Crexendo, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Crexendo provides hosted web, ecommerce, online marketing and telecom services, primarily through StoresOnline, Crexendo Web Services and Crexendo Network Services. The company changed its name from iMergent, Inc. in May 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $17.496m | $17.448m | $32.064m | $34.542m |
| Operating loss | $4.459m | $1.042m | $8.590m | $1.923m |
| Net income (loss) | $(9.345)m | $0.051m | $(11.196)m | $0.174m |
| Diluted loss per share | $(0.88) | $0.00 | $(1.05) | $0.02 |
| Operating cash flow | Not separately stated | Not separately stated | $(2.769)m | $(0.025)m |
- Q2 revenue was nearly flat year over year; first-half revenue declined 7%. StoresOnline revenue fell 9% in the first half, while Web Services revenue rose to $1.029m from $0.607m. Network Services generated $18,000 in its initial billing period.
- Operating costs increased faster than revenue. Cost of revenue was $7.675m in Q2 and $13.980m in the first half. Gross margin, calculated as revenue less cost of revenue, was approximately 56% in both 2011 periods, versus approximately 70% in 2010.
- Q2 and first-half results included $1.075m of inventory write-down and intangible-asset impairment charges. A full valuation allowance against deferred tax assets drove tax provisions of $6.162m in Q2 and $5.040m in the first half, despite losses before tax.
- Cash and cash equivalents were $10.578m at June 30, down from $14.207m at December 31, 2010. Working capital was $4.292m, or $20.372m excluding deferred revenue. Restricted cash was $1.088m.
- Net trade receivables were $24.787m, including $11.921m classified as long-term; the allowance for doubtful accounts was $18.140m. The filing reports no debt balance; interest expense was $2,000 for the first half.
- Total liabilities were $34.752m, including $28.053m of current and long-term deferred revenue. Stockholders’ equity fell to $8.831m from $20.120m, mainly reflecting the first-half net loss.
Material changes, outlook and risks
- On July 5, 2011, after the reporting date, Crexendo suspended StoresOnline seminar sales and direct-mail marketing and reduced its full-time workforce by about 30%, with further reductions in part-time and temporary staff. It plans to focus on recurring subscription-based offerings and expand direct, inside and online sales channels.
- Management estimated $1.375m–$1.675m in aggregate pretax restructuring charges and non-recurring transition expenses during 2011; $1.075m was already recorded for asset write-downs and impairment. The remaining amount was expected primarily from lease cancellations.
- Seminar-related cash sales and associated commission revenue are not expected to continue materially. Existing extended-payment-term contracts are expected to generate declining revenue over the next two to three years. Management said hosting revenue should continue and expected sufficient liquidity for at least the next 12 months.
- New revenue-allocation guidance adopted January 1, 2011 deferred revenue: the reported impact was a $654,000 reduction in Q2 revenue and a $1.226m reduction for the first half. Deferred revenue at June 30 included a $1.226m increase associated with the guidance.
- Management cited tight credit, customer defaults and high receivables risk; collections had stabilized and improved slightly but defaults remained high. Revenue from extended-payment contracts depends on cash collections. The company also disclosed ongoing government inquiries and customer complaints/litigation typical of its business, with no material change to previously reported matters and no additional legal liabilities recorded at June 30.
- No quantified revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year performance. Disclosure controls were assessed as effective, with no material changes to internal control reported.
Investor verification priorities
- Track post-quarter restructuring costs, workforce actions and the financial effects of ending seminar sales.
- Assess the recoverability and aging of receivables, allowance adequacy and cash collections from extended-payment contracts.
- Reconcile deferred revenue and the continuing effects of the new revenue-recognition method.
- Review the basis for the full deferred-tax-asset valuation allowance and possible future tax consequences.
- Monitor cash burn, working-capital needs, dividends and the company’s stated 12-month liquidity outlook.