Crexendo, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 7, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions.
Business context
Crexendo provides cloud telecommunications and broadband services, plus website hosting and related professional services. Its two segments are Cloud Telecommunications Services and Web Services. The company is shifting its focus toward telecommunications as its legacy seminar-related and website business declines.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $9.119 million | $7.823 million |
| Operating loss | $2.763 million | $4.839 million |
| Net loss | $2.792 million | $4.541 million |
| Basic and diluted loss per share | $0.21 | $0.35 |
| Cash used in operating activities | $1.126 million | $2.974 million |
- Telecommunications revenue rose 30% to $7.757 million; segment loss before tax narrowed to $3.210 million from $4.833 million. Telecommunications backlog increased to $15.921 million from $13.907 million.
- Web Services revenue fell 26% to $1.362 million, while segment income before tax increased to $430,000 from $280,000.
- Gross margin was approximately 60% in 2016 versus 54% in 2015, calculated from reported revenue and cost of revenue. Operating expenses declined to $11.882 million from $12.662 million. The smaller net loss also reflects lower other income.
- Fourth-quarter 2016 revenue was $2.345 million and net loss was $525,000, compared with revenue of $2.109 million and net loss of $1.268 million in fourth-quarter 2015.
- Cash and cash equivalents were $619,000 at year-end, down from $1.497 million; working capital was $57,000, down from $998,000. The current ratio was approximately 1.03.
- Notes payable had a net carrying value of $1.032 million, including a $1.000 million unsecured related-party loan. Total liabilities were $3.018 million and stockholders’ equity was $515,000.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $1.735 million, improved from a loss of $3.035 million. The company cautions that this measure is supplemental and not a substitute for GAAP results or cash flow.
Material changes versus 2015
Revenue growth was led by telecommunications and partly offset by continued Web Services contraction. The company reduced its operating loss through higher revenue and lower operating expenses, but remained loss-making and used operating cash. Cash declined 59%, and working capital fell 94%. Stockholders’ equity decreased to $515,000 from $2.204 million, principally reflecting the annual net loss.
Outlook, risks, contingencies and unusual items
- Funding and going concern: Management said year-end cash alone did not appear sufficient to meet obligations over the following year. It concluded that available borrowing under the related-party loan agreement would alleviate substantial doubt. A post-year-end amendment extended the board’s ability to request up to the remaining $1.0 million through May 30, 2018; the filing provides no assurance that the funds will be drawn or that profitability will be achieved.
- Related-party financing: The loan bears 9% simple annual interest, payable in company shares under the agreement, and has a balloon payment due December 30, 2020. The lender is CEO and principal shareholder Steven G. Mihaylo. The initial 250,000-share warrant was exercised in 2016 for $300,000.
- Operating and market risks: Risks include continuing losses, competitive pricing, dependence on third-party carriers and equipment manufacturers, customer retention and sales execution, and reliance on a single data center without multiple-site redundancy. Regulatory obligations, E-911 service, privacy and cybersecurity also create exposure.
- Legal and regulatory matters: The company reported government inquiries and customer complaints, including matters related primarily to discontinued seminar operations; some complaints have resulted in litigation. It recorded no estimated legal-loss liability at year-end, but stated that outcomes could adversely affect the business.
- Other notable items: A full valuation allowance was maintained against deferred tax assets. Approximately $24.325 million of federal net operating loss carryforwards were disclosed, with some subject to Section 382 limits. No dividends were declared.
- Management outlook: No quantified revenue, earnings, cash-flow or margin guidance was provided. Management described continued investment in telecommunications products and cost control; the filing warns operating losses may continue.
Important facts for investors to verify
- Whether the company draws the additional related-party loan and how cash runway and operating cash use develop.
- Whether telecommunications backlog converts into recognized revenue and improved segment margins, and whether Web Services continues to contract.
- Debt terms, stock-based interest payments, potential dilution and the CEO’s related-party role; the filing cites 68% ownership of outstanding common shares and 70.5% beneficial ownership including options.
- Progress toward geographic data-center redundancy and the reliability of third-party network, E-911 and manufacturing providers.
- Status and potential financial impact of governmental inquiries, customer disputes and litigation, which the filing does not quantify clearly.