Crexendo, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statement amounts below are in millions of dollars unless stated otherwise. Crexendo provides web and e-commerce services, hosted telecommunications, and broadband services. Its three segments are StoresOnline, Crexendo Web Services, and Crexendo Network Services.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $3.865 | $10.242 | $14.034 | $42.306 |
| Gross profit and margin | $2.632; 68.1% | $8.185; 79.9% | $10.082; 71.8% | $26.269; 62.1% |
| Operating income (loss) | $(1.215) | $3.296 | $(2.555) | $(5.294) |
| Net income (loss) | $(0.806) | $4.507 | $(0.726) | $(6.689) |
| Diluted EPS | $(0.08) | $0.42 | $(0.07) | $(0.63) |
Q3 operating expenses were $5.080 million, down 27% year over year; nine-month operating expenses were $16.589 million, down 65%. The Q3 operating loss reflects the sharp revenue decline despite lower costs. Nine-month net loss improved year over year, partly because 2011 included a $5.079 million income-tax provision; the 2012 period recorded a $0.130 million tax benefit.
For the first nine months, operating cash flow was positive $0.248 million, investing cash use was $1.124 million, and financing cash use was $0.143 million. Cash and cash equivalents were $7.639 million at September 30, down from $8.658 million at year-end 2011; restricted cash was an additional $1.965 million. Working capital was $8.707 million, or $12.941 million excluding current deferred revenue. Net receivables fell to $5.046 million from $15.517 million at year-end, primarily through EPTA collections. Total liabilities were $7.559 million, principally deferred revenue; the filing reports no interest expense for the 2012 periods and no off-balance-sheet arrangements. No material borrowings or debt balance is identified in the filing.
Material changes and business trends
- Consolidated revenue declined 62% in Q3 and 67% year to date, primarily following the suspension of direct-mail seminar sales in 2011. StoresOnline revenue fell 68% in Q3 and 72% year to date.
- StoresOnline continued to depend largely on collections from legacy extended payment term agreements (EPTAs). EPTA principal collections recognized as revenue were $2.132 million in Q3 and $8.088 million year to date. Management expects the remaining related deferred revenue to be recognized at a decreasing rate over the next 12 to 18 months.
- Web Services revenue was $0.575 million in Q3, down 11%, but $2.037 million year to date, up 22%. The segment remained loss-making, with a nine-month operating loss of $2.060 million.
- Network Services revenue rose to $0.235 million in Q3 and $0.478 million year to date, but the segment reported respective operating losses of $0.592 million and $1.963 million. Its reported backlog expected to be recognized over 24 to 36 months was $2.221 million at September 30.
- The Web Services backlog expected to be recognized within the next 12 months was $0.904 million at September 30. Backlog is not a guarantee of future revenue.
Outlook, risks, and unusual items
- Management’s strategy is to grow Web Services and Network Services and expects to fund growth from operating cash flows. It cautions that additional financing may be needed if cash flows are insufficient and may not be available on acceptable terms.
- Management cited continued high StoresOnline customer default rates, despite recent stabilization and improvement in collections. Because EPTA-related revenue depends on cash collection, weaker collections could reduce future revenue.
- The board suspended the quarterly dividend program on October 24, 2012. The company had declared $0.04 per share in dividends during the first nine months of 2012.
- Crexendo anticipated abandoning its Orem, Utah office space in Q4 2012, with a non-cash lease-abandonment charge; it expects rent expense to decline afterward.
- StoresOnline legal-proceeding liabilities were $0.202 million at September 30, versus $0.381 million at December 31, 2011. The filing reports no material changes in previously disclosed proceedings, but notes that unresolved government inquiries and customer claims could have adverse effects.
- The company began leasing hosted telecom equipment in April 2012, including operating and sales-type leases. Equipment financing receivables totaled $0.059 million net at September 30.
- Management stated disclosure controls were effective and reported no materially affecting changes in internal control during the quarter.
Investor verification points
- Track EPTA collections, the quality and aging of remaining receivables, and the pace of deferred-revenue runoff.
- Assess whether Web Services and Network Services can convert reported backlogs into recurring revenue and improve segment profitability.
- Review unrestricted cash, operating cash flow, and capital requirements as legacy StoresOnline revenue continues to contract.
- Confirm the timing and amount of the Orem lease-abandonment charge and the expected rent savings.
- Monitor legal and regulatory inquiries, customer claims, and any changes in reported contingencies.
- Verify the effect of the dividend suspension on capital allocation and future liquidity.