Crexendo, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts below are in thousands unless otherwise noted. Crexendo provides cloud telecommunications and broadband services, plus website hosting and related services, through its Cloud Telecommunications and Web Services segments.
Financial performance and liquidity
- Q3 revenue: $3,026, up 14% from $2,644 a year earlier. Service revenue rose 20% to $2,712; product revenue fell 18% to $314.
- Nine-month revenue: $8,811, up 19% from $7,374. Service revenue increased 20% to $7,694 and product revenue increased 16% to $1,117.
- Segment trends: Cloud Telecommunications revenue grew 18% to $2,823 in Q3 and 24% to $8,175 for nine months. Web Services revenue declined 22% to $203 in Q3 and 21% to $636 for nine months.
- Profit and margins: Q3 operating loss was $193 versus $54; net loss was $199 versus $190, or $0.01 per share in both periods. Nine-month operating loss improved to $206 from $755, and net loss narrowed to $215 from $961, or $0.02 versus $0.07 per share. Gross margin, calculated from reported revenue less service and product costs, was approximately 67.2% in Q3 versus 69.2% and 67.7% for nine months versus 68.2%.
- Cash flow: Nine-month operating cash flow was positive $350 versus $177. Investing used $136, primarily for property and equipment; financing provided $300. Cash, cash equivalents and restricted cash increased $514 to $1,896.
- Liquidity: September 30 cash and cash equivalents were $1,796, plus $100 restricted cash. Current assets were $3,260 and current liabilities $2,017, producing working capital of $1,243, up from $921 at December 31, 2017.
- Debt and obligations: Notes payable totaled $74, all current; the related-party note was fully repaid during September. Capital lease obligations were $150, including $27 current. The company also disclosed $425 of future minimum operating lease payments, including rent under its headquarters sale-leaseback arrangement.
- Other metrics: Total assets were $4,464 and stockholders’ equity $1,914. Shares outstanding were 14,394,113 at September 30; 3,699,695 stock-option shares were excluded from diluted loss per share as anti-dilutive.
Material changes versus prior comparable periods
- Telecommunications service revenue growth drove consolidated revenue gains, while Web Services continued to contract. Management attributed telecom service growth mainly to contracted services, usage and professional services.
- Operating expenses rose 19% in Q3 to $3,219, outpacing revenue growth; the operating loss consequently widened. For the nine-month period, revenue growth and sharply lower interest expense helped narrow the net loss despite higher operating expenses.
- Cloud Telecommunications backlog was $21,734 at September 30, 2018, versus $18,264 a year earlier and $19,871 at January 1, 2018. Management says backlog represents signed contract value less revenue recognized and expects recognition over the next 36–60 months.
- Accrued expenses increased $293 from year-end to $1,254, including higher accrued wages and benefits and sales taxes. Inventory increased $162 to $293, which management attributed to a large replenishment shipment.
Outlook, management commentary, risks and unusual items
- Management stated that operations and existing liquidity sources should meet cash requirements for at least the next 12 months. It may seek additional equity or debt financing if business-plan assumptions change or unexpected needs arise. No quantified revenue or earnings guidance is provided.
- Management expects telecom growth to appear initially in backlog; product revenue can vary with installation timing, particularly for larger enterprise customers.
- The company adopted ASC 606 retrospectively from January 1, 2018. The change included capitalizing qualifying incremental contract acquisition commissions and reporting certain reseller revenue net as an agent. Prior periods were restated; the filing reports that the standard affected reported revenue and expenses and adjusted opening equity.
- Adjusted EBITDA was $2 in Q3 versus $61 a year earlier, and $204 for nine months versus negative $155. These are non-GAAP measures; the company cautions they should not replace GAAP results and may not be comparable across companies.
- Risks cited include customer demand and churn, competition, scaling and cost control, reliance on third-party network providers, service or infrastructure failures, cybersecurity, regulatory compliance, and intellectual-property claims. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
- The filing reports no pending or threatened legal matters expected to materially affect the company. A related-party arrangement remains notable: the company leases its Tempe headquarters from an entity owned by its CEO and principal shareholder.
Important facts for investors to verify
- Whether telecom backlog converts to recognized revenue on the expected schedule, and whether its growth translates into durable operating profitability.
- Drivers of the Q3 operating-loss deterioration, especially expense growth in selling and marketing, general and administrative, and service costs.
- Cash needs and liquidity after considering accrued expenses, lease commitments, capital investment and the company’s stated 12-month liquidity assessment.
- The impact of ASC 606 on period-to-period comparability, including the retrospective restatements and commission-cost treatment.
- The terms and governance of the CEO-related headquarters lease, as well as dilution from outstanding options and future equity compensation.