Crexendo, Inc. — 2011 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011, with 2010 as the comparable year. Crexendo provides website, e-commerce, online marketing and hosted telecom services, alongside its legacy StoresOnline business. The company changed its name from iMergent, Inc. to Crexendo, Inc. in May 2011. Annual financial statements are audited; quarterly figures are unaudited.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $48.0 million | $65.8 million |
| Operating loss | $5.9 million | $6.6 million |
| Loss before income taxes | $1.2 million | $1.6 million |
| Income tax provision | $5.1 million | $0.7 million |
| Net loss | $6.2 million | $2.3 million |
| Diluted loss per share | $0.59 | $0.20 |
| Cash from (used in) operations | $(1.6) million | $0.04 million |
| Cash and cash equivalents at year-end | $8.7 million | $14.2 million |
| Working capital | $8.4 million | $11.4 million |
| Total assets | $33.1 million | $51.6 million |
| Stockholders’ equity | $13.3 million | $20.1 million |
| Debt and collateralized borrowings | None reported | None reported |
Revenue less cost of revenue implies gross margin of approximately 63% in 2011 versus 67% in 2010. The company reported $15.5 million of net trade receivables, including $6.1 million classified as long-term, and $15.4 million of deferred revenue at year-end. Restricted cash was $2.0 million. Operating lease and billing-software commitments totaled $2.8 million, including $1.4 million due within one year.
Material changes versus 2010
- Revenue fell 27%, primarily as StoresOnline seminar sales were suspended in July 2011. StoresOnline revenue declined 29% to $45.6 million and remained the dominant source of revenue.
- Crexendo Web Services revenue grew 75% to $2.3 million but generated a $2.5 million operating loss. Network Services began phased sales in March 2011, producing $0.1 million of revenue and a $2.1 million operating loss.
- Total operating expenses declined 26% to $53.9 million, but the net loss widened. The $5.1 million tax provision—despite a pre-tax loss—was primarily associated with a valuation allowance on deferred tax assets.
- Cash declined by $5.5 million during 2011. Operating cash flow turned negative, while working capital and equity also decreased.
- StoresOnline EPTA principal collections generated $16.2 million of revenue in 2011. The company expects remaining StoresOnline deferred revenue to be recognized at a declining rate over the next two to three years.
Outlook, commentary, risks and unusual items
- Management’s strategy is to move toward recurring SaaS and hosted telecom revenue and expand direct, inside-sales, online, affiliate, white-label and partner channels. The company provided no specific quantitative revenue, earnings or cash-flow guidance.
- The July restructuring ended direct-mail seminar sales, reduced the workforce by approximately 30%, and redirected resources toward other channels and subscription-oriented offerings. Restructuring and transition charges were approximately $1.3 million, including asset write-downs and impairment charges; a separate $0.2 million lease impairment was recorded.
- Management cited continuing high customer default rates, although collections had stabilized and improved slightly. Revenue from EPTAs is recognized as cash is collected, making future revenue sensitive to collections. EPTA balances generally carry an 18% simple interest rate; interest income was $4.8 million in 2011.
- The full valuation allowance on deferred tax assets reflects uncertainty about future realization. Federal NOL carryforwards were approximately $7.7 million and subject to an annual Section 382 limitation of approximately $0.46 million. Unrecognized tax benefits were $1.3 million.
- Risks include unresolved regulatory inquiries and customer litigation, changing sales-practice and telecom regulation, intense competition, dependence on third-party network and E-911 providers, service/security interruptions, and the need to build effective sales channels. Recorded estimated legal liabilities were $0.38 million, versus $0.05 million in 2010.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements; its report did not provide an opinion on internal-control effectiveness.
Most important facts for investors to verify
- Whether new sales channels can replace seminar revenue and grow recurring web and telecom subscriptions.
- Actual EPTA collections, delinquencies and remaining deferred revenue, and how quickly this legacy revenue base runs off.
- The basis and potential future effects of the tax valuation allowance, NOL limitations and uncertain tax positions.
- Cash burn, liquidity needs and the availability and terms of any future financing.
- Developments in regulatory inquiries, customer claims and the recorded legal contingencies.