10-Q

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ________ to ________.

Commission file number 001-32277

Crexendo, Inc.

(Exact name of registrant as specified in its charter)

Nevada	87-0591719
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
1615 South 52nd Street, Tempe, AZ	85281
(Address of Principal Executive Offices)	(Zip Code)

(602) 714-8500

 (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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one).

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated Filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☒
			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 ☐ No ☒.

The number of shares outstanding of the registrant’s common stock as of April 30, 2022 was 22,421,707.

INDEX

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	43
Signatures		44

2

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)

	March 31, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	5,690		$	7,468
Trade receivables, net of allowance for doubtful accounts of $50 as of March 31, 2022 and $72 as of December 31, 2021		2,702			2,177
Contract assets		240			261
Inventories		233			231
Equipment financing receivables		446			332
Contract costs		861			648
Prepaid expenses		599			358
Income tax receivable		-			11
Other current assets		45			74
Total current assets		10,816			11,560
Long-term equipment financing receivables, net		918			942
Property and equipment, net		2,953			2,989
Deferred income tax assets, net		986			986
Operating lease right-of-use assets		586			532
Intangible assets, net		21,612			22,161
Goodwill		36,972			36,972
Contract costs, net of current portion		727			697
Income tax receivable, net of current portion		177			-
Other long-term assets		328			313
Total Assets	$	76,075		$	77,152
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	449		$	476
Accrued expenses		4,240			4,904
Finance leases		109			110
Notes payable		1,854			1,873
Operating lease liabilities		441			447
Income tax payable		-			24
Contract liabilities		2,549			2,738
Total current liabilities		9,642			10,572
Contract liabilities, net of current portion		236			290
Finance leases, net of current portion		166			193
Operating lease liabilities, net of current portion		224			164
Total liabilities		10,268			11,219
Stockholders' equity:
Preferred stock, par value $0.001 per share - authorized 5,000,000 shares; none issued		—			—
Common stock, par value $0.001 per share - authorized 50,000,000 shares, 22,395,477 shares issued and outstanding as of March 31, 2022 and 22,054,239 shares issued and outstanding as of December 31, 2021		22			22
Additional paid-in capital		119,535			118,432
Accumulated deficit		(53,753	)		(52,533	)
Accumulated other comprehensive income		3			12
Total stockholders' equity		65,807			65,933
Total Liabilities and Stockholders' Equity	$	76,075		$	77,152

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

3

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share and share data)

	Three Months Ended March 31,
	2022			2021
Service revenue	$	4,398		$	4,139
Software solutions revenue		3,268			-
Product revenue		492			368
Total revenue		8,158			4,507
Operating expenses:
Cost of service revenue		1,436			1,259
Cost of software solutions revenue		1,661			-
Cost of product revenue		317			225
Selling and marketing		2,584			1,279
General and administrative		3,249			2,216
Research and development		304			350
Total operating expenses		9,551			5,329
Loss from operations		(1,393	)		(822	)
Other income/(expense):
Interest expense		(19	)		(19	)
Other income/(expense), net		(9	)		2
Total other expense, net		(28	)		(17	)
Loss before income tax		(1,421	)		(839	)
Income tax benefit		201			124
Net loss	$	(1,220	)	$	(715	)
Earnings per common share:
Basic	$	(0.05	)	$	(0.04	)
Diluted	$	(0.05	)	$	(0.04	)
Weighted-average common shares outstanding:
Basic		22,236,362			18,189,783
Diluted		22,236,362			18,189,783

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

4

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	Three Months Ended March 31,
	2022			2021
Net loss	$	(1,220	)	$	(715	)
Other comprehensive income/(loss), net of tax
Foreign currency translation loss		(9	)		-
Total other comprehensive loss		(9	)		-
Comprehensive loss	$	(1,229	)	$	(715	)

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

5

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2022 and 2021

(Unaudited, in thousands, except share data)

								Accumulated
					Additional			Other						Total
	Common Stock				Paid-in			Comprehensive			Accumulated			Stockholders'
	Shares		Amount		Capital			Income			Deficit			Equity
Balance, January 1, 2022		22,054,239	$	22	$	118,432		$	12		$	(52,533	)	$	65,933
Share-based compensation		-		-		1,053			-			-			1,053
Vesting of restricted stock units		103,657		-		-			-			-			-
Foreign currency translation adjustment, net of tax		-		-		-			(9	)		-			(9	)
Issuance of common stock for exercise of stock options		237,581		-		278			-			-			278
Taxes paid on the net settlement of stock options and RSUs		-		-		(117	)		-			-			(117	)
Dividends declared		-		-		(111	)		-			-			(111	)
Net loss		-		-		-			-			(1,220	)		(1,220	)
Balance, March 31, 2022		22,395,477	$	22	$	119,535		$	3		$	(53,753	)	$	65,807

								Accumulated
					Additional			Other					Total
	Common Stock				Paid-in			Comprehensive		Accumulated			Stockholders'
	Shares		Amount		Capital			Income		Deficit			Equity
Balance, January 1, 2021		17,983,177	$	18	$	75,834		$	-	$	(50,088	)	$	25,764
Share-based compensation		-		-		282			-		-			282
Vesting of restricted stock units		14,367		-		-			-		-			-
Issuance of common stock for exercise of stock options		380,396		-		1,146			-		-			1,146
Taxes paid on the net settlement of stock options		-		-		(152	)		-		-			(152	)
Issuance of common stock in connection with a business acquisition		46,662		-		346			-		-			346
Net loss		-		-		-			-		(715	)		(715	)
Balance, March 31, 2021		18,424,602	$	18	$	77,456		$	-	$	(50,803	)	$	26,671

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

6

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

	Three Months Ended March 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,220	)	$	(715	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		619			101
Share-based compensation		1,053			282
Changes in assets and liabilities:
Trade receivables		(525	)		174
Contract assets		21			(46	)
Equipment financing receivables		(90	)		14
Inventories		(2	)		97
Contract costs		(243	)		(15	)
Prepaid expenses		(241	)		(309	)
Income tax receivable		(166	)		(125	)
Other assets		14			(8	)
Accounts payable and accrued expenses		(691	)		291
Income tax payable		(24	)		-
Contract liabilities		(243	)		11
Net cash used for operating activities		(1,738	)		(248	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(34	)		(29	)
Acquisition of Centric Telecom		-			(2,163	)
Net cash used for investing activities		(34	)		(2,192	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments made on finance leases		(28	)		(11	)
Repayments made on notes payable		(19	)		(18	)
Proceeds from exercise of options		278			1,146
Dividend payments		(111	)		-
Taxes paid on the net settlement of stock options		(117	)		(152	)
Net cash provided by financing activities		3			965
Effect of exchange rate changes on cash		(9	)		-
NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,778	)		(1,475	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR		7,468			17,679
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	$	5,690		$	16,204
Supplemental disclosure of cash flow information:
Cash used during the year for:
Income taxes, net	$	-		$	(1	)
Interest expense	$	(19	)	$	(19	)
Supplemental disclosure of non-cash investing and financing information:
Stock issued for the acquisition of Centric Telecom	$	-		$	346
Contingent consideration related to the acquisition of Centric Telecom	$	-		$	746

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

7

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 Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two Million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. The Company has two operating segments, which consist of cloud telecommunications services and software solutions.

Basis of Presentation–The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., 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 March 31, 2022 and 2021, we recorded foreign currency translation gains/(losses) of $9,000, and $0, respectively, in our statements of comprehensive income (loss).

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 March 31, 2022 and December 31, 2021, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $4,979,000 and $6,573,000, respectively.

Trade Receivables–Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance for Doubtful Accounts–The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

Contract Assets–Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs–Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $1,588,000 and $1,345,000 at March 31, 2022 and December 31, 2021, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the three months ended March 31, 2022 and 2021, the Company amortized $261,000 and $122,000, respectively, and there was no impairment loss in relation to the costs capitalized.

8

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

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions–Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

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–Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets–Our intangible assets consist of customer relationships, 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.

9

Contract Liabilities–Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as deferred revenue.

Use of Estimates–In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies–The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

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 2.

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 asset 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.

10

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.

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.

11

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 Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers–No customer accounted for 10% or more of our total revenue for the three months ended March 31, 2022 and 2021. No customer accounted for 10% or more of our total trade accounts receivable as of March 31, 2022 and December 31, 2021.

Recently Adopted Accounting Pronouncements–In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

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Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In 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 is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

2. 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 15.

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.

Desktop Devices – Revenue generated from the sale of telecommunications equipment (desktop devices) is recognized when the customer takes possession of the devices and the cloud telecommunications services begin. The Company typically bills and collects the fees for the equipment upon entering into a contract with a customer. Cash receipts are recorded as a contract liability until implementation is complete and the services begin.

Equipment Financing Revenue – Fees generated from renting our cloud telecommunication equipment (IP or cloud telephone desktop devices) through leasing contracts are recognized as revenue based on whether the lease qualifies as an operating lease or sales-type lease. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: 1) lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and 2) the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. The economic life of most of our products is estimated to be three years, since this represents the most frequent contractual lease term for our products, and there is no residual value for used equipment. Residual values, if any, are established at the lease inception using estimates of fair value at the end of the lease term. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases in recognized ratably over the applicable service period.

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Cloud Telecommunications Services – Cloud telecommunication services include voice, data, collaboration software, broadband Internet access, 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.

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.

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· 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.

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 March 31, 2022	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	492	$	-	$	492
Equipment financing revenue		72		-		72
Telecommunications services		3,759		-		3,759
Fees, commissions, and other, recognized over time		433		-		433
One time fees, commissions and other		134		-		134
Software licenses		-		645		645
Software licenses subscription maintenance and support		-		2,505		2,505
Professional services and other		-		118		118
	$	4,890	$	3,268	$	8,158
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	575	$	767	$	1,342
Products, services, and fees transferred over time		4,315		2,501		6,816
	$	4,890	$	3,268	$	8,158

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Three Months Ended March 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	368	$	-	$	368
Equipment financing revenue		68		-		68
Telecommunications services		3,592		-		3,592
Fees, commissions, and other, recognized over time		395		-		395
One time fees, commissions and other		84		-		84
	$	4,507	$	-	$	4,507
Timing of revenue recognition
Products and fees recognized at a point in time	$	452	$	-	$	452
Services and fees transferred over time		4,055		-		4,055
	$	4,507	$	-	$	4,507

Contract balances

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

	March 31,		December 31,
(In thousands)	2022		2021
Receivables, which are included in trade receivables, net of allowance for doubtful accounts	$	2,702	$	2,177
Contract assets		240		261
Contract liabilities		2,785		3,028

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

	Three Months Ended					For the Year Ended
(In thousands)	March 31, 2022					December 31, 2021
	Contract Assets			Contract Liabilities		Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-	$	(1,524)		$	-		$	(1,137	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-		1,281			-			2,937
Transferred to receivables from contract assets recognized at the beginning of the period		(46)			-		(60	)		-
Increase due to additional unamortized discounts		25			-		162			-

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 from the cloud telecommunications services segment (in thousands):

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	272									$	272
Telecommunications services	$	10,001		9,146		6,149		3,426		973	$	29,701
Software Solutions	$	6,611		4,219		1,739		461		4	$	13,034
All consideration from contracts with customers is included in the amounts presented above

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3. Earnings Per Common Share

Basic net income/(loss) per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. Diluted net loss per common share for the three months ended March 31, 2022 and 2021 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 March 31,
	2022			2021
Net loss (in thousands) (A)	$	(1,220	)	$	(715	)
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		22,236,362			18,189,783
Dilutive effect of stock-based awards		-			-
Diluted weighted-average outstanding shares of common stock (C)		22,236,362			18,189,783
Earnings/(loss) per common share:
Basic (A/B)	$	(0.05	)	$	(0.04	)
Diluted (A/C)	$	(0.05	)	$	(0.04	)

For the three months ended March 31, 2022 and 2021, 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 March 31,
	2022		2021
Stock options		1,798,872		91,845

4. Acquisitions

NetSapiens, Inc. Merger Agreement

On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two million users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

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

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

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

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734		8,247		$	34,981

________________

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

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

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

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

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

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

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

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

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

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

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

	For the Three Months Ended March 31, (Unaudited, in thousands)
	2022			2021
Revenues	$	8,158		$	8,353
Net loss		(1,220	)		(1,591	)
Earnings per share	$	(0.05	)	$	(0.07	)

The unaudited pro forma financial information is presented for informational purposes only, and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated NetSapiens, Inc. as of January 1, 2020.

Acquisition related expenses incurred by us in connection with the NetSapiens acquisition of $970,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

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Centric Telecom, Inc. Business Acquisition

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period. The fair value of the common stock issued as consideration was determined based on the closing market price of the Company’s common stock on the date of the acquisition of $7.42. The aggregate purchase price is subject to customary upward or downward adjustments for Centric Telecom’s net working capital.

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

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

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

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

_______________

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

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

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

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

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

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

Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition of $67,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

5. Trade Receivables, net

	March 31,			December 31,
	2022			2021
Gross trade receivables	$	2,752		$	2,249
Less: allowance for doubtful accounts		(50	)		(72	)
Trade receivables, net	$	2,702		$	2,177
Current trade receivables, net	$	2,702		$	2,177
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,702		$	2,177

Our trade receivables balance consists of traditional trade receivables. Below is an analysis of our trade receivables as shown on our balance sheet (in thousands):

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6. Prepaid Expenses

Prepaid expenses consisted of the following (in thousands):

	March 31,		December 31,
	2022		2021
Prepaid corporate insurance	$	30	$	90
Prepaid software services and support		321		160
Prepaid employee insurance premiums		139		9
Prepaid Nasdaq listing fee		15		15
Other prepaid expenses		94		84
Total prepaid expenses	$	599	$	358

7. Property and Equipment

Property and equipment consisted of the following (in thousands):

	March 31,			December 31,
	2022			2021
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,888			1,854
Computer software		576			576
Internal-use software		14			14
Furniture and fixtures		75			75
Vehicles		74			74
Leasehold improvements		7			7
Less: accumulated depreciation		(2,181	)		(2,111	)
Total property and equipment, net	$	2,953		$	2,989

Depreciation and amortization expense is included in general and administrative expenses and totaled $70,000 and $44,000 for the three months ended March 31, 2022 and 2021, respectively.

8. Intangible Assets and Goodwill

Acquired intangible assets subject to amortization consist of the following (in thousands):

	March 31, 2022							December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,917	)	$	17,156	$	19,073	$	(1,619	)	$	17,454
Developed technologies		4,900		(748	)		4,152		4,900		(528	)		4,372
Trademark and trade names		400		(96	)		304		400		(65	)		335
Total acquired intangible assets	$	24,373	$	(2,761	)	$	21,612	$	24,373	$	(2,212	)	$	22,161

As of March 31, 2022, the weighted average remaining useful life for customer relationships was 14.9 years, developed technologies was 5.2 years, and trademarks and trade names was 3.2 years.

Amortization expense for customer relationships intangible assets is included in sales and marketing expenses and totaled $283,000 and $57,000 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for developed technologies intangible assets is included in cost of software solutions revenue and totaled $220,000 and $0 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for trademark and trade name intangible assets is included in general and administrative expenses and totaled $46,000 and $0 for the three months ended March 31, 2022 and 2021, respectively.

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                As of March 31, 2022, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

Year ending December 31,
2022 remaining	$	1,649
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,830
Total	$	21,612

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

	Goodwill
Balance at December 31, 2021	$	36,972
Additions		-
Balance at March 31, 2022	$	36,972

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	2022		2021
Accrued wages and benefits	$	672	$	1,188
Accrued accounts payable		686		609
Accrued sales and telecommunications taxes		2,216		2,487
Product warranty liability		51		50
Other		615		570
Total accrued expenses	$	4,240	$	4,904

The changes in aggregate product warranty liabilities for the year ended December 31, 2021 and the three months ended March 31, 2022 were as follows (in thousands):  

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Product warranty expense is included in cost of product revenue expense and totaled $11,000 and $5,000 for the three months ended March 31, 2022 and 2021, respectively.

	Warranty Liabilities
Balance at January 1, 2021	$	33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021		50
Accrual for warranties		11
Warranty settlements		(10	)
Balance at March 31, 2022	$	51

10. Notes Payable

Notes payable consists of a short and long-term financing arrangements:

	March 31,			December 31,
	2022			2021
Notes payable	$	1,854		$	1,873
Less: current notes payable		(1,854	)		(1,873	)
Notes payable, net of current portion	$	-		$	-

On January 27, 2020, we entered into a Fixed Rate Term Loan Agreement with Bank of America, N.A. to finance Two Million Dollars ($2,000,000) to purchase our corporate office building. The Loan Agreement has a term of seven (7) years with monthly payments of Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars ($11,841.15), including interest at 3.67%, beginning on March 1, 2020, secured by the office building. At December 31, 2021 and at March 31, 2022, we were in default of our basic fixed charge coverage ratio and we have classified the note payable as current on our balance sheet.

As of March 31, 2022, future principal payments are scheduled as follows (in thousands):

Year ending December 31,
2022 remaining	$	1,854
2023		-
2024		-
2025		-
2026 and thereafter		-
Total	$	1,854

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11. Fair Value Measurements

We have financial instruments as of March 31, 2022 and December 31, 2021 for which the fair value is summarized below (in thousands):

	March 31, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,702	$	2,702	$	2,177	$	2,177
Equipment financing receivables		1,364		1,364		1,274		1,274
Liabilities:
Finance lease obligations	$	275	$	275	$	303	$	303
Notes payable		1,854		1,854		1,873		1,873

We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of March 31, 2022 and December 31, 2021.

In January 2021, the Company recorded $746,000 of contingent consideration in connection with the Centric Telecom business acquisition, to be paid based on the completion of the earn-out period. Upon completion of the earn-out period in October 2021, the Company paid out $746,000 of contingent consideration and additional consideration of $126,000 based on revenue target achievements, which was recorded as general and administrative expenses for the year ended December 31, 2021. The progression of the Company’s Level 3 instruments fair valued on a recurring basis for the year ended December 31, 2021 and the three months ended March 31, 2022 are shown in the table below (in thousands):

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

12. Income Taxes

Our effective tax rate for the three months ended March 31, 2022 and 2021 was (14.2%) and (14.8%), respectively, which resulted in an income tax benefit of $201,000 and $124,000, respectively.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2021, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as achievement of three years of cumulative pretax income in the U.S. federal tax jurisdiction, projections of future pretax income and the duration of statutory carry-forward periods. As of December 31, 2021 the Company has three years of cumulative pretax income, the achievement of three years of cumulative pretax income is objectively verifiable positive evidence and is considered significant positive evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Management utilized historical objectively verifiable revenue growth trends and operating expense trends as assumptions for projections of future pretax income and determined that the Company would generate sufficient pre-tax income in future periods to utilize all of our deferred tax assets. Although historical trends utilized in our projections are objectively verifiable we assigned less weight to this positive evidence given the subjective nature of assumptions in projections. The combination of three years of cumulative pretax income and projections of future pretax income was considered significant positive evidence. Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2031 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $7,001,000 are realizable.

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13. Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease office space, other assets, and office equipment under operating leases. We lease data center equipment, including maintenance contracts and vehicles under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet, excluding leases that are less than 12 months. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease. At the adoption date of ASC Topic 842, the Company was reasonably certain that we would exercise our option to renew our corporate office building operating lease. Lease expense is recognized on a straight-line basis over the lease term.

We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on July 31, 2021. The operating lease contained customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $0 and $17,000 respectively.

We currently lease office space in Reston, Virginia under a non-cancelable operating lease agreement that expires in 2025. The operating lease contains customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $12,000 and $0, respectively.

We currently lease office space in La Jolla, California under a non-cancelable operating lease agreement that expires in 2022. The operating lease contains customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $90,000 and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2024 and the interest rates range from 2.81% to 13.00%. The expense is included in cost of product expenses and totaled approximately $18,000 and $11,000 for the three months ended March 31, 2022 and 2021, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada and Dallas, Texas under non-cancelable operating lease agreements that expire in 2022. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $39,000 and $0, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under finance lease agreements which extends through 2026. The Company also leases three vehicles under financing agreements. One vehicle lease ended in 2021 and two vehicle leases extend through 2022. The outstanding balance for finance leases was $285,000 and $311,000 as of March 31, 2022 and December 31, 2021, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $486,000 as of March 31, 2022 and December 31, 2021, respectively. Related accumulated depreciation totaled $190,000 and $167,000 as of March 31, 2022 and December 31, 2021, respectively. The $40,000 in support contracts were classified as a prepaid expense and are being amortized over the service period of 3 years. One support contract expired in January 2021 and the other expires in June 2024. Amortization expense is included in general and administrative expenses and totaled $1,000 and $0 for the three months ended March 31, 2022 and 2021, respectively. The interest rates on the finance lease obligations range from 1.37% and 15.74% and interest expense was $2,000 and $2,000 for the three months ended March 31, 2022 and 2021, respectively.

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The maturity of operating leases and finance lease liabilities as of March 31, 2022 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2022 remaining	$	405		$	86
2023		114			98
2024		95			77
2025		-			21
2026		-			3
Total minimum lease payments		614			285
Less: amount representing interest		(23	)		(10	)
Present value of minimum lease payments	$	591		$	275

Lease term and discount rate	March 31, 2022
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		2.7
Weighted-average discount rate
Operating leases		7.6	%
Finance leases		2.8	%

	Three Months Ended  March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	135
Operating cash flows from finance leases		3
Financing cash flows from finance leases		28

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. Crexendo offers its customers lease financing for the lease of our cloud telecommunication equipment (IP or cloud telephone desktop devices). We account for these transactions as sales-type leases. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Operating lease revenue is classified as product revenue and totaled $59,000 and $43,000 for the three months ended March 31, 2022 and 2021, respectively. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases is recognized ratably over the applicable service period.

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

	March 31,			December 31,
	2022			2021
Gross financing receivables	$	1,920		$	1,822
Less: unearned income		(556	)		(548	)
Financing receivables, net		1,364			1,274
Less: current portion of finance receivables, net		(446	)		(332	)
Finance receivables due after one year	$	918		$	942

Future minimum lease payments as of March 31, 2022, consisted of the following:

Year ending December 31,	Lease Receivables
2022 remaining	$	554
2023		642
2024		453
2025		203
2026 and thereafter		68
Gross equipment financing receivables		1,920
Less: unearned income		(556	)
Equipment financing receivables, net	$	1,364

14. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company may be involved in a variety of claims, lawsuits, investigations, and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters, and contractual disputes, that can arise in the normal course of the Company’s operations. The Company recognizes a provision when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts the amount of the provision to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. As of March 31, 2022, the Company does not have a recorded liability for estimated losses. Legal costs are expensed as incurred.

15. Segment Reporting

Our chief operating decision maker (who is our Chief Executive Officer) reviews our financial information presented on an operating segment basis for purposes of allocating resources and evaluating our financial performance. Following the merger with NetSapiens, Inc., the Company reorganized into two operating segments, a software solutions operating segment and a cloud telecommunications services operating segment. The cloud telecommunications services segment generates revenue from selling cloud telecommunication services, products, and other internet services. The software solutions segment generates revenue from selling perpetual software licenses and software subscriptions, subscription maintenance and support, and professional services. The Company has two reportable operating segments, which consist of cloud telecommunications services and software solutions. Segment revenue, income/(loss) from operations, other income/(expense) and income/(loss) before income tax provision are as follows (in thousands):

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	Three Months Ended March 31,
	2022			2021
Revenue:
Cloud telecommunications services	$	4,890		$	4,507
Software solutions		3,268			-
Consolidated revenue		8,158			4,507
Loss from operations:
Cloud telecommunications services		(1,054	)		(822	)
Software solutions		(339	)		-
Total operating loss		(1,393	)		(822	)
Other expense, net:
Cloud telecommunications services		(18	)		(17	)
Software solutions		(10	)		-
Total other expense		(28	)		(17	)
Loss before income tax provision:
Cloud telecommunications services		(1,072	)		(839	)
Software solutions		(349	)		-
Loss before income tax provision	$	(1,421	)	$	(839	)

Depreciation and amortization was $115,000 and $101,000 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Depreciation and amortization was $504,000 and $0 for the software solutions segment for the three months ended March 31, 2022 and 2021, respectively.

Interest income was $0 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Interest income was $0 for the software solutions segment for the three months ended March 31, 2022 and 2021.

Interest expense was $19,000 and $19,000 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Interest expense was $0 and $0 for the software solutions segment for the three months ended March 31, 2022 and 2021

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

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

OVERVIEW

Crexendo, Inc. is an award-winning premier provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. 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 two million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. By providing a variety of comprehensive and scalable solutions, we are able to cater to businesses of all sizes on a monthly subscription basis without the need for expensive capital investments, regardless of where their business is in its lifecycle. Our products and services can be categorized in the following offerings:

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

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

· Mobile Features such as extension dialing, transfer and conference and seamless hand-off from WiFi to/from 3G and 4G, LTE, as well as other data services. These features are also available on CrexMo, an intelligent mobile application for iPhones and Android smartphones, as well as iPads and Android tablets

· Business Productivity Features such as dial-by extension and name, transfer, conference, call recording, Unlimited calling to anywhere in the US and Canada, International calling, Toll free (Inbound and Outbound)

· Individual Productivity Features such as Caller ID, Call Waiting, Last Call Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified Messaging, Hot-Desking

· Group Productivity Features such as Call Park, Call Pickup, Interactive Voice Response (IVR), Individual and Universal Paging, Corporate Directory, Multi-Party Conferencing, Group Mailboxes, Web and mobile devices based collaboration applications

· Call Center Features such as Automated Call Distribution (ACD), Call Monitor, Whisper and Barge, Automatic Call Recording, One way call recording, Analytics

· Advanced Unified Communication Features such as Find-Me-Follow-Me, Sequential Ring and Simultaneous Ring, Voicemail transcription

· Traditional PBX Features such as Busy Lamp Fields, System Hold. 16-48 Port density Analog Devices

· Expanded Desktop Device Selection such as Entry Level Phone, Executive Desktop, DECT Phone for roaming users

· Advanced Faxing solution such as Cloud Fax (cFax) allowing customers to send and receive Faxes from their Email Clients, Mobile Phones and Desktops without having to use a Fax Machine simply by attaching a file

· Web based online portal to administer, manage and provision the system.

· Asynchronous communication tools like SMS/MMS, chat and document sharing to keep in pace with emerging communication trends.

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

Software Solutions – Our software solutions offering provides a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to over 190 service providers, servicing over two 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 Branch Exchange (PBX), auto-attendant, call center, conferencing, and mobility. The platform includes a broad range of feature-sets, custom-built to provide unprecedented levels of flexibility, making the solution competitive with the market’s leading players. SNAPsolution includes a full suite of Voice over Internet Protocol (VoIP)/UC features with one low cost universal license, as opposed to pricing each feature individually. The Company licenses its platform based on concurrent sessions, not per seat/per feature. This allows service providers to oversubscribe their networks, driving down the cost per seat as volume increases. As the service provider increases their customer base, they only have to ensure they have sufficient concurrent call licenses to support users across the network.

· SNAPaccel – a Software-as-a-Service (“SaaS”) based software license referred to as subscription arrangements.

· Subscription Maintenance and Support - The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations and customer support. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches.

· Professional Services and Other - The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services.

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 March 31,
	2022			2021
Service revenue	$	4,398		$	4,139
Software solutions revenue		3,268			-
Product revenue		492			368
Total revenue	$	8,158		$	4,507
Loss before income tax		(1,421	)		(839	)
Income tax benefit		201			124
Net loss		(1,220	)		(715	)
Basic earnings per share	$	(0.05	)	$	(0.04	)
Diluted earnings per share	$	(0.05	)	$	(0.04	)

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Three months ended March 31, 2022 compared to three months ended March 31, 2021

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Total revenue	$	8,158	$	4,507	$	3,651		81	%

The increase in total revenue is due to an increase in service revenue of $259,000, software solutions revenue of $3,268,000 contributed from our acquisition of NetSapiens on June 1, 2021, and an increase in product revenue of $124,000.

Loss Before Income Taxes

The following table reflects our loss before income taxes for the three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022			2021			Dollar Change			Percent Change
Loss before income tax	$	(1,421	)	$	(839	)	$	(582	)		69	%

The increase in loss before income tax is primarily due to an increase in operating expenses of $4,222,000 and an increase in interest expense and other expense of $11,000, offset by an increase in revenue of $3,651,000. The increase in operating expenses is primarily related to increases in salaries, wages and benefits, share-based compensation expense, and $3,607,000 of additional operating expenses related to our software solutions segment from our acquisition of NetSapiens on June 1, 2021.

Income Tax Benefit

The following table reflects our income tax benefit for the three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Income tax benefit	$	201	$	124	$	77		62	%

We had an income tax benefit of $201,000 for the three months ended March 31, 2022 compared to an income tax benefit of $124,000 for the three months ended March 31, 2021. We had pre-tax loss for the three months ended March 31, 2022 and 2021 of $(1,421,000) and $(839,000), 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 May 12, 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;

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· 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.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly comparable U.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparable U.S. GAAP measures.

Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income 

(Unaudited, in thousands, except for per share and share data) 

	Three Months Ended March 31,
	2022			2021
U.S. GAAP net loss	$	(1,220	)	$	(715	)
Share-based compensation		1,053			282
Acquisition related expenses		23			684
Amortization of intangible assets		549			57
Non-GAAP net income	$	405		$	308
Non-GAAP earnings per common share:
Basic	$	0.02		$	0.02
Diluted	$	0.02		$	0.02
Weighted-average common shares outstanding:
Basic		22,236,362			18,189,783
Diluted		25,787,255			19,484,148

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

(Unaudited, in thousands)

	Three Months Ended March 31,
	2022			2021
U.S. GAAP net loss	$	(1,220	)	$	(715	)
Depreciation and amortization		619			101
Interest expense		19			19
Interest and other expense/(income)		9			(2	)
Income tax benefit		(201	)		(124	)
EBITDA		(774	)		(721	)
Acquisition related expenses		23			684
Share-based compensation		1,053			282
Adjusted EBITDA	$	302		$	245

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

	Three Months Ended March 31,
Cloud Telecommunications Services	2022			2021
Service revenue	$	4,398		$	4,139
Product revenue		492			368
Total revenue	$	4,890		$	4,507
Operating expenses:
Cost of service revenue	$	1,436		$	1,259
Cost of product revenue		317			225
Selling and marketing		1,581			1,279
General and administrative		2,306			2,216
Research and development		304			350
Total operating expenses		5,944			5,329
Operating loss		(1,054	)		(822	)
Other expense		(18	)		(17	)
Loss before income tax	$	(1,072	)	$	(839	)

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Three months ended March 31, 2022 compared to three months ended March 31, 2021

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Service revenue	$	4,398	$	4,139	$	259		6	%

The increase in service revenue is due to an increase in telecommunications services fees of $168,000, an increase in one-time fees, commissions and other of $50,000, an increase in fees, commissions, and other, recognized over time of $38,000, and an increase in sales-type lease interest 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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Product revenue	$	492	$	368	$	124		34	%

Product revenue fluctuates from one period to the next based on timing of installations. Our typical customer installation is complete within 30-60 days. However, larger enterprise customers can take multiple months, depending on size and the number of locations. Product revenue is recognized when products have been installed and services commence. Additionally, product revenue can fluctuate due to the allocation of discounts or sales promotions across the performance obligations.

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of March 31, 2022 and 2021. Backlog increased 8%, or $2,207,000 to $29,973,000 as of March 31, 2022 as compared to $27,776,000 as of March 31, 2021. Below is a table which displays the Cloud Telecommunications segment revenue backlog as of January 1, 2022 and 2021, and March 31, 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 January 1, 2022	$	30,190
Cloud Telecommunications backlog as of March 31, 2022	$	29,973
Cloud Telecommunications backlog as of January 1, 2021	$	28,551
Cloud Telecommunications backlog as of March 31, 2021	$	27,766

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Cost of service revenue	$	1,436	$	1,259	$	177		14	%

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The increase in cost of service revenue was primarily due to increases in customer support and implementation specialist headcount to assist with the migration of our customers to our new VIP platform, and company-wide salary increases resulting in $235,000 in additional cost, an increase in other cost of service revenue of $7,000, offset by a decrease in bandwidth costs of $65,000.

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 March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Cost of product revenue	$	317	$	225	$	92		41	%

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

Selling and Marketing

Selling and marketing expenses consist primarily of direct and channel sales representative salaries, wages and benefits, share-based compensation, partner channel commissions, amortization of costs to acquire contracts, travel expenses, lead generation services, trade shows, internal and third-party marketing costs, the production of marketing materials, and sales support software. The following table reflects our selling and marketing expenses for the three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Selling and marketing	$	1,581	$	1,279	$	302		24	%

The increase in selling and marketing expense is due to an increase in salaries, wages and benefits of $194,000 related to expansion of our sales team and an increase in share-based compensation expense as a result of a company-wide employee retention grant, an increase in travel related costs and tradeshows of $63,000, an increase in sales leads and marketing material costs of $26,000, an increase in commission expense of $24,000 directly related to the increase in revenue, and an increase in $11,000 of other sales and marketing expense.

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 March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
General and administrative	$	2,306	$	2,216	$	90		4	%

The increase in general and administrative expenses is primarily due to an increase in administrative salaries, wages and benefits of $635,000 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. Additionally, there was an increase in telecommunications fees of $42,000 and an increase in other general and administrative expenses of $74,000, offset by a decrease in acquisition related expenses of $661,000, related to the 2021 acquisitions of Centric Telecom and NetSapiens.

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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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change			Percent Change
Research and development	$	304	$	350	$	(46	)		-13	%

The decrease in research and development expenses is primarily related to a decrease in salaries, wages and benefits of $49,000, offset by an increase in costs for maintenance on our mobile applications and other development costs of $3,000.

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022			2021			Dollar Change			Percent Change
Other expense, net	$	(18	)	$	(17	)	$	(1	)		6	%

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

	Three Months Ended March 31,
Software Solutions	2022			2021
Software solutions revenue	$	3,268		$	-
Operating expenses:
Cost of software solutions revenue		1,661			-
Selling and marketing		1,003			-
General and administrative		943			-
Research and development		-			-
Total operating expenses		3,607			-
Operating loss		(339	)		-
Other expense		(10	)		-
Loss before tax benefit	$	(349	)	$	-

Three months ended March 31, 2022 compared to three months ended March 31, 2021

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Software solutions revenue	$	3,268	$	-	$	3,268		-

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

Backlog

Backlog represents the total contract value of all contracts signed, less revenue recognized from those contracts as of March 31, 2022 and 2021. Backlog increased 100%, to $13,034,000 as of March 31, 2022 as compared to $0 as of March 31, 2021 as a result of our June 1, 2021 acquisition. Below is a table which displays the Software solutions segment revenue backlog as of January 1, 2022 and 2021, and March 31, 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 January 1, 2022	$	11,528
Software solutions backlog as of March 31, 2022	$	13,034
Software solutions backlog as of January 1, 2021	$	-
Software solutions backlog as of March 31, 2021	$	-

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 ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Cost of software solutions revenue	$	1,661	$	-	$	1,661		-

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

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 three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
Selling and marketing	$	1,003	$	-	$	1,003		-

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

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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 three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change		Percent Change
General and administrative	$	943	$	-	$	943		-

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

Liquidity and Capital Resources

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We finance our operations primarily through services, software solutions, and product sales to our customers. As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $5,690,000 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 12 months.

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

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 three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022			2021			Dollar Change			Percent Change
Net cash used in operating activities	$	(1,738	)	$	(248	)	$	(1,490	)		601	%

The net cash used for operations was primarily driven by our net loss for the three months ended March 31, 2022 of $1,220,000, an increase in accounts receivable, an increase in contract costs, 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 three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022			2021			Dollar Change		Percent Change
Net cash used for investing activities	$	(34	)	$	(2,192	)	$	2,158		-98	%

Net cash used for investing activities in the three months ended March 31, 2022, primarily relates to the purchase of property and equipment. Net cash used for investing activities for the three months ended March 31, 2021, primarily relates to cash paid for a business combination. During the three months ended March 31, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period.

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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 financing activities for the three months ended March 31, 2022, compared to the three months ended March 31, 2021:

	Three Months Ended March 31,
	2022		2021		Dollar Change			Percent Change
Net cash provided by financing activities	$	3	$	965	$	(962	)		-100	%

Net cash provided by financing activities in the three months ended March 31, 2022, primarily relates to cash proceeds from the exercise of stock options of $278,000, offset by the payments of employee tax withholdings related to the net settlement of stock options and RSUs of $117,000, and dividend payments of $111,000. Net cash provided by financing activities in the three months ended March 31, 2021, primarily relates to cash received from the exercise of stock options of $1,146,000 offset by the payments of employee tax withholdings related to the net settlement of stock options of $152,000.

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 ended December 31, 2021.

Off Balance Sheet Arrangements

As of, March 31, 2022, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Related Party Transactions

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

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

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

41

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 6. Exhibits

EXHIBIT INDEX

Exhibit No.	Exhibit Description	Incorporated By Reference			Filed Herewith
		Form	Date	Number
31.1	Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended				x
31.2	Certification Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934 as amended				x
32.1	Certification Pursuant to 18 U.S.C. Section 1350				x
32.2	Certification Pursuant to 18 U.S.C. Section 1350				x
101.INS	XBRL INSTANCE DOCUMENT
101.SCH	XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
101.LAB	XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

______________________

* In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

43

SIGNATURES

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

	Crexendo, Inc.
May 12, 2022	By:	/s/ Steven G. Mihaylo
		Steven G. Mihaylo Chief Executive Officer

May 12, 2022	By:	/s/ Ronald Vincent
		Ronald Vincent Chief Financial Officer

44

EX-31.1

EXHIBIT 31.1

Certification Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended

I, Steven G. Mihaylo, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Crexendo, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 12, 2022	By:	/s/ STEVEN G. MIHAYLO
		Steven G. Mihaylo Chief Executive Officer

EX-31.2

  EXHIBIT 31.2

Certification Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Amended

I, Ronald Vincent, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Crexendo, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 12, 2022	By:	/s/ RONALD VINCENT
		Ronald Vincent Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Crexendo, Inc., a Nevada corporation (the “Company”), on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), Steven G. Mihaylo, Chief Executive Officer of the Company, does hereby certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date:  May 12, 2022	By:	/s/ STEVEN G. MIHAYLO
		Steven G. Mihaylo Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATIONS PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Crexendo, Inc., a Nevada corporation (the “Company”), on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), Ronald Vincent, Chief Financial Officer of the Company, does hereby certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: May 12, 2022	By:	/s/ RONALD VINCENT
		Ronald Vincent Chief Financial Officer

XML

Cover - shares	3 Months Ended
	Mar. 31, 2022	Apr. 30, 2022
Cover [Abstract]
Entity Registrant Name	Crexendo, Inc.
Entity Central Index Key	0001075736
Document Type	10-Q
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Mar. 31, 2022
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2022
Entity Common Stock Shares Outstanding		22,421,707
Document Transition Report	false
Entity File Number	001-32277
Entity Incorporation State Country Code	NV
Entity Tax Identification Number	87-0591719
Entity Interactive Data Current	Yes
Entity Address Address Line 1	1615 South 52nd Street
Entity Address City Or Town	Tempe
Entity Address State Or Province	AZ
Entity Address Postal Zip Code	85281
City Area Code	602
Local Phone Number	714-8500
Document Quarterly Report	true

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Current Assets:
Cash And Cash Equivalents	$ 5,690	$ 7,468
Trade Receivables, Net Of Allowance For Doubtful Accounts Of $50 As Of March 31, 2022 And $72 As Of December 31, 2021	2,702	2,177
Contract Assets	240	261
Inventories	233	231
Equipment Financing Receivables	446	332
Contract Costs	861	648
Prepaid Expenses	599	358
Income Tax Receivable	0	11
Other Current Assets	45	74
Total Current Assets	10,816	11,560
Long-term Equipment Financing Receivables, Net	918	942
Property And Equipment, Net	2,953	2,989
Deferred Income Tax Assets, Net	986	986
Operating Lease Right-of-use Assets	586	532
Intangible Assets, Net	21,612	22,161
Goodwill	36,972	36,972
Contract Costs, Net Of Current Portion	727	697
Income Tax Receivable, Net Of Current Portion	177	0
Other Long-term Assets	328	313
Total Assets	76,075	77,152
Current Liabilities:
Accounts Payable	449	476
Accrued Expenses	4,240	4,904
Finance Leases	109	110
Notes Payable	1,854	1,873
Operating Lease Liabilities	441	447
Income Tax Payable	0	24
Contract Liabilities	2,549	2,738
Total Current Liabilities	9,642	10,572
Contract Liabilities, Net Of Current Portion	236	290
Finance Leases, Net Of Current Portion	166	193
Operating Lease Liabilities, Net Of Current Portion	224	164
Total Liabilities	10,268	11,219
Stockholders' Equity:
Preferred Stock, Par Value $0.001 Per Share - Authorized 5,000,000 Shares; None Issued	0	0
Common Stock, Par Value $0.001 Per Share - Authorized 50,000,000 Shares, 22,395,477 Shares Issued And Outstanding As Of March 31, 2022 And 22,054,239 Shares Issued And Outstanding As Of December 31, 2021	22	22
Additional Paid-in Capital	119,535	118,432
Accumulated Deficit	(53,753)	(52,533)
Accumulated Other Comprehensive Income	3	12
Total Stockholders' Equity	65,807	65,933
Total Liabilities And Stockholders' Equity	$ 76,075	$ 77,152

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Condensed Consolidated Balance Sheets
Allowance For Doubtful Accounts - Trade Receivables	$ 50	$ 72
Preferred Stock, Par Value	$ 0.001	$ 0.001
Preferred Stock, Authorized	5,000,000	5,000,000
Preferred Stock, Issued	0	0
Common Stock, Par Value	$ 0.001	$ 0.001
Common Stock, Authorized	50,000,000	50,000,000
Common Stock, Issued	22,395,477	22,054,239
Common Stock, Outstanding	22,395,477	22,054,239

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Condensed Consolidated Statements of Operations (Unaudited)
Service Revenue	$ 4,398	$ 4,139
Software Solutions Revenue	3,268	0
Product Revenue	492	368
Total Revenue	8,158	4,507
Operating Expenses:
Cost Of Service Revenue	1,436	1,259
Cost Of Software Solutions Revenue	1,661	0
Cost Of Product Revenue	317	225
Selling And Marketing	2,584	1,279
General And Administrative	3,249	2,216
Research And Development	304	350
Total Operating Expenses	9,551	5,329
Loss From Operations	(1,393)	(822)
Other Income/(expense):
Interest Expense	(19)	(19)
Other Income/(expense), Net	(9)	2
Total Other Expense, Net	(28)	(17)
Loss Before Income Tax	(1,421)	(839)
Income Tax Benefit	201	124
Net Loss	$ (1,220)	$ (715)
Earnings Per Common Share:
Basic Per Share	$ (0.05)	$ (0.04)
Diluted Per Share	$ (0.05)	$ (0.04)
Weighted-average Common Shares Outstanding:
Basic	22,236,362	18,189,783
Diluted	22,236,362	18,189,783

XML

Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Net Loss	$ (1,220)	$ (715)
Other Comprehensive Income/(loss), Net Of Tax
Foreign Currency Translation Loss	(9)	0
Total Other Comprehensive Loss	(9)	0
Comprehensive Loss	$ (1,229)	$ (715)

XML

Condensed Consolidated Statements of Stockholders Equity (Unaudited) - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-In Capital	Accumulated other comprehensive loss	Accumulated Deficit
Balance, Shares at Jan. 01, 2021		17,983,177
Balance, Amount at Jan. 01, 2021	$ 25,764	$ 18	$ 75,834	$ 0	$ (50,088)
Share-based Compensation	282	$ 0	282	0	0
Vesting Of Restricted Stock Units, Shares		14,367
Vesting Of Restricted Stock Units, Amount	0	$ 0	0	0	0
Issuance Of Common Stock For Exercise Of Stock Options, Shares		380,396
Issuance Of Common Stock For Exercise Of Stock Options, Amount	1,146	$ 0	1,146	0	0
Taxes Paid On The Net Settlement Of Stock Options	(152)	$ 0	(152)	0	0
Issuance Of Common Stock In Connection With A Business Acquisition, Shares		46,662
Issuance Of Common Stock In Connection With A Business Acquisition, Amount	346	$ 0	346	0	0
Net Loss	(715)	$ 0	0	0	(715)
Balance, Shares at Mar. 31, 2021		18,424,602
Balance, Amount at Mar. 31, 2021	26,671	$ 18	77,456	0	(50,803)
Balance, Amount at Dec. 31, 2021	65,933
Share-based Compensation	1,053
Net Loss	(1,220)
Taxes Paid On The Net Settlement Of Stock Options And Rsus	(117)
Balance, Shares at Mar. 31, 2022		22,395,477
Balance, Amount at Mar. 31, 2022	65,807	$ 22	119,535	3	(53,753)
Balance, Shares at Jan. 01, 2022		22,054,239
Balance, Amount at Jan. 01, 2022	65,933	$ 22	118,432	12	(52,533)
Share-based Compensation	1,053	$ 0	1,053	0	0
Vesting Of Restricted Stock Units, Shares		103,657
Vesting Of Restricted Stock Units, Amount	0	$ 0	0	0	0
Issuance Of Common Stock For Exercise Of Stock Options, Shares		237,581
Issuance Of Common Stock For Exercise Of Stock Options, Amount	278	$ 0	278	0	0
Net Loss	(1,220)	0	0	0	(1,220)
Foreign Currency Translation Adjustment, Net Of Tax	(9)	0	0	(9)	0
Taxes Paid On The Net Settlement Of Stock Options And Rsus	(117)	0	(117)	0	0
Dividends Declared	(111)	$ 0	(111)	0	0
Balance, Shares at Mar. 31, 2022		22,395,477
Balance, Amount at Mar. 31, 2022	$ 65,807	$ 22	$ 119,535	$ 3	$ (53,753)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Cash Flows From Operating Activities
Net Loss	$ (1,220)	$ (715)
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation And Amortization	619	101
Share-based Compensation	1,053	282
Changes In Assets And Liabilities:
Trade Receivables	(525)	174
Contract Assets	21	(46)
Equipment Financing Receivables	(90)	14
Inventories	(2)	97
Contract Costs	(243)	(15)
Prepaid Expenses	(241)	(309)
Income Tax Receivable	(166)	(125)
Other Assets	14	(8)
Accounts Payable And Accrued Expenses	(691)	291
Income Tax Payable	(24)	0
Contract Liabilities	(243)	11
Net Cash Used For Operating Activities	(1,738)	(248)
Cash Flows From Investing Activities
Purchase Of Property And Equipment	(34)	(29)
Acquisition Of Centric Telecom	0	(2,163)
Net Cash Used For Investing Activities	(34)	(2,192)
Cash Flows From Financing Activities
Repayments Made On Finance Leases	(28)	(11)
Repayments Made On Notes Payable	(19)	(18)
Proceeds From Exercise Of Options	278	1,146
Dividend Payments	(111)	0
Taxes Paid On The Net Settlement Of Stock Options	(117)	(152)
Net Cash Provided By Financing Activities	3	965
Effect Of Exchange Rate Changes On Cash	(9)	0
Net Decrease In Cash And Cash Equivalents	(1,778)	(1,475)
Cash And Cash Equivalents At The Beginning Of The Year	7,468	17,679
Cash And Cash Equivalents At The End Of The Year	5,690	16,204
Cash Used During The Year For:
Income Taxes, Net	0	(1)
Interest Expense	(19)	(19)
Supplemental Disclosure Of Non-cash Investing And Financing Information:
Stock Issued For The Acquisition Of Centric Telecom	0	346
Contingent Consideration Related To The Acquisition Of Centric Telecom	$ 0	$ 746

XML

Significant Accounting Policies

3 Months Ended

Mar. 31, 2022

Significant Accounting Policies

Significant Accounting Policies

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 Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two Million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. The Company has two operating segments, which consist of cloud telecommunications services and software solutions.

Basis of Presentation–The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., 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 March 31, 2022 and 2021, we recorded foreign currency translation gains/(losses) of $9,000, and $0, respectively, in our statements of comprehensive income (loss).

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 March 31, 2022 and December 31, 2021, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $4,979,000 and $6,573,000, respectively.

Trade Receivables–Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance for Doubtful Accounts–The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

Contract Assets–Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs–Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $1,588,000 and $1,345,000 at March 31, 2022 and December 31, 2021, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the three months ended March 31, 2022 and 2021, the Company amortized $261,000 and $122,000, respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory–Finished goods telecommunications equipment inventory is stated at the lower of cost or net realizable value (first-in, first-out method). In accordance with applicable accounting guidance, we regularly evaluate whether inventory is stated at the lower of cost or net realizable value. If net realizable value is less than cost, the write-down is recognized as a loss in earnings in the period in which the excess occurs.

Property and Equipment–Depreciation and amortization expense is computed using the straight-line method in amounts sufficient to allocate the cost of depreciable assets over their estimated useful lives ranging from two to thirty-nine years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Land is not depreciable. Depreciable lives by asset group are as follows:

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

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions–Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

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–Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets–Our intangible assets consist of customer relationships, 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 deferred revenue.

Use of Estimates–In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies–The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

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 2.

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 asset 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.

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.

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 Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers–No customer accounted for 10% or more of our total revenue for the three months ended March 31, 2022 and 2021. No customer accounted for 10% or more of our total trade accounts receivable as of March 31, 2022 and December 31, 2021.

Recently Adopted Accounting Pronouncements–In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In 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 is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

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Revenue

3 Months Ended

Mar. 31, 2022

Revenue

Revenue

2. 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 15.

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.

Desktop Devices – Revenue generated from the sale of telecommunications equipment (desktop devices) is recognized when the customer takes possession of the devices and the cloud telecommunications services begin. The Company typically bills and collects the fees for the equipment upon entering into a contract with a customer. Cash receipts are recorded as a contract liability until implementation is complete and the services begin.

Equipment Financing Revenue – Fees generated from renting our cloud telecommunication equipment (IP or cloud telephone desktop devices) through leasing contracts are recognized as revenue based on whether the lease qualifies as an operating lease or sales-type lease. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: 1) lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and 2) the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. The economic life of most of our products is estimated to be three years, since this represents the most frequent contractual lease term for our products, and there is no residual value for used equipment. Residual values, if any, are established at the lease inception using estimates of fair value at the end of the lease term. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases in recognized ratably over the applicable service period.

Cloud Telecommunications Services – Cloud telecommunication services include voice, data, collaboration software, broadband Internet access, 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.

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.

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 March 31, 2022	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	492	$	-	$	492
Equipment financing revenue		72		-		72
Telecommunications services		3,759		-		3,759
Fees, commissions, and other, recognized over time		433		-		433
One time fees, commissions and other		134		-		134
Software licenses		-		645		645
Software licenses subscription maintenance and support		-		2,505		2,505
Professional services and other		-		118		118
	$	4,890	$	3,268	$	8,158
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	575	$	767	$	1,342
Products, services, and fees transferred over time		4,315		2,501		6,816
	$	4,890	$	3,268	$	8,158

Three Months Ended March 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	368	$	-	$	368
Equipment financing revenue		68		-		68
Telecommunications services		3,592		-		3,592
Fees, commissions, and other, recognized over time		395		-		395
One time fees, commissions and other		84		-		84
	$	4,507	$	-	$	4,507
Timing of revenue recognition
Products and fees recognized at a point in time	$	452	$	-	$	452
Services and fees transferred over time		4,055		-		4,055
	$	4,507	$	-	$	4,507

Contract balances

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

	March 31,		December 31,
(In thousands)	2022		2021
Receivables, which are included in trade receivables, net of allowance for doubtful accounts	$	2,702	$	2,177
Contract assets		240		261
Contract liabilities		2,785		3,028

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

	Three Months Ended					For the Year Ended
(In thousands)	March 31, 2022					December 31, 2021
	Contract Assets			Contract Liabilities		Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-	$	(1,524)		$	-		$	(1,137	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-		1,281			-			2,937
Transferred to receivables from contract assets recognized at the beginning of the period		(46)			-		(60	)		-
Increase due to additional unamortized discounts		25			-		162			-

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 from the cloud telecommunications services segment (in thousands):

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	272									$	272
Telecommunications services	$	10,001		9,146		6,149		3,426		973	$	29,701
Software Solutions	$	6,611		4,219		1,739		461		4	$	13,034
All consideration from contracts with customers is included in the amounts presented above

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Earnings Per Common Share

3 Months Ended

Mar. 31, 2022

Earnings Per Common Share:

Earnings Per Common Share

3. Earnings Per Common Share

Basic net income/(loss) per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. Diluted net loss per common share for the three months ended March 31, 2022 and 2021 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 March 31,
	2022			2021
Net loss (in thousands) (A)	$	(1,220	)	$	(715	)
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		22,236,362			18,189,783
Dilutive effect of stock-based awards		-			-
Diluted weighted-average outstanding shares of common stock (C)		22,236,362			18,189,783
Earnings/(loss) per common share:
Basic (A/B)	$	(0.05	)	$	(0.04	)
Diluted (A/C)	$	(0.05	)	$	(0.04	)

For the three months ended March 31, 2022 and 2021, 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 March 31,
	2022		2021
Stock options		1,798,872		91,845

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Acquisitions

3 Months Ended

Mar. 31, 2022

Acquisitions

Acquisitions

4. Acquisitions

NetSapiens, Inc. Merger Agreement

On June 1, 2021, the Company acquired 100% of the issued and outstanding shares of NetSapiens, Inc. (“NetSapiens”), a provider of a comprehensive suite of unified communications (UC), video conferencing, collaboration & contact center solutions to service providers, servicing over two million users around the globe. The aggregate purchase price was approximately $49.1 million, consisting of $10 million in cash, and approximately $39 million in common stock and stock options. In connection with the closing of the Merger, the Company issued 3,097,309 shares of the Company’s common stock valued at $5.47 per share for common stock consideration of approximately $16.9 million, and 4,482,328 options under the Crexendo, Inc. 2021 Equity Incentive Plan with an aggregate value of $22.1 million, net of the aggregate exercise price of $5.6 million.

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

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

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

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734		8,247		$	34,981

________________

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

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

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

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

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

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

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

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

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

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

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

	For the Three Months Ended March 31, (Unaudited, in thousands)
	2022			2021
Revenues	$	8,158		$	8,353
Net loss		(1,220	)		(1,591	)
Earnings per share	$	(0.05	)	$	(0.07	)

The unaudited pro forma financial information is presented for informational purposes only, and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated NetSapiens, Inc. as of January 1, 2020.

Acquisition related expenses incurred by us in connection with the NetSapiens acquisition of $970,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

Centric Telecom, Inc. Business Acquisition

On January 14, 2021, the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our common stock with an estimated fair value of $346,000 issued at closing, and $746,000 of estimated contingent consideration to be paid out based on annualized revenue recognized during the nine month earn-out period. The fair value of the common stock issued as consideration was determined based on the closing market price of the Company’s common stock on the date of the acquisition of $7.42. The aggregate purchase price is subject to customary upward or downward adjustments for Centric Telecom’s net working capital.

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

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

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

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

_______________

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

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

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

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

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

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

Acquisition related expenses incurred by us in connection with the Centric Telecom acquisition of $67,000 for the year ended December 31, 2021, are recorded within general and administrative expenses in our consolidated statements of operations.

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Trade Receivables, net

3 Months Ended

Mar. 31, 2022

Trade Receivables, net

Trade Receivables, Net

5. Trade Receivables, net

	March 31,			December 31,
	2022			2021
Gross trade receivables	$	2,752		$	2,249
Less: allowance for doubtful accounts		(50	)		(72	)
Trade receivables, net	$	2,702		$	2,177
Current trade receivables, net	$	2,702		$	2,177
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,702		$	2,177

Our trade receivables balance consists of traditional trade receivables. Below is an analysis of our trade receivables as shown on our balance sheet (in thousands):

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Prepaid Expenses

3 Months Ended

Mar. 31, 2022

Prepaid Expenses

Prepaid Expenses

6. Prepaid Expenses

Prepaid expenses consisted of the following (in thousands):

	March 31,		December 31,
	2022		2021
Prepaid corporate insurance	$	30	$	90
Prepaid software services and support		321		160
Prepaid employee insurance premiums		139		9
Prepaid Nasdaq listing fee		15		15
Other prepaid expenses		94		84
Total prepaid expenses	$	599	$	358

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Property and Equipment

3 Months Ended

Mar. 31, 2022

Property and Equipment

Property And Equipment

7. Property and Equipment

Property and equipment consisted of the following (in thousands):

	March 31,			December 31,
	2022			2021
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,888			1,854
Computer software		576			576
Internal-use software		14			14
Furniture and fixtures		75			75
Vehicles		74			74
Leasehold improvements		7			7
Less: accumulated depreciation		(2,181	)		(2,111	)
Total property and equipment, net	$	2,953		$	2,989

Depreciation and amortization expense is included in general and administrative expenses and totaled $70,000 and $44,000 for the three months ended March 31, 2022 and 2021, respectively.

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Intangible Assets and Goodwill

3 Months Ended

Mar. 31, 2022

Intangible Assets and Goodwill

Intangible Assets And Goodwill

8. Intangible Assets and Goodwill

Acquired intangible assets subject to amortization consist of the following (in thousands):

	March 31, 2022							December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,917	)	$	17,156	$	19,073	$	(1,619	)	$	17,454
Developed technologies		4,900		(748	)		4,152		4,900		(528	)		4,372
Trademark and trade names		400		(96	)		304		400		(65	)		335
Total acquired intangible assets	$	24,373	$	(2,761	)	$	21,612	$	24,373	$	(2,212	)	$	22,161

As of March 31, 2022, the weighted average remaining useful life for customer relationships was 14.9 years, developed technologies was 5.2 years, and trademarks and trade names was 3.2 years.

Amortization expense for customer relationships intangible assets is included in sales and marketing expenses and totaled $283,000 and $57,000 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for developed technologies intangible assets is included in cost of software solutions revenue and totaled $220,000 and $0 for the three months ended March 31, 2022 and 2021, respectively. Amortization expense for trademark and trade name intangible assets is included in general and administrative expenses and totaled $46,000 and $0 for the three months ended March 31, 2022 and 2021, respectively.

                As of March 31, 2022, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

Year ending December 31,
2022 remaining	$	1,649
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,830
Total	$	21,612

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

	Goodwill
Balance at December 31, 2021	$	36,972
Additions		-
Balance at March 31, 2022	$	36,972

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Accrued Expenses

3 Months Ended

Mar. 31, 2022

Accrued Expenses

Accrued Expenses

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	March 31,		December 31,
	2022		2021
Accrued wages and benefits	$	672	$	1,188
Accrued accounts payable		686		609
Accrued sales and telecommunications taxes		2,216		2,487
Product warranty liability		51		50
Other		615		570
Total accrued expenses	$	4,240	$	4,904

The changes in aggregate product warranty liabilities for the year ended December 31, 2021 and the three months ended March 31, 2022 were as follows (in thousands):  

Product warranty expense is included in cost of product revenue expense and totaled $11,000 and $5,000 for the three months ended March 31, 2022 and 2021, respectively.

	Warranty Liabilities
Balance at January 1, 2021	$	33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021		50
Accrual for warranties		11
Warranty settlements		(10	)
Balance at March 31, 2022	$	51

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Notes Payable

3 Months Ended

Mar. 31, 2022

Notes Payable

Notes Payable

10. Notes Payable

Notes payable consists of a short and long-term financing arrangements:

	March 31,			December 31,
	2022			2021
Notes payable	$	1,854		$	1,873
Less: current notes payable		(1,854	)		(1,873	)
Notes payable, net of current portion	$	-		$	-

On January 27, 2020, we entered into a Fixed Rate Term Loan Agreement with Bank of America, N.A. to finance Two Million Dollars ($2,000,000) to purchase our corporate office building. The Loan Agreement has a term of seven (7) years with monthly payments of Eleven Thousand Eight Hundred Forty-One and 15/100 Dollars ($11,841.15), including interest at 3.67%, beginning on March 1, 2020, secured by the office building. At December 31, 2021 and at March 31, 2022, we were in default of our basic fixed charge coverage ratio and we have classified the note payable as current on our balance sheet.

As of March 31, 2022, future principal payments are scheduled as follows (in thousands):

Year ending December 31,
2022 remaining	$	1,854
2023		-
2024		-
2025		-
2026 and thereafter		-
Total	$	1,854

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Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Fair Value Measurements

Fair Value Measurements

11. Fair Value Measurements

We have financial instruments as of March 31, 2022 and December 31, 2021 for which the fair value is summarized below (in thousands):

	March 31, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,702	$	2,702	$	2,177	$	2,177
Equipment financing receivables		1,364		1,364		1,274		1,274
Liabilities:
Finance lease obligations	$	275	$	275	$	303	$	303
Notes payable		1,854		1,854		1,873		1,873

We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of March 31, 2022 and December 31, 2021.

In January 2021, the Company recorded $746,000 of contingent consideration in connection with the Centric Telecom business acquisition, to be paid based on the completion of the earn-out period. Upon completion of the earn-out period in October 2021, the Company paid out $746,000 of contingent consideration and additional consideration of $126,000 based on revenue target achievements, which was recorded as general and administrative expenses for the year ended December 31, 2021. The progression of the Company’s Level 3 instruments fair valued on a recurring basis for the year ended December 31, 2021 and the three months ended March 31, 2022 are shown in the table below (in thousands):

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

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Income Taxes

3 Months Ended

Mar. 31, 2022

Income Taxes

Income Taxes

12. Income Taxes

Our effective tax rate for the three months ended March 31, 2022 and 2021 was (14.2%) and (14.8%), respectively, which resulted in an income tax benefit of $201,000 and $124,000, respectively.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2021, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as achievement of three years of cumulative pretax income in the U.S. federal tax jurisdiction, projections of future pretax income and the duration of statutory carry-forward periods. As of December 31, 2021 the Company has three years of cumulative pretax income, the achievement of three years of cumulative pretax income is objectively verifiable positive evidence and is considered significant positive evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Management utilized historical objectively verifiable revenue growth trends and operating expense trends as assumptions for projections of future pretax income and determined that the Company would generate sufficient pre-tax income in future periods to utilize all of our deferred tax assets. Although historical trends utilized in our projections are objectively verifiable we assigned less weight to this positive evidence given the subjective nature of assumptions in projections. The combination of three years of cumulative pretax income and projections of future pretax income was considered significant positive evidence. Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2031 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $7,001,000 are realizable.

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Leases

3 Months Ended

Mar. 31, 2022

Leases

Leases

13. Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease office space, other assets, and office equipment under operating leases. We lease data center equipment, including maintenance contracts and vehicles under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet, excluding leases that are less than 12 months. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease. At the adoption date of ASC Topic 842, the Company was reasonably certain that we would exercise our option to renew our corporate office building operating lease. Lease expense is recognized on a straight-line basis over the lease term.

We leased office space in McLean, Virginia under a non-cancelable operating lease agreement that expired on July 31, 2021. The operating lease contained customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $0 and $17,000 respectively.

We currently lease office space in Reston, Virginia under a non-cancelable operating lease agreement that expires in 2025. The operating lease contains customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $12,000 and $0, respectively.

We currently lease office space in La Jolla, California under a non-cancelable operating lease agreement that expires in 2022. The operating lease contains customary escalation clauses. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $90,000 and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2024 and the interest rates range from 2.81% to 13.00%. The expense is included in cost of product expenses and totaled approximately $18,000 and $11,000 for the three months ended March 31, 2022 and 2021, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada and Dallas, Texas under non-cancelable operating lease agreements that expire in 2022. Rental expense for the three months ended March 31, 2022 and 2021 was approximately $39,000 and $0, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under finance lease agreements which extends through 2026. The Company also leases three vehicles under financing agreements. One vehicle lease ended in 2021 and two vehicle leases extend through 2022. The outstanding balance for finance leases was $285,000 and $311,000 as of March 31, 2022 and December 31, 2021, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $486,000 as of March 31, 2022 and December 31, 2021, respectively. Related accumulated depreciation totaled $190,000 and $167,000 as of March 31, 2022 and December 31, 2021, respectively. The $40,000 in support contracts were classified as a prepaid expense and are being amortized over the service period of 3 years. One support contract expired in January 2021 and the other expires in June 2024. Amortization expense is included in general and administrative expenses and totaled $1,000 and $0 for the three months ended March 31, 2022 and 2021, respectively. The interest rates on the finance lease obligations range from 1.37% and 15.74% and interest expense was $2,000 and $2,000 for the three months ended March 31, 2022 and 2021, respectively.

The maturity of operating leases and finance lease liabilities as of March 31, 2022 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2022 remaining	$	405		$	86
2023		114			98
2024		95			77
2025		-			21
2026		-			3
Total minimum lease payments		614			285
Less: amount representing interest		(23	)		(10	)
Present value of minimum lease payments	$	591		$	275

Lease term and discount rate	March 31, 2022
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		2.7
Weighted-average discount rate
Operating leases		7.6	%
Finance leases		2.8	%

	Three Months Ended  March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	135
Operating cash flows from finance leases		3
Financing cash flows from finance leases		28

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. Crexendo offers its customers lease financing for the lease of our cloud telecommunication equipment (IP or cloud telephone desktop devices). We account for these transactions as sales-type leases. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Operating lease revenue is classified as product revenue and totaled $59,000 and $43,000 for the three months ended March 31, 2022 and 2021, respectively. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases is recognized ratably over the applicable service period.

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

	March 31,			December 31,
	2022			2021
Gross financing receivables	$	1,920		$	1,822
Less: unearned income		(556	)		(548	)
Financing receivables, net		1,364			1,274
Less: current portion of finance receivables, net		(446	)		(332	)
Finance receivables due after one year	$	918		$	942

Future minimum lease payments as of March 31, 2022, consisted of the following:

Year ending December 31,	Lease Receivables
2022 remaining	$	554
2023		642
2024		453
2025		203
2026 and thereafter		68
Gross equipment financing receivables		1,920
Less: unearned income		(556	)
Equipment financing receivables, net	$	1,364

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2022

Commitments and Contingencies

Commitments And Contingencies

14. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company may be involved in a variety of claims, lawsuits, investigations, and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters, and contractual disputes, that can arise in the normal course of the Company’s operations. The Company recognizes a provision when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts the amount of the provision to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. As of March 31, 2022, the Company does not have a recorded liability for estimated losses. Legal costs are expensed as incurred.

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Segment Reporting

3 Months Ended

Mar. 31, 2022

Segment Reporting

Segment Reporting

15. Segment Reporting

Our chief operating decision maker (who is our Chief Executive Officer) reviews our financial information presented on an operating segment basis for purposes of allocating resources and evaluating our financial performance. Following the merger with NetSapiens, Inc., the Company reorganized into two operating segments, a software solutions operating segment and a cloud telecommunications services operating segment. The cloud telecommunications services segment generates revenue from selling cloud telecommunication services, products, and other internet services. The software solutions segment generates revenue from selling perpetual software licenses and software subscriptions, subscription maintenance and support, and professional services. The Company has two reportable operating segments, which consist of cloud telecommunications services and software solutions. Segment revenue, income/(loss) from operations, other income/(expense) and income/(loss) before income tax provision are as follows (in thousands):

	Three Months Ended March 31,
	2022			2021
Revenue:
Cloud telecommunications services	$	4,890		$	4,507
Software solutions		3,268			-
Consolidated revenue		8,158			4,507
Loss from operations:
Cloud telecommunications services		(1,054	)		(822	)
Software solutions		(339	)		-
Total operating loss		(1,393	)		(822	)
Other expense, net:
Cloud telecommunications services		(18	)		(17	)
Software solutions		(10	)		-
Total other expense		(28	)		(17	)
Loss before income tax provision:
Cloud telecommunications services		(1,072	)		(839	)
Software solutions		(349	)		-
Loss before income tax provision	$	(1,421	)	$	(839	)

Depreciation and amortization was $115,000 and $101,000 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Depreciation and amortization was $504,000 and $0 for the software solutions segment for the three months ended March 31, 2022 and 2021, respectively.

Interest income was $0 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Interest income was $0 for the software solutions segment for the three months ended March 31, 2022 and 2021.

Interest expense was $19,000 and $19,000 for the cloud telecommunications services segment for the three months ended March 31, 2022 and 2021, respectively. Interest expense was $0 and $0 for the software solutions segment for the three months ended March 31, 2022 and 2021

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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2022

Significant Accounting Policies

Description Of Business

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 Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through our business partners, agents, and direct channels. Our solutions currently support over two Million end users globally and was recently recognized as the fastest growing UCaaS platform in the United States. The Company has two operating segments, which consist of cloud telecommunications services and software solutions.

Basis Of Presentation

Basis of Presentation–The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., 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

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 March 31, 2022 and 2021, we recorded foreign currency translation gains/(losses) of $9,000, and $0, respectively, in our statements of comprehensive income (loss).

Cash And Cash Equivalents

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 March 31, 2022 and December 31, 2021, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $4,979,000 and $6,573,000, respectively.

Trade Receivables

Trade Receivables–Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts.

Allowance For Doubtful Accounts

Allowance for Doubtful Accounts–The allowance represents estimated losses resulting from customers’ failure to make required payments. The allowance estimate is based on historical collection experience, specific identification of probable bad debts based on collection efforts, aging of trade receivables, customer payment history, and other known factors, including current economic conditions. We believe that the allowance for doubtful accounts is adequate based on our assessment to date, however, actual collection results may differ materially from our expectations.

Contract Assets

Contract Assets–Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional.

Contract Costs

Contract Costs–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 $1,588,000 and $1,345,000 at March 31, 2022 and December 31, 2021, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the three months ended March 31, 2022 and 2021, the Company amortized $261,000 and $122,000, respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory

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

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

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions

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.

Business Acquisition

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

Goodwill–Goodwill is tested for impairment using a fair-value-based approach on an annual basis (December 31) and between annual tests if indicators of potential impairment exist.

Intangible Assets

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

Contract Liabilities–Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as deferred revenue.

Use Of Estimates

Use of Estimates–In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

Contingencies

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

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 2.

Cost Of Service 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–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–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

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–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 asset 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–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.

Fair Value Measurements

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

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

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

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.

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

Stock-based Compensation

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

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 Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. We generate over 99% of our total revenue from customers within North America (United States and Canada) and less than 1% of our total revenues from customers in other parts of the world.

Significant Customers

Significant Customers–No customer accounted for 10% or more of our total revenue for the three months ended March 31, 2022 and 2021. No customer accounted for 10% or more of our total trade accounts receivable as of March 31, 2022 and December 31, 2021.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements–In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)–Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in this update require contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The amendments in ASU 2021-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We adopted this guidance in October 2021 an applied the amendment to all business combinations that occurred during the year ended December 31, 2021.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. Following the effective date philosophy for all other entities in ASU 2019-10, which includes smaller reporting companies (SRCs), this guidance is effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We do not plan to early adopt this ASU. We are in the process of evaluating the potential impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In 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 is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.

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Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2022

Significant Accounting Policies (Tables)

Property And Equipment

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

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Revenue (Tables)

3 Months Ended

Mar. 31, 2022

Revenue

Disaggregation Of Revenue

Three Months Ended March 31, 2022	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	492	$	-	$	492
Equipment financing revenue		72		-		72
Telecommunications services		3,759		-		3,759
Fees, commissions, and other, recognized over time		433		-		433
One time fees, commissions and other		134		-		134
Software licenses		-		645		645
Software licenses subscription maintenance and support		-		2,505		2,505
Professional services and other		-		118		118
	$	4,890	$	3,268	$	8,158
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$	575	$	767	$	1,342
Products, services, and fees transferred over time		4,315		2,501		6,816
	$	4,890	$	3,268	$	8,158

Three Months Ended March 31, 2021	Cloud		Software		Total
(In thousands)	Telecommunications		Solutions		Reportable
	Segment		Segment		Segments
Major products/services lines
Desktop devices	$	368	$	-	$	368
Equipment financing revenue		68		-		68
Telecommunications services		3,592		-		3,592
Fees, commissions, and other, recognized over time		395		-		395
One time fees, commissions and other		84		-		84
	$	4,507	$	-	$	4,507
Timing of revenue recognition
Products and fees recognized at a point in time	$	452	$	-	$	452
Services and fees transferred over time		4,055		-		4,055
	$	4,507	$	-	$	4,507

Contract Balances

	March 31,		December 31,
(In thousands)	2022		2021
Receivables, which are included in trade receivables, net of allowance for doubtful accounts	$	2,702	$	2,177
Contract assets		240		261
Contract liabilities		2,785		3,028

Significant Changes In The Contract Assets And Liabilities

	Three Months Ended					For the Year Ended
(In thousands)	March 31, 2022					December 31, 2021
	Contract Assets			Contract Liabilities		Contract Assets			Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	-	$	(1,524)		$	-		$	(1,137	)
Increase due to cash received, excluding amounts recognized as revenue during the period		-		1,281			-			2,937
Transferred to receivables from contract assets recognized at the beginning of the period		(46)			-		(60	)		-
Increase due to additional unamortized discounts		25			-		162			-

Performance Obligations

	2022		2023		2024		2025		2026 and thereafter		Total
Desktop devices	$	272									$	272
Telecommunications services	$	10,001		9,146		6,149		3,426		973	$	29,701
Software Solutions	$	6,611		4,219		1,739		461		4	$	13,034
All consideration from contracts with customers is included in the amounts presented above

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Earnings Per Common Share (Tables)

3 Months Ended

Mar. 31, 2022

Earnings Per Common Share:

Basic And Diluted Net Income Per Common Share

	Three Months Ended March 31,
	2022			2021
Net loss (in thousands) (A)	$	(1,220	)	$	(715	)
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)		22,236,362			18,189,783
Dilutive effect of stock-based awards		-			-
Diluted weighted-average outstanding shares of common stock (C)		22,236,362			18,189,783
Earnings/(loss) per common share:
Basic (A/B)	$	(0.05	)	$	(0.04	)
Diluted (A/C)	$	(0.05	)	$	(0.04	)

Common Stock Not Included In The Computation Of Diluted Income Per Share

	Three Months Ended March 31,
	2022		2021
Stock options		1,798,872		91,845

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Acquisitions (Tables)

3 Months Ended

Mar. 31, 2022

Acquisitions (Tables)

Cost Of Acquisition

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

(in thousands)	Initial Valuation		Adjustments	December 31, 2021
Consideration:
Cash	$	2,163		$	2,163
Common stock		346			346
Contingent consideration		746			746
Total consideration	$	3,255		$	3,255

Schedule Of Recognized Identified Assets Acquired And Liabilities Assumed

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	49,062				$	49,062
Cash		1,658		739	(b)		2,397
Accounts receivables		846		107	(f)		953
Prepaid expenses		57					57
Contract cost		-		105	(f)		105
Other assets		319		4	(c)		323
Property, plant & equipment		62		(2	)(c)		60
Right to use assets		551		4	(d)		555
Deferred tax assets		2,829		(2,829	)(g)		-
Intangible assets acquired (FV)		21,520		(420	)(a)		21,100
Long-term trade receivables, net of current		-		63	(f)		63
Other long-term assets		84		5	(c)		89
Total identifiable assets		27,926					25,702
Accounts payable		438		69	(c)		507
Accrued expenses		2,412		817	(b)(c)		3,229
Contract liability		1,475		732	(e)(f)		2,207
Operating lease liability		379		17	(d)		396
Direct financing liability		17		(17	)(d)		-
Contract liability, net of current portion		629		(629	)(e)		-
Direct financing liability, net of current portion		29		(29	)(d)		-
Operating lease liability, net of current portion		219		30	(d)		249
Deferred tax liability		-		5,033	(g)		5,033
Total liabilities assumed		5,598					11,621
Total goodwill	$	26,734		8,247		$	34,981

	Initial Valuation		Adjustments			December 31, 2021
Total purchase price	$	3,255				$	3,255
Cash		7					7
Accounts receivables		122					122
Prepaid expenses		4					4
Inventory		12					12
Other assets		12					12
Property, plant & equipment		57					57
Right to use assets		134					134
Intangible assets acquired (FV)		2,238		(38	)(a)		2,200
Other long-term assets		44					44
Total identifiable assets		2,630					2,592
Accounts payable		26					26
Accrued expenses		187		8	(b)		195
Contract liability		147					147
Operating lease liability		118		16	(c)		134
Direct financing liability		20					20
Deferred tax liability		-		534	(d)		534
Total liabilities assumed		498					1,056
Total goodwill	$	1,123		596		$	1,719

Pro Forma Information

	For the Three Months Ended March 31, (Unaudited, in thousands)
	2022			2021
Revenues	$	8,158		$	8,353
Net loss		(1,220	)		(1,591	)
Earnings per share	$	(0.05	)	$	(0.07	)

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Trade Receivables, net (Tables)

3 Months Ended

Mar. 31, 2022

Trade Receivables, net

Trade Receivables, Net

	March 31,			December 31,
	2022			2021
Gross trade receivables	$	2,752		$	2,249
Less: allowance for doubtful accounts		(50	)		(72	)
Trade receivables, net	$	2,702		$	2,177
Current trade receivables, net	$	2,702		$	2,177
Long-term trade receivables, net		-			-
Trade receivables, net	$	2,702		$	2,177

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Prepaid Expenses (Tables)

3 Months Ended

Mar. 31, 2022

Prepaid Expenses

Prepaid Expenses

	March 31,		December 31,
	2022		2021
Prepaid corporate insurance	$	30	$	90
Prepaid software services and support		321		160
Prepaid employee insurance premiums		139		9
Prepaid Nasdaq listing fee		15		15
Other prepaid expenses		94		84
Total prepaid expenses	$	599	$	358

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Property and Equipment (Tables)

3 Months Ended

Mar. 31, 2022

Property and Equipment

Property And Equipment

	March 31,			December 31,
	2022			2021
Building	$	2,000		$	2,000
Land		500			500
Computer and office equipment		1,888			1,854
Computer software		576			576
Internal-use software		14			14
Furniture and fixtures		75			75
Vehicles		74			74
Leasehold improvements		7			7
Less: accumulated depreciation		(2,181	)		(2,111	)
Total property and equipment, net	$	2,953		$	2,989

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Intangible Assets and Goodwill (Tables)

3 Months Ended

Mar. 31, 2022

Intangible Assets and Goodwill

Intangible Assets

	March 31, 2022							December 31, 2021
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	19,073	$	(1,917	)	$	17,156	$	19,073	$	(1,619	)	$	17,454
Developed technologies		4,900		(748	)		4,152		4,900		(528	)		4,372
Trademark and trade names		400		(96	)		304		400		(65	)		335
Total acquired intangible assets	$	24,373	$	(2,761	)	$	21,612	$	24,373	$	(2,212	)	$	22,161

Amortization Of Intangible Assets

Year ending December 31,
2022 remaining	$	1,649
2023		2,147
2024		2,057
2025		1,929
2026 and thereafter		13,830
Total	$	21,612

Goodwill Carrying Amount

	Goodwill
Balance at December 31, 2021	$	36,972
Additions		-
Balance at March 31, 2022	$	36,972

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Accrued Expenses (Tables)

3 Months Ended

Mar. 31, 2022

Accrued Expenses

Accrued Expenses

	March 31,		December 31,
	2022		2021
Accrued wages and benefits	$	672	$	1,188
Accrued accounts payable		686		609
Accrued sales and telecommunications taxes		2,216		2,487
Product warranty liability		51		50
Other		615		570
Total accrued expenses	$	4,240	$	4,904

Product Warranty Liabilities

	Warranty Liabilities
Balance at January 1, 2021	$	33
Accrual for warranties		50
Adjustments related to pre-existing warranties		1
Warranty settlements		(34	)
Balance at December 31, 2021		50
Accrual for warranties		11
Warranty settlements		(10	)
Balance at March 31, 2022	$	51

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Notes Payable (Tables)

3 Months Ended

Mar. 31, 2022

Notes Payable (Tables)

Notes Payable

	March 31,			December 31,
	2022			2021
Notes payable	$	1,854		$	1,873
Less: current notes payable		(1,854	)		(1,873	)
Notes payable, net of current portion	$	-		$	-

Principal Payments Of Notes Payable

Year ending December 31,
2022 remaining	$	1,854
2023		-
2024		-
2025		-
2026 and thereafter		-
Total	$	1,854

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2022

Fair Value Measurements

Financial Instruments

	March 31, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Trade receivables, net	$	2,702	$	2,702	$	2,177	$	2,177
Equipment financing receivables		1,364		1,364		1,274		1,274
Liabilities:
Finance lease obligations	$	275	$	275	$	303	$	303
Notes payable		1,854		1,854		1,873		1,873

Liabilities For Which Fair Value Is Recognized

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

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Leases (Tables)

3 Months Ended

Mar. 31, 2022

Leases

Maturity Of Finance Lease Liabilities

Year ending December 31,	Operating Leases			Finance Leases
2022 remaining	$	405		$	86
2023		114			98
2024		95			77
2025		-			21
2026		-			3
Total minimum lease payments		614			285
Less: amount representing interest		(23	)		(10	)
Present value of minimum lease payments	$	591		$	275

Lease Term And Discount

Lease term and discount rate	March 31, 2022
Weighted-average remaining lease term (years)
Operating leases		1.6
Finance leases		2.7
Weighted-average discount rate
Operating leases		7.6	%
Finance leases		2.8	%

Cash Paid For Amounts Included In The Measurement Of Lease Liabilities

	Three Months Ended  March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	135
Operating cash flows from finance leases		3
Financing cash flows from finance leases		28

Equipment Finance Receivables

	March 31,			December 31,
	2022			2021
Gross financing receivables	$	1,920		$	1,822
Less: unearned income		(556	)		(548	)
Financing receivables, net		1,364			1,274
Less: current portion of finance receivables, net		(446	)		(332	)
Finance receivables due after one year	$	918		$	942

Future Aggregate Minimum Lease Obligations Under Operating Leases

Year ending December 31,	Lease Receivables
2022 remaining	$	554
2023		642
2024		453
2025		203
2026 and thereafter		68
Gross equipment financing receivables		1,920
Less: unearned income		(556	)
Equipment financing receivables, net	$	1,364

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Segment Reporting (Tables)

3 Months Ended

Mar. 31, 2022

Segment Reporting

Information On Reportable Segments And Reconciliation To Condensed Consolidated Net (loss) Income

	Three Months Ended March 31,
	2022			2021
Revenue:
Cloud telecommunications services	$	4,890		$	4,507
Software solutions		3,268			-
Consolidated revenue		8,158			4,507
Loss from operations:
Cloud telecommunications services		(1,054	)		(822	)
Software solutions		(339	)		-
Total operating loss		(1,393	)		(822	)
Other expense, net:
Cloud telecommunications services		(18	)		(17	)
Software solutions		(10	)		-
Total other expense		(28	)		(17	)
Loss before income tax provision:
Cloud telecommunications services		(1,072	)		(839	)
Software solutions		(349	)		-
Loss before income tax provision	$	(1,421	)	$	(839	)

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Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2022
Land
Depreciable Lives	Not depreciated
Building
Depreciable Lives	39 years
Computer and Office Equipment
Depreciable Lives	2 to 5 years
Computer Software
Depreciable Lives	3 years
Internal-use Software
Depreciable Lives	3 years
Furniture and Fixtures
Depreciable Lives	4 years
Leasehold Improvements
Depreciable Lives	2 to 5 years

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Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Dec. 31, 2021
Significant Accounting Policies (Tables)
Foreign Currency Translation Gains/(losses)	$ 9,000	$ 0
Cash And Cash Equivalents	4,979,000		$ 6,573,000
Amortization In Relation To Costs Capitalized	261,000,000	$ 122,000,000
Capitalized Contract Costs	$ 1,588,000		$ 1,345,000
Trade Account Payable Rate	10.00%

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Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Major Product Services Lines
Desktop Services	$ 492	$ 368
Equipment Financing Revenue	72	68
Telecommunications Services	3,759	3,592
Revenue	8,158	4,507
Fees, Commissions And Other Recognized Over Time	433	395
One Time Fees , Commissions And Other	134	84
Software Licenses	645
Software Licences Subscription Maintenance And Support	2,505
Professional Servicing And Other	118
Service Lines	8,158	4,507
Time Of Revenue Recognition
Products Services And Fees Recognized At A Point In Time	1,342	452
Products Services And Fees Transferred Over Time	6,816	4,055
Software Solution Segment
Major Product Services Lines
Desktop Services	0	0
Equipment Financing Revenue	0	0
Telecommunications Services	0	0
Revenue	3,268	0
Fees, Commissions And Other Recognized Over Time	0	0
One Time Fees , Commissions And Other	0	0
Software Licenses	645
Professional Servicing And Other	118
Service Lines	3,268	0
Time Of Revenue Recognition
Products Services And Fees Recognized At A Point In Time	767	0
Products Services And Fees Transferred Over Time	2,501	0
Software Licenses Subscription Maintenance And Support	2,505
Cloud Telecommunications Service
Major Product Services Lines
Desktop Services	492	368
Equipment Financing Revenue	72	68
Telecommunications Services	3,759	3,592
Revenue	4,890	4,507
Fees, Commissions And Other Recognized Over Time	433	395
One Time Fees , Commissions And Other	134	84
Software Licenses	0
Professional Servicing And Other	0
Service Lines	4,890	4,507
Time Of Revenue Recognition
Products Services And Fees Recognized At A Point In Time	575	452
Products Services And Fees Transferred Over Time	4,315	$ 4,055
Software Licenses Subscription Maintenance And Support	$ 0

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Revenue (Details 1) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Revenue
Receivables, Which Are Included In Trade Receivables, Net Of Allowance For Doubtful Accounts	$ 2,702	$ 2,177
Contract Assets	240	261
Contract Liabilities	$ 2,785	$ 3,028

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Revenue (Details 2) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2022	Dec. 31, 2021
Contract Assets
Revenue Recognized That Was Included In The Contract Liability Balance At The Beginning Of The Period	$ 0	$ 0
Increase Due To Cash Received, Excluding Amounts Recognized As Revenue During The Period	0	0
Transferred To Receivables From Contract Assets Recognized At The Beginning Of The Period	(46)	(60)
Increase Due To Additional Unamortized Discounts	25	162
Contract Liabilities
Revenue Recognized That Was Included In The Contract Liability Balance At The Beginning Of The Period	(1,524)	(1,137)
Increase Due To Cash Received, Excluding Amounts Recognized As Revenue During The Period	1,281	2,937
Transferred To Receivables From Contract Assets Recognized At The Beginning Of The Period	0	0
Increase Due To Additional Unamortized Discounts	$ 0	$ 0

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Revenue (Details 3) $ in Thousands	Mar. 31, 2022 USD ($)
Software Solutions [Member]
2022	$ 6,611
Total	13,034
2023	4,219
2024	1,739
2025	461
2026 And Thereafter	4
Desktop Devices
2022	272
Total	272
Telecommunications Services
2022	10,001
Total	29,701
2023	9,146
2024	6,149
2025	3,426
2026 And Thereafter	$ 973

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Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2022	Mar. 31, 2021	Mar. 31, 2021
Earnings Per Common Share:
Net Loss	$ (1,220)	$ (1,220)	$ (715)	$ (715)
Weighted-average Share Reconciliation:
Basic		22,236,362	18,189,783
Dilutive Effect Of Stock-based Awards		0	0
Diluted Shares Outstanding		22,236,362	18,189,783
Earnings Per Common Share:
Basic		$ (0.05)	$ (0.04)
Diluted		$ (0.05)	$ (0.04)

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Earnings Per Common Share (Details 1) - shares	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Stock Options
Securities Excluded From Earnings	1,798,872	91,845

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Acquisitions (Details) - NetSapiens, Inc. $ in Thousands	3 Months Ended
	Mar. 31, 2022 USD ($)
Initial Valuation
Cash	$ 10,000
Common Stock	16,942
Stock Options	22,120
Total Consideration	49,062
Cash Initial Valuation	10,000
Common Stock Initial Valuation	16,942
Stock Options Initial Valuation	22,120
Total Consideration Initial Valuation	$ 49,062

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Acquisitions (Details 1) $ in Thousands	Dec. 31, 2021 USD ($)
Acquisitions (Tables)
Total Purchase Price	$ 49,062
Cash	2,397
Accounts Receivables	953
Prepaid Expense	57
Contract Cost	105
Other Assets	323
Property And Equipment Net	60
Right Of Use Assets	555
Deferred Tax Assets	0
Intangible Assets Acquired (fv)	21,100
Long-term Trade Receivables, Net Of Current	63
Other Long-term Assets	89
Total Identifiable Assets	25,702
Account Payable	(507)
Accrued Expenses	(3,229)
Contract Liability	2,207
Operating Lease Liabilities	396
Direct Financing Liability	0
Contract Liabilities Net Of Current Portion	0
Direct Financing Liability, Net Of Current Portion	0
Operating Lease Liabilities Net Of Current Portion	249
Deferred Tax Liability	5,033
Total Liabilities Assumed	11,621
Total Goodwill	34,981
Initial Valuation
Total Purchase Price, Initial Valuation	49,062
Cash, Initial Valuation	1,658
Accounts Receivables, Initial Valuation	846
Prepaid Expenses, Initial Valuation	57
Contract Cost, Initial Valuation	0
Other Assets, Initial Valuation	319
Property, Plant & Equipment, Initial Valuation	62
Right To Use Assets, Initial Valuation	551
Deferred Tax Assets, Initial Valuation	2,829
Intangible Assets Acquired, Initial Valuation	21,520
Long-term Trade Receivables, Net Of Current, Initial Valuation	0
Other Long-term Assets, Initial Valuation	84
Total Identifiable Assets, Initial Valuation	27,926
Accounts Payable, Initial Valuation	438
Accrued Expenses, Initial Valuation	2,412
Contract Liability, Initial Valuation	1,475
Operating Lease Liability, Initial Valuation	379
Direct Financing Liability, Initial Valuation	17
Contract Liability, Net Of Current Portion, Initial Valuation	629
Direct Financing Liability, Net Of Current Portion, Initial Valuation	29
Operating Lease Liability, Net Of Current Portion, Initial Valuation	219
Deferred Tax Liability, Initial Valuation	0
Total Liabilities Assumed, Initial Valuation	5,598
Total Goodwill, Initial Valuation	26,734
Adjustments
Cash, Adjustments	739
Accounts Receivables, Adjustments	107
Contract Cost, Adjustments	105
Other Assets, Adjustments	4
Property, Plant & Equipment, Adjustments	(2)
Right To Use Assets, Adjustments	4
Deferred Tax Assets, Adjustments	2,829
Intangible Assets Acquired, Adjustments	(420)
Long-term Trade Receivables, Net Of Current, Adjustments	63
Other Long-term Assets, Adjustments	5
Accounts Payable, Adjustments	69
Accrued Expenses, Adjustments	817
Contract Liability, Adjustments	732
Operating Lease Liability, Adjustments	17
Direct Financing Liability, Adjustments	(17)
Contract Liability, Net Of Current Portion, Adjustments	(629)
Direct Financing Liability, Net Of Current Portion, Adjustments	(29)
Operating Lease Liability, Net Of Current Portion, Adjustments	30
Deferred Tax Liability, Adjustments	5,033
Total Goodwill, Adjustments	$ 8,247

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Acquisitions (Details 2) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Acquisitions (Tables)
Revenues	$ 8,158	$ 8,353
Net Income (loss) Operations	$ (1,220)	$ (1,591)
Earning Per Share	$ (0.05)	$ (0.07)

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Acquisitions (Details 3) - Centric Telecom, Inc. $ in Thousands	3 Months Ended
	Mar. 31, 2022 USD ($)
Initial Valuation
Cash	$ 2,163
Common Stock	346
Stock Options	746
Total Consideration	3,255
Cash Initial Valuation	2,163
Common Stock Initial Valuation	346
Stock Options Initial Valuation	746
Total Consideration Initial Valuation	$ 3,255

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Acquisitions (Details 4) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Total Purchase Price		$ 49,062
Accounts Receivables		953
Intangible Assets Acquired (fv)		21,100
Operating Lease Liability	$ 591
Deferred Tax Liability		5,033
Goodwill		34,981
Total Purchase Price, Initial Valuation		49,062
Cash, Initial Valuation		1,658
Accounts Receivables, Initial Valuation		846
Prepaid Expenses, Initial Valuation		57
Other Assets, Initial Valuation		319
Property, Plant & Equipment, Initial Valuation		62
Right To Use Assets, Initial Valuation		551
Intangible Assets Acquired, Initial Valuation		21,520
Other Long-term Assets, Initial Valuation		84
Total Identifiable Assets, Initial Valuation		27,926
Accrued Expenses, Initial Valuation		2,412
Operating Lease Liability, Initial Valuation		379
Direct Financing Liability, Initial Valuation		17
Deferred Tax Liability, Initial Valuation		0
Total Liabilities Assumed, Initial Valuation		5,598
Total Goodwill, Initial Valuation		26,734
Intangible Assets Acquired, Adjustments		(420)
Accrued Expenses, Adjustments		817
Operating Lease Liability, Adjustments		17
Deferred Tax Liability, Adjustments		5,033
Total Goodwill, Adjustments		8,247
Centric Telecom, Inc.
Total Purchase Price		3,255
Cash		7
Accounts Receivables		122
Prepaid Expenses		4
Inventory		12
Other Assets		12
Property And Equipment		57
Right To Use Assets		134
Intangible Assets Acquired (fv)		2,200
Other Long-term Assets		44
Total Assets Acquired		2,592
Accounts Payable		26
Accrued Expenses		195
Contract Liability		147
Operating Lease Liability		134
Direct Financing Liability		20
Deferred Tax Liability		534
Total Liabilities Assumed		1,056
Goodwill		1,719
Total Purchase Price, Initial Valuation		3,255
Cash, Initial Valuation		7
Accounts Receivables, Initial Valuation		122
Prepaid Expenses, Initial Valuation		4
Inventory, Initial Valuation		12
Other Assets, Initial Valuation		12
Property, Plant & Equipment, Initial Valuation		57
Right To Use Assets, Initial Valuation		134
Intangible Assets Acquired, Initial Valuation		2,238
Other Long-term Assets, Initial Valuation		44
Total Identifiable Assets, Initial Valuation		2,630
Accounts Payable, Initial Valuation		26
Accrued Expenses, Initial Valuation		187
Contract Liability, Initial Valuation		147
Operating Lease Liability, Initial Valuation		118
Direct Financing Liability, Initial Valuation		20
Deferred Tax Liability, Initial Valuation		0
Total Liabilities Assumed, Initial Valuation		498
Total Goodwill, Initial Valuation		1,123
Intangible Assets Acquired, Adjustments		(38)
Accrued Expenses, Adjustments		8
Operating Lease Liability, Adjustments		16
Deferred Tax Liability, Adjustments		534
Total Goodwill, Adjustments		$ 596

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Acquisitions (Details Narrative) - USD ($)		3 Months Ended		12 Months Ended
	Jan. 14, 2021	Mar. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Business Acquisition Description	the Company acquired 100% of the issued and outstanding shares of Centric Telecom, Inc., a provider of telecommunications products, services, and solutions in Northern Virginia. The aggregate purchase price of $3,255,000 consisted of $2,163,000 of cash paid at closing, 46,662 shares of our
Aggregate Purchase Price		$ 4,910,000
Comon Stock Shares For Services		4,482,328
Consideration Amount		$ 1,690,000
Aggregate Vaue Of Comon Stock		$ 2,210,000
Decrease In The Fair Value Of The Intangible Asset			$ 420,000
Less Amortization Expense In Cost Of Software Solutions			59,000
Additional Amortization Expense In Sales And Marketing			98,000
Additional Amortization Expense In General And Administrative			37,000
Increase In Opening Balance Sheet Cash And Accrued Liabilities			739,000
Increase Of Assets Acquired			9,000
Increase In Liabilities Assumed			147,000
Increase To Goodwill Adjustment			140,000
Increase Of Right To Use Assets Balance			4,000
Increase Of Operating Lease Liability			1,000
Deferred Tax Assets, Initial Valuation			2,829,000
Decrease To Goodwill			3,000
Deferred Tax Liability			$ 5,033,000
Weighted-average Tax Rate			25.00%
Contract Cost			$ 105,000
Increase To Current And Long-term Accounts Receivables			170,000
Increase In Contract Liabilities			103,000
Decrease To Goodwill Adjustment			$ 172,000
Estimated Economic Life		16 years
Weighted Average Cost Of Capital, Rate			11.00%
Description Of Key Assumptions Used In Valuing The Developed Technology		The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 14.0%, tax rate of 25.0%, and estimated economic life of 15 years
Acquisition Related Expenses Incurred		$ 970,000
Estimated Contingent Consideration			$ 746,000
Stock Options				$ 453,000
Centric Telecom, Inc.
Deferred Tax Liability			534,000
Description Of Key Assumptions Used In Valuing The Developed Technology		The key assumptions used in valuing the developed technology are as follows: royalty rate of 7%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 6 years. The key assumptions used in valuing the existing trademarks are as follows: royalty rate of 1.0%, discount rate of 11.0%, tax rate of 25% and estimated average economic life of 4 years
Acquisition Related Expenses Incurred		$ 67,000
Intangible Assets Acauired, Adjustments			38,000
Increase To Accrued Liabilities			8,000
Decrease In Amortization Expense			16,000
Increase To Goodwill			38,000
Increase To Goodwill Due To Recording Of Pre-acquisition Liabilities			8,000
Increase In Operating Lease Liability Due To Adoption Of Asc 842			16,000
Increase To Goodwill Due To Adoption Of Asc 842			16,000
Increase To Goodwill Due To Recording Of Deferred Tax Liability			$ 534,000
Merger [Member] | June 1, 2021 [Member]
Comon Stock Shares For Services		3,097,309
Stock Options		$ 39,000,000
Cash Amount		$ 10,000,000
Common Stock Price Per Share	$ 7.42	$ 5.47
Aggregate Exercise Price		$ 560,000

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Trade Receivables net (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Trade Receivables, net
Gross Trade Receivables	$ 2,752	$ 2,249
Less Allowance For Doubtful Accounts	(50)	(72)
Trade Receivables, Net	2,702	2,177
Current Trade Receivables, Net	2,702	2,177
Long-term Trade Receivables, Net	0	0
Trade Receivables	$ 2,702	$ 2,177

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Prepaid Expenses (Details) - USD ($)	Mar. 31, 2022	Dec. 31, 2021
Prepaid Expenses
Prepaid Corporate Insurance	$ 30,000	$ 90,000
Prepaid Software Services And Support	21,000	160,000
Prepaid Employee Insurance Premiums	139,000	9,000
Nasdaq Listing Fee	15,000	15,000
Other Prepaid Expenses	94,000	84,000
Total Prepaid Assets	$ 599,000	$ 358,000

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Property and Equipment (Details) - USD ($)	Mar. 31, 2022	Dec. 31, 2021
Less: Accumulated Depreciation	$ (2,181,000)	$ (2,111,000)
Total Property And Equipment, Net	2,953,000	2,989,000
Land
Property And Equipment, Gross	500,000	500,000
Building
Property And Equipment, Gross	2,000,000	2,000,000
Computer and Office Equipment
Property And Equipment, Gross	1,888,000	1,854,000
Computer Software
Property And Equipment, Gross	576,000	576,000
Internal-use Software
Property And Equipment, Gross	14,000	14,000
Furniture and Fixtures
Property And Equipment, Gross	75,000	29,000
Leasehold Improvements
Property And Equipment, Gross	7,000	7,000
Vehicles [Member]
Property And Equipment, Gross	$ 74,000	$ 74,000

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Property and Equipment
Depreciation And Amortization Expense	$ 70,000	$ 44,000

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Intangible Assets and Goodwill (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Carrying Amount Of Intangible, Gross	$ 24,373	$ 24,373
Less: Accumulated Amortization	(2,761)	(2,212)
Carrying Amount Of Intangible, Net	21,612	22,161
Customer Relationships
Carrying Amount Of Intangible, Gross	19,073	19,073
Less: Accumulated Amortization	(1,917)	(1,619)
Carrying Amount Of Intangible, Net	17,156	17,454
Devloped Technologies
Carrying Amount Of Intangible, Gross	4,900	4,900
Less: Accumulated Amortization	(748)	(528)
Carrying Amount Of Intangible, Net	4,152	4,372
Trademark and trade names [Member]
Carrying Amount Of Intangible, Gross	400	400
Less: Accumulated Amortization	(96)	(65)
Carrying Amount Of Intangible, Net	$ 304	$ 335

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Intangible Assets and Goodwill (Details 1) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Intangible Assets and Goodwill
2022 Remaining	$ 1,649
2023	2,147
2024	2,057
2025	1,929
2026 And Thereafter	13,830
Total	$ 21,612	$ 22,161

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Intangible Assets and Goodwill (Details 2) $ in Thousands	3 Months Ended
	Mar. 31, 2022 USD ($)
Intangible Assets and Goodwill
Goodwill, Beginning Balance	$ 36,972
Additions	0
Goodwill, Ending Balance	$ 36,972

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Intangible Assets and Goodwill (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Intangible Assets and Goodwill
Software Solution Revenue	$ 220,000	$ 0
Sales And Marketing Expenses	$ 283,000	57,000
Devloped Technologies	5 years 2 months 12 days
Trademarks And Trade Names	3 years 2 months 12 days
Weighted Average Remaining Useful Life For Customer Relationships	14 years 10 months 24 days
General And Administrative Expenses	$ 46,000	$ 0

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Accrued Expenses (Details) - USD ($)	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Dec. 31, 2020	Dec. 31, 2019
Accrued Expenses (Details)
Accrued Wages And Benefits	$ 672,000	$ 1,188,000
Accrued Accounts Payable	686,000	609,000
Accrued Sales And Telecommunications Taxes	2,216,000	2,487,000
Product Warranty Liability	51,000	50,000	$ 34,000	$ 33,000	$ 37,000
Other Accrued Expenses	615,000	570,000
Total Accrued Expenses	$ 4,240,000	$ 4,904,000

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Accrued Expenses (Details 1) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2022	Dec. 31, 2021
Accrued Expenses
Beginning Balance	$ 50	$ 33
Accrual For Warranties	11	50
Adjustments Related To Pre-existing Warranties		1
Warranty Settlements	(10)	(34)
Ending Balance	$ 51	$ 50

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Accrued Expenses (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Accrued Expenses (Details)
Product Warranty Expense	$ 11,000	$ 5,000

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Notes Payable (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Notes Payable (Tables)
Notes Payable	$ 1,854	$ 1,873
Less: Current Notes Payable	1,854	1,873
Notes Payable, Net Of Current Portion	$ 0	$ 0

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Notes Payable (Details 1)	Mar. 31, 2022 USD ($)
Notes Payable (Tables)
2022	$ 1,854,000
2023	0
2024	0
2025	0
2026	0
Thereafter	0
Total	$ 1,854,000

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Notes Payable (Details Narrative)	3 Months Ended
	Mar. 31, 2022 USD ($)
Notes Payable (Tables)
Agreement Term	7 years
Purchase Of Building	$ 2,000,000
Interest Rate	3.67%
Monthly Payment	$ 11,841

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Fair Value Measurements (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Liabilities:
Notes Payable	$ 1,854	$ 1,873
Carrying Value
Liabilities:
Notes Payable	1,854	1,873
Trade Receivables, Net	2,702	2,177
Equipment Financing Receivables	1,364	1,274
Finance Leases	275	303
Estimated Fair Value
Liabilities:
Notes Payable	1,854	1,873
Trade Receivables, Net	2,702	2,177
Equipment Financing Receivables	1,364	1,274
Finance Leases	$ 275	$ 303

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Fair Value Measurements (Details 1) - USD ($)	3 Months Ended	12 Months Ended
	Mar. 31, 2022	Dec. 31, 2021
Fair Value Measurements (Details)
Beginning Balance	$ 0	$ 0
Additions	0
Cash Payments	0	746,000
Adjustment	0	(746,000)
Ending Balance	$ 0	$ 0

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Fair Value Measurements (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Fair Value Measurements (Details)
Continguent Consideration	$ 746,000	$ 126,000

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Income Taxes (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Income Taxes
Effective Tax Rate	14.20%	14.80%
Deferred Taxes	$ 7,001,000
Income Tax Benefit/(provision)	$ 201,000	$ 124,000

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Leases (Details) $ in Thousands	Mar. 31, 2022 USD ($)
Operating Leases
2022	$ 405
2023	114
2024	95
2025	0
2026	0
Total Minimum Lease Payment	614
Less: Amount Representing Interest	(23)
Present Value Of Minimum Lease Payments	591
Finance Leases
2022	86
2023	98
2024	77
2025	21
2026	3
Total Minimum Lease Payment	285
Less: Amount Representing Interest	(10)
Present Value Of Minimum Lease Payments	$ 275

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Leases (Details 1)	3 Months Ended
	Mar. 31, 2022
Leases
Weighted-average Remaining Lease Term - Operating Leases	1 year 7 months 6 days
Weighted-average Remaining Lease Term - Finance Leases	2 years 8 months 12 days
Weighted-average Discount Rate - Operating Leases	7.60%
Weighted-average Discount Rate- Finance Leases	2.80%

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Leases (Details 2) $ in Thousands	3 Months Ended
	Mar. 31, 2022 USD ($)
Leases
Operating Cash Flows From Operating Leases	$ 135
Operating Cash Flows From Finance Leases	3
Financing Cash Flows From Finance Leases	$ 28

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Leases (Details 3) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Leases
Gross Financing Receivables	$ 1,920	$ 1,822
Less Unearned Income	(556)	(548)
Financing Receivables, Net	1,364	1,274
Less: Current Portion Of Finance Receivables, Net	(446)	(332)
Finance Receivables Due After One Year	$ 918	$ 942

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Leases (Details 4) $ in Thousands	Mar. 31, 2022 USD ($)
Leases
2022	$ 554
2023	642
2024	453
2025	203
2026 And Thereafter	68
Gross Equipment Financing Receivables	1,920
Less: Unearned Income	(556)
Equipment Financing Receivables, Net	$ 1,364

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Leases (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Dec. 31, 2021	Dec. 31, 2020
Amortization Of The Rou Assets And Operating Lease Liabilities	$ 0	$ 0
Rental Expense Incurred On Operating Leases	0	17,000,000
Amortized Expenses	$ 40,000,000
Service Period	3 years
Rent Expense	$ 39,000,000	0
Product Revenue Services	59,000,000	43,000
Amortization Expense Included In General And Administrative Expenses	1,000,000	0
Weighted-average Discount Rate- Finance Leases			1.37%	15.74%
Product Expense	18,000,000	11,000,000
Interest Expenses	$ 2,000,000	2,000,000
Lease Description	The outstanding balance for finance leases was $285,000 and $311,000 as of March 31, 2022 and December 31, 2021, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486,000 and $486,000 as of March 31, 2022 and December 31, 2021, respectively. Related accumulated depreciation totaled $190,000 and $167,000 as of March 31, 2022 and December 31, 2021, respectively
Non-cancelable operating lease agreement [Member]
Rental Expense Incurred On Operating Leases	$ 12,000,000	0
Description Oflease Expiry Date	lease agreement that expires in 2025
Virginias [Member]
Rental Expense Incurred On Operating Leases	$ 0	17,000,000
Lease Expiry Date	July 31, 2021
Californias [Member]
Rental Expense Incurred On Operating Leases	$ 90,000,000	$ 0
Description Oflease Expiry Date	lease agreement that expires in 2022

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Segments Reporting (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Income/(loss) Before Income Tax Benefit
Total Cloud Telecommunications Services	$ (1,072,000)	$ (839,000)
Software Solutions	(349,000)	0
Total Other Income Expense Net	(1,421,000)	(839,000)
Cloud Telecommunications Service
Income/(loss) Before Income Tax Benefit
Total Cloud Telecommunications Services	4,890,000	4,507,000
Software Solutions	3,268,000	0
Consolidated Revenue	8,158,000	4,507,000
Cloud Telecommunications Service 1
Income/(loss) Before Income Tax Benefit
Total Cloud Telecommunications Services	(1,054,000)	(822,000)
Software Solutions	(339,000)	0
Total Operating Income Loss	(1,393,000)	(822,000)
Cloud Telecommunications Service 2
Income/(loss) Before Income Tax Benefit
Total Cloud Telecommunications Services	(18,000)	(17,000)
Software Solutions	(10,000)	0
Total Other Income Expense Net	$ (28,000)	$ (17,000)

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Segments Reporting (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Depreciation And Amortization	$ 70,000	$ 44,000
Interest Expense	19,000	19,000
Software Solutions [Member]
Depreciation And Amortization	504,000	0
Interest Expense	0	0
Interest Income	0	0
Cloud Telecommunications
Depreciation And Amortization	115,000	101,000
Interest Expense	19,000	19,000
Interest Income	$ 0	$ 0