Filing Date: 2011-08-09 Form Type: 10-Q Description: Quarterly report
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Document and Entity Information (USD $)
 6 Months Ended
Jun. 30, 2011
Aug. 08, 2011
Entity Registrant Name Crexendo, Inc.  
Entity Central Index Key 0001075736  
Document Type 10-Q  
Document Period End Date Jun. 30, 2011
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Is Entity a Well-known Seasoned Issuer? No  
Is Entity a Voluntary Filer? No  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Smaller Reporting Company  
Entity Public Float   $ 27,728,000
Entity Common Stock, Shares Outstanding   10,652,269
Document Fiscal Period Focus Q2  
Document Fiscal Year Focus 2011  
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Condensed Consolidated Balance Sheets (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
Current assets:    
Cash and cash equivalents $ 10,578 $ 14,207
Restricted cash 1,088 1,088
Trade receivables, net of allowance for doubtful accounts of $9,662 as of June 30, 2011 and $10,464 as of December 31, 2010 12,866 12,122
Inventories 495 1,067
Income tax receivable 669 1,239
Deferred income tax assets, net 0 949
Prepaid expenses and other 965 1,376
Total current assets 26,661 32,048
Certificate of deposit 500 500
Long-term trade receivables, net of allowance for doubtful accounts of $8,478 as of June 30, 2011 and $7,957 as of December 31, 2010 11,921 9,442
Property and equipment, net 3,390 3,139
Deferred income tax assets, net 428 5,024
Intangible assets 115 987
Goodwill 265 265
Other long-term assets 303 239
Total Assets 43,583 51,644
Current liabilities:    
Accounts payable 2,204 3,328
Accrued expenses and other 3,444 3,361
Dividend payable 213 214
Deferred income tax liability 428 0
Deferred revenue, current portion 16,080 13,757
Total current liabilities 22,369 20,660
Deferred revenue, net of current portion 11,973 9,523
Other long-term liabilities 410 1,341
Total liabilities 34,752 31,524
Stockholders Equity    
Preferred stock, par value $0.001 per share - authorized 5,000,000 shares; none issued 0 0
Common stock, par value $0.001 per share - authorized 100,000,000 shares; 10,663,787 shares outstanding as of June 30, 2011 and 10,664,878 shares outstanding as of December 31, 2010 11 11
Additional paid-in capital 49,388 49,481
Accumulated deficit (40,568) (29,372)
Total Stockholders Equity 8,831 20,120
Total Liabilities and Stockholders' Equity $ 43,583 $ 51,644
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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data
Jun. 30, 2011
Dec. 31, 2010
Assets    
Allowance for Doubtful Accounts - Trade Receivables $ 9,662 $ 10,464
Allowance for Doubtful accounts - Long Term Trade Receivables $ 8,478 $ 7,957
Stockholders Equity    
Preferred Stock par value $ 0.001 $ 0.001
Preferred Stock Shares Authorized 5,000,000 5,000,000
Preferred Stock Issued 0 0
Common Stock par value $ 0.001 $ 0.001
Common Stock Shares Authorized 100,000,000 100,000,000
Common Stock Outstanding 10,663,787 10,664,878
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Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Share data
 3 Months Ended 6 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Jun. 30, 2010
Revenue $ 17,496 $ 17,448 $ 32,064 $ 34,542
Operating expenses:        
Cost of revenue 7,675 5,228 13,980 10,325
Selling and marketing 10,076 8,913 18,839 17,787
General and administrative 3,333 3,634 6,092 7,100
Research and development 871 715 1,743 1,253
Total operating expenses 21,955 18,490 40,654 36,465
Loss from operations (4,459) (1,042) (8,590) (1,923)
Other income (expense):        
Interest income 1,316 1,246 2,469 2,434
Interest expense (1) (1) (2) (2)
Other expense, net (39) (76) (33) (134)
Total other income, net 1,276 1,169 2,434 2,298
Income (loss) before income tax provision (3,183) 127 (6,156) 375
Income tax provision (6,162) (76) (5,040) (201)
Net income (loss) $ (9,345) $ 51 $ (11,196) $ 174
Net income (loss) per common share:        
Basic $ (0.88) $ 0.00 $ (1.05) $ 0.02
Diluted $ (0.88) $ 0.00 $ (1.05) $ 0.02
Dividends per common share $ 0.02 $ 0.02 $ 0.04 $ 0.04
Weighted-average common shares outstanding:        
Basic 10,642,384 11,402,806 10,640,489 11,413,246
Diluted 10,642,384 11,419,919 10,640,489 11,439,788
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Condensed Consolidated Statement of Stockholders Equity (Unaudited) (USD $)
In Thousands, except Share data
Common Stock
Additional Paid In Capital
Accumulated Deficit
Total
Opening Balance - Amount at Dec. 31, 2010 $ 11 $ 49,481 $ (29,372) $ 20,120
Opening balance - Shares at Dec. 31, 2010 10,664,878      
Expenses for Stock options granted to Employees   362   362
Stock issued under stock award plans (net of forfeitures) - shares 18,702      
Stock issued under stock award plans ( net of forfeitures )- amount   60   60
Dividened Declared   (426)   (426)
Repurchase of Common Stock - Shares (19,793)      
Repurchase of common stock - amount   (89)   (89)
Net Loss     (11,196) (11,196)
Closing Balance - Amount at Jun. 30, 2011 $ 11 $ 49,388 $ (40,568) $ 8,831
Closing Balance - Shares at Jun. 30, 2011 10,663,787      
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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
 6 Months Ended
Jun. 30, 2011
Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income (loss) $ (11,196) $ 174
Adjustments to reconcile net income (loss) to net cash used for operating activities:    
Depreciation and amortization 704 678
Impairment of inventory and intangible assets 1,075 0
Expense for stock options issued to employees 362 533
Tax benefit upon issuance of common stock 0 (3)
Deferred income tax provision 5,973 377
Changes in assets and liabilities net of effects from acquisition:    
Trade receivables (3,223) 1,257
Inventories 345 (228)
Income tax receivable 570 (511)
Prepaid expenses and other 411 799
Other long-term assets (8) 13
Accounts payable, accrued expenses and other (1,624) (1,290)
Income taxes payable 0 (21)
Deferred revenue 4,773 (1,793)
Other long-term liabilities (931) (10)
Net cash provided by (used for) operating activities (2,769) (25)
CASH FLOWS FROM INVESTING ACTIVITIES    
Acquisition of property and equipment (348) (2,053)
Acquisition of company 0 (250)
Investment in Subsidiary (56) 0
Net cash provided by (used for) investing activities (404) (2,303)
CASH FLOWS FROM FINANCING ACTIVITIES    
Repurchase of common stock (89) (323)
Proceeds from exercise of options and related income tax benefit 60 13
Dividend payments (427) (458)
Net cash used for financing activities (456) (768)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,629) (3,096)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 14,207 21,549
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 10,578 18,453
Supplemental disclosure of cash flow information:    
Cash paid (received) during the period for Interest 1 2
Cash paid (received) during the period for Income taxes (569) 356
Supplemental disclosure of non-cash investing and financing information:    
Dividends declared 213 229
Purchase of property and equipment included in accounts payable 395 110
Acquisition of company with stock 0 117
Contingent consideration related to acquisition $ 0 $ 269
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Description of Business and Significant Accounting Policies
 6 Months Ended
Jun. 30, 2011
Description of Business and Significant Accounting Policies

(1) Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business - Crexendo, Inc. is incorporated in the state of Delaware. As used hereafter in the notes to the condensed consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company”. We are a hosted services company that provides ecommerce software, website development, web hosting, search engine optimization link building and hosted telecom services that integrates ecommerce with  email, fax, and phone for businesses and entrepreneurs. Our services are designed to make enterprise class hosting services available to small and medium sized businesses at affordable monthly rates.

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements reflect the results of operations, financial position, changes in stockholders’ equity, and cash flows of our Company.

Basis of Presentation – These unaudited condensed consolidated financial statements include the financial statements of Crexendo, Inc. and its wholly-owned subsidiaries. We have eliminated all intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for interim periods presented. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our Annual Report on Form 10-K for the period ended December 31, 2010. Results of the three and six months ended June 30, 2011 do not necessarily indicate the results we expect for the period ending December 31, 2011 or any other period. In view of our revenue recognition policies and the rapidly evolving nature of our business and the markets we serve, we believe period-to-period comparisons of our operating results, including operating expenses as a percentage of revenue and cash flows, are not necessarily meaningful and should not be relied upon as an indication of future performance.

Company Name Change - In May 2011, our shareholders approved an amendment to our articles of incorporation to change our name from "iMergent, Inc." to "Crexendo, Inc." The name change was effective May 18, 2011. Our ticker symbol "IIG" on the New York Stock Exchange changed to “EXE.”

Seasonality - Our StoresOnline revenue has historically been subject to seasonal fluctuations as responses to our marketing for Preview Training Sessions and Internet Training Workshops are historically lower during the period from June through Labor Day, and during the holiday season from Thanksgiving Day through the middle of January. As a result of the restructuring announced on July 5, 2011 (see Notes 5, 6, and 13) that resulted in the suspension of our seminar sales model, which included Preview Training Sessions and Internet Training Workshops, we believe that seasonality will have less of an impact going forward.

Significant Accounting Policies – We described our significant accounting policies in Note 1 to our consolidated financial statements set forth in Item 8 of our Annual Report on Form 10-K for the period ended December 31, 2010. Other than the policies discussed below, there have been no significant changes to our accounting policies since December 31, 2010.

Recently Adopted Accounting Guidance – On January 1, 2011, we prospectively adopted new guidance on revenue recognition in which arrangements that include tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and such software-enabled products will now be subject to other relevant revenue recognition guidance. This new accounting guidance applies to arrangements entered into or materially modified beginning on January 1, 2011. Additionally, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance, on a prospective basis, had a material impact on our financial statements (Note 7). For all other revenue arrangements we continue to follow accounting guidance as set forth in prior periods.

On January 1, 2011, we adopted new guidance which amends existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this authoritative guidance did not have a material impact on our financial position or results of operations.

Other Comprehensive Income (Loss) – Our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2011 and 2010 did not reflect any components of other comprehensive income (loss) other than net income (loss).

Significant Customers – No customer accounted for 10% or more of our total net revenue or total accounts receivable for the three and six months ended June 30, 2011 or 2010.
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Dividends
 6 Months Ended
Jun. 30, 2011
Dividends

(2) Dividends

During the three and six months ended June 30, 2011 and 2010, our Board of Directors declared the following cash dividends:

Declaration Date     Per Share   Record Date         Payment Date
   Dividend   Total Amount
(Fiscal year 2011)                    
June 30, 2011      $         0.02   July 11, 2011      $        213,000   July 18, 2011
March 22, 2011      $         0.02   March 31, 2011      $        213,000   April 7, 2011
(Fiscal year 2010)                    
June 22,2010      $         0.02   June 29, 2010      $        229,000   July 7, 2010
March 29, 2010      $         0.02   April 5, 2010      $        229,000   April 12, 2010
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Net Income (Loss) Per Common Share
 6 Months Ended
Jun. 30, 2011
Net Income (Loss) Per Common Share

(3) Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. Diluted net loss per common share for the three and six months ended June 30, 2011 was the same as basic net loss per common share because the common share equivalents were anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per common share:

   Three Months Ended March 31,  Six Months Ended June 30,
   2011  2010  2011  2010
             
Net income (loss) (in thousands)  $(9,345)  $51   $(11,196)  $174 
                     
Weighted-average share reconciliation:                    
        Weighted-average shares outstanding   10,656,384    11,430,921    10,654,489    11,443,687 
        Weighted-average restricted shares held in escrow   (14,000)   (28,115)   (14,000)   (30,441)
        Weighted-average basic shares outstanding   10,642,384    11,402,806    10,640,489    11,413,246 
        Dilutive employee stock options   —      17,113    —      26,542 
Diluted shares outstanding   10,642,384    11,419,919    10,640,489    11,439,788 
Net income (loss) per common share:                    
       Basic  $(0.88)  $0.00   $(1.05)  $0.02 
       Diluted  $(0.88)  $0.00   $(1.05)  $0.02 
                     

Weighted-average anti-dilutive common share equivalents not included in the calculation of diluted net income per common share totaled 800,304 and 559,887 for the three months ended June 30, 2011 and 2010, respectively, and 680,954 and 555,026 for the six months ended June 30, 2011 and 2010, respectively.
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Trade Receivables
 6 Months Ended
Jun. 30, 2011
Trade Receivables

(4)   Trade Receivables

 

Currently we operate with one class of financing receivable.  Below is an analysis of the days outstanding of our trade receivables as shown on our balance sheet for the dates indicated (in thousands):

 

  June 30,   December 31,
  2011   2010
Current  $              32,933    $           30,029
1 - 30 days                    4,651                   3,416
31 - 60 days                    3,374                   2,291
61 - 90 days                    1,969                   1,533
91 days and over                          -                     2,716
Gross trade receivables                  42,927                 39,985
Less allowance for doubtful accounts                 (18,140)               (18,421)
Trade receivables, net  $              24,787    $           21,564
       
Current trade receivables, net  $              12,866    $           12,122
Long-term trade receivables, net                  11,921                   9,442
Trade receivables, net  $              24,787    $           21,564
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Inventory Write-down
 6 Months Ended
Jun. 30, 2011
Inventory Write-down

5)   Inventory Write-down

 

In accordance with  applicable accounting guidance we regularly evaluate whether inventory is stated at the lower of cost or market. As a result of suspending the sale of product and services through the seminar sales channel for our StoresOnline division (see Note 13), we concluded that the market value for certain inventory items associated with the sale of products and services through the seminar sales channel were less than their cost. As such, $227,000 of inventory was written-off and charged to cost of sales for the three and six months ended June 30, 2011.
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Intangible Asset Impairment and Write-off of Prepaid Costs
 6 Months Ended
Jun. 30, 2011
Intangible Asset Impairment and Write-off of Prepaid Costs

(6)   Intangible Asset Impairment and Write-off of Prepaid Costs

 

In accordance with applicable accounting guidance we perform impairment tests when events occur or circumstances change that indicate that the carrying amount of long-lived assets may not be recoverable. As a result of suspending the sale of products and services through the seminar sales channel for our StoresOnline division, we concluded that sufficient indicators of impairment existed to require the performance of an interim assessment of StoresOnline’s advertising lists as of June 30, 2011. We determined that the implied value of the name lists was zero as we no longer had plans of utilizing the name lists in the StoresOnline division and no future cash flow would result from the name lists. The assessment resulted in the recognition of impairment charges of $660,000 included in sales and marketing in the statement of operations related to the name lists during the quarter ended June 30, 2011.

 

Additionally, prior to the decision to suspend seminar sales in our StoresOnline division, we had purchased direct-response advertising to be used in future periods during the three and six months ended June 30, 2011. In accordance with applicable accounting guidance, costs associated with direct-response advertising were historically deferred and amortized over the estimated benefit period. As a result of suspending the sale of products and services through the seminar sales channel for our StoresOnline division, $188,000 was charged to sales and marketing in the statement of operations for the three and six months ended June 30, 2011. As of June 30, 2011 we had no direct-response advertising related to future workshops as prepaid expenses. As of December 31, 2010, we recorded $609,000 of direct-response advertising related to future workshops as prepaid expenses. Prior to the decision to suspend seminar sales in our StoresOnline division, amounts recorded as prepaid advertising costs were amortized over the estimated benefit period, typically three months.
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Revenue
 6 Months Ended
Jun. 30, 2011
Revenue

(7)   Revenue

 

In October 2009, the FASB amended the accounting standard for multiple-element revenue arrangements outside the scope of the software revenue recognition guidance. The new guidance changes the requirements for establishing separate units of accounting in a multiple-element arrangement and requires the allocation of arrangement consideration to each deliverable using the relative selling price. This new guidance also eliminated the residual method of accounting for delivered items. The guidance for arrangements within the scope of software revenue recognition guidance still allows for the residual method.

 

 

The impact of our adoption of this new accounting guidance on a prospective basis was to defer revenue to future periods and the impact on our condensed consolidated financial statements was follows (in thousands):

 

Statement of Operations   Three Months Ended June 30, 2011   Six Months Ended June 30, 2011
Decrease in revenue    $          654,000    $        1,226,000
Increase in net loss    $          654,000    $        1,226,000
         
Balance Sheet        
Increase in current deferred revenue as of June 30, 2011    $       1,226,000    

 

The increase in the deferral of revenue was primarily because to the fair value of the bundle is less than the selling amount, resulting in and implied premium on our StoresOnline bundled arrangements. There was no impact relating to the three and six months ended June 30, 2010 as we adopted the new guidance on a prospective basis.

 

For multiple-element arrangements originating or materially modified on or after January 1, 2011, we evaluated whether each deliverable could be accounted for as a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value and for an arrangement where a general right of return exists relative to a delivered item, delivery or performance of the undelivered item must be considered probable and substantially in our control. Stand-alone value exists if the product or service is sold separately or could be resold on a stand-alone basis. We allocate the total arrangement consideration to each separable element of an arrangement based upon the relative selling price of each element. We recognize revenue on our Extended Payment Term Agreements (“EPTAs”) as cash is collected. As cash is received we allocate the cash to our undelivered products and services first. Once enough cash is received to cover the undelivered items we then allocate the remaining cash to the delivered products and services in the arrangement.

We allocate arrangement consideration at the inception of an arrangement to all deliverables beginning January 1, 2011 based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence, or VSOE, if available; (2) third-party evidence, or TPE, if vendor-specific objective evidence is not available; and (3) best estimate of selling price, or BESP, if neither VSOE nor TPE is available.

 

·         VSOE — We determine VSOE based on our historical pricing and discounting practices for the specific product or support service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for products or support services fall within a reasonably narrow pricing range. We have historically priced our products within a narrow range and have used VSOE to allocate the selling price of certain deliverables.

 

·         TPE — When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our products and services differ slightly from those of our peers such that the comparable pricing of training and other services cannot be obtained.

 

·         BESP — When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.

  

In addition, we recognize revenue net of estimated returns. Estimates for these items are based on historical experience and are recorded at the time of revenue recognition or when circumstances change resulting in a change in the number of estimated returns. If our estimates are incorrect, our actual results could change materially.

 

Multiple-element arrangements we entered into or materially modified as of January 1, 2011 and thereafter consist primarily of three deliverables, software access fees, website programming services, and educational trainings related to building and marketing a website. Each of our deliverables is accounted for as a separate unit of accounting. Subscription and hosting fees, which do not provide the customer with the right to take possession of the software supporting our Software-as-a-Service (“SaaS”) model are recognized ratably over the period of service, typically in monthly, quarterly, or yearly increments. Website programming fees are recognized upon completion of the service, or 90 days after purchase whichever is sooner. Educational trainings are recognized upon delivery which typically happens at the time of sale.
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Income Taxes
 6 Months Ended
Jun. 30, 2011
Income Taxes

(8) Income Taxes

Our effective tax rate for the three and six months ended June 30, 2011 was 194% and 82%, respectively, which resulted in a provision for income taxes of $6,162,000 and $5,040,000, respectively. The increased tax rate for the three and six months ended June 30, 2011 was a result of placing a full valuation allowance on net deferred tax assets. In assessing the recovery of the deferred tax assets, we considered whether it is more likely than not that some portion or all of our deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible.  We considered the scheduled reversals of future deferred tax liabilities, projected future taxable income, the suspension of the sale of product and services through the seminar sales channel for our StoresOnline division, the restructuring of the StoresOnline division, and tax planning strategies in making this assessment.  As a result, we determined it was more likely than not the deferred tax assets would not be realized as of June 30, 2011; accordingly, we recorded a full valuation allowance. The valuation allowance for deferred tax assets as of June 30, 2011 and December 31, 2010 was $8,147,000 and $837,000, respectively.  

 

 

Our effective tax rate for the three months ended June 30, 2010 was 60% which resulted in a provision of for income taxes of $76,000.  Our effective tax rate for the six months ended June 30, 2010 was 54% which resulted in a provision for income taxes of $201,000.  Our tax rate for the three and six months ended June 30, 2010 was unfavorable due to the Company’s permanent differences.
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Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements

(9) Fair Value Measurements

The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: 

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

· Quoted prices for similar assets or liabilities in active markets;

· Quoted prices for identical or similar assets in non-active markets;

· Inputs other than quoted prices that are observable for the asset or liability; and

· Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2011 and 2010 (in thousands):

        Fair value measurement at reporting date
Description   As of June 30, 2011   Level 1   Level 2   Level 3
Contingent consideration    $                      17                        -                          -      $                 17

 

 

Description   As of December 31, 2010   Level 1   Level 2   Level 3
Contingent consideration    $                     46                        -                          -      $                 46

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):

    Contingent
  Consideration
Balances as of December 31, 2010   $                    46
Purchases, sales and settlements, net                      (29)
Transfers in and/or (out) of Level 3     —
Balances as of June 30, 2011   $                    17

During the six months ended June 30, 2011, there were no transfers of financial assets or liabilities in or out of Level 1 or Level 2 of the fair value hierarchy.

We have financial instruments as of June 30, 2011 and December 31, 2010 for which the fair value is summarized below (in thousands):

   June 30, 2011  December 31, 2010
   Carrying Value  Estimated Fair Value  Carrying Value  Estimated Fair Value
Cash and cash equivalents  $10,578   $10,578   $14,207   $14,207 
Restricted cash   1,088    1,088    1,088    1,088 
Trade receivables   24,787    24,221    21,564    21,120 
Certificate of deposit   500    500    500    500 

The fair value of cash and cash equivalents and restricted cash approximates fair value because of the short maturity of those instruments. The fair values of the trade receivables and certificate of deposits were computed using a discounted cash flow model using estimated market rates.

Our disclosure of the estimated fair value of our financial instruments is made in accordance with generally accepted accounting guidance. The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2011 and December 31, 2010.

Regarding non-recurring fair values, we evaluated the fair value of certain intangible assets and inventory as discussed in Notes 5 and 6, and determined that they had a fair value of zero.
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Commitments and Contingencies
 6 Months Ended
Jun. 30, 2011
Commitments and Contingencies

(10) Commitments and Contingencies

Legal Proceedings

From time to time we receive inquiries from federal, state, city and local government officials in the various jurisdictions in which we operate. These inquiries and investigations generally concern compliance with various city, county, state and/or federal regulations involving sales, representations made, customer service, refund policies, and marketing practices. We respond to these inquiries and have generally been successful in addressing the concerns of these persons and entities, without a formal complaint or charge being made, although there is often no formal closing of the inquiry or investigation. There can be no assurance that the ultimate resolution of these or other inquiries or investigations will not have a material adverse effect on our business or operations, or that a formal complaint will not be initiated. We also receive complaints and inquiries in the ordinary course of business from both customers and governmental and non-governmental bodies on behalf of customers, and in some cases these customer complaints have risen to the level of litigation. There can be no assurance that the ultimate resolution of these matters will not have a material adverse effect on our business or results of operations. There have been no material changes to current legal events as outlined in our Annual Report on Form 10-K for the year ended December 31, 2010.

As of June 30, 2011 we have not recorded any additional liabilities relating to legal proceedings. We recorded liabilities of $50,000 as of December 31, 2010, for estimated losses resulting from various legal proceedings in which we were engaged. Attorneys’ fees associated with the various legal proceedings are expensed as incurred. We are also subject to various claims and legal proceedings covering matters that arise in the ordinary course of business. We believe that the resolution of these other cases will not have a material adverse effect on our business, financial position, or results of operations.
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Restricted Cash
 6 Months Ended
Jun. 30, 2011
Restricted Cash

(11) Restricted Cash

We classified $1,088,000 as restricted cash as of June 30, 2011 and December 31, 2010, to reflect the compensating balance requirement for our purchasing card, ACH, and foreign currency agreements. Restricted cash consists of funds held in an account as collateral for the issuer of our corporate credit card, ACH and foreign currency. All changes in restricted cash presented in the cash flow statements is presented in the operating section as the restricted cash was received directly from customers and was immediately restricted from use in our operations.
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Segment Information
 6 Months Ended
Jun. 30, 2011
Segment Information

(12) Segment Information

Our management has chosen to organize our Company around differences in products and services.  In the fiscal year ended June 30, 2009, we introduced two new segments into the market Crexendo Web Services and Crexendo Network Services.  Crexendo Web Services generates revenue from managing e-commerce or lead generation offerings, web sites, SEO/management and online promotional needs for small, medium, and large businesses.  Crexendo Network Services launched a phase one release during the quarter ended March 31, 2011 and markets to the data and telecommunications industry.  StoresOnline will continue to generate revenue by offering businesses a continuum of services and technology providing tools and training to establish a successful website on the Internet for entrepreneurs and small office/home office (SOHO) customers.

 

Due to the integrated structure of our business, certain costs incurred by one segment may benefit other segments. The costs that are identifiable are allocated to the segments that benefit from those costs so that one segment is not solely burdened by the cost of a mutually beneficial activity. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. These cost allocations were not material in any period presented. Certain other corporate-level activity is not allocated to our segments, including costs of: option expense; support services; human resources; legal; finance; information technology; corporate development and procurement activities; research and development that is not specifically identifiable to a business segment; and depreciation.

 

Segment revenue and operating income (loss) was as follows (in thousands):

 

  Three Months Ended June 30,   Six Months Ended June 30,
  2011   2010   2011   2010
Revenue:          
StoresOnline  $               16,928    $            17,083    $               31,017    $            33,935
Crexendo Web Services 550                       365   1,029                       607
Crexendo Network Services                          18                          -                              18                          -  
Consolidated revenue  $               17,496    $            17,448    $               32,064    $            34,542
               
Operating Income (Loss):          
StoresOnline  $                (1,175)    $              1,813    $                (1,960)    $              3,705
Crexendo Web Services (599)                      (443)   (1,269)                      (828)
Crexendo Network Services                       (489)                      (339)                         (975)                      (547)
Unallocated corporate items                    (2,196)                   (2,073)                      (4,386)                   (4,253)
Total operating loss  $                (4,459)    $             (1,042)    $                (8,590)    $             (1,923)
Other Income, net:          
StoresOnline  $                 1,276    $              1,169    $                 2,434    $              2,298
Total other income  $                 1,276    $              1,169    $                 2,434    $              2,298
Income (Loss) Before Income Tax Provision:          
StoresOnline  $                    101    $              2,982    $                    474    $              6,003
Crexendo Web Services (599)                      (443)   (1,269)                      (828)
Crexendo Network Services                       (489)                      (339)                         (975)                      (547)
Unallocated corporate items                    (2,196)                   (2,073)                      (4,386)                   (4,253)
Income (loss) before income tax provision  $                (3,183)    $                 127    $                (6,156)    $                 375
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Subsequent Events
 6 Months Ended
Jun. 30, 2011
Subsequent Events

(13) Subsequent Events

On July 5, 2011, we announced the suspension of the sale of products and services through the seminar sales channel for our StoresOnline division. Following this announcement, we reduced our full-time workforce by approximately 30% as a result of a restructuring plan. We are also reducing the number of our StoresOnline part-time and temporary workers. The reduction in workforce is consistent with the reduction in the employees supporting the seminar sales channel. It is anticipated that we will have restructuring charges between $300,000 and $600,000, which primarily consist of the cancellation of certain lease agreements in future periods. As discussed in Notes 5 and 6, we incurred asset write-downs and impairment charges totaling $1,075,000 for the three and six months ended June 30, 2011.