UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM
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(Mark One)
For the quarterly period ended
OR
For the transition period from ________ to ________.
Commission file number
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
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(Address of Principal Executive Offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one).
Large accelerated filer | ☐ |
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| Accelerated filer | ☐ |
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| (Do not check if a smaller reporting company) | Smaller reporting company | ||
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the registrant’s common stock as of October 31, 2023 was
INDEX
PART I – FINANCIAL INFORMATION
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| 2 |
| Table of Contents |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except par value and share data)
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| September 30, 2023 |
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| December 31, 2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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Trade receivables, net of allowance of $ |
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Inventories |
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Equipment financing receivables, net of allowance of $ |
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Contract costs |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Contract assets, net of allowance of $ |
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Long-term equipment financing receivables, net of allowance of $ |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Intangible assets, net |
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Goodwill |
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Contract costs, net of current portion |
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Other long-term assets |
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Total Assets |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable |
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Accrued expenses |
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Finance leases |
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Notes payable |
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Operating lease liabilities |
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Income tax payable |
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Contract liabilities |
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Total current liabilities |
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Contract liabilities, net of current portion |
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Finance leases, net of current portion |
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Notes payable, net of current portion |
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Line of credit |
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Operating lease liabilities, net of current portion |
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Total liabilities |
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Stockholders' equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive income |
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Total stockholders' equity |
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Total Liabilities and Stockholders' Equity |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
| 3 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share and share data)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2023 |
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Service revenue |
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Software solutions revenue |
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Product revenue |
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Total revenue |
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Operating expenses: |
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Cost of service revenue |
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Cost of software solutions revenue |
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Cost of product revenue |
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Selling and marketing |
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General and administrative |
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Research and development |
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Total operating expenses |
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Income/(loss) from operations |
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Other income/(expense): |
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Interest expense |
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Gain on sale of property and equipment |
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Other income/(expense), net |
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Total other income/(expense), net |
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Income/(loss) before income tax |
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Income tax benefit/(provision) |
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Net income/(loss) |
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Earnings per common share: |
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Basic |
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Diluted |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2023 |
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| 2022 |
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| 2023 |
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| 2022 |
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Net income/(loss) |
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Other comprehensive income, net of tax |
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Foreign currency translation gain/(loss) |
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Total other comprehensive income/(loss) |
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Comprehensive income/(loss) |
| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2023 and 2022
(Unaudited, in thousands, except share data)
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| Accumulated |
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| Additional |
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| Other |
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| Total |
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| Common Stock |
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| Paid-in |
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| Comprehensive |
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| Accumulated |
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| Stockholders' |
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| Shares |
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| Amount |
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| Capital |
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| Income |
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| Deficit |
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| Equity |
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Balance, January 1, 2023 |
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Cumulative effect of accounting change |
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Share-based compensation |
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Vesting of restricted stock units |
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Foreign currency translation adjustment, net of tax |
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Issuance of common stock for exercise of stock options |
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Taxes paid on the net settlement of stock options and RSUs |
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Net loss |
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Balance, March 31, 2023 |
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Share-based compensation |
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Foreign currency translation adjustment, net of tax |
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Issuance of common stock for exercise of stock options |
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Taxes paid on the net settlement of stock options and RSUs |
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Dividends declared |
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Net loss |
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Balance, June 30, 2023 |
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Share-based compensation |
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Foreign currency translation adjustment, net of tax |
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Issuance of common stock for exercise of stock options |
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Net income |
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Balance, September 30, 2023 |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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| 6 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2023 and 2022
(Unaudited, in thousands, except share data)
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| Accumulated |
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| Additional |
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| Other |
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| Total |
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| Common Stock |
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| Paid-in |
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| Comprehensive |
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| Accumulated |
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| Stockholders' |
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| Shares |
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| Amount |
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| Capital |
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| Income |
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| Deficit |
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| Equity |
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Balance, January 1, 2022 |
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Share-based compensation |
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Vesting of restricted stock units |
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Foreign currency translation adjustment, net of tax |
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| - |
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Issuance of common stock for exercise of stock options |
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Taxes paid on the net settlement of stock options |
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| - |
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Dividends declared |
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| - |
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Net loss |
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| - |
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Balance, March 31, 2022 |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Share-based compensation |
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| - |
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Vesting of restricted stock units |
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Foreign currency translation adjustment, net of tax |
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| - |
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Issuance of common stock for exercise of stock options |
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Taxes paid on the net settlement of stock options |
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| - |
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Dividends declared |
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| - |
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Net loss |
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| - |
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| ( | ) |
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Balance, June 30, 2022 |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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Share-based compensation |
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| - |
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Vesting of restricted stock units |
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Foreign currency translation adjustment, net of tax |
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| - |
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Issuance of common stock for exercise of stock options |
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Taxes paid on the net settlement of stock options |
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| - |
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Dividends declared |
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| - |
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Net loss |
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| - |
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| ( | ) |
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Balance, September 30, 2022 |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
| 7 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
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| Nine Months Ended September 30, |
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| 2023 |
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| 2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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| $ | ( | ) |
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Non-cash operating lease amortization |
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Gain on sale of property and equipment |
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Allowance for credit losses |
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Changes in assets and liabilities: |
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Trade receivables |
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Contract assets |
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Equipment financing receivables |
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Inventories |
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Contract costs |
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Prepaid expenses |
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Income tax receivable |
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Other assets |
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Accounts payable and accrued expenses |
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Income tax payable |
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Contract liabilities |
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Net cash provided by/(used in) operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment |
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Proceeds from the sale of property and equipment |
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Net cash provided by/(used in) investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Repayments made on finance leases |
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Repayments made on notes payable |
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Proceeds from notes payable |
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Proceeds from exercise of options |
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Dividend payments |
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Taxes paid on the net settlement of stock options and RSUs |
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Borrowing on a line of credit, net |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash |
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NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD |
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD |
| $ |
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| $ |
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Cash used during the year for: |
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Income taxes, net |
| $ | ( | ) |
| $ | ( | ) |
Interest expense |
| $ | ( | ) |
| $ | ( | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 8 |
| Table of Contents |
CREXENDO, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Significant Accounting Policies
Description of Business – Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo, Inc. is an award-winning premier provider of cloud communication platform and services, video collaboration and managed IT services designed to provide enterprise-class cloud solutions to any size business. The Company has two operating segments, which consist of Cloud Telecommunications Services and Software Solutions.
Basis of Presentation – The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Allegiant Networks, LLC, Crexendo Business Solutions, Inc., NetSapiens, LLC, Crexendo Business Solutions of Virginia, Inc., NSHC, Inc., NetSapiens Canada, Inc., NetSapiens International Limited 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.
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Foreign Currency Translation - The functional currency of our international subsidiaries is the local currency. We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income (loss).
Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During the three months ended September 30, 2023 and 2022, the Company recorded foreign currency translation gains of $
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, 2023 and December 31, 2022, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $
Trade Receivables and Allowance for Credit Losses – Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts. Trade receivables are generally due within 30 days after the invoice date. We provide an allowance for credit losses based on historical loss experience, the age of the receivables, specific troubled accounts and other currently available information.
The allowance for credit losses is determined based on an assessment of historical collection experience using the aging schedule method as well as consideration of current and future economic conditions. Trade receivables are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our trade receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary.
Equipment Financing Receivables and Allowance for Credit Losses – Equipment financing receivables are comprised of sales-type leases. Sales-type leases are from financing options provided to clients for cloud telecommunications equipment (IP or cloud telephone desktop devices) and are generally due in installments over periods ranging from three to five years.
We provide an allowance for credit losses based on historical loss experience, adverse situations that may affect a client's ability to pay, current economic conditions and outlook based on reasonable and supportable forecasts. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary. Equipment financing receivables are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our equipment financing receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.
| 9 |
| Table of Contents |
Contract Assets and Allowance for Credit Losses– Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The contract assets are transferred to receivables when the rights become unconditional.
The allowance for credit losses is determined based on an assessment of historical collection experience using the loss-rate method as well as consideration of current and future economic conditions and changes in our loss-rate trends. We utilize a five-year lookback period to establish our estimate of expected credit losses, as our contractual terms range from three to five years. Contract assets are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our contract assets credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary.
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 $
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:
Building | |
Land | |
Computer and office equipment | |
Computer software | |
Internal-use software | |
Furniture and fixtures | |
Leasehold improvements | |
Vehicles |
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.
Property and equipment, held for sale – Property and equipment are classified as held for sale when the Company commits to and commences a plan of sale that is reasonably expected to be completed within one year and satisfies certain other held for sale criteria. Property and equipment held for sale are recorded at the lesser of carrying value or fair value, less estimated cost to sell. Depreciation ceases once an asset is classified as held for sale. The Company performs an impairment review of assets held for sale each reporting period. An impairment loss is recorded for an asset or asset group held for sale when the carrying value of the asset or asset group exceeds its fair value, less estimated cost to sell.
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.
| 10 |
| Table of Contents |
Business Acquisitions - We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expenses.
Goodwill – We have recorded goodwill related to various business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to: sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors; and decline in overall market or economic conditions leading to a decline in our stock price.
The process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company must perform the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.
Impairment assessment inherently involves management judgments regarding a number of assumptions. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values. For further information, see Note 10 (Intangible Assets and Goodwill).
Intangible Assets – Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.
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 contract liabilities.
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, the provision for credit losses related to trade receivables, provision for contract assets, provision for equipment financing receivables, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accruals, recoverability of long-lived assets and intangible 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.
| 11 |
| Table of Contents |
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.
Service, Software Solutions and Product Revenue Recognition – Revenue is recognized upon transfer of control of promised services, software solutions or products 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 3 (Revenue).
Cost of Service Revenue – Cost of service revenue includes cloud telecommunications services. 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.
Cost of Software Solutions Revenue – Cost of software solutions revenue consists primarily of royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, direct costs to manufacture and distribute products, direct costs to provide product support and professional support services, direct costs associated with delivery of the Company’s software offerings, and amortization expense related to developed technology intangible assets.
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 business acquisition and 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 acquisition date fair value. Contingent consideration recorded in connection with a business acquisition is reported at fair value each reporting period until the contingency is resolved. Any changes in fair value are recognized in earnings. 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.
Research and Development – Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation and the cost of certain third-party contractors. 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.
| 12 |
| Table of Contents |
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. At December 31, 2022, we determined that it is more likely-than-not that we will not be able to realize our deferred income tax assets in the future. A valuation allowance of $
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”).
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 reorganized into two operating segments, which consist of cloud telecommunications services and software solutions. The software solutions segment includes the results of operation of NetSapiens, LLC, NSHC, Inc., NetSapiens Canada, Inc., and NetSapiens International Limited. The cloud telecommunications segment includes the results of operations of Allegiant Networks, LLC, Crexendo Business Solutions, Inc., Crexendo International, Inc., and Crexendo Business Solutions of Virginia, Inc. We generate 95% of our total revenue from customers within the United States and 5% of our total revenues from customers in other parts of the world.
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| Table of Contents |
Significant Customers – No customer accounted for
Recently Adopted Accounting Pronouncements – In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is effective for our fiscal year beginning after December 15, 2021, including interim periods within this fiscal year. This guidance can be applied using either a modified or full retrospective approach. The Company adopted ASU 2020-06 effective January 1, 2022. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, with additional updates and amendments being issued in 2018, 2019, 2020 and 2022 (collectively, “ASC 326”). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss (“CECL”) model. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. The Company adopted ASC 326 on a modified retrospective basis as of January 1, 2023, through a cumulative-effect adjustment to the Company's beginning accumulated deficit balance; the impact of the adoption was not material to the Company's consolidated financial statements. The adoption of this standard and applicable amendments primarily impacted the estimation of our allowance for credit losses for accounts receivable and established an allowance for credit losses for our equipment finance receivables and contract assets. See Note 2 for disclosures related to changes in accounting policies. See Note 6 - Trade Receivables and Allowance for Credit Losses, Note 7 – Equipment Financing Receivables and Allowance for Credit Losses, and Note 3 – Contract Assets Allowance for Credit Losses for additional discussion regarding the impacts from the adoption of this standard.
Recently Issued Accounting Pronouncements – None
2. Changes in Accounting Principles
On January 1, 2023, the Company adopted ASC 326 Financial Instruments — Credit Losses (“ASC 326”). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss (“CECL”) model. For trade and other receivables, held-to-maturity debt securities, loans, contract assets, and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. The Company applied the modified retrospective method of adoption for ASC 326. Under this transition method, the Company applied the transition provisions starting at the date of adoption. The cumulative effect of the adoption of ASC 326 on our January 1, 2023 Condensed Consolidated Balance Sheet was as follows:
Condensed Consolidated Balance Sheet |
| December 31, 2022 |
|
| New ASC 326 |
|
| January 1, 2023 |
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| As Previously |
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| Standard |
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| As |
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(In thousands) |
| Reported |
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| Adjustment |
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| Adjusted |
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Assets |
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Trade receivables, net of allowance |
| $ |
|
| $ | ( | ) |
| $ |
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Contract assets, net of allowance |
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| ( | ) |
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Equipment financing receivables, net of allowance |
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| ( | ) |
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Total current assets |
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| ( | ) |
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Long-term equipment financing receivables, net of allowance |
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| ( | ) |
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Total Assets |
| $ |
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| $ | ( | ) |
| $ |
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Liabilities and Stockholders' Equity |
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Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total stockholders' equity |
|
|
|
|
| ( | ) |
|
|
| ||
Total Liabilities and Stockholders' Equity |
| $ |
|
| $ | ( | ) |
| $ |
| ||
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| Table of Contents |
3. Revenue
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product, service, or software solution 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 18 (Segment Reporting).
Cloud Telecommunications Services 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.
Telecommunications Equipment – 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, managed IT services, cloud server rental and support, managed security, cabling, software license sales, interest generated from equipment financing revenue, and support for premise based PBX phone systems. 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. |
| 15 |
| Table of Contents |
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. |
Software Solutions Segment
The Software Solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.
Software Licenses - The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS") based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software is delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue could be recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. However, historical experience shows that customers regularly renegotiate the number of licenses during the installation process. Therefore, the Company recognizes revenue from software licenses when the setup is complete. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.
| · | SNAPsolution® - a comprehensive, IP-based platform that provides a broad suite of UC services including hosted Private Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network. The Company recognizes one-time upfront software license revenue when the software setup is complete. |
| · | SNAPaccel – a Software-as-a-Service ("SaaS") based software license referred to as subscription arrangements. The Company recognizes revenue as subscriptions are provided in service revenue on a monthly basis. |
Subscription Maintenance and Support - Subscription maintenance and support revenue includes revenue from maintenance service contracts, customer support, and other supportive services. The Company offers warranties on its products. The warranty period for the Company’s licensed software is generally 90 days. Certain of the Company's warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.
Professional Services and Other - The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Revenue from professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.
| 16 |
| Table of Contents |
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, 2023 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Telecommunications equipment |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products, services, and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Products, services, and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Three Months Ended September 30, 2022 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Telecommunications equipment |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products, services, and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Products, services, and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Nine Months Ended September 30, 2023 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Telecommunications equipment |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Services and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
| 17 |
| Table of Contents |
Nine Months Ended September 30, 2022 |
| Cloud |
|
| Software |
|
| Total |
| |||
(In thousands) |
| Telecommunications |
|
| Solutions |
|
| Reportable |
| |||
|
| Segment |
|
| Segment |
|
| Segments |
| |||
Major products/services lines |
|
|
|
|
|
|
|
|
| |||
Telecommunications equipment |
| $ |
|
| $ |
|
| $ |
| |||
Equipment financing revenue |
|
|
|
|
|
|
|
|
| |||
Telecommunications services |
|
|
|
|
|
|
|
|
| |||
Fees, commissions, and other, recognized over time |
|
|
|
|
|
|
|
|
| |||
One time fees, commissions and other |
|
|
|
|
|
|
|
|
| |||
Software licenses |
|
|
|
|
|
|
|
|
| |||
Software license and maintenance and support subscriptions |
|
|
|
|
|
|
|
|
| |||
Professional services and other |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Timing of revenue recognition |
|
|
|
|
|
|
|
|
|
|
|
|
Products and fees recognized at a point in time |
| $ |
|
| $ |
|
| $ |
| |||
Services and fees transferred over time |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
|
| September 30, |
|
| December 31, |
| ||
(In thousands) |
| 2023 |
|
| 2022 |
| ||
Receivables, which are included in trade receivables, net of allowance for doubtful accounts |
| $ |
|
| $ |
| ||
Contract assets, net of allowance for credit losses |
|
|
|
|
|
| ||
Contract liabilities |
|
|
|
|
|
| ||
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
|
| For the Nine Months Ended |
|
| For the Year Ended |
| ||||||||||
(In thousands) |
| September 30, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Contract Assets |
|
| Contract Liabilities |
|
| Contract Assets |
|
| Contract Liabilities |
| ||||
Revenue recognized that was included in the contract liability balance at the beginning of the period |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Transferred to receivables from contract assets recognized at the beginning of the period |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Increase due to additional unamortized discounts |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Contract assets allowance for credit losses
Our contract assets balance consists of 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 assets were as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Gross contract assets |
| $ |
|
| $ |
| ||
Less: allowance for credit losses |
|
| ( | ) |
|
|
| |
Contract assets, net of allowance for credit losses |
| $ |
|
| $ |
| ||
| 18 |
| Table of Contents |
The allowance for credit losses was as follows (in thousands):
Balance at December 31, 2022 |
| $ |
| |
Cumulative effect of accounting change |
|
|
| |
Provision |
|
|
| |
Write-offs |
|
|
| |
Recoveries and other |
|
|
| |
Balance at March 31, 2023 |
| $ |
| |
Provision |
|
| ( | ) |
Write-offs |
|
|
| |
Recoveries and other |
|
|
| |
Balance at June 30, 2023 |
| $ |
| |
Provision |
|
|
| |
Write-offs |
|
|
| |
Recoveries and other |
|
|
| |
Balance at September 30, 2023 |
| $ |
|
The allowance for credit losses is determined based on an assessment of historical collection experience using the loss-rate method as well as consideration of current and future economic conditions and changes in our loss-rate trends. We utilize a five-year lookback period to establish our estimate of expected credit losses, as our contractual terms range from three to five years. Based on that assessment, the allowance for credit losses as a percent of gross contract assets increased to 10.3% at September 30, 2023 from 0% at December 31, 2022.
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):
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 and thereafter |
|
| Total |
| ||||||
Desktop devices |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
Telecommunications services |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
Software Solutions |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| ||||||
All consideration from contracts with customers is included in the amounts presented above |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 19 |
| Table of Contents |
4. Earnings Per Common Share
Basic net income/(loss) per common share is computed by dividing the net income/(loss) 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. Diluted net loss per common share for the three months ended September 30, 2022 and nine months ended September 30, 2023 and 2022 is the same as basic net loss per common share because the common share equivalents were anti-dilutive due to the net loss. 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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net income/(loss) (in thousands) (A) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average share reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares outstanding (B) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive effect of stock-based awards |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
| |
Diluted weighted-average outstanding shares of common stock (C) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (A/B) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | |
Diluted (A/C) |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) | |
For the three and nine months ended September 30, 2023 and 2022, 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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
| ||||
5. Acquisitions
Allegiant Networks, LLC Business Acquisition
On October 17, 2022, the Company entered into an Acquisition Agreement with Allegiant Networks, LLC, a Kansas limited liability company (the “Allegiant Networks”) to acquire from Seller one hundred percent (
(in thousands) |
| December 31, 2022 |
| |
Consideration: |
|
|
| |
Cash |
| $ |
| |
Common stock |
|
|
| |
Note Payable |
|
|
| |
Total consideration |
| $ |
| |
The acquisition was accounted for under the acquisition method of accounting and the operating results of Allegiant Networks have been included in our consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to Allegiant Networks’ net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon our conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. Goodwill, which is non-deductible for tax purposes, is primarily attributable to the customer relationships of the acquired business and expected synergies at the time of the acquisition.
| 20 |
| Table of Contents |
We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities. The following table presents the final allocation of the purchase price for Allegiant Networks as of December 31, 2022 (in thousands):
|
| Final Purchase Price Allocation |
| |
Total purchase price |
| $ |
| |
Cash |
|
|
| |
Accounts receivables |
|
|
| |
Prepaid expenses |
|
|
| |
Inventory |
|
|
| |
Other assets |
|
|
| |
Property, plant & equipment |
|
|
| |
Right to use assets |
|
|
| |
Intangible assets acquired (FV) |
|
|
| |
Total identifiable assets |
|
|
| |
|
|
|
|
|
Accounts payable |
|
|
| |
Accrued expenses |
|
|
| |
Contract liability |
|
|
| |
Operating lease liability |
|
|
| |
Direct financing liability |
|
|
| |
Buyers note |
|
|
| |
Deferred tax liability |
|
|
| |
Total liabilities assumed |
|
|
| |
Total goodwill |
| $ |
| |
The fair values of the customer relationships was established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.
The customer relationships was valued using the multi-period excess earnings method. Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset.
The following unaudited pro forma information presents our consolidated results of operations as if Allegiant Networks had been included in our consolidated results since January 1, 2022:
|
| For the Nine Months Ended September 30, (Unaudited, in thousands) |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Revenues |
| $ |
|
| $ |
| ||
Net loss |
|
| ( | ) |
|
| ( | ) |
Earnings per share |
| $ | ( | ) |
| $ | ( | ) |
The unaudited pro forma financial information is presented for informational purposes only and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated Allegiant Networks as of January 1, 2022.
Acquisition related expenses incurred by us in connection with the Allegiant Networks acquisition totaled $
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| Table of Contents |
6. Trade Receivables and Allowance for Credit Losses
Our trade receivables balance consists of traditional trade receivables. Trade receivables were as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Gross trade receivables |
| $ |
|
| $ |
| ||
Less: allowance for credit losses |
|
| ( | ) |
|
| ( | ) |
Trade receivables, net |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Current trade receivables, net |
| $ |
|
| $ |
| ||
Long-term trade receivables, net |
|
|
|
|
|
| ||
Trade receivables, net |
| $ |
|
| $ |
| ||
The allowance for credit losses was as follows (in thousands):
Balance at December 31, 2022 |
| $ |
| |
Cumulative effect of accounting change |
|
|
| |
Provision |
|
|
| |
Write-offs |
|
| ( | ) |
Recoveries and other |
|
|
| |
Balance at March 31, 2023 |
| $ |
| |
Provision |
|
|
| |
Write-offs |
|
| ( | ) |
Recoveries and other |
|
|
| |
Balance at June 30, 2023 |
| $ |
| |
Provision |
|
| ( | ) |
Write-offs |
|
| ( | ) |
Recoveries and other |
|
|
| |
Balance at September 30, 2023 |
| $ |
|
The allowance for credit losses is determined based on an assessment of historical collection experience using the aging schedule method as well as consideration of current and future economic conditions. Based on that assessment, the allowance for credit losses as a percent of gross accounts receivable decreased to
7. Equipment Financing Receivables and Allowance for Credit Losses
Our equipment financing receivables balance consists of sales-type leases arising from lease financing of cloud telecommunication equipment (IP or cloud telephone desktop devices) bundled and sold with our cloud telecommunications services. The 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. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. These receivables are typically collateralized by a security interest in the underlying equipment. Equipment financing receivables were as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Gross equipment financing receivables |
| $ |
|
| $ |
| ||
Less: unearned income |
|
| ( | ) |
|
| ( | ) |