Crexendo, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited; amounts below are in USD millions unless otherwise stated. Crexendo provides cloud telecommunications services and, following its June 1 acquisition of NetSapiens, software solutions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $8.810 | $4.143 | $19.096 | $12.064 |
| Operating income/(loss) | $0.053 | $0.155 | $(2.013) | $0.867 |
| Net income/(loss) | $(0.125) | $0.131 | $(1.843) | $0.779 |
| Basic and diluted EPS | $(0.01) | $0.01 | $(0.09) | $0.05 |
| Operating cash flow | Not separately presented for quarter | $(0.473) | $0.423 | |
| Adjusted EBITDA | $1.041 | $0.348 | $1.133 | $1.441 |
Q3 revenue rose 113%; nine-month revenue rose 58%. Software solutions contributed $3.784 million in Q3 and $4.796 million year to date, following the NetSapiens acquisition; the prior-year comparison had no software segment revenue. Cloud telecommunications revenue was $5.026 million in Q3, up from $4.143 million, and $14.300 million year to date, up from $12.064 million.
Direct costs of service, software solutions and products were $3.346 million in Q3 and $6.989 million year to date. The resulting approximate gross margins were 62.0% and 63.4%, respectively, versus 69.6% and 70.0% in the comparable periods. Operating margins were approximately 0.6% in Q3 and negative 10.5% year to date. Management attributed expense increases principally to employee costs, share-based compensation and acquisition costs; nine-month acquisition-related expense was $1.065 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $7.701 million at September 30, down from $17.579 million at December 31, 2020. Operating cash flow was $(0.473) million; investing cash flow was $(10.596) million, including $10.505 million of acquisitions net of cash acquired; financing cash flow was $1.081 million.
- Current assets were $11.173 million and current liabilities $8.245 million, implying working capital of approximately $2.928 million and a current ratio of about 1.36.
- Notes payable totaled $1.891 million and finance lease obligations approximately $0.367 million. Operating lease liabilities were about $0.759 million. Total liabilities were $11.622 million.
- Goodwill was $28.129 million and net intangible assets $23.237 million, largely reflecting the acquisitions. Deferred tax assets were $8.883 million.
- Shares outstanding were 21.668 million at quarter-end and 21,685,214 as of October 31, 2021.
Material changes and acquisitions
- NetSapiens was acquired June 1 for approximately $49.1 million: $10 million cash and approximately $39 million in stock and stock options. The preliminary allocation included $26.734 million goodwill and $21.520 million of acquired technology and customer-relationship intangibles. Purchase accounting remained subject to refinement.
- Centric Telecom was acquired in January for $3.255 million, including $0.746 million of contingent consideration. Its preliminary allocation included $1.123 million goodwill.
- Q3 software solutions reported $0.306 million operating income; cloud telecommunications reported a $0.253 million operating loss. Year-to-date segment operating results were a $0.009 million loss for software solutions and a $2.004 million loss for cloud telecommunications.
- Cloud telecommunications backlog was $30.723 million at September 30, up 9% from $28.313 million a year earlier; the company expects recognition over the next 36–60 months.
Outlook, risks and unusual items
- No quantified forward guidance was provided. Management stated that operations and existing liquidity sources should meet cash requirements for at least the next 12 months.
- Management identified merger integration and customer migration risks, including possible customer or employee losses, service disruption, higher near-term costs, and failure to realize expected efficiencies. The filing also notes potential dilution and continued acquisition-related risks.
- The company reported no recorded legal-loss liability and no pending or threatened matter expected to materially affect its business or financial condition. It reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
- The nine-month tax benefit was $0.247 million, while Q3 included a $0.137 million tax provision despite modest pretax income. Management’s prior-year release of a $7.487 million deferred-tax valuation allowance and reliance on future taxable income are relevant to tax-asset realizability.
- Adjusted EBITDA and non-GAAP net income are supplemental, non-GAAP measures and exclude items including share-based compensation, acquisition expense and amortization; the filing cautions they should not replace GAAP results or cash-flow analysis.
Important facts for investors to verify
- Reconcile apparent filing inconsistencies: the balance sheet reports stockholders’ equity of $66.694 million, while the equity statement reports $65.694 million; the cash-flow statement reports nine-month net loss of $1.843 million, while MD&A cites $1.706 million.
- Confirm final NetSapiens and Centric purchase-price allocations, acquired-asset valuations, contingent consideration and the resulting amortization and impairment exposure.
- Assess whether acquired software revenue, integration progress, customer migration and backlog conversion support sustainable growth and margins; reported comparisons include only post-acquisition NetSapiens results from June 1.
- Reconcile merger consideration disclosures: acquisition details cite 3.097 million shares and 4.482 million options, while a risk disclosure refers to an aggregate 6.462 million shares and options.
- Monitor cash use, working-capital movements, deferred-tax-asset recoverability, dilution from outstanding awards, and management’s liquidity outlook.