Crexendo, Inc. — FY2018 Form 10-K
Business context and period. Crexendo provides cloud telecommunications and broadband services, plus website hosting and related services. This filing covers the fiscal year ended December 31, 2018; comparative 2017 figures were retrospectively adjusted for accounting changes. The company trades on OTCQX under CXDO.
Financial performance and position
- Revenue: $11.91 million, up 17% from adjusted 2017 revenue of $10.19 million. Service revenue rose 18% to $10.46 million; product revenue rose 7% to $1.45 million.
- Segments: Cloud Telecommunications revenue was $11.08 million versus $9.14 million in 2017, and the segment reported a $613,000 operating loss versus a $1.24 million loss. Web Services revenue fell 21% to $825,000; segment operating income was $407,000 versus $505,000.
- Profitability: Operating loss narrowed to $206,000 from $734,000. Net loss narrowed to $223,000, or $0.02 per share, from $929,000, or $0.07 per share. Adjusted EBITDA, a non-GAAP measure, was positive $324,000 versus negative $17,000.
- Cash flow: Operating activities provided $452,000, compared with $294,000 in 2017. Investing activities used $7,000; financing activities provided $122,000. Cash, cash equivalents and restricted cash increased $567,000.
- Liquidity: Cash and cash equivalents were $1.85 million, plus $100,000 restricted cash. Working capital was $1.32 million; current assets were $3.33 million and current liabilities $2.01 million.
- Debt and obligations: Notes payable totaled $56,000, all current. Capital lease obligations were $144,000, including $28,000 current. The related-party loan from CEO Steven Mihaylo was fully repaid in September 2018. Operating lease commitments included $300,000 due in 2019 and $50,000 in 2020.
- Other metrics: Telecommunications backlog was $23.03 million, up from $19.87 million, expected to be recognized over the next 36–60 months. R&D expense was $801,000. Stock-based compensation expense was $438,000.
Material changes versus 2017
- Telecommunications service growth drove higher consolidated revenue; website hosting and Web Services revenue continued to decline.
- Net loss improved substantially, aided by revenue growth and a $197,000 reduction in interest expense, primarily following repayment of the related-party loan. Higher operating expenses partially offset these improvements.
- Cash from operations increased to $452,000. Cash and cash equivalents rose to $1.85 million, while working capital increased to $1.32 million.
- Crexendo adopted ASC 606 retrospectively. The adjusted 2017 comparison reflects changes including capitalization and amortization of qualifying contract acquisition commissions and revised principal-versus-agent presentation for certain services. The company reported 2017 revenue $190,000 lower and net loss $91,000 lower than previously reported.
Outlook, risks and unusual items
- Management said existing liquidity and operations should meet cash requirements for at least the next 12 months, but provided no quantified revenue or earnings guidance. It may seek additional equity or debt financing if business assumptions change or needs arise.
- The company has incurred operating losses in each of the three prior years and warns losses may continue. Its 2018 net loss improved, but it remained loss-making.
- Key risks include intense competition and pricing pressure; customer retention and sales execution; service outages, cybersecurity and third-party network dependence; telecom regulation and E-911 obligations; and privacy/HIPAA compliance. The company said it stopped hosting websites in GDPR-compliant countries and blocked access from certain countries due to compliance costs.
- The CEO beneficially owned approximately 70% of outstanding shares, giving him substantial voting control. One telecommunications customer represented 22% of year-end trade receivables, though no customer accounted for at least 10% of annual revenue.
- Government inquiries and customer-related claims, including matters associated with the discontinued seminar business, may continue. The company reported no recorded loss liability for legal proceedings and stated it could not assure that inquiries would not have a material adverse effect.
- Crexendo reported effective disclosure controls and internal control over financial reporting. Its independent auditor issued an unqualified opinion on the financial statements, but did not audit internal control effectiveness.
Important facts for investors to verify
- Confirm the reported segment and consolidated comparisons against the audited statements: the extracted filing text contains inconsistent year labels in some segment and MD&A tables.
- Assess whether telecommunications growth, backlog conversion and customer retention can sustain operations and improve segment profitability.
- Review cash use, working-capital needs, lease payments and financing needs, including the new data-center capital lease.
- Evaluate the effects of CEO voting control, outstanding equity awards and potential dilution; 3.66 million options were outstanding at year-end.
- Monitor the resolution of regulatory and customer matters, tax-asset limitations, and service, security and compliance risks.