Crexendo, Inc. — FY2017 Form 10-K
Business context and period: Crexendo provides cloud-based business telecommunications and broadband services, plus website hosting and related services. This annual report covers the fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $10.377 million | $9.119 million |
| Operating loss | $0.825 million | $2.763 million |
| Net loss | $1.020 million | $2.792 million |
| Net loss per share, basic and diluted | $0.07 | $0.21 |
| Cash from operating activities | $0.294 million | Cash used: $1.126 million |
| Cash and cash equivalents at year-end | $1.282 million | $0.619 million |
| Notes payable at year-end | $0.079 million | $1.032 million |
| Working capital at year-end | $0.478 million | $0.057 million |
Revenue increased 14% year over year. Service revenue rose 18% to $9.030 million, while product revenue fell 9% to $1.347 million. Cloud Telecommunications revenue was $9.320 million, up from $7.757 million; Web Services revenue was $1.057 million, down from $1.362 million. The Cloud Telecommunications segment reported a $1.514 million loss before tax; Web Services reported $0.501 million income before tax.
Calculated from reported revenue and cost-of-revenue line items, gross margin was approximately 66.7% in 2017 versus 60.2% in 2016. Operating expenses declined to $11.202 million from $11.882 million. The net loss narrowed substantially, although total other expense increased to $0.188 million, primarily reflecting interest expense and reduced sublease income.
Fourth-quarter 2017 revenue was $2.858 million, compared with $2.345 million in fourth-quarter 2016. Fourth-quarter net loss was $7,000, compared with $525,000; operating loss was $17,000.
FY2017 Adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $0.108 million, compared with a loss of $1.735 million in 2016. It should be considered alongside, not as a substitute for, GAAP results.
Cash increased by $0.663 million during 2017, including $0.294 million provided by operations, $0.252 million from sale of a certificate of deposit, and $0.117 million from financing activities. The company reported total assets of $3.446 million and stockholders’ equity of $1.339 million at year-end. Cash balances exceeding federal insurance limits were $1.038 million.
Material changes versus the prior year
- Cloud Telecommunications service revenue grew 27%, supported by increased contracted service revenue, usage charges, and professional services. Its reported backlog rose to $19.871 million from $15.921 million; the company expects to recognize this contract value over the next 36 to 60 months.
- Web Services revenue continued to contract, falling 22%, primarily due to lower website hosting, extended-payment-term agreement, and web-management revenue. The company said it was not actively marketing its website software or hosting services.
- Operating loss improved by $1.938 million. Management attributed the improvement principally to higher revenue and lower operating expenses, including reduced general and administrative costs.
- Notes payable fell by $0.953 million, mainly after repayment of $0.996 million of the CEO-related note. The repayment was funded in part by the CEO’s exercise of stock options; option exercises generated $1.162 million in proceeds overall.
- Common shares outstanding increased from 13,578,556 to 14,287,556. Stock-based compensation expense was $0.573 million in 2017.
Outlook, risks, contingencies, and unusual items
- Outlook: The company provided no specific revenue or earnings guidance. Management said third- and fourth-quarter operations generated positive cash flow, expected the trend to continue, and believed existing liquidity and operations would meet cash requirements for at least the next 12 months. Management noted additional equity or debt financing could be sought if its assumptions change or unexpected needs arise.
- Customer and execution risks: Results depend on customer retention and acquisition, sales-channel expansion, enterprise installations, pricing, and the company’s ability to scale support and infrastructure. Longer enterprise sales and installation cycles may affect quarterly results.
- Infrastructure and service risks: The company relied on a single Tempe data center and said it did not yet have multiple-site capacity for a catastrophic event. It also depends on third-party bandwidth, telecom carriers, power, internet connections, equipment manufacturers, and providers supporting emergency 911 and number portability. Outages or security incidents could harm customers, revenue, and reputation.
- Regulatory and legal risks: The business is subject to FCC and state telecommunications rules, privacy and security requirements, and potential changes in VoIP regulation and network-neutrality policy. The filing describes ongoing or historical governmental inquiries and customer complaints, including matters related to discontinued seminar operations; it reports no liability accrual for legal proceedings at year-end but cannot assure outcomes will be immaterial.
- Ownership and related-party matters: CEO Steven G. Mihaylo owned approximately 74% of outstanding common shares, creating significant voting control. The company’s headquarters is owned by the CEO and leased back to the company; the lease was renewed for three years beginning March 2017. The company also had a term loan from the CEO’s trust, with a remaining related-party principal balance of $4,000 at year-end; the original loan carried 9% interest and a balloon maturity in December 2020.
- Tax items: The company reported approximately $24.401 million of federal net operating loss carryforwards, with some subject to Section 382 limitations, and maintained a full valuation allowance on deferred tax assets. The 2017 Tax Cuts and Jobs Act reduced the federal corporate rate; remeasurement of deferred tax balances was offset by a corresponding valuation-allowance adjustment, with no reported income-tax charge from the rate change.
- Other commitments: Future minimum lease obligations were $0.665 million, including the CEO-related headquarters lease. The company reported no off-balance-sheet arrangements and declared no dividends in 2017 or 2016.
Important facts for investors to verify
- Whether growth in cloud telecommunications revenue and the $19.871 million backlog converts into recognized revenue and sustainable operating cash flow.
- Whether the company can continue reducing losses while funding sales expansion, product development, and infrastructure resilience.
- The assumptions behind management’s 12-month liquidity assessment, including cash needs, lease payments, and any future financing requirements.
- The terms, governance, and ongoing implications of the CEO-related loan, headquarters lease, and CEO’s approximately 74% ownership.
- Whether customer retention, service reliability, data-center redundancy, and regulatory compliance risks are adequately addressed.
- The impact of the January 2018 adoption of the new revenue-recognition standard: the company expected a cumulative adjustment to accumulated deficit for certain contract-acquisition costs, while anticipating no material impact on revenue or cost of revenue.