Crexendo, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 4, 2014. The filing reports annual results and unaudited quarterly results, including the quarter ended December 31, 2013. Crexendo provides hosted telecommunications, web services and website hosting/e-commerce offerings through Network Services, Web Services and StoresOnline.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $10.328 million | $17.167 million |
| Gross profit and gross margin | $6.237 million; approximately 60% | $12.075 million; approximately 70% |
| Operating loss | $5.745 million | $6.115 million |
| Loss before tax | $5.220 million | $4.153 million |
| Net loss | $4.963 million | $3.941 million |
| Basic and diluted loss per share | $0.46 | $0.37 |
| Cash used in operating activities | $5.382 million | $0.446 million |
| Cash and cash equivalents at year-end | $3.076 million | $7.440 million |
| Working capital | $2.849 million | $6.310 million |
| Total assets / stockholders’ equity | $9.607 million / $6.701 million | $17.527 million / $10.292 million |
Approximate gross margins are calculated from reported revenue less cost of revenue. The filing reports no borrowings or other material debt balance; year-end liabilities were $2.906 million, principally deferred revenue and accrued expenses. Restricted cash was $0.487 million. Trade receivables, net, were $1.206 million, down from $3.438 million. Operating leases were the disclosed contractual obligations: $338,000 total, including $126,000 due within one year.
Fourth quarter: Revenue was $2.141 million and net loss was $1.836 million, versus revenue of $3.133 million and net loss of $3.215 million in Q4 2012. The Q4 2013 operating loss was $1.948 million.
Material changes and segment results
- Consolidated revenue declined 40%, mainly reflecting continued runoff after the 2011 suspension of StoresOnline direct-mail seminars, lower EPTA collections, and reduced third-party commissions.
- StoresOnline: Revenue fell 57% to $5.908 million; segment income before tax was $2.528 million versus $6.487 million. EPTA principal collections recognized as revenue declined to $3.189 million from $9.320 million. Remaining StoresOnline deferred revenue was $545,000.
- Network Services: Revenue rose 194% to $2.370 million, but the segment recorded a $5.429 million loss before tax, little changed from the prior-year loss. Year-end backlog rose to $7.019 million from $2.374 million. Crexendo acquired PBX Central in June for approximately $770,000, including contingent consideration.
- Web Services: Revenue declined 18% to $2.050 million. The segment loss before tax narrowed to $2.319 million from $5.277 million. Management narrowed service provision to enterprise-sized customers; backlog fell to $553,000 from $1.135 million, and the company expects Web Services revenue to decline as existing contracts are completed.
- Total operating expenses decreased 31% to $16.073 million, but the pre-tax loss widened as revenue and other income fell. FY 2013 included a $265,000 goodwill impairment. The prior year included a $1.393 million lease-abandonment charge; a 2013 settlement released $606,000 of that accrual.
Liquidity, outlook and risks
Management described the company as a start-up telecom business that must fund operations while pursuing profitability. It said available cash, collection of the remaining $545,000 in former StoresOnline receivables, and a subsequent $2.0 million office sale were expected to support operations. In February 2014, CEO and major shareholder Steven Mihaylo committed to provide financial support as needed to enable payment of debts through March 31, 2015. Management also cautioned that additional capital may be needed in the future and may not be available on acceptable terms.
After year-end, the company sold its Tempe office property to an entity controlled by the CEO for $2.0 million cash and entered a three-year leaseback. Initial-term rent is $300,000 per year, payable in common shares at $3 per share, with the first three years’ rent payable in advance. This is a related-party transaction and creates potential share dilution.
- No specific consolidated revenue, earnings or cash-flow guidance was provided. Management’s outlook emphasizes growth in telecom distribution and customers, while StoresOnline EPTA collections and Web Services revenue are expected to continue declining.
- Key risks include ongoing losses and cash consumption, uncertain adoption and profitability of new telecom services, strong competition and pricing pressure, regulatory changes affecting VoIP and 911 service, dependence on third-party network providers, and service interruption or security risks.
- The filing describes a pending StoresOnline dispute with Information Technology Customer Care, Inc. involving contract, tortious-interference and related allegations; the company disputes the claims. It also notes continuing governmental inquiries and customer complaints related in part to former seminar practices. A separate lease dispute was settled in March 2013.
- Net operating loss carryforwards were approximately $13.219 million; use of some is limited under Section 382. The company maintained a full valuation allowance on deferred tax assets.
Investor verification priorities
- Verify cash burn, current liquidity and the timing/terms of the $2.0 million related-party property sale and stock-paid leaseback.
- Assess the CEO’s support commitment, its enforceability and the company’s funding needs beyond March 31, 2015.
- Track whether Network Services backlog converts to recurring revenue and whether segment losses narrow.
- Monitor the runoff and collectability of EPTA receivables, StoresOnline deferred revenue and Web Services backlog.
- Review the pending ITCCI litigation, other regulatory/customer matters, potential Section 382 effects, and dilution from outstanding options and stock-based rent.
The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2013.