Crexendo, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; amounts below are in millions unless stated otherwise. Crexendo provides web services, hosted telecommunications and broadband, and legacy StoresOnline products and services.
Financial results and liquidity
- Revenue: Q2 revenue was $4.914 million, down 72% from $17.496 million a year earlier. First-half revenue was $10.169 million, down 68% from $32.064 million.
- Profitability: Q2 operating loss was $0.614 million and net loss was $0.117 million ($0.01 per share), compared with a $4.459 million operating loss and $9.345 million net loss in Q2 2011. For the first half, operating loss was $1.340 million; net income was $0.080 million ($0.01 per share), versus a $11.196 million net loss in the prior-year period. The first-half tax benefit of $0.140 million was primarily associated with expiration of the statute of limitations on certain uncertain tax positions.
- Margins: Cost of revenue was $1.298 million in Q2 and $2.719 million for the first half, implying gross margins of approximately 74% for each period. Operating margins were approximately negative 12% for Q2 and negative 13% for the first half.
- Cash flow: First-half operating cash flow was positive $0.739 million; investing activities used $1.024 million, primarily for property and equipment; financing activities provided $0.070 million. Cash and cash equivalents declined $0.215 million to $8.443 million. Restricted cash was an additional $1.965 million.
- Liquidity and balance sheet: Working capital was $9.405 million, or $17.179 million excluding deferred revenue. Total assets were $26.283 million and total liabilities were $12.114 million. The filing reports no off-balance-sheet arrangements and does not identify material borrowings. Deferred revenue totaled $9.411 million, down from $15.411 million at December 31, 2011.
- Receivables and equity: Net trade receivables were $9.360 million, down from $15.517 million at year-end, mainly reflecting EPTA collections. Stockholders’ equity was $14.169 million. Shares outstanding at June 30 were 10,669,201.
Changes versus the prior comparable period
- The principal cause of the revenue decline was the suspension of direct-mail seminar sales in 2011. StoresOnline revenue fell 76% in Q2 and 73% for the first half; seminar-event cash sales ceased. Management expects collections on legacy extended payment term agreements (EPTAs) to continue declining and remaining deferred revenue to be recognized over roughly the next 12–18 months.
- Lower seminar-related costs sharply reduced expenses: total operating expenses declined 75% in Q2 and 72% for the first half year over year.
- Growth businesses increased from smaller bases. Web Services revenue rose 26% in Q2 and 42% for the first half; Network Services revenue was $0.168 million in Q2 and $0.243 million for the first half. Both segments remained loss-making.
- First-half operating cash flow improved from a $2.769 million use in 2011 to $0.739 million provided in 2012, supported in part by a $6.157 million receivables cash-flow contribution, partly offset by a $6.000 million decline in deferred revenue.
Outlook, commentary and risks
- Management is focusing on growing Web Services and Network Services and says it expects to fund growth with operating cash flow. It cautions that additional capital may be needed if operating cash flow is insufficient, and that financing may not be available on acceptable terms.
- Management reported sufficient liquidity for at least the next 12 months. No specific consolidated revenue or earnings guidance was provided. Web Services backlog was $1.007 million at June 30, expected to be recognized over 12–18 months; Network Services backlog was $1.292 million, expected over 24–36 months.
- Management said StoresOnline customer defaults remain high despite stabilized and improved collections. Because revenue from EPTAs is recognized as cash is collected, weaker collections could reduce future revenue.
- The company declared a $0.02-per-share quarterly dividend on July 6, payable July 24, 2012. It paid $0.422 million in dividends during the first half.
- Management anticipated vacating its Orem, Utah office during Q3, with a non-cash charge expected and rent expense expected to decrease thereafter; the charge amount is not stated.
- StoresOnline-related legal liabilities were $0.220 million at June 30. The filing describes government and customer inquiries and litigation risks, with no material change to previously reported proceedings. Management considers the other ordinary-course claims not likely to materially affect the company, while noting outcomes cannot be assured.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether EPTA collections, receivable quality and the related allowance for doubtful accounts support management’s cash and revenue expectations.
- Whether Web Services and Network Services can grow backlog into recognized revenue and improve from operating losses.
- Whether operating cash flow can fund the business as legacy StoresOnline revenue and deferred revenue run down, while supporting dividends and investment.
- The amount and timing of the anticipated Orem office exit charge, and any developments in StoresOnline-related legal matters or regulatory inquiries.