Crexendo, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Crexendo provides cloud telecommunications and broadband services, plus website hosting and related web services. Amounts below are in U.S. dollars; financial-statement figures are generally in thousands unless noted.
Financial performance and position
- Revenue: $2.344 million, up 8% ($170,000) year over year. Cloud Telecommunications Services revenue rose 16% to $2.061 million; Web Services revenue fell 29% to $283,000.
- Profitability: Cost of revenue was $802,000, implying gross profit of approximately $1.542 million and gross margin of 65.8%, versus approximately 58.0% in Q1 2016. Operating loss was $509,000 (21.7% of revenue), improved from $869,000 (40.0%). Net loss was $543,000, or $0.04 per share, compared with $868,000, or $0.07 per share.
- Cash flow: Operating activities used $52,000, compared with $261,000 in Q1 2016. Investing activities provided $252,000, primarily from selling a certificate of deposit; financing activities provided $149,000, including $166,000 from option exercises. Cash and cash equivalents increased $349,000 to $968,000; restricted cash was an additional $100,000.
- Liquidity: Working capital was $403,000, up from $57,000 at December 31, 2016. Current assets were $2.521 million and current liabilities $2.118 million.
- Debt and equity: Notes payable had a net carrying value of $1.021 million, including a $1.0 million related-party loan from CEO and principal shareholder Steven G. Mihaylo’s trust. Total stockholders’ equity was $507,000. Shares outstanding increased to 13,803,556 at March 31, 2017.
- Non-GAAP measures: Adjusted EBITDA loss was $184,000, versus $580,000 in Q1 2016. The filing cautions these supplemental measures are not substitutes for GAAP results.
Changes versus the prior comparable period
- Cloud telecommunications growth more than offset declining Web Services revenue. Cloud segment backlog was $16.888 million at March 31, 2017, up from $14.723 million a year earlier.
- Operating expenses decreased $190,000 overall. Cost of revenue and general and administrative expense fell; selling and marketing expense rose, partly due to increased headcount and commissions.
- Loss before tax improved to $539,000 from $865,000. Management attributed the improvement mainly to higher revenue and lower operating expenses, partly offset by lower other income.
- Cash from operations remained negative, though the use of cash was lower than in Q1 2016. The cash balance increase included proceeds from selling the $252,000 certificate of deposit, not solely operating cash generation.
Outlook, risks, and notable items
- Going concern and funding: Management stated that $968,000 of cash and cash equivalents did not appear adequate to meet obligations over the year following issuance of the financial statements. It concluded that borrowing availability under the amended loan agreement would alleviate substantial doubt. The board may request up to $1.0 million of additional borrowing through May 30, 2018 if needed.
- Business outlook: No numerical revenue, earnings, or cash-flow guidance was provided. Management expects growth in cloud telecommunications to be reflected initially in backlog, given typical 36–60 month contracts, and says it continues to invest in cloud technology and SaaS offerings.
- Key risks and obligations: Continued operating losses and negative operating cash flow, execution of growth plans, collection of receivables, and competition and technology changes. The company reported $905,000 of future minimum operating lease obligations as of March 31, 2017.
- Related-party matters: The CEO’s trust is the lender under the $1.0 million note; the company also issued 75,000 shares valued at $109,000 for prepaid interest on that note. The Tempe headquarters is leased from an entity owned by the CEO and principal shareholder.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no pending or threatened legal matters expected to have a material adverse impact.
Important facts for investors to verify
- Whether the company can achieve profitability and generate positive operating cash flow before available cash and borrowing capacity are exhausted.
- The conditions and practical availability of the remaining $1.0 million related-party loan commitment, including the May 30, 2018 extension.
- Whether cloud telecommunications backlog converts to recognized revenue and cash on expected terms, and whether Web Services declines continue.
- The quality and collection timing of receivables, including customer concentration and extended-payment-term balances.
- The effects of share-based compensation, potential dilution, related-party financing and leases, and the company’s stated non-GAAP adjustments.