Crexendo, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter results also reported. Financial amounts below are in U.S. dollars; “$m” means millions. The filing describes Crexendo as a hosted-services provider with Hosted Telecommunications Services and Web Services segments.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $7.594m | $10.328m |
| Gross profit / gross margin | $4.012m / 52.8% | $6.237m / 60.4% |
| Operating loss | ($6.599m) | ($5.745m) |
| Net loss | ($6.376m) | ($4.963m) |
| Net loss per share | ($0.57) | ($0.46) |
| Operating cash flow | ($4.338m) | ($5.382m) |
| Capital expenditures | $0.008m | $0.062m |
Revenue fell 26.5% year over year, while net loss widened 28.5%. Gross margin declined to 52.8% from 60.4%; operating loss was equivalent to about 86.9% of revenue, versus 55.6% in 2013. Adjusted EBITDA was a loss of $4.619m, compared with a loss of $3.792m in 2013; this is a non-GAAP measure and should not replace GAAP results.
Fourth quarter: Revenue was $1.989m and net loss was $1.748m, compared with revenue of $2.141m and net loss of $1.836m in Q4 2013. Q4 2014 loss per share was $0.15.
Segments: Hosted Telecommunications revenue grew 81% to $4.297m, but the segment recorded a $5.689m pretax loss (2013: $5.429m loss). Web Services revenue declined 59% to $3.297m; the segment recorded a $0.610m pretax loss versus $0.209m income in 2013. Telecom backlog increased to $9.763m from $7.019m; Web Services backlog fell to $0.028m from $0.553m.
Liquidity and balance sheet: Year-end cash and cash equivalents were $2.906m, restricted cash $0.133m, and working capital $2.154m, down from $2.849m. Current assets were $4.857m and current liabilities $2.703m. Total liabilities were $2.970m and stockholders’ equity $4.544m. The balance sheet does not show a conventional borrowings balance; operating lease commitments totaled $0.211m. Cash declined $0.170m during 2014 after operating cash use of $4.338m, investing cash provided of $2.152m (including $2.002m from property-sale proceeds), and financing cash provided of $2.016m.
Material changes and unusual items
- The shift toward telecommunications was reinforced by the June 2014 acquisition of One Stop Voice assets for approximately $0.540m, including contingent consideration.
- Web Services contracted following the decision to limit services to enterprise customers and the continued run-off of legacy extended-payment-term agreements (EPTAs). EPTA cash-collection revenue fell to $0.694m from $3.189m; remaining EPTA deferred revenue was $0.186m at year-end.
- On December 23, 2014, the CEO and major shareholder purchased 1,449,275 shares for $2.0m and received warrants for 500,000 additional shares at $1.38 each. The company may require exercise of the warrants, potentially generating approximately $0.690m, subject to the agreement’s terms.
- The company sold its Tempe headquarters property to an entity owned by the CEO for $2.0m in February 2014 and leased it back. Initial three-year rent was prepaid with 300,000 company shares, valued at $0.966m; the filing reports $0.268m of related 2014 rent expense, net of deferred-gain amortization.
- The company voluntarily moved from NYSE MKT to OTCQX on January 13, 2015. A significant Utah lawsuit was settled in November 2014 and dismissed with prejudice; the filing also describes ongoing governmental inquiries and ordinary-course legal matters.
Outlook, risks and contingencies
Management said available cash alone did not appear sufficient to fund anticipated needs for the next twelve months, given historical operating cash outflows and forecasts. It cited the warrant exercise mechanism and a February 2015 CEO commitment to provide up to $1.0m, if needed, to support operations through March 31, 2016, and stated it expected to meet obligations as due. No specific revenue, earnings, or profitability guidance was provided.
Key risks include continued losses and dependence on additional financing; uncertainty about growth and profitability in hosted telecommunications; declining legacy Web Services and EPTA revenue; intense competition and pricing pressure; evolving telecom and privacy regulation; reliance on third-party carriers, vendors and a single data center; service, cybersecurity and E-911 interruptions; and potential legal or regulatory costs. The company reported a full valuation allowance on deferred tax assets and Section 382 limitations on use of tax-loss carryforwards. The financial statements received an unqualified audit opinion; the auditor was not engaged to audit internal control effectiveness.
Investor verification priorities
- Verify whether the CEO’s up-to-$1.0m support commitment was documented, available on the stated terms, and sufficient alongside potential warrant proceeds to cover cash needs.
- Track quarterly operating cash burn, financing dependence, and progress toward reducing the $6.376m annual net loss.
- Assess whether telecom backlog converts to installed, paying customers and improved segment margins; confirm the definition and timing of backlog conversion.
- Monitor the continued decline of EPTA collections, Web Services revenue, and related receivables, including collectability and any further write-offs.
- Review related-party sale-leaseback terms, share-based rent accounting, CEO financing and warrant terms, and resulting dilution.
- Check subsequent filings for litigation or regulatory developments, data-center resilience, listing status, and any changes to liquidity or going-concern assessments.