Crexendo, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Crexendo provides cloud telecommunications and web services. This unaudited quarterly report covers the three months ended March 31, 2018; financial amounts below are in thousands of dollars unless otherwise noted. Prior-period revenue figures were retrospectively adjusted for the adoption of ASC 606.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Service revenue | $2,442 | $2,015 |
| Product revenue | $366 | $279 |
| Total revenue | $2,808 | $2,294 |
| Operating loss | $(63) | $(481) |
| Net loss | $(63) | $(515) |
| Basic and diluted loss per share | $(0.00) | $(0.04) |
| Cash used in operating activities | $(127) | $(52) |
- Revenue rose 22% year over year. Cloud telecommunications revenue increased to $2,583 from $2,014; Web Services revenue declined to $225 from $280.
- Gross profit, calculated as revenue less service and product costs, was $1,892, or approximately 67% of revenue, versus $1,542, also approximately 67%, in the comparable period.
- At March 31, cash and cash equivalents were $1,117, with another $100 of restricted cash. Current assets were $2,684 and current liabilities $1,728; reported working capital was $956.
- Total notes payable were $39, down from $79 at year-end. Total liabilities were $2,111; stockholders’ equity was $1,631.
- Non-GAAP Adjusted EBITDA was $18, compared with $(156) in Q1 2017. This company-defined measure excludes certain expenses and should be considered alongside GAAP results.
Material changes versus the prior comparable period
- Net loss narrowed by $452, primarily reflecting higher revenue and $34 more in other income, partly offset by $96 higher operating expenses. General and administrative expense fell $226, while selling and marketing expense rose $167.
- Cloud Telecommunications service revenue increased 28%; its product revenue increased 31%. Web Services revenue decreased 20%.
- Cloud Telecommunications backlog reached $20,715 at March 31, versus $16,888 a year earlier, and $19,871 at January 1, 2018. The company expects this contract value to be recognized over the next 36 to 60 months; backlog is not a guarantee of future revenue.
- Operating cash use increased to $127 from $52. Cash and cash equivalents declined $165 from December 31, 2017, with cash used in both operations and debt repayments.
Outlook, risks, contingencies 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 equity or debt financing if business-plan assumptions change or unexpected needs arise. No numeric revenue or earnings guidance was provided.
- The company adopted ASC 606 retrospectively. The adoption changed accounting for contract-acquisition commissions and certain principal-versus-agent revenue; the prior-year comparison reflects adjustments, including a $50 reduction in Q1 2017 revenue and a $28 improvement in reported net loss. Assess trends using the restated figures.
- The company reported $585 of future minimum headquarters lease obligations. The headquarters sale-leaseback is with an entity owned by the CEO and principal shareholder; Q1 2018 rent expense was $75. The filing also describes a related-party note with a 9% interest rate and a 2020 balloon maturity; the reported remaining note balance was $4.
- Cash exceeding federally insured limits was $888 at quarter-end. One telecommunications customer represented 11% of trade receivables; no customer accounted for 10% or more of quarterly revenue.
- Management cited risks including changing economic conditions and Internet technologies, interest-rate fluctuations, and risks described in the 2017 Form 10-K. It reported no pending or threatened legal matters expected to have a material adverse effect, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether telecommunications customer growth and backlog convert into recognized revenue and cash collections as expected.
- Whether the increase in operating cash use, prepaid expenses, inventory and accrued expenses affects liquidity beyond management’s stated 12-month outlook.
- The comparability of reported periods after ASC 606 adoption, particularly commission capitalization and gross-versus-net revenue presentation.
- The terms and related-party nature of the headquarters lease and remaining related-party debt, including future lease payments.
- The calculation and usefulness of Adjusted EBITDA relative to GAAP losses, including the effect of share-based compensation.