Crexendo(CXDO) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Crexendo, Inc. for the quarterly period ended June 30, 2022, including Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows, along with detailed notes Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets to $75.9 million as of June 30, 2022, from $77.2 million at the end of 2021, primarily due to a reduction in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,876 | $7,468 | | Total current assets | $10,960 | $11,560 | | Goodwill | $36,972 | $36,972 | | Intangible assets, net | $21,062 | $22,161 | | Total Assets | $75,868 | $77,152 | | Total current liabilities | $9,463 | $10,572 | | Total Liabilities | $9,984 | $11,219 | | Total Stockholders' Equity | $65,884 | $65,933 | Condensed Consolidated Statements of Operations For the second quarter of 2022, Crexendo reported a 53% year-over-year increase in total revenue to $8.8 million, largely driven by significant growth in software solutions revenue, resulting in a net loss of $0.9 million Q2 2022 vs Q2 2021 Statement of Operations (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $4,556 | $4,327 | 5.3% | | Software solutions revenue | $3,598 | $1,012 | 255.5% | | Total revenue | $8,846 | $5,779 | 53.1% | | Loss from operations | ($852) | ($1,244) | (31.5%) | | Net loss | ($896) | ($1,003) | (10.7%) | | Diluted EPS | ($0.04) | ($0.05) | (20.0%) | H1 2022 vs H1 2021 Statement of Operations (in thousands, except per share data) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $8,954 | $8,466 | 5.8% | | Software solutions revenue | $6,866 | $1,012 | 578.5% | | Total revenue | $17,004 | $10,286 | 65.3% | | Loss from operations | ($2,245) | ($2,066) | 8.7% | | Net loss | ($2,116) | ($1,718) | 23.2% | | Diluted EPS | ($0.09) | ($0.09) | 0.0% | Condensed Consolidated Statements of Cash Flows For the first six months of 2022, net cash used in operating activities increased significantly to $2.6 million from $0.2 million in the prior year, driven by net loss and working capital changes, while investing and financing activities had minimal impact Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used for operating activities | ($2,614) | ($224) | | Net cash used for investing activities | ($40) | ($10,546) | | Net cash provided by/(used for) financing activities | ($20) | $966 | | Net decrease in cash | ($2,592) | ($9,803) | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on significant accounting policies, revenue recognition, acquisitions, and segment reporting, including the company's two operating segments and a debt covenant default - The company operates through two segments: Cloud Telecommunications Services and Software Solutions The Software Solutions segment was established following the acquisition of NetSapiens[28][67] - On June 1, 2021, the company acquired NetSapiens for an aggregate purchase price of approximately $49.1 million, consisting of $10 million in cash and the remainder in common stock and stock options[97] - As of June 30, 2022, the company was in default of the basic fixed charge coverage ratio on its $2.0 million loan with Bank of America, resulting in the entire note payable balance of $1.8 million being classified as a current liability[139] Segment Revenue and Operating Loss (Q2 2022, in thousands) | Segment | Revenue | Operating Loss | | :--- | :--- | :--- | | Cloud telecommunications services | $5,248 | ($543) | | Software solutions | $3,598 | ($309) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting 53% total revenue growth in Q2 2022 driven by the Software Solutions segment, and provides analysis by operating segment, non-GAAP measures, liquidity, and capital resources Results of Operations Comparing Q2 2022 to Q2 2021, total revenue increased by 53% to $8.8 million, primarily due to a $2.6 million increase in software solutions revenue, while the loss before income taxes improved Q2 Revenue Comparison (in thousands) | Period | Total Revenue | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | | Q2 2022 | $8,846 | $3,067 | 53% | | Q2 2021 | $5,779 | | | - The increase in total revenue for Q2 2022 was primarily due to a $2,586,000 increase in software solutions revenue following the NetSapiens acquisition[186] Use of Non-GAAP Financial Measures The company provides reconciliations for non-GAAP measures, including Non-GAAP Net Income of $512,000 and Adjusted EBITDA of $626,000 for Q2 2022, to their most comparable GAAP figures Reconciliation of GAAP Net Loss to Non-GAAP Measures (Q2 2022, in thousands) | Metric | Amount | | :--- | :--- | | U.S. GAAP net loss | ($896) | | Share-based compensation | $858 | | Amortization of intangible assets | $550 | | Non-GAAP net income | $512 | Reconciliation to Adjusted EBITDA (Q2 2022, in thousands) | Metric | Amount | | :--- | :--- | | U.S. GAAP net loss | ($896) | | Adjustments (Depreciation, Interest, Taxes, etc.) | $558 | | EBITDA | ($232) | | Share-based compensation | $858 | | Adjusted EBITDA | $626 | Segment Operating Results The Cloud Telecommunications segment saw Q2 revenue grow 10% year-over-year to $5.2 million with a narrowing operating loss and increased backlog, while the Software Solutions segment generated $3.6 million in revenue with an operating loss of $0.3 million - The Cloud Telecommunications segment backlog increased 8% year-over-year, from $27.2 million as of June 30, 2021, to $29.5 million as of June 30, 2022[209] - The Software Solutions segment backlog was $12.7 million as of June 30, 2022 This segment did not exist in the prior-year period[235] Segment Performance (Q2 2022 vs Q2 2021, in thousands) | Segment | Revenue (Q2 2022) | Revenue (Q2 2021) | Operating Loss (Q2 2022) | Operating Loss (Q2 2021) | | :--- | :--- | :--- | :--- | :--- | | Cloud Telecommunications | $5,248 | $4,767 | ($543) | ($929) | | Software Solutions | $3,598 | $1,012 | ($309) | ($315) | Liquidity and Capital Resources As of June 30, 2022, the company's cash and cash equivalents decreased to $4.9 million, primarily due to $2.6 million in cash used for operating activities, though existing liquidity is expected to meet requirements for the next 12 months - Cash and cash equivalents decreased from $7,468,000 at December 31, 2021, to $4,876,000 at June 30, 2022[248] - Net cash used in operating activities for the first six months of 2022 was $2,614,000, a significant increase from the $224,000 used in the same period of 2021[249] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company states that its sales and operating expenses are predominantly denominated in U.S. dollars, leading management to believe its exposure to foreign currency risk is not material - The company's sales and operating expenses are predominately denominated in U.S. dollars, and it has not had material foreign currency risk[259] Item 4. Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[262] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[263] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reports that it is not currently involved in any legal proceedings expected to have a material adverse impact on its business, financial condition, or cash flows - As of the filing date, there are no pending or threatened legal matters that are expected to have a material adverse impact on the company[264] Item 1A. Risk Factors This section refers the reader to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, indicating no material changes to those risks - The company refers to the risk factors detailed in its 2021 Form 10-K and does not list any new or materially changed risk factors in this report[265] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and XBRL data files Signatures