Crexendo, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Financial amounts below are in thousands of dollars unless stated otherwise. Crexendo provides hosted telecommunications and web services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,725 | $2,428 | $5,605 | $8,187 |
| Gross profit / margin | $935 / 54.2% | $1,384 / 57.0% | $3,001 / 53.5% | $5,131 / 62.7% |
| Operating loss | $(1,554) | $(1,734) | $(4,792) | $(3,797) |
| Net loss | $(1,502) | $(1,659) | $(4,628) | $(3,127) |
| Basic and diluted loss per share | $(0.13) | $(0.15) | $(0.42) | $(0.29) |
Q3 revenue fell 29%, while the net loss narrowed by $157. For the first nine months, revenue fell 32% and the net loss widened by $1,501. Lower operating expenses helped Q3 results, but not enough to offset the sharp year-to-date revenue decline.
- Segments: Q3 hosted telecommunications revenue rose 49% to $1,035; web services revenue fell 60% to $690. Nine-month telecom revenue increased 88% to $2,953, while web services fell 60% to $2,652.
- Telecommunications posted operating losses of $1,300 in Q3 and $4,187 year to date. Web Services posted operating losses of $254 and $605, respectively; it had reported $57 of operating income for the first nine months of 2013.
- Telecom backlog was $8,806 at September 30, versus $5,220 a year earlier. Web Services backlog was $66, versus $760 a year earlier.
- Cash flow: Operating activities used $3,016 in the first nine months, compared with $3,917 in 2013. Investing activities provided $1,807, principally reflecting $2,002 of proceeds from the headquarters sale-leaseback; financing activities used $6. Cash declined $1,215 to $1,861.
- Liquidity and balance sheet: Current assets were $4,221 and current liabilities $2,795, for working capital of $1,426 and a current ratio of approximately 1.5. Total assets were $6,940, liabilities $3,107, and stockholders’ equity $3,833. Cash plus restricted cash was $2,341; restricted cash of $480 was not freely available. The filing reports no debt balance on the balance sheet.
Material changes and unusual items
- The company attributed the web-services decline to its decision to focus provision of web services on enterprise customers, reduced collections on legacy extended-payment-term agreements (EPTAs), and lower hosting revenue. EPTA cash-collection revenue fell 81% in Q3 and 79% year to date; the company said remaining deferred EPTA revenue would decline over the following year to 18 months.
- Telecom growth was driven by recurring and one-time services; customer-support costs rose as the company staffed to fulfill increasing orders. Management expects telecom growth to appear first in backlog because many contracts run 36–60 months.
- On June 1, Crexendo acquired certain One Stop Voice assets for approximately $540, comprising $195 cash, $134 in stock, and $211 of estimated contingent consideration. The preliminary allocation included $197 of goodwill and $353 of intangible assets; final valuation remained pending.
- In February, the company sold its Tempe headquarters to an entity controlled by CEO and principal shareholder Steven G. Mihaylo for $2.0 million, recording a deferred gain of $281. It then entered a three-year lease, prepaid with 300,000 shares valued at $966; stated annual rent was $322. This is a material related-party transaction.
- Legal proceedings carried estimated liabilities of approximately $193 at September 30. The filing describes ongoing governmental inquiries and customer complaints and says adverse outcomes cannot be ruled out.
Outlook, risks and controls
Management said the company’s $1,861 of cash and cash equivalents, together with historical operating cash use and internal forecasts, appeared insufficient to fund anticipated needs for the next 12 months. The CEO and major shareholder committed in July to provide necessary financial support to enable payment of debts as they come due through November 15, 2015. Management therefore believed funding would be sufficient for the next 12 months, but the filing makes continued operations dependent on this support or additional financing. No quantitative revenue or earnings guidance was provided.
Key risks include continuing losses and negative operating cash flow, reliance on CEO-provided financing, declining web-services revenue and shrinking web backlog, collection uncertainty on EPTAs, and valuation uncertainty for acquisition-related contingent consideration and intangible assets. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the nine months.
Investor verification points
- Confirm the terms, availability, and actual funding under the CEO’s support commitment, and whether any additional financing was obtained.
- Track operating cash burn, unrestricted liquidity, and progress toward profitability.
- Assess whether telecom backlog converts to revenue and whether growth improves segment losses and gross margins.
- Monitor web-services revenue and backlog, including the runoff and collectability of legacy EPTAs.
- Review final One Stop Voice purchase accounting and contingent-consideration payments, as well as the economics and governance of the related-party headquarters lease.