Crexendo, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022; unaudited. Crexendo provides cloud telecommunications services and communications software. It reports cloud telecommunications and software solutions segments. The software solutions business includes NetSapiens, acquired June 1, 2021, so comparisons with 2021 reflect a shorter contribution period for that segment.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $8.846 | $5.779 | $17.004 | $10.286 |
| Operating loss | $(0.852) | $(1.244) | $(2.245) | $(2.066) |
| Net loss | $(0.896) | $(1.003) | $(2.116) | $(1.718) |
| GAAP diluted loss per share | $(0.04) | $(0.05) | $(0.09) | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $0.626 | $(0.153) | $0.928 | $0.092 |
- Revenue mix and growth: Q2 software solutions revenue was $3.598 million, versus $1.012 million, and cloud telecommunications revenue was $5.248 million, up from $4.767 million. Six-month software solutions revenue was $6.866 million, versus $1.012 million; cloud telecommunications revenue was $10.138 million, versus $9.274 million. The software comparison is materially affected by NetSapiens being consolidated for only one month in the 2021 comparable period.
- Margins: Calculated from reported revenue and direct costs, Q2 gross margin was approximately 66.5%, compared with 62.6% in Q2 2021; six-month gross margin was approximately 62.5%, compared with 64.6%. Operating margin was approximately (9.6)% in Q2 and (13.2)% for the first half.
- Cash flow: Cash used in operations was $2.614 million in the first half, compared with $0.224 million used in 2021. Investing activities used $0.040 million, versus $10.546 million, primarily reflecting the absence of comparable 2021 acquisition cash outlays. Financing activities used $0.020 million; the company paid $0.223 million in dividends and received $0.415 million from option exercises.
- Liquidity: Cash and cash equivalents were $4.876 million at June 30, down from $7.468 million at December 31, 2021. Current assets were $10.960 million and current liabilities $9.463 million, implying working capital of approximately $1.497 million. Management stated that operations and existing liquidity sources should meet cash requirements for at least the next 12 months.
- Debt and leases: Notes payable were $1.836 million, all classified as current. Finance lease obligations totaled approximately $0.246 million. Total liabilities were $9.984 million; stockholders’ equity was $65.884 million.
Material changes versus the prior comparable period
- Q2 revenue grew 53% and first-half revenue grew 65%. Management attributed most of the increase to software solutions, alongside more modest growth in cloud services and product sales.
- Q2 net loss narrowed by $0.107 million, but first-half net loss increased by $0.398 million. First-half operating expenses rose $6.897 million, exceeding the $6.718 million revenue increase; management cited staffing, compensation, stock-based compensation, and the longer period of NetSapiens operations.
- First-half operating cash use increased by $2.390 million, driven in part by higher receivables and contract costs, prepaid expenses and income tax receivable, and lower accrued expenses and contract liabilities.
- Cloud telecommunications backlog was $29.452 million at June 30, up 8% year over year. Software solutions backlog was $12.669 million; the company said it expected to recognize backlog over the next 36 to 60 months.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management’s stated liquidity expectation is for at least the next 12 months.
- Loan covenant default: The company disclosed that it was in default of the Bank of America term loan’s basic fixed charge coverage ratio at both December 31, 2021 and June 30, 2022. The $1.836 million balance was classified as current, with the filing listing the full amount as due in the remainder of 2022. The supplied filing text does not clearly describe a waiver, cure, or lender remedy.
- Cash and execution: Cash declined substantially during the first half while operating cash flow was negative. The filing also reports $4.047 million of cash held at financial institutions in excess of federally insured limits. Continued losses, collections, customer growth, and execution of the software integration and platform migration are relevant risks.
- Non-GAAP measures: Adjusted EBITDA was positive in both 2022 periods, but excludes items including stock-based compensation and amortization. The company cautions that this measure is not a substitute for GAAP results or cash flow.
- Contingencies and controls: The company reported no recorded liability for estimated legal losses and no pending or threatened matters expected to have a material adverse impact. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
- Unusual items: First-half share-based compensation was $1.911 million; intangible amortization was $1.099 million. These amounts contributed to the difference between GAAP net loss and non-GAAP performance measures. The filing also reports foreign-currency translation gains of $0.082 million for the first half.
Key facts for investors to verify
- Whether the bank covenant default has been waived or cured, and whether the lender can demand repayment or impose other remedies.
- Cash runway and operating cash use in subsequent periods, including whether receivables and contract-related working capital normalize.
- How much revenue growth and backlog conversion are recurring, particularly after accounting for the acquisition-driven comparison and the 36-to-60-month recognition horizon.
- Whether software solutions growth can translate into improved GAAP operating results after ongoing compensation, development, and amortization costs.
- Potential share dilution: common shares outstanding were 22.537 million at June 30, 2022, and 3.305 million stock options were excluded from Q2 diluted GAAP EPS as anti-dilutive.