Crexendo, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 1, 2016. The filing is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Business context and reporting period
Crexendo provides hosted telecommunications and broadband services, plus website hosting, e-commerce software, and web-development services. It reports two segments: Hosted Telecommunications Services and Web Services. The company describes itself as having transitioned into a startup-stage business while pursuing growth in telecommunications and winding down its former seminar-based Web Services model.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $7.823 million | $7.594 million |
| Operating loss | $(4.839) million | $(6.599) million |
| Loss before tax | $(4.553) million | $(6.299) million |
| Net loss | $(4.541) million | $(6.376) million |
| Diluted loss per share | $(0.35) | $(0.57) |
| Cash used in operations | $(2.974) million | $(4.448) million |
- Revenue grew 3%. Hosted Telecommunications revenue rose 39% to $5.989 million; Web Services revenue fell 44% to $1.834 million.
- Gross profit was approximately $4.246 million, a 54.3% gross margin, versus approximately $4.012 million and 52.8% in 2014. Operating expenses declined to $12.662 million from $14.193 million.
- Adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $2.941 million versus a loss of $4.619 million. The company cautions that this measure is supplemental and not a substitute for GAAP results or cash flow.
- Year-end cash and cash equivalents were $1.497 million, down from $2.906 million; restricted cash was $112,000. Working capital was $998,000, down from $2.154 million.
- Notes payable had a net carrying value of $1.022 million, including a $1.000 million related-party loan from the CEO’s trust. Total stated principal was $1.137 million, including other notes; the related-party loan carries 9% simple interest and is due in a balloon payment on December 30, 2020.
- Stockholders’ equity was $2.204 million, down from $4.544 million. The company reported a $12,000 income tax benefit and a full valuation allowance on deferred tax assets.
Material changes versus the prior comparable period
- Telecommunications revenue and backlog increased; year-end backlog rose to $13.907 million from $9.763 million. Backlog represents signed contracts for which service or payment had not yet begun.
- Web Services revenue continued to decline, attributed to lower web-management revenue, declining collections on legacy extended-payment agreements, and reduced website-hosting revenue.
- Net loss improved by $1.835 million, mainly as operating expenses fell and revenue increased, but operating losses and negative operating cash flow continued.
- R&D expense fell to $779,000 from $1.604 million. Management cited lower personnel costs, including fewer engineers in the telecommunications segment.
- Cash declined despite $1.569 million of financing cash flow, including the CEO-related $1.000 million loan and $690,000 from exercise of warrants issued in connection with a 2014 stock sale.
- Crexendo moved its listing from NYSE MKT to OTCQX in January 2015 and changed its ticker to CXDO.
Outlook, risks, contingencies, and unusual items
- Funding: Management said existing cash alone appeared inadequate for anticipated needs over the following 12 months. It expects available cash, borrowing capacity, and a February 2016 CEO commitment to exercise warrants if needed to fund operations through March 31, 2017 to provide sufficient resources. The commitment is conditional; continued losses or inability to secure financing could threaten operations.
- Related-party financing and governance: The CEO and majority shareholder owns more than 50% of outstanding shares. The $1.000 million unsecured loan bears 9% interest, with interest payable in shares at $1.20 per share; a warrant to purchase 250,000 shares at $1.20 was also issued. The loan may be increased by up to another $1.000 million subject to independent-director determination, with an additional warrant contemplated.
- Operating risks: The company identifies intense competition, uncertain adoption of its services, reliance on third-party carriers and vendors, dependence on a single data center without multi-site capacity, and potential service, cybersecurity, privacy, and E-911 disruptions.
- Regulatory and legal matters: Government inquiries have related primarily to discontinued seminar operations and past sales practices; customer complaints and litigation may continue. The filing does not quantify a likely loss for unresolved inquiries. A previously disclosed Utah case was settled and dismissed with prejudice in November 2014. Accrued legal liabilities were zero at year-end 2015, compared with $231,000 at year-end 2014.
- Other exposures: Approximately $21.936 million of federal NOL carryforwards were disclosed, but Section 382 limits annual use to approximately $461,000 and restricts some carryforwards. The company also disclosed unrecognized tax benefits of $891,000.
- Quarterly context: In Q4 2015, revenue was $2.109 million and net loss was $1.268 million, or $(0.10) per share. This compares with Q4 2014 revenue of $1.989 million and net loss of $1.748 million, or $(0.15) per share.
- The financial statements received an unqualified independent audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to opine on internal-control effectiveness.
Important facts for investors to verify
- Whether cash burn, working-capital needs, and the CEO’s conditional warrant-exercise commitment support the stated operating runway, and on what terms any additional financing would be available.
- Whether telecommunications backlog converts into recurring revenue and improved segment economics; telecommunications still recorded a $4.833 million pretax loss in 2015.
- Whether Web Services revenue declines continue, including the runoff of legacy EPTAs and hosting customers.
- The terms, accounting treatment, dilution impact, and independent-director oversight of related-party loans, warrants, and the CEO’s majority ownership.
- The status and potential financial effect of government inquiries, customer claims, tax matters, and the company’s NOL limitations.
- The extent of dilution risk: 4.381 million options were outstanding at year-end 2015, in addition to warrants, while the filing reported 13.227 million common shares outstanding at year-end.