Crexendo, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in thousands except per-share data. Crexendo provides cloud telecommunications and web services.
Financial performance and liquidity
- Q3 revenue: $4,143, up 15% from $3,602. Service revenue increased 12% to $3,654; product revenue rose 43% to $489.
- Q3 earnings: Operating income was $155, down from $336; net income was $131 versus $334. Basic and diluted EPS were $0.01 versus $0.02. Operating margin was approximately 3.7%, compared with 9.3% in Q3 2019.
- Nine-month revenue and earnings: Revenue was $12,064, up 13%. Operating income declined to $867 from $917, and net income to $779 from $911. EPS was $0.05 versus $0.06.
- Margins: Q3 gross margin was approximately 69.6%, versus 72.0% a year earlier. Nine-month gross margin was approximately 70.0%, versus 69.6%. These calculations use reported revenue less cost of service and product revenue.
- Cash flow: For the first nine months, operating cash flow was $423, investing cash flow was negative $921, and financing cash flow was $11,671. Cash, cash equivalents and restricted cash ended at $15,453, up from $4,280 at year-end 2019.
- Liquidity: Working capital was $13,756, compared with $2,845 at December 31, 2019; current assets were $17,430 and current liabilities $3,674. Management said existing liquidity and operations should meet cash requirements for at least 12 months.
- Debt: Notes payable totaled $2,962, comprising financing for the office building and a PPP loan; finance lease obligations were $94. The PPP loan bears 1% interest and may be forgiven if qualifying conditions are met. The company believed forgiveness would be granted, but the filing does not report that it had been approved.
- Non-GAAP measures: Q3 Adjusted EBITDA was $348, down from $468; nine-month Adjusted EBITDA was $1,441, up from $1,279. These are company-defined supplemental measures, not substitutes for GAAP results.
Material changes and business developments
- Cloud Telecommunications drove growth: Q3 segment revenue increased 17% to $4,014, while Web Services revenue fell 19% to $129. For nine months, Cloud Telecommunications revenue rose 14% to $11,643; Web Services declined 16% to $421.
- Cloud Telecommunications backlog increased 12% year over year to $28,313. The company expects to recognize it over the next 36 to 60 months; backlog is contract value less revenue already recognized, not a guarantee of future revenue.
- Operating expenses increased faster than Q3 revenue. Management cited higher staffing and support costs, R&D investment, commissions, recruiting and legal costs, and Nasdaq listing fees. The lower rent expense reflected the purchase of the corporate office building.
- On September 28, the company issued 1.75 million shares at $5.50 per share, receiving net proceeds of $8,633. On October 21, underwriters bought another 420,000 shares, generating net proceeds of $2,148. Shares outstanding were 17,536,891 at September 30 and 17,963,234 at October 31.
- In January, Crexendo purchased its Tempe office building for $2,500 from an entity owned by its major shareholder and CEO. The filing says the building’s fair value was established by an independent appraisal. The company also recorded $2,000 of property and equipment financed by a note.
- The DoubleHorn customer-relationship asset acquisition’s contingent consideration was reduced by $121; $54 was paid, leaving no contingent consideration at September 30.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management reported that COVID-19 had not materially adversely affected operations to date, but said future effects were uncertain and forecasts difficult to predict.
- COVID-19 risks include slower customer collections, weaker demand, installation delays, customer failures or contract changes, and disruption to suppliers and manufacturers in China. The company reported that collections had slowed for some customers and that it had taken the FCC Keep Americans Connected Pledge not to disconnect customers for nonpayment.
- The company reported a full valuation allowance on deferred tax assets. It also said annual incentive-plan targets might be achieved, but a reasonable estimate of any related liability could not be made.
- No pending or threatened legal matters were expected to have a material adverse impact. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the PPP loan was forgiven and what debt payments and interest remain due.
- Whether receivables and collections improved after the reported COVID-related slowdown, and how the allowance for doubtful accounts develops.
- Whether backlog converts to recurring revenue and whether Cloud Telecommunications growth can offset declining Web Services revenue.
- How operating expenses, margins and cash generation trend after the offering and increased hiring and development investment.
- The share-count and dilution impact of the September offering, subsequent underwriter allotment, and outstanding equity awards.
- Terms and related-party safeguards for the office-building purchase, including the independent appraisal referenced in the filing.