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Leases

6 Months Ended

Jun. 30, 2021

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 previously leased our corporate office building in Tempe, Arizona from a Company that is owned by the major shareholder and CEO of the Company. Amortization of the ROU assets and operating lease liabilities for the three months ended June 30, 2021 and 2020 was $0 and $0, respectively, and for the six months ended June 30, 2021 and 2020 was $0 and $50,000, respectively. Rental expense incurred on operating leases for the three months ended June 30, 2021 and 2020 was approximately $0 and $0, respectively, and for the six months ended June 30, 2021 and 2020 was approximately $0 and $25,000, respectively.

We currently lease office space in McLean, Virginia under a non-cancelable operating lease agreement that expires in 2021. The operating lease contains customary escalation clauses. Rental expense for the three months ended June 31, 2021 and 2020 was approximately $20,000 and $0, respectively, and for the six months ended June 30, 2021 and 2020 was $37,000 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 June 30, 2021 and 2020 was approximately $30,000 and $0, respectively, and for the six months ended June 30, 2021 and 2020 was approximately $30,000, and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2023 and the interest rates range from 3.00% to 15.09%. The expense is included in cost of product expenses and totaled approximately $17,000 and $0 for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020 was $28,000 and $0, 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 June 30, 2021 and 2020 was approximately $6,000 and $0, respectively, and for the six months ended June 30, 2021 and 2020 was approximately $6,000 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 2025. The Company also leases three vehicles under financing agreements. One vehicle lease extends through 2021 and two vehicle leases extend through 2022. The outstanding balance for finance leases was $418,000 and $84,000 as of June 30, 2021 and December 31, 2020, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $497,000 and $129,000 as of June 30, 2021 and December 31, 2020, respectively. Related accumulated depreciation totaled $142,000 and $54,000 as of June 30, 2021 and 2020, respectively. The $39,000 in support contracts were classified as a prepaid expense and is 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 $0 and $2,000 for the three months ended June 30, 2021 and 2020, respectively, and $0 and $4,000 for the six months ended June 30, 2021 and 2020, respectively. The interest rates on the finance lease obligations range from 1.37% and 6.7% and interest expense was $2,000 and $2,000 for the three months ended June 30, 2021 and 2020, respectively and $4,000 and $4,000 for the six months ended June 30, 2021 and 2020, respectively.

The maturity of operating leases and finance lease liabilities as of June 30, 2021 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2021 remaining	$	243		$	88
2022		409			137
2023		4			114
2024		-			77
2025		-			18
Total minimum lease payments		656			434
Less: amount representing interest		(3	)		(16	)
Present value of minimum lease payments	$	653		$	418

Lease term and discount rate	June 30, 2021
Weighted-average remaining lease term (years)
Operating leases		1.4
Finance leases		3.4
Weighted-average discount rate
Operating leases		4.5	%
Finance leases		2.2	%

	Three Months Ended June 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	75
Operating cash flows from finance leases		4
Financing cash flows from finance leases		25

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 $52,000 and $0 for the three months ended June 31, 2021 and 2020, respectively, and $95,000 and $0 for the six months ended June 31, 2021 and 2020, 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):

	June 30,			December 31,
	2021			2020
Gross financing receivables	$	1,606		$	1,774
Less: unearned income		(508	)		(582	)
Financing receivables, net		1,098			1,192
Less: current portion of finance receivables, net		(316	)		(286	)
Finance receivables due after one year	$	782		$	906

Future minimum lease payments as of June 30, 2021, consisted of the following:

Year ending December 31,	Lease Receivables
2021 remaining	$	287
2022		527
2023		421
2024		259
2025 and thereafter		112
Gross equipment financing receivables		1,606
Less: unearned income		(508	)
Equipment financing receivables, net	$	1,098