Crexendo, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Unless stated otherwise, financial amounts are in millions of dollars. The filing was signed March 14, 2023.
Business context
Crexendo provides cloud telecommunications, unified communications software, collaboration and managed IT services. Its two reportable segments are Cloud Telecommunications Services and Software Solutions; management reported support for more than three million end users globally. The company acquired Allegiant Networks on November 1, 2022, and its 2021 acquisition of NetSapiens was included for only seven months in the 2021 comparison.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $37.554 | $28.092 |
| Operating loss | $(37.392) | $(2.810) |
| Loss before income taxes | $(36.175) | $(2.910) |
| Income tax benefit | $0.762 | $0.465 |
| Net loss | $(35.413) | $(2.445) |
| Basic and diluted loss per share | $(1.54) | $(0.12) |
| Net cash used in operating activities | $(0.411) | $(1.006) |
| Cash and cash equivalents at year-end | $5.475 | $7.468 |
Revenue increased 34%. Cloud telecommunications revenue was $22.406 million, up from $19.426 million; Software Solutions revenue was $15.148 million, up from $8.666 million. The company reported FY2022 Adjusted EBITDA of $2.462 million, compared with $1.607 million in 2021; this is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Fourth-quarter 2022 revenue was $11.442 million, compared with $8.996 million in fourth-quarter 2021. Fourth-quarter net loss was $32.601 million, versus $0.602 million, largely reflecting a $32.678 million impairment charge recorded in Q4.
Cash, debt and liquidity
Operating cash use improved by $0.595 million year over year, though the company still recorded a substantial GAAP net loss. Investing activities used $1.703 million, principally reflecting the Allegiant acquisition and property and equipment purchases; financing activities used $0.054 million. Cash declined by $1.993 million during 2022.
At year-end, notes payable totaled $3.025 million, finance lease liabilities were $0.193 million, and the line of credit had an $0.082 million balance with $0.618 million available. The $0.700 million line was renewed in February 2023 through February 2024. Management stated that operations and existing liquidity sources were expected to meet cash requirements for at least the next 12 months. No conventional margin measure is clearly stated in the filing.
Material changes, outlook and risks
- The $32.678 million impairment consisted principally of a $32.609 million Software Solutions goodwill impairment; the remaining $0.069 million was a long-lived asset impairment. The impairment followed a triggering event associated primarily with a sustained decline in the share price.
- Allegiant was acquired for approximately $9.4 million: $2.0 million cash, $6.3 million in Crexendo shares and a $1.1 million three-year note. It contributed two months of 2022 results. Allegiant’s acquired assets included $7.0 million of intangible assets and $5.1 million of goodwill.
- Software Solutions’ 2022 revenue growth partly reflects the full-year inclusion of NetSapiens, versus seven months in 2021; it should not be interpreted as purely organic growth. Allegiant also contributed to the reported revenue increase.
- Other income included a $1.435 million non-cash release of a sales-tax accrual. The company recorded a full valuation allowance of $3.179 million against deferred tax assets, citing three years of cumulative pretax losses.
- Management provided no numeric revenue or earnings guidance in this filing. It described plans to invest in product development and pursue acquisitions, and is migrating some telecommunications customers to the Software Solutions platform; migration failures could lead to service problems, cancellations or added costs.
- Key disclosed risks include sustained losses, acquisition integration and execution, intense competition and pricing pressure, customer churn, supply-chain disruption, service outages and cybersecurity incidents, third-party provider dependence, regulatory and tax uncertainty, and possible dilution from stock issuance or acquisitions. Management also cautioned that inflation, higher interest rates and a potential recession could weaken customer demand.
The board declared quarterly dividends of $0.005 per share during 2022 and declared another $0.005 dividend in March 2023; future dividends remain at the board’s discretion. The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an opinion on internal control effectiveness.
Important facts for investors to verify
- How much of reported revenue growth is recurring and organic, versus acquisition-related and due to the longer NetSapiens comparison period.
- Whether Software Solutions can grow enough to support the remaining goodwill and intangible asset carrying values, and whether further impairment is possible.
- Cash requirements, debt and line-of-credit terms, and whether management’s stated 12-month liquidity expectation remains supportable.
- Customer retention, backlog conversion, and progress and costs associated with migrating customers to the Software Solutions platform.
- The effect of the sales-tax accrual release and the full deferred-tax valuation allowance on future reported results and cash taxes.
- Potential dilution and control considerations: the Allegiant share issuance increased shares outstanding, and the chairman owned approximately 44% of outstanding shares at December 31, 2022.