Crexendo, Inc. — Q2 2018 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2018. Crexendo provides cloud telecommunications and web services. Unless stated otherwise, financial amounts are in thousands of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,977 | $2,436 | $5,785 | $4,730 |
| Operating income (loss) | $50 | $(220) | $(13) | $(701) |
| Net income (loss) | $47 | $(256) | $(16) | $(771) |
| Operating cash flow | Not separately reported for quarter | — | $(32) | $(143) |
- Q2 service revenue rose 19% to $2.540 million and product revenue rose 44% to $437,000. Six-month revenue grew 22%.
- Calculated gross margin was approximately 68.7% in Q2 versus 68.1% a year earlier; six-month gross margin was approximately 68.1% versus 67.7%. Calculated operating margin was 1.7% in Q2 and negative 0.2% for the first half.
- Q2 diluted EPS was reported as $0.00; six-month diluted loss per share was $(0.00), rounded in the filing. Q2 adjusted EBITDA was $184,000 and six-month adjusted EBITDA was $202,000; these are non-GAAP measures.
Balance sheet, cash flow and liquidity
- At June 30, cash and cash equivalents were $1.340 million, plus $100,000 restricted cash. Cash, cash equivalents and restricted cash totaled $1.440 million, up $58,000 from year-end.
- Current assets were $3.004 million and current liabilities $1.852 million; working capital was $1.152 million and the current ratio was approximately 1.62.
- Six-month cash flows: $32,000 used in operations, $136,000 used in investing (including equipment and leasehold improvements), and $226,000 provided by financing. Financing included $267,000 of note proceeds, $71,000 of repayments, and $30,000 from option exercises.
- Total notes payable were $275,000, up from $79,000 at December 31, 2017. Current maturities were $141,000. The related-party note payable balance was $4,000; other notes financed equipment, software/support and insurance.
- Inventory increased to $394,000 from $131,000, primarily following a large shipment received late in June. Contract liabilities were $1.007 million, including customer advance payments.
Changes versus the prior comparable period
- Cloud Telecommunications drove growth: segment revenue rose 28% in Q2 to $2.769 million and 28% for the six months to $5.352 million. Its operating loss narrowed to $56,000 in Q2 and $244,000 for the first half.
- Web Services revenue declined 22% in Q2 to $208,000 and 21% for the first half to $433,000. The segment remained profitable, with Q2 operating income of $106,000 and first-half operating income of $231,000.
- Cloud Telecommunications backlog was $20.774 million at June 30, 2018, compared with $18.045 million a year earlier. Management says it expects backlog to convert to revenue over the next 36–60 months.
- The first-half net loss narrowed substantially from $771,000 to $16,000, reflecting revenue growth and lower general and administrative costs, partly offset by higher selling and marketing and service costs.
Outlook, accounting matters and risks
- Management believes operating cash and existing liquidity will meet cash requirements for at least the next 12 months, but says it may seek debt or equity financing if plans change or unexpected needs arise. No specific earnings or revenue guidance is provided.
- ASC 606 was adopted retrospectively from January 1, 2018. It changed accounting for contract acquisition commissions and certain principal-versus-agent revenue; the filing restated prior-period comparisons. Verify the effects when comparing reported growth and margins.
- Management cites risks including customer acceptance, competition, customer churn, scaling operations, reliance on third-party network providers, service or infrastructure failures, cybersecurity, regulatory compliance, profitability and potential claims. Management also identifies product-installation timing as a source of revenue fluctuation.
- The company leases its Tempe headquarters from an entity owned by its CEO and principal shareholder. Minimum operating lease obligations were $505,000 at June 30, 2018. Management reported no pending or threatened legal matters expected to have a material adverse impact and stated disclosure controls were effective.
Important facts for investors to verify
- Whether cloud-telecommunications backlog converts to recognized revenue on the anticipated timetable and supports sustained profitability.
- Drivers of declining Web Services revenue and whether that decline continues.
- Cash requirements, working-capital trends, new equipment-related borrowing and the sufficiency of liquidity beyond management’s stated 12-month assessment.
- The impact of ASC 606 restatements and the treatment of commissions and third-party services in reported revenue and margins.
- Related-party lease terms and the company’s ongoing obligations under the headquarters lease.