CREXENDO, INC. 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 endedDecember 31, 2021 (the "2020 Form 10-K") filed with theSEC and the Condensed Consolidated Financial Statements and notes thereto included in the 2022 Form 10-Qs and elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. OVERVIEWCrexendo, Inc. is an award-winning premier provider ofUnified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over 2.5 million end users globally and was recently recognized as the fastest growing UCaaS platform inthe United States . By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings: Cloud Telecommunications Services - Our cloud telecommunications services transmit calls using IP or cloud technology, which converts voice signals into digital data packets for transmission over the Internet or cloud. Each of our calling plans provides a number of basic features typically offered by traditional telephone service providers, plus a wide range of enhanced features that we believe offer an attractive value proposition to our customers. This platform enables a user, via a single "identity" or telephone number, to access and utilize services and features regardless of how the user is connected to the Internet or cloud, whether it's from a desktop device or an application on
a
mobile device.
We generate recurring revenue from our cloud telecommunications and broadband
Internet services. Our cloud telecommunications contracts typically have a
thirty-six to sixty month term. We may also charge activation and flash fees and
the Company generally allocates a portion of the activation fees to the desktop
devices, which is recognized at the time of the installation or customer
acceptance, and a portion to the service, which is recognized over the contract
term using the straight-line method. We also charge other various contracted and
non-contracted fees.
We generate product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the sale of
equipment, including those from sales-type leases, are recognized at the time of
sale or at the inception of the lease, as appropriate.
Software Solutions - Our software solutions segment derives revenues from three
primary sources: software licenses, software maintenance support and
professional services. Software and services may be sold separately or in
bundled packages. Generally, contracts with customers contain multiple
performance obligations, consisting of software and services. For bundled
packages, the Company accounts for individual products and services separately
if they are distinct - i.e. if a product or service is separately identifiable
from other items in the bundled package and if a customer can benefit from it on
its own or with other resources that are readily available to the customer. The
consideration is allocated between separate products and services in a bundle
based on their relative stand-alone selling prices. The stand-alone selling
prices are determined based on the prices at which the Company separately sells
the software licenses and professional services. For items that are not sold
separately (e.g. additional features) the Company estimates stand-alone selling
prices using the adjusted market assessment approach. When we provide a free
trial period, we do not begin to recognize recurring revenue until the trial
period has ended and the customer has been billed for the services.
We generate software license revenue from the sale of perpetual software
licenses, term-based software licenses that expire, and Software-as-a-Service
("SaaS") based software which are referred to as subscription arrangements. The
Company does not recognize software revenue related to the renewal of
subscription software licenses earlier than the beginning of the subscription
period.
We generate subscription and maintenance support revenue from customer support
and other supportive services. The Company offers warranties on its products.
The warranty period for our licensed software is generally 90 days. Certain of
the Company's warranties are considered to be assurance-type in nature and do
not cover anything beyond ensuring that the product is functioning as intended.
Based on the guidance in ASC 606, assurance-type warranties do not represent
separate performance obligations. The Company also sells separately-priced
maintenance service contracts, which qualify as service-type warranties and
represent separate performance obligations. The Company does not typically allow
and has no history of accepting material product returns. Customer support
includes software updates on a when-and-if-available basis, telephone support,
integrated web-based support and bug fixes or patches. Subscription and
maintenance support revenue is recognized ratably over the term of the customer
support agreement, which is typically one year.
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We generate professional services and other revenue from consulting, technical
support, resident engineer services, design services and installation services.
Revenue for professional services and other is recognized when the performance
obligation is complete and the customer has accepted the performance obligation.
OUR SERVICES AND PRODUCTS
Our solutions currently support over 2.5 million end users globally and was recently recognized as the fastest growing UCaaS platform inthe United States . By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings: Cloud Telecommunications Services - Our cloud telecommunications service offering includes hardware, software, and unified ng IP or cloud technology over any high-speed Internet connection. These services are rendered through a variety of devices and communication solutions for businesses using user interfaces such as aCrexendo 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.
· Business Productivity Features such as dial-by extension and name,
transfer, conference, call recording, Unlimited calling to anywhere in the
US and
· 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
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 andseamless 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
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.
Software Solutions - Our software solutions offering provides a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to over 200 service providers, servicing over 2.5 million users around the globe. Our platform enables its service provider partners to customize packages with unprecedented levels of flexibility, profitability, and ease of use.
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Our software solutions offering are as follows:
· SNAPsolution® - a comprehensive, IP-based platform that provides a broad
suite of UC services including hosted Private
auto-attendant, call center, conferencing, and mobility. The platform
includes a broad range of feature-sets, custom-built to provide
unprecedented levels of flexibility, making the solution competitive with
the market's leading players. SNAPsolution includes a full suite of Voice
over Internet Protocol (VoIP)/UC features with one low cost universal
license, as opposed to pricing each feature individually. The Company
licenses its platform based on concurrent sessions, not per seat/per
feature. This allows service providers to oversubscribe their networks,
driving down the cost per seat as volume increases. As the service
provider increases their customer base, they only have to ensure they have
sufficient concurrent call licenses to support users across the network.
· SNAPaccel - a Software-as-a-Service ("SaaS") based software license
referred to as subscription arrangements.
· Subscription Maintenance and Support - The Company also sells
separately-priced maintenance service contracts, which qualify as
service-type warranties and represent separate performance obligations and
customer support. Customer support includes software updates on a
when-and-if-available basis, telephone support, integrated web-based
support and bug fixes or patches.
· Professional Services and Other - The Company's professional services
include consulting, technical support, resident engineer services, design
services and installation services.
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
2022 2021 2022 2021
Service revenue $ 4,473 $ 4,325 $ 13,427 $ 12,791
Software solutions
revenue 3,875 3,784 10,741 4,796
Product revenue 760 701 1,944 1,509
Total revenue $ 9,108 $ 8,810 $ 26,112 $ 19,096
Income/(loss)
before income taxes (728 ) 12 (3,127 ) (2,090 )
Income tax
benefit/(provision) 32 (137 ) 315 247
Net loss (696 ) (125 ) (2,812 ) (1,843 )
Basic earnings per
share $ (0.03 ) $ (0.01 ) $ (0.13 ) $ (0.09 )
Diluted earnings
per share $ (0.03 ) $ (0.01 ) $ (0.13 ) $ (0.09 )
Three months ended
Total Revenue Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Total revenue$ 9,108 $ 8,810 $ 298 3 % 33 Table of Contents
The increase in total revenue is due to an increase in service revenue of
Income/(Loss) Before Income Taxes
The following table reflects our income/(loss) before income taxes for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Income/(loss) before income taxes$ (728 ) $ 12 $ (740 ) -6167 % The increased loss before income tax is primarily due to an increase in operating expenses of$895,000 and an increase in other expense of$143,000 . The increase in operating expenses is primarily related to increases in salaries and benefits and stock compensation expense, offset by an increase in revenue of$298,000 .
Income Tax Benefit/(Provision)
The following table reflects our income tax benefit for the three months ended
Three Months Ended September 30,
2022 2021 Dollar Change Percent Change
Income tax
benefit/(provision) $ 32 $ (137 ) $ 169 -123 %
We had an income tax benefit of $32,000 for the three months ended September 30,
2022 compared to an income tax provision of $(137,000) for the three months
ended September 30, 2021 . We had income/(loss) before income tax for the three
months ended September 30, 2022 and 2021 of $(728,000) and $12,000 ,
respectively.
Nine months ended
Total Revenue Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our service revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Total revenue$ 26,112 $ 19,096 $ 7,016 37 % The increase in total revenue is due to an increase in service revenue of$636,000 , an increase in software solutions revenue of$5,945,000 , and an increase in product revenue of$435,000 . The significant increase in software solutions revenue is primarily related to nine months of revenue for 2022 compared to only four months of revenue for the nine months endSeptember 31, 2021 . Loss Before Income Taxes The following table reflects our loss before income taxes for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change
Loss before income taxes$ (3,127 ) $ (2,090 ) $ (1,037 )
50 %
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The increase in the loss before income tax is primarily due to an increase in revenue of$7,016,000 , offset by an increase in operating expenses of$7,792,000 and an increase in other expense of$261,000 . The increase in operating expenses is primarily related to increases in salaries and benefits, stock compensation expense, and nine months of software solutions operating expenses compared to only four month in the prior period. Income Tax Benefit
The following table reflects our income tax benefit for the nine months ended
Nine Months Ended September 30,
2022 2021 Dollar Change Percent Change
Income tax benefit $ 315 $ 247 $ 68 28 %
We had an income tax benefit of $315,000 for the nine months ended September 30,
2022 compared to an income tax benefit of $247,000 for the nine months ended
September 30, 2021 . We had a loss before income tax for the nine months ended
September 30, 2022 and 2021 of $(3,127,000) and $(2,090,000) , respectively.USE OF NON-GAAP FINANCIAL MEASURES
To evaluate our business, we consider and use non-generally accepted accounting
principles ("Non-GAAP") net income/(loss) and Adjusted EBITDA as a supplemental
measure of operating performance. These measures include the same adjustments
that management takes into account when it reviews and assesses operating
performance on a period-to-period basis. We consider Non-GAAP net income/(loss)
to be an important indicator of overall business performance because it allows
us to evaluate results without the effects of share-based compensation,
acquisition related expenses, changes in fair value of contingent consideration
and amortization of intangibles. We define EBITDA as U.S. GAAP net income/(loss)
before interest income, interest expense, other income and expense, provision
for income taxes, and depreciation and amortization. We believe EBITDA provides
a useful metric to investors to compare us with other companies within our
industry and across industries. We define Adjusted EBITDA as EBITDA adjusted for
acquisition related expenses, changes in fair value of contingent consideration
and share-based compensation. We use Adjusted EBITDA as a supplemental measure
to review and assess operating performance. We also believe use of Adjusted
EBITDA facilitates investors' use of operating performance comparisons from
period to period, as well as across companies.
In our November 10, 2022 earnings press release, as furnished on Form 8-K, we
included Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA. The terms
Non-GAAP net income/(loss), EBITDA, and Adjusted EBITDA are not defined under
U.S. GAAP, and are not measures of operating income, operating performance or
liquidity presented in analytical tools, and when assessing our operating
performance, Non-GAAP net income/(loss), EBITDA, and Adjusted EBITDA should not
be considered in isolation, or as a substitute for net income/(loss) or other
consolidated income statement data prepared in accordance with U.S. GAAP. Some
of these limitations include, but are not limited to:
· 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/(loss), EBITDA, and Adjusted EBITDA only
as supplemental support for management's analysis of business performance.
Non-GAAP net income/(loss), EBITDA and Adjusted EBITDA are calculated as follows
for the periods presented.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
In accordance with the requirements of Regulation G issued by theSEC , we are presenting the most directly comparableU.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparableU.S.
GAAP
measures.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income
(Unaudited, in thousands, except for per share and share data)
Three Months Ended September 30 , Nine Months
Ended September 30,
2022 2021 2022 2021
U.S. GAAP net
loss $ (696 ) $ (125 ) $ (2,812 ) $ (1,843 )
Share-based
compensation 851 415 2,762 1,150
Acquisition
related expenses 8 4 31 1,065
Amortization of
intangible
assets 550 506 1,649 773
Non-GAAP net
income $ 713 $ 800 $ 1,630 $ 1,145
Non-GAAP
earnings per
common share:
Basic $ 0.03 $ 0.04 $ 0.07 $ 0.06
Diluted $ 0.03 $ 0.03 $ 0.06 $ 0.05
Weighted-average
common shares
outstanding:
Basic 22,620,703 21,596,415 22,439,575 19,757,658
Diluted 25,285,848 26,196,240 25,491,062 22,481,104
Reconciliation of U.S. GAAP Net Loss to EBITDA toAdjusted EBITDA
(Unaudited, in thousands)
Three Months Ended September 30 , Nine
Months Ended
2022 2021 2022 2021
U.S. GAAP net loss $ (696 ) $ (125 ) $ (2,812 ) $ (1,843 )
Depreciation and
amortization 623 569 1,862 931
Interest expense 19 24 57 64
Interest and other
expense 165 17 281 13
Income tax
provision/(benefit) (32 ) 137 (315 ) (247 )
EBITDA 79 622 (927 ) (1,082 )
Acquisition related
expenses 8 4 31 1,065
Share-based
compensation 851 415 2,762 1,150
Adjusted EBITDA $ 938 $ 1,041 $ 1,866 $ 1,133
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 endedDecember 31, 2021 . Segment Operating Results The Company has two operating segments, which consist of cloud telecommunications services and software solutions. The information below is organized in accordance with our two reportable segments. Segment operating income is equal to segment net revenue less segment cost of service revenue, cost of product revenue, sales and marketing, research and development, and general and administrative expenses. 36 Table of Contents Operating Results of our Cloud Telecommunications Services Segment (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Cloud Telecommunications Services 2022 2021 2022 2021 Service revenue $ 4,473 $ 4,325$ 13,427 $ 12,791 Product revenue 760 701 1,944 1,509 Total revenue $ 5,233 $ 5,026$ 15,371 $ 14,300 Operating expenses: Cost of service revenue $ 1,375 $ 1,210 $ 4,249 $ 3,816 Cost of product revenue 453 461 1,142 972 Selling and marketing 1,704 1,487 4,963 4,274 General and administrative 2,056 1,763 6,355 6,146 Research and development 284 358 898 1,096 Total operating expenses 5,872 5,279 17,607 16,304 Operating loss (639 ) (253 ) (2,236 ) (2,004 ) Other expense (17 ) (22 ) (52 ) (58 ) Loss before tax benefit/(provision) $ (656 ) $ (275 )$ (2,288 ) $ (2,062 )
Three months ended
Service Revenue Cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services, professional services, interest from sales-type leases, reselling broadband Internet services, administrative fees, website hosting, and web management services. The following table reflects our service revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Service revenue$ 4,473 $ 4,325 $ 148 3 %
The increase in service revenue is due to an increase in telecommunications services of$113,000 , an increase in sales-type lease interest of$24,000 , an increase in one-time fees, commissions and other of$7,000 , and an increase in fees, commissions, and other, recognized over time of$4,000 , A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts. Product Revenue Product revenue consists primarily of fees collected from the sale of desktop phone devices and third-party equipment. The following table reflects our product revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Product revenue$ 760 $ 701 $ 59 8 % Product revenue fluctuates from one period to the next based on timing of installations. Our typical customer installation is complete within 30-60 days. However, larger enterprise customers can take multiple months, depending on size and the number of locations. Product revenue is recognized when products have been installed and services commence. Additionally, product revenue can fluctuate due to the allocation of discounts or sales promotions across the
performance obligations.
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Backlog
Backlog represents the total contract value of all contracts signed, less
revenue recognized from those contracts as of September 30, 2022 and 2021.
Backlog decreased 2%, or $660,000 to $30,063,000 as of September 30, 2022 as
compared to $30,723,000 as of September 30, 2021 . Below is a table which
displays the Cloud Telecommunications segment revenue backlog as of July 1, 2022
and 2021, and September 30, 2022 and 2021, which we expect to recognize as
revenue within the next thirty-six to sixty months (in thousands):
Cloud Telecommunications backlog as of
Cloud Telecommunications backlog as of
Cost of Service Revenue Cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers, broadband Internet providers, software providers, costs related to installations, customer support salaries, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Cost of service revenue$ 1,375 $ 1,210 $ 165 14 % The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in$165,000 in additional costs, an increase of$60,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of$26,000 , offset by an$85,000 decrease in third-party telecommunications carrier costs. Cost of Product Revenue
Cost of product revenue consists of the costs associated with desktop phone
devices and third-party equipment. The following table reflects our cost of
product revenue for the three months ended
Three Months Ended September 30,
2022 2021 Dollar Change Percent Change
Cost of product revenue $ 453 $ 461 $ (8 ) -2 %
The decrease in cost of product revenue was primarily due to negotiating lower costs on our desktop phone devices.
Selling and Marketing Selling and marketing expenses consist primarily of direct and channel sales representative salaries and benefits, share-based compensation, partner channel commissions, amortization of costs to acquire contracts, travel expenses, lead generation services, trade shows, internal and third-party marketing costs, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 :
Three Months Ended September 30,
2022 2021 Dollar Change Percent Change
Selling and marketing $ 1,704 $ 1,487 $ 217 15 %
The increase in selling and marketing expense is due to an increase in
commission expense of $121,000 directly related to the increase in revenue, an
increase in salaries, wages and benefits of $88,000 related to expansion of our
sales team, an increase in travel related costs and tradeshows of $30,000 ,
offset by a decrease in sales leads and marketing material costs of $20,000 and
a decrease in other sales and marketing expense of $2,000 .
General and Administrative
General and administrative expenses consist of salaries, wages and benefits,
share-based compensation for executives, administrative personnel, legal, rent,
equipment, accounting and other professional services, investor relations,
depreciation, amortization of intangibles, and other administrative corporate
expenses. The following table reflects our general and administrative expenses
for the three months ended September 30, 2022 , compared to the three monthsendedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change General and administrative$ 2,056 $ 1,763 $ 293 17 % 38 Table of Contents The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages, and benefits of$375,000 related to an increase in headcount and company-wide salary increases, offset by a decrease in corporate insurance of$37,000 due to an allocation of cost to the software solutions segment, a decrease in bank processing fees of$13,000 , and a decrease in other general and administrative expense of$32,000 . Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of new cloud telecommunications features and products. The following table reflects our research and development expenses for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Research and development$ 284 $ 358 $ (74 ) -21 %
The decrease in research and development expenses is primarily related to a
decrease in costs for maintenance on our mobile applications and other
development costs of
Other Expense Other expense primarily relates to interest expense and net foreign exchange gains or losses, offset by credit card cash back rewards. The following table reflects our other expense for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Other expense$ (17 ) $ (22 ) $ 5 -23 %
Nine months ended
Service Revenue Cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services, professional services, interest from sales-type leases, reselling broadband Internet services, administrative fees, website hosting, and web management services. The following table reflects our service revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Service revenue$ 13,427 $ 12,791 $ 636 5 %
The increase in service revenue is due to an increase in telecommunications service revenue of$397,000 , an increase in one time fees, commissions and other of$182,000 , an increase in sales-type lease interest of$40,000 , and an increase in fees, commissions, and other, recognized over time of$17,000 . A substantial portion of Cloud Telecommunications service revenue is generated through thirty-six to sixty month service contracts. 39 Table of Contents Product Revenue Product revenue consists primarily of fees collected from the sale of desktop phone devices and third-party equipment. The following table reflects our product revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Product revenue$ 1,944 $ 1,509 $ 435 29 % Product revenue fluctuates from one period to the next based on timing of installations. Our typical customer installation is complete within 30-60 days. However, larger enterprise customers can take multiple months, depending on size and the number of locations. Product revenue is recognized when products have been installed and services commence. Additionally, product revenue can fluctuate due to the allocation of discounts or sales promotions across the
performance obligations. Backlog Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as ofSeptember 30, 2022 and 2021. Backlog decreased 2%, or$660,000 to$30,063,000 as ofSeptember 30, 2022 as compared to$30,723,000 as ofSeptember 30, 2021 . Below is a table which displays the Cloud Telecommunications segment revenue backlog as ofJanuary 1, 2022 and 2021, andSeptember 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Cloud Telecommunications backlog as of
Cloud Telecommunications backlog as of
Cost of Service Revenue Cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers, broadband Internet providers, software providers, costs related to installations, customer support salaries, wages and benefits, and share-based compensation. The following table reflects our cost of service revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Cost of service revenue$ 4,249 $ 3,816 $ 433 11 % The increase in cost of service revenue was primarily due to added headcount related to our increase in revenue and company-wide salary increases resulting in$513,000 in additional costs, an increase of$178,000 for third party installation services, outsourced customer support, and assistance in the migration of our customers to our VIP platform, and an increase in other cost of service revenue of$44,000 , offset by a$302,000 decrease in telecommunication carrier costs as we've eliminated costs by migrating customers to our VIP platform and as we've switched to lower cost telecommunication carriers. Cost of Product Revenue
Cost of product revenue consists of the costs associated with desktop phone
devices and third-party equipment. The following table reflects our cost of
product revenue for the nine months ended
Nine Months Ended September 30,
2022 2021 Dollar Change Percent Change
Cost of product revenue $ 1,142 $ 972 $ 170 17 %
The increase in cost of product revenue is primarily due to an increase in product revenue.
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Selling and Marketing
Selling and marketing expenses consist primarily of direct and channel sales
representative salaries and benefits, share-based compensation, partner channel
commissions, amortization of costs to acquire contracts, travel expenses, lead
generation services, trade shows, internal and third-party marketing costs, the
production of marketing materials, and sales support software. The following
table reflects our selling and marketing expenses for the nine months ended
September 30, 2022 , compared to the nine months ended September 30, 2021 :
Nine Months Ended September 30,
2022 2021 Dollar Change Percent Change
Selling and marketing $ 4,963 $ 4,274 $ 689 16 %
The increase in selling and marketing expense is due to an increase in salaries,
wages and benefits of $366,000 related to expansion of our sales team, an
increase in commission expense of $193,000 directly related to the increase in
revenue, and an increase in travel related costs and tradeshows of $161,000 ,
offset by a decrease in other selling and marketing expenses of $31,000 .
General and Administrative
General and administrative expenses consist of salaries, wages and benefits,
share-based compensation for executives, administrative personnel, legal, rent,
equipment, accounting and other professional services, investor relations,
depreciation, amortization of intangibles, and other administrative corporate
expenses. The following table reflects our general and administrative expenses
for the nine months ended September 30, 2022 , compared to the nine months ended
September 30, 2021 :
Nine Months Ended September 30,
2022 2021 Dollar Change Percent Change
General and
administrative $ 6,355 $ 6,146 $ 209 3 %
The increase in general and administrative expenses is primarily due an increase
in administrative salaries, wages and benefits of $1,207,000 related to an
increase in share-based compensation as a result of a company-wide employee
retention grant, an increase in headcount, and company-wide salary increases,
and an increase in telecommunication fees of $53,000 , offset by a decrease in
acquisition related expenses of $1,050,000 , related to the 2021 acquisitions of
Centric Telecom and NetSapiens, and a decrease in other general and
administrative expenses of $1,000 .
Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of new cloud telecommunications features and products. The following table reflects our research and development expenses for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Research and development$ 898 $ 1,096 $ (198 ) -18 %
The decrease in research and development expenses is primarily related to a
decrease in costs for maintenance on our mobile applications and other
development costs of
Other Expense Other expense primarily relates to interest expense and net foreign exchange gains or losses, offset by credit card cash back rewards. The following table reflects our other expense for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Other expense$ (52 ) $ (58 ) $ 6 -10 % 41 Table of Contents
Operating Results of Software Solutions segment (in thousands):
In connection with the merger with
Three Months Ended September 30, Nine Months Ended September 30,
Software Solutions 2022 2021 2022 2021
Software solutions
revenue $ 3,875 $ 3,784 $ 10,741 $ 4,796
Operating expenses:
Cost of software
solutions revenue 1,170 1,675 3,987 2,201
Selling and
marketing 1,028 798 3,124 1,187
General and
administrative 744 1,005 2,451 1,417
Research and
development 838 - 1,732 -
Total operating
expenses 3,780 3,478 11,294 4,805
Operating
income/(loss) 95 306 (553 ) (9 )
Other expense (167 ) (19 ) (286 ) (19 )
Income/(loss)
before tax
benefit/(provision) $ (72 ) $ 287 $ (839 ) $ (28 )
Three months ended
Software Solutions Revenue Software solutions revenue consists primarily of software license fees, subscription maintenance and support, and professional services. Software licenses are billed by the number of concurrent sessions a Partner has purchased or subscribes to. Subscription maintenance and support is ongoing and provides for software updates and improvements, support for add-on modules, bug fixes, and other general maintenance items. Professional services and other revenues consist of professional services such as the installation of software and integration of other modules, training and implementation as well as custom mobile branding. The following table reflects our service revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change Software solutions revenue$ 3,875 $ 3,784 $ 91 2 % The increase is primarily related to a$546,000 increase in recurring software license and maintenance and support subscriptions, an increase in professional services of$33,000 , offset by a decrease in perpetual software licenses of
$488,000 . Backlog Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as ofSeptember 30, 2022 and 2021. Backlog increased 6%, or$786,000 to$13,334,000 as ofSeptember 30, 2022 as compared to$12,558,000 as ofSeptember 30, 2021 as a result of ourJune 1, 2021 acquisition. Below is a table which displays the software solutions segment revenue backlog as ofJuly 1, 2022 and 2021, andSeptember 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Software solutions backlog as of
Software solutions backlog as of
Cost of Software Solutions Revenue
Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, amortization expense related to the technology, cost of Data Center hosting, third-party software modules and outsourced services required to install and support software solutions. The following table reflects our cost of service revenue for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 :
Three Months Ended September 30,
2022 2021 Dollar Change Percent Change
Cost of software
solutions revenue $ 1,170 $ 1,675 $ (505 ) -30 %
42
Table of contents
The decrease in cost of service revenue is primarily related to the
reclassification of $738,000 of research and development expenses out of cost
of service revenue after carefully reviewing operating expenses that qualify as
research and development operating expenses, a $50,000 decrease in amortization
expense related to the technology, offset by an increase in cost of service
revenue of $284,000 related to the company-wide salary increases that resulted
in $158,000 of additional costs, an increase of $67,000 in data center hosting
related to data center expansion and increased activity, an increase of $41,000
in third-party software modules and outsourced services required to install and
support software solutions also due to increased activity, and a $18,000
increase in share-based compensation.
Selling and Marketing
Selling and marketing expenses consist primarily of sales and marketing
salaries, wages and benefits, commissions, share-based compensation, travel
expenses, lead generation services, trade shows, third-party marketing services,
the production of marketing materials, amortization expense related to customer
relationships intangible asset, and sales support software. The following table
reflects our selling and marketing expenses for the three months ended September
30, 2022 , compared to the three months ended September 30, 2021 :
Three Months Ended September 30,
2022 2021 Dollar Change Percent ChangeSelling and marketing$ 1,028 $ 798 $ 230
29 %
The increase in selling and marketing expenses is primarily related to an
increase in commissions of $99,000 , an increase in salaries, wages and benefits
of $76,000 , an increase in share-based compensation of $29,000 , an increase in
customer relationships intangible asset amortization expense of $74,000 , an
increase in sales support software of $17,000 , and a $20,000 increase in other
selling and marketing expenses, offset by a decrease of $85,000 in third-party
marketing services.
General and Administrative
General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, administrative personnel, amortization of intangible asset related to trademarks and trade names, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Dollar Change Percent Change General and administrative$ 744 $ 1,005 $ (261 ) -26 %
The decrease in general and administrative expenses is primarily related to the reclassification of$100,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses, and a reduction in professional service fees of$117,000 , a decrease in equipment of$38,000 , and a$6,000 decrease in other administrative corporate expenses. Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : 2022 2021 Dollar Change Percent Change Research and development$ 838 $ - $ 838 - 43 Table of contents The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of$738,000 and general and administrative expenses of$100,000 after carefully reviewing operating expenses that qualify as research and development operating expenses. Other Expense Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2022 Dollar Change Percent Change Other expense$ (167 ) $ (19 ) $ (148 ) 779 %
The increase in other expense primarily related to net foreign exchange losses during the period.
Nine months ended
Software Solutions Revenue Software solutions revenue consists primarily of software license fees, subscription maintenance and support, and professional services. Software licenses are billed by the number of concurrent sessions a Partner has purchased or subscribes to. Subscription maintenance and support is ongoing and provides for software updates and improvements, support for add-on modules, bug fixes, and other general maintenance items. Professional services and other revenues consist of professional services such as the installation of software and integration of other modules, training and implementation as well as custom mobile branding. The following table reflects our service revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Software solutions revenue$ 10,741 $ 4,796 $ 5,945 124 % The increase is primarily related to nine months of revenue for the nine months endedSeptember 30, 2022 , compared to only four months of revenue for the nine months endSeptember 30, 2021 , due to theJune 1, 2021 acquisition date. Backlog Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as ofSeptember 30, 2022 and 2021. Backlog increased 6%, or$786,000 to$13,334,000 as ofSeptember 30, 2022 as compared to$12,558,000 as ofSeptember 30, 2021 . Below is a table which displays the software solutions segment revenue backlog as ofJanuary 1, 2022 and 2021, andSeptember 30, 2022 and 2021, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):
Software solutions backlog as of
Software solutions backlog as of
44
Table of contents
Cost of Software Solutions Revenue
Cost of software solutions revenue consists primarily of salaries, wages and benefits, share-based compensation, amortization expense related to the technology, cost of Data Center hosting, third-party software modules and outsourced services required to install and support software solutions. The following table reflects our cost of service revenue for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Cost of software solutions revenue$ 3,987 $ 2,201 $ 1,786 81 %
The increase in cost of service revenue is primarily related to nine months of costs for the nine months endedSeptember 30, 2022 , compared to only four months of costs for the nine months endSeptember 30, 2021 , due to theJune 1, 2021 acquisition date, and the reclassification of$1,530,000 in research and development expenses out of cost of service revenue for the nine months endedSeptember 30, 2022 , after carefully reviewing operating expenses that qualify as research and development operating expenses. Selling and Marketing Selling and marketing expenses consist primarily of sales and marketing salaries, wages and benefits, commissions, share-based compensation, travel expenses, lead generation services, trade shows, third-party marketing services, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Selling and marketing$ 3,124 $ 1,187 $ 1,937 163 %
The increase in selling and marketing expenses is primarily related to nine months of expenses for the nine months endedSeptember 30, 2022 , compared to only four months of expenses for the nine months endSeptember 30, 2021 , due to theJune 1, 2021 acquisition date. General and Administrative
General and administrative expenses consist of salaries, wages and benefits for executives, share-based compensation, administrative personnel, amortization of intangible asset related to customer lists, legal, rent, equipment, accounting and other professional services, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change
General and administrative$ 2,451 $ 1,417 $ 1,034
73 %
The increase in general and administrative expenses is primarily related to nine months of expenses for the nine months endedSeptember 30, 2022 , compared to only four months of expenses for the nine months endSeptember 30, 2021 , due to theJune 1, 2021 acquisition date, and the reclassification of$202,000 of research and development expenses out of general & administrative expenses after carefully reviewing expenses that qualify as research and development operating expenses. Research and Development
Research and development expenses primarily consist of salaries, wages and benefits, share-based compensation, and outsourced engineering services related to the development of our software solutions. The following table reflects our research and development expenses for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Research and development$ 1,732 $ - $ 1,732 - The increase in research and development expenses is primarily related to the reclassification of research and development expenses out of cost of service revenue of$1,530,000 and general and administrative expenses of$202,000 after carefully reviewing operating expenses that qualify as research and development operating expenses. 45 Table of contents Other Expense Other expense primarily relates to interest expense and net foreign exchange gains or losses. The following table reflects our other expense for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Other expense$ (286 ) $ (19 ) $ (267 ) 1405%
The increase in other expenses is primarily related to net foreign exchange
losses during the nine months ended
Liquidity and Capital Resources
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We finance our operations primarily through services, software solutions, and product sales to our customers. As ofSeptember 30, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$4,821,000 and$7,468,000 , respectively. Changes in cash and cash equivalents are dependent upon changes in, among other things, working capital items such as contract liabilities, contract costs, accounts payable, accounts receivable, prepaid expenses, and various accrued expenses, as well as purchases of property and equipment, asset acquisitions, business combinations, and changes in our capital and financial structure due to debt repayments and issuances, stock option exercises, sales of equity investments and similar events. We believe that our operations along with existing liquidity sources will satisfy our cash requirements for at least
the next twelve months. Operating Activities
Cash provided by or used in operating activities is driven by our net loss, the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business. The following table reflects our net cash used in operating activities for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Net cash used in operating activities$ (2,665 ) $ (473 ) $ (2,192 ) 463 % The net cash used for operations was primarily driven by our net loss for the nine months endedSeptember 30, 2022 of$696,000 , an increase in accounts receivable, an increase in equipment financing receivables, an increase in contract costs, an increase in prepaid expenses, an increase in income tax receivable, a decrease in accounts payable and accrued expenses, and a decrease in contract liabilities, offset by non-cash expenses for depreciation and amortization and share-based compensation. Investing Activities
Cash provided by or used in investing activities is driven by the purchase of property and equipment, business combinations, and asset acquisitions. The following table reflects our net cash used in investing activities for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Net cash used in investing activities$ (192 ) $ (10,596 ) $ 10,404 -98 %
Net cash used for investing activities in the nine months ended
Net cash used for investing activities for the nine months endedSeptember 30, 2021 , primarily relates to cash paid for a business combination. During the nine months endedSeptember 30, 2021 , the Company acquired 100% of the issued and outstanding shares ofCentric Telecom, Inc. , a provider of telecommunications products, services, and solutions inNorthern Virginia . The aggregate purchase price of$3,255,000 consisted of$2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of$346,000 issued at closing, and$746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period. OnSeptember 1, 2021 , the Company acquired 100% of the issued and outstanding shares ofNetSapiens, Inc. ("NetSapiens"), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over 1.7M users around the globe. The aggregate purchase price was approximately$49.1 million , consisting of$10 million in cash, and approximately$39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company's common stock valued at$5.47 per share for common stock consideration of approximately$16.9 million , and 4,482,328 options under theCrexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of$22.1 million , net of the aggregate exercise price of$5.6 million . 46 Table of contents Financing Activities
Cash provided by or used in financing activities is driven by the proceeds from the exercise of options, taxes paid on the net settlement of stock options and RSUs, payment of contingent consideration, proceeds from finance leases and notes payable, repayments made on finance leases and notes payable, dividend payments, and proceeds from the issuance of common stock in connection with an offering. The following table reflects our net cash provided by/(used in) financing activities for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Dollar Change Percent Change Net cash provided by/(used in) financing activities$ (36 ) $ 1,081 $ (1,117 ) -103 % Net cash used in financing activities in the nine months endedSeptember 30, 2022 , primarily relates to cash proceeds from the exercise of stock options of$576,000 , offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of$135,000 , dividend payments of$336,000 , and repayments of notes payable and finance leases of$141,000 . Net cash provided by financing activities in the nine months endedSeptember 30, 2021 , primarily relates to cash proceeds from the exercise of stock options of$1,177,000 offset by the payments of employee tax withholdings related to the net settlement of stock options of$155,000 .
Contractual Obligations and Commitments
Except as set forth in Notes 4, 10, and 13 in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no significant changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Off Balance Sheet Arrangements
As of,
Related Party Transactions None
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.
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