Crexendo, Inc. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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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, 2021

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

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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, 2021 was 18,445,086.

 

 

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item 1.        Financial Statements	3
Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.        Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.        Controls and Procedures	36
PART II – OTHER INFORMATION
Item 1.        Legal Proceedings	37
Item 1A.     Risk Factors	37
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.        Exhibits	37
Signatures	38

 

 

PART I - FINANCIAL INFORMATION

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except par value and share data)

 

	March 31, 2021	December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$16,204	$17,579
Restricted cash	-	100
Trade receivables, net of allowance for doubtful accounts of $20
as of March 31, 2021 and $21 as of December 31, 2020	486	538
Contract assets	205	159
Inventories	419	504
Equipment financing receivables	298	286
Contract costs	442	421
Prepaid expenses	503	190
Income tax receivable	129	4
Other current assets	2	-
Total current assets	18,688	19,781
Long-term equipment financing receivables, net	880	906
Property and equipment, net	2,776	2,734
Deferred income tax assets, net	6,054	6,054
Operating lease right-of-use assets	135	1
Intangible assets, net	2,433	252
Goodwill	1,395	272
Contract costs, net of current portion	543	549
Other long-term assets	225	156
Total Assets	$33,129	$30,705
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$190	$56
Accrued expenses	1,998	1,628
Finance leases	43	29
Notes payable	72	71
Operating lease liabilities	44	1
Contigent consideration	746	-
Contract liabilities	1,034	778
Total current liabilities	4,127	2,563
Contract liabilities, net of current portion	352	450
Finance leases, net of current portion	50	55
Notes payable, net of current portion	1,854	1,873
Operating lease liabilities, net of current portion	75	-
Total liabilities	6,458	4,941
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 25,000,000 shares, 18,424,602
shares issued and outstanding as of March 31, 2021 and 17,983,177 shares issued
and outstanding as of December 31, 2020	18	18
Additional paid-in capital	77,456	75,834
Accumulated deficit	(50,803)	(50,088)
Total stockholders' equity	26,671	25,764
Total Liabilities and Stockholders' Equity	$33,129	$30,705

 

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

 

 

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

 

	Three Months Ended March 31,
	2021	2020
Service revenue	$4,139	$3,488
Product revenue	368	379
Total revenue	4,507	3,867
Operating expenses:
Cost of service revenue	1,259	970
Cost of product revenue	225	220
Selling and marketing	1,241	1,038
General and administrative	2,254	1,188
Research and development	350	270
Total operating expenses	5,329	3,686
Income/(loss) from operations	(822)	181
Other income/(expense):
Interest income	-	1
Interest expense	(19)	(9)
Other income/(expense), net	2	(30)
Total other income/(expense), net	(17)	(38)
Income/(loss) before income tax	(839)	143
Income tax benefit/(provision)	124	(3)
Net income/(loss)	$(715)	$140
Earnings per common share:
Basic	$(0.04)	$0.01
Diluted	$(0.04)	$0.01
Weighted-average common shares outstanding:
Basic	18,189,783	14,905,599
Diluted	18,189,783	16,262,886

 

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

 

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2021 and 2020

(Unaudited, in thousands, except share data)

 

	Common Stock		Additional		Total
	Shares	Amount	Paid-in Capital	Accumulated Deficit	Stockholders' 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

 

	Common Stock		Additional		Total
	Shares	Amount	Paid-in Capital	Accumulated Deficit	Stockholders' Equity
Balance, January 1, 2020	14,884,755	$15	$62,400	$(58,028)	$4,387
Share-based compensation	-	-	105	-	105
Vesting of restricted stock units	7,498	-	-	-	-
Issuance of common stock for exercise of stock options	49,200	-	84	-	84
Net income	-	-	-	140	140
Balance, March 31, 2020	14,941,453	$15	$62,589	$(57,888)	$4,716

 

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

 

CREXENDO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

	Three Months Ended March 31,
	2021	2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)	$(715)	$140
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization	101	103
Share-based compensation	282	105
Changes in assets and liabilities:
Trade receivables	174	(54)
Contract assets	(46)	(6)
Equipment financing receivables	14	(102)
Inventories	97	153
Contract costs	(15)	(20)
Prepaid expenses	(309)	(323)
Income tax receivable	(125)	3
Other assets	(8)	(50)
Accounts payable and accrued expenses	291	(290)
Contract liabilities	11	53
Net cash used for operating activities	(248)	(288)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(29)	(528)
Business acquisition	(2,163)	-
Net cash used for investing activities	(2,192)	(528)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments made on finance leases	(11)	(8)
Repayments made on notes payable	(18)	(5)
Proceeds from exercise of options	1,146	84
Taxes paid on the net settlement of stock options	(152)	-
Net cash provided by financing activities	965	71
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(1,475)	(745)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE BEGINNING OF THE PERIOD	17,679	4,280
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT THE END OF THE PERIOD	$16,204	$3,535
Cash used during the year for:
Income taxes, net	$(1)	$-
Interest expense	$(19)	$(9)
Supplemental disclosure of non-cash investing and financing information:
Purchase of property and equipment with a note payable	$-	$2,000
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.

 

CREXENDO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Description of Business – Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo is an award-winning premier provider of cloud communications, UCaaS, call center, collaboration services, and other cloud business services that are designed to provide enterprise-class cloud services to any size business at affordable monthly rates. The Company has two operating segments, which consist of Cloud Telecommunications and Web Services.

 

Basis of Presentation – The consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Crexendo Business Solutions, Inc., Crexendo International, Inc., and Centric Telecom, Inc. All intercompany account balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements reflect the results of operations, financial position, changes in stockholders’ equity, and cash flows of our Company.

 

 Cash and Cash Equivalents – We consider all highly liquid, short-term investments with maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2021 and December 31, 2020, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $15,565,000 and $17,175,000, respectively.

 

Restricted Cash – We classified $0 and $100,000 as restricted cash as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, our restricted cash requirement was waived and we released $100,000 into cash and cash equivalents. Cash was restricted for compensating balance requirements on purchasing card agreements. As of March 31, 2021 and December 31, 2020, we had restricted cash in financial institutions in excess of federally insured limits in the amount of $0 and $100,000, respectively.

 

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported on the balance sheet to the cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows (in thousands):

 

	March 31,	March 31,
	2021	2020
Cash and cash equivalents	$16,204	$3,435
Restricted cash	-	100
Total cash, cash equivalents, and restricted cash shown in the condensed
consolidated statement of cash flows	$16,204	$3,535

 

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

 

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

 

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

 

 

Contract Costs – Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining telecommunications contracts which are recoverable. The Company capitalized contract costs in the amount of $985,000 and $970,000 at March 31, 2021 and December 31, 2020, 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, 2021 and 2020, the Company amortized $122,000 and $111,000 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
Vehicles	5 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. In 2019, the Company acquired customer relationships for an estimated aggregate purchase price of $351,000. During the year ended December 31, 2020, the Company determined that the contingent consideration payable was $121,000 less than initially recorded and recognized a reduction in the cost of the asset acquired.

 

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. The intangible assets are amortized following the patterns in which the economic benefits are consumed. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.

 

 

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

 

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

 

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

 

Product and Service Revenue Recognition – Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. For more detailed information about revenue, see Note 2.

 

Cost of Service Revenue – Cost of service includes Cloud Telecommunications and Web Services cost of service revenue. Cloud Telecommunications cost of service revenue primarily consists of fees we pay to third-party telecommunications and broadband Internet providers, costs of other third-party services we resell, personnel and travel expenses related to system implementation, and customer service. Web Services cost of service revenue consists primarily of customer service costs and outsourcing fees related to fulfillment of our professional web management services.

 

Cost of Product Revenue – Cost of product revenue primarily consists of the costs associated with the purchase of desktop devices and other third-party equipment we purchase for resale.

 

Product Warranty – We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service.

 

Contingent Consideration – Contingent consideration represents deferred 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.

 

Public Offering – On September 28, 2020, the Company completed a public offering in which it issued and sold 1,750,000 shares of common stock at a price to the public of $5.50 per share. The shares sold and issued in the public offering resulted in an aggregate gross offering price of $9,625,000. The Company received net proceeds of $8,623,000 after deducting underwriting discounts and commissions of $674,000 and offering expenses of $328,000.

 

On October 21, 2020, the underwriters of the Company’s public offering exercised their option to purchase additional shares of the Company’s common stock to cover sales by the underwriters of a greater number of shares than the total set forth in the filed prospectus for the public offering. The underwriters purchased an additional 420,000 shares of common stock from the Company. The gross proceeds to the Company of the issuance were $2,310,000, and the Company received net proceeds of $2,148,000 after deducting underwriting discounts and commissions.

 

 

Research and Development – Research and development costs are expensed as incurred. Costs related to internally developed software are expensed as research and development expense until technological feasibility has been achieved, after which the costs are capitalized.

 

Fair Value Measurements – The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: 

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

 

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

·      Quoted prices for similar assets or liabilities in active markets;

·      Quoted prices for identical or similar assets in non-active markets;

·      Inputs other than quoted prices that are observable for the asset or liability; and

·      Inputs that are derived principally from or corroborated by other observable market data.

 

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 

Lease Obligations – We determine if an agreement is a lease at inception. We evaluate the lease terms to determine whether the lease will be accounted for as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current portion, and operating lease liabilities, net of current portion in our consolidated balance sheets.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

A lease that transfers substantially all of the benefits and risks incidental to ownership of property are accounted for as finance leases. At the inception of a finance lease, an asset and finance lease obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property’s fair market value. Finance lease obligations are classified as either current or long-term based on the due dates of future minimum lease payments, net of interest.

 

Notes Payable – We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

 

Income Taxes – We recognize a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Accruals for uncertain tax positions are provided for in accordance with accounting guidance. Accordingly, we may recognize the tax benefits from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting guidance is also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, and cash flows. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. At December 31, 2020 we determined that we would be able to realize our deferred income tax assets in the future and released $7,487,000 of the valuation allowance.

 

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

 

 

Stock-Based Compensation – For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

 

Comprehensive Income/(Loss) – There were no other components of comprehensive income/(loss) other than net income/(loss) for the three months ended March 31, 2021 and 2020.

 

Operating Segments – Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has two operating segments, which consist of Cloud Telecommunications and Web Services. Research and development expenses are allocated to Cloud Telecommunications and Web Services segments based on the level of effort, measured primarily by wages and benefits attributed to our engineering department.  Indirect sales and marketing expenses are allocated to the Cloud Telecommunications and Web Services segments based on level of effort, measured by month-to-date contract bookings. General and administrative expenses are allocated to both segments based on revenue recognized for each segment. Accounting guidance also establishes standards for related disclosure about products and services, geographic areas and major customers. We generate over 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, 2021 and 2020. No customer accounted for 10% or more of our total trade accounts receivable as of March 31, 2021 and one telecommunications services customer accounted for 11% of total trade accounts receivable as of December 31, 2020.

 

Recently Adopted Accounting Pronouncements – In December 2019, the Financial Accounting Standards Board (“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.

 

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, see Note 15.

 

Cloud Telecommunications Segment

 

Products and services may be sold separately or in bundled packages. The typical length of a contract for service is thirty-six to sixty months. Customers are billed for these services on a monthly basis. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the desktop devices and telecommunication services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

 

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

 

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

 

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

 

 

One-Time Fees, Commissions, and Other – Includes contracted and non-contracted items such as:

 

 

 

 

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, 2021	Cloud		Total
(In thousands)	Telecommunications	Web Services	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	289	-	289
One time fees, commissions and other	74	-	74
Website hosting services	-	106	106
Website management services and other	-	10	10
	$4,391	$116	$4,507
Timing of revenue recognition
Products, services, and fees recognized at a point in time	$341	$-	$341
Products, services, and fees transferred over time	4,050	116	4,166
	$4,391	$116	$4,507

 

Three Months Ended March 31, 2020	Cloud		Total
(In thousands)	Telecommunications	Web Services	Reportable
	Segment	Segment	Segments
Major products/services lines
Desktop devices	$379	$-	$379
Equipment financing revenue	45	-	45
Telecommunications services	3,025	-	3,025
Fees, commissions, and other, recognized over time	233	-	233
One time fees, commissions and other	29	-	29
Website hosting services	-	133	133
Website management services and other	-	23	23
	$3,711	$156	$3,867
Timing of revenue recognition
Products and fees recognized at a point in time	$408	$-	$408
Services and fees transferred over time	3,303	156	3,459
	$3,711	$156	$3,867

 

 

Contract balances

 

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

 

	March 31,	December 31,
(In thousands)	2021	2020
Receivables, which are included in trade receivables, net of allowance
for doubtful accounts	$486	$538
Contract assets	205	159
Contract liabilities	1,386	1,228

 

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, 2021		December 31, 2020
	Contract Assets	Contract Liabilities	Contract Assets	Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$-	$(788)	$-	$(976)
Increase due to cash received, excluding amounts recognized as revenue during the period	-	946	-	990
Transferred to receivables from contract assets recognized at the beginning of the period	(15)	-	(21)	-
Increase due to additional unamortized discounts	61	-	158	-

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

 

	2021	2022	2023	2024	2025	2026	Total
Desktop devices	$307	-	-	-	-	-	$307
Telecommunications service	$8,420	8,214	5,768	3,665	1,331	61	$27,459
All consideration from contracts with customers is included in the amounts presented above

 

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, 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,
	2021	2020
Net income/(loss) (in thousands) (A)	$(715)	$140
Weighted-average share reconciliation:
Weighted-average basic shares outstanding (B)	18,189,783	14,904,599
Dilutive effect of stock-based awards	-	1,358,287
Diluted weighted-average outstanding shares of common stock (C)	18,189,783	16,262,886
Earnings per common share:
Basic (A/B)	$(0.04)	$0.01
Diluted (A/C)	$(0.04)	$0.01

 

For the three months ended March 31, 2021 and 2020, 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,
	2021	2020
Stock options	488,104	1,662,311

 

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.

The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer. The Company’s unaudited condensed consolidated financial statements include the results of operations of Centric Telecom from the date of acquisition. The historical results of operations of Centric Telecom were not significant to the Company’s unaudited condensed consolidated results of operations for the periods presented. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Centric Telecom’s net tangible assets and intangible assets based on their estimated fair value on the acquisition date. The preliminary purchase price allocation, as set forth in the table below, reflects various preliminary fair value estimates and analysis prepared by the Company. The preliminary purchase price allocation is subject to revision as a more detailed analysis is completed by a third party valuation specialist and additional information on the fair values of Centric’s assets and liabilities becomes available. Any change in the fair value of the net assets of Centric Telecom will change the amount of the purchase price allocable to goodwill. Final purchase accounting adjustments may differ materially from preliminary purchase price allocation presented here. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of the intangible assets acquired, fair value of right to use assets and associated operating lease liabilities assumed, and net working capital adjustments. We anticipate finalizing our purchase price allocation during 2021. The following table presents the preliminary allocation of the assets acquired and liabilities assumed as of January 14, 2021 (in thousands):

 

Consideration (including estimated unpaid contingent consideration)
Cash	$2,163
Common stock	346
Contingent consideration	746
	$3,255
Assets
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	2,238
Other long-term assets	44
Total assets acquired	2,630
Liabilities
Accounts Payable	26
Accrued Expenses	187
Contract Liability	147
Operating Lease Liability	118
Direct Financing Liability	20
Total liabilities assumed	498
Net identifiable assets acquired	2,132
Goodwill	1,123
Total purchase price	$3,255

 

 

The intangible assets acquired consist of customer relationships. The fair value of the customer relationships was determined utilizing variations of the income approach where the expected future cash flows resulting from the acquired identifiable intangible assets were reduced by operating costs and charges for contributory assets and then discounted to present value at the weighted average cost of capital. The key assumptions used in valuing the customer relationships acquired is a weighted average cost of capital of 17.4% and a tax rate of 22.5%. The amortizable intangible assets have an average useful life of eight years. The purchase price exceeded the estimated fair value of the tangible and identifiable intangible assets and liabilities acquired and, as a result of the allocation, the Company recorded goodwill of $1,123,000, which is not deductible for tax purposes. The goodwill recognized is primarily attributable to contributions of the entity's assembled workforce of the acquired business.

 

NetSapiens, Inc. Merger Agreement

During the three months ended March 31, 2021, the Company entered into a Merger Agreement to acquire NetSapiens, Inc. for approximately $50 million, consisting of (1) $10 million in cash, and (2) approximately $40 million in the form of shares of the Company’s common stock or Company options. The merger consideration is subject to customary upward or downward adjustments for NetSapiens’ net working capital and closing cash. When taking into account the anticipated adjustments for net working capital and closing cash, the Company expects to issue approximately 3,114,690 shares of the Company’s common stock valued at $6.19 per share for common stock consideration of approximately $19.3 million and approximately 4,438,321 options with an aggregate value of $21.8 million, net of the aggregate exercise price of $5.6 million, at the closing. The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including: (i) the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of all outstanding shares of NetSapiens entitled to vote; (ii) the approval of the issuance of the Merger Shares and the other matters requiring stockholder approval for the consummation of the Transactions by the affirmative vote of the holders of a majority of all outstanding shares of the Company entitled to vote thereon; and (iii) the absence of governmental restraints or prohibitions preventing the consummation of the Mergers.

 

DoubleHorn, LLC Asset Acquisition

On December 31, 2019, the Company acquired certain assets from DoubleHorn, LLC. The aggregate purchase price of approximately $351,000 consisted of $176,000 of cash payable at closing and $175,000 of contingent consideration it estimates will be paid during the six month earn-out period. The Company concluded that the DoubleHorn acquisition met the definition of an asset acquisition under ASU 2017-01, "Clarifying the Definition of a Business", and the cost was allocated to the individual assets acquired and liabilities assumed based on their relative fair values. The customer relationships intangible asset will be amortized over a six year estimated useful life following the pattern of the economic benefits.

During the year ended December 31, 2020, $54,000 of contingent consideration was paid in cash and the Company determined that the contingent consideration payable was $121,000 less than initially recorded and recognized a reduction in the cost of the asset acquired. The following table presents the cost of the acquisition and the allocation to assets acquired based upon their relative fair value:

 

Consideration:
Cash	$230
Total consideration	$230
Recognized amounts of identifiable assets acquired and liabilities assumed:
Customer relationships	$230
Net assets acquired	$230

 

 

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):

 

	March 31,	December 31,
	2021	2020
Gross trade receivables	$506	$559
Less: allowance for doubtful accounts	(20)	(21)
Trade receivables, net	$486	$538
Current trade receivables, net	$486	$538
Long-term trade receivables, net	-	-
Trade receivables, net	$486	$538

 

Prepaid expenses consisted of the following (in thousands):

	March 31,	December 31,
	2021	2020
Prepaid corporate insurance	$32	$53
Prepaid software services and support	220	20
Prepaid employee insurance premiums	71	71
Prepaid tax deposit	45	-
Prepaid Nasdaq listing fee	44	-
Other prepaid expenses	91	46
Total prepaid expenses	$503	$190

 

 

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

 

	March 31,	December 31,
	2021	2020
Building	$2,000	$2,000
Land	500	500
Computer and office equipment	1,480	1,407
Computer software	547	526
Internal-use software	14	14
Furniture and fixtures	75	29
Vehicles	95	-
Leasehold improvements	25	-
Less: accumulated depreciation	(1,960)	(1,742)
Total property and equipment, net	$2,776	$2,734

 

Depreciation and amortization expense is included in general and administrative expenses and totaled $44,000 and $73,000 for the three months ended March 31, 2021 and 2020, respectively.

 

 

 

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

 

	March 31, 2021			December 31, 2020
	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount
Customer relationships	$3,409	$(976)	$2,433	$1,171	$(919)	$252
Total acquired intangible assets	$3,409	$(976)	$2,433	$1,171	$(919)	$252

 

As of March 31, 2021, the weighted average remaining useful life for customer relationships was 7.5 years.

 

Amortization expense is included in general and administrative expenses and totaled $57,000 and $30,000 for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, the Company acquired $2,238,000 in intangible assets in connection with the Centric Telecom business acquisition. During the year ended December 31, 2020, we reduced customer relationships by $121,000 due to an adjustment to the total consideration payable under the DoubleHorn customer relationships asset purchase agreement.

 

As of March 31, 2021, 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,
2021 remaining	$188
2022	225
2023	390
2024	361
2025 and thereafter	1,269
Total	$2,433

 

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

 

	Goodwill
Balance at December 31, 2020	272
Business acquisition	1,123
Balance at March 31, 2021	$1,395

 

 

Accrued expenses consisted of the following (in thousands):

	March 31,	December 31,
	2021	2020
Accrued wages and benefits	$440	$513
Accrued accounts payable	691	505
Accrued sales and telecommunication taxes	684	438
Product warranty liability	31	33
Other accrued expenses	152	139
Total accrued expenses	$1,998	$1,628

 

The changes in aggregate product warranty liabilities for the year ended December 31, 2020 and three months ended March 31, 2021 were as follows (in thousands):

 

	Warranty Liabilities
Balance at January 1, 2020	$37
Accrual for warranties	33
Adjustments related to pre-existing warranties	(10)
Warranty settlements	(27)
Balance at December 31, 2020	33
Accrual for warranties	5
Warranty settlements	(7)
Balance at March 31, 2021	$31

 

Product warranty expense is included in cost of product revenue expense and totaled $5,000 and $8,000 for the three months ended March 31, 2021 and 2020, respectively.

 

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

 

	March 31,	December 31,
	2021	2020
Notes payable	$1,926	$1,944
Less: current notes payable	(72)	(71)
Notes payable, net of current portion	$1,854	$1,873

 

 

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.

 

As of March 31, 2021, future principal payments are scheduled as follows (in thousands):

 

Year ending December 31,
2021 remaining	$53
2022	74
2023	76
2024	79
2025 and thereafter	1,644
Total	$1,926

 

We have financial instruments as of March 31, 2021 and December 31, 2020 for which the fair value is summarized below (in thousands):

 

	March 31, 2021		December 31, 2020
	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
Assets:
Trade receivables, net	$486	$486	$538	$538
Equipment financing receivables	1,178	1,178	1,192	1,192
Liabilities:
Finance lease obligations	$93	$93	$84	$84
Notes payable	1,926	1,926	1,944	1,944
Business acquisition contigent consideration	746	746	-	-

 

Liabilities for which fair value is recognized in the balance sheet on a recurring basis are summarized below as of March 31, 2021 and December 31, 2020 (in thousands):

 

		Fair value measurement at reporting date
Description	As of March 31, 2021	Level 1	Level 2	Level 3
Liabilities:
Business acquisition contingent consideration	$746	$-	$-	$746

Description	As of December 31, 2020	Level 1	Level 2	Level 3
Liabilities:
Asset acquisition contingent consideration	$-	$-	$-	$-

 

 

The recurring Level 3 measurement of our business acquisition contingent consideration liability includes the following significant unobservable inputs at March 31, 2021 (in thousands):

 

Contingent consideration liability	Fair Value at March 31, 2021	Valuation technique	Unobservable inputs	Range
Revenue - based payments	$746	Discounted cash flow	Discount Rate	17.38%
			Probability of milestone payment	90%
			Projected year of payments	2021