Crexendo, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. Crexendo provides cloud communications and related services through Cloud Telecommunications and Web Services segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $3.492 million | $2.808 million; up 24% |
| Service revenue | $3.008 million | $2.442 million; up 23% |
| Product revenue | $484,000 | $366,000; up 32% |
| Gross profit and margin* | $2.366 million; approximately 67.8% | $1.892 million; approximately 67.4% |
| Operating income (loss) | $241,000; approximately 6.9% of revenue | $(63,000); approximately (2.2%) of revenue |
| Net income (loss) | $239,000; diluted EPS $0.02 | $(63,000); diluted EPS $(0.00) |
| Cash from operating activities | $294,000 | $(127,000) |
| Cash, cash equivalents and restricted cash | $2.194 million at March 31 | $1.949 million at December 31, 2018 |
*Gross profit and margins are derived from reported revenue less cost of service and product revenue.
- Revenue growth came principally from Cloud Telecommunications: segment revenue rose 28% to $3.314 million, while Web Services revenue fell 21% to $178,000. Cloud Telecommunications operating income improved to $163,000 from a $188,000 loss; Web Services operating income declined to $78,000 from $125,000.
- Management attributed the consolidated pretax improvement to $684,000 of additional revenue, partly offset by $380,000 higher operating expenses and $3,000 lower other income. Selling and marketing and general and administrative costs increased; R&D investment included development of a new customer interface and Android application.
- Working capital was $1.406 million at March 31, up from $1.322 million at year-end. Current assets were $3.810 million and current liabilities $2.404 million.
- Cash from operations was partly offset by $49,000 of financing outflows, including $40,000 of note repayments and $9,000 of finance-lease payments. Investing cash flow was zero.
- Notes payable were $16,000 and finance-lease obligations $135,000 at March 31. Operating-lease liabilities were $1.031 million; the company adopted ASC 842 in January, recognizing $1.088 million of lease assets and liabilities at adoption. These lease obligations are separate from notes payable.
Outlook, commentary and risks
- Management said existing liquidity and operations should meet cash requirements for at least the next 12 months, while noting it may seek equity or debt financing if business assumptions change or unexpected needs arise. No numerical earnings or revenue guidance is provided.
- Cloud Telecommunications backlog was $24.226 million at March 31, 2019, versus $20.715 million a year earlier. Management described Q1 as a record sales quarter and said March was the company’s second-highest sales month. Backlog is contract value not yet recognized as revenue and is expected to be recognized over the next 36–60 months.
- Telecommunications contracts typically run 36–60 months; installation timing can delay recognition of equipment revenue. The filing reports $1.164 million in contract liabilities, primarily customer advance payments, and $23.980 million of estimated future telecommunications-service revenue from remaining performance obligations.
- The Tempe office lease is with an entity owned by the CEO and major shareholder. The renewed lease carries monthly rent of $25,000, and management considered a further renewal option reasonably certain. This is a related-party arrangement.
- No customer represented at least 10% of quarterly revenue, but one telecommunications customer represented 18% of trade receivables at March 31. Cash balances exceeded federal insurance limits by $1.991 million at financial institutions.
- The company maintains a full valuation allowance against deferred tax assets. Management reported no pending or threatened legal matters expected to have a material adverse impact, no off-balance-sheet arrangements, and effective disclosure controls. The filing refers investors to risk factors in the 2018 Form 10-K and cautions that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether Cloud Telecommunications growth and backlog convert into recognized revenue and operating cash flow, and whether Web Services revenue continues to decline.
- Receivables quality, customer concentration, inventory needs, and the timing of installations and customer advances.
- Total future cash commitments under operating and finance leases, including the related-party office lease and renewal assumptions.
- Whether the stated 12-month liquidity expectation remains supported by operating cash generation and the company’s financing needs.
- The assumptions supporting the full deferred-tax-asset valuation allowance and any changes in legal or other contingencies.