Crexendo, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited; dollar amounts below are in thousands unless stated otherwise.
Business context
Crexendo provides hosted telecommunications and broadband services, website hosting, and related professional services. Its two segments are Hosted Telecommunications Services and Web Services. The company described itself as a start-up working toward profitability.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,333 | $1,972 | $6,774 | $5,714 |
| Operating loss | ($609) | ($1,052) | ($2,254) | ($3,512) |
| Net loss | ($621) | ($1,043) | ($2,267) | ($3,273) |
| Basic and diluted loss per share | ($0.05) | ($0.08) | ($0.17) | ($0.25) |
| Adjusted EBITDA loss (non-GAAP) | ($364) | ($738) | ($1,469) | ($2,341) |
- Revenue mix: Hosted Telecommunications Services revenue grew 31% to $2,013 in Q3 and 33% to $5,711 for nine months. Web Services revenue declined 26% in both periods, to $320 and $1,063, respectively.
- Margins: Gross margin, calculated as revenue less cost of revenue, was approximately 60% in Q3 2016 versus 55% in Q3 2015, and approximately 59% versus 55% for the nine-month periods.
- Cash flow: Operating activities used $737 in the first nine months, compared with $1,969 in 2015. Investing activities provided $11 and financing activities provided $83. Cash and cash equivalents decreased $643 to $854.
- Liquidity: Current assets were $2,374 and current liabilities $2,660, resulting in negative working capital of $286. Restricted cash was $100; a $252 certificate of deposit was held as collateral for merchant accounts.
- Debt and equity: Notes payable had a net carrying value of $1,071, including a $1,000 related-party loan; $98 was classified as current. Total liabilities were $3,718 and stockholders’ equity was $693. Accumulated deficit was $57,690.
Changes versus prior period
- Revenue rose 18% in Q3 and 19% for the nine-month period, led by telecommunications growth; Web Services continued to contract.
- Net loss improved by $422 in Q3 and $1,006 for the nine-month period. Lower operating losses reflected higher revenue and lower operating expenses, partly offset by reduced other income and higher interest expense.
- Nine-month telecommunications revenue benefited from increased recurring and one-time services and equipment sales. The company no longer provided customer equipment leasing, with customers instead buying devices or using third-party leasing.
- Telecommunications backlog was $15,957 at September 30, 2016, versus $12,612 a year earlier; management expected it to be recognized over the following 36–60 months.
- Web Services’ nine-month revenue decline reflected lower EPTA cash collections, web management services, and hosting revenue. A $193 reversal of legal accruals contributed to other income in the 2015 comparison period.
Outlook, risks and unusual items
- Management said the $854 of cash and cash equivalents alone did not appear sufficient for anticipated cash needs over the next 12 months, given historical operating cash outflows and forecasts. It believed funding would be sufficient based on available cash, borrowing availability, and the CEO’s November 2016 commitment.
- The CEO and majority shareholder had agreed to make up to an additional $1,000 available under the related-party loan arrangement and to exercise all warrants received in connection with that agreement if additional capital was needed to fund operations through December 31, 2017. The existing $1,000 loan bears 9% simple annual interest, is due December 30, 2020, and is unsecured. The additional borrowing remained subject to the agreement’s conditions.
- The company remained loss-making and dependent on obtaining financing to sustain operations until profitability. Its 2016 nine-month operating cash use was $737. These funding and execution risks are material despite management’s stated expectation that resources would be adequate.
- Other notable items include $504 of nine-month stock-option compensation, stock issued for loan interest, and settlement of the remaining acquisition contingent consideration. Management reported no pending or threatened legal matters expected to have a material adverse impact, no off-balance-sheet arrangements, and effective disclosure controls.
- No specific revenue, earnings, or cash-flow guidance was provided. Management’s forward-looking statements are subject to risks and uncertainty; the filing identifies no assurance that expected growth or profitability will be achieved.
Important facts for investors to verify
- Availability and terms of the CEO-related borrowing and warrant-exercise commitment, including whether funds were actually provided after quarter-end.
- Cash runway, operating cash burn, and the company’s ability to fund operations without further related-party or external financing.
- Whether telecommunications backlog converts to recurring revenue as expected, and whether its growth can offset continued Web Services declines.
- Debt repayment and interest obligations, related-party terms, and potential dilution from outstanding equity awards and warrants. At September 30, 2016, 4,100,812 common-stock equivalents were excluded from diluted loss per share as anti-dilutive.
- Potential collection losses on receivables and the realizability of deferred tax assets; the company maintained a full valuation allowance on net deferred tax assets.