Crexendo, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; year-over-year comparisons are to the corresponding 2012 periods. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context
Crexendo provides hosted website and telecommunications services, e-commerce and website software, and broadband services through StoresOnline, Crexendo Web Services, and Crexendo Network Services. Following suspension of StoresOnline direct-mail seminars in 2011, the company said it was shifting its focus toward Web and Network Services. It acquired certain PBX Central assets in June 2013.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,428 | $3,865 | $8,187 | $14,034 |
| Operating loss | $(1,734) | $(1,215) | $(3,797) | $(2,555) |
| Net loss | $(1,659) | $(806) | $(3,127) | $(726) |
| Basic and diluted loss per share | $(0.15) | $(0.08) | $(0.29) | $(0.07) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(3,917) | $248 |
- Revenue fell 37% in Q3 and 42% for the first nine months. StoresOnline revenue fell 61% and 57%, respectively; Web Services revenue fell 7% and 20%. Network Services revenue rose 196% and 229%, respectively, but the segment remained loss-making.
- Operating expenses declined 18% in Q3 and 28% year to date, but the lower revenue contributed to wider consolidated losses. Q3 included a $265 goodwill impairment charge.
- Approximate gross margin, calculated as revenue less cost of revenue, was 57% in Q3 2013 versus 68% in Q3 2012, and 63% for the first nine months of 2013 versus 72% in 2012.
- Cash and cash equivalents were $3,506 at September 30, down from $7,440 at December 31, 2012. Restricted cash was $1,444. Current assets were $6,914 and current liabilities $2,515, yielding reported working capital of $4,399.
- Total assets were $10,876; total liabilities $2,618; stockholders’ equity $8,258. The balance sheet reports no borrowings or debt.
- Operating cash use of $3,917 was partly offset by $88 of financing cash inflow; investing cash use was $105. The filing attributes working-capital pressure in part to reduced collections from legacy StoresOnline extended-payment contracts and declining deferred revenue.
Changes, outlook, and risks
- Management said StoresOnline revenue from legacy extended-payment agreements (EPTAs) is expected to decline as collections run off; remaining StoresOnline deferred revenue was $644, and was expected to be recognized at a decreasing rate over the next 12–18 months. StoresOnline revenue is recognized as cash is collected.
- Management decided during Q3 to limit Web Services to enterprise customers. It expected Web Services revenue to decline as existing contracts are completed; reported backlog expected to be recognized within 12 months was $760, down from $904 a year earlier.
- Network Services backlog, expected to be recognized over 36–60 months, was $5,220 at September 30, compared with $2,221 a year earlier. Backlog represents signed contracts for which service or payment had not yet begun; it is not reported revenue.
- The PBX Central asset acquisition had approximately $770 total consideration, including estimated contingent consideration. The company recorded $688 of identifiable intangible assets and $75 of goodwill. PBX Central’s historical results were not material to the reported periods.
- Management said it believed available and expected funding would support operations for the next 12 months, citing cash, collection of legacy receivables, anticipated release of restricted cash, planned sale or financing of its Phoenix-area headquarters, and a CEO commitment to provide up to $2.0 million if needed. The filing cautions that failure to secure additional funding sources would raise substantial doubt about the company’s ability to continue as a going concern.
- The company had approval to release $1,000 of restricted cash and planned to complete bank paperwork in Q4. No formal earnings or revenue guidance was provided.
- Risks include continuing operating losses and cash burn, declining legacy collections and revenue, execution and funding needs for the growth businesses, and uncertain recoveries on receivables. The company disclosed ongoing legal inquiries and proceedings, with approximately $202 accrued for estimated legal losses; it said no pending or threatened matter was expected to have a material adverse impact.
Important facts for investors to verify
- Whether the company completed the planned release of restricted cash and obtained the anticipated property financing or sale proceeds and any CEO support.
- Subsequent cash burn, liquidity, and progress toward profitability, given the going-concern funding caveat.
- Actual collections and remaining balances on EPTAs, and whether StoresOnline revenue declines as management anticipated.
- Conversion of Network Services backlog into active, paying customers and revenue, including segment margins and losses.
- Whether Web Services customer concentration, contract runoff, or the Q3 strategic shift causes further revenue changes; also monitor the $265 goodwill impairment and PBX contingent consideration.