Crexendo, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in thousands of dollars unless otherwise noted. Crexendo provides cloud telecommunications, broadband internet, and web services through its Cloud Telecommunications and Web Services segments.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,690 | $2,333 | $7,519 | $6,774 |
| Gross profit and margin | $1,829; 68.0% | $1,401; 60.1% | $5,029; 66.9% | $4,012; 59.2% |
| Operating loss | $(54) | $(609) | $(808) | $(2,254) |
| Net loss | $(189) | $(621) | $(1,013) | $(2,267) |
| Net loss per share | $(0.01) | $(0.05) | $(0.07) | $(0.17) |
Gross profit and margin are calculated as revenue less reported cost of service and product revenue. Q3 revenue rose 15%; nine-month revenue rose 11%. Service revenue increased 18% in Q3 and 17% for the nine months, while product revenue was nearly flat in Q3 and declined 17% year to date. Cloud Telecommunications drove growth: nine-month segment revenue rose to $6,704 from $5,711. Web Services revenue fell to $815 from $1,063 for the nine months.
- Cash flow: Operating activities provided $177 for the nine months, versus $737 used in the prior-year period. Cash and cash equivalents increased $588 to $1,207; the period-end balance also included $100 of restricted cash.
- Liquidity: Working capital was $360, versus $57 at December 31, 2016; current assets were $2,450 and current liabilities $2,090.
- Debt: Notes payable declined to $141 from $1,032, primarily after a $974 repayment of the related-party loan. The loan is from CEO and principal shareholder Steven G. Mihaylo’s trust, bears 9% interest, and is due in 2020. Up to a further $1,000 was available under the loan agreement, subject to the agreement’s terms and board determination.
- Equity and non-GAAP: Shares outstanding increased to 14,275,555 from 13,578,556 at year-end. Option exercises generated $1,140 of cash proceeds. Company-reported Adjusted EBITDA was $61 for Q3 and $(208) for the nine months; these non-GAAP measures are supplemental and not substitutes for GAAP results.
Material changes and management commentary
Losses narrowed substantially year over year, reflecting higher telecommunications service revenue and lower operating costs. Management cited expense reductions, including lower general and administrative costs, as well as lower service costs; selling and marketing expense increased as the company added sales representatives and incurred higher commissions. Web Services continued to contract. Cloud Telecommunications backlog was $18,264 at September 30, 2017, compared with $15,957 a year earlier; the company expects to recognize backlog over the next 36 to 60 months, subject to execution and timing.
Q3 interest expense increased to $135 from $39. The filing attributes higher other expense in part to interest on the related-party loan and the end of sublease income; it also reports $75 of accelerated debt-discount amortization and $34 of prepaid interest during the quarter. The company issued 75,000 shares for interest on the related-party note during the nine-month period. The headquarters sale-leaseback is with an entity owned by the CEO and was renewed for three years beginning March 2017; future minimum lease obligations under operating leases and the sale-leaseback totaled $745 at September 30.
Outlook, risks, and contingencies
No specific revenue or earnings guidance is provided. Management said it is focused on controlling expenses and reducing cash used in operations. The company continues to generate losses. Management believes operational improvements are probable and borrowing availability under the existing loan agreement mitigates substantial doubt about meeting estimated liquidity needs for 12 months from issuance of the financial statements, but cautioned that the outcomes of its plans are uncertain. The additional borrowing availability was extended through May 30, 2018.
Risks include continued losses and uncertainty in generating liquidity, converting backlog to recognized revenue, and sustaining telecommunications growth. The filing also identifies exposure to collection estimates, asset valuation and impairment judgments, and future accounting-standard adoption. No material pending or threatened legal matters were reported. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported for the nine months.
Important facts for investors to verify
- Availability, conditions, and duration of the remaining related-party loan capacity, and the company’s liquidity needs and operating cash flow trend.
- Whether the $18.3 million telecommunications backlog converts to revenue as expected, including the timing and costs of customer installations.
- Whether service-revenue growth can offset declining Web Services and year-to-date product revenue.
- The full economic and governance implications of related-party borrowing, the CEO-owned sale-leaseback, and future rent obligations.
- Potential dilution from equity compensation and future share issuances, alongside the sustainability of reported non-GAAP improvement.