Crexendo, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 3, 2020. Crexendo provides cloud communications/UCaaS and related services, alongside a smaller website-services business. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise stated.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $14.436 | $11.908 | +21% |
| Operating income (loss) | $1.135 | $(0.206) | Turned profitable |
| Net income (loss) | $1.139 | $(0.223) | Turned profitable |
| Diluted EPS | $0.07 | $(0.02) | Improved |
| Operating cash flow | $1.638 | $0.452 | +$1.186 |
- Service revenue rose 22% to $12.745 million; product revenue increased 17% to $1.691 million. Cloud Telecommunications revenue grew 24% to $13.780 million, while Web Services revenue declined 20% to $0.656 million.
- Operating margin was approximately 7.9%, versus approximately negative 1.7% in 2018. Gross margin, calculated from reported revenue and cost of service and product revenue, was approximately 69.9%, up from 67.9%.
- Segment pre-tax income: Cloud Telecommunications $0.862 million, compared with a $0.608 million loss; Web Services $0.283 million, down from $0.400 million.
- Fourth-quarter revenue was $3.728 million and net income was $0.228 million, compared with revenue of $3.097 million and a net loss of $0.008 million in Q4 2018.
- Non-GAAP adjusted EBITDA was $1.628 million, compared with $0.324 million in 2018. This company-defined supplemental measure excludes share-based compensation and has limitations; it is not a substitute for GAAP results.
Cash, liquidity, debt and balance sheet
- Year-end cash and cash equivalents were $4.180 million, plus $0.100 million restricted cash. Working capital was $2.845 million, versus $1.322 million in 2018; current assets were $5.731 million and current liabilities $2.886 million.
- Operating activities provided $1.638 million; investing used $0.072 million, primarily for property and equipment; financing provided $0.765 million, including $0.849 million from option exercises. Cash, cash equivalents and restricted cash increased $2.331 million.
- Year-end notes payable were zero. Finance lease obligations totaled $0.116 million; the balance sheet also showed $0.051 million of operating lease liabilities and $0.175 million contingent consideration related to an asset acquisition.
- Stockholders’ equity increased to $4.387 million from $2.000 million. No dividends were declared in either year.
- Management said existing liquidity and operations were expected to meet cash requirements for at least the next 12 months.
Changes, outlook and material matters
- Cloud Telecommunications growth and improved operating performance drove the return to profitability. Management attributed the improvement primarily to $2.528 million of additional revenue and $1.187 million of higher operating expenses.
- Cloud Telecommunications service backlog was $26.110 million at year-end, up from $23.029 million. The company expects to recognize this contract value over the next 36–60 months; it is not a forecast of annual revenue. No quantified revenue or earnings guidance is provided.
- Research and development expense was $0.853 million, versus $0.801 million in 2018. Management said most investment supported telecommunications products, services and website software.
- On December 31, 2019, the company acquired DoubleHorn, LLC customer-relationship assets for approximately $0.351 million, including $0.176 million cash consideration and $0.175 million contingent consideration.
- After year-end, the company agreed to purchase its Tempe office building from an entity owned by CEO and major shareholder Steven G. Mihaylo for $2.5 million. A $2.0 million, seven-year Bank of America term loan at 3.67% financed part of the purchase.
- Risks highlighted include strong competition and pricing pressure; customer retention and sales execution; service outages, cybersecurity and third-party network dependence; telecommunications and privacy regulation; potential legal or governmental inquiries; and the CEO’s approximately 69% ownership, which gives him substantial voting control. Web Services revenue has continued to decline and is not actively marketed.
- The company reported no off-balance-sheet arrangements. It disclosed historical inquiries and litigation related to discontinued seminar operations and other ordinary-course complaints; outcomes could adversely affect results, and the filing does not provide a clear quantified estimate of potential exposure.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the auditor did not provide an internal-control audit opinion.
Important facts for investors to verify
- Whether telecommunications revenue growth and the $26.110 million backlog convert into recognized revenue and cash on expected timelines.
- Customer churn, installation timing, commissions and carrier/bandwidth costs, which affect growth and margins.
- Cash-flow sustainability, including the effect of equipment financing receivables and working-capital movements.
- Terms, payments and governance safeguards for the related-party $2.5 million building purchase and $2.0 million bank loan.
- Potential dilution from stock options and equity awards; the filing reported 3.189 million options outstanding and 1.715 million shares available for future grants at year-end.
- Tax-asset realizability: the company reported approximately $18.520 million of federal NOL carryforwards but maintained a full valuation allowance on deferred tax assets.
- Updates on regulatory inquiries, customer disputes, cybersecurity and service reliability, and the continued decline of Web Services.