Crexendo, Inc. — Q2 2017 Form 10-Q
Period: Three and six months ended June 30, 2017. Crexendo provides cloud telecommunications, broadband internet and web services through its Cloud Telecommunications and Web Services segments. Figures are in U.S. dollars; financial statement amounts are in thousands unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.485m | $2.267m | $4.829m | $4.441m |
| Operating loss | $(245)k | $(776)k | $(754)k | $(1.645)m |
| Net loss | $(281)k | $(778)k | $(824)k | $(1.646)m |
| Net loss per share, basic and diluted | $(0.02) | $(0.06) | $(0.06) | $(0.12) |
- Q2 service revenue rose 19% to $2.182m; product revenue fell 30% to $303k. For the first half, service revenue rose 16% to $4.247m and product revenue fell 25% to $582k.
- Calculated gross margin, based on revenue less cost of service and product revenue, was approximately 66.7% in Q2 versus 59.5% a year earlier, and 66.3% for the first half versus 58.8%.
- Cloud Telecommunications revenue increased 15% in Q2 to $2.216m and 16% in the first half to $4.277m. Web Services revenue declined 22% in Q2 to $269k and 26% in the first half to $552k. Cloud Telecommunications remained loss-making; Web Services reported operating income of $128k for Q2 and $235k for the first half.
- Operating expenses declined 10% in Q2 to $2.730m and 8% in the first half to $5.583m. Selling and marketing increased, partly reflecting added sales staff and commissions; general and administrative costs fell amid company-wide expense reductions.
Cash, liquidity and debt
- Cash and cash equivalents were $929k at June 30, up from $619k at December 31, 2016; restricted cash was a further $100k. Working capital was $345k, versus $57k at year-end; current assets were $2.452m and current liabilities $2.107m.
- First-half operating cash use was $143k, compared with $710k in 2016. Investing cash provided $252k, primarily from sale of a certificate of deposit after its collateral requirement was removed. Financing cash provided $201k, including $166k from option exercises. Cash increased $310k in total.
- Notes payable had a $1.079m net carrying value at June 30 ($127k current and $952k long-term), including a $1.0m unsecured related-party loan. The loan bears 9% annual interest and is due in a balloon payment on December 30, 2020. The filing reports $1.0m of additional borrowing availability under the loan agreement, requestable by the board through May 30, 2018, if needed.
- Stockholders’ equity declined to $358k from $515k at year-end, primarily reflecting the $824k first-half net loss, partly offset by share-based compensation and equity issuances. Shares outstanding increased to 13,830,556 from 13,578,556.
Changes, outlook and risks
- Management attributed the improved losses mainly to revenue growth and lower operating expenses. Cloud Telecommunications service revenue grew on contracted service revenue, usage charges and professional services; product sales vary with installation timing. Cloud segment backlog was reported at $18.045m at June 30, 2017, versus $15.434m at June 30, 2016 in the segment backlog table; the overview instead gives $15.280m for 2016.
- The company continued to incur operating losses and negative operating cash flow. Management said expected operating improvements and borrowing availability were expected to meet estimated liquidity needs for 12 months after issuance, while cautioning that planned actions might not produce expected liquidity. No specific revenue or earnings guidance is provided.
- Notable related-party arrangements include the CEO/principal shareholder’s loan and a headquarters sale-leaseback with an entity owned by him. The lease was renewed for three years from March 2017; Q2 rent expense was $75k, and aggregate minimum lease obligations at June 30 were $825k.
- The filing identifies risks including the company’s historical losses and cash use, execution uncertainty, changing economic conditions and internet technologies, and interest-rate fluctuations; it refers readers to the 2016 Form 10-K for further risk factors. Management reported effective disclosure controls. It reported no pending or threatened legal matters expected to have a material adverse impact.
Important facts for investors to verify
- Whether operating improvements and the additional related-party borrowing availability will be sufficient to fund liquidity needs, and the terms and governance surrounding any further loan advance.
- Whether Cloud Telecommunications backlog converts into recognized revenue and cash on schedule; also reconcile the filing’s differing 2016 backlog figures ($15.434m versus $15.280m).
- The sustainability of Cloud Telecommunications growth and expense reductions, given continuing operating losses and declining Web Services revenue.
- Debt repayment capacity, related-party loan interest and maturity, and cash obligations under the renewed headquarters lease.
- Potential dilution from equity awards: 4.068m common-share equivalents were excluded from diluted loss per share as anti-dilutive.