Crexendo, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Amounts are in U.S. dollars, generally thousands, unless stated otherwise. Crexendo provides hosted telecommunications and broadband, web services, and StoresOnline products and hosting. Management describes the business as transitioning toward a start-up telecom company following the suspension of StoresOnline seminar sales in 2011.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior balance-sheet date |
|---|---|---|
| Revenue | $2.072 million | $3.022 million |
| Gross profit and gross margin | Approximately $1.142 million; 55.1% | Approximately $1.980 million; 65.5% |
| Operating loss | $1.675 million | $847,000 |
| Net loss; loss per share | $1.632 million; $0.15 | $398,000; $0.04 |
| Cash used in operating activities | $1.278 million | $1.818 million |
| Cash and cash equivalents | $3.825 million | $3.076 million at Dec. 31, 2013 |
| Working capital | $3.989 million | $2.849 million at Dec. 31, 2013 |
| Total assets; total liabilities | $8.984 million; $2.742 million | $9.607 million; $2.906 million at Dec. 31, 2013 |
Cash increased by $749,000, mainly because investing activities included $2.002 million of proceeds from the headquarters sale-leaseback. The company reported no debt balance in the presented statements. Restricted cash was $484,000 and a certificate of deposit was $251,000 at quarter-end. Stockholders’ equity was $6.242 million, down from $6.701 million at year-end.
Changes versus the prior comparable period
- Revenue fell 31% ($950,000). Network Services grew 148% to $955,000; Web Services declined 53% to $252,000; and StoresOnline declined 59% to $865,000.
- The larger net loss primarily reflected lower revenue. Total operating expenses declined modestly, but general and administrative expense increased to $1.750 million from $1.438 million.
- Network Services remained loss-making, with a $1.508 million operating loss despite revenue growth. Its reported backlog rose to $7.152 million from $7.019 million at the start of 2014; backlog is expected to be recognized over 36–60 months.
- Web Services’ March backlog was $208,000, down from $553,000 at the start of 2014. StoresOnline deferred revenue was $374,000 at quarter-end, compared with $1.780 million a year earlier.
Outlook, risks, contingencies, and unusual items
- Management expects to fund operations over the next 12 months with $3.8 million of cash and collection of $374,000 associated with the former StoresOnline business. The CEO and major shareholder committed in February 2014 to provide necessary financial support for the company to pay its debts as due through March 31, 2015. Management believes available sources will be sufficient; additional financing could be needed if cash flows fall short of expectations.
- No numerical earnings or revenue guidance was provided. Management expects Web Services revenue to continue declining as existing contracts are completed; legacy StoresOnline EPTA revenue is expected to decrease over the next 12–18 months. Network Services growth is expected to appear initially in backlog.
- On February 28, the company sold its Tempe headquarters property and furniture to an entity controlled by its CEO for $2.0 million cash, then entered a three-year lease. The initial lease rent was prepaid with 300,000 company shares valued at $966,000; annual rent is stated as $322,000. A $281,000 sale gain was deferred and is to be amortized over the initial lease term. This related-party transaction is a significant item for investors to assess.
- The company recorded estimated legal-proceeding liabilities of approximately $193,000. It reported routine governmental inquiries and customer-related claims, while stating that it did not expect pending or threatened matters to have a material adverse impact. Outcomes cannot be assured.
- Management identified funding operations until profitability as a risk. Other risks include uncertainty in collecting receivables, estimates for doubtful accounts and contingent consideration, and execution of the telecom-focused strategy. The company had a full valuation allowance on net deferred tax assets.
Important facts for investors to verify
- Terms, valuation, approvals, and ongoing costs of the CEO-controlled related-party sale-leaseback, including the 300,000-share rent prepayment and deferred gain accounting.
- Whether the CEO’s funding commitment is enforceable and sufficient, and the company’s cash runway given $1.278 million of quarterly operating cash use.
- Quality and conversion timing of the $7.152 million Network Services backlog, and whether telecom growth can improve segment profitability.
- Collection of StoresOnline receivables and the pace of decline in legacy EPTA and Web Services revenue.
- Legal contingencies and key estimates, including receivable allowances and Level 3 acquisition-related contingent consideration.
- The filing’s MD&A comparative-results table appears to show 2013 net income of $398,000 in one line; the financial statements report a net loss of $398,000, consistent with the stated $0.04 loss per share.