Crexendo, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Crexendo provides hosted telecommunications and broadband services, plus web hosting and related web services, through two operating segments. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.972 | $1.725 | $5.714 | $5.605 |
| Gross profit / margin | $1.090 / 55.3% | $0.935 / 54.2% | $3.116 / 54.5% | $3.001 / 53.5% |
| Operating loss | $(1.052) | $(1.554) | $(3.512) | $(4.792) |
| Net loss | $(1.043) | $(1.502) | $(3.273) | $(4.628) |
| Basic and diluted loss per share | $(0.08) | $(0.13) | $(0.25) | $(0.42) |
| Operating cash flow | Not separately presented for the quarter | $(1.969) | $(3.016) |
Revenue grew 14% in Q3 and 2% year to date. Losses narrowed in both comparisons, reflecting higher Q3 revenue and lower operating expenses. Cash and cash equivalents declined to $1.595 million from $2.906 million at year-end 2014; cash used in investing was $0.020 million and financing provided $0.678 million over nine months. Working capital was $0.804 million, down from $2.154 million. Total liabilities were $2.898 million, including $0.902 million of deferred revenue; the balance sheet reports no borrowings or debt balance.
At September 30, current assets were $3.478 million and current liabilities were $2.674 million. Total assets were $5.732 million, and stockholders’ equity was $2.834 million, down from $4.544 million at December 31, 2014. The company reported $0.124 million of restricted cash and a $0.251 million certificate of deposit.
Segment trends and changes versus prior periods
- Hosted Telecommunications Services: Q3 revenue rose 49% to $1.542 million; nine-month revenue rose 45% to $4.287 million. Segment operating losses were $1.119 million in Q3 and $3.560 million for nine months. Backlog reached $12.612 million at September 30, 2015, versus $8.806 million a year earlier; management expects this contracted backlog to be recognized over 36–60 months.
- Web Services: Q3 revenue fell 38% to $0.430 million; nine-month revenue fell 46% to $1.427 million. The segment reported operating income of $0.067 million in Q3 and $0.048 million for nine months, versus losses in the comparable 2014 periods. Declines reflected lower extended-payment-plan collections, reduced web management work following a focus on enterprise customers, and lower hosting revenue.
- For the nine months, consolidated operating expenses decreased $1.171 million. General and administrative expense fell, while telecommunications bandwidth costs and selling commissions increased. Research and development spending declined, including following discontinued development of website software.
Outlook, risks, contingencies and unusual items
- Management stated that $1.595 million of cash did not appear adequate to fund anticipated needs for the next 12 months, given historical negative operating cash flow and internal forecasts. In October 2015, the CEO and major shareholder committed, if needed, to provide up to $2.0 million to support operations through December 31, 2016. Management believed these sources would provide sufficient funds for the next 12 months. This support is a commitment, not cash already received.
- The company described itself as having transformed into a start-up and identified funding operations until profitability as an inherent risk. It provided no specific revenue or earnings guidance.
- Nine-month Web Services other income included a $0.193 million reversal of legal accruals deemed no longer reasonably likely to be paid, partly offset by lower EPTA interest income. Management reported no pending or threatened legal matters expected to have a material adverse impact.
- In 2014, the company sold and leased back its Tempe headquarters to an entity owned by the CEO/major shareholder. The lease required advance rent in company shares; prepaid rent was $0.456 million at September 30, 2015. The related-party arrangement and its continuing costs merit attention.
- Common shares outstanding increased to 13,227,289 from 12,681,617 at year-end, including 500,000 shares issued upon warrant exercise. Another 3,187,347 shares issuable under equity plans were excluded from diluted loss per share as anti-dilutive.
- The company had no off-balance-sheet arrangements. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the nine months.
Investor verification priorities
- Verify the terms, enforceability, availability and actual funding of the CEO’s up-to-$2.0 million support commitment, and the company’s cash runway if support is delayed or unavailable.
- Track operating cash burn, working capital and the path to profitability; the company continued to incur substantial losses.
- Assess whether telecom backlog converts into billed, collected revenue, and whether telecom growth can offset continued declines in Web Services.
- Review the $0.193 million legal-accrual reversal, the CEO-related headquarters sale-leaseback and rent arrangements, and the assumptions underlying contingent consideration.
- Monitor share issuance and potential dilution from outstanding options and other equity awards.