Crexendo, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Crexendo provides hosted telecommunications and broadband services, along with web hosting and related web services. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $1.852 million | $2.072 million; down 11% |
| Gross profit / gross margin | $991,000 / approximately 53.5% | $1.142 million / approximately 55.1% |
| Operating loss | $1.375 million | $1.675 million |
| Net loss | $1.170 million; $0.09 per share | $1.632 million; $0.15 per share |
| Operating cash flow | $(756,000) | $(1.278) million |
| Cash and cash equivalents at quarter-end | $2.085 million | $2.906 million at Dec. 31, 2014 |
| Working capital at quarter-end | $1.500 million | $2.154 million at Dec. 31, 2014 |
Operating expenses fell 14% to $3.227 million. Interest and other income totaled $215,000, including a $193,000 reversal of legal accruals identified in management’s discussion as the primary reason Web Services other income increased. Income tax provision was $10,000. The balance sheet reports no borrowing line; it lists $179,000 of other long-term liabilities and $110,000 of contingent consideration at quarter-end.
Material changes versus the prior-year quarter
- Hosted Telecommunications Services revenue rose 39% to $1.324 million, while its operating loss narrowed to $1.350 million from $1.508 million. Management cited growth in recurring and one-time services, equipment sales, and lease interest revenue.
- Web Services revenue fell 53% to $528,000, reflecting lower cash collections on legacy extended payment term agreements (EPTAs), reduced web management work after the company narrowed its focus to enterprise customers, and lower hosting revenue. Its operating loss narrowed to $25,000 from $167,000; reported income before tax was $169,000, including other income.
- Consolidated net loss improved by $462,000, despite lower revenue, mainly as operating expenses declined. Stock-based compensation rose to $371,000 from $164,000.
- Cash declined by $821,000 during the quarter. Investing activities used $4,000 and financing activities used $61,000; the prior-year period included $2.002 million of proceeds from a property sale.
Liquidity, outlook, risks and unusual items
Management said the $2.085 million of cash on hand, considered alongside historical negative operating cash flow and internal forecasts, did not appear sufficient to meet anticipated needs for the next 12 months. The company stated it expected to have sufficient funding through identified sources: the ability to call outstanding warrants for approximately $690,000 and a May 2015 commitment from the CEO and major shareholder to provide up to $1 million, if needed, to fund operations through May 31, 2016. This is a stated expectation dependent on those funding sources; the filing provides no revenue or earnings guidance.
- Telecommunications backlog expected to be recognized over 36–60 months increased to $10.987 million at March 31, 2015 from $7.152 million a year earlier. Web Services backlog expected within 12 months was $31,000, down from $208,000.
- The company described itself as having transformed into a start-up and remains loss-making with negative operating cash flow. Continued operations depend on controlling cash use and obtaining additional financing if required.
- A related-party sale-leaseback of the Tempe headquarters was completed in February 2014 with a company owned by the CEO and major shareholder. The company had $617,000 of net prepaid rent remaining at March 31, 2015 and amortizes a deferred gain against rent expense.
- Management reported no pending or threatened legal matters expected to have a material adverse impact. Disclosure controls were deemed effective, and no material change in internal control was reported for the quarter.
Important facts for investors to verify
- Whether and when the CEO funding commitment or warrant proceeds are available, and whether they are sufficient if operating cash burn continues.
- Subsequent cash flows, operating expenses, and progress toward profitability; Q1 operating cash use was $756,000.
- Whether telecommunications revenue growth and backlog convert to recognized revenue and cash collections, and whether the decline in Web Services continues.
- The sustainability of Q1’s lower net loss, given the $193,000 legal-accrual reversal and $219,000 of consolidated other income.
- Collection performance and remaining balances for legacy EPTAs and equipment financing receivables, as well as the assumptions behind contingent consideration and intangible asset valuations.