Crexendo, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollar amounts are in thousands unless noted. Crexendo provides hosted telecommunications and web services through two operating segments.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,890 | $1,808 | $3,742 | $3,880 |
| Gross profit | $1,035 | $924 | $2,026 | $2,066 |
| Gross margin | 54.8% | 51.1% | 54.1% | 53.2% |
| Operating loss | $(1,085) | $(1,563) | $(2,460) | $(3,238) |
| Net loss | $(1,060) | $(1,494) | $(2,230) | $(3,126) |
| Net loss per share | $(0.08) | $(0.13) | $(0.18) | $(0.28) |
For the six months ended June 30, operating cash used was $1,733, compared with $2,212 in 2014. Investing activities used $20; financing activities provided $629, including $690 from warrant exercises. Cash and cash equivalents fell $1,124 to $1,782. Working capital was $1,430, down from $2,154 at December 31, 2014; current assets were $3,682 and current liabilities $2,252. The balance sheet lists no borrowings; it does report a $110 contingent-consideration liability. Total liabilities were $2,503.
Total assets were $6,129 and stockholders’ equity was $3,626 at June 30, 2015. Shares outstanding were 13,200,624 at June 30 and July 31. Potential common shares of 3,175,961 were excluded from diluted loss per share as anti-dilutive.
Changes versus the prior comparable period
- Q2 revenue rose 5%, while first-half revenue declined 4%. Hosted Telecommunications Services revenue grew 48% in Q2 and 43% for the first half; Web Services revenue fell 44% and 49%, respectively.
- Lower operating expenses contributed to narrower operating and net losses. First-half operating expenses decreased 13% to $6,202.
- Web Services revenue declines reflected lower collections on legacy extended-payment agreements (EPTAs), reduced web management activity following the company’s focus on enterprise customers, and lower hosting revenue. The company no longer offers EPTAs and expects remaining EPTA deferred revenue to be recognized at a decreasing rate.
- Hosted Telecommunications Services backlog, expected to be recognized over 36–60 months, increased to $11,283 at June 30, 2015 from $8,402 a year earlier.
Outlook, risks, contingencies and unusual items
- Management said $1,782 of cash did not appear adequate for anticipated needs over the next 12 months, given historical negative operating cash flow and internal forecasts. In July 2015, the CEO and major shareholder committed to provide up to $2,000 of support, if needed, to fund operations through September 30, 2016. With this support, management believed funding would be sufficient for the next 12 months. The filing provides no formal revenue or earnings guidance.
- The company described itself as having transformed into a start-up and identified funding operations until profitability as a risk. Continued losses, cash use, and reliance on additional financing remain important considerations.
- First-half other income included a $193 reversal of legal accruals judged no longer reasonably likely to be paid. The filing says no pending or threatened legal matters were expected to have a material adverse impact.
- The company sold and leased back its Tempe headquarters in February 2014 to an entity owned by its CEO and major shareholder. Rent for the initial three-year lease was prepaid with 300,000 shares; the arrangement generated deferred rent and gain amortization.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the six-month period.
Most important facts for investors to verify
- Whether the CEO’s up-to-$2,000 funding commitment is documented, available on the stated terms, and sufficient relative to actual cash burn.
- Whether Hosted Telecommunications Services growth and backlog convert into recurring revenue and improved profitability, given continuing segment losses.
- Whether Web Services declines and legacy EPTA collections continue at the pace management anticipated.
- The composition and cash impact of first-half other income, including the $193 legal-accrual reversal, and the related-party headquarters lease terms.
- Cash runway, receivable collectability, and potential dilution from outstanding equity awards and warrants.