Crexendo, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts are in millions unless otherwise noted. Crexendo provides cloud telecommunications services and, following its June 1 acquisition of NetSapiens, software solutions. NetSapiens’ operating results are included for June only, limiting period-to-period comparability.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $5.779 | $4.054 | $10.286 | $7.921 |
| Operating income (loss) | $(1.244) | $0.531 | $(2.066) | $0.712 |
| Net income (loss) | $(1.003) | $0.508 | $(1.718) | $0.648 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $(0.224) | $0.091 |
| Adjusted EBITDA (non-GAAP) | $(0.153) | $0.704 | $0.092 | $1.093 |
- Q2 revenue increased 43%; first-half revenue increased 30%. Q2 service revenue rose 20% to $4.327 million, and software solutions contributed $1.012 million after the NetSapiens acquisition. Product revenue was $0.440 million, down 2%.
- Q2 direct costs of service, software solutions and products totaled $2.159 million, implying gross profit of approximately $3.620 million and a 62.6% gross margin. First-half gross profit was approximately $6.643 million, or a 64.6% margin. These calculated figures use reported revenue and direct costs.
- Losses reflected higher operating expenses, including increased salaries and benefits, share-based compensation, and acquisition expenses. The company recorded $0.377 million of acquisition-related expenses in Q2 and $1.061 million in the first half.
- Cash and cash equivalents were $7.876 million at June 30, versus $17.579 million at year-end 2020. First-half investing cash outflow was $10.546 million, largely related to acquisitions. The company reported $1.908 million of notes payable, $0.418 million of finance lease liabilities, and $0.682 million of operating lease liabilities. Current assets of $12.110 million exceeded current liabilities of $9.764 million.
Material changes and transactions
- On June 1, Crexendo acquired NetSapiens for approximately $49.1 million: $10 million cash and approximately $39 million in common stock and options. It issued 3,097,309 shares and 4,482,328 options. Preliminary purchase accounting recorded $26.7 million of goodwill and $21.5 million of intangible assets; allocation remained subject to final valuation.
- In January, Crexendo acquired Centric Telecom for $3.255 million, including $2.163 million cash, $0.346 million in stock, and $0.746 million contingent consideration.
- Common shares outstanding increased to 21,554,053 at June 30 from 17,983,177 at December 31, 2020. The filing also reports 21,558,644 shares outstanding at July 31.
- Cloud telecommunications revenue backlog was $27.227 million at June 30, down less than 1% from $27.349 million a year earlier. The filing excludes NetSapiens software backlog from its remaining-performance-obligation estimate because data was not yet compiled.
Outlook, risks and other notable items
- Management stated that operating cash flows and existing liquidity sources should meet cash requirements for at least the next 12 months. No specific revenue, earnings, or margin guidance was provided.
- Management identified integration of NetSapiens and migration of Crexendo customers to the NetSapiens platform as key execution risks, including possible customer losses, service disruption, added costs, and delayed or unrealized efficiencies. Other disclosed risks include employee retention, disruption to customer and business relationships, dilution, and future acquisition risks.
- The company reported no recorded liability for estimated legal losses and no pending or threatened legal matter expected to have a material adverse impact. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
- Non-GAAP adjusted EBITDA was positive $0.092 million for the first half despite a GAAP net loss of $1.718 million. The company cautions that this non-GAAP measure excludes items including acquisition costs and share-based compensation and is not a substitute for GAAP results or a measure of liquidity.
Investor verification points
- Track NetSapiens integration, customer migrations, retention, and whether anticipated synergies materialize; the acquired business was included for only one month in reported results.
- Review final acquisition valuations, including the substantial goodwill and intangible asset balances and the resulting amortization and impairment exposure.
- Assess cash use, operating cash-flow trends, and the company’s stated 12-month liquidity outlook, particularly after acquisition spending.
- Reconcile the share and option issuance with ongoing dilution and potential selling pressure from merger recipients.
- Compare GAAP losses with non-GAAP performance measures and monitor whether backlog converts to revenue; reported backlog is limited to cloud telecommunications.