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Acquisitions | 9 Months Ended
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Sep. 30, 2021
Acquisitions |
4. 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. Acquisition costs are included in general and administrative expenses and totaled $4,000 for the three months ended September 30, 2021 and $1,015,000 for the nine months ended September 30, 2021. 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 NetSapiens from the date of acquisition. The historical results of operations of NetSapiens 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 NetSapiens’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 NetSapiens’s assets and liabilities becomes available. Any change in the fair value of the net assets of NetSapiens 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 preliminary areas of the purchase price allocation that are not yet finalized relate to the identification and valuation of intangible assets by an independent third party valuation firm and the determination of fair values of certain assets and liabilities; trade receivable, right-of-use assets and associated liabilities, deferred tax assets, and contract costs. 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 June 1, 2021 (in thousands):
Total purchase price |  | $ | 49,062 |
Cash |  |  | 1,658 |
Trade receivables |  |  | 846 |
Prepaid expenses |  |  | 57 |
Other current assets |  |  | 319 |
Property and equipment, net |  |  | 62 |
Right-of-use assets |  |  | 551 |
Deferred tax assets |  |  | 2,829 |
Other long-term assets |  |  | 84 |
Intangible assets- existing technology |  |  | 5,047 |
Intangible assets- customer relationships |  |  | 16,473 |
Total identifiable assets |  |  | 27,926 |
Accounts payable |  |  | (438 | )
Accrued expenses |  |  | (2,412 | )
Finance leases |  |  | (17 | )
Contract liabilities |  |  | (1,475 | )
Operating lease liabilities |  |  | (379 | )
Contract liabilities, net of current portion |  |  | (629 | )
Finance leases, net of current portion |  |  | (29 | )
Operating lease liabilities, net of current portion |  |  | (219 | )
Total liabilities assumed |  |  | (5,598 | )
Total goodwill |  | $ | 26,734 |
A preliminary estimate of $5.0 million has been allocated to existing technology, an intangible asset with an estimated useful life of approximately 6 years. A preliminary estimate of $16.5 million has been allocated to customer relationships with an estimated life of approximately 9 years. The estimated fair values of existing technology and customer relationships was established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration. The existing technology and customer relationships were valued using the multi-period excess earnings method. Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the existing technology and customer relationships acquired are as follows: weighted average cost of capital of 17.4%, tax rate of 22.5%, and estimated economic life of 6 and 9 years, respectively. A preliminary estimate of $26.7 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill will not be amortized and will be tested for impairment at least annually. The preliminary purchase price allocation for NetSapiens is subject to revision as more detailed analysis is completed and additional information on the fair values of NetSapiens’ assets and liabilities becomes available. Any changes in the fair value of the net assets of NetSapiens will change the amount of the purchase price allocable to goodwill. The final purchase accounting allocation may therefore differ materially from the pro forma adjustments presented herein. The final allocation may include (1) changes in fair values of property and equipment (2) changes in allocations to intangible assets such as technology, customer relationships, and deferred revenue as well as goodwill and (3) other changes to assets and liabilities. The following unaudited pro forma information presents our condensed consolidated results of operations as if NetSapiens, Inc. had been included in our consolidated results since January 1, 2020:
|  | For the Nine Months Ended September 30, (Unaudited) |
(In thousands) |  | 2021 |  |  | 2020 |
Revenues |  | $ | 24,123 |  |  | $ | 20,867 |
Net income/(loss) |  |  | (12,671 | ) |  |  | 487 |
Earnings per share |  | $ | (0.64 | ) |  | $ | 0.03 |
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. 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. Acquisition costs are included in general and administrative expenses and totaled $0 for the three months ended September 30, 2021 and $50,000 for the nine months ended September 30, 2021. 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.

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