Crexendo, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Crexendo provides web, e-commerce, hosting and hosted telecom services. In July 2011, it suspended StoresOnline’s direct-mail seminar sales channel and began shifting its focus toward Web Services and Network Services.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $10.242 | $14.284 | $42.306 | $48.826 |
| Operating income (loss) | $3.296 | $(1.907) | $(5.294) | $(3.830) |
| Net income (loss) | $4.507 | $(0.079) | $(6.689) | $0.095 |
| Diluted earnings (loss) per share | $0.42 | $(0.01) | $(0.63) | $0.01 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(3.089) | $(0.626) |
- Q3 revenue fell 28% year over year; nine-month revenue fell 13%. StoresOnline remained the dominant business, with Q3 revenue of $9.542 million versus $13.969 million. Web Services grew to $648,000 from $315,000; Network Services recorded $52,000 versus none.
- Q3 operating expenses declined 57% to $6.946 million, and operating income turned positive. The improvement reflects sharply lower seminar-related costs and a greater share of higher-margin collections and deferred revenue recognition; it does not establish a sustainable run rate.
- Nine-month operating expenses declined 10% to $47.600 million, but operating loss widened and net loss included a $5.079 million income-tax provision. The provision primarily reflected a full valuation allowance on deferred tax assets.
- Cash and cash equivalents were $9.008 million at September 30, down from $14.207 million at December 31, 2010. Restricted cash was $1.088 million. Nine-month investing and financing cash outflows were $0.820 million and $1.290 million, respectively.
- Working capital was $8.376 million, versus $11.388 million at year-end; excluding deferred revenue, it was $19.809 million, versus $25.145 million. Total liabilities were $23.412 million. No conventional borrowings are listed on the balance sheet; interest expense was negligible.
- Net trade receivables were $19.348 million, including $7.867 million classified as long-term. The allowance for doubtful accounts was $11.420 million. The company said customer defaults remained high, despite some stabilization in collections.
- Stockholders’ equity declined to $12.866 million from $20.120 million. The company declared $0.02 per share dividends in each of the first three quarters and repurchased 143,000 shares in Q3 at an average $4.15 per share.
Material changes, outlook and risks
- The StoresOnline seminar suspension ended a key source of new license, product and commission revenue. Management expected seminar cash sales and significant third-party commissions not to continue, while hosting revenue was expected to persist. Collections on existing extended-payment contracts (EPTAs) were expected to support revenue at a declining rate for two to three years; deferred revenue was also expected to provide a smaller benefit in Q4 2011, with no future benefit from run-off thereafter.
- The restructuring included a roughly 30% reduction in full-time staff and reductions in temporary and part-time workers. The company estimated approximately $1.169 million of aggregate pretax restructuring and nonrecurring transition charges during 2011; $960,000 of inventory, advertising and intangible-asset write-downs had been recorded, with the remainder related to lease cancellation. A separate $209,000 lease-abandonment impairment was recorded.
- Management said it planned to fund growth in Web and Network Services through operating cash flows, but warned additional capital might be needed if cash flows were insufficient and financing might not be available on acceptable terms. Web Services revenue backlog expected to be recognized within 12 months was $1.135 million at September 30, 2011, up from $692,000 a year earlier. Network Services remained early-stage and loss-making.
- Revenue-recognition guidance adopted prospectively in 2011 materially affected reported results. The filing reports a $1.008 million increase in Q3 revenue and net income and a $218,000 decrease in nine-month revenue and net income, with $218,000 more current deferred revenue at quarter-end.
- Other risks include uncertain realization of deferred tax assets, weak customer credit and collections, possible need for financing, and potential NYSE Amex listing-compliance concerns if equity or operating performance deteriorates. The company reported no formal notice of noncompliance. It also disclosed ongoing government inquiries and ordinary-course litigation; estimated legal liabilities were $136,000, with no material change to previously reported legal matters.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Investor verification priorities
- Track cash burn, liquidity and whether operating cash flow can support the shift to Web and Network Services without new financing.
- Assess the quality and collectability of EPTA receivables, the allowance for doubtful accounts, and the expected pace of deferred-revenue runoff.
- Verify that reported Q3 profitability is not being mistaken for ongoing earnings power, given seminar-channel exit, deferred revenue recognition and the tax-allowance effects.
- Monitor growth, backlog conversion and operating losses in Web Services and Network Services, alongside the loss of seminar and commission revenue.
- Review restructuring and lease costs, future tax-asset realizability, legal exposures, and NYSE Amex listing status.