Crexendo, Inc. — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2014. Crexendo provides hosted telecom, website hosting and other web services through Hosted Telecom Services and Web Services. The company said it had transformed into a start-up while seeking to reach profitability.
Financial performance
| Metric (USD thousands, except per-share data) | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | 1,808 | 2,737 | 3,880 | 5,759 |
| Gross profit (revenue less cost of revenue) | 924 | 1,767 | 2,066 | 3,747 |
| Gross margin, approximate | 51% | 65% | 53% | 65% |
| Operating loss | (1,563) | (1,216) | (3,238) | (2,063) |
| Net loss | (1,494) | (1,070) | (3,126) | (1,468) |
| Basic and diluted loss per share | (0.13) | (0.10) | (0.28) | (0.14) |
- Revenue and segments: Q2 revenue fell 34%; six-month revenue fell 33%. Hosted Telecom revenue grew 96% in Q2 and 119% for the half, to $963,000 and $1.918 million, respectively. Web Services revenue declined 62% in Q2 and 60% for the half, to $845,000 and $1.962 million.
- Profitability: Operating expenses declined 15% in Q2 and 9% for the half, but the lower revenue base and weaker gross margin contributed to larger operating and net losses. No positive operating or net income was reported.
- Cash flow: Six-month operating cash use was $2.212 million, versus $2.403 million in 2013. Investing activities provided $1.808 million, primarily from $2.002 million proceeds on the headquarters sale-leaseback; financing provided $5,000. Cash decreased $399,000 to $2.677 million.
- Liquidity and balance sheet: At June 30, cash was $2.677 million, restricted cash $482,000, and current assets $5.159 million versus current liabilities of $2.593 million. Reported working capital was $2.566 million. Total assets were $8.082 million; total liabilities $2.936 million; stockholders’ equity $5.146 million. The filing reports no debt balance. Contingent consideration was $228,000, including current and acquisition-related amounts.
Material changes and management commentary
- Web Services’ decline reflected lower cash collections from legacy extended payment term agreements (EPTAs), the decision to focus web services on enterprise customers, and lower hosting revenue. Management expected Web Services revenue to continue decreasing as existing obligations were completed. The remaining EPTA deferred-revenue balance was $284,000; management expected recognition to decline over the next 12–18 months.
- The company suspended its direct-mail seminar sales channel and no longer planned to offer EPTAs. Related third-party commission revenue was not expected to be significant in the future.
- Hosted Telecom backlog was $8.402 million at June 30, 2014, compared with $4.253 million a year earlier; management said contracts are generally expected to convert over 36–60 months. The figure includes $588,000 of backlog associated with the One Stop Voice acquisition. Web Services backlog was $117,000, compared with $1.162 million a year earlier.
- On June 1, Crexendo acquired certain One Stop Voice assets for estimated total consideration of $540,000: $195,000 cash, $134,000 in stock, and $211,000 estimated contingent consideration. The purchase-price allocation was preliminary, particularly the valuation of acquired intangibles.
- On February 28, Crexendo sold its headquarters property to an entity controlled by its CEO and principal shareholder for $2.0 million cash and entered a three-year lease. The initial rent was prepaid with 300,000 shares valued at $966,000; the stated annual rent was $322,000. A $281,000 gain was deferred and is to be amortized over the lease term.
Outlook, risks and unusual items
- Management planned to fund the next 12 months using cash and collections of former seminar-sales receivables. In July 2014, the CEO and major shareholder committed to provide financial support sufficient for the company to pay debts as due through November 15, 2015. Management said it believed funding would be sufficient for the next 12 months; it also warned that weaker-than-expected cash flows could require additional debt or equity financing.
- No numerical earnings or revenue guidance was provided. Management described continued investment in hosted telecom products and technology, while anticipating further Web Services revenue declines.
- Legal and regulatory inquiries and customer matters arise in the ordinary course. The company recorded estimated legal-proceeding liabilities of approximately $193,000 at June 30. It said no pending or threatened matters were expected to have a material adverse impact, while cautioning that outcomes of inquiries and claims cannot be assured.
- Other risks include ongoing operating losses and cash burn, execution and collection risks, estimates for receivable allowances and acquired asset valuations, and dependence on the CEO’s financial support. Deferred tax assets were subject to a full valuation allowance.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the six-month period.
Key facts for investors to verify
- Whether the CEO’s July support commitment is documented, available when needed, and sufficient relative to continuing operating cash use.
- Whether Hosted Telecom backlog converts to revenue and cash on expected terms, and whether growth can improve segment economics.
- The pace of Web Services and legacy EPTA revenue runoff, including cash collections and receivable recoverability.
- Final One Stop Voice purchase-price allocation, contingent consideration, and realized acquisition performance against the stated backlog.
- The related-party sale-leaseback valuation, prepaid rent accounting, and continuing lease obligations.