Crexendo, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Crexendo provides hosted telecommunications and broadband services, website hosting, and related services through its Hosted Telecommunications Services and Web Services segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2.174 | $1.852 |
| Gross profit / gross margin | $1.261 / 58.0% | $0.991 / 53.5% |
| Operating loss / operating margin | $(0.869) / (40.0)% | $(1.375) / (74.2)% |
| Net loss / net margin | $(0.868) / (39.9)% | $(1.170) / (63.2)% |
| Basic and diluted loss per share | $(0.07) | $(0.09) |
| Operating cash flow | $(0.261) | $(0.756) |
| Adjusted EBITDA (non-GAAP) | $(0.580) | $(0.860) |
Revenue increased 17% year over year. Hosted Telecommunications revenue rose 34% to $1.778 million; Web Services revenue fell 25% to $0.396 million. The company reported a $0.865 million pretax loss. The narrower loss reflected higher revenue and lower operating expenses, partly offset by $0.211 million less in other income. No customer represented 10% or more of quarterly revenue.
Liquidity, cash flow, and debt
- Cash and cash equivalents were $1.151 million at March 31, down from $1.497 million at year-end; restricted cash was $0.100 million. Operating activities used $0.261 million, investing activities provided $0.012 million, and financing activities used $0.097 million.
- Working capital was $0.482 million, down from $0.998 million at December 31, 2015. Current assets were $3.020 million and current liabilities $2.538 million.
- Notes payable had a net carrying value of $1.013 million, including a $1.000 million related-party loan from the CEO’s trust. The loan bears 9% annual interest, is due December 30, 2020, and has a $1.000 million initial principal; an additional advance of up to $1.000 million is subject to independent-director approval.
- Stockholders’ equity declined to $1.569 million from $2.204 million, primarily reflecting the quarterly net loss.
Material changes and management commentary
- Hosted Telecommunications revenue growth included a $0.419 million increase in recurring and one-time services and a $0.067 million increase in equipment sales; lease-related interest revenue fell $0.032 million. The company said it no longer provides equipment leasing directly, with customers purchasing devices or using third-party leasing.
- Hosted Telecommunications operating loss improved to $0.963 million from $1.350 million. Web Services moved to $0.094 million operating income from a $0.025 million loss, despite lower revenue; lower costs and expenses contributed to the improvement.
- Hosted Telecommunications contract backlog increased to $14.723 million at March 31, 2016, from $10.987 million a year earlier. The company expects to recognize this backlog over the next 36 to 60 months; it is not equivalent to near-term revenue.
- Management stated that existing cash was not expected to cover anticipated needs for the next 12 months. In April, the CEO and majority shareholder committed to exercise all warrants from the loan agreement if additional capital is needed to fund operations through May 31, 2017. Management believed cash resources, borrowing availability, and this commitment would be sufficient for the next 12 months.
- The filing provides no quantitative revenue or earnings guidance. Management described the business as a startup with funding risks until profitability is achieved.
Risks, contingencies, and unusual items
- Funding depends on additional debt or equity financing if operations do not generate sufficient cash. The CEO-related financing and warrant commitment are important dependencies; the loan is also a related-party arrangement.
- Cash balances exceeded federal deposit-insurance limits by $0.928 million at March 31. A $0.251 million certificate of deposit is pledged as collateral for merchant accounts.
- Net trade receivables were $0.557 million, including legacy extended-payment-term agreements; the company wrote off $0.020 million of such agreements during the quarter. One telecom customer represented 13% of trade receivables at quarter-end.
- The company recorded a full valuation allowance against net deferred tax assets. It reported no pending or threatened legal matters expected to have a material adverse impact and no off-balance-sheet arrangements.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether cash use, operating performance, and available financing support management’s stated 12-month liquidity outlook, including the conditions and mechanics of the CEO’s warrant-exercise commitment and additional loan availability.
- Whether hosted telecommunications growth and backlog convert into revenue and improved margins, and whether the declining Web Services business stabilizes.
- The collection performance and aging of trade receivables, particularly legacy extended-payment agreements and the concentrated telecom customer balance.
- The related-party loan’s effective economic cost, including the warrant, stock-settled interest terms, and any future advances.