Crexendo(US:CXDO)2020-05-05 21:27PART I – FINANCIAL INFORMATION Item 1. Financial Statements Q1 2020 financial statements show revenue growth to $3.87 million, a net income decrease to $140,000, total assets of $9.8 million, and negative operating cash flow Condensed Consolidated Balance Sheets As of March 31, 2020, total assets increased to $9.81 million, primarily due to a new office building, with total liabilities rising to $5.10 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $5,251 | $5,731 | | Total Assets | $9,812 | $7,783 | | Total Current Liabilities | $2,671 | $2,886 | | Total Liabilities | $5,096 | $3,396 | | Total Stockholders' Equity | $4,716 | $4,387 | Condensed Consolidated Statements of Operations For Q1 2020, total revenue increased 10.7% to $3.87 million, but net income declined 41.4% to $140,000 due to a 13.4% rise in operating expenses Statement of Operations Summary (in thousands) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Total Revenue | $3,867 | $3,492 | | Service Revenue | $3,488 | $3,008 | | Product Revenue | $379 | $484 | | Total Operating Expenses | $3,686 | $3,251 | | Income from Operations | $181 | $241 | | Net Income | $140 | $239 | | Diluted EPS | $0.01 | $0.02 | Condensed Consolidated Statements of Cash Flows In Q1 2020, net cash decreased by $745,000, primarily due to $288,000 used in operations and $528,000 for investing activities, including property purchases Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash provided by/(used for) operating activities | $(288) | $294 | | Net cash used for investing activities | $(528) | $0 | | Net cash provided by/(used for) financing activities | $71 | $(49) | | Net Increase/(Decrease) in Cash | $(745) | $245 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, segment reporting, and key events including the DoubleHorn acquisition, corporate office purchase, and a $1 million PPP loan - The company operates through two segments: Cloud Telecommunications and Web Services, with over 90% of total revenue generated from customers within North America2562 - On December 31, 2019, the company acquired certain assets from DoubleHorn, LLC for approximately $351,000, accounted for as an asset acquisition90 - In January 2020, the company entered into a $2.0 million term loan to finance the purchase of its corporate office building97 - Subsequent to the quarter end, on April 21, 2020, the company received a $1 million loan pursuant to the Paycheck Protection Program (PPP) under the CARES Act119 Revenue Disaggregation by Segment (Q1 2020 vs Q1 2019, in thousands) | Segment | Q1 2020 Revenue | Q1 2019 Revenue | YoY Change | | :--- | :--- | :--- | :--- | | Cloud Telecommunications | $3,711 | $3,314 | +12.0% | | Web Services | $156 | $178 | -12.4% | | Total | $3,867 | $3,492 | +10.7% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 10.7% revenue growth, net income decline due to higher expenses, 10% growth in Cloud Telecommunications backlog to $26.6 million, and reduced liquidity Results of Operations Q1 2020 consolidated revenue increased due to services, but higher operating expenses led to a 41% decrease in income before tax to $143,000 - Service revenue increased 16% YoY, driven by an 18% increase in Cloud Telecommunications service revenue135 - Product revenue decreased 22% YoY, with management noting that revenue fluctuates based on the timing of customer installations136 - The decrease in income before tax was primarily due to increased operating expenses, including a $51,000 write-off of leasehold improvements and $85,000 in additional salary and benefits related to employee profit sharing plans137 Use of Non-GAAP Financial Measures The company uses Non-GAAP net income and Adjusted EBITDA, with Q1 2020 Non-GAAP net income at $275,000 and Adjusted EBITDA increasing to $389,000 Reconciliation of U.S. GAAP Net Income to Non-GAAP Measures (in thousands) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | U.S. GAAP net income | $140 | $239 | | Share-based compensation | $105 | $91 | | Amortization of intangible assets | $30 | $13 | | Non-GAAP net income | $275 | $343 | | EBITDA | $284 | $263 | | Adjusted EBITDA | $389 | $354 | Segment Operating Results Cloud Telecommunications revenue grew 12% to $3.7 million with backlog increasing 10% to $26.6 million, while Web Services revenue declined 12% to $156,000 - Cloud Telecommunications service revenue increased 18% YoY, driven by growth in contracted services and usage charges151 - The Cloud Telecommunications backlog increased 10% to $26.6 million as of March 31, 2020, compared to $24.2 million a year prior154 - Web Services revenue decreased 12% YoY primarily due to a decline in hosting revenue164 Liquidity and Capital Resources Cash and equivalents decreased by $745,000 to $3.5 million due to cash used in operations and the corporate office building purchase - Cash and cash equivalents stood at $3.5 million as of March 31, 2020, down from $4.3 million at year-end 2019169 - The company purchased its corporate office building from a related party (a company owned by the CEO) for $2.5 million in January 2020187 - A new $2.0 million note payable was taken on to finance the building purchase179 Item 3. Quantitative and Qualitative Disclosures about Market Risk This section is not required for smaller reporting companies - Disclosure is not required for this item189 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020189 - No material changes to internal control over financial reporting occurred during the quarter190 PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any material pending or threatened legal proceedings - There are no material legal proceedings pending or threatened against the company192 Item 1A. Risk Factors The COVID-19 outbreak is identified as a new material risk factor, potentially impacting customer demand, collections, and the supply chain, with uncertain future effects - The novel coronavirus (COVID-19) outbreak is identified as a significant risk factor that could adversely affect business operations, customer demand, and supply chain193 - Potential impacts include reduced customer spending, contract terminations, supply chain disruptions from China, and challenges for the sales team due to travel restrictions194196 - As of the filing date, the outbreak had not yet had a material adverse impact on operations, but the future impact remains highly uncertain195 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None reported198 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data - Lists required certifications from the CEO and CFO (pursuant to Rules 13a-14(a) and 18 U.S.C. Section 1350) and XBRL interactive data files as exhibits199