Crexendo, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter where relevant. Crexendo provides cloud telecommunications/UCaaS and website hosting services. Cloud Telecommunications is the principal business; Web Services is a smaller, declining segment.
Financial performance and position
| Metric | FY2020 | FY2019 | Change / note |
|---|---|---|---|
| Total revenue | $16.387 million | $14.436 million | Up 14% |
| Service revenue | $14.544 million | $12.745 million | Up 14% |
| Product revenue | $1.843 million | $1.691 million | Up 9% |
| Operating income | $991,000 | $1.135 million | Down 13% |
| Income before tax | $1.899 million | $1.145 million | Up 66%; includes PPP debt extinguishment gain |
| Net income | $7.940 million | $1.139 million | FY2020 includes a $6.041 million income tax benefit |
| Diluted EPS | $0.46 | $0.07 | Net income was materially affected by tax and debt-forgiveness items |
| Operating cash flow | $647,000 | $1.638 million | Down year over year |
| Cash and cash equivalents | $17.579 million | $4.180 million | Restricted cash was an additional $100,000 |
| Working capital | $17.218 million | $2.845 million | Up $14.373 million |
| Notes payable | $1.944 million | None | Primarily a seven-year, 3.67% loan for the office building |
Cloud Telecommunications revenue was $15.845 million, up 15%; its income before tax was $1.788 million versus $862,000. Web Services revenue fell 17% to $542,000, and income before tax fell to $111,000 from $283,000. Cloud service backlog increased 9% to $28.551 million, expected to be recognized over the next 36–60 months.
Operating expenses rose 16% to $15.396 million, including increases in R&D (to $1.189 million) and general and administrative costs (to $5.107 million). The filing does not provide a clear consolidated gross-margin figure. Adjusted EBITDA, a non-GAAP measure, was $1.872 million versus $1.628 million; the company cautions that it is supplemental and not a substitute for GAAP results or cash flow.
Material changes versus FY2019
- Revenue growth was led by recurring Cloud Telecommunications services; Web Services continued to contract.
- Operating income declined despite higher revenue, reflecting operating expense growth.
- Net income rose sharply, but the result was not solely operational: the company released $7.487 million of its deferred-tax valuation allowance, recording a $6.041 million net tax benefit, and recognized a $1.007 million gain from PPP loan forgiveness.
- Cash from financing was $13.673 million, chiefly from a $10.771 million public stock offering and $2.043 million of option exercises. Share count increased to 17.983 million at year-end from 14.885 million.
- Cash provided by operations decreased to $647,000. Investing used $921,000, including the office purchase and other property/equipment and customer-relationship assets.
Outlook, commentary, risks and unusual items
- Management gave no quantitative revenue or earnings guidance. It said existing operations and liquidity should meet cash requirements for at least 12 months.
- Management reported that COVID-19 had not materially adversely affected operations to date, but warned that prolonged disruption could affect demand, collections, productivity, supply chains, margins and cash flow. Receivables increased amid slower collections attributed partly to COVID-19.
- The company identifies competition and pricing pressure, customer churn, dependence on third-party carriers and equipment suppliers, service outages and cybersecurity, regulatory compliance, and the challenges and costs of serving larger enterprise customers as significant risks. It also reported prior failures in automatic failover to AWS and said remediation was expected.
- On January 14, 2021, Crexendo acquired Centric Telecom for cash and shares, with estimated contingent consideration. On March 5, 2021, it agreed to merge with NetSapiens for approximately $50 million, including $10 million cash and approximately $40 million in shares and options; closing was subject to customary conditions and shareholder approval. These transactions occurred after year-end.
- In January 2020, Crexendo bought its Tempe office building from an entity owned by its CEO/major shareholder for $2.5 million; the filing says fair value was supported by an independent appraisal. The related $2.0 million bank loan remained outstanding at year-end.
- The filing reports ongoing governmental inquiries and customer complaints, including matters relating to discontinued seminar operations, and says some customer complaints have led to litigation. It does not clearly quantify a probable loss or provide a definitive resolution for these matters.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
Important facts for investors to verify
- How much future earnings and cash generation depend on recurring service growth, given lower operating income and operating cash flow in 2020.
- The sustainability of the $6.041 million tax benefit: it principally reflects a valuation-allowance release based on expected future taxable income, and the company has NOL carryforwards subject to Section 382 limits.
- Terms, financing, integration plans and dilution implications of the Centric acquisition and proposed NetSapiens merger; the latter represents a major transaction relative to Crexendo’s reported scale.
- Customer retention, backlog conversion and collection trends, including the effects of enterprise installations and COVID-related payment delays.
- Continuing service resilience, including AWS failover remediation, third-party dependencies, cybersecurity and E-911 compliance.
- Capital structure and governance: the offering and option exercises increased shares outstanding, and the CEO owned approximately 56% of shares at December 31, 2020. The company reported no dividends and did not anticipate paying them in the foreseeable future.