Crexendo, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 15, 2013. This is an annual filing, with unaudited fourth-quarter results also presented. Crexendo provides web, e-commerce, marketing, hosted telecommunications and broadband services through StoresOnline, Crexendo Web Services and Crexendo Network Services.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $17.167 million | $48.024 million |
| Operating expenses | $23.282 million | $53.915 million |
| Operating loss | $6.115 million | $5.891 million |
| Loss before tax | $4.153 million | $1.178 million |
| Income tax benefit (provision) | $0.212 million benefit | $5.052 million provision |
| Net loss / diluted loss per share | $3.941 million / $0.37 | $6.230 million / $0.59 |
| Cash used in operating activities | $0.446 million | $1.648 million |
Revenue fell 64%, mainly following suspension of StoresOnline direct-mail seminars in July 2011 and lower collections on legacy extended payment term agreements (EPTAs). Operating expenses fell 57%, but the operating loss widened. The smaller net loss versus 2011 largely reflects the prior-year tax provision, rather than improved pre-tax performance.
- Segments: StoresOnline revenue was $13.857 million, down 70%; segment income before tax was $6.487 million. Web Services revenue grew 8% to $2.505 million, with a $5.277 million pre-tax loss. Network Services revenue rose to $0.805 million from $0.110 million, with a $5.363 million pre-tax loss.
- Q4 2012: Revenue was $3.133 million, operating loss $3.560 million, pre-tax loss $3.297 million, net loss $3.215 million and diluted loss per share $0.30. Q4 2011 revenue was $5.718 million and net income was $0.459 million. The 2012 quarter included a $1.393 million charge for abandoned Orem, Utah office space.
- Liquidity: Cash and cash equivalents were $7.440 million, down from $8.658 million; restricted cash was a further $1.444 million. Working capital was $6.310 million. Net trade receivables declined to $3.438 million from $15.517 million, primarily as EPTAs were collected and written off.
- Debt and obligations: The presented balance sheet reports no borrowings. Operating lease commitments totaled $1.660 million, including $1.323 million due within one year. The company reported $10.292 million of stockholders’ equity, down from $13.347 million.
- Cash generation and investment: Investing activities used $0.629 million, including $1.172 million for property and equipment; financing activities used $0.143 million. Research and development expense was $1.985 million, versus $3.262 million in 2011.
Material changes, outlook and risks
- StoresOnline seminar sales ended in July 2011. FY 2012 StoresOnline revenue was largely runoff from existing EPTAs; related deferred revenue declined to $3.173 million from $15.196 million and was expected to be recognized at a decreasing rate over the next year to 18 months.
- Network Services gained momentum after direct sales began in January 2012: quarterly revenue rose from $75,000 in Q1 to $327,000 in Q4. Its signed-contract backlog was $2.374 million at year-end, compared with $155,000 a year earlier; Web Services backlog was $1.135 million. Backlog represents signed contracts for which service or payment had not yet begun, and is not recognized revenue.
- Management said available cash and expected operating cash flows were intended to fund growth, but its forecast indicated additional capital might be needed. After year-end, CEO and majority shareholder Steven Mihaylo offered financial support of up to $2.0 million if there were a cash shortfall. A post-year-end workforce reduction was expected to lower annual operating expenses by approximately $0.960–$1.2 million beginning March 2013.
- The quarterly dividend program was suspended in Q4 2012. Dividends declared in FY 2012 totaled $0.04 per share, or $0.424 million.
- Key risks include continuing losses and possible funding needs; uncertain adoption and profitability of newer services; strong competition and pricing pressure; telecom regulation and third-party network/E-911 reliance; customer and regulatory claims related to the discontinued seminar model; and potential limits on use of tax-loss carryforwards. The filing reports $8.565 million of federal NOL carryforwards, with $5.761 million subject to Section 382 limitations and an approximately $461,000 annual limitation.
- A landlord sued over the vacated Orem premises, seeking unspecified damages and rent-related charges. Crexendo disputed the claim and filed counterclaims; discovery had not begun. The company recorded a $1.393 million lease-abandonment accrual and approximately $0.202 million for estimated losses in other legal proceedings.
Deloitte & Touche issued an unqualified audit opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Investor verification priorities
- Track cash burn, unrestricted versus restricted cash, and whether the CEO’s stated support is documented, available and sufficient.
- Test whether Web and Network Services backlog converts to billed revenue, cash collections and improving segment margins; confirm backlog definitions and cancellations.
- Review EPTA collection performance, remaining deferred revenue, write-offs and the basis for the doubtful-account allowance.
- Follow the Orem lease litigation, the recorded accrual and any additional exposure, including fees and damages.
- Assess progress toward the announced cost reductions and any further financing or dilution needs; also monitor NYSE MKT listing compliance.
- Verify the tax valuation allowance and Section 382 restrictions, and the status of customer, regulatory and other legal matters.