utilize
management’s estimates of market participant
assumptions.
Lease Obligations
– We determine if an
agreement is a lease at inception. We evaluate the lease terms to
determine whether the lease will be accounted for as an operating
or finance lease. Operating leases are included in operating lease
right-of-use (“ROU”) assets, operating lease
liabilities, current portion, and operating lease liabilities, net
of current portion in our consolidated balance
sheets.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU
asset also includes any lease payments made and excludes lease
incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease
term.
A
lease that transfers substantially all of the benefits and risks
incidental to ownership of property are accounted for as finance
leases. At the inception of a finance lease, an asset and finance
lease obligation is recorded at an amount equal to the lesser of
the present value of the minimum lease payments and the
property’s fair market value. Finance lease obligations are
classified as either current or long-term based on the due dates of
future minimum lease payments, net of interest.
Notes Payable
– We record notes
payable net of any discounts or premiums. Discounts and premiums
are amortized as interest expense or income over the life of the
note in such a way as to result in a constant rate of interest when
applied to the amount outstanding at the beginning of any given
period.
Income Taxes
– We recognize a
liability or asset for the deferred tax consequences of all
temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated
financial statements that will result in taxable or deductible
amounts in future years when the reported amounts of the assets and
liabilities are recovered or settled. Accruals for uncertain tax
positions are provided for in accordance with accounting guidance.
Accordingly, we may recognize the tax benefits from an uncertain
tax position only if it is more-likely-than-not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate
settlement. Accounting guidance is also provided on de-recognition
of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, and income tax
disclosures. Judgment is required in assessing the future tax
consequences of events that have been recognized in the financial
statements or tax returns. Variations in the actual outcome of
these future tax consequences could materially impact our financial
position, results of operations, and cash flows. In assessing the
need for a valuation allowance, we evaluate all significant
available positive and negative evidence, including historical
operating results, estimates of future taxable income and the
existence of prudent and feasible tax planning strategies. We have
placed a full valuation allowance on net deferred tax
assets.
Interest
and penalties associated with income taxes are classified as income
tax expense in the consolidated statements of
operations.
Stock-Based Compensation
– For equity-classified awards, compensation expense
is recognized over the requisite service period based on the
computed fair value on the grant date of the award. Equity
classified awards include the issuance of stock options and
restricted stock units (“RSUs”).
Comprehensive Income
– There were no
other components of comprehensive income other than net income for
the three and nine months ended September 30, 2020 and
2019.
Operating Segments
– Accounting
guidance establishes standards for the way public business
enterprises are to report information about operating segments in
annual financial statements and requires enterprises to report
selected information about operating segments in financial reports
issued to stockholders. The Company has two operating segments,
which consist of Cloud Telecommunications and Web Services.
Research and development expenses are allocated to Cloud
Telecommunications and Web Services segments based on the level of
effort, measured primarily by wages and benefits attributed to our
engineering department. Indirect sales and marketing expenses
are allocated to the Cloud Telecommunications and Web Services
segments based on level of effort, measured by month-to-date
contract bookings. General and
administrative expenses are allocated to both segments based on
revenue recognized for each segment. Accounting guidance also
establishes standards for related disclosure about products and
services, geographic areas and major customers. We generate over
90% of our total revenue from customers within North America
(United States and Canada) and less than 10% of our total revenues
from customers in other parts of the world.
Significant Customers
– No customer
accounted for 10% or more of our total revenue for the three and
nine months ended September 30, 2020 and 2019. No customer
accounted for 10% or more of our total trade accounts receivable as
of September 30, 2020 and one telecommunications services customer
accounted for 11% of total trade accounts receivable as of December
31, 2019.
Recently
Adopted Accounting Pronouncements – In
August 2018, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2018-13, which removes, modifies and adds to
the disclosure requirements on fair value measurements in Topic
820. The amendments on changes in unrealized gains and losses, the
range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. An entity is permitted to
early adopt any removed or modified disclosures upon issuance of
this updated guidance and delay adoption of the additional
disclosures until their effective date. We adopted this guidance
effective January 1, 2020. The adoption of this guidance did not
have a material impact on our consolidated financial statements and
related disclosures.
In January 2017, the FASB issued ASU
2017-04, Intangibles - Goodwill and
Other (Topic 350): Simplifying
the Test for Goodwill Impairment, which eliminates Step 2 from the
goodwill impairment test. The annual, or interim, goodwill
impairment test is performed by comparing the fair value of a
reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. In addition, income tax effects from any
tax deductible goodwill on the carrying amount of the reporting
unit should be considered when measuring the goodwill impairment
loss, if applicable. The amendments also eliminate the requirements
for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is
necessary. The Company adopted ASU 2017-04 effective January 1,
2020. The adoption of this ASU did not have an impact on our
condensed consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), and in December 2018, ASU No.
2018-20, Narrow-Scope Improvements for
Lessors, and in July 2018, ASU
No. 2018-10, Codification Improvements to
Topic 842, Leases, and ASU
2018-11, Leases (Topic 842) - Targeted
Improvements (collectively,
“the new lease standard” or “ASC 842”). The
new standard requires lessees to record assets and liabilities on
the balance sheet for all leases with terms longer than 12 months.
This ASU does not significantly change the previous lease guidance
for how a lessee should recognize, measure, and present expenses
and cash flows arising from a lease. Additionally, the criteria for
classifying a finance lease versus an operating lease are
substantially the same as the previous guidance.
We adopted Topic 842 as of January 1, 2019, using the alternative
transition method that allowed us to recognize a cumulative-effect
adjustment to the opening balance of retained earnings at the
beginning of the period of adoption. We used the package of
practical expedients permitted under the transition guidance that
allowed us to not reassess: (1) whether any expired or existing
contracts are or contain leases, (2) lease classification for any
expired or existing leases and (3) initial direct costs for any
expired or existing leases. We elected the practical expedient that
allows lessees to treat the lease and non-lease components of
leases as a single lease component. Additionally, we elected the
hindsight practical expedient to determine the reasonably certain
lease terms for existing leases. The adoption of Topic 842 did not
have a material adjustment to the opening balance of retained
earnings. The adoption of Topic
842 had a material impact on our condensed consolidated balance
sheet due to the recognition of right-of-use (“ROU”)
assets and lease liabilities. As a result of the adoption of the
standard, the Company recognized ROU assets and lease liabilities
of $1,088,000 as of January 1, 2019. The adoption of Topic 842 did
not have a material impact on our condensed consolidated statement
of operations or our condensed consolidated statement cash
flows.
In
August 2018, the FASB issued ASU 2018-07, to simplify the
accounting for share-based payments to nonemployees by aligning it
with the accounting for share-based payments to employees, with
certain exceptions. The new guidance expands the scope of
Accounting Standards Codification (ASC) 718 to include share-based
payments granted to nonemployees in exchange for goods or services
used or consumed in an entity’s own operations and supersedes
the guidance in ASC 505-50. The guidance also applies to awards
granted by an investor to employees and nonemployees of an equity
method investee for goods or services used or consumed in the
investee’s operations. The guidance in ASC 718 does not apply
to instruments issued to a lender or an investor in a financing
(e.g., in a capital raising) transaction. It also does not apply to
equity instruments granted when selling goods or services to
customers in the scope of ASC 606. However, the guidance states
that share-based payments granted to a customer in exchange for a
distinct good or service to be used or consumed in the
grantor’s own operations are accounted for under ASC 718. The
Company adopted ASU 2018-07 effective January 1, 2019. The adoption
of this ASU did not have an impact on our condensed consolidated
financial statements.
Recently
Issued Accounting Pronouncements – In
June 2016, the FASB issued ASU 2016-13, which requires measurement
and recognition of expected credit losses for financial assets
held. Following the effective date philosophy for all other
entities in ASU 2019-10, which includes smaller reporting companies
(SRCs), this guidance is effective for fiscal years beginning after
December 15, 2022 including interim periods within those fiscal
years. The standard is to be applied through a cumulative-effect
adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective. We do not plan
to early adopt this ASU. We are in the process of evaluating the
potential impact of adopting this new accounting standard on our
consolidated financial statements and related
disclosures.
In December 2019, the FASB issued ASU 2019-12 to
simplify the accounting in ASC 740, Income
Taxes. This guidance removes
certain exceptions related to the approach for intra-period tax
allocation, the methodology for calculating income taxes in an
interim period, and the recognition of deferred tax liabilities for
outside basis differences. This guidance also clarifies and
simplifies other areas of ASC 740. This ASU will be effective
beginning in the first quarter of the Company’s fiscal year
2021. Early adoption is permitted. Certain amendments in this
update must be applied on a prospective basis, certain amendments
must be applied on a retrospective basis, and certain amendments
must be applied on a modified retrospective basis through a
cumulative-effect adjustment to retained earnings/(deficit) in the
period of adoption. The Company is currently evaluating the impact
this ASU will have on the financial statements and related
disclosures, as well as the timing of adoption.
Revenue
is measured based on a consideration specified in a contract with a
customer, and excludes any sales incentives and amounts collected
on behalf of third parties. The Company recognizes revenue when it
satisfies a performance obligation by transferring control over a
product or service to a customer. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by the Company
from a customer, are excluded from revenue. The following is a
description of principal activities – separated by reportable
segments – from which the Company generates its revenue. For
more detailed information about reportable segments, see Note
15.
Cloud Telecommunications Segment
Products
and services may be sold separately or in bundled packages. The
typical length of a contract for service is thirty-six to sixty
months. Customers are billed for these services on a monthly basis.
For bundled packages, the Company accounts for individual products
and services separately if they are distinct – i.e. if a
product or service is separately identifiable from other items in
the bundled package and if a customer can benefit from it on its
own or with other resources that are readily available to the
customer. The consideration (including any discounts) is allocated
between separate products and services in a bundle based on their
relative stand-alone selling prices. The stand-alone selling prices
are determined based on the prices at which the Company separately
sells the desktop devices and telecommunication services. For items
that are not sold separately (e.g. additional features) the Company
estimates stand-alone selling prices using the adjusted market
assessment approach. When we provide a free trial period, we do not
begin to recognize recurring revenue until the trial period has
ended and the customer has been billed for the
services.
Desktop Devices
– Revenue
generated from the sale of telecommunications equipment (desktop
devices) is recognized when the customer takes possession of the
devices and the cloud telecommunications services begin. The
Company typically bills and collects the fees for the equipment
upon entering into a contract with a customer. Cash receipts are
recorded as a contract liability until implementation is complete
and the services begin.
Equipment Financing
Revenue – Fees
generated from renting our cloud telecommunication equipment (IP or
cloud telephone desktop devices) through leasing contracts are
recognized as revenue based on whether the lease qualifies as an
operating lease or sales-type lease. The two primary accounting
provisions which we use to classify transactions as sales-type or
operating leases are: 1) lease term to determine if it is equal to
or greater than 75% of the economic life of the equipment and 2)
the present value of the minimum lease payments to determine if
they are equal to or greater than 90% of the fair market value of
the equipment at the inception of the lease. The economic life of
most of our products is estimated to be three years, since this
represents the most frequent contractual lease term for our
products, and there is no residual value for used equipment.
Residual values, if any, are established at the lease inception
using estimates of fair value at the end of the lease term. The
vast majority of our leases that qualify as sales-type leases are
non-cancelable and include cancellation penalties approximately
equal to the full value of the lease receivables. Leases that do
not meet the criteria for sales-type lease accounting are accounted
for as operating leases. Revenue from sales-type leases is
recognized upon installation and the interest portion is deferred
and recognized as earned. Revenue from operating leases in
recognized ratably over the applicable service
period.
Cloud Telecommunications
Services – Cloud
telecommunication services include voice, data, collaboration
software, broadband Internet access, and interest generated from
equipment financing revenue. The Company recognizes revenue as
services are provided in service revenue. Fees generated from
reselling broadband Internet access are recognized as revenue net
of the costs charged by the third-party service providers. Cloud
telecommunications services are billed and paid on a monthly basis.
Our telecommunications services contracts typically have a term of
thirty-six to sixty months.
Fees, Commissions, and Other,
Recognized over Time – Includes
contracted and non-contracted items such as:
●
Contracted
activation and flash fees – The Company generally allocates a
portion of the activation fees to the desktop devices, which is
recognized at the time of the installation or customer acceptance,
and a portion to the service, which is recognized over the contract
term using the straight-line method.
●
Non-contracted
carrier cost recovery fee – This fee recovers the various
costs and expenses that the Company incurs in connection with
complying with legal, regulatory, and other requirements, including
without limitation federal, state, and local reporting and filing
requirements. This fee is assessed as a set percentage of our
monthly billing and is recognized monthly.
●
Non-contracted
administrative fees – Administrative fees are recognized as
revenue on a monthly basis.
One-Time Fees, Commissions,
and Other – Includes
contracted and non-contracted items such as:
●
Contracted
professional service revenue – Professional service revenue
includes professional installation services, custom integration,
and other professional services. The Company typically bills and
collects professional service revenue upon entering into a contract
with a customer. Professional service revenue is recognized as
revenue when the performance obligations are
completed.
●
Non-contracted
cancellation fees – These cancellation fees relate to
remaining contractual term buyout payments in connection with early
cancellation and are billed and recognized as revenue upon
receipt.
●
Other
non-contracted fees – These fees include disconnect fees,
shipping fees, restocking fees, and porting fees. Other
non-contracted fees are recognized as revenue upon receipt of
payment.
Web Services Segment
Website Hosting Service
– Fees
generated from hosting customer websites are recognized as revenue
as the services are provided in service revenue. Website hosting
services are billed and collected on a monthly
basis.
Professional Website
Management Service and Other – Fees
generated from reselling professional website management services
are recognized as revenue net of the costs charged by the
third-party service providers. Professional website management
services are billed and paid on a monthly
basis.
Disaggregation of Revenue
In
the following table, revenue is disaggregated by primary major
product line, and timing of revenue recognition. The table also
includes a reconciliation of the disaggregated revenue with the
reportable segments.
|
Three Months Ended September 30, 2020
|
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
|
Telecommunications
Segment
|
|
Total
Reportable Segments
|
|
Major products/services lines
|
|
|
|
|
Desktop
devices
|
$489
|
$-
|
$489
|
|
Equipment
financing revenue
|
59
|
-
|
59
|
|
Telecommunications
services
|
3,182
|
-
|
3,182
|
|
Fees,
commissions, and other, recognized over time
|
244
|
-
|
244
|
|
One
time fees, commissions and other
|
40
|
-
|
40
|
|
Website
hosting services
|
-
|
117
|
117
|
|
Website
management services and other
|
-
|
12
|
12
|
|
|
$4,014
|
$129
|
$4,143
|
|
Timing of revenue recognition
|
|
|
|
|
Products
and fees recognized at a point in time
|
$529
|
$-
|
$529
|
|
Services
and fees transferred over time
|
3,485
|
129
|
3,614
|
|
|
$4,014
|
$129
|
$4,143
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Telecommunications Segment
|
|
Total
Reportable
Segments
|
|
Major products/services lines
|
|
|
|
|
Desktop
devices
|
$343
|
$-
|
$343
|
|
Equipment
financing revenue
|
30
|
-
|
30
|
|
Telecommunications
services
|
2,813
|
-
|
2,813
|
|
Fees,
commissions, and other, recognized over time
|
176
|
-
|
176
|
|
One
time fees, commissions and other
|
81
|
-
|
81
|
|
Website
hosting services
|
-
|
146
|
146
|
|
Website
management services and other
|
-
|
13
|
13
|
|
|
$3,443
|
$159
|
$3,602
|
|
Timing of revenue recognition
|
|
|
|
|
Products
and fees recognized at a point in time
|
$424
|
$-
|
$424
|
|
Services
and fees transferred over time
|
3,019
|
159
|
3,178
|
|
|
$3,443
|
$159
|
$3,602
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
|
Telecommunications
Segment
|
|
Total
Reportable
Segments
|
|
Major products/services lines
|
|
|
|
|
Desktop
devices
|
$1,317
|
$-
|
$1,317
|
|
Equipment
financing revenue
|
156
|
-
|
156
|
|
Telecommunications
services
|
9,321
|
-
|
9,321
|
|
Fees,
commissions, and other, recognized over time
|
726
|
-
|
726
|
|
One
time fees, commissions and other
|
123
|
-
|
123
|
|
Website
hosting services
|
-
|
372
|
372
|
|
Website
management services and other
|
-
|
49
|
49
|
|
|
$11,643
|
$421
|
$12,064
|
|
Timing of revenue recognition
|
|
|
|
|
Products
and fees recognized at a point in time
|
$1,440
|
$-
|
$1,440
|
|
Services
and fees transferred over time
|
10,203
|
421
|
10,624
|
|
|
$11,643
|
$421
|
$12,064
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
(In
thousands)
|
Cloud
|
|
|
|
|
Telecommunications
Segment
|
|
Total
Reportable
Segments
|
|
Major products/services lines
|
|
|
|
|
Desktop
devices
|
$1,294
|
$-
|
$1,294
|
|
Equipment
financing revenue
|
79
|
-
|
79
|
|
Telecommunications
services
|
7,949
|
-
|
7,949
|
|
Fees,
commissions, and other, recognized over time
|
575
|
-
|
575
|
|
One
time fees, commissions and other
|
309
|
-
|
309
|
|
Website
hosting services
|
-
|
444
|
444
|
|
Website
management services and other
|
-
|
58
|
58
|
|
|
$10,206
|
$502
|
$10,708
|
|
Timing of revenue recognition
|
|
|
|
|
Products
and fees recognized at a point in time
|
$1,603
|
$-
|
$1,603
|
|
Services
and fees transferred over time
|
8,603
|
502
|
9,105
|
|
|
$10,206
|
$502
|
$10,708
|
Contract balances
The
following table provides information about receivables, contract
assets, and contract liabilities from contracts with
customers.
|
|
|
|
|
(In
thousands)
|
|
|
|
Receivables,
which are included in trade receivables, net of
allowance
|
|
|
|
for
doubtful accounts
|
$634
|
$386
|
|
Contract
assets
|
94
|
22
|
|
Contract
liabilities
|
1,233
|
1,214
|
Significant
changes in the contract assets and the contract liabilities
balances during the period are as follows:
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Revenue
recognized that was included in the contract liability balance at
the beginning of the period
|
$-
|
$(942)
|
$-
|
$(882)
|
|
Increase
due to cash received, excluding amounts recognized as revenue
during the period
|
-
|
923
|
-
|
1,033
|
|
Transferred
to receivables from contract assets recognized at the beginning of
the period
|
(12)
|
-
|
(13)
|
-
|
|
Increase
due to additional unamortized discounts
|
84
|
-
|
23
|
-
|
Transaction price allocated to the remaining performance
obligations
The
following table includes estimated revenue expected to be
recognized in the future related to performance obligations that
are unsatisfied (or partially unsatisfied) at the end of the
reporting period (in thousands):
|
|
|
|
|
|
|
|
|
|
Desktop
devices
|
$304
|
-
|
-
|
-
|
-
|
-
|
$304
|
|
Telecommunications
service
|
$3,166
|
9,937
|
7,057
|
4,752
|
2,598
|
499
|
$28,009
|
|
All
consideration from contracts with customers is included in the
amounts presented above
|
|
|
|
|
|
|
|
3.
Earnings Per Common Share
Basic
net income per common share is computed by dividing the net income
for the period by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share
is computed giving effect to all dilutive common stock equivalents,
consisting of common stock options. The following table sets forth
the computation of basic and diluted net income per common
share:
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Net
income (in thousands) (A)
|
$131
|
$334
|
$779
|
$911
|
|
|
|
|
|
|
|
Weighted-average
share reconciliation:
|
|
|
|
|
|
Weighted-average
basic shares outstanding (B)
|
15,244,804
|
14,663,151
|
15,058,192
|
14,507,696
|
|
Dilutive
effect of stock-based awards
|
2,004,231
|
966,496
|
1,735,704
|
936,367
|
|
Diluted
weighted-average outstanding shares of common stock
(C)
|
17,249,035
|
15,629,647
|
16,793,896
|
15,444,063
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
Basic
(A/B)
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
|
Diluted
(A/C)
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
For
the three and nine months ended September 30, 2020 and 2019, the
following potentially dilutive common stock, including awards
granted under our equity incentive compensation plans, were
excluded from the computation of diluted net income per share
because including them would be anti-dilutive.
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Stock
options
|
18,685
|
1,271,559
|
91,845
|
1,662,311
|
DoubleHorn, LLC Asset Acquisition
On
December 31, 2019, the Company acquired certain assets from
DoubleHorn, LLC. The aggregate purchase price of approximately
$351,000 consisted of $176,000 of cash payable at closing and
$175,000 of contingent consideration it estimates will be paid
during the six month earn-out period. The Company concluded that
the DoubleHorn acquisition met the definition of an asset
acquisition under ASU 2017-01, "Clarifying the Definition of a
Business", and the cost was allocated to the individual assets
acquired and liabilities assumed based on their relative fair
values. The customer relationships intangible asset will be
amortized over a six year estimated useful life following the
pattern of the economic benefits.
During
the nine month period ended September 30, 2020, $54,000 of
contingent consideration was paid in cash and the Company
determined that the contingent consideration payable was $121,000
less than initially recorded and recognized a reduction in the cost
of the asset acquired. The following table presents the cost of the
acquisition and the allocation to assets acquired based upon their
relative fair value:
|
Consideration:
|
|
|
Cash
|
$230
|
|
Total
consideration
|
$230
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities
assumed:
|
|
|
Customer
relationships
|
$230
|
|
Net
assets acquired
|
$230
|
5.
Trade Receivables, net
Our
trade receivables balance consists of traditional trade
receivables. Below is an analysis of our trade
receivables as shown on our balance sheet (in
thousands):
|
|
|
|
|
|
|
|
|
Gross
trade receivables
|
$684
|
$400
|
|
Less:
allowance for doubtful accounts
|
(50)
|
(14)
|
|
Trade
receivables, net
|
$634
|
$386
|
|
|
|
|
|
Current
trade receivables, net
|
$632
|
$380
|
|
Long-term
trade receivables, net
|
2
|
6
|
|
Trade
receivables, net
|
$634
|
$386
|
Prepaid
expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Prepaid
corporate insurance
|
$87
|
$48
|
|
Prepaid
software services and support
|
80
|
27
|
|
Prepaid
inventory deposits
|
90
|
-
|
|
Other
prepaid expenses
|
75
|
66
|
|
Total
prepaid expenses
|
$332
|
$141
|
7.
Property and Equipment
Property
and equipment consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
Building
|
$2,000
|
$-
|
|
Land
|
500
|
-
|
|
Computer
and office equipment
|
1,407
|
1,388
|
|
Computer
software
|
526
|
346
|
|
Internal
software
|
14
|
-
|
|
Furniture
and fixtures
|
29
|
-
|
|
Leasehold
improvements
|
-
|
85
|
|
Less:
accumulated depreciation
|
(1,704)
|
(1,664)
|
|
Total
property and equipment, net
|
$2,772
|
$155
|
Depreciation
and amortization expense is included in general and administrative
expenses and totaled $34,000 and $12,000 for the three months ended
September 30, 2020 and 2019, respectively and $128,000 and $29,000
for the nine months ended September 30, 2020 and 2019,
respectively.
The net carrying amount of intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
Customer
relationships
|
$1,171
|
$1,292
|
|
Less:
accumulated amortization
|
(896)
|
(827)
|
|
Total
|
$275
|
$465
|
Amortization
expense is included in general and administrative expenses and
totaled $23,000 and $13,000 for the three months ended September
30, 2020 and 2019, respectively, and $69,000 and $40,000 for the
nine months ended September 30, 2020 and 2019, respectively. During
the nine months ended September 30, 2020, we reduced customer
relationships by $121,000 due to an adjustment to the total
consideration payable under the DoubleHorn customer relationships
asset purchase agreement.
Accrued
expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Accrued
wages and benefits
|
$384
|
$538
|
|
Accrued
accounts payable
|
607
|
566
|
|
Accrued
sales and telecommunication taxes
|
393
|
529
|
|
Product
warranty liability
|
47
|
37
|
|
Other
|
139
|
84
|
|
Total
accrued expenses
|
$1,570
|
$1,754
|
The
changes in aggregate product warranty liabilities for the year
ended December 31, 2019 and nine months ended September 30, 2020
were as follows (in thousands):
|
|
|
|
Balance
at January 1, 2019
|
$16
|
|
Accrual
for warranties
|
37
|
|
Adjustments
related to pre-existing warranties
|
7
|
|
Warranty
settlements
|
(23)
|
|
Balance
at December 31, 2019
|
37
|
|
Accrual
for warranties
|
29
|
|
Warranty
settlements
|
(19)
|
|
Balance
at September 30, 2020
|
$47
|
Product
warranty expense is included in cost of product revenue expense and
totaled $11,000 and $4,000 for the three months ended September 30,
2020 and 2019, respectively, and $29,000 and $14,000 for the nine
months ended September 30, 2020 and 2019,
respectively.
Notes
payable consists of a short and long-term financing
arrangements:
|
|
|
|
|
|
|
|
|
Notes
payable
|
$2,962
|
$-
|
|
Less:
current notes payable
|
(1,071)
|
-
|
|
Notes
payable, net of current portion
|
$1,891
|
$-
|
On
January 27, 2020, we entered into a Fixed Rate Term Loan Agreement
with Bank of America, N.A. to finance Two Million Dollars
($2,000,000) to purchase our corporate office building. The Loan
Agreement has a term of seven (7) years with monthly payments of
Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars
($11,841.15), including interest at 3.67%, beginning on March 1,
2020, secured by the office building.
On
April 21, 2020, we received a loan from Infinity Bank in the
aggregate principal amount of One Million, Six Hundred and
Twenty-Six Dollars ($1,000,626), pursuant to the Paycheck
Protection Program (the “PPP”) under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES
Act”), which was enacted March 27, 2020. The loan bears
interest at a rate of 1.00% per annum, payable monthly commencing
on November 21, 2020, following an initial deferral period as
specified under the PPP. The notes may be prepaid by the applicable
Borrower at any time prior to maturity with no prepayment
penalties. Proceeds from the loan will be available to fund
designated expenses, including certain payroll costs, group health
care benefits and other permitted expenses, in accordance with the
PPP. Under the terms of the PPP, up to the entire amount of
principal and accrued interest may be forgiven to the extent loan
proceeds are used for qualifying expenses as described in the CARES
Act and applicable implementing guidance issued by the U.S. Small
Business Administration under the PPP. The Company will use the
entire loan amount for designated qualifying expenses and believes
forgiveness will be granted of the respective loan in accordance
with the terms of the PPP.
As
of September 30, 2020, future principal payments are scheduled as
follows (in thousands):
|
Year ending December
31,
|
|
|
2020
remaining
|
$1,018
|
|
2021
|
71
|
|
2022
|
74
|
|
2023
|
76
|
|
2024
|
79
|
|
Thereafter
|
1,644
|
|
Total
|
$2,962
|
11.
Fair Value Measurements
We
have financial instruments as of September 30, 2020 and December
31, 2019 for which the fair value is summarized below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Trade
receivables, net
|
$634
|
$634
|
$386
|
$386
|
|
Equipment
financing receivables
|
1,099
|
1,099
|
704
|
704
|
|
Liabilities:
|
|
|
|
|
|
Finance
lease obligations
|
$94
|
$94
|
$116
|
$116
|
|
Notes
payable
|
2,962
|
2,962
|
-
|
-
|
|
Asset
acquisition contigent consideration
|
-
|
-
|
175
|
175
|
Liabilities
for which fair value is recognized in the balance sheet on a
recurring basis are summarized below as of September 30, 2020 and
December 31, 2019 (in thousands):
|
|
|
Fair
value measurement at reporting date
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Asset
acquisition contingent consideration
|
$-
|
$-
|
$-
|
$-
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Asset
acquisition contingent consideration
|
$175
|
$-
|
$-
|
$175
|
The
recurring Level 3 measurement of our asset acquisition contingent
consideration liability includes the following significant
unobservable inputs at December 31, 2019 (in
thousands):
|
Contingent
consideration liability
|
Fair
Value at December 31, 2019
|
Valuation
technique
|
Unobservable
inputs
|
|
|
Revenue
- based payments
|
$175
|
Discounted
cash flow
|
Discount
Rate
|
3.67%
|
|
|
|
|
|
|
|
|
|
|
Probability
of milestone payment
|
100%
|
|
|
|
|
Projected
year of payments
|
2020
|
Level
3 instruments are valued based on unobservable inputs that are
supported by little or no market activity and reflect the
Company’s own assumptions in measuring fair value. Future
changes in fair value of the contingent financial milestone
consideration, as a result of changes in significant inputs such as
the discount rate and estimated probabilities of financial
milestone achievements, could have a material effect on the
statement of operations and balance sheet in the period of the
change.
During
the nine month period ended September 30, 2020, the Company reduced
the contingent consideration to be paid based on the completion of
the earn-out period by $121,000 and recognized a reduction in the
cost of the assets acquired. The progression of the Company’s
Level 3 instruments fair valued on a recurring basis for the nine
months ended September 30, 2020 and the year ended December 31,
2019 are shown in the table below (in thousands):
|
|
Asset
Acquisition Contingent Consideration
|
|
Balance
at January 1, 2019
|
$-
|
|
Additions
|
175
|
|
Balance
at December 31, 2019
|
$175
|
|
Cash
payments
|
(54)
|
|
Adjustment
|
(121)
|
|
Balance
at September 30, 2020
|
$-
|
Our
effective tax rate for the three months ended September 30, 2020
and 2019 was 2.2% and 0.1%, respectively, which resulted in an
income tax provision of $(3,000) and $0, respectively. Our
effective tax rate for the nine months ended September 30, 2020 and
2019 was 1.1% and 0.7%, respectively, which resulted in an income
tax provision of $(9,000) and $(7,000), respectively. The tax
provision is due to state tax payments made with extensions
filed.
Significant
management judgment is required in determining our provision for
income taxes and in determining whether deferred tax assets will be
realized in full or in part. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income in the periods in which those temporary differences become
deductible. We reduce the carrying amounts of deferred tax assets
by a valuation allowance if, based on the evidence available, it is
more-likely-than-not that such assets will not be realized. In
making the assessment under the more-likely-than-not standard,
appropriate consideration must be given to all positive and
negative evidence related to the realization of the deferred tax
assets. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts
of future profitability, the duration of statutory carry-forward
periods by jurisdiction, unitary versus stand-alone state tax
filings, our experience with loss carryforwards expiring
unutilized, and all tax planning alternatives that may be
available. Based on the significant negative evidence of cumulative
losses and history of loss carryforwards expiring unutilized, the
positive evidence of forecasts of future profitability was not
sufficient to overcome the negative evidence. As a result, we
determined it was more likely than not that the deferred tax assets
would not be realized as of September 30, 2020 and December 31,
2019; accordingly, we recorded a full valuation
allowance.
Lessee Accounting
We
determine if an agreement is a lease at inception. We previously
leased our corporate office building and equipment under operating
leases. We lease data center equipment, including maintenance
contracts under finance leases.
Operating
leases are recorded as right-of-use (“ROU”) assets and
lease liabilities on the balance sheet. ROU assets represent our
right to use the leased asset for the lease term and lease
liabilities represent our obligation to make lease payments.
Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over
the lease term. As most of our leases do not provide an implicit
rate, we use our estimated incremental borrowing rate at the
commencement date to determine the present value of lease payments.
The operating lease ROU assets also include any lease payments made
and exclude lease incentives. The Company’s lease agreements
do not contain any variable lease payments, material residual value
guarantees or any restrictive covenants. Our lease terms may
include options, at our sole discretion, to extend or terminate the
lease. At the adoption date of ASC Topic 842, the Company was
reasonably certain that we would exercise our option to renew our
corporate office building operating lease. Lease expense is
recognized on a straight-line basis over the lease
term.
We
previously leased the corporate office building in Tempe, Arizona
from a Company that is owned by the major shareholder and CEO of
the Company. Effective March 1, 2017, the lease agreement was
renewed for a three year term with monthly rent payments of
$25,000. There was a renewal option for another three year term at
the end of the lease that was considered in valuing the ROU asset
as we were reasonably certain we would exercise the renewal option.
Amortization of the ROU assets and operating lease liabilities for
the three months ended September 30, 2020 and 2019 was $0 and
$59,000, respectively, and for the nine months ended September 30,
2020 and 2019 was $50,000 and $174,000, respectively. Rental
expense incurred on operating leases for the three months ended
September 30, 2020 and 2019 was approximately $0 and $75,000,
respectively, and for the nine months ended September 30, 2020 and
2019 was approximately $25,000 and $225,000,
respectively.
As
of December 31, 2019 we initiated the process to purchase the
corporate office building back from our lessor and gave notice that
we will not be exercising our option to renew for another three
year term. The ROU asset and associated lease liabilities were
revalued as of December 31, 2019 for the remaining two months of
the lease term. This resulted in an adjustment of approximately
$804,000 for the associated ROU, $250,000 for the operating lease
liability, current portion, and $554,000 for the operating lease
liability, net of current portion.
We
have lease agreements with lease and non-lease components, and we
account for the lease and non-lease components as a single lease
component. Our lease agreements do not contain any material
residual value guarantees or material restrictive covenants. The
Company leases equipment and support under a finance lease
agreement which extends through 2023. The outstanding balance for
finance leases was $94,000 and $116,000 as of September 30, 2020
and December 31, 2019, respectively. The Company recorded assets
classified as property and equipment under finance lease
obligations of $129,000 and $129,000 as of September 30, 2020 and
December 31, 2019, respectively. Related accumulated depreciation
totaled $60,000 and $34,000 as of September 30, 2020 and 2019,
respectively. The $25,000 support contract was classified as a
prepaid expense and is being amortized over the service period of 3
years. Amortization expense is included in general and
administrative expenses and totaled $2,000 and $2,000 for the three
months ended September 30, 2020 and 2019, respectively, and $6,000
and $6,000 for the nine months ended September 30, 2020 and 2019,
respectively. The interest rate on the finance lease obligation is
6.7% and interest expense was $2,000 and $1,000 for the three
months ended September 30, 2020 and 2019, respectively and $5,000
and $7,000 for the nine months ended September 30, 2020 and 2019,
respectively.
The
maturity of operating leases and finance lease liabilities as of
September 30, 2020 are as follows:
|
Year ending December
31,
|
|
|
|
2020
remaining
|
$-
|
$9
|
|
2021
|
1
|
36
|
|
2022
|
-
|
37
|
|
2023
|
-
|
21
|
|
Total
minimum lease payments
|
1
|
103
|
|
Less:
amount representing interest
|
-
|
(9)
|
|
Present
value of minimum lease payments
|
$1
|
$94
|
|
Lease term and discount
rate
|
|
|
Weighted-average remaining lease term (years)
|
|
|
Operating
leases
|
3.5
|
|
Finance
leases
|
2.8
|
|
Weighted-average discount rate
|
|
|
Operating
leases
|
6.7%
|
|
Finance
leases
|
6.7%
|
|
|
Nine Months Ended September
30,
2020
|
|
Cash paid for amounts included in the measurement of lease
liabilities:
|
|
|
Operating
cash flows from operating leases
|
$25
|
|
Operating
cash flows from finance leases
|
5
|
|
Financing
cash flows from finance leases
|
22
|
Lessor Accounting
Lessor
accounting remained substantially unchanged with the adoption of
ASC Topic 842. Crexendo offers its customers lease financing for
the lease of our cloud telecommunication equipment (IP or cloud
telephone desktop devices). We account for these transactions as
sales-type leases. The vast majority of our leases that qualify as
sales-type leases are non-cancelable and include cancellation
penalties approximately equal to the full value of the lease
receivables. Leases that do not meet the criteria for sales-type
lease accounting are accounted for as operating leases. Revenue
from sales-type leases is recognized upon installation and the
interest portion is deferred and recognized as earned. Revenue from
operating leases is recognized ratably over the applicable service
period.
Equipment
finance receivables arising from the rental of our cloud
telecommunications equipment through sales-type leases, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
Gross
financing receivables
|
$1,650
|
$1,086
|
|
Less:
unearned income
|
(551)
|
(382)
|
|
Financing
receivables, net
|
1,099
|
704
|
|
Less:
current portion of finance receivables, net
|
(253)
|
(143)
|
|
Finance
receivables due after one year
|
$846
|
$561
|
Future
minimum lease payments as of September 30, 2020, consisted of the
following:
|
Year ending December
31,
|
|
|
2020
remaining
|
$126
|
|
2021
|
485
|
|
2022
|
431
|
|
2023
|
338
|
|
2024
|
214
|
|
2025
|
56
|
|
Gross
equipment financing receivables
|
1,650
|
|
Less:
unearned income
|
(551)
|
|
Equipment
financing receivables, net
|
$1,099
|
14.
Commitments and Contingencies
Annual Incentive Bonuses Accrual
We
utilize incentive bonuses to reward performance achievements and
have in place annual target incentive bonuses, payable either in
whole or in part, depending on the extent to which the financial
performance goals set by the Compensation Committee are achieved.
Under our 2020 Profit Sharing Plan, incentive bonuses for all of
the participants, including the participating officers excluding
the CEO, are determinable based upon four measures of corporate
financial performance. The four performance target are; (a) The
revenue for the year ended December 31, 2020 must exceed the
budgeted revenue approved by the Board; (b) adjusted EBITDA must
exceed the budgeted adjusted EBITDA approved by the board; (c)
sales bookings for the year ended December 31, 2020 must exceed
budgeted Sales Bookings approved by the board; and (d) completion
of an asset or business acquisition during the year ended December
31, 2020. If the requirements of (a-c) are met individually, there
shall be an award pool of sixty thousand ($60,000) for each
performance target achieved during the year ended December 31,
2020, to be allocated to participants based on the
participant’s proportionate share. If the requirement of (d)
is met, there shall be an award pool based on the acquired annual
revenue for each asset or business combination completed during the
year ended December 31, 2020. An amount of $20,000 per $1M of
acquired annualized revenue up to $5 million of acquired annualized
revenue; plus $10,000 per $1M of acquired annualized revenue above
$5M will be placed in the award pool to be allocated to
participating executives based on the participant’s
proportionate share. Based on our financial performance as of
September 30, 2020, it is reasonably possible that one or multiple
of the performance targets may be achieved, however a reasonable
estimate of liability cannot be made at this time.
Management
has chosen to organize the Company around differences based on its
products and services. Cloud Telecommunications segment generates
revenue from selling cloud telecommunication products and services
and broadband Internet services. Web Services segment generates
revenue from website hosting and other professional services. The
Company has two operating segments, which consist of Cloud
Telecommunications and Web Services. Segment revenue and income
before income tax provision are as follows (in
thousands):
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Cloud
telecommunications
|
$4,014
|
$3,443
|
$11,643
|
$10,206
|
|
Web
services
|
129
|
159
|
421
|
502
|
|
Consolidated
revenue
|
4,143
|
3,602
|
12,064
|
10,708
|
|
|
|
|
|
|
|
Income
from operations:
|
|
|
|
|
|
Cloud
telecommunications
|
124
|
276
|
739
|
692
|
|
Web
services
|
31
|
60
|
128
|
225
|
|
Total
operating income
|
155
|
336
|
867
|
917
|
|
Other
income/(expense), net:
|
|
|
|
|
|
Cloud
telecommunications
|
(20)
|
2
|
(47)
|
(2)
|
|
Web
services
|
(1)
|
(4)
|
(32)
|
3
|
|
Total
other income/(expense), net
|
(21)
|
(2)
|
(79)
|
1
|
|
Income
before income tax provision:
|
|
|
|
|
|
Cloud
telecommunications
|
104
|
278
|
692
|
690
|
|
Web
services
|
30
|
56
|
96
|
228
|
|
Income
before income tax provision
|
$134
|
$334
|
$788
|
$918
|
Depreciation
and amortization was $55,000 and $24,000 for the Cloud
Telecommunications segment for the three months ended September 30,
2020 and 2019, respectively. Depreciation and amortization was
$190,000 and $66,000 for the Cloud Telecommunications segment for
the nine months ended September 30, 2020 and 2019, respectively.
Depreciation and amortization was $2,000 and $1,000 for the Web
Services segment for the three months ended September 30, 2020 and
2019, respectively. Depreciation and amortization was $7,000 and
$3,000 for the Web Services segment for the nine months ended
September 30, 2020 and 2019, respectively.
Interest
income was $1,000 and $1,000 for the Web Services segment for the
three months ended September 30, 2020 and 2019, respectively.
Interest income was $3,000 and $4,000 for the Web Services segment
for the nine months ended September 30, 2020 and 2019,
respectively.
Interest expense was $22,000 and $1,000 for the
Cloud Telecommunications segment for the three months ended
September 30, 2020 and 2019, respectively. Interest expense was $52,000 and $9,000 for the
Cloud Telecommunications segment for the nine months ended
September 30, 2020 and 2019, respectively. Interest expense was
$1,000 and $0 for the Web Services segment for the three months
ended September 30, 2020 and 2019. Interest expense was $2,000 and
$0 for the Web Services segment for the nine months ended September
30, 2020 and 2019, respectively.
On
October 21, 2020, the underwriters of the Company’s public
offering exercised their option to purchase additional shares of
the Company’s common stock to cover sales by the underwriters
of a greater number of shares than the total set forth in the filed
prospectus for the public offering. The underwriters purchased an
additional 420,000 shares of common stock from the Company. The
gross proceeds to the Company of the issuance were $2,310,000, and
the Company received net proceeds of $2,148,000 after deducting
underwriting discounts and commissions.
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, 2019 (the “2019
Form 10-K”) filed with the SEC and the Condensed Consolidated
Financial Statements and notes thereto included in the 2019 Form
10-Qs and elsewhere in this Form 10-Q. We assume no obligation to
revise or update any forward-looking statements for any reason,
except as required by law.
OVERVIEW
Crexendo
is an award-winning premier provider of cloud communications, UCaaS
(Unified Communications as a Service), call center, collaboration
services, and other cloud business services that are designed to
provide enterprise-class cloud services to any size business at
affordable monthly rates. The Company has two operating segments,
which consist of Cloud Telecommunications and Web
Services.
Cloud
Telecommunications – Our
cloud telecommunications services transmit calls using IP or cloud
technology, which converts voice signals into digital data packets
for transmission over the Internet or cloud. Each of our calling
plans provides a number of basic features typically offered by
traditional telephone service providers, plus a wide range of
enhanced features that we believe offer an attractive value
proposition to our customers. This platform enables a user, via a
single “identity” or telephone number, to access and
utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device or an application on a mobile
device.
We
generate recurring revenue from our cloud telecommunications and
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We may also charge
activation and flash fees and the Company generally allocates a
portion of the activation fees to the desktop devices, which is
recognized at the time of the installation or customer acceptance,
and a portion to the service, which is recognized over the contract
term using the straight-line method. We also charge other various
contracted and non-contracted fees.
We
generate product revenue and equipment financing revenue from the
sale and lease of our cloud telecommunications equipment. Revenues
from the sale of equipment, including those from sales-type leases,
are recognized at the time of sale or at the inception of the
lease, as appropriate.
Our
Cloud Telecommunications service revenue increased 14% or $425,000
to $3,525,000 for the three months ended September 30, 2020 as
compared to $3,100,000 for the three months ended September 30,
2019. Cloud Telecommunications service revenue increased 16% or
$1,414,000 to $10,326,000 for the nine months ended September 30,
2020 as compared to $8,912,000 for the nine months ended September
30, 2019. Our Cloud Telecommunications product revenue increased
43% or $146,000 to $489,000 for the three months ended September
30, 2020 as compared to $343,000 for the three months ended
September 30, 2019. Cloud Telecommunications product revenue
increased 2% or $23,000 to $1,317,000 for the nine months ended
September 30, 2020, as compared to $1,294,000 for the nine months
ended September 30, 2019. As of September 30, 2020 and 2019, our
backlog was $28,313,000 and $25,335,000, respectively.
Web Services
– We generate recurring revenue
from website hosting and other professional
services.
Our
Web Services revenue decreased 19% or $30,000 to $129,000 for the
three months ended September 30, 2020 as compared to $159,000 for
the three months ended September 30, 2019. Our Web Services revenue
decreased 16% or $81,000 to $421,000 for the nine months ended
September 30, 2020 as compared to $502,000 for the nine months
ended September 30, 2019.
OUR SERVICES AND PRODUCTS
Our
goal is to provide a broad range of cloud-based products and
services that nearly eliminate the cost of a businesses’
technology infrastructure and enable businesses of any size to more
efficiently run their business. By providing a variety of
comprehensive and scalable solutions, we are able to cater to
businesses of all sizes on a monthly subscription basis without the
need for expensive capital investments, regardless of where their
business is in its lifecycle. Our products and services can be
categorized in the following offerings:
Cloud Telecommunications
– 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, 3rd
party products and vendor
relationships. We also develop end user portals for account
management, license management, billing and customer support and
adopt other cloud technologies through our
partnerships.
Crexendo’s
cloud telecommunication service offers a wide variety of essential
and advanced features for businesses of all sizes. Many of these
features included in the service offering are:
●
Business
Productivity Features such as dial-by extension and name, transfer,
conference, call recording, Unlimited calling to anywhere in the US
and Canada, International calling, Toll free (Inbound and
Outbound)
●
Individual
Productivity Features such as Caller ID, Call Waiting, Last Call
Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified
Messaging, Hot-Desking
●
Group
Productivity Features such as Call Park, Call Pickup, Interactive
Voice Response (IVR), Individual and Universal Paging, Corporate
Directory, Multi-Party Conferencing, Group Mailboxes, Web and
mobile devices based collaboration applications
●
Call
Center Features such as Automated Call Distribution (ACD), Call
Monitor, Whisper and Barge, Automatic Call Recording, One way call
recording, Analytics
●
Advanced
Unified Communication Features such as Find-Me-Follow-Me,
Sequential Ring and Simultaneous Ring, Voicemail
transcription
●
Mobile
Features such as extension dialing, transfer and conference and
seamless hand-off from WiFi to/from 3G and 4G, LTE, as well as
other data services. These features are also available on CrexMo,
an intelligent mobile application for iPhones and Android
smartphones, as well as iPads and Android tablets
●
Traditional
PBX Features such as Busy Lamp Fields, System Hold. 16-48 Port
density Analog Devices
●
Expanded
Desktop Device Selection such as Entry Level Phone, Executive
Desktop, DECT Phone for roaming users
●
Advanced
Faxing solution such as Cloud Fax (cFax) allowing customers to send
and receive Faxes from their Email Clients, Mobile Phones and
Desktops without having to use a Fax Machine simply by attaching a
file
●
Web
based online portal to administer, manage and provision the
system.
●
Asynchronous
communication tools like SMS/MMS, chat and document sharing to keep
in pace with emerging communication trends.
Many
of these services are included in our basic offering to our
customers for a monthly recurring fee and do not require a capital
expense. Some of the advanced features such as Automatic Call
Recording and Call Center Features require additional monthly fees.
Crexendo continues to invest and develop its technology and CPaaS
offerings to make them more competitive and
profitable.
Website Services
– Our website services segment
allows businesses to host their websites in our data center for a
recurring monthly fee.
RESULTS OF OPERATIONS
The
following discussion of financial condition and results of
operations should be read in conjunction with our condensed
consolidated financial statements and notes thereto and other
financial information included elsewhere in this Form
10-Q.
Results of Consolidated Operations (in
thousands, except for per share amounts):
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
Service
revenue
|
$3,654
|
$3,259
|
$10,747
|
$9,414
|
|
Product
revenue
|
489
|
343
|
1,317
|
1,294
|
|
Total
revenue
|
$4,143
|
$3,602
|
$12,064
|
$10,708
|
|
Income
before income taxes
|
134
|
334
|
788
|
918
|
|
Income
tax provision
|
(3)
|
-
|
(9)
|
(7)
|
|
Net
income
|
131
|
334
|
779
|
911
|
|
Basic
earnings per share
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
|
Diluted
earnings per share
|
$0.01
|
$0.02
|
$0.05
|
$0.06
|
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Service revenue
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.
Service revenue increased 12% or $395,000, to $3,654,000 for the
three months ended September 30, 2020 as compared to $3,259,000 for
the three months ended September 30, 2019. Cloud Telecommunications
service revenue increased 14% or $425,000, to $3,525,000 for the
three months ended September 30, 2020 as compared to $3,100,000 for
the three months ended September 30, 2019. Web service revenue
decreased 19% or $30,000, to $129,000 for the three months ended
September 30, 2020 as compared to $159,000 for the three months
ended September 30, 2019.
Product Revenue
Product
revenue consists primarily of fees collected from the sale of
desktop phone devices and third-party equipment. Product revenue
increased by 43% or $146,000, to $489,000 for the three months
ended September 30, 2020 as compared to $343,000 for the three
months ended September 30, 2019. 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.
Income Before Income Taxes
Income
before income taxes decreased 60% or $200,000, to $134,000 for the
three months ended September 30, 2020 as compared to $334,000 for
the three months ended September 30, 2019. The decrease in income
before income tax is primarily due to an increase in operating
expenses of $722,000 and an increase in interest expense and other
expense of $19,000, offset by an increase in revenue of
$541,000.
Income Tax Provision
We
had an income tax provision of $3,000 for the three months ended
September 30, 2020 compared to an income tax provision of $0 for
the three months ended September 30, 2019. We had pre-tax income
for the three months ended September 30, 2020 and 2019 of $134,000
and $334,000, respectively, and a full valuation allowance on all
of our deferred tax assets for the three months ended September 30,
2020 and 2019.
Nine months ended September 30, 2020 compared to nine months ended
September 30, 2019
Service revenue
Service
revenue consists primarily of fees collected for cloud
telecommunications services, professional services, interest from
sales-type leases, broadband Internet services, administrative
fees, website hosting, and web management services. Service revenue
increased 14% or $1,333,000, to $10,747,000 for the nine months
ended September 30, 2020 as compared to $9,414,000 for the nine
months ended September 30, 2019. Cloud Telecommunications service
revenue increased 16% or $1,414,000, to $10,326,000 for the nine
months ended September 30, 2020 as compared to $8,912,000 for the
nine months ended September 30, 2019. Web service revenue decreased
16% or $81,000, to $421,000 for the nine months ended September 30,
2020 as compared to $502,000 for the nine months ended September
30, 2019.
Product Revenue
Product
revenue consists primarily of fees collected from the sale of
desktop phone devices and third-party equipment. Product revenue
increased by 2% or $23,000, to $1,317,000 for the nine months ended
September 30, 2020 as compared to $1,294,000 for the nine months
ended September 30, 2019. 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.
Income Before Income Taxes
Income
before income tax decreased 14% or $130,000, to $788,000 for the
nine months ended September 30, 2020 as compared to $918,000 for
the nine months ended September 30, 2019. The decrease in income
before income tax is primarily due to an increase in operating
expenses of $1,406,000 and an increase in interest expense of
$45,000 and other expense of $35,000, offset by an increase in
revenue of $1,356,000.
Income Tax Provision
We
had an income tax provision of $9,000 for the nine months ended
September 30, 2020 compared to an income tax provision of $7,000
for the nine months ended September 30, 2019. We had pre-tax income
for the nine months ended September 30, 2020 and 2019 of $788,000
and $918,000, respectively, and a full valuation allowance on all
of our deferred tax assets for the nine months ended September 30,
2020 and 2019.
USE OF NON-GAAP FINANCIAL MEASURES
To
evaluate our business, we consider and use non-generally accepted
accounting principles (“Non-GAAP”) net income and
Adjusted EBITDA as a supplemental measure of operating performance.
These measures include the same adjustments that management takes
into account when it reviews and assesses operating performance on
a period-to-period basis. We consider Non-GAAP net income to be an
important indicator of overall business performance because it
allows us to evaluate results without the effects of share-based
compensation and amortization of intangibles. We define EBITDA as
U.S. GAAP net income before interest income, interest expense,
other income and expense, provision for income taxes, and
depreciation and amortization. We believe EBITDA provides a useful
metric to investors to compare us with other companies within our
industry and across industries. We define Adjusted EBITDA as EBITDA
adjusted for share-based compensation. 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, 2020 earnings press release, as furnished on Form
8-K, we included Non-GAAP net income, EBITDA and Adjusted EBITDA.
The terms Non-GAAP net income, EBITDA, and Adjusted EBITDA are not
defined under U.S. GAAP, and are not measures of operating income,
operating performance or liquidity presented in analytical tools,
and when assessing our operating performance, Non-GAAP net income,
EBITDA, and Adjusted EBITDA should not be considered in isolation,
or as a substitute for net income or other consolidated income
statement data prepared in accordance with U.S. GAAP. Some of these
limitations include, but are not limited to:
●
EBITDA
and Adjusted EBITDA do not reflect our cash expenditures or future
requirements for capital expenditures or contractual
commitments;
●
they
do not reflect changes in, or cash requirements for, our working
capital needs;
●
they
do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt
that we may incur;
●
they
do not reflect income taxes or the cash requirements for any tax
payments;
●
although
depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will be replaced sometime in the
future, and EBITDA and Adjusted EBITDA do not reflect any cash
requirements for such replacements;
●
while
share-based compensation is a component of operating expense, the
impact on our financial statements compared to other companies can
vary significantly due to such factors as the assumed life of the
options and the assumed volatility of our common stock;
and
●
other
companies may calculate EBITDA and Adjusted EBITDA differently than
we do, limiting their usefulness as comparative
measures.
We
compensate for these limitations by relying primarily on our U.S.
GAAP results and using Non-GAAP net income, EBITDA, and Adjusted
EBITDA only as supplemental support for management’s analysis
of business performance. Non-GAAP net income, EBITDA and Adjusted
EBITDA are calculated as follows for the periods
presented.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
In
accordance with the requirements of Regulation G issued by the SEC,
we are presenting the most directly comparable U.S. GAAP financial
measures and reconciling the unaudited Non-GAAP financial metrics
to the comparable U.S. GAAP measures.
Reconciliation of U.S. GAAP Net Income to Non-GAAP Net
Income
(Unaudited)
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP net income
|
$131
|
$334
|
$779
|
$911
|
|
Share-based
compensation
|
136
|
107
|
377
|
293
|
|
Amortization
of intangible assets
|
23
|
13
|
69
|
40
|
|
Non-GAAP
net income
|
$290
|
$454
|
$1,225
|
$1,244
|
|
|
|
|
|
|
|
Non-GAAP
earnings per common share:
|
|
|
|
|
|
Basic
|
$0.02
|
$0.03
|
$0.08
|
$0.09
|
|
Diluted
|
$0.02
|
$0.03
|
$0.07
|
$0.08
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
Basic
|
15,244,804
|
14,663,151
|
15,058,192
|
14,507,696
|
|
Diluted
|
17,249,035
|
15,629,647
|
16,793,896
|
15,444,063
|
Reconciliation of U.S. GAAP Net Income to EBITDA to Adjusted
EBITDA
(Unaudited)
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP net income
|
$131
|
$334
|
$779
|
$911
|
|
Depreciation
and amortization
|
57
|
25
|
197
|
69
|
|
Interest
expense
|
23
|
1
|
54
|
9
|
|
Interest
and other expense/(income)
|
(2)
|
1
|
25
|
(10)
|
|
Income
tax provision
|
3
|
-
|
9
|
7
|
|
EBITDA
|
212
|
361
|
1,064
|
986
|
|
Share-based
compensation
|
136
|
107
|
377
|
293
|
|
Adjusted
EBITDA
|
$348
|
$468
|
$1,441
|
$1,279
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In
preparing our financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our revenue,
operating income or loss and net income or loss, as well as on the
value of certain assets and liabilities on our balance sheet.
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, 2019.
Segment Operating Results
The
Company has two operating segments, which consist of Cloud
Telecommunications and Web Services. The information below is
organized in accordance with our two reportable segments. Segment
operating income is equal to segment net revenue less segment cost
of service revenue, cost of product revenue, sales and marketing,
research and development, and general and administrative expenses.
Operating Results of our Cloud Telecommunications Segment (in
thousands):
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
Cloud Telecommunications
|
|
|
|
|
|
Service
revenue
|
$3,525
|
$3,100
|
$10,326
|
$8,912
|
|
Product
revenue
|
489
|
343
|
1,317
|
1,294
|
|
Total
revenue
|
$4,014
|
$3,443
|
$11,643
|
$10,206
|
|
Operating
expenses:
|
|
|
|
|
|
Cost
of service revenue
|
$930
|
$811
|
$2,758
|
$2,515
|
|
Cost
of product revenue
|
314
|
172
|
797
|
664
|
|
Research
and development
|
318
|
207
|
816
|
600
|
|
Selling
and marketing
|
1,051
|
1,003
|
3,151
|
2,865
|
|
General
and administrative
|
1,277
|
974
|
3,382
|
2,870
|
|
Total
operating expenses
|
3,890
|
3,167
|
10,904
|
9,514
|
|
Operating
income
|
124
|
276
|
739
|
692
|
|
Other
income/(expense)
|
(20)
|
2
|
(47)
|
(2)
|
|
Income
before tax provision
|
$104
|
$278
|
$692
|
$690
|
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Service Revenue
Cloud
Telecommunications service revenue consists primarily of fees
collected for cloud telecommunications services, professional
services, interest from sales-type leases, administrative fees, and
reselling broadband Internet services. Service revenue increased
14% or $425,000, to $3,525,000 for the three months ended September
30, 2020 as compared to $3,100,000 for the three months ended
September 30, 2019. The increase in service revenue is due to an
increase in contracted service revenue and usage charges of
$369,000, an increase in fees, commissions, and other, recognized
over time of $68,000, and an increase in sales-type lease interest
of $29,000, offset by a decrease in one time fees, commissions and
other of $41,000. A substantial portion of Cloud Telecommunications
service revenue is generated through thirty-six to sixty month
service contracts.
Product Revenue
Product
revenue consists primarily of fees collected from the sale of
desktop phone devices and third-party equipment. Product revenue
increased 43% or $146,000, to $489,000 for the three months ended
September 30, 2020 as compared to $343,000 for the three months
ended September 30, 2019. 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 across the performance obligations, primarily due to
sales promos.
Backlog
Backlog
represents the total contract value of all contracts signed, less
revenue recognized from those contracts as of September 30, 2020
and 2019. Backlog increased 12% or $2,978,000 to $28,313,000 as of
September 30, 2020 as compared to $25,335,000 as of September 30,
2019. Below is a table which displays the Cloud Telecommunications
segment revenue backlog as of July 1, 2020 and 2019, and September
30, 2020 and 2019, which we expect to recognize as revenue within
the next thirty-six to sixty months (in thousands):
|
Cloud Telecommunications backlog as of July 1, 2020
|
$27,349
|
|
Cloud Telecommunications backlog as of September 30,
2020
|
$28,313
|
|
|
|
|
Cloud Telecommunications backlog as of July 1, 2019
|
$24,772
|
|
Cloud Telecommunications backlog as of September 30,
2019
|
$25,335
|
Cost of Service Revenue
Cost
of service revenue consists primarily of fees we pay to third-party
telecommunications carriers, broadband Internet providers, software
providers, costs related to installations, credit card processing
fees, shipping charges, customer support salaries and benefits, and
share-based compensation. Cost of service revenue increased 15% or
$119,000, to $930,000 for the three months ended September 30, 2020
as compared to $811,000 for the three months ended September 30,
2019. The increase in cost of service revenue was primarily due to
an increase in salaries and benefits of $55,000 as a result of an
increase in customer support and implementation headcount and
temporary labor, an increase in bandwidth costs of $38,000 from an
increase in service revenue, an increase in credit card processing
fees of $8,000, an increase in share-based compensation of $5,000,
an increase in shipping charges of $4,000, an increase in costs
related to professional installation services of $4,000, and an
increase in other cost of service revenue of $5,000. These
increases are directly related to the growth in monthly recurring
revenue.
Cost of Product Revenue
Cost
of product revenue consists of the costs associated with desktop
phone devices and third-party equipment. Cost of product revenue
increased 83% or $142,000, to $314,000 for the three months ended
September 30, 2020 as compared to $172,000 for the three months
ended September 30, 2019. The increase is primarily due to the
increase in product revenue, offset by an increase in device costs
and an increase in product warranty costs.
Research and Development
Research
and development expenses primarily consist of salaries and
benefits, share-based compensation, and outsourced engineering
services related to the development of new cloud telecommunications
features and products. Research and development expenses increased
54% or $111,000, to $318,000 for the three months ended September
30, 2020 as compared to $207,000 for the three months ended
September 30, 2019. There was an increase in salaries and benefits
of $82,000 as a result of an increase in headcount as we continue
to invest in our solution, an increase in costs for maintenance on
our customer user interface, our Android and iPhone mobile phone
applications, and Java development of $23,000, and an increase in
share-based compensation of $6,000.
Selling and Marketing
Selling
and marketing expenses consist primarily of direct and channel
sales representative salaries and benefits, share-based
compensation, partner channel commissions, amortization of costs to
acquire contracts, travel expenses, lead generation services, trade
shows, internal and third-party marketing costs, the production of
marketing materials, and sales support software. Selling and
marketing expenses increased 5% or $48,000, to $1,051,000 for the
three months ended September 30, 2020 as compared to $1,003,000 for
the three months ended September 30, 2019. The increase in selling
and marketing expense is due to an increase in commission expense
of $50,000 directly related to an increase in revenue, an increase
in salaries and benefits of $38,000 primarily related to the
addition of one sales rep and a new director of marketing, and an
increase in share-based compensation of $2,000, offset by a
decrease in travel related expenses of $27,000, a decrease in bad
debt expense of $8,000, and a decrease in other sales and marketing
expense of $7,000.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, equipment,
accounting and other professional services, investor relations, and
other administrative corporate expenses. General and administrative
expenses increased 31% or $303,000, to $1,277,000 for the three
months ended September 30, 2020 as compared to $974,000 for the
three months ended September 30, 2019. Consolidated general and
administrative expenses increased 30% or $311,000, to $1,351,000
for the three months ended September 30, 2020 as compared to
$1,040,000 for the three months ended September 30, 2019. As Web
Services segment revenue has decreased and Cloud Telecommunications
segment revenue has increased, a higher percentage of general and
administrative costs are being allocated to the Cloud
Telecommunications segment. Therefore, we will discuss changes in
our consolidated general and administrative expenses. The increase
in consolidated general and administrative expenses is primarily
due to an increase in stock exchange uplisting and annual fees of
$89,000 related to our uplisting from the OTCQX marketplace to the
Nasdaq Capital Markets, an increase in administrative salaries and
benefits of $73,000, an increase in recruiting fees of $55,000, an
increase in legal fees of $37,000, an increase in contractor costs
of $33,000, an increase in telecommunication fees of $20,000, an
increase in depreciation expense of $20,000, an increase in
share-based compensation of $17,000, an increase in software
expense of $14,000, an increase in computer, office equipment, and
data center maintenance costs of $11,000, an increase in intangible
amortization expense of $10,000 related to the DoubleHorn asset
acquisition, and an increase in other administrative corporate
expenses of $7,000, offset by a decrease in rent expense of $75,000
related to the purchase of our corporate office
building.
Other Income/(Expense)
Other
income/(expense) primarily relates to the allocated portions of
interest expense offset by credit card cash back rewards. Other
expenses increased 1,100%, or $22,000, to $(20,000) for the three
months ended September 30, 2020 as compared to $2,000 of net other
income for the three months ended September 30, 2019. The increase
in other expenses is related to our increase in interest expense
from our outstanding notes payables and a decrease in credit card
cash back rewards of $2,000.
Nine months ended September 30, 2020 compared to nine
months ended September 30, 2019
Service Revenue
Cloud
Telecommunications service revenue consists primarily of fees
collected for cloud telecommunications services, professional
services, interest from sales-type leases, administrative fees, and
broadband Internet services. Service revenue increased 16% or
$1,414,000, to $10,326,000 for the nine months ended September 30,
2020 as compared to $8,912,000 for the nine months ended September
30, 2019. The increase in service revenue is due to an increase in
contracted service revenue and usage charges of $1,372,000, an
increase in fees, commissions, and other, recognized over time of
$151,000, and an increase in sales-type lease interest of $77,000,
offset by a decrease in one time fees, commissions and other of
$186,000 related to a higher volume of site surveys and
installation service revenue in the first quarter of 2019. A
substantial portion of Cloud Telecommunications service revenue is
generated through thirty-six to sixty month service
contracts.
Product Revenue
Product
revenue consists primarily of fees collected from the sale of
desktop phone devices and third-party equipment. Product revenue
increased 2% or $23,000, to $1,317,000 for the nine months ended
September 30, 2020 as compared to $1,294,000 for the nine months
ended September 30, 2019. 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 across the performance obligations, primarily due to
sales promos.
Backlog
Backlog
represents the total contract value of all contracts signed, less
revenue recognized from those contracts as of September 30, 2020
and 2019. Backlog increased 12% or $2,978,000 to $28,313,000 as of
September 30, 2020 as compared to $25,335,000 as of September 30,
2019. Below is a table which displays the Cloud Telecommunications
segment revenue backlog as of January 1, 2020 and 2019, and
September 30, 2020 and 2019, which we expect to recognize as
revenue within the next thirty-six to sixty months (in
thousands):
|
Cloud Telecommunications backlog as of January 1, 2020
|
$26,110
|
|
Cloud Telecommunications backlog as of September 30,
2020
|
$28,313
|
|
|
|
|
Cloud Telecommunications backlog as of January 1, 2019
|
$23,029
|
|
Cloud Telecommunications backlog as of September 30,
2019
|
$25,335
|
Cost of Service Revenue
Cost
of service revenue consists primarily of fees we pay to third-party
telecommunications carriers, broadband Internet providers, software
providers, costs related to installations, credit card processing
fees, shipping charges, customer support salaries and benefits, and
share-based compensation. Cost of service revenue increased 10% or
$243,000, to $2,758,000 for the nine months ended September 30,
2020 as compared to $2,515,000 for the nine months ended September
30, 2019. The increase in cost of service revenue is primarily due
to an increase in bandwidth costs of $136,000, an increase in
salaries and benefits of $123,000 as a result of an increase in
customer support and implementation headcount and temporary labor,
an increase in profit sharing costs of $33,000, an increase in
credit card processing fees of $30,000, an increase in share-based
compensation of $20,000, an increase in shipping charges of $9,000,
an increase in other cost of service revenue of $6,000, and an
increase in project management software costs of $4,000, offset by
a decrease in costs related to professional installation services
of $118,000. These increases are directly related to the growth in
monthly recurring revenue.
Cost of Product Revenue
Cost
of product revenue consists of the costs associated with desktop
phone devices and third-party equipment. Cost of product revenue
increased 20% or $133,000, to $797,000 for the nine months ended
September 30, 2020 as compared to $664,000 for the nine months
ended September 30, 2019. The increase is primarily due to the
increase in product revenue, offset by an increase in device costs
and an increase in product warranty costs.
Research and Development
Research
and development expenses primarily consist of salaries and
benefits, share-based compensation, and outsourced engineering
services, related to the development of new cloud
telecommunications features and products. Research and development
expenses increased 36% or $216,000, to $816,000 for the nine months
ended September 30, 2020 as compared to $600,000 for the nine
months ended September 30, 2019. The increase is primarily due to
an increase in costs for maintenance on our customer user
interface, our Android and iPhone mobile phone applications, and
Java development of $98,000, an increase of $97,000 in salaries and
benefits as a result of an increase in headcount as we continue to
invest in our solution, an increase in share-based compensation of
$14,000, and an increase in allocated profit sharing costs of
$7,000.
Selling and Marketing
Selling
and marketing expenses consist primarily of direct and channel
sales representative salaries and benefits, share-based
compensation, partner channel commissions, amortization of costs to
acquire contracts, travel expenses, lead generation services, trade
shows, third-party marketing services, the production of marketing
materials, and sales support software. Selling and marketing
expenses increased 10% or $286,000, to $3,151,000 for the nine
months ended September 30, 2020 as compared to $2,865,000 for the
nine months ended September 30, 2019. The increase in selling and
marketing expense is due to an increase in commission expense of
$155,000 directly related to an increase in revenue, an increase in
salaries and benefits of $147,000 primarily related to the addition
of one sales rep and a new director of marketing, an increase in
bad debt expense of $19,000, an increase in tradeshow related
expense of $18,000, and an increase in share-based compensation of
$14,000, offset by a decrease in travel related expenses of $56,000
and a decrease in other sales and marketing expenses of
$11,000.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, equipment,
accounting and other professional services, investor relations, and
other administrative corporate expenses. General and administrative
expenses increased 18% or $512,000, to $3,382,000 for the nine
months ended September 30, 2020 as compared to $2,870,000 for the
nine months ended September 30, 2019. Consolidated general and
administrative expenses increased 18%, or $534,000 to $3,585,000
for the nine months ended September 30, 2020 as compared to
$3,051,000 for the nine months ended September 30, 2019. As Web
Services segment revenue has decreased and Cloud Telecommunications
segment revenue has increased, a higher percentage of general and
administrative costs are being allocated to the Cloud
Telecommunications segment. Therefore, we will discuss changes in
our consolidated general and administrative expenses. The increase
in consolidated general and administrative expenses is primarily
due to an increase in administrative salaries and benefits of
$143,000, an increase in depreciation expense of $98,000 from an
acceleration of leasehold improvements amortization and
depreciation of the corporate office building directly related to
the purchase of the corporate office building and from depreciation
of additional datacenter related licenses, an increase in stock
exchange uplisting and annual fees of $94,000 related to our
uplisting from the OTCQX marketplace to the Nasdaq Capital Markets,
an increase in recruiting fees of $70,000, an increase in
telecommunication fees of $55,000, an increase in contractor costs
of $54,000, an increase in software expense of $48,000, an increase
in legal fees of $43,000, an increase in share-based compensation
of $36,000, an increase in computer, office equipment, and data
center maintenance costs of $35,000, an increase in intangible
amortization expense of $29,000 related to the DoubleHorn asset
acquisition, an increase in profit sharing costs of $12,000, an
increase in corporate insurance costs of $8,000, an increase in
other administrative corporate expenses of $8,000, an increase in
board of director fees of $6,000, an increase in closing and
inspection fees related to the building purchase of $5,000, offset
by a decrease in rent expense of $200,000 related to the purchase
of our corporate office building and a decrease in accounting fees
of $10,000.
Other Expense
Other
expense primarily relates to the allocated portions of interest
expense offset by credit card cash back rewards. Net other expense
increased 2,250%, or $45,000, to $47,000 for the nine months ended
September 30, 2020 as compared to $2,000 for the nine months ended
September 30, 2019. The increase in other expense is due to an
increase in allocated interest expense of $43,000 for interest paid
on finance agreements and a decrease in credit card cash back
rewards of $2,000.
Operating Results of Web Services segment (in
thousands):
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
Web Services
|
|
|
|
|
|
Service
revenue
|
$129
|
$159
|
$421
|
$502
|
|
Operating
expenses:
|
|
|
|
|
|
Cost
of service revenue
|
16
|
25
|
66
|
72
|
|
Research
and development
|
8
|
8
|
24
|
24
|
|
General
and administrative
|
74
|
66
|
203
|
181
|
|
Total
operating expenses
|
98
|
99
|
293
|
277
|
|
Operating
income
|
31
|
60
|
128
|
225
|
|
Other
income/(expense)
|
(1)
|
(4)
|
(32)
|
3
|
|
Income
before tax provision
|
$30
|
$56
|
$96
|
$228
|
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Service Revenue
Service
revenue is generated primarily through website hosting and
professional web management services. Web Services segment revenue
decreased 19% or $30,000, to $129,000 for the three months ended
September 30, 2020 as compared to $159,000 for the three months
ended September 30, 2019. The decrease in service revenue is
primarily due to a decrease in hosting revenue of
$30,000.
Cost of Service Revenue
Cost
of service revenue consists primarily of bandwidth, web domain
registration fees, customer service salaries and benefits,
temporary labor cost, and credit card processing fees. Cost of
service revenue decreased 36% or $9,000, to $16,000 for the three
months ended September 30, 2020 as compared to $25,000 for the
three months ended September 30, 2019. The decrease in cost of
service revenue is primarily related to a decrease in customer
service salaries and benefits and temporary labor of $7,000, a
decrease in web domain registration fees of $1,000, and a decrease
in credit card fees of $1,000, directly related to the decrease in
revenue.
Research and
Development
Research
and development expenses primarily consist of salaries and
benefits, and related expenses which are attributable to the
development of our website development software products. Research
and development expenses were $8,000 for the three months ended
September 30, 2020 as compared to $8,000 for the three months ended
September 30, 2019.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, equipment,
accounting and other professional services, investor relations, and
other administrative corporate expenses. General and administrative
expenses increased 12% or $8,000, to $74,000 for the three months
ended September 30, 2020 as compared to $66,000 for the three
months ended September 30, 2019. Consolidated general and
administrative expenses increased 30% or $311,000, to $1,351,000
for the three months ended September 30, 2020 as compared to
$1,040,000 for the three months ended September 30, 2019. As Web
Services segment revenue has decreased and Cloud Telecommunications
segment revenue has increased, a higher percentage of general and
administrative costs are being allocated to the Cloud
Telecommunications segment. Therefore, we will discuss changes in
our consolidated general and administrative expenses. The increase
in consolidated general and administrative expenses is primarily
due to an increase in stock exchange uplisting and annual fees of
$89,000 related to our uplisting from the OTCQX marketplace to the
Nasdaq Capital Markets, an increase in administrative salaries and
benefits of $73,000, an increase in recruiting fees of $55,000, an
increase in legal fees of $37,000, an increase in contractor costs
of $33,000, an increase in telecommunication fees of $20,000, an
increase in depreciation expense of $20,000, an increase in
share-based compensation of $17,000, an increase in software
expense of $14,000, an increase in computer, office equipment, and
data center maintenance costs of $11,000, an increase in intangible
amortization expense of $10,000 related to the DoubleHorn asset
acquisition, and an increase in other administrative corporate
expenses of $7,000, offset by a decrease in rent expense of $75,000
related to the purchase of our corporate office
building.
Other Expense
Other
expense primarily relates to interest income, foreign exchange
gains or losses, the allocated portions of interest expense, and
credit card cash back rewards. Net other expense decreased 75% or
$3,000, to $1,000 for the three months ended September 30, 2020 as
compared to $4,000 for the three months ended September 30, 2019.
The decrease in net other expense is due to a $5,000 decrease in
foreign exchange losses offset by an increase in allocated interest
expense of $1,000 for interest on finance agreements and a $1,000
decrease in interest income.
Nine months ended September 30, 2020 compared to nine months ended
September 30, 2019
Service Revenue
Service
revenue is generated primarily through website hosting and
professional web management services. Web Services segment revenue
decreased 16% or $81,000, to $421,000 for the nine months ended
September 30, 2020 as compared to $502,000 for the nine months
ended September 30, 2019. The decrease in service revenue is
primarily due to a decrease in hosting revenue of $88,000 offset by
an increase in professional web management services of
$7,000.
Cost of Service Revenue
Cost
of service revenue consists primarily of bandwidth, web domain
registration fees, customer service salaries and benefits,
temporary labor cost, and credit card processing fees. Cost of
service revenue decreased 8% or $6,000, to $66,000 for the nine
months ended September 30, 2020 as compared to $72,000 for the nine
months ended September 30, 2019. The decrease in cost of service
revenue is primarily related to a decrease in web domain
registration fees of $3,000 and a decrease in credit card fees of
$3,000, directly related to the decrease in revenue.
Research and
Development
Research
and development expenses primarily consist of salaries and
benefits, and related expenses which are attributable to the
development of our website development software products. Research
and development expenses were $24,000 for the nine months ended
September 30, 2020 as compared to $24,000 for the nine months ended
September 30, 2019.
General and Administrative
General
and administrative expenses consist of salaries and benefits for
executives, administrative personnel, legal, rent, equipment,
accounting and other professional services, investor relations, and
other administrative corporate expenses. General and administrative
expenses increased 12% or $22,000, to $203,000 for the nine months
ended September 30, 2020 as compared to $181,000 for the nine
months ended September 30, 2019. Consolidated general and
administrative expenses increased 18%, or $534,000 to $3,585,000
for the nine months ended September 30, 2020 as compared to
$3,051,000 for the nine months ended September 30, 2019. As Web
Services segment revenue has decreased and Cloud Telecommunications
segment revenue has increased, a higher percentage of general and
administrative costs are being allocated to the Cloud
Telecommunications segment. Therefore, we will discuss changes in
our consolidated general and administrative expenses. The increase
in consolidated general and administrative expenses is primarily
due to an increase in administrative salaries and benefits of
$143,000, an increase in depreciation expense of $98,000 from an
acceleration of leasehold improvements amortization and
depreciation of the corporate office building directly related to
the purchase of the corporate office building and from depreciation
of additional datacenter related licenses, an increase in stock
exchange uplisting and annual fees of $94,000 related to our
uplisting from the OTCQX marketplace to the Nasdaq Capital Markets,
an increase in recruiting fees of $70,000, an increase in
telecommunication fees of $55,000, an increase in contractor costs
of $54,000, an increase in software expense of $48,000, an increase
in legal fees of $43,000, an increase in share-based compensation
of $36,000, an increase in computer, office equipment, and data
center maintenance costs of $35,000, an increase in intangible
amortization expense of $29,000 related to the DoubleHorn asset
acquisition, an increase in profit sharing costs of $12,000, an
increase in corporate insurance costs of $8,000, an increase in
other administrative corporate expenses of $8,000, an increase in
board of director fees of $6,000, an increase in closing and
inspection fees related to the building purchase of $5,000, offset
by a decrease in rent expense of $200,000 related to the purchase
of our corporate office building and a decrease in accounting fees
of $10,000.
Other Income/(Expense)
Other
income/(expense) primarily relates to interest income, foreign
exchange gains or losses, the allocated portions of interest
expense, and credit card cash back rewards. Net other income
decreased 1,167% or $35,000, to $(32,000) of net other expense for
the nine months ended September 30, 2020 as compared to $3,000 of
net other income for the nine months ended September 30, 2019. The
decrease in net other income is due to an increase in net foreign
exchange losses of $32,000 and an increase in allocated interest
expense of $3,000 for interest on finance agreements.
Liquidity and Capital Resources
As of
September 30, 2020 and December 31, 2019, we had cash and cash
equivalents of $15,453,000 and $4,280,000, 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, and changes in our
capital and financial structure due to debt repayments and
issuances, stock option exercises, sales of equity investments and
similar events. We believe that our operations along with existing
liquidity sources will satisfy our cash requirements for at least
the next 12 months.
Working Capital
Working
capital increased 384% or $10,911,000 to $13,756,000 as of
September 30, 2020 as compared to $2,845,000 at December 31, 2019.
The increase in working capital was primarily related to an
increase in cash and cash equivalents of $11,173,000, an increase
in trade receivables, net of allowance for doubtful accounts of
$252,000, an increase in contract assets of $72,000, an increase in
equipment financing receivables of $110,000, an increase in
contract costs of $24,000, an increase in prepaid expenses of
$191,000, a decrease in accrued expenses of $184,000, a decrease in
operating lease liabilities of $50,000, a decrease in contingent
consideration of $175,000, and a decrease in contract liabilities
of $8,000, offset by a decrease in inventories of $119,000, a
decrease in income tax receivable of $4,000, an increase in
accounts payable of $128,000, an increase in finance leases of
$1,000, an increase in notes payable of $1,071,000, and an increase
in income tax payable of $5,000 during the nine months ended
September 30, 2020.
Cash, Cash Equivalents, and Restricted Cash
Cash,
cash equivalents, and restricted cash increased 261% or $11,173,000
to $15,453,000 at September 30, 2020 as compared to $4,280,000 at
December 31, 2019. During the nine months ended September 30, 2020,
cash provided by operating activities was $423,000. Cash used for
investing activities was $921,000, primarily for the purchase of
our corporate office building, datacenter related assets, and a
redesigned company website of $745,000 and an initial asset
acquisition payment of $176,000 for customer relationships. Cash
provided by financing activities was $11,671,000, primarily related
to proceeds from notes payable of $1,001,000, proceeds from the
exercise of options of $2,007,000, and proceeds from the issuance
of common stock in connection with our public offering of
$8,778,000, offset by $54,000 in contingent consideration payments
for a customer relationship asset acquisition, repayments made on
notes payable of $39,000, and repayments on finance leases of
$22,000 during the period.
Inventories
Inventories
decreased 31% or $119,000 to $263,000 at September 30, 2020 as
compared to $382,000 at December 31, 2019. Inventory balances
fluctuate based on timing of installations and inventory shipments.
The decrease is primarily due to the timing of inventory shipments.
We feel our inventory balance at September 30, 2020 is sufficient
to fulfill future installations.
Prepaid Expenses
Prepaid
expenses increased 135% or $191,000 to $332,000 at September 30,
2020 as compared to $141,000 at December 31, 2019. The increase is
related to a $90,000 increase in inventory deposits, $53,000
increase in software services and support, a $39,000 increase in
corporate insurance policies, and a $9,000 increase in other
prepaid expense accounts.
Trade Receivables
Current
and long-term trade receivables, net of allowance for doubtful
accounts, increased 64% or $248,000, to $634,000 as of September
30, 2020 as compared to $386,000 as of December 31, 2019. Current
trade receivables, net of allowance for doubtful accounts,
increased 66% or $252,000, to $632,000 as of September 30, 2020 as
compared to $380,000 as of December 31, 2019. The increase in
current trade receivables can primarily be attributed to a number
of customers carrying a balance as of September 30, 2020 related to
a slowdown in collections resulting from COVID-19. The Company took
the FCC’s Keep Americans Connected Pledge in response to the
COVID-19 pandemic to not shut off customers for non-payment.
Long-term trade receivables, net of allowance for doubtful
accounts, decreased 67% or $4,000, to $2,000 as of September 30,
2020 as compared to $6,000 as of December 31, 2019. The decrease is
primarily due to the receipt of monthly installment
payments.
Accounts Payable and Accrued Expenses
Accounts
payable increased 149% or $128,000 to $214,000 at September 30,
2020 as compared to $86,000 at December 31, 2019. The aging of
accounts payable as of September 30, 2020 were generally within our
vendors’ terms of payment. The increase is primarily related
to the timing of check processing schedule.
Accrued
expenses decreased 10% or $184,000 to $1,570,000 at September 30,
2020 as compared to $1,754,000 at December 31, 2019. The decrease
is related to a $200,000 decrease in accrued bonuses due to the
payout of the 2019 Profit Sharing Plan, a $176,000 decrease in
accrued asset acquisition costs, a $108,000 decrease in accrued
telecommunications and sales tax accrual, and a $62,000 decrease in
accrued salaries, offset by a $179,000 increase in accrued
invoices, an $89,000 increase in accrued paid time off, a $55,000
increase in partner commissions, a $12,000 increase in 401k accrued
contributions, a $10,000 increase in warranty reserve, and a
$17,000 increase in other accrued expenses.
Notes Payable
Notes
payables increased $2,962,000 to $2,962,000 at September 30, 2020
as compared to $0 at December 31, 2019. The increase in notes
payable is related to the $1,961,000 note payable for the purchase
of the corporate office building, and a $1,001,000 note payable
related to the Paycheck Protection Program loan.
Finance Lease
Finance
lease obligations decreased 19% or $22,000, to $94,000 as of
September 30, 2020 as compared to $116,000 at December 31, 2019.
The decrease in finance lease obligations can be attributed to
payments made on financing contracts of $22,000.
Contingent Consideration
Contingent
consideration decreased 100% or $175,000 to $0 at September 30,
2020 as compared to $175,000 at December 31, 2019. The decrease is
due to $54,000 in earn-out payments and a $121,000 adjustment to
the total consideration payable under the customer relationships
asset purchase agreement.
Operating Lease Liabilities
Operating
lease liabilities decreased 98% or $50,000 to $1,000 at September
30, 2020 as compared to $51,000 at December 31, 2019. The decrease
is related to the expiration of the corporate office lease due to
the purchase of the building in January 2020.
Contract Liabilities
Contract
liabilities increased 2% or $19,000 to $1,233,000 at September 30,
2020 as compared to $1,214,000 at December 31, 2019. The increase
is from an increase in the prorated portion of monthly invoices
with service dates in future periods for customers added during the
period and an increase in down payments of uninstalled contracts.
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
Capital
Total
stockholders’ equity increased 269% or $11,796,000, to
$16,183,000 as of September 30, 2020 as compared to $4,387,000 at
December 31, 2019. The increase in total stockholders’ equity
was attributable to net income of $779,000, and increases in
additional paid-in capital of $2,007,000 from stock option
exercises, $8,633,000 from the issuance of common stock related to
an offering, and $377,000 in share-based compensation for options
issued to employees.
Off Balance Sheet Arrangements
As
of, September 30, 2020, we are not involved in any off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
RELATED PARTY TRANSACTIONS
We
leased our corporate office building in Tempe, Arizona from a
Company that is owned by the major shareholder and CEO of the
Company, a related party. On March 1, 2017, the lease agreement was
renewed for a three year term with monthly rent payments of
$25,000. As of December 31, 2019, we initiated the process to
purchase our corporate office building and gave notice that we will
not be exercising our option to renew for another three year term.
On January 27, 2020, the Company entered into an agreement to
purchase our corporate office building located at 1615 S 52nd St,
Tempe, AZ 85281 from a Company that is owned by the major
shareholder and CEO of the Company for $2,500,000. The fair value
of the building was established by an independent
appraisal.
Impact of Recent Accounting Pronouncements
The
information set forth under Note 1 to the condensed consolidated
financial statements under the caption “Recent Accounting
Pronouncements” is incorporated herein by
reference.
Quantitative
and Qualitative Disclosures about Market Risk
Not
required
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
Our
Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this Report,
have concluded that, based on the evaluation of these controls and
procedures, our disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the three months ended September 30, 2020 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.