Crexendo, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Crexendo provides cloud telecommunications and unified communications software. This unaudited report covers the three and nine months ended September 30, 2022; amounts below are in millions unless stated otherwise. Its two segments are cloud telecommunications services and software solutions. The software segment includes NetSapiens, acquired in June 2021, making year-to-date comparisons materially affected by having only four months of NetSapiens results in the 2021 comparison period versus nine months in 2022.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $9.108 | $8.810 | $26.112 | $19.096 |
| Operating income (loss) | $(0.544) | $0.053 | $(2.789) | $(2.013) |
| Net income (loss) | $(0.696) | $(0.125) | $(2.812) | $(1.843) |
| GAAP diluted loss per share | $(0.03) | $(0.01) | $(0.13) | $(0.09) |
| Operating cash flow | Not separately presented | Not separately presented | $(2.665) | $(0.473) |
- Q3 revenue grew 3% year over year. Service revenue was $4.473 million, software solutions revenue $3.875 million, and product revenue $0.760 million. The company attributed the larger nine-month revenue increase of 37% primarily to the additional NetSapiens reporting period.
- Reported gross margin, calculated as revenue less the three listed revenue-cost categories, was approximately 67% in Q3 2022 versus 62% in Q3 2021, and 64% versus 63% for the nine-month periods. Comparability is affected by reclassification of software research and development costs into R&D in 2022.
- Q3 operating results deteriorated from $53,000 income to a $544,000 loss, chiefly as operating expenses rose $895,000, partly offset by $298,000 of additional revenue. Nine-month operating expenses increased $7.792 million, exceeding revenue growth of $7.016 million.
- At September 30, cash was $4.821 million, down from $7.468 million at December 31, 2021. Current assets were $11.595 million and current liabilities $7.923 million (current ratio approximately 1.46). Total liabilities were $10.109 million and stockholders’ equity $66.234 million.
- Notes payable totaled $1.818 million; finance lease liabilities were $0.217 million. Cash exceeded those balances by approximately $2.786 million, before considering operating leases and other liabilities. The bank waived all financial covenants as of September 30, allowing the long-term portion of the building loan to be classified as long-term; the company had classified it as current at year-end 2021 after a covenant default.
- Nine-month investing cash use was $0.192 million, mainly property and equipment purchases. Financing cash use was $0.036 million, including $0.336 million of dividend payments and debt/lease repayments, partly offset by stock-option proceeds. Cash declined by $2.647 million in total.
Changes, outlook, risks and unusual items
- Software solutions revenue for the nine months rose to $10.741 million from $4.796 million, primarily because NetSapiens contributed for nine months in 2022 versus four months in 2021. Q3 software revenue increased 2%; recurring subscription and support growth was partly offset by lower perpetual-license revenue.
- Cloud telecommunications backlog was $30.063 million, down 2% year over year. Software solutions backlog was reported as both $13.334 million and $13.344 million in different parts of the filing; verify the correct figure. Backlog is expected to be recognized over the next 36–60 months.
- Management stated that operations and existing liquidity sources should meet cash requirements for at least the next 12 months. No quantified revenue or earnings guidance was provided. The company reported over 2.5 million end users globally and described its platform as a fast-growing UCaaS offering.
- Adjusted EBITDA was $0.938 million for Q3 and $1.866 million for the nine months, versus $1.041 million and $1.133 million, respectively, in the comparable periods. These are non-GAAP measures; the filing cautions they do not replace GAAP results or reflect all cash requirements.
- Foreign-exchange losses were cited as a principal reason for higher software-segment other expense; consolidated other expense, net, was $0.338 million for the nine months. The company also reported $2.762 million of share-based compensation over that period.
- No annual incentive liability was accrued at September 30 because targets had not then been achieved; management estimated approximately $492,000 could be earned in Q4. The company reported no recorded legal-loss liability and no pending or threatened matters expected to have a material adverse impact.
- After quarter-end, Crexendo closed its acquisition of Allegiant Networks on November 1, 2022, for $2.0 million cash, a $1.1 million three-year promissory note, and 2,461,538 common shares valued at $2.57 per share; stated aggregate consideration was approximately $9.4 million. Allegiant’s results are not included in Q3 statements. This transaction adds financing needs and potential share dilution.
Important facts for investors to verify
- Reconcile the software backlog inconsistency ($13.334 million versus $13.344 million) and confirm the basis and timing of reported backlog.
- Assess whether operating cash outflows and the decline in cash are sustainable, particularly after the Allegiant cash payment and promissory note issuance.
- Review the Allegiant acquisition’s final purchase-price allocation, integration costs, performance, and dilution from the shares issued.
- Evaluate the drivers of rising operating expenses, share-based compensation, and GAAP losses, alongside the company’s non-GAAP adjustments.
- Monitor covenant status and the continuing terms of the bank waiver, as well as the company’s capacity to fund possible incentive awards and dividends.
- Consider the comparability limits in year-over-year software results and margin analysis caused by NetSapiens acquisition timing and the R&D expense reclassification.