Crexendo, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Crexendo provides web, e-commerce, marketing, hosting, and hosted telecom services. After suspending its direct-mail seminar channel in July 2011, it is shifting focus toward Crexendo Web Services and Crexendo Network Services.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $5.255 million | $14.568 million |
| Gross profit (revenue less cost of revenue) | $3.834 million | $8.263 million |
| Gross margin (calculated) | 72.9% | 56.7% |
| Operating loss | $726,000 | $4.131 million |
| Income (loss) before tax | $44,000 | $(2.973) million |
| Income tax benefit | $153,000 | $1.122 million |
| Net income (loss) | $197,000 | $(1.851) million |
| Diluted EPS | $0.02 | $(0.17) |
| Cash from operations | $652,000 | $(3.307) million |
Revenue fell 64% year over year. Operating expenses declined 68% to $5.981 million, primarily reflecting the end of seminar-related costs. Interest income was $742,000, versus $1.153 million; interest expense was zero in Q1 2012. No debt balance is reported in the balance sheet provided.
Business and segment developments
- StoresOnline: Revenue was $4.410 million, down 69%. It generated $3.186 million of operating income, versus an operating loss of $785,000, largely as seminar selling and fulfillment costs ceased. EPTA principal collections contributed $3.120 million of revenue, down from $4.204 million. The company expects remaining deferred revenue to be recognized at a declining quarterly rate over roughly 18 months to two years. Seminar cash sales were zero, compared with $6.651 million a year earlier.
- Crexendo Web Services: Revenue increased 61% to $770,000; operating loss narrowed to $563,000 from $670,000. Backlog rose to $1.212 million from $972,000 a year earlier, expected to be recognized over the next 12–18 months.
- Crexendo Network Services: Revenue was $75,000 versus none a year earlier; operating loss widened to $688,000 from $486,000. Backlog increased to $965,000 from $155,000 at year-end 2011, expected to be recognized over 24–36 months.
Liquidity, cash flow, and balance sheet
- Cash and cash equivalents were $8.723 million at March 31, up $65,000 from year-end; restricted cash was $1.965 million. The quarter used $711,000 in investing activities, including $711,000 for property and equipment, and generated $124,000 from financing activities.
- Working capital was $8.999 million, or $17.869 million excluding deferred revenue. Total assets were $29.605 million; total liabilities were $15.683 million; stockholders’ equity was $13.922 million.
- Net trade receivables fell to $12.338 million from $15.517 million. The allowance for doubtful accounts was $2.440 million against gross receivables of $14.778 million. Management reported that default rates remained high, although collection rates had stabilized and improved slightly.
- Deferred revenue totaled $12.214 million, current and long-term combined, versus $15.411 million at year-end. Management said it expects costs to fulfill the related obligations to be insignificant.
- The company declared a $0.02-per-share dividend ($211,000); the payout ratio was 107% of quarterly EPS. It reported sufficient liquidity and capital resources for at least the next 12 months, while cautioning that additional financing might be needed if operating cash flow cannot fund growth.
Outlook, risks, and unusual items
- No quantified full-year revenue or earnings guidance was provided. Management intends to invest in product development and grow Web Services and Network Services, while funding growth primarily through operating cash flow.
- Management expects EPTA collections and related revenue to decline over the next 18 months to two years. It does not expect commissions from third parties to be significant following the seminar-channel suspension.
- The $153,000 tax benefit primarily reflected the expiration of the statute of limitations on certain uncertain tax positions. The company had recorded a full valuation allowance on net deferred tax assets in 2011 because realization was not considered more likely than not.
- Risks include continued high receivable defaults, uncertainty in growing the newer service businesses, possible need for external capital on acceptable terms, and customer or government inquiries concerning sales, marketing, service, and refund practices. Legal-proceeding liabilities were $241,000 at quarter-end; the filing reported no material change in previously disclosed legal matters.
- Management stated disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Track receivable aging, collections, and allowance adequacy; confirm whether default rates improve.
- Assess whether Web Services and Network Services convert backlog into revenue and reduce operating losses.
- Verify the pace of EPTA runoff and whether cash collections support forecast liquidity after the legacy portfolio declines.
- Review cash use, capital spending, dividend sustainability, and any future financing needs.
- Monitor legal and regulatory inquiries and the financial effects of the tax valuation allowance and uncertain tax positions.