Crexendo, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts are in thousands of dollars except per-share data. Crexendo provides hosted telecommunications, broadband internet, and website services through its Hosted Telecommunications Services and Web Services segments.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,267 | $1,890 | $4,441 | $3,742 |
| Gross profit (revenue less cost of revenue) | $1,350 | $1,035 | $2,611 | $2,026 |
| Gross margin | 59.5% | 54.8% | 58.8% | 54.1% |
| Operating loss | $(776) | $(1,085) | $(1,645) | $(2,460) |
| Net loss | $(778) | $(1,060) | $(1,646) | $(2,230) |
| Basic and diluted loss per share | $(0.06) | $(0.08) | $(0.12) | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $(525) | $(744) | $(1,105) | $(1,604) |
For the six months, cash used in operating activities was $710, compared with $1,733 in the prior-year period. Investing activities provided $11 and financing activities provided $125; cash and cash equivalents fell by $574 to $923. At June 30, current assets were $2,778 and current liabilities $2,648, yielding working capital of $130 and a current ratio of about 1.05. Notes payable had a net carrying value of $1,116, including a $1,000 related-party loan; total liabilities were $3,743. Stockholders’ equity was $1,141.
Changes and segment results
- Q2 revenue increased 20% year over year; six-month revenue increased 19%. Hosted Telecommunications Services revenue grew 35% in both comparisons, reaching $1,920 for the quarter and $3,698 for six months.
- Web Services revenue declined 26% in Q2 to $347 and 25% for six months to $743. Management attributed the declines to lower hosting, web-management, and extended-payment-term collections.
- Hosted Telecommunications Services remained loss-making: operating losses were $872 in Q2 and $1,835 for six months. Web Services reported operating income of $96 and $190, respectively.
- Operating losses narrowed versus the prior year as revenue increased and, for the six-month period, operating expenses declined. Net loss improved for six months but not as quickly as operating loss, partly because other income was substantially lower.
- Hosted-services contract backlog was $15,434 at June 30, 2016, versus $11,283 a year earlier. The company expects this backlog to be recognized over the next 36–60 months; backlog is not a near-term revenue guarantee.
Outlook, risks, and unusual items
- Funding risk: Management said $923 of cash was not expected to cover anticipated cash needs for the next 12 months given historical operating cash outflows and forecasts. It therefore expected to require additional financing. A July 2016 commitment from the CEO and majority shareholder included warrant exercise if needed to fund operations through August 31, 2017; the loan agreement also allows for up to $1,000 of additional borrowing subject to independent-director approval. Management believed available cash and these sources would fund operations for the next 12 months.
- Related-party debt: The CEO’s trust provided a $1,000 unsecured loan at 9% interest, due December 30, 2020. Interest is paid in advance in company shares during the first two years. The lender received a five-year warrant for 250,000 shares at $1.20 per share.
- Revenue mix and execution: The company is shifting focus toward hosted telecommunications and continues investing in its technology and SaaS offerings. Telecom contracts typically run 36–60 months; customer growth, sales execution, and delivery of services affect the conversion of backlog into revenue.
- Other income item requiring clarification: The filing reports six-month other income of $6 in 2016 versus $248 in 2015, and separately attributes a $193 legal-accrual reversal to the six months ended June 30, 2016. That explanation appears inconsistent with the reported year-over-year decline and should be checked against the filed statements and underlying disclosure.
- The company reported no pending or threatened legal matters expected to have a material adverse impact and no off-balance-sheet arrangements. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Adjusted EBITDA and non-GAAP net loss are supplemental measures, not substitutes for GAAP results or cash flow. Management noted that these measures exclude, among other items, cash needs for debt service, working capital, and capital expenditures.
Important facts for investors to verify
- Whether the CEO financing and warrant-exercise commitments are available and sufficient, and what conditions govern additional borrowing.
- Cash runway, ongoing operating cash burn, and progress toward profitability without relying on further related-party funding.
- Whether telecom backlog converts into recurring revenue as expected, and whether Web Services declines stabilize.
- The timing and details of the $193 legal-accrual reversal disclosure, given its apparent inconsistency with the reported other-income comparison.
- Potential dilution: 4,199,288 common-share equivalents were excluded from diluted loss per share as anti-dilutive at June 30, 2016.
- Collection quality and concentration: one telecom customer represented 12% of trade receivables at June 30, 2016; the company also disclosed uninsured cash balances of $666.