Crexendo, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Crexendo provides cloud telecommunications and web services. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $3.867 million | $3.492 million |
| Operating income | $181,000 | $241,000 |
| Net income | $140,000 | $239,000 |
| Basic and diluted EPS | $0.01 | $0.02 |
| Operating cash flow | $(288,000) | $294,000 |
| Cash, cash equivalents and restricted cash | $3.535 million | $4.280 million at Dec. 31, 2019 |
| Working capital | $2.580 million | $2.845 million at Dec. 31, 2019 |
| Total assets | $9.812 million | $7.783 million at Dec. 31, 2019 |
| Total liabilities | $5.096 million | $3.396 million at Dec. 31, 2019 |
Revenue less service and product costs was $2.677 million, approximately 69% of revenue, compared with $2.366 million, approximately 68%, in Q1 2019. Operating margin was approximately 4.7% versus 6.9%; net margin was approximately 3.6% versus 6.8%. Adjusted EBITDA, a non-GAAP measure, was $389,000 versus $354,000; the filing cautions that this measure is supplemental and not a substitute for GAAP results or cash flows.
Service revenue rose 16% to $3.488 million, while product revenue fell 22% to $379,000. Cloud Telecommunications revenue increased to $3.711 million from $3.314 million; Web Services revenue declined to $156,000 from $178,000. Cloud Telecommunications backlog was $26.583 million at March 31, up 10% from $24.226 million a year earlier; the company expects to recognize it over the next 36–60 months.
Cash used in investing was $528,000, principally for the office building and improvements. Financing activities provided $71,000, including $84,000 from option exercises. The company reported $3.435 million of cash and cash equivalents plus $100,000 of restricted cash at quarter-end. Current assets were $5.251 million and current liabilities $2.671 million, a current ratio of approximately 2.0. Management said existing liquidity and operations should meet cash requirements for at least 12 months.
Material changes and notable items
- Total revenue increased 11%, but operating income declined 25% and net income declined 41%. Management attributed lower pre-tax income mainly to $435,000 higher operating expenses and $39,000 higher other expenses, partly offset by revenue growth.
- Operating expenses included $51,000 to write off leasehold improvements and $85,000 of additional salary and benefit expense related to employee profit-sharing plans. Depreciation and amortization also rose, partly because of the office purchase and the DoubleHorn customer-relationship asset.
- On January 27, 2020, Crexendo purchased its Tempe office building from an entity owned by its CEO and major shareholder for $2.5 million. A $2.0 million, seven-year Bank of America term loan at 3.67% financed the purchase; $1.995 million remained outstanding at March 31. The filing reports $2.0 million of property and equipment acquired with a note payable and $528,000 of cash property and equipment purchases.
- Operating cash use and lower cash balances reflected working-capital movements, including higher prepaid expenses and lower accrued expenses, as well as the building-related investment. Cash, cash equivalents and restricted cash declined $745,000 during the quarter.
Outlook, risks and contingencies
- The filing provides no formal revenue or earnings guidance. Management cites the growing telecommunications backlog and states it expects cash resources to cover at least the next 12 months.
- COVID-19 had not materially affected operations as of the filing, but the company said the outlook was uncertain. Risks include customer payment or renewal problems, delayed installations and sales cycles, lower demand, remote-work challenges, and disruptions to suppliers and manufacturers in China.
- After quarter-end, Crexendo received a $1 million Paycheck Protection Program loan at 1% interest. It intended to use the proceeds for qualifying expenses and apply for forgiveness; forgiveness was not assured.
- The 2020 profit-sharing plan has revenue, adjusted EBITDA, bookings and acquisition-related targets. Management said a target could be achieved but could not reasonably estimate the potential liability at March 31.
- The company reported no pending or threatened legal matters expected to have a material adverse effect, no off-balance-sheet arrangements, and effective disclosure controls. It maintains a full valuation allowance against deferred tax assets.
Key facts investors should verify
- Whether recurring telecommunications revenue and backlog convert into recognized revenue and cash, particularly given installation timing and COVID-19 risks.
- The causes and persistence of operating cash outflow, declining cash, and rising expenses despite revenue growth.
- The related-party office purchase terms, valuation, financing, and continuing obligations under the building and lease arrangements.
- The use and potential forgiveness of the $1 million PPP loan, and the amount ultimately payable if forgiveness is denied or partial.
- Profit-sharing accruals, customer collections, and supplier availability as economic and operating conditions evolve.