Crexendo, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Crexendo provides web, hosted telecommunications, SEO, e-commerce and broadband services through StoresOnline, Crexendo Web Services and Crexendo Network Services. The company had suspended its direct-mail seminar sales channel in July 2011 and was shifting its focus to its newer web and network services businesses.
Key financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $3.022 | $5.255 |
| Gross profit / gross margin | $1.980 / 65.5% | $3.834 / 72.9% |
| Operating expenses | $3.869 | $5.981 |
| Operating loss | $(0.847) | $(0.726) |
| Net income (loss) | $(0.398) | $0.197 |
| Basic and diluted EPS | $(0.04) | $0.02 |
| Operating cash flow | $(1.818) | $0.652 |
- Revenue fell 42% year over year. Operating expenses declined 35%, but not enough to offset the revenue contraction; the operating loss widened by $0.121 million. A $0.237 million income-tax benefit contributed to the reported net loss.
- Cash and cash equivalents were $5.565 million at quarter-end, down $1.875 million from December 31, 2012. Restricted cash was $1.444 million; management expected restrictions to be removed within a year. Investing cash outflow was $0.054 million and financing cash outflow was $0.003 million.
- Working capital was $6.360 million. Total assets were $13.892 million, liabilities $3.765 million, and stockholders’ equity $10.127 million. The balance sheet reports no borrowings or other debt.
- Net trade receivables fell to $2.196 million from $3.438 million, primarily as legacy extended-payment-term agreement (EPTA) balances were collected. The company wrote off $0.500 million of EPTAs during the quarter; the allowance for doubtful accounts was $1.028 million against gross receivables of $3.224 million.
Segments and material changes
- StoresOnline: Revenue fell 52% to $2.104 million, primarily as legacy EPTA collections declined. Segment operating income fell to $1.016 million from $1.662 million. StoresOnline deferred revenue declined to $1.780 million from $3.173 million at the start of the quarter; management expected the remaining balance to be recognized at a decreasing rate over roughly the next 12–18 months.
- Crexendo Web Services: Revenue fell 31% to $0.533 million; operating loss narrowed to $0.629 million from $1.440 million. Backlog expected to be recognized within 12 months was $1.329 million, up from $1.135 million at the start of the quarter.
- Crexendo Network Services: Revenue increased 413% to $0.385 million, but the operating loss widened to $1.234 million from $0.948 million as costs rose with the business. Backlog expected to be recognized over 24–36 months increased to $3.451 million from $2.374 million at the start of the quarter.
- Interest income declined to $0.219 million from $0.742 million, mainly reflecting lower EPTA balances. The quarterly dividend program had been suspended in October 2012; no dividend was paid in Q1 2013.
Outlook, risks and unusual items
- Management said available cash, collections of former StoresOnline receivables and expected release of restricted cash should fund operations for the next 12 months. The CEO and majority shareholder provided a letter indicating potential support of up to $2.0 million if needed. Beyond 12 months, management’s forecast indicated that additional capital may be required; availability and terms are not assured.
- The company characterized itself as a start-up following the seminar-channel suspension and cautioned that historical period-to-period comparisons may not indicate future performance. No quantified earnings or revenue guidance was provided.
- A Utah lease dispute was settled, paid and dismissed with prejudice for approximately $0.787 million. The company released $0.606 million of its previously recorded lease-abandonment accrual during the quarter. It also reported approximately $0.202 million of accrued liabilities for other legal proceedings and noted that governmental inquiries and customer-related claims could have adverse effects.
- StoresOnline EPTA revenue is recognized as customer cash is collected, making revenue sensitive to collection and default trends. Management reported that StoresOnline default rates remained high despite recent stabilization in collections. The company also cited the possibility that weaker-than-expected operating performance could harm liquidity and increase the need for capital.
- Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether declining StoresOnline EPTA collections and receivable write-offs continue, and how quickly the remaining deferred revenue is recognized.
- Whether Web Services backlog converts to revenue and Network Services growth improves segment economics, given both businesses’ operating losses.
- Actual operating cash burn, timing of release of restricted cash, and the availability and terms of any CEO support or external financing.
- The status of remaining legal matters and the adequacy of receivable allowances and other significant estimates.