Crexendo, Inc. — Q2 2020 Form 10-Q
Business context and period. Crexendo provides cloud communications and related services through its Cloud Telecommunications and Web Services segments. This unaudited filing covers the three and six months ended June 30, 2020; financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $4.054 | $3.614 | $7.921 | $7.106 |
| Operating income | $0.531 | $0.340 | $0.712 | $0.581 |
| Net income | $0.508 | $0.338 | $0.648 | $0.577 |
| Diluted EPS | $0.03 | $0.02 | $0.04 | $0.04 |
| Operating cash flow | Not separately stated for Q2 | $0.091 | $0.495 |
- Q2 revenue rose 12% year over year, led by Cloud Telecommunications; service revenue increased 15%, while product revenue declined 4%. H1 revenue increased 11%; service revenue rose 15% and product revenue declined 13%.
- Cloud Telecommunications revenue was $3.918 million in Q2 and $7.629 million in H1. Web Services revenue fell 18% in Q2 to $0.136 million and 15% in H1 to $0.292 million.
- Calculated gross margin, using revenue less service and product costs, was approximately 71.1% in Q2 versus 69.1% a year earlier, and 70.2% in H1 versus 68.4%. Operating margin was approximately 13.1% versus 9.4% in Q2 and 9.0% versus 8.2% in H1; net margin was approximately 12.5% versus 9.4% and 8.2% versus 8.1%, respectively.
- Cash from operations was $0.091 million in H1, down from $0.495 million. Investing used $0.704 million, primarily for the office building and customer-relationship assets; financing provided $1.422 million. Cash, cash equivalents and restricted cash increased to $5.089 million from $4.280 million at year-end.
- At June 30, current assets were $7.080 million and current liabilities $3.422 million; working capital was $3.658 million. Total liabilities were $5.852 million and stockholders’ equity $5.774 million.
- Notes payable totaled $2.979 million: approximately $1.978 million related to the office purchase and $1.001 million to the Paycheck Protection Program (PPP) loan. The company also had $0.102 million of finance lease obligations.
Changes, outlook and risks
- Revenue growth and lower rent following the office purchase contributed to improved operating income. Expenses increased in several areas, including selling and marketing, research and development, and administration. Interest expense also rose with new borrowing.
- Cloud Telecommunications backlog increased 10% year over year to $27.349 million. The company expects this contract value to be recognized over the next 36 to 60 months; backlog is not a guarantee of future revenue.
- Management said existing liquidity and operations should meet cash requirements for at least the next 12 months. The filing provides no formal revenue or earnings guidance and says pandemic effects make forecasting difficult.
- Crexendo received a $1.001 million PPP loan at 1% interest. Management said proceeds would be used for qualifying expenses and believed forgiveness would be granted; forgiveness remained subject to program requirements.
- COVID-19 risks include customer payment delays or business failures, weaker demand, longer sales and installation cycles, collection difficulties, and disruption to suppliers in China. The company reported no material operating impact to date but said future effects were uncertain. It had joined the FCC’s Keep Americans Connected Pledge, contributing to slower collections; trade receivables rose to $0.569 million from $0.386 million.
- The company bought its Tempe office building for $2.5 million from an entity owned by its CEO and major shareholder; the filing says an independent appraisal established fair value. Management reported effective disclosure controls and no material change in internal control over financial reporting. No pending or threatened legal matters were expected to have a material adverse impact.
- A 2020 incentive plan may create bonus pools if specified revenue, adjusted EBITDA, sales-booking or acquisition targets are met. Management said achievement was reasonably possible but could not reasonably estimate the liability.
Important facts for investors to verify
- Whether the PPP loan qualifies for full forgiveness and how any unforgiven amount would affect debt service.
- Whether COVID-related collection delays persist, and how receivable growth and the allowance for doubtful accounts develop.
- How backlog converts to recognized revenue and cash, particularly given installation timing and multi-year contract terms.
- The office purchase’s related-party terms, appraisal support, financing obligations and effect on future occupancy costs.
- Why H1 operating cash flow was substantially below net income, and whether working-capital investment continues.
- The effect of stock-based awards and higher diluted weighted-average shares on per-share results.