As filed with the
Securities and Exchange Commission on September 21,
2020
Registration No.
333-248767
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington D.C. 20549
AMENDMENT NO.
1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES
ACT OF 1933
Crexendo, Inc.
(Exact name of registrant as
specified in its charter)
Nevada
|
4813
|
87-0591719
|
(State or other jurisdiction of
incorporation or
organization)
|
(Primary Standard Industrial Classification Code Number)
|
(I.R.S. Employer Identification
No.)
|
Crexendo, Inc.
1615 S. 52nd
Street
Tempe, AZ 85281
(602)
714-8500
(Address, including
zip code, and telephone number, including area code, of
registrant’s principal executive offices)
________________________
Steven
G. Mihaylo
Chairman
and Chief Executive Officer
Crexendo,
Inc.
1615 S.
52nd Street
Tempe,
AZ 85281
(602)
714-8500
|
(Name, address,
including zip code, and telephone number, including area code, of
agent for service)
________________________
Copies of all
communications, including communications sent to agent for service,
should be sent to:
|
Matthew M. Holman,
Esq.
Fred A. Summer,
Esq.
Squire Patton Boggs (US)
LLP
1
E. Washington St., Suite 2700
Phoenix, Arizona
85004
(602) 528-4083
|
|
Jonathan R.
Zimmerman
Ben A. Stacke
Faegre Drinker Biddle &
Reath LLP
2200 Wells Fargo Center, 90
South Seventh Street
Minneapolis, MN
55402
(612) 766-7000
|
Approximate date of
commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration
Statement.
________________________
|
If any of the securities
being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (“Securities Act”), check the
following box: ☐
|
If this Form is filed to
register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
☐
|
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
|
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
|
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Securities Exchange Act of 1934
(“Exchange Act”):
|
Large accelerated filer
☐
|
Accelerated filer
☐
|
Non-accelerated filer
☒
|
Smaller reporting
company ☒
|
|
Emerging growth company
☐
|
If an emerging growth
company, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section
7(a)(2)(B) of the Securities Act. ☐
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class
of
Securities to be
Registered
|
Amount to
be
Registered(1)
|
Proposed
Maximum
Offering Price
Per Share(2)
|
Proposed
Maximum
Aggregate
Offering
Price(1)
(2)
|
Amount
of
Registration
Fee(3)
|
|
|
|
|
|
Common Stock, $0.001 par
value per share
|
4,025,000
|
$8.12
|
$32,683,000
|
$4,242.25
|
(1)
Includes 525,000 shares of common stock that the
underwriters have the option to purchase from the
Registrant.
(2)
Estimated solely for the purpose of calculating
the registration fee in accordance with Rule 457(c) of the
Securities Act based on the average of the high and low prices of
the Registrant’s common stock as reported on the Nasdaq
Capital Market on September 17, 2020.
(3)
$4,170.70 of such fee was previously paid and the
remaining amount $71.55 is being paid
herewith .
The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or until the
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
The information in this
preliminary prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these
securities and it is not soliciting an
offer to buy these securities in any jurisdiction where the offer
or sale is not permitted.
Subject
to Completion, dated September 21, 2020
PRELIMINARY
PROSPECTUS
3,500,000 Shares
COMMON STOCK
We are offering
1,750,000 shares of our common stock and the selling stockholders
named in this prospectus are offering 1,750,000 shares of our
common stock in this offering. We will not receive any of the
proceeds from the sale of our common stock by the selling
stockholders. On September 17, 2020, the last reported sale price
of our common stock on the Nasdaq Capital
Market was $7.90 per share. Steven G. Mihaylo currently owns
approximately 69% of our outstanding common stock. Upon completion
of this offering, Mr. Mihaylo will own approximately 53% of our
outstanding common stock (approximately 51% if the underwriters
exercise their option to purchase additional shares in full). Upon
completion of this offering, we will continue to be a
“controlled company” within the meaning of The
Nasdaq
Stock Market, LLC (“Nasdaq”) listing
rules.
Our
common stock is listed on the Nasdaq Capital
Market under the symbol “CXDO.”
Investing in our common stock
involves risks. See “Risk Factors”
beginning on page 8 of this prospectus and in any applicable free
writing prospectuses, and under similar headings in the documents
that are incorporated by reference into this
prospectus.
|
|
Underwriting
Discounts and
Commissions (1)
|
Proceeds, before
expenses, to
Crexendo
|
Proceeds to
Selling
Stockholders
|
Per share
|
$
|
$
|
$
|
$
|
Total
|
$
|
$
|
$
|
$
|
(1)
|
We have also agreed to
reimburse certain expenses of the underwriters. See
“Underwriting” for a description of the compensation
payable to the underwriters.
|
We have granted the
underwriters an option to purchase up to 525,000 additional shares
of common stock from us at the public offering price, less the
underwriting discounts and commissions, to cover over-allotments,
if any, within 30 days from the date of this
prospectus.
Neither the Securities and
Exchange Commission (“SEC”) nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect
to deliver the shares of common stock to investors on or about
, 2020, subject to customary closing conditions.
|
|
|
|
|
|
|
|
B. Riley Securities
|
|
|
|
Colliers Securities
LLC
|
|
|
|
|
|
|
|
|
The
date of this prospectus is
,
2020
TABLE OF
CONTENTS
|
Page
|
PROSPECTUS
SUMMARY
|
1
|
THE
OFFERING
|
4
|
SUMMARY CONSOLIDATED
FINANCIAL DATA
|
5
|
RISK
FACTORS
|
8
|
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
|
21
|
INDUSTRY AND MARKET
DATA
|
22
|
USE OF
PROCEEDS
|
23
|
DIVIDEND
POLICY
|
24
|
CAPITALIZATION
|
25
|
DILUTION
|
26
|
BUSINESS
|
27
|
MANAGEMENT
|
34
|
PRINCIPAL AND SELLING
STOCKHOLDERS
|
36
|
MATERIAL U.S. FEDERAL
INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON
STOCK
|
37
|
UNDERWRITING
|
39
|
LEGAL
MATTERS
|
43
|
EXPERTS
|
43
|
WHERE YOU CAN FIND
ADDITIONAL INFORMATION
|
43
|
INCORPORATION OF
DOCUMENTS BY REFERENCE
|
44
|
SIGNATURES
|
49
|
You should rely only on
the information contained in this prospectus or contained in any
free writing prospectuses filed with the SEC, or information
incorporated by reference into this prospectus. Neither we, the
selling stockholders, nor the underwriters have authorized anyone
to provide you with any information or to make any representations
other than those contained in this prospectus or in any free
writing prospectuses filed with the SEC and that we authorize to be
distributed to you. Neither we, the selling stockholders, nor the
underwriters take any responsibility for, or can provide any
assurance as to the reliability of, any other information that
others may give you. Neither we, the selling stockholders, nor the
underwriters are offering to sell, or seeking offers to buy, shares
of our common stock in any jurisdiction where these offers and
sales are not permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
unless the information specifically indicates that another date
applies, regardless of the time of delivery of this prospectus or
any sale of shares of our common stock. Our business, financial
condition, results of operations, and prospects may have and are
likely to have changed since that date.
For investors outside
the United States: Neither we, the selling stockholders, nor the
underwriters have done anything that would permit this offering or
possession or distribution of this prospectus in any jurisdiction
where action for that purpose is required, other than in the United
States. Persons outside the United States who come into possession
of this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of our common
stock and the distribution of this prospectus outside of the United
States.
Unless otherwise stated
or the context otherwise requires, the terms
“Crexendo®,” “the Company,”
“we,” “us,” “our,” and similar
references in this prospectus refer to Crexendo, Inc. and its
subsidiaries.
This prospectus
contains references to our registered trademarks and service marks
in several jurisdictions. This prospectus also contains trade
names, trademarks, and service marks of other companies, and such
tradenames, trademarks, and service marks are the property of their
respective owners. Solely for convenience, the trademarks and
tradenames in this prospectus may be referred to without the ®
and ™ symbols, but such references should not be construed as
any indicator that their respective owners will not assert, to the
fullest extent under applicable law, their rights thereto. We do
not intend or use or display other companies’ tradenames,
trademarks, or service marks to imply a relationship with, or
endorsement or sponsorship of us by, these other
companies.
|
PROSPECTUS
SUMMARY
This summary highlights
information contained elsewhere in greater detail in this
prospectus and incorporated by reference in this prospectus and
does not contain all of the information you should consider in
making your investment decision. Before investing in our common
stock, you should carefully read this entire prospectus and any
related free writing prospectus, and the information incorporated
by reference herein, including the information set forth in this
prospectus under the heading “Risk Factors” and under
similar headings in other documents that are incorporated by
reference into this prospectus, and in our consolidated financial
statements and the sections titled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the
year ended December 31, 2019 and our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2020, respectively,
which are incorporated herein by reference.
Our
Mission
Our mission is to
provide enterprise-class UCaaS (“Unified Communications as a
Service”), call center, collaboration services, and other
cloud business services to any size business at affordable monthly
rates.
Company Overview
Crexendo, Inc. is an
award-winning premier provider of cloud communications, UCaaS, call
center, collaboration services, and other cloud business services
that are designed to provide enterprise-class cloud services to any
size business at affordable monthly rates. The Company has two
operating segments, which consist of Cloud Telecommunications and
Web Services.
Cloud Telecommunications – Our
cloud telecommunications services transmit calls using Internet
Protocol (IP) or cloud technology, which converts voice signals
into digital data packets for transmission over the Internet or
cloud. Each of our calling plans provides a number of basic
features typically offered by traditional telephone service
providers, plus a wide range of enhanced features that we believe
offer an attractive value proposition to our customers. This
platform enables a user, via a single “identity” or
telephone number, to access and utilize services and features
regardless of how the user is connected to the Internet or cloud,
whether it’s from a desktop device, computer, or an
application on a mobile device.
We generate recurring
revenue from our cloud telecommunications and reselling broadband
Internet services. Our cloud telecommunications contracts typically
have a thirty-six to sixty month term. We generate product revenue
and equipment financing revenue from the sale and lease of our
cloud telecommunications equipment. Revenues from the sale of
equipment, including those from sales-type leases, are recognized
at the time of sale or at the inception of the lease, as
appropriate.
Web Services – We generate
recurring revenue from website hosting and other professional
services.
Industry
Background
Communications systems
are critical to any business. In recent years, there have been
significant changes in how people work and communicate with
customers, co-workers and other third parties. Traditionally,
business personnel worked primarily at a single office, during
business hours, and utilized desk phones as their primary
communications devices connected through a private branch exchange
(“PBX”). With the proliferation of smartphones and
tablets that offer much of the functionality of PCs, combined with
the pervasiveness of inexpensive broadband Internet access,
businesses are increasingly working around the clock across
geographically dispersed locations, and their employees are using a
broad array of communications devices and utilizing text, along
with voice, fax, and video conferencing, for business
communications.
These changes have
created new challenges for business communications. Traditional
on-premise systems are generally not designed for workforce
mobility, “bring-your-own” communications device
environments, or the use of multiple communication channels,
including text and video conferencing. Today, businesses require
flexible, location- and device-agnostic communications solutions
that provide users with a single identity across multiple locations
and devices.
Fundamental advances in
cloud technologies have enabled a new generation of business
software to be delivered as a service over the Internet. Today,
mission-critical applications such as customer relationship
management, human capital management, enterprise resource planning
and information technology (“IT”), support are being
delivered securely and reliably to businesses through cloud-based
platforms. While on-premise systems typically require significant
upfront and ongoing costs, as well as trained and dedicated IT
personnel, cloud-based services enable cost-effective and easy
delivery of business applications to users regardless of location
or access device.
We believe that there
is a significant opportunity to leverage the benefits of cloud
computing to provide next-generation, cloud-based business
communications solutions that address the new realities of workforce mobility,
multi-device environments and multi-channel communications, thereby
enabling people to communicate the way they do
business.
|
|
|
Our
Solutions and Technology
Our goal is to provide
a broad range of cloud-based products and services that nearly
eliminate the cost of a businesses’ technology infrastructure
and enable businesses of any size to more efficiently run their
business. By providing a variety of comprehensive and scalable
solutions, we are able to cater to businesses of all sizes on a
monthly subscription basis without the need for expensive capital
investments, regardless of where their business is in its
lifecycle. Our products and services can be categorized in the
following offerings:
Cloud Telecommunications: Our cloud
telecommunications service offering includes hardware, software,
and unified communication solutions for businesses using IP or
cloud technology over any high-speed Internet connection. These
services are rendered through a variety of devices and user
interfaces such as Crexendo branded desktop phones and/or mobile
and desktop applications. Some examples of mobile devices are
Android cell phones, iPhones, iPads or Android tablets. These
services enable our customers to seamlessly communicate with others
through phone calls that originate/terminate on our network or PSTN
networks. Our cloud telecommunications services are powered by our
proprietary implementation of standards based Web and VoIP cloud
technologies. Our services use our highly scalable complex
infrastructure that we build and manage based on industry standard
best practices to achieve greater efficiencies, better quality of
service (QoS) and customer satisfaction. Our infrastructure is
comprised of compute, storage, network technologies, third-party
party products and vendor relationships. We also develop end user
portals for account management, license management, billing and
customer support and adopt other cloud technologies through our
partnerships.
Crexendo’s cloud
telecommunication service offers a wide variety of essential and
advanced features for businesses of all sizes. Many of these
features included in the service offering are:
● Business
Productivity Features such as dial-by extension and name, transfer,
conference, call recording, Unlimited calling to anywhere in the
United States and Canada, International calling, Toll free (Inbound
and Outbound).
● Individual
Productivity Features such as Caller ID, Call Waiting, Last Call
Return, Call Recording, Music/Message-On-Hold, Voicemail, Unified
Messaging, Hot-Desking.
● Group
Productivity Features such as Call Park, Call Pickup, Interactive
Voice Response (IVR), Individual and Universal Paging, Corporate
Directory, Multi-Party Conferencing, Group Mailboxes, Web and
mobile devices based collaboration applications.
● Call Center
Features such as Automated Call Distribution (ACD), Call Monitor,
Whisper and Barge, Automatic Call Recording, One way call
recording, Analytics.
● Advanced
Unified Communication Features such as Find-Me-Follow-Me,
Sequential Ring and Simultaneous Ring, Voicemail
transcription.
● Mobile Features
such as extension dialing, transfer and conference and seamless
hand-off from WiFi to/from 3G and 4G, LTE, as well as other data
services. These features are also available on Crexendo Mobile
Application (“CrexMo”), an intelligent mobile
application for iPhones and Android smartphones, as well as iPads
and Android tablets.
● Traditional PBX
Features such as Busy Lamp Fields, System Hold. 16-48 Port density
Analog Devices
● Expanded
Desktop Device Selection such as Entry Level Phone, Executive
Desktop, DECT Phone for roaming users.
● Advanced Faxing
solution such as Cloud Fax (cFax) allowing customers to send and
receive Faxes from their Email Clients, Mobile Phones and Desktops
without having to use a Fax Machine simply by attaching a
file.
● Web based
online portal to administer, manage and provision the
system.
● Asynchronous
communication tools like SMS/MMS, chat and document sharing to keep
in pace with emerging communication trends.
Many of these services
are included in our basic offering to our customers for a monthly
recurring fee and do not require a capital expense. Some of the
advanced features such as Automatic Call Recording and Call Center
Features require additional monthly fees. Crexendo continues to
invest and develop its technology and CPaaS offerings to make them
more competitive and profitable.
Our Cloud
Telecommunications technology is continuously being enhanced with
additional features and software functionality. Our current
functionality includes:
● High-end
desktop telephony devices such as Gigabit, PoE, 6 Line Color Phone
with 10 programmable buttons and lower end Monochrome 2 Line wall
mountable device.
● Basic Business
Telephony Features such as those offered in a traditional PBX
systems like extension dialing, Direct Inward Dialing (DID),
Hold/Resume, Music-On-Hold, Call Transfer (Attended and
Unattended), Conferencing, Local, Long Distance, Toll-Free and
International Dialing, Voicemail, Auto-Attendant and traditional
faxing.
● Advanced
telephony features such as Call Park, Call Pickup, Paging (through
the phones), Overhead paging, Call Recording.
● Call Center
Functionality such as Agent Log In/Log Out, Whisper, Barge and Call
center reporting;
● Unified
Communications features like Simultaneous Ring, Sequential Ring,
Status based Routing (Find-Me-Follow-Me), 10-party instant
conference, and Mobile application (CrexMo).
● CrexMo, which
allows users to place and receive extension calls using
Crexendo’s network, transfer and conference other users right
from their mobile device as if they were in the office. It also
provided users instant access to visual voicemail and call
logs.
● End User Portal
and Unified Messaging with Voicemail, Call Recording and eFax
inbox.
● Collaboration
products like group chat, SMS/MMS, document sharing, video and web
conferencing.
Website Services: Our website services
segment allows businesses to host their websites in our data center
for a recurring monthly fee. Our website software platform is
feature rich and battle tested to provide an innovative
website-building environment. We continue to maintain our Web
platform to make it an available and reliable experience for our
web customers and for their website visitors.
|
|
|
Recent
Developments
The Company commenced
trading on the Nasdaq Capital Market on July 8, 2020 using its
current trading symbol of CXDO. Crexendo’s stock was
previously listed on the OTCQX market, which is operated by the
Over the Counter (“OTC”) Markets Group.
Risks Associated with Our
Business
Investing in our common
stock involves substantial risk. Our business is subject to
numerous risks, as more fully described in “Risk
Factors” in this prospectus. You should read these risks
before you invest in our common stock. These risks include, but are not limited to, the
following:
● Significant Losses.
We have incurred significant losses in the past, and we may
therefore not be able to achieve or sustain profitability in the
future;
● Operating Results May
Fluctuate. Our operating results for any given quarter or
fiscal year should not be relied upon as an indication of future
performance;
● COVID-19 Pandemic.
The impact and uncertainty related to the COVID-19 pandemic could
further negatively impact our business or the businesses of our
suppliers and customers;
● Reliance on Third
Parties. We rely on third parties for all of the network
connectivity that is needed to deliver our services. We use
purchased or leased hardware and licensed software from third
parties and rely on third parties for some software development and
network functions;
● Interruptions of
Services. Interruptions in our services, whether caused by
us or third parties, could harm our reputation, result in
significant costs to us and impair our ability to sell our
services;
● Security Risks. A
security breach could delay or interrupt service to our customers,
harm our reputation or subject us to significant liability;
and
● Threats of Intellectual
Property Infringement. Accusations of infringement of
third-party intellectual property rights could materially and
adversely affect our business.
Smaller Reporting Company
Status
We are currently a
“smaller reporting company,” meaning that as of the
last business day of our most recent second fiscal quarter, we had
a public float of less than $250 million or annual revenues of less
than $100 million. As long as we are still considered a
“smaller reporting company,” the disclosure we will be
required to provide in our SEC filings will remain less than it
would be if we were not considered a “smaller reporting
company.” Specifically, “smaller reporting
companies” are able to provide simplified executive
compensation disclosures in their filings; are exempt from the
provisions of Section 404(b) of the Sarbanes-Oxley Act requiring
that independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over
financial reporting; are not required to present more than two
years of audited financial statements in our registration
statements and annual reports on Form 10-K; and have certain
other decreased disclosure obligations in their SEC
filings.
Corporate
Information
Crexendo, Inc. was
incorporated as a Nevada corporation under the name
“Netgateway, Inc.” on April 13, 1995. In November 1999,
we were reincorporated under the laws of Delaware. In July 2002, we
changed our corporate name to “iMergent, Inc.” In May
2011, our stockholders approved an amendment to our Certificate 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 was changed to “EXE” on May 18, 2011. We
changed the name to better reflect the scope and direction of our
business activities of assisting and providing web-based technology
solutions to any size business who are seeking to take advantage of
the benefits of conducting business on the cloud. On January 13,
2015, the Company moved to the OTCQX Marketplace and our ticker
symbol was changed to “CXDO.” In November 2016, we were
reincorporated as a Nevada corporation. On July 8, 2020, the
Company moved to the Nasdaq Capital Market using its current
trading symbol “CXDO.”
Our principal executive
offices are located at 1615 S. 52nd Street, Tempe, AZ 85281. The
telephone number of our principal executive offices is (602)
714-8500, and our main corporate website is www.crexendo.com.
Information contained on, or that can be accessed through, our
website, is not part of this prospectus.
|
|
|
THE OFFERING
The
following summary contains general information about this offering.
The summary is not intended to be complete. You should read the
full text and more specific details contained elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
Common stock offered by
us
|
|
1,750,000
shares
|
|
|
|
|
|
|
Common stock offered by
the selling stockholders
|
|
1,750,000 shares
(including 490,000 shares to be exercised and sold in the offering
upon exercise of vested options).
|
|
|
|
|
|
|
|
Options exercised in
connection with shares to be sold in the offering by the selling
stockholders
|
|
490,000
options
|
|
|
|
|
|
|
Underwriters’
option to purchase additional shares
|
|
We have granted the
underwriters a 30-day option to purchase up to an additional
525,000 shares of our common stock from us at the public offering
price, less underwriting discounts and commissions, to cover
over-allotments, if any.
|
|
|
|
|
|
|
Common stock to be
outstanding immediately after this offering
|
|
17,340,264 shares
(including 490,000 shares to be exercised and sold in the offering
upon exercise of vested options) (or 17,865,264 shares if the
underwriters exercise their option to purchase additional shares in
full).
|
|
|
|
|
|
|
Use of
proceeds
|
|
We estimate that the
net proceeds to us from the sale of shares of our common stock in
this offering will be approximately $12.6 million (or approximately
$16.4 million if the
underwriters exercise their option to purchase additional shares in
full), based on an assumed public offering price of $7.90 per
share, which was the last reported sale price of our common stock
on the Nasdaq Capital Market on September 17, 2020, after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us. We will not receive any proceeds from the
sale of shares by the selling stockholders.
We currently intend to
use the net proceeds to us from this offering primarily for general
corporate purposes, including working capital, sales and marketing
activities, product development, general and administrative
matters, and capital expenditures, although we do not currently
have any specific plans with respect to use of proceeds for such
purposes. We also may use a portion of the net proceeds to acquire
complementary businesses, products, services, or technologies, or
to pay down a portion of our outstanding indebtedness. However, we
do not have agreements, commitments, or plans for any specific
acquisitions or debt repayments at this time. See the section of
this prospectus titled “Use of Proceeds” for a more
complete description of the intended use of proceeds from this
offering.
|
|
|
|
|
|
|
Risk
factors
|
|
You should read the
section of this prospectus titled “Risk Factors” for a
discussion of certain of the factors to consider carefully before
deciding to purchase any shares of our common stock.
|
|
|
|
|
|
|
Trading symbol on the
Nasdaq Capital Market
|
|
“CXDO”
|
|
|
Unless otherwise
indicated, the number of shares of our common stock to be
outstanding after this offering is based on 15,100,264 shares of
common stock outstanding as of June 30, 2020, plus 490,000 shares
to be sold upon exercise of options in connection with this
offering, and excludes, as of June 30, 2020:
● 2,596,184
shares of common stock issuable upon the exercise of stock options
having a weighted-average exercise price of $2.72 per share under
our 2013 Long-Term Incentive Plan (the “2013 Plan”)
(which excludes 490,000 shares to be sold in this offering by
certain selling stockholders upon exercise of options in connection
with this offering);
● 129,256
unvested restricted stock units under our 2013 Plan;
and
● 1,486,049
shares of our common stock reserved for future issuance under our
2013 Plan, as well as any automatic increases in the number of
shares of common stock reserved for future issuance under our 2013
Plan.
Unless otherwise
indicated, all information contained in this prospectus assumes no
exercise of options outstanding as of June 30, 2020, other than the
490,000 shares to be sold upon exercise of options by certain
selling stockholders in connection with this offering, and no
exercise by the underwriters of their option to purchase up to
525,000 additional shares of our common stock from us in this
offering.
|
|
|
SUMMARY CONSOLIDATED
FINANCIAL DATA
The
summary consolidated statements of operations data presented below
for the years ended December 31, 2018 and 2019 are derived from our
audited consolidated financial statements incorporated by reference
in this prospectus. We have derived the summary consolidated
statement of operations data for the six months ended June 30, 2019
and 2020 and the summary condensed consolidated balance sheet data
as of June 30, 2020 from our unaudited interim consolidated
financial statements for such periods incorporated by reference in
this prospectus. In the opinion of management, the unaudited
interim consolidated financial statements have been prepared on the
same basis as our audited condensed consolidated financial
statements and reflect all adjustments, consisting only of normal,
recurring adjustments that are necessary for a fair presentation of
the unaudited interim condensed consolidated information. The
following summary consolidated financial data should be read
together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
consolidated financial statements and related notes incorporated by
reference in this prospectus. Our historical results are not
necessarily indicative of the results that may be expected for any
period in the future, and the results for the six months ended June
30, 2020 are not necessarily indicative of results to be expected
for the full year ending December 31, 2020 or any other
period.
|
|
|
Consolidated Statement of
Operations Data
|
|
Six
Months Ended June 30,
|
|
|
(in thousands, except per
share amounts)
|
|
|
|
|
|
|
Service
revenue
|
$10,461
|
$12,745
|
$6,155
|
$7,093
|
|
|
Product
revenue
|
1,447
|
1,691
|
951
|
828
|
|
|
Total revenue
|
11,908
|
14,436
|
7,106
|
7,921
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Cost of service revenue
(1)
|
3,092
|
3,456
|
1,751
|
1,878
|
|
|
Cost of product
revenue
|
727
|
895
|
492
|
483
|
|
|
Selling and marketing
(1)
|
3,403
|
3,862
|
1,862
|
2,100
|
|
|
General and administrative
(1)
|
4,091
|
4,235
|
2,011
|
2,234
|
|
|
Research and development
(1)
|
801
|
853
|
409
|
514
|
|
|
Total operating
expenses
|
12,114
|
13,301
|
6,525
|
7,209
|
|
|
|
|
|
|
|
|
|
Income/(loss) from
operations
|
(206)
|
1,135
|
581
|
712
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
Interest
income
|
7
|
6
|
3
|
2
|
|
|
Interest
expense
|
(12)
|
(12)
|
(8)
|
(31)
|
|
|
Other income/(expense),
net
|
3
|
16
|
8
|
(29)
|
|
|
Total other
income/(expense), net
|
(2)
|
10
|
3
|
(58)
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income
tax
|
(208)
|
1,145
|
584
|
654
|
|
|
|
|
|
|
|
|
|
Income tax
provision
|
(15)
|
(6)
|
(7)
|
(6)
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$(223)
|
$1,139
|
$577
|
$648
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common
share:
|
|
|
|
|
|
|
Basic
|
$(0.02)
|
$0.08
|
$0.04
|
$0.04
|
|
|
Diluted
|
$(0.02)
|
$0.07
|
$0.04
|
$0.04
|
|
|
|
|
|
|
|
|
|
Weighted-average common
shares outstanding:
|
|
|
|
|
|
|
Basic
|
14,332,092
|
14,570,286
|
14,428,694
|
14,964,138
|
|
|
Diluted
|
14,332,092
|
15,559,863
|
15,339,404
|
16,485,754
|
|
|
|
|
|
|
|
|
Other Financial
Data:
|
|
|
|
(1) Share-based
compensation expense is included in our results of operations as
follows (in thousands):
|
|
|
|
|
Share-based compensation
expense by financial statement line item:
|
|
|
Cost of
revenue
|
$136
|
$57
|
Research
and development
|
71
|
46
|
Selling
and marketing
|
69
|
72
|
General
and administrative
|
162
|
224
|
Total
cost related to share-based compensation expense
|
$438
|
$399
|
|
|
|
|
|
Six
Months Ended June 30,
|
(in
thousands)
|
|
|
|
|
EBITDA
(1)
|
$(114)
|
$1,229
|
$625
|
$852
|
Adjusted
EBITDA (1)
|
324
|
1,628
|
811
|
1,093
|
|
|
|
|
(1) See “Use of Non-GAAP Financial Measures” for a
reconciliation of EBITDA and Adjusted EBITDA to net income/(loss)
and for a discussion of how we define EBITDA and Adjusted EBITDA,
why management believes these Non-GAAP financial measures provide
useful information to investors, and the purposes for which
management uses these Non-GAAP financial
measures.
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
(in thousands)
|
Consolidated
Balance Sheet Data:
|
|
|
Cash
and cash equivalents
|
$4,989
|
$ 17,569
|
Working
capital
|
3,658
|
16,238
|
Total
assets
|
11,626
|
24,206
|
Total
debt
|
3,081
|
3,081
|
Total
liabilities
|
5,852
|
5,852
|
Total
stockholders' equity
|
5,774
|
18,354
|
|
|
|
|
(1) The as-adjusted balance sheet data
reflects the receipt by us of the proceeds from the sale by us of
shares of common stock in this offering, based on the assumed
public offering price of $7.90 per share, which was the last
reported sale price of our common stock on the Nasdaq Capital
Market on September 17, 2020, after deducting underwriting
discounts and commissions and estimated offering expenses payable
by us, and the sale of shares of common stock by the selling
stockholders.
A $1.00 increase (decrease) in the assumed public offering price of
$7.90 per share would increase (decrease) cash and cash
equivalents, total stockholders’ equity, and total
capitalization by $1,627,500, assuming that the number of shares
offered by us and the selling stockholders, as set forth on the
cover page of this prospectus, remains the same, and after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by us. Each 1,000,000 increase of shares
in the number of shares offered by us and the selling stockholders,
assuming that the assumed public offering price remains the same,
would increase cash, total stockholders’ equity, and total
capitalization by $7,347,000. Similar, each 1,000,000 decrease of
shares in the number of shares offered by us and the selling
stockholders, assuming the assumed public offering price remains
the same, would decrease cash and cash equivalents, total
stockholders’ equity, and total capitalization by
$7,347,000.
|
|
|
|
|
|
|
|
|
Use
of Non-GAAP Financial Measures
To evaluate our
business, we consider non-generally accepted accounting principles
(“Non-GAAP”) EBITDA and Adjusted EBITDA as supplemental
measures of operating performance. These measures include the same
adjustments that management takes into account when it reviews and
assesses operating performance on a period-to-period basis. We
define EBITDA as U.S. GAAP net income/loss before interest income,
interest expense, other income and expense, provision for income
taxes, and depreciation and amortization. We believe EBITDA
provides a useful metric to investors to compare us with other
companies within our industry and across industries. We define
Adjusted EBITDA as EBITDA adjusted for share-based compensation. We
use Adjusted EBITDA as a supplemental measure to review and assess
operating performance. We also believe use of Adjusted EBITDA
facilitates investors’ use of operating performance
comparisons from period to period, as well as across
companies.
The terms EBITDA
and Adjusted EBITDA are not defined under U.S. GAAP, and are not
measures of operating income, operating performance or liquidity
presented in analytical tools, and when assessing our operating
performance, EBITDA and Adjusted EBITDA should not be considered in
isolation, or as a substitute for net income/(loss) or other
consolidated income statement data prepared in accordance with U.S.
GAAP. Some of these limitations include, but are not limited
to:
● EBITDA and
Adjusted EBITDA do not reflect our cash expenditures or future
requirements for capital expenditures or contractual
commitments;
● they do not
reflect changes in, or cash requirements for, our working capital
needs;
● they do not
reflect the interest expense, or the cash requirements necessary to
service interest or principal payments, on our debt that we may
incur;
● they do not
reflect income taxes or the cash requirements for any tax
payments;
● although
depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will be replaced sometime in the
future, and EBITDA and Adjusted EBITDA do not reflect any cash
requirements for such replacements;
● while
share-based compensation is a component of operating expense, the
impact on our financial statements compared to other companies can
vary significantly due to such factors as the assumed life of the
options and the assumed volatility of our common stock;
and
● other
companies may calculate EBITDA and Adjusted EBITDA differently than
we do, limiting their usefulness as comparative
measures.
We compensate for
these limitations by relying primarily on our U.S. GAAP results and
using EBITDA and Adjusted EBITDA only as supplemental support for
management’s analysis of business performance. EBITDA and
Adjusted EBITDA are calculated as follows for the periods
presented.
Reconciliation
of U.S. GAAP Net Income/(Loss) to EBITDA and Adjusted
EBITDA
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
(in
thousands)
|
|
|
|
|
U.S.
GAAP net income/(loss)
|
$(223)
|
$1,139
|
$577
|
$648
|
Depreciation
and amortization
|
92
|
94
|
44
|
140
|
Interest
expense
|
12
|
12
|
8
|
31
|
Interest
and other expense/(income)
|
(10)
|
(22)
|
(11)
|
27
|
Income
tax provision
|
15
|
6
|
7
|
6
|
EBITDA
|
(114)
|
1,229
|
625
|
852
|
Share-based
compensation
|
438
|
399
|
186
|
241
|
Adjusted
EBITDA
|
$324
|
$1,628
|
$811
|
$1,093
|
|
|
|
|
|
RISK
FACTORS
Investing in our common stock involves a high degree of risk. The
following are certain risk factors that could affect our business,
financial condition, and results of operations. You should
carefully consider the risks and uncertainties described below and
under “Risk Factors” in our most recent Annual Report
on Form 10-K, or any updates in our Quarterly Reports on
Form 10-Q, together with all of the other information
contained in this prospectus or incorporated by reference into this
prospectus, including our audited consolidated financial statements
and the related notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” incorporated by reference in this prospectus,
before investing in our common stock. We cannot assure you that any
of the events discussed in the risk factors below will not occur.
If any of the following risks are realized, in whole or in part,
our business, financial condition, results of operations, and
prospects could be materially and adversely affected. In that
event, the trading price of shares of our common stock could
decline, and you could lose all or part of your investment.
Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business
operation.
Risks
Related to Our Business and Our Industry
The COVID-19 pandemic has had some adverse effect on our business
and may continue to have increased adverse effects our business,
results of operations, and financial condition.
The effects of the
global spread of the disease caused by the COVID-19 pandemic on our
business are evolving and difficult to predict. To date, the
COVID-19 pandemic has significantly and negatively impacted the
global economy and it is unclear how long the pandemic will
continue to do so. To combat the spread of COVID-19, the United
States and other foreign countries have imposed measures such as
quarantines and “shelter-in-place” orders that are
restricting business operations and travel and requiring
individuals to Work from Home (“WFH”), which has
impacted all aspects of our business as well as those of the
third-parties we rely upon for our manufacturing, shipping and
other operations. To date the COVID-19
outbreak has not had a material adverse impact on our
operations. However, the continuation of WFH and other
restrictions for an extended period of time may negatively impact
our productivity, product development, operations, sales and
support, business and financial results. Among other things, the
continuation of the COVID-19 pandemic may result in:
●
a decrease in demand and/or prices for our products and
services;
●
a prolonged economic recession or depression that could
significantly reduce demand and/or prices for our products and
services;
●
reduced productivity in our product development, operations,
marketing, sales and other activities;
●
disruptions to our supply chain;
●
increased costs resulting from our efforts to mitigate the impact
of the COVID-19 pandemic;
●
reduced access to financing to fund our operations due to a
deterioration of credit and financial markets; or
●
higher rate of losses on our accounts receivables due to credit
defaults.
The COVID-19
pandemic has also caused significant uncertainty and volatility in
global and domestic financial markets and the trading prices for
the common stock of technology companies, including us. Due to such
volatility, we may not be able to raise additional capital, if
needed, on favorable terms, or at all. Further adverse economic
events resulting from the COVID-19 pandemic, including a sustained
economic downturn, could materially and adversely affect our
business, access to capital markets and the value of our common
stock.
In addition, given
the inherent uncertainty surrounding COVID-19 due to rapidly
changing governmental directives, public health challenges and
economic disruption and the duration of the foregoing, the
potential impact that the COVID-19 pandemic could have on the other
risk factors described in this “Risk Factors” section
remain unclear and evolving.
We believe we have
experienced some and may continue to experience greater delay and
disruption in the demand for, our products and services. In
addition, we believe the production capabilities of our suppliers
have been, and may continue to be, impacted as a result of
quarantines, closures of production facilities, lack of supplies,
or delays caused by restrictions on travel or WFH orders. The
continued disruption in the manufacture, shipment and sales of
telephones and ancillary equipment may negatively and materially
impact our operating and financial operating results, including
revenue, gross margins, operating margins, cash flows and other
operating results. The resumption of normal business operations
after such disruptions may be delayed and a resurgence of COVID-19
on a large scale could occur resulting in continued disruption to
us, our suppliers and/or our customers. As a result, the effects of
the COVID-19 pandemic could have a material adverse impact on our
business, results of operations and financial condition for the
remainder of 2020 and beyond.
Implications of tax provisions in the CARES Act are uncertain and
we are evaluating their impact.
On March 27, 2020,
the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) was signed into law, featuring significant
tax provisions and other measures to assist individuals and
businesses impacted by the economic effects of the COVID-19
pandemic. The CARES Act increased the Section 163(j) interest
expense limitation from 30% to 50% of adjusted taxable income,
provided for the payment deferral of certain Social Security taxes,
made a technical correction allowing Qualified Improvement Property
to be treated as 15-year property, and included numerous other
provisions. The Company is currently evaluating the impact of the
CARES Act.
There is no guarantee that the loan proceeds received by the
Company under the Paycheck Protection Program will be forgiven,
which may adversely impact our loan covenants.
On April 21, 2020,
we received a loan from Infinity Bank in the aggregate principal
amount of $1,000,626.00 pursuant to the Paycheck Protection Program
(“PPP”). The PPP was established under the CARES Act
and is administered by the U.S. Small Business Administration (the
“SBA”). The PPP loan application required the Company
to certify that there was economic uncertainty surrounding the
Company and that, as such, the PPP loan was necessary to support
our ongoing operations. The Company made this certification in good
faith after analyzing, among other things, our financial situation
and access to alternative forms of capital, and believed that the
Company satisfied all eligibility criteria for the PPP loan, and
that our receipt of the PPP loan proceeds was consistent with the
broad objectives of the PPP of the CARES Act. In early May, the SBA
provided guidance with respect to these certifications providing a
safe harbor under which companies such as Crexendo with PPP loans
of less than $2 million will be deemed to have made these
certifications in good faith. While the Company continued to
believe that it qualified for a loan under the PPP and our use of
the PPP loan will meet the conditions for forgiveness, no assurance
can be made that we will not take actions that could cause the
Company to be ineligible for forgiveness of the PPP loan, in whole
or in part. In addition, the Company’s receipt of the PPP
loan may result in adverse publicity and damage to our reputation,
and a review or audit by the SBA or other government entity or
claims under the False Claims Act could consume significant
financial and management resources.
A continued downturn in the worldwide or domestic economy may harm
our business.
The COVID-19
pandemic has caused a downturn in the worldwide and domestic
economy. As the pandemic and the economic downturn prolongs, this
may continue to reduce demand for our products or our
customers’ products, which could result in significant
decreases in sales and margins for our products. In addition, the
deterioration in credit markets could limit our ability to obtain
external financing to fund our operations and capital expenditures.
We may experience losses on our holdings of cash and investments
due to failures of financial institutions and other parties.
Adverse economic conditions may also result in a higher rate of
losses on our accounts receivables due to credit defaults. As a
result, a continued downturn in the worldwide or domestic economy
could have a material adverse effect on our business, results of
operations, or financial condition.
Our quarterly and annual results of operations have fluctuated in
the past and may continue to do so in the future. As a result, we
may fail to meet or to exceed the expectations of research analysts
or investors, which could cause our stock price to fluctuate and
impair our ability to raise capital.
Our quarterly and
annual results of operations have varied historically from period
to period, and we expect that they will continue to fluctuate due
to a variety of factors, some of which are outside of our control,
including:
●
our ability to retain existing customers and resellers, expand our
existing customers’ user base, and attract new
customers;
●
our ability to introduce new solutions;
●
the actions of our competitors, including pricing changes or the
introduction of new solutions;
●
our ability to effectively manage our growth;
●
our ability to successfully penetrate the market for larger
businesses;
●
the mix of annual and multi-year subscriptions at any given
time;
●
the timing, cost, and effectiveness of our advertising and
marketing efforts;
●
the timing, operating cost, and capital expenditures related to the
operation, maintenance and expansion of our business;
●
service outages or information security breaches and any related
impact on our reputation;
●
our ability to accurately forecast revenues and appropriately plan
our expenses;
●
our ability to realize our deferred tax assets;
●
costs associated with defending and resolving intellectual property
infringement and other claims;
●
changes in tax laws, regulations, or accounting rules;
●
the timing and cost of developing or acquiring technologies,
services or businesses, and our ability to successfully manage any
such acquisitions;
●
adverse weather conditions;
●
the impact of worldwide economic, political, industry, and market
conditions; and,
●
our ability to maintain compliance with all regulatory
requirements.
Any one of the
factors above, or the cumulative effect of some or all of the
factors referred to above, may result in significant fluctuations
in our quarterly and annual results of operations. This variability
and unpredictability could result in our failure to meet the
expectations of research analysts or investors for any period,
which could cause our stock price to decline. We sustained
operating losses in prior years and cannot guarantee ongoing
profitability. In addition, a significant percentage of our
operating expenses is fixed in nature and is based on forecasted
revenues trends. Accordingly, in the event of revenue shortfalls,
we may not be able to mitigate the negative impact on net
income/(loss) and margins in the short term. If we fail to meet or
exceed the expectations of research analysts or investors, the
market price of our shares could fall substantially, and we could
face costly lawsuits, including securities class-action suits. This
may also impair our ability to raise capital, should we seek to do
so.
We expect to undertake acquisitions, mergers or change to our
capital structure to expand our business, which may pose risks to
our business and dilute the ownership of our existing
stockholders.
As part of a
potential growth strategy, we may attempt to acquire or merge with
certain businesses. Whether we realize benefits from any such
transactions will depend in part upon the integration of the
acquired businesses, the performance of the acquired products,
services and capacities of the technologies acquired, as well as
the personnel hired in connection therewith. Accordingly, our
results of operations could be adversely affected from
transaction-related charges, amortization of intangible assets, and
charges for impairment of long-term assets. While we believe that
we have established appropriate and adequate procedures and
processes to mitigate these risks, there can be no assurance that
any potential transaction will be successful.
In addition, the
financing of any acquisition may require us to raise additional
funds through public or private sources. Additional funds may not
be available on terms that are favorable to us and, in the case of
equity financings, may result in dilution to our stockholders.
Future acquisitions by us could also result in large and immediate
write-offs or assumptions of debt and contingent liabilities, any
of which may have a material adverse effect on our consolidated
financial position, results of operations, and cash
flows.
Our strategy to expand through acquisitions or investments in,
other companies, may divert our management’s attention,
increase expenses, disrupt our operations and harm our results of
operations.
Our business
strategy may, from time to time, include acquiring or investing in
complementary services, technologies or businesses. We cannot
assure you that we will successfully identify suitable acquisition
candidates, integrate or manage disparate technologies, lines of
business, personnel and corporate cultures, realize our business
strategy or the expected return on our investment, or manage a
geographically dispersed company. Our inability to successfully
operate and integrate newly acquired businesses appropriately,
effectively, and in a timely manner could impair our ability to
take advantage of future growth opportunities and other advances in
technology, as well as on our revenues, gross margins and expenses.
Any such acquisition or investment could materially and adversely
affect our results of operations. Acquisitions and other strategic
investments involve significant risks and uncertainties, including:
the potential failure to achieve the expected benefits of the
combination or acquisition; unanticipated costs and liabilities;
difficulties in integrating new products and services; software,
businesses; operations and technology infrastructure in an
efficient and effective manner; difficulties in maintaining
customer relations; the potential loss of key employees of the
acquired businesses; the diversion of the attention of our senior
management from the operation of our daily business; the potential
adverse effect on our cash position to the extent that we use cash
for the purchase price; the potential significant increase of our
interest expense, leverage, and debt service requirements if we
incur additional debt to pay for an acquisition; the potential to
incur large and immediate write-offs and restructuring and other
related expenses; and the inability to maintain uniform standards,
controls, policies and procedures.
Further, any
acquisition may affect our ability to adequately maintain our
internal control over financial reporting. If our internal control
over financial reporting is not effective, it may adversely affect
investor confidence in the Company.
Our ability to use our net operating loss carry-forwards may be
reduced in the event of an ownership change and could adversely
affect our financial results.
As of December 31,
2019, we had net operating loss (“NOL”) carry-forwards
of approximately $18,520,000. Section 382 of the Internal Revenue
Code, as amended (the “Code”) imposes limitations on a
corporation’s ability to utilize its NOL carry-forwards. In
general terms, an ownership change results from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50% over a three-year period. Any limited
amounts may be carried over into later years, and the amount of the
limitation may, under certain circumstances, be increased by the
“recognized built-in gains” that occur during the
five-year period after the ownership change (the recognition
period). Future changes in ownership of more than 50% may also
limit the use of these remaining NOL carry-forwards. Our earnings,
if any, and cash resources would be materially and adversely
affected if we cannot receive the full benefit of the remaining NOL
carry-forwards. An ownership change could occur as a result of
circumstances that are not within our control.
The telecommunications industry is highly competitive. We face
intense competition from traditional telephone companies, wireless
companies, cable companies and alternative voice communication
providers and other VoIP companies.
Our Cloud
telecommunications services compete with other voice over internet
protocol (“VoIP”) providers. In addition, we also
compete with traditional telephone service providers which provide
telephone service based on the public switched telephone network
(“PSTN”). Our VoIP offering is not fully compatible
with such customers. Some of these traditional providers have also
added VoIP services. There is also competition from cable
providers, which have added VoIP service offerings in bundled
packages to their existing cable customers. The telecommunications
industry is highly competitive. We face intense competition from
traditional telephone companies, wireless companies, cable
companies, and alternative voice communication
providers.
Most traditional
wire line and wireless telephone service providers, cable
companies, and some VoIP providers are substantially larger and
better capitalized than we are and have the advantage of a large
existing customer base. Because most of our target customers are
already purchasing communications services from one or more of
these providers, our success is dependent upon our ability to
attract target customers away from their existing
providers.
The markets for our
products and services are continuing to evolve and are increasingly
competitive. Demand and market acceptance for recently introduced
and proposed new products and services and sales of such products
and services are subject to a high level of uncertainty and risk.
Our business may suffer if the market develops in an unexpected
manner, develops more slowly than in the past or becomes saturated
with competitors, if any new products and services do not sustain
market acceptance. A number of very large, well-capitalized, high
profile companies serve the e-commerce, VoIP and Cloud technology
markets. If any of these companies entered our markets in a focused
and concentrated fashion, we could lose customers, particularly
more sophisticated and financially stable customers.
Our VoIP or cloud telecommunications service competes against
established well financed alternative voice communication providers
(such as 8x8 and Ring Central), who may provide comparable services
at comparable or lower pricing.
Pricing in the
telecommunications industry is very fluid and competitive. Price is
often a substantial motivation factor in a customer’s
decision to switch to our telephony products and services. Our
competitors may reduce their rates, which may require us to reduce
our rates, which would affect our margins and revenues, or
otherwise make our pricing non-competitive. We may be at a
disadvantage compared with those competitors who have substantially
greater resources than us or may otherwise be better positioned to
withstand an extended period of downward pricing
pressure.
Many of our current
and potential competitors have longer operating histories,
significantly greater resources and brand awareness, and a larger
base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers.
Our competitors may also offer bundled service arrangements that
present a more differentiated or better integrated product to
customers. Announcements, or expectations, as to the introduction
of new products and technologies by our competitors or us could
cause customers to defer purchases of our existing products, which
also could have a material adverse effect on our business,
financial condition or operating results.
We face risks in our strategy of designing and developing our own
desktop telephones (“desktop devices”).
We continue to
primarily sell Crexendo ® branded desktop devices, although,
the Company also supports third party devices manufactured by
Yealink, Cisco, and Polycom. Our desktop devices are being
manufactured by third party vendors in China. The current economic challenges in China and global
economic ramifications of Chinese economic difficulties, the U.S.
trade war with China, including trade protection measures such as
tariffs, and the effects of any new wave of COVID-19 infections or
another pandemic may cause potential supply-chain disruptions in
obtaining our desktop devices. This may increase pricing, slow
delivery times or may force us to find another third party
manufacturer of our branded desktop devices.
The Crexendo
branded desktop devices include firmware specifically designed for
our cloud telecommunications services and are not currently
intended to work with other competitors’ or vendors’
services. If the desktop devices are successfully manufactured,
there is no assurance of the acceptance of them by customers.
Successful roll out is not guaranteed and is contingent on various
factors including but not limited to: meeting certain industry
standards, the availability of our vendors to meet agreed terms,
supply from vendors being sufficient to meet demand, industry
acceptance of the desktop devices, desktop devices meeting the
needs of our customers, competitive pricing of the desktop devices,
feature set of the desktop devices being up to competitive
standards, regulatory approval as required of the desktop devices
and competitor claims relating to the desktop devices. Our failure
to be able to fully implement the sale of the Crexendo desktop
devices or the inability to have desktop devices manufactured to
meet our supply needs may cause us damage as well as require us to
have to purchase desktop devices from other suppliers at a higher
price which could affect sales and margins.
Errors in our technology or technological issues outside our
control could cause delays or interruptions to our
customers.
Our services
(including cloud telecommunications and e-commerce) may be
disrupted by problems with our technology and systems such as
malfunctions in our software or facilities. In addition, there may
be service interruptions for reasons outside our control. Our
customers and potential customers subscribing to our services have
experienced interruptions in the past and may experience
interruptions in the future as a result of these types of problems.
Interruptions could cause us to lose customers and offer customer
credits, which could adversely affect our revenue and
profitability. Network and telecommunication interruptions may also
impair our ability to sign-up new customers. In addition, since our
systems and our customers’ ability to use our services are
Internet-dependent, our services may be subject to
“cyber-attacks” from the Internet, which could have a
significant impact on our systems and services.
If we do not successfully expand our physical infrastructure and
build diverse geo redundant locations, which require large
investments, we may be unable to substantially increase our sales
and retain customers.
Our ability to
provide cloud telecommunications services is dependent upon on our
physical and cloud-based infrastructure. While most of our physical
equipment required for providing these services is redundant in
nature and offers high availability, certain types of failures or
malfunctioning of critical hardware/software equipment, including
but not limited to fire, water or other physical damage may impact
our ability to deliver continuous service to our customers. Act of
God or terrorism or vandalism or gross negligence of person(s)
currently or formerly associated with the Company may result in
loss of revenue, profitability and failure to retain and acquire
new customers.
Our ability to
recover from disasters, if and when they occur, is paramount to
offering continued service to our existing customers. We maintain a
fully redundant physical infrastructure in our data center in
Tempe, Arizona for disaster recovery. This system does not
guarantee continued reliability if a catastrophic event occurs.
Despite implementation of network security measures, our servers
may be vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with our computer systems
including, but not limited to, denial of service attacks. In
addition, if there is a breach or alleged breach of security or
privacy involving our services including but not limited to data
loss, or if any third party undertakes illegal or harmful actions
using our communications or e-commerce services, our business and
reputation could suffer substantial adverse publicity and
impairment. We have experienced interruptions in service in the
past. While we do not believe that we have lost customers as a
consequence, the harm to our reputation is difficult to assess. We
have taken and continue to take steps to improve our infrastructure
to prevent service interruptions.
In addition to our
physical infrastructure, we have a cloud infrastructure deployment
with Amazon Web Services which is intended to provide continuous
service to our customers in the event of a disaster or failure of
our physical infrastructure. If we fail to properly maintain our
infrastructure or our third-party service providers fail to
maintain these facilities properly, or fail to respond quickly to
problems, our customers may experience service interruptions. The
failure to properly maintain services may result in negative
consequences to us including but not limited to: (i) cause a loss
of customers, (ii) adversely affect our reputation, (iii) cause
negative publicity, (iv) negatively impact our ability to acquire
customers, (v) negatively impact our revenue and profitability,
(vi) potential law suits for not reaching E-911 services, and (vii)
potential law suits for loss of business and loss of
reputation.
Failure in our data center or services could lead to significant
costs and disruptions.
All data centers,
including ours, are subject to various points of failure. Problems
with cooling equipment, generators, uninterruptible power supply,
routers, switches, or other equipment, whether or not within our
control, could result in service interruptions for our customers as
well as equipment damage. Any failure or downtime could affect a
significant percentage of our customers. The total destruction or
severe impairment of our data center facilities could result in
significant downtime of our services and the loss of customer
data.
We depend on our senior management and other key personnel, and a
loss of these individuals could adversely impact our ability to
execute our business plan and grow our business.
We depend on the
continued services of our key personnel, including our officers and
certain engineers. Each of these individuals has acquired
specialized knowledge and skills with respect to our operations.
The loss of one or more of these key personnel could negatively
impact our performance. In addition, we expect to hire additional
personnel as we continue to execute our strategic plan,
particularly if we are successful in expanding our operations.
Competition for the limited number of qualified personnel in our
industry is intense. At times, we have experienced difficulties in
hiring personnel with the necessary training or
experience.
Changes in our business model and sales strategies may continue to
adversely impact our website hosting revenue.
When the Company
shifted away from a seminar sales model in 2011, our web services
revenue was adversely impacted and has continued to decrease. Our
website hosting revenue has continued to decline since we no longer
sell our website development software through a seminar sales
model. The Company is not actively marketing its website
development software or website hosting services. Our web services
segment revenue was approximately 3% of our total revenue in the
fiscal quarter ended June 30, 2020 and may continue to decline over
time as more competitors enter the website building and hosting
industry.
We have targeted sales to mid-market and larger enterprise
customers. Not properly managing these customers could negatively
affect our business, margins, cash flow and
operations.
Selling to larger
enterprise customers contains inherent risks and uncertainties. Our
sales cycle has become more time-consuming and expensive. The
delays associated with closing and installing larger customers may
impact results on a quarter to quarter basis. There may be
additional pricing pressure in this market which may affect margins
and profitability. Revenue recognition may be delayed for some
complex transactions, all of which could harm our business and
operating results. The loss of a large customer may have a material
negative impact on quarterly or annual results.
Multi-location
users require additional and expensive customer service which may
require additional expense and impact margins on enterprise sales.
Enterprise customers may demand more features, integration services
and customization which require additional engineering and
operational time which could impact margins on an enterprise sale.
Multi-location enterprise customer sales may have different
requirement in different locations which may be difficult to
fulfill or satisfy various interests which could result in
cancellations.
Enterprise
customers might demand we provide service locations internationally
where we may encounter technical, logistical, infrastructure and
regulatory limitations on our ability to implement or deliver our
services. Our inability to provide service in certain international
locations may result in a cancellation of the entire contract.
Further with larger enterprise customer sales, the risk of
customers transporting desktop devices internationally without our
knowledge may increase.
We have a limited
history of selling our services to larger businesses and may
experience challenges in configuring and providing ongoing support
for the solutions we sell to large customers. Larger
customers’ networks are often more complex than those of
smaller customers, and the configuration of our services for these
customers usually requires customer assistance. There is no
guarantee that the customer will make available to us the necessary
personnel and other resources for a successful configuration of
services. Lack of assistance from the customers or lack of local
resources may prevent us from properly configuring our services for
the customers, which can in turn adversely impact the quality of
services that we deliver over our customers’ networks, and/or
may result in delays in the implementation of our services and
impact the quality and ability to continue to provide the services.
This could also create a public perception that we are unable to
deliver high quality of service to our customers, which could harm
our reputation. In addition to the foregoing, larger customers tend
to require higher levels of customer service and individual
attention, which may increase our costs for implementing and
delivering services.
Sales to small and medium-sized businesses face risks as they may
have fewer financial resources to weather an economic
downturn.
A substantial
percentage of our revenues come from small and medium-sized
businesses. These customers may be more adversely affected by
economic downturns than larger, more established businesses. The
majority of our customers pay for our subscriptions with credit and
debit cards. Weakness in certain segments of the credit markets and
in the U.S. and global economies may result in increased numbers of
rejected credit and debit card payments, which could negatively
affect our business. If small and medium-sized businesses
experience financial hardship as a result of a weak economy,
industry consolidation, or any other reason, the overall demand for
our subscriptions could be materially and adversely
affected.
We must acquire new customers on an ongoing basis to maintain and
increase our customers and revenues while the significant costs to
acquire new customers may reduce our profitability.
We will have to
acquire new customers in order to increase revenues. We incur
significant costs to acquire new customers, and those costs are an
important factor in determining our profitability. Therefore, if we
are unsuccessful in retaining customers or are required to spend
significant amounts to acquire new customers beyond those budgeted,
our revenue could decrease, which could prevent us from reaching
profitability and have our net loss increase. Marketing
expenditures are an ongoing requirement and will become a larger
ongoing requirement of our business as we strive for acquiring new
customers.
If we do not successfully expand our sales, including our partner
channel program and direct sales, we may be unable to increase our
sales and that may affect our stock price.
We sell our
products primarily through direct sales and our partner channel,
and we must substantially expand the number of partners and
producing direct sales personnel to increase organic revenue
substantially. If we are unable to expand our partner channel
network and hire and retain qualified sales personnel, our ability
to increase our organic revenue and grow our business could be
compromised. The challenge of attracting, training, and retaining
qualified candidates, may make it difficult to grow revenue. Our direct sales are driven largely by inside sales who sell our
services and products to customers. Our future growth depends on
our ability to develop and maintain a successful direct sales
organization that identifies and closes a significant portion of
sales. If we or the agents fail to do so, we may be unable to meet
our revenue growth targets. Our partner sales are generated through
indirect channel sales. These channels consist of master
agents’ independent agents (including master agents),
value-added resellers, and service providers. We contract directly
with the end customer. We may or may not have active involvement in
the sale or may use these channel partners to identify, qualify and
manage prospects throughout the sales cycle. These channels may
generate an increasing portion of our revenue in the future. Our
continued success requires continuing to develop and maintain
successful relationships with these partners. If we fail to
properly select and manage our partners, or they are not successful
in their sales efforts, we may be unable to meet our revenue growth
targets.
Our churn rate may increase in future periods due to customer
cancellations or other factors, which may adversely impact our
revenue or require us to spend more money to grow our customer
base.
Our customers
generally have initial service periods of between three and five
years and may discontinue their subscriptions for our services
after the expiration of their initial subscription period. In
addition, our customers may renew for lower subscription amounts or
for shorter contract lengths. We may not accurately predict
cancellation rates for our customers. Our cancellation rates may
increase or fluctuate because of a number of factors, including
customer usage, pricing changes, number of applications used by our
customers, customer satisfaction with our service, the acquisition
of our customers by other companies and deteriorating general
economic conditions. If our customers do not renew their
subscriptions for our service or decrease the amount they spend
with us, our revenue will decline, and our business will
suffer.
Our rate of
customer cancellations may increase in future periods due to many
factors, some of which are beyond our control, such as the
financial condition of our customers or the state of credit
markets, especially given the continued COVID-19 pandemic and its
impact on the economy. In addition, a single, protracted service
outage or a series of service disruptions, whether due to our
services or those of our bandwidth carriers, may result in a sharp
increase in customer cancellations.
We may not be able to scale our business efficiently or quickly
enough to meet our customers’ growing needs, in which case
our operating results could be harmed.
As usage of our
cloud telecommunications services by mid-market and larger
distributed enterprises expands and as customers continue to
integrate our services across their enterprises, we are required to
devote additional resources to improving our application
architecture, integrating our products and applications across our
technology platform as well as expanding integration and
performance. We will need to appropriately scale our internal
business systems and our services organization, including customer
support and services and regulatory compliance, to serve a growing
customer base. Any failure of or delay in these efforts could
impair our systems’ performance and reduce customer
satisfaction, which could result in decreased sales to new
customers and lower renewal rates by existing customers and
eventually hurt our revenue growth and our reputation. We cannot
guarantee that the expansion and improvements to our infrastructure
and systems will be fully or effectively implemented on a timely
basis, if at all, which failure may reduce revenue and our margins
and adversely impact our financial results.
Our success depends in part upon our ability to provide customer
service that effectively supports the needs of our
customers.
Providing customer
services effectively requires that our customer support personnel
have industry-specific technical knowledge and expertise. It may be
difficult and costly for us to hire qualified personnel,
particularly in the strong labor market in Phoenix, Arizona where
we are headquartered. Our support personnel require extensive
training on our products and services, which may make it difficult
to scale up our support operations rapidly or effectively. The
importance of high-quality customer support will increase as we
expand our business and pursue new customers. If we do not help our
customers quickly resolve post-implementation issues and provide
effective ongoing support, our ability to sell additional features
and services to existing customers will suffer and our reputation
may be harmed.
Our success depends in part upon the capacity, reliability, and
performance of our several third party providers and their network
infrastructure, the failure of which could cause delays or
interruptions of our service and impact our revenue and
profitability.
We depend on
several third-party providers to provide uninterrupted and
error-free service to maintain our operations. We do not have
control over these providers, and some of these providers may be
our competitors. We may be subject to interruptions or delays in
their service and our reputation and business may be harmed. The
failure of any of these third party service providers to properly
maintain services may result in negative consequences to us
including but not limited to: (i) cause a loss of customers, (ii)
adversely affect our reputation, (iii) cause negative publicity,
(iv) negatively impact our ability to acquire customers, (v)
negatively impact our revenue and profitability, (vi) potential law
suits for not reaching E-911 services, and (vii) potential law
suits for loss of business and loss of reputation. These
third-party providers include:
●
Internet Bandwidth
Providers. We may be subject to interruptions or delays in
network service. If we fail to maintain reliable bandwidth or
performance that could significantly reduce customer demand for our
services and damage our business. Our cloud telecommunications
service (and to a lesser extent our e-commerce services) requires
our customers to have an operative broadband Internet connection
and an electrical power supply, which are provided by the
customer’s Internet service provider and electric utility
company and not by us. The quality of some broadband Internet
connections may be too poor for customers to use our services
properly. In addition, if there is any interruption to a
customer’s broadband Internet service or electrical power
supply, that customer will be unable to make or receive calls,
including emergency calls (our E-911 service), using our service.
In addition, internet backbone providers may be able to block,
degrade or charge for access to, or the bandwidth use of certain of
our products and services which could have a negative effect on our
services and could lead to additional expenses and the loss of
users. Our products and services depend on the ability of our users
to access the Internet, and many of our services require
significant bandwidth to work effectively. Further, customers who
access our mobile application Crexmo© (or future application)
through their smartphones must have a high-speed connection, to use
our services. This access is provided by companies that have
significant and increasing market power in the broadband and
Internet access marketplace some of these providers offer products
and services that directly compete with our own offerings, which
give them a significant competitive advantage.
●
Tier 1 and non-Tier 1 Telecom
suppliers for Telecom Origination and Termination Services.
We depend on these companies to provide service telecom services,
sourcing of Direct Inward Dialing (DID), porting of numbers and
delivering telephone calls from and to endpoints and devices on our
network. If we fail to maintain reliable connectivity or
performance with our upstream carriers it could then significantly
reduce customer demand for our services and damage our
business.
●
A portion of our customer service
responses, delivery of calls to and from PSTN and other public
telephone VoIP/Wireless service providers and provision of aspects
of our E-911 service. We offer our cloud telecommunications
customers support 24 hours a day, seven days a week. We may rely on
third parties (sometimes outside of the U.S) to respond to customer
inquiries. These third-party providers generally represent us
without identifying themselves as independent parties. The ability
of third-party providers to provide these representatives may be
disrupted due to issues outside our control. We also maintain an
agreement with an E-911 provider to assist us in routing emergency
calls directly to an emergency service dispatcher at the
public-safety answering point (“PSAP”) in the area of
the customer’s registered location and terminating E-911
calls. We also contract with a provider for the national call
center that operates 24 hours a day, seven days a week to receive
certain emergency calls and with several companies that maintain
PSAP databases for the purpose of deploying and operating E-911
services. The dispatcher will have automatic access to the
customer's telephone number and registered location information. If
a customer moves their Crexendo service to a new location, the
customer's registered location information must be updated and
verified by the customer. Until that takes place, the customer will
have to verbally advise the emergency dispatcher of his or her
actual location at the time of an emergency 9-1-1 call. This can
lead to delays in the delivery of emergency services. Interruptions
in service from these vendors could also cause failures in our
customers’ access to E-911 services and expose us to
liability.
●
Initiation of local number
portability for our customers. We also have agreements with
companies that initiate our local number portability, which allow
new customers to retain their existing telephone numbers when
subscribing to our services. We will need to work with these
companies to properly port numbers. The failure to port numbers may
subject us to loss of customers or regulatory review.
●
Outside contractors and
third-party agents for fulfillment of certain items and critical
manufacturing services. We outsource the manufacturing of
certain products we sell and provide. We submit purchase orders to
agents or the companies that manufacture the products. We describe,
among other things, the type and quantities of products or
components to be supplied or manufactured and the delivery date and
other terms applicable to the products or components. Our suppliers
or manufacturers potentially may not accept any purchase order that
we submit. Our reliance on outside parties involves a number of
potential risks, including: (i) the absence of adequate capacity,
(ii) the unavailability of, or interruptions in access to,
production or manufacturing processes, (iii) reduced control over
delivery schedules, (iv) errors in the product, and (v) claims of
third party intellectual infringement or defective merchandise. If
delays, problems or defects were to occur, it could adversely
affect our business, cause claims for damages to be filed against
us, and negatively impact our consolidated operations and cash
flows.
We depend upon industry standard protocols, best practices,
solutions, third-party software, technology, and tools, including
but not limited to Open Source software.
We rely on
non-proprietary third-party licensing and software, some of which
may be Open Source and protected under various licensing
agreements. We may be subject to additional royalties, license or
trademark infringement costs or other unknown costs when one or
more of these third-party technologies are affected or need to be
replaced due to end-of-support or end-of-sale of such third
parties.
Changes to rates by our suppliers and increasing regulatory charges
or tariffs may require us to raise prices, which could impact
results.
Our upstream
carriers, suppliers and vendors may increase their rates thus
directly impacting our cost of sales, which would affect our
margins. Interconnected VoIP traffic may be subject to increased
charges. Should this occur, the rates paid to our underlying
carriers may increase which could reduce our profitability. Future
changes in tariffs by regulatory agencies or application of tariff
requirements to currently untariffed products or services could
affect the price and sales of our products for certain classes of
customers. Changes in our underlying costs of sales may increase
rates we charge our customers which could make us less competitive
and impact our sales and retention of existing
customers.
Changes in laws and regulations and the interpretation and
enforcement of such laws and regulations could adversely impact our
financial results or ability to conduct business.
We are subject to a
variety of federal and state laws and regulations as well as
oversight from a variety of governmental agencies and public
service commissions. The laws governing our business may change in
ways that harm our business. Federal or state governmental agencies
administering and enforcing such laws may also choose to interpret
and apply them in ways that harm our business. These
interpretations are also subject to change. Regulatory action could
materially impair or force us to change our business model and may
adversely affect our revenue, increase our compliance costs, and
reduce our profitability. In addition, governmental agencies such
as the SEC, Internal Revenue Service (“IRS”), Federal
Trade Commission (“FTC”), Federal Communication
Commission (“FCC”) and state taxing authorities may
conclude that we have violated federal laws, state laws or other
rules and regulations, and we could be subject to fines, penalties
or other actions that could adversely impact our financial results
or our ability to conduct business.
Our telecommunications services are
required to comply with industry standards, FCC regulations,
privacy laws as well as certain state and local jurisdiction
specific regulations. Failure to comply with existing laws and any
new laws that may become applicable to us may subject us to
penalties, increase our operation costs, and may also require us to
modify existing products and/or service.
The acceptance of
telecommunications services is dependent upon our meeting certain
industry standards. We are required to comply with certain rules
and regulations of the FCC regarding safety standards. Standards
are continuously being modified and replaced. As standards evolve,
we may be required to modify our existing products or develop and
support new versions of our products. We must comply with certain
federal, state, and local requirements regarding how we interact
with our customers, including marketing practices, consumer
protection, privacy, and billing issues, the provision of 9-1-1
emergency service and the quality of service we provide to our
customers. The failure of our products and services to comply, or
delays in compliance, with various existing and evolving standards
could delay future offerings and impact our sales, margins, and
profitability. Changes to the Universal Service Funds by the FCC or
various states may require us to increase our costs which could
negatively affect revenue and margins.
We are subject to
Federal laws and FCC regulations that require us to protect
customer information. While we have protections in place to protect
customer information there is no assurance that our systems will
not be subject to failure or intentional fraudulent attack. The
failure to protect required information could subject us to
penalties and diminish the confidence our customers have in our
systems, which could negatively affect results. While we try to
comply with all applicable data protection laws, regulations,
standards, and codes of conduct, as well as our own posted privacy
policies and contractual commitments to the extent possible, any
failure by us to protect our users’ privacy and data,
including as a result of our systems being compromised by hacking
or other malicious or surreptitious activity, could result in a
loss of user confidence in our services and ultimately in a loss of
users, which could materially and adversely affect our business as
well as subject us to law suits, civil fines and criminal
penalties.
Governmental
entities, class action lawyers and consumer advocates are reviewing
the data collection and use by companies that must maintain such
data. Our own requirements as well as regulatory codes of conduct,
enforcement actions by regulatory agencies, and lawsuits by other
parties could impose additional compliance costs on us as well as
subject us to unknown potential liabilities. These evolving laws,
rules and practices may also curtail our current business
activities, which may delay or affect our ability to become
profitable as well as affect customers and other business
opportunities.
In addition,
several foreign countries and governmental bodies, including the
E.U., Brazil and Canada, have laws and regulations concerning the
collection and use of personally identifiable information obtained
from their residents, including payment card information, which are
often more restrictive than those in the U.S. Laws and regulations
in these jurisdictions apply broadly to the collection, use,
storage, disclosure and security of personally identifiable
information, including payment card information identifying, or
which may be used to identify, an individual, such as names, email
addresses and, in some jurisdictions, Internet Protocol (IP)
addresses, device identifiers and other data. Our phones may be
moved to locations which could potentially subject us to
jurisdiction. Also, websites we host may be available in these
locations. As we conduct business or become deemed to conduct
business in those foreign jurisdictions, we may become subject to
those laws.
We are also subject
to the privacy and data protection-related obligations in our
contracts with our customers and other third parties. Any failure,
or perceived failure, to comply with federal, state, or
international laws, or to comply with our contractual obligations
related to privacy, could result in proceedings or actions against
us which could result in significant liability to us as well as
harm to our reputation. Additionally, third parties with whom we
contract may violate or appear to violate laws or regulations which
could subject us to the same risks. Any new laws, regulations,
other legal obligations or industry standards, or any changed
interpretation of existing laws, regulations or other standards may
require us to incur additional costs and restrict our business
operations.
Our collection, processing, storage, use, and transmission of
personal data could give rise to liabilities as a result of
governmental regulation, conflicting legal requirements, differing
views on data privacy, or security breaches.
We collect,
process, store, use, and transmit personal data on a daily basis.
Personal data is increasingly subject to legal and regulatory
protections around the world, which vary widely in approach and
which possibly conflict with one another. In recent years, for
example, U.S. legislators and regulatory agencies, such as the
Federal Trade Commission, as well as U.S. states have increased
their focus on protecting personal data by law and regulation and
have increased enforcement actions for violations of privacy and
data protection requirements. California recently enacted
legislation, the California Consumer Privacy Act
(“CCPA”) that will, among other things, require covered
companies to provide new disclosures to California consumers, and
afford such consumers new abilities to opt-out of certain sales of
personal information, which became effective January 1, 2020. While
we believe that we are not a covered entity under the law, the
effects of the CCPA potentially are significant, however, and may
require us to modify our data processing practices and policies and
to incur substantial costs and expenses in an effort to comply. We
may also from time to time be subject to, or face assertions that
we are subject to, additional obligations relating to personal data
by contract or due to assertions that self-regulatory obligations
or industry standards apply to our practices. Washington and
Massachusetts have also introduced significant privacy bills and
Congress is debating federal privacy legislation, which if passed,
may restrict our business operations and require us to incur
additional costs for compliance.
The European
Commission also approved and adopted the General Data Protection
Regulation (“GDPR”), its data protection law, which
took effect in May 2018. A Data Protection Act substantially
implementing the GDPR was enacted in the U.K., effective in May
2018. These data protection laws and regulations are intended to
protect the privacy and security of personal data, including credit
card information that is collected, processed, and transmitted in
or from the relevant jurisdiction. We stopped hosting websites in
GDPR-complaint countries or countries from which the bulk of
business came from countries subject to GDPR. We also took steps to
block those countries from accessing any other sites we host. While
we do not currently provide services in countries where compliance
would be required and are therefore not required to be compliant,
if we did provide those services or otherwise were required to
become complaint, implementation of and compliance with these laws
and regulations may be more costly or take longer than we
anticipate, or could otherwise adversely affect our business
operations, which could negatively impact our financial position or
cash flows.
Additionally, media
coverage of data breaches has escalated, in part because of the
increased number of enforcement actions, investigations, and
lawsuits. As this focus and attention on privacy and data
protection increases, we also risk exposure to potential
liabilities and costs resulting from compliance with or any failure
to comply with applicable legal requirements, conflicts among these
legal requirements, or differences in approaches to
privacy.
We face risks in our sales to certain market segments including,
but not limited to, sales subject to HIPAA
Regulations.
We have sold and
will continue to attempt to sell to certain customer segments which
may have requirements for additional privacy or security. In
addition, sales may be made to customers that are subject to
additional security requirements. Selling into segments with
additional requirements increases potential liability which in some
instances may be unlimited. While the Company believes it meets or
exceeds all requirements for sales into such segments, there is no
assurance that the Company systems fully comply with all
requirements. Our customers can use our services to store contact
and other personal or identifying information, and to process,
transmit, receive, store and retrieve a variety of communications
and messages, including information about their own customers and
other contacts. In addition, customers may use our services to
store protected health information, or PHI, that is protected under
the Health Insurance Portability and Accountability Act, or HIPAA.
Noncompliance with laws and regulations relating to privacy and
HIPAA may lead to significant fines, penalties or civil
liability.
Our ability to offer services outside the U.S. is subject to
different regulations which may be unknown and
uncertain.
Regulatory
treatment of VoIP providers outside the United States varies from
country to country, and local jurisdictions. Many times, the laws
are vague, unclear and regulations are not enforced uniformly. We
are licensed as a VoIP seller in Canada and are considering
expanding to other countries. We also cannot control if our
customers take their devices out of the United States and use them
abroad. Our resellers may sell to customers who maintain facilities
outside the United States. The failure by us or our customers and
resellers to comply with laws and regulations could reduce our
revenue and profitability. As we expand to additional countries
there may be additional regulations that we are required to comply
with, the failure to comply or properly assess regulations may
subject us to penalties, fines and other actions which could
materially affect our business.
Examinations by relevant tax authorities may result in material
changes in related tax reserves for tax positions taken in
previously filed tax returns or may impact the valuation of certain
deferred income tax assets, such as net operating loss
carry-forwards.
Based on the
outcome of examinations by relevant tax authorities, or as a result
of the expiration of statutes of limitations for specific
jurisdictions, it is reasonably possible that the related tax
reserves for tax positions taken regarding previously filed tax
returns will materially change from those recorded in our financial
statements. In addition, the outcome of examinations may impact the
valuation of certain deferred income tax assets (such as NOL
carry-forwards) in future periods. It is not possible to estimate
the impact of the amount of such changes, if any, to previously
recorded uncertain tax positions.
The FCC net neutrality rules have changed. There may be a negative
effect to our business going forward as a consequence of those
changes.
On January 4, 2018,
the FCC, released an order that largely repeals rules that the FCC
had in place which prevented broadband internet access providers
from degrading or otherwise disrupting a broad range of services
provisioned over consumers’ and enterprises’ broadband
internet access lines. There are efforts in Congress to prevent the
order from becoming effective and a number of state attorneys
general have filed an appeal of the FCC’s January 4, 2018
order. Many of the largest providers of broadband services, like
cable companies and traditional telephone companies, have publicly
stated that they will not degrade or disrupt their customers”
use of applications and services, like ours. However, there is not
guarantee that they will continue to do such. If such providers
were to degrade, impair, or block our services, it would negatively
impact our ability to provide services to our customers, likely
result in lost revenue and profits, and we would incur legal fees
in attempting to restore our customers' access to our services.
Broadband internet access providers may also attempt to charge us
or our customers additional fees to access services like ours that
may result in the loss of customers and revenue, decreased
profitability, or increased costs to our offerings that may make
our services less competitive. Following the adoption of the
January 4, 2018 order, a number of states have passed laws
establishing rules similar to those that existed prior to the
effective date of the January 4, 2018 order. States have adopted a
variety of approaches in attempting to preserve the rules in place
prior to the order. We however cannot rely on those laws as there
is legal uncertainty as to whether states that have passed such
laws have the authority to do so if such laws as they could be
interpreted to conflict with the January 4, 2018 order. The U.S.
Department of Justice has taken the position that local authorities
do not have the authority to contradict the FCC’s January 4,
2018 order. We cannot predict the ultimate outcome of these
disputes.
States are adding regulation for VoIP
providers which could increase our costs and change certain aspects
of our service.
Certain states take
the position that offerings by VoIP providers are intrastate and
therefore subject to state regulation. We have registered as a
competitive local exchange carrier (“CLEC”) in most
states; however, our rates are not regulated in the same manner as
traditional telephone service providers. Some states are also
requiring that we register as a seller of VoIP services even though
we have registered as a CLEC. Some states argue that if the
beginning and desktop devices of communications are known, and if
some of these communications occur entirely within the boundaries
of a state, the state can regulate that offering and may therefore
add additional taxes or surcharges or regulate rates in a similar
matter to traditional telephone service providers. We believe that
the FCC has pre-empted states from regulating VoIP providers in the
same manner as providers of traditional telecommunications
services. We cannot predict how this issue will be resolved or its
impact on our business at this time.
Taxing authorities may successfully assert that we should have
collected or in the future should collect sales and use, value
added, or similar taxes, and any such assessments could adversely
affect our business, financial condition, and results of
operations.
Jurisdictions in
which we do not collect sales, use, value added, or similar taxes
on VoIP services or other products may assert that such taxes are
applicable, which could result in tax assessments, penalties, and
interest, and we may be required to collect such taxes in the
future. Such tax assessments, penalties, interest, or future
requirements would adversely affect our financial condition and
results of operations. Further, in June 2018, the Supreme Court
held in South Dakota v. Wayfair,
Inc. that states could impose sales tax collection
obligations on out-of-state sellers even if those sellers lack any
physical presence within the states imposing the sales taxes. Under
Wayfair, a person requires
only a “substantial nexus” with the taxing state before
the state may subject the person to sales tax collection
obligations therein. An increasing number of states (both before
and after the publication of Wayfair) have considered or adopted
laws that attempt to impose sales tax collection obligations on
out-of-state sellers. The Supreme Court’s Wayfair decision has removed a
significant impediment to the enactment and enforcement of these
laws, and it is possible that states may seek to tax out-of-state
sellers on sales that occurred in prior tax years, which could
create additional administrative burdens for us, put us at a
competitive disadvantage if such states do not impose similar
obligations on our competitors, and decrease our future sales,
which would adversely impact our business, financial condition, and
results of operations.
We incur increased costs and demands on management as a result of
compliance with laws and regulations applicable to public
companies, which could harm our future operating
results.
As a public company
we incur significant legal, accounting, and other expenses,
including costs associated with public company reporting
requirements. Our management team and other personnel devote a
substantial amount of time complying with SEC, Nasdaq and other
public company requirements.
The growth of our
business may require that we strengthen our financial reporting
systems and infrastructure if we fail to do so we may not remain in
compliance with Section 404 of the Sarbanes-Oxley Act over internal
control over financial reporting. If we fail to maintain
compliance, we could be unable to report our financial results
timely and accurately or prevent fraud. We may to incur significant
expense and devote substantial management effort toward
strengthening our systems.
From time to time we had been the subject of governmental inquiries
and investigations related to our discontinued seminar sales model
and business practices that could require us to pay refunds,
damages or fines, which could negatively impact our financial
results or ability to conduct business. We have received customer
complaints and civil actions.
From time to time,
we received inquiries from federal, national, state, city and local
government officials in the various jurisdictions in which we
operated. These inquiries had historically been related to our
discontinued seminar sales practices. There is still the potential
of review of past sales and sales of our current web and telecom
services. 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.
If the ultimate resolution of these or other inquiries or
investigations is not in our favor, this may have a material
adverse effect on our business or operations, or a formal complaint
could be initiated. During the ordinary course of business, we also
receive a number of complaints and inquiries from customers,
governmental and private entities. In some cases, these complaints
and inquiries from agencies and customers have ended up in civil
court. We may continue to receive customer and agency claims and
actions.
We could be liable for breaches of security on our website,
fraudulent activities of our users, or the failure of third-party
vendors to deliver credit card transaction processing
services.
We engage in
electronic billing and processing of our customers using secure
transmission of sometimes confidential information over public
networks. We have systems and processes in place that we deem
sufficient and industry standard that are designed to protect
consumer information and prevent fraudulent credit card
transactions and other security breaches. However, there is no
guarantee that such systems and processes will not experience a
failure. Our failure to protect against fraud or breaches may
subject us to costly breach notification and other mitigation
obligations, class action lawsuits, investigations, fines,
forfeitures, or penalties from governmental agencies that could
adversely affect our operating results. We may be unable to prevent
our customers from fraudulently receiving goods and services. Our
liability could also increase if a large fraction of transactions
using our services involve fraudulent or disputed credit card
transactions. We may also experience losses due to customer fraud
and theft of service. Customers have, in the past, obtained access
to our service without paying for monthly service and international
toll calls by unlawfully using fraudulently obtained codes. If our
existing anti-fraud procedures are not adequate or effective,
consumer fraud and theft of service could have a material adverse
effect on our business, financial condition, and operating
results.
We could experience security breaches in the transmission and
analysis of confidential and proprietary information of the
consumer, the merchant, or both, as well as our own confidential
and proprietary information.
Anyone able to
circumvent security measures could misappropriate proprietary
information or cause interruptions in our operations, as well as
the operations of the merchant. We may be required to expend
significant capital and other resources to protect against security
breaches or to minimize problems caused by security breaches. To
the extent that we experience breaches in the security of
proprietary information which we store and transmit, our reputation
could be damaged, and we could be exposed to a risk of loss or
litigation.
We collect personal and credit card information from our customers
and employees could misuse this information.
The PCI Data
Security Standard (“PCI DSS”) is a specific set of
comprehensive security standards required by credit card brands for
enhancing payment account data security, including but not limited
to requirements for security management, policies, procedures,
network architecture, and software design. We maintain credit card
and other personal information in our systems. Due to the sensitive
nature of retaining such information we have implemented policies
and procedures to preserve and protect our data and our
customers’ data against loss, misuse, corruption,
misappropriation caused by systems failures, unauthorized access,
or misuse. Notwithstanding these policies, we could be subject to
liability claims by individuals and customers whose data resides in
our databases for the misuse of that information. While the Company
believes its systems meet or exceed industry standards, the Company
does not believe it is required to meet PCI level 1 compliance and
has not certified under that level. Failure to meet PCI compliance
levels could negatively impact the Company’s ability to
collect and store credit card information which could cause
substantial disruption to our business. Notwithstanding the results
of this assessment there can be no assurance that payment card
brands will not request further compliance assessments or set forth
additional requirements to maintain access to credit card
processing services, which could incur substantial additional costs
and could have a material adverse effect on our
business.
We may incur substantial expenses in defending against third-party
patent and trademark infringement claims regardless of their
merit.
From time to time,
parties may assert patent infringement claims against us in the
form of letters, lawsuits, and other forms of communication. Third
parties may also assert claims against us alleging infringement of
copyrights, trademark rights, trade secret rights or other
proprietary rights or alleging unfair competition. If there is a
determination that we have infringed third-party proprietary
rights, we could incur substantial monetary liability and be
prevented from using the rights in the future.
Risks
Related to Our Common Stock
Our stock price may be volatile and may decline, resulting in a
loss of some or all of your investment.
The trading price
and volume of our common stock is likely to be volatile and could
fluctuate significantly in response to numerous factors, many of
which are beyond our control, including:
●
actual or anticipated fluctuations in our results of operations due
to, among other things, changes in customer demand, pricing,
ordering patterns, and unforeseen operating costs;
●
announcements with respect to developments, status, and impact on
us, our competitors, our constituents, and our suppliers of the
COVID-19 global pandemic;
●
failure of research analysts to maintain coverage or the ability to
get additional coverage, changes in financial estimates or ratings
by any research analysts who follow us, or our failure to meet
these estimates or the expectations of investors;
●
announcements by us or our competitors of significant technical
innovations, substantial promotions, price reductions,
acquisitions, strategic partnerships or joint
ventures.
●
changes in operating performance and stock market valuations of
other competitive companies generally, or those in the
telecommunication and related services industry;
●
cyclical fluctuations
●
price and volume fluctuations in the overall stock market from time
to time, including as a result of trends in the economy as a
whole;
●
actual or anticipated developments in our business or our
competitors’ businesses or the competitive landscape
generally;
●
new laws or regulations or new interpretations of existing laws, or
regulations applicable to our business;
●
any major change in our management;
●
lawsuits threatened or filed against us; and
●
other events or factors, including those resulting from war,
incidents of terrorism, the COVID-19 pandemic or responses to these
events.
In addition, the
market for telecommunication stocks and the stock markets in
general have experienced extreme price and volume fluctuations.
Stock prices of many technology companies have fluctuated in a
manner unrelated or disproportionate to the operating performance
of those companies. The COVID-19 pandemic has also caused
significant uncertainty and volatility in global and domestic
financial markets and the trading prices for the common stock of
technology companies, including us. In the past, stockholders have
instituted securities class action litigation following periods of
market volatility. If we were to become involved in securities
litigation, it could subject us to substantial costs, divert
resources and the attention of management from our business and
adversely affect our business, financial condition, and results of
operations.
Our securities have been thinly traded. An active trading market in
our equity securities may cease to exist, which would adversely
affect the market price and liquidity of our common stock, in
addition our stock price has been subject to fluctuating prices.
Our stock price may also be affected by the securities sold as a
consequence of this S-1 and future sales of our common stock or
equity-linked securities in the public market.
Our common stock is
currently traded on the Nasdaq Capital Market. We cannot predict
the actions of market makers, investors or other market
participants, and can offer no assurances that the market for our
securities will be stable. If there is no active trading market in
our equity securities, the market price and liquidity of the
securities will be adversely affected.
The market price of
our common stock could decline as a result of sales of a large
number of shares of our common stock in the market or the
perception that these sales could occur. Such sales or offerings
could lower the market price for our common stock and may make it
more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. We may in the future
sell additional shares of our common stock or equity-linked
securities to raise capital. A substantial number of shares of our
common stock could be registered and issued. Furthermore, there are
substantial amounts of vested stock options which are “in the
money” which could be exercised and sold in public markets.
The Company continues to expect to issue stock options as part of
compensation. There may be further effect on our stock price upon
the vesting and settlement of restricted stock units and
performance units. We cannot predict the size of future issuances
or the effect, if any, that they may have on the market price for
our common stock. The issuance and sale of substantial amounts of
common stock or equity-linked securities as in this offering, or
the perception that such issuances and sales may occur, could
adversely affect the trading price of our common stock and impair
our ability to raise capital through the sale of additional equity
or equity-linked securities. Additional dilution will also result
as a consequence of shares of common stock sold pursuant to this
offering and potential future offerings as well as if outstanding
options to acquire shares of our common stock are
exercised.
We are a “smaller reporting company,” and the reduced
disclosure requirements applicable to us as such may make our
common shares less attractive to our stockholders and
investors.
We are a
“smaller reporting company” under the federal
securities laws and, as such, are subject to scaled disclosure
requirements afforded to such companies. For example, as a smaller
reporting company, we are subject to reduced executive compensation
disclosure requirements. Our stockholders and investors may find
our common shares less attractive as a result of our status as a
“smaller reporting company” and our reliance on the
reduced disclosure requirements afforded to these companies. If
some of our stockholders or investors find our common shares less
attractive as a result, there may be a less active trading market
for our common shares and the market price of our common shares may
be more volatile.
Our actual operating results may not meet expectations, which could
likely cause our stock price to decline.
We have
historically not provided guidance in our earnings releases,
earnings conference calls, or otherwise. Management in the future
may change this policy and provide future guidance. If given, this
guidance, which will include forward-looking statements, will be
based on projections prepared by our management. Projections are
based upon a number of assumptions and estimates that, while
presented with numerical specificity, are inherently subject to
significant business, economic, and competitive uncertainties and
contingencies, many of which are beyond our control. With or
without our guidance, analysts, and other third parties may publish
expectations regarding our business, financial condition, and
results of operations. We do not accept any responsibility for any
projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be
expected that some or all of the assumptions of the guidance
furnished by us will not materialize or will vary significantly
from actual results. If our actual performance does not meet or
exceed our guidance or expectations, the trading price of our
common stock is likely to decline.
Our stock price, volatility and acceptance of our securities may be
influenced by the research and reports that securities or industry
analysts may publish about us or our business.
The Company cannot
guarantee if there will be research reports written on the Company.
Our stock price may be affected by the ability to get coverage
and/or sufficient coverage. If coverage is initiated and/or if one
or more of current or future analysts who cover us downgrades our
stock or publishes inaccurate or unfavorable research about our
business, our stock price would likely decline. If one or more of
these analysts after issuing coverage ceases coverage of the
Company or fails to publish reports on us regularly, demand for our
stock could decrease, which might cause our stock price and trading
volume to decline. Furthermore, such analysts publish their own
projections regarding our actual results. These projections may
vary widely from one another and may not accurately predict the
results we actually achieve. Our stock price may decline if we fail
to meet analysts’ projections.
Lack of sufficient stockholder equity or continued losses from
operations could subject us to fail to comply with the listing
requirements of the Nasdaq Capital Market, if that occurred, the
price of our common stock and our ability to access the capital
markets could be negatively impacted, and our business will be
harmed.
Our common stock is
currently listed on the Nasdaq Capital Market. Our stock was
previously traded in the over-the-counter market prior to which it
was traded on the New York Stock Exchange and failed to maintain
the continued listing qualifications. We cannot guarantee that we
will always meet Nasdaq listing qualifications. We have had annual
losses from continuing operations in four of the last five
completed fiscal years (the last fiscal year and the six month
ended June 30, 2020 have been profitable). There remains the
possibility of future losses. It is possible we may not remain in
compliance with the minimum conditions of Nasdaq listing
qualifications. Delisting from the Nasdaq Capital Market could
negatively affect the trading price of our stock and could also
have other negative results, including the potential loss of
confidence by suppliers and employees, the failure to attract the
interest of institutional investors, and fewer business development
opportunities.
We may invest or spend the proceeds of this offering in ways with
which you may not agree or in ways which may not yield a favorable
return.
Our management will
have considerable discretion in the application of the net proceeds
of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for corporate
purposes that do not increase the value of our business, which
could cause our stock price to decline. See the section of this
prospectus titled “Use of Proceeds.”
Purchasers in this offering will experience immediate and
substantial dilution in the book value of their
investment.
The assumed initial
public offering price of our common stock of $7.90 per share is
substantially higher than the pro forma as adjusted net tangible
book value per share of our outstanding common stock immediately
after this offering. Therefore, if you purchase our common stock in
this offering, you will incur immediate dilution of $6.87 in the
pro forma as adjusted net tangible book value per share from the
price you paid assuming that stock price. In addition, following
this offering, purchasers who bought shares from us in the offering
will have contributed 18% of the total consideration paid to us by
all purchasers of our common stock but will own only approximately
10% of our common stock outstanding after this
offering.
We do not intend to pay dividends on our common stock so any
returns will be limited to changes in the value of our common
stock.
We do not
anticipate declaring or paying, in the foreseeable future, any cash
dividends on our capital stock. Although our existing loan
agreements do not contain restrictions on our ability to pay
dividends or make distributions, we may in the future amend our
existing loan agreements or enter into new credit facilities that
contain such restrictions. We currently anticipate that we will
retain future earnings for the development, operation, and
expansion of our business and do not anticipate declaring or paying
any cash dividends for the foreseeable future. Any return to
stockholders will therefore be limited to the increase, if any, in
our stock price, which may never occur.
Our Chief Executive Officer owns a significant amount of our common
stock and could exercise substantial corporate control. There may
be limited ability to sell the Company absent the consent of the
CEO.
Steven G. Mihaylo,
Chief Executive Officer (“CEO”) of Crexendo, Inc., owns
approximately 69% of the outstanding shares of our common stock
based on the number of shares outstanding as of June 30, 2020. If
the offering is fully subscribed and assuming full exercise of the
over-allotment option, his ownership interest should decrease to
approximately 51%. Mr. Mihaylo has the
ability to determine the outcome of matters submitted to our
stockholders for approval, including the election of directors and
any merger, amalgamation, consolidation or sale of all or
substantially all of our assets. Mr. Mihaylo may have the ability
to control the management and affairs of our Company. As a
“control company” it may not be required that the
Company maintains a board comprising a majority of independent
directors. As a director and officer, Mr. Mihaylo owes a fiduciary
duty to our stockholders. As a stockholder, Mr. Mihaylo is entitled
to vote his shares, in his own interests, which may not always be
in the interests of our stockholders generally. Accordingly, even
though certain transactions may be in the best interests of other
stockholders, this concentration of ownership may harm the market
price of our common stock by, among other things, delaying,
deferring or preventing a change in control of our Company,
impeding a merger, amalgamation, consolidation, takeover or other
business combination involving our Company, or discouraging a
potential acquirer from making a tender offer or otherwise
attempting to obtain control of our Company.
In addition, sales
or other dispositions of our shares by Mr. Mihaylo may depress our
stock price. Sales of a significant number of shares of our common
stock in the public market could harm the market price of our
common stock, as Mr. Mihaylo is doing in this offering. As
additional shares of our common stock become available for resale
in the public market, the supply of our common stock will increase,
which could result in a decrease in the market price of our common
stock.
Some of the
provisions of our articles of incorporation and bylaws could make
it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders by providing them with the
opportunity to sell their shares at a premium to the then market
price. Our bylaws contain provisions regulating the introduction of
business at annual stockholders’ meetings by anyone other
than the board of directors. These provisions may have the effect
of making it more difficult, delaying, discouraging, preventing or
rendering costlier an acquisition or a change in control of our
Company.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus,
particularly the sections of this prospectus titled
“Prospectus Summary,” “Risk Factors” and
“Business,” and the documents incorporated herein by
reference, contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of
1934, as amended, or the Exchange Act. These forward-looking
statements are intended to be covered by the safe harbor for
forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995. All statements other than present
and historical facts and conditions contained in this prospectus
and documents incorporated herein by reference, including
statements regarding our future results of operations and financial
positions, business strategy, plans, and our objectives for future
operations, are forward-looking statements. We may, in some cases,
use words such as “anticipate,” “believe,”
“could,” “estimate,” “expect,”
“intend,” “may,” “objectives,”
“plan,” “potential,” “predict,”
“project,” “should,” “will,”
“would,” or the negative of those terms, and similar
expressions that convey uncertainty of future events or outcomes to
identify these forward-looking statements. Any statements contained
herein that are not statements of historical facts may be deemed to
be forward-looking statements. Forward-looking statements in this
prospectus include, but are not limited to, statements
about:
●
our customer relationships and our ability to retain and expand our
customer relationships and to increase sales;
●
the success, cost, and timing of new products;
●
our ability to address market and customer demands;
●
anticipated trends, challenges and growth in our business and the
markets in which we operate;
●
the potential impact of the COVID-19 pandemic on our business,
including our revenue and other operating results, liquidity, and
cash flows, and our anticipated responses thereto, and the
businesses of our suppliers and customers;
●
our expectations regarding our ability to maintain or increase
revenues and maintain expenses;
●
expected impact of new legislation and IRS guidance issued in
response to the COVID-19 pandemic;
●
the size and growth potential of the markets for our solutions, and
our ability to serve and expand our presence in those
markets;
●
our plans to expand sales and marketing efforts as well as increase
our partner channel;
●
our positioning of current and future products;
●
our ability to acquire or partner with companies and our ability to
integrate those acquisitions;
●
our expectations regarding competition in our existing and new
markets;
●
regulatory developments in the United States and foreign
countries;
●
the performance of our third-party suppliers and
manufacturers;
●
our ability to respond successfully to technological or industry
developments;
●
our ability to attract and retain key management
personnel;
●
intellectual property and related litigation;
●
the accuracy of our estimates regarding capital requirements, and
needs for additional financing; and
●
our expectations regarding our ability to obtain, maintain, and
protect our technology.
These
forward-looking statements reflect our management’s beliefs
and views with respect to future events and are based on estimates
and assumptions as of the date of this prospectus and are subject
to risks and uncertainties. We discuss many of these risks in
greater detail under the section of this prospectus titled
“Risk Factors.” Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge from
time to time. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements.
You should read
this prospectus, the documents incorporated by reference in this
prospectus, and the documents that we reference in this prospectus
and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding
that our actual future results may be materially different from
what we expect. We qualify all of the forward-looking statements in
this prospectus by these cautionary statements.
You should not rely
upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that
the future results, levels of activity, performance, or events and
circumstances reflected in the forward-looking statements will be
achieved or occur. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements for any reason after the
date of this prospectus to conform these statements to actual
results or to changes in our expectations, except as required by
law.
INDUSTRY
AND MARKET DATA
This prospectus
includes statistical and other industry and market data that we
obtained from industry publications and research, as well as
estimates by our management based on such data. All of the market
data and estimates used in this prospectus involve a number of
assumptions and limitations, and you are cautioned not to give
undue weight to such data and estimates. We believe that the
information from these industry publications, surveys, and studies
is reliable; however, our business is subject to a high degree of
risk. See the section of this prospectus titled “Risk
Factors” for additional information regarding risks that
could cause results to differ materially from those expressed in
the estimates made by the independent parties and by
us.
USE
OF PROCEEDS
We estimate that we
will receive net proceeds of approximately $12.6 million (or
approximately $16.4
million if the underwriters’ option to purchase additional
shares is exercised in full) from the sale of the 1,750,000 shares
of common stock offered by us in this offering, based on an assumed
public offering price of $7.90 per share, the last reported sale
price of our common stock on the Nasdaq Capital Market on September
17, 2020, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We will
not receive any proceeds from the sale of shares of common stock by
the selling stockholders.
Each $1.00 increase
or decrease in the assumed public offering price of $7.90 per
share, the last reported sale price of our common stock on the
Nasdaq Capital Market on September 17, 2020, would increase or
decrease the net proceeds that we receive from this offering by
approximately $1,627,500, assuming that the number of shares
offered by us, as set forth on the cover page of this prospectus,
remains the same and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us.
Similarly, each increase or decrease of 1,000,000 shares in the
number of shares offered by us would increase or decrease the net
proceeds that we receive from this offering by approximately
$7,347,000, assuming the assumed public offering price remains the
same and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us.
Our expected use of
the net proceeds from this offering represents our current
intentions based upon our present plans and business condition. As
of the date of this prospectus, we cannot predict with certainty
all of the particular uses for the net proceeds to be received upon
completion of this offering, or the amounts that we will actually
spend on the uses set forth below. We currently intend to use such
net proceeds for general corporate purposes, including working
capital, sales and marketing activities, product development,
general and administrative matters and capital expenditures. We
also may use a portion of the net proceeds to acquire complementary
businesses, products, services, or technologies, or to pay down a
portion of our outstanding indebtedness. However, we do not have
agreements, commitments, or plans for any specific acquisitions or
debt repayments at this time.
The amounts and
timing of our actual use of the net proceeds will vary depending on
numerous factors, including the other factors described in the
section of this prospectus titled “Risk Factors.” As a
result, our management will have broad discretion in the
application of the net proceeds, and investors will be relying on
our judgment regarding the application of the net proceeds of this
offering.
DIVIDEND
POLICY
We do not
anticipate declaring or paying, in the foreseeable future, any cash
dividends on our capital stock. We currently intend to retain all
available funds and any future earnings to support our operations
and finance the growth and development of our business. Any future
determination related to our dividend policy will be made at the
discretion of our board of directors and will depend upon, among
other factors, our results of operations, financial condition,
capital requirements, contractual restrictions, business prospects,
and other factors our board of directors may deem relevant.
Although our existing loan agreements do not contain restrictions
on our ability to pay dividends or make distributions, we may in
the future amend our existing loan agreements or enter into new
credit facilities that contain such restrictions.
CAPITALIZATION
The following table
sets forth our cash and cash equivalents, and our capitalization as
of June 30, 2020:
●
on an actual basis; and
●
on an as-adjusted basis, giving effect to (i) the sale of 1,750,000
shares of our common stock by us in this offering at an assumed
public offering price of $7.90 per share, the last reported sale
price of our common stock on the Nasdaq Capital Market on September
17, 2020, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us, and (ii) the
issuance of 490,000 shares to be sold upon exercise of options in
connection with this offering.
The as-adjusted
information below is illustrative only, and our capitalization
following the completion of this offering will be adjusted based on
the actual public offering price and other terms of this offering
determined at pricing. You should read this table together with
“Selected Consolidated Financial Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and the related notes incorporated by
reference in this prospectus.
|
|
|
|
|
|
(unaudited)
(in thousands)
|
Cash
and cash equivalents
|
$4,989
|
$ 17,569
|
|
|
|
Debt
and capital lease obligations
|
3,081
|
3,081
|
Stockholders'
equity:
|
5,774
|
18,354
|
Preferred
stock, par value $0.001 per share - authorized 5,000,000 shares;
none issued, actual and as adjusted
|
-
|
-
|
Common
stock, par value $0.001 per share - authorized 25,000,000 shares,
15,100,264 shares issued and outstanding as of June 30, 2020,
actual; and 17,340,264 issued and outstanding as of June 30, 2020,
as adjusted
|
15
|
17
|
Additional
paid-in capital
|
63,139
|
75,717
|
Accumulated
deficit
|
(57,380)
|
(57,380)
|
Total
stockholders' equity
|
5,774
|
18,354
|
|
|
|
Total
capitalization
|
$8,855
|
$ 21,435
|
(1)
|
A $1.00 increase
(decrease) in the assumed public offering price of $7.90 per share,
which was the last reported sale price of our common stock on the
Nasdaq Capital Market on September 17, 2020, would increase
(decrease) cash and cash equivalents, total stockholders’
equity, and total capitalization by $1,627,500, assuming that the
number of shares offered by us and the selling stockholders, as set
forth on the cover page of this prospectus, remains the same, and
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. Each increase of
1,000,000 shares in the number of shares offered by us and the
selling stockholders, assuming that the assumed public offering
price remains the same, would increase cash, total
stockholders’ equity, and total capitalization by $7,347,000.
Similar, each decrease of 1,000,000 shares in the number of shares
offered by us and the selling stockholders, assuming the assumed
public offering price remains the same, would decrease cash and
cash equivalents, total stockholders’ equity, and total
capitalization by $7,347,000.
|
|
|
Unless otherwise
indicated, the number of shares of our common stock to be
outstanding after this offering is based on 15,100,264 shares of
common stock outstanding as of June 30, 2020, plus 490,000 shares
to be sold upon exercise of options in connection with this
offering, and excludes, as of June 30, 2020:
●
2,596,184 shares of common stock issuable upon the exercise of
stock options having a weighted-average exercise price of $2.72 per
share from our 2013 Plan (which excludes 490,000 shares to be sold
in this offering by certain selling stockholders upon exercise of
options in connection with this offering);
●
129,256 unvested restricted stock units under our 2013 Plan;
and
●
1,486,049 shares of our common stock reserved for future issuance
under our 2013 Plan, as well as any automatic increases in the
number of shares of common stock reserved for future issuance under
our 2013 Plan.
DILUTION
If you invest in
our common stock in this offering, your ownership interest will be
immediately diluted to the extent of the difference between the
public offering price per share of our common stock and the
as-adjusted net tangible book value per share of our common stock
immediately after this offering.
Our historical net
tangible book value (deficit) as of June 30, 2020, was
approximately $5.2 million, or $0.34 per share of our common stock.
Our historical net tangible book value (deficit) is the amount of
our total tangible assets less our total liabilities. Historical
net tangible book value (deficit) per share is our historical net
tangible book value (deficit) divided by the number of shares of
common stock outstanding as of June 30, 2020.
As-adjusted net
tangible book value is our net tangible book value (deficit), plus
the effect of (i) the sale of 1,750,000 shares of our common stock
in this offering at an assumed public offering price of $7.90 per
share, the last reported sale price of our common stock on the
Nasdaq Capital Market on September 17, 2020, after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us, and (ii) the issuance of 490,000 shares of
common stock to be sold upon exercise of options in connection with
this offering. This amount represents an immediate increase in the
as adjusted net tangible book value of $0.69 per share to our
existing stockholder, and an immediate dilution of $6.87 per share
to new investors participating in this offering. The following
table illustrates this dilution on a per share basis:
Assumed
public offering price per share
|
|
$ 7.90
|
Net
tangible book value per share as of June 30, 2020
|
$0.34
|
|
Increase
in as adjusted net tangible book value per share attributable to
investors participating in this offering
|
0.69
|
|
As
adjusted net tangible book value per share after giving effect to
this offering
|
|
1.03
|
|
|
|
As
adjusted dilution per share to investors participating in this
offering
|
|
$ 6.87
|
If the underwriters
exercise their option to purchase an additional 525,000 shares from
us in full at the assumed public offering price of $7.90 per share,
the as-adjusted net tangible book value will increase to $1.21 per
share, representing an immediate increase in the as- adjusted net
tangible book value to our existing stockholders of
$0.18
per share, and an immediate decrease of dilution of $6.69 per share
to new investors participating in this offering.
Each $1.00 increase
or decrease in the assumed public offering price of $7.90 per
share, the last reported sale price of our common stock on the
Nasdaq Capital Market on September 17, 2020, would increase or
decrease the dilution per common share to new investors
participating in this offering by $0.91 per share, assuming that
the number of shares offered by us and the selling stockholders, as
set forth on the cover page of this prospectus, remains the same
and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. An increase or decrease
of 1,000,000 shares in the number of shares offered by us and the
selling stockholders would decrease or increase the dilution to new
investors by ($0.34) and $0.39 per share, respectively, assuming
the assumed public offering price remains the same and after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table
summarizes, on an as adjusted basis as of June 30, 2020, the number
of shares purchased or to be purchased from us, the total
consideration paid or to be paid to us, and the average price per
share paid to us by our existing stockholders and paid us to by
investors participating in this offering at an assumed public
offering price of $7.90 per share, the last reported sale price of
our common stock on the Nasdaq Capital Market on September 17,
2020, before deducting underwriting discounts and commissions and
estimated offering expenses payable by us. The table below shows
the average price per share investors participating in this
offering will pay compared to our existing
stockholders.
|
|
|
|
|
|
|
|
|
|
Existing
stockholders
|
15,100,264
|
87%
|
$ 63,139,000
|
81%
|
$ 4.18
|
New
investors purchasing shares from us in this offering
|
1,750,000
|
10%
|
13,825,000
|
18%
|
7.90
|
Shares
to be sold upon exercise of options in connection with this
offering
|
490,000
|
3%
|
1,133,100
|
1%
|
2.31
|
Total
|
17,340,264
|
100%
|
$78,097,100
|
100%
|
|
The table above
assumes no exercise of the underwriters’ option to purchase
up to an additional 525,000 shares from us in this offering. If the
underwriters’ option to purchase additional shares is
exercised in full, the number of shares of our common stock held by
the existing stockholders would be reduced to 84% of the total
number of shares of our common stock outstanding after this
offering, and the number of shares of common stock held by new
investors purchasing shares from us in the offering would be
increased to 13% of the total number of shares outstanding after
this offering.
The foregoing
discussion and table are based on 15,100,264 shares of common stock
outstanding as of June 30, 2020, plus 490,000 shares to be sold
upon exercise of options in connection with this offering, and
excludes, as of June 30, 2020:
●
2,596,184 shares of common stock issuable upon the exercise of
stock options having a weighted-average exercise price of $2.72 per
share from our 2013 Plan (which excludes 490,000 shares to be sold
in this offering by certain selling stockholders upon exercise of
options in connection with this offering);
●
129,256 unvested restricted stock units under our 2013 Plan;
and
●
1,486,049 shares of our common stock reserved for future issuance
under our 2013 Plan, as well as any automatic increases in the
number of shares of common stock reserved for future issuance under
our 2013 Plan.
We may choose to
raise additional capital through the sale of equity or convertible
debt securities due to market conditions or strategic
considerations even if we believe we have sufficient funds for our
current or future operating plans. To the extent we issue
additional shares of common stock or other equity or convertible
debt securities in the future, there will be further dilution to
investors participating in this offering.
BUSINESS
Our
Mission
Our mission is to
to provide enterprise-class UCaaS (“Unified Communications as
a Service”), call center, collaboration services, and other
cloud business services to any size business at affordable monthly
rates.
Company
Overview
Crexendo, Inc. is
an award-winning premier provider of cloud communications, UCaaS,
call center, collaboration services, and other cloud business
services that are designed to provide enterprise-class cloud
services to any size business at affordable monthly rates. The
Company has two operating segments, which consist of Cloud
Telecommunications and Web Services.
Cloud
Telecommunications – Our cloud telecommunications
services transmit calls using Internet Protocol (IP) or cloud
technology, which converts voice signals into digital data packets
for transmission over the Internet or cloud. Each of our calling
plans provides a number of basic features typically offered by
traditional telephone service providers, plus a wide range of
enhanced features that we believe offer an attractive value
proposition to our customers. This platform enables a user, via a
single “identity” or telephone number, to access and
utilize services and features regardless of how the user is
connected to the Internet or cloud, whether it’s from a
desktop device, computer, or an application on a mobile
device.
We generate
recurring revenue from our cloud telecommunications and reselling
broadband Internet services. Our cloud telecommunications contracts
typically have a thirty-six to sixty month term. We generate
product revenue and equipment financing revenue from the sale and
lease of our cloud telecommunications equipment. Revenues from the
sale of equipment, including those from sales-type leases, are
recognized at the time of sale or at the inception of the lease, as
appropriate.
Web Services –
We generate recurring revenue from website hosting and other
professional services.
Industry
Background
Communications
systems are critical to any business. In recent years, there have
been significant changes in how people work and communicate with
customers, co-workers and other third parties. Traditionally,
business personnel worked primarily at a single office, during
business hours, and utilized desk phones as their primary
communications devices connected through a PBX. With the
proliferation of smartphones and tablets that offer much of the
functionality of PCs, combined with the pervasiveness of
inexpensive broadband Internet access, businesses are increasingly
working around the clock across geographically dispersed locations,
and their employees are using a broad array of communications
devices and utilizing text, along with voice, fax, and video
conferencing, for business communications.
These changes have
created new challenges for business communications. Traditional
on-premise systems are generally not designed for workforce
mobility, “bring-your-own” communications device
environments, or the use of multiple communication channels,
including text and video conferencing. Today, businesses require
flexible, location- and device-agnostic communications solutions
that provide users with a single identity across multiple locations
and devices.
Fundamental
advances in cloud technologies have enabled a new generation of
business software to be delivered as a service over the Internet.
Today, mission-critical applications such as customer relationship
management, human capital management, enterprise resource planning
and information technology (“IT”), support are being
delivered securely and reliably to businesses through cloud-based
platforms. While on-premise systems typically require significant
upfront and ongoing costs, as well as trained and dedicated IT
personnel, cloud-based services enable cost-effective and easy
delivery of business applications to users regardless of location
or access device.
We believe that
there is a significant opportunity to leverage the benefits of
cloud computing to provide next-generation, cloud-based business
communications solutions that address the new realities of workforce mobility,
multi-device environments and multi-channel communications, thereby
enabling people to communicate the way they do
business
Our
Solutions and Technology
Our goal is to
provide a broad range of cloud-based products and services that
nearly eliminate the cost of a businesses’ technology
infrastructure and enable businesses of any size to more
efficiently run their business. By providing a variety of
comprehensive and scalable solutions, we are able to cater to
businesses of all sizes on a monthly subscription basis without the
need for expensive capital investments, regardless of where their
business is in its lifecycle. Our products and services can be
categorized in the following offerings:
Cloud Telecommunications: Our cloud
telecommunications service offering includes hardware, software,
and unified communication solutions for businesses using IP or
cloud technology over any high-speed Internet connection. These
services are rendered through a variety of devices and user
interfaces such as Crexendo branded desktop phones and/or mobile
and desktop applications. Some examples of mobile devices are
Android cell phones, iPhones, iPads or Android tablets. These
services enable our customers to seamlessly communicate with others
through phone calls that originate/terminate on our network or PSTN
networks. Our cloud telecommunications services are powered by our
proprietary implementation of standards based Web and VoIP cloud
technologies. Our services use our highly scalable complex
infrastructure that we build and manage based on industry standard
best practices to achieve greater efficiencies, better quality of
service (QoS) and customer satisfaction. Our infrastructure is
comprised of compute, storage, network technologies, third party
products and vendor relationships. We also develop end user portals
for account management, license management, billing and customer
support and adopt other cloud technologies through our
partnerships.
Crexendo’s
cloud telecommunication service offers a wide variety of essential
and advanced features for businesses of all sizes. Many of these
features included in the service offering are:
●
Business Productivity Features such as dial-by extension and name,
transfer, conference, call recording, Unlimited calling to anywhere
in the United States and Canada, International calling, Toll free
(Inbound and Outbound).
●
Individual Productivity Features such as Caller ID, Call Waiting,
Last Call Return, Call Recording, Music/Message-On-Hold, Voicemail,
Unified Messaging, Hot-Desking.
●
Group Productivity Features such as Call Park, Call Pickup,
Interactive Voice Response (IVR), Individual and Universal Paging,
Corporate Directory, Multi-Party Conferencing, Group Mailboxes, Web
and mobile devices based collaboration applications.
●
Call Center Features such as Automated Call Distribution (ACD),
Call Monitor, Whisper and Barge, Automatic Call Recording, One way
call recording, Analytics.
●
Advanced Unified Communication Features such as Find-Me-Follow-Me,
Sequential Ring and Simultaneous Ring, Voicemail
transcription.
●
Mobile Features such as extension dialing, transfer and conference
and seamless hand-off from WiFi to/from 3G and 4G, LTE, as well as
other data services. These features are also available on CrexMo,
an intelligent mobile application for iPhones and Android
smartphones, as well as iPads and Android tablets.
●
Traditional PBX Features such as Busy Lamp Fields, System Hold.
16-48 Port density Analog Devices.
●
Expanded Desktop Device Selection such as Entry Level Phone,
Executive Desktop, DECT Phone for roaming users.
●
Advanced Faxing solution such as Cloud Fax (cFax) allowing
customers to send and receive Faxes from their Email Clients,
Mobile Phones and Desktops without having to use a Fax Machine
simply by attaching a file.
●
Web based online portal to administer, manage and provision the
system.
●
Asynchronous communication tools like SMS/MMS, chat and document
sharing to keep in pace with emerging communication
trends.
Many of these
services are included in our basic offering to our customers for a
monthly recurring fee and do not require a capital expense. Some of
the advanced features such as Automatic Call Recording and Call
Center Features require additional monthly fees. Crexendo continues
to invest and develop its technology and CPaaS offerings to make
them more competitive and profitable.
Our Cloud
Telecommunications technology is continuously being enhanced with
additional features and software functionality. Our current
functionality includes:
●
High-end desktop telephony devices such as Gigabit, PoE, 6 Line
Color Phone with 10 programmable buttons and lower end Monochrome 2
Line wall mountable device.
●
Basic Business Telephony Features such as those offered in a
traditional PBX systems like extension dialing, Direct Inward
Dialing (DID), Hold/Resume, Music-On-Hold, Call Transfer (Attended
and Unattended), Conferencing, Local, Long Distance, Toll-Free and
International Dialing, Voicemail, Auto-Attendant and traditional
faxing.
●
Advanced telephony features such as Call Park, Call Pickup, Paging
(through the phones), Overhead paging, Call Recording.
●
Call Center Functionality such as Agent Log In/Log Out, Whisper,
Barge and Call center reporting.
●
Unified Communications features like Simultaneous Ring, Sequential
Ring, Status based Routing (Find-Me-Follow-Me), 10-party instant
conference, and Mobile application (CrexMo).
●
Crexendo Mobile Application (CrexMo), which allows users to place
and receive extension calls using Crexendo’s network,
transfer and conference other users right from their mobile device
as if they were in the office. It also provided users instant
access to visual voicemail and call logs.
●
End User Portal and Unified Messaging with Voicemail, Call
Recording and eFax inbox.
●
Collaboration products like group chat, SMS/MMS, document sharing,
video and web conferencing.
Website Services: Our website services
segment allows businesses to host their websites in our data center
for a recurring monthly fee. Our website software platform is
feature rich and battle tested to provide an innovative
website-building environment. We continue to maintain our Web
platform to make it an available and reliable experience for our
web customers and for their website visitors.
Our
Products and Services
Communications as
we know it has changed in today’s world and Crexendo’s
platform is designed to allow business to communicate anywhere, any
time and on any device. Whether a business needs traditional voice
services, high end call center applications, video conferencing
abilities, screen sharing collaboration, texting and chat, or
mobility solutions, Crexendo has the solutions they can depend on
and succeed with.
Our cloud-based
business UCaaS solutions provide a feature rich communications
platform for large, mid-sized, and small enterprise level
customers. Our solutions allow businesses to be more efficient and
productive whether they have one location or multiple locations and
allows them to communicate via multiple devices, including desk
phones, smartphones, tablets, PCs and laptops, and allows for
communications across multiple channels, including voice, text,
video web conferencing and fax. Our in-house designed and developed
solutions enable a more productive and dynamic workforce, and have
been architected using industry standards to meet modern business
communications requirements, including workforce mobility, BYOD
requirements, and multi-channel collaboration.
Our solutions are
delivered using a redundant, resilient, high-availability and
scalable infrastructure and are designed for easy implementation,
provisioning and administration with minimal technical expertise or
training required. Our solutions scale easily and quickly, allowing
our customers to add new users through a web portal regardless of
where they are located. Our solutions are very cost effective,
often saving businesses up to 50% off of their existing telecom
spend. Migrating to our system requires little to no upfront
infrastructure hardware costs and our solutions require no ongoing
maintenance and upgrade costs that are commonly associated with
legacy on-premise systems.
We sell our
Crexendo solution as an all-inclusive, feature rich communications
platform that allows customers to eliminate their older,
premise-based systems and the costs associated with local dial
tone, long distance, maintenance, support and upgrades. Since our
system includes features such as Automatic Call Distribution (ACD)
for call centers, record-a-call, mobility, and collaboration all as
standard offerings, we have a significant advantage over many of
our competitors who charge much higher fees for these types of
applications. In addition, our solution is also a great, cost
effective solution for businesses that are already using cloud
communications from a competitive UCaaS provider as we can likely
easily migrate their existing VoIP phones over to our system and
likely offer them more capabilities at a lower cost.
We believe that our
solutions provide not only the core functionality of existing
on-premise communications solutions, but also additional key
benefits that address the changing requirements of business to
allow businesses to function in remote work environments using
voice, video, collaboration, SMS/text, chat and
mobility.
Some of the key
benefits of our system include:
●
Location Flexibility. Our
cloud-based UCaaS system is designed to be location independent.
Customers can easily connect their desk phone, mobile application,
or PC softphone from any location that has sufficient internet
access. In addition, office calls can easily be forwarded to a cell
phone to further allow location flexibility. The ability to handle
your business calls anywhere is a key benefit to cloud
communications.
●
Device Independence. We not
only design, sell and support our own Crexendo branded phones that
work with our system, but our solution is also able to support a
wide range of industry standard VoIP devices from manufacturers
such as Polycom, Yealink, Cisco, H-tek, and Grandstream allowing
customers to utilize existing hardware if needed. We also support
mobile devices including smartphones, tablets, PCs and laptops,
allowing businesses many options to meet their communications
needs.
●
Easy Implementation and
Support. Our solutions are designed for quick and efficient
implementation and ease of ongoing administration and support. Our
system provides a lifetime warranty on service and support for our
platform and our Crexendo phones. Our white glove service and
support is all handles in-house, twenty four hours a day, seven
days a week, three hundred and sixty-five days a year.
●
Productivity and Efficiency
Enhancing Features. Our system offers a full suite of
features and capabilities that improve employee productivity and
efficiency. In today’s competitive world, enabling workforces
with enhanced abilities and communications options is critical for
every business.
●
Scalability. Our
cloud-based solutions allow businesses to easily and efficiently
grow their business and expand their communications without fear of
obsolescence or capacity limits. Customers can add users,
regardless of their location, without having to purchase additional
infrastructure hardware or software upgrades.
●
Lower Cost of Ownership. We
believe that our customers experience significantly lower cost of
ownership compared to legacy on-premise systems. By eliminating
expensive dial tone, long distance and support costs, our UCaaS
solution typically has an instant and significant ROI for
businesses.
●
Analytics and Reporting. Our
system provides detailed analytics and reporting packages so
businesses can get real-time and historical accounts on their
internal and external communications. Combined with enhanced call
center type features like call recording, chat, and skills based
routing, businesses get the tools they need to effectively manage
their business.
●
CRM and Application
Integration. Our system integrates with cloud-based
CRM’s and business applications like Salesforce, ZOHO,
Outlook, Oracle, etc. to help quickly distribute calls and call
detail information to your employees, making them more productive.
In addition, our in-house engineering team is available to help
create custom applications and features if needed.
●
Disaster Recovery/Business
Continuity. Now more than ever, business continuity and
communicating during a disaster such as a pandemic, hurricane,
fire, etc. is critical. Our platform allows businesses to function
wherever they need to. The massive shift to remote workforces that
Covid-19 created is a great example of how the Crexendo solution
easily addresses the rapid shift from office to home without
skipping a beat or losing features or functionality.
Whether a business
has 5 employees or 5,000 employees, we believe that
Crexendo’s UCaaS cloud communications platform is a great
solution to help communicate effectively in today’s ever
changing business environment. Our in-house designed and engineered
award winning solutions are supported by our in-house U.S. based
customer service team. Crexendo’s complete cloud solutions
are designed to help those business improve their internal and
external communications at a low cost.
Our
Customers
We have a diverse and growing customer base comprised of over 2,500
businesses across a wide range of industries, including
advertising, consulting, finance, healthcare, legal, real estate,
retail and technology. Our revenues are highly diversified across
our customer base, with no single non-reseller customer accounting
for more than 5% of our total revenues in fiscal 2018 or 2019 or
during any period presented in this prospectus. To date, we have
focused our principal efforts on the market for small and
medium-sized businesses (“SMB”) in the United States.
We believe that there is strong additional growth opportunity in
the SMB markets as well as the small enterprise business markets
and will continue to focus our primary efforts in these
sectors.
Sales
and Marketing
We sell our
solutions through both a direct sales force and an indirect partner
channel. Our direct sales force is currently comprised of 8 sales
representatives that sell our solutions directly to end-user
customers. Our partner channel currently consists of 200 partners
that sell our solutions on a revenue share basis. We currently have
5 channel managers that support our partners in their sales
efforts.
Our partners
currently contribute approximately 70% of our new sales bookings.
Our partners tend to fall into four different categories. First is
the traditional telecom partner that sells primarily only telecom
solutions, of which we would be one of their product offerings.
Second would be Data Value-Added Resellers (VARs) and Managed
Service Providers (MSP) that typically offer data services and IT
consulting services and they sell our solutions as an added
offering to their data related portfolio of offerings. A third type
of partner is the traditional business to business sales
organization that specializes in selling business-oriented services
such as copiers, cellular services, network services, office
furniture, etc. This type of partner would add Crexendo’s
UCaaS offering to their suite of products they represent. The
fourth category is master agents, which are similar to a brokerage
house for independent sales agents across the country, selling
technology-related services under a master agent
umbrella.
Once a sale is made
by either our direct channel or our partner channel, our in-house
implementation and support team takes over the account and is
responsible for setup and deployment. Our sales efforts continue in
a support mode if needed after the customer goes live on our
services. Since we have our customers on long-term agreements, our
sales department is also in charge of ongoing sales and support for
the new customers after the implementation process is complete. We
also have sales efforts focused on our existing customers for
add-on orders and renewals at the end of contract
terms.
Our sales efforts
are supported by our in-house marketing department that is
responsible for sales and marketing materials, our corporate
website, lead generation efforts and ad campaigns. Our marketing
efforts are designed to generate lead opportunities and support our
messaging to the SMB business space.
Manufacturing
We outsource the
manufacturing of our Crexendo branded desktop devices. This
outsourced manufacturing approach allows us to focus our resources
on the design, sale, and marketing of our products. In addition, we
believe that outsourcing many of our manufacturing and assembly
activities provides us with the flexibility needed to respond to
new market opportunities and scale for customer demand, simplifies
our operations, and significantly reduces our capital
commitments.
We subject our
third-party manufacturing contractors to rigorous qualification
requirements to meet the high quality and reliability standards
required of our products. We carefully qualify each of our partners
and their processes before applying the technology to our products.
Our engineers work closely with our manufacturing contractors and
other contractors to increase yield, lower manufacturing costs, and
improve product quality.
Research
and Development
We believe that
continued investment in research and development is critical to
expanding our leadership position within the cloud-based business
communications solutions market. We devote the majority of our
research and development resources to software development. Our
engineering team has significant experience in various disciplines
related to our platform, such as voice, text, video and fax
processing, mobile application development, IP networking and
infrastructure, user experience, security and robust multi-tenant
cloud-based system architecture.
Our development
methodology, in combination with our software as a service
(“SaaS”) delivery model, allows us to provide new and
enhanced capabilities on a regular basis. Based on feedback from
our customers and prospects and our review of the broader business
communications and SaaS markets, we continuously develop new
functionality while maintaining and enhancing our existing
solution.
Our research and
development expenses were $0.8 million and $0.9 million in fiscal
2018 and 2019, respectively.
Intellectual
Property
Our success depends
in part on using and protecting our proprietary technology and
other intellectual property. Furthermore, we must conduct our
operations without infringing on the proprietary rights of third
parties. We also rely upon trade secrets and the know-how and
expertise of our key employees. To protect our proprietary
technology and other intellectual property, we rely on a
combination of the protections provided by applicable copyright,
trademark and trade secret laws, as well as confidentiality
procedures and licensing arrangements. Although we believe we have
taken appropriate steps to protect our intellectual property
rights, including requiring employees and third parties who are
granted access to our intellectual property to enter into
confidentiality agreements, these measures may not be sufficient to
protect our rights against third parties. Others may independently
develop or otherwise acquire unpatented technologies or products
similar or superior to ours.
We license from
third parties certain software and Internet tools which we include
in our services and products. If any of these licenses were
terminated, we could be required to seek licenses for similar
software and Internet tools from other third parties or develop
these tools internally. We may not be able to obtain such licenses
or develop such tools in a timely fashion, on acceptable terms, or
at all.
Companies
participating in the software, Internet technology, and
telecommunication industries are frequently involved in disputes
relating to intellectual property. We may be required to defend our
intellectual property rights against infringement, duplication,
discovery and misappropriation by third parties or to defend
against third-party claims of infringement. Likewise, disputes may
arise in the future with respect to ownership of technology
developed by employees who were previously employed by other
companies. Any such litigation or disputes could be costly and
divert our attention from our business. An adverse determination
could subject us to significant liabilities to third parties,
require us to seek licenses from, or pay royalties to, third
parties, or require us to develop appropriate alternative
technology. Some or all of these licenses may not be available to
us on acceptable terms, or at all. In addition, we may be unable to
develop alternate technology at an acceptable price, or at all. Any
of these events could have a material adverse effect on our
business prospects, financial position, or results of
operations.
Competition
The market for
cloud business communications services is large and increasingly
competitive. We expect competition to continue to increase in the
future. Some of these competitors include:
●
traditional on-premise, hardware business communications providers
such as Alcatel-Lucent, Avaya Inc., Cisco Systems, Inc., Mitel,
NEC, and Siemens Enterprise Networks, LLC, any of which may now or
in the future also host their solutions through the
cloud;
●
software providers such as Microsoft Corporation (Microsoft Teams
(formerly Skype for Business)) and BroadSoft, Inc. (acquired by
Cisco Systems, Inc.) that generally license their software and may
now or in the future also host their solutions through the cloud,
and their resellers including major carriers and cable
companies;
●
established communications providers that resell on-premise
hardware, software, and hosted solutions, such as AT&T, Verizon
Communications Inc., CenturyLink, Cox, Charter and Comcast
Corporation in the United States, TELUS and others in Canada, and
BT, Vodafone, and others in the United Kingdom, all of whom have
significantly greater resources than us and do now or may in the
future also develop and/or host their own or other solutions
through the cloud;
●
other cloud companies such as 8x8, Inc., RingCentral, Inc.,
Amazon.com, Inc., DialPad, Inc., Fusion, Fuze (formerly Thinking
Phone Networks), StarBlue (merger of Star2Star and BlueFace),
Intermedia.net, Inc., J2 Global, Inc., Jive Communications, Inc.
(acquired by LogMeIn, Inc.), Microsoft Corporation (Microsoft Teams
(formerly Skype for Business)), Mitel, Nextiva, Inc., Slack
Technologies, Inc., Vonage Holdings Corp., and West
Corporation;
●
other large internet companies such as Alphabet Inc., Facebook,
Inc., Oracle Corporation, Zoom, and Salesforce.com, Inc., any of
which might launch its own cloud-based business communication
services or acquire other cloud-based business communications
companies in the future; and
●
established contact center providers such as Amazon.com, Inc.,
Aspect Software, Inc., Avaya Inc., Five9, Inc., Genesys
Telecommunications Laboratories, Inc., and
NewVoiceMedia.
Additionally,
should we determine to pursue acquisition opportunities, we may
compete with other companies with similar growth strategies. Some
of these competitors may be larger and have greater financial
resources than we do. Competition for these acquisition targets
could also result in increased prices of acquisition targets and a
diminished pool of companies available for
acquisition.
There are
relatively low barriers to entry into our business. Our proprietary
technology does not preclude or inhibit competitors from entering
our markets. In particular, we anticipate new entrants will attempt
to develop competing products and services or new forums for
conducting e-commerce and telecommunications services which could
be deemed competition. Additionally, if telecommunications service
providers with more resources and name recognition were to enter
our markets, they may redefine our industry and make it difficult
for us to compete.
Expected technology
advances associated with the Cloud, increasing use of the Cloud,
and new software products are welcome advancements that we believe
will broaden the Cloud’s viability. We anticipate that we can
compete successfully by relying on our infrastructure, marketing
strategies and techniques, systems and procedures, and by adding
additional products and services in the future. We believe we can
continue the operation of our business by periodic review and
revision to our product offerings and marketing
approach.
Employees
As of June 30,
2020, we had 61 employees; 60 full-time and 1 part-time, including
3 executives, 17 sales representatives and sales management, 1 in
marketing, 11 engineers and IT support, 21 in operations and
customer support, and 8 in accounting, finance, and
legal.
Legal
Proceedings
From time to time
we receive inquiries from federal, state, city and local government
officials as well as the FCC and taxing authorities in the various
jurisdictions in which we operate. These inquiries and
investigations relate primarily to our discontinued seminar
operations and concern compliance with various city, county, state,
and/or federal regulations involving sales, representations made,
customer service, refund policies, services 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 and 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 our 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.
MANAGEMENT
Executive
Officers and Directors
The following table
sets forth the names, ages, and positions of our executive officers
and directors as of June 30, 2020:
Name
|
Age
|
Position
|
Executive Officers
|
|
|
Steven
G. Mihaylo
|
76
|
Chief
Executive Officer and Chairman of the Board
|
Doug
Gaylor
|
54
|
Chief
Operating Officer and President
|
Ron
Vincent
|
44
|
Chief
Financial Officer
|
Non-Employee Directors
|
|
|
Jeffrey
P. Bash (2)(3)
|
78
|
Director
|
Anil
Puri (1)
|
71
|
Director
|
David
Williams (1)(3)
|
65
|
Director
|
Todd
Goergen (1)(2)(3)
|
47
|
Director
|
(1)
Member of the Audit committee
|
|
|
(2)
Member of the Compensation committee
|
|
(3)
Member of the Nominating committee
|
|
Executive
Officers
Steven G. Mihaylo - Mr. Mihaylo was
appointed our Chief Executive Officer in 2008 and has served as
Chairman of our board of directors since November 2010. Mr. Mihaylo
is the former Chairman and Chief Executive Officer of Inter-Tel,
Incorporated (“Inter-Tel”), which he founded in 1969.
Mr. Mihaylo led the Inter-Tel revolution from providing business
telephone systems to offering complete managed services and
software that help businesses facilitate communication and increase
customer service and productivity. Before selling Inter-Tel for
nearly $750 million in 2007, he grew the business to nearly $500
million in annual revenue. Mr. Mihaylo led the development of
Inter-Tel from providing business telephone systems to offering
complete managed services and software that helped businesses
facilitate communication and increase customer service and
productivity. The board of directors nominated Mr. Mihaylo to the
board in part because he is the Chief Executive Officer of the
Company and has more than 40 years of experience in the
industry.
Mr. Mihaylo was
awarded an honorary PhD from California State University -
Fullerton and received a Bachelor of Arts in Business
Administration in Accounting & Finance from California State
University - Fullerton in 1969. Mr. Mihaylo has served on boards of
numerous community organizations including the Arizona Heart
Foundation, Junior Achievement of Arizona, Arizona Museum of
Science and Technology and the Arizona State University College of
Business Dean’s Council of 100. Committed to education, Mr.
Mihaylo is involved with the Karl Eller College of Management at
the University of Arizona and has served on the advisory board of
Junior Achievement of Central Arizona for over 25 years, as a
member of the board of directors, as well as being a member of the
Big Bear High School Education Foundation, and is on the
Dean’s Advisory Board of California State University -
Fullerton.
Doug Gaylor - Mr. Gaylor has served as
our President and Chief Operating Officer (COO) since May 2012.
Prior to ascending to the role of President, Mr. Gaylor was Vice
President of Sales for the Company, a position he held since
joining the Company in 2009. Mr. Gaylor’s 30+ years in the
telecom industry have all been focused on sales, business
development, and executive management with publicly held
telecommunications companies making him a subject matter expert in
UCaaS, call center, and collaboration.
Prior to joining
Crexendo, Mr. Gaylor held positions of increasing responsibility,
culminating with the position of Sr. Vice President, at
Inter-Tel/Mitel where he was originally hired in 1987. Mr. Gaylor
was responsible for overseeing the sales efforts in the Western
United States where he was ultimately responsible for the
activities of approximately 200 sales representatives. Under his
leadership yearly sales for his region reached over $175 million
annually. Mr. Gaylor holds a Bachelors of Arts in Communications
from the University of Houston. He is an active board member for
multiple non-profit organizations specializing in education and
community support.
Ron Vincent - Mr. Vincent has served as
our Chief Financial Officer since April 2012. Prior to joining the
Company, Mr. Vincent was employed by Ernst & Young, LLP (EY),
as an audit senior manager, which concluded his fourteen year
professional career as an auditor. Mr. Vincent received a Bachelor
of Science in Business from Indiana University (Bloomington), Kelly
School of Business in 1998 and a Master of Business Administration
degree from the University of Phoenix. Mr. Vincent is a licensed
Certified Public Accountant in the State of Arizona.
Non-Employee
Directors
Jeffrey P. Bash - Mr. Bash has served as
a member of our Board since August 2013. Mr. Bash has been a long
time investor in Crexendo and has extensive investing and corporate
finance experience. From 2008 to the present, Mr. Bash has also
worked as a consultant to the private equity firm, FinTekk AP, LLC
of Newport Beach, CA, providing strategic planning, corporate
finance, structure, analysis, research and report writing services,
including advisory services, as needed, to small private companies.
Since 1996, Mr. Bash has been a private investor and advocate for
stockholder interests with both managements and boards. Prior to
1996, Mr. Bash was a Corporate Vice President & Actuary for New
York Life Insurance Company, becoming a Fellow of the Society of
Actuaries (FSA) from 1970 until his retirement in 1995. He has also
been a Vice President of private, family-owned Richmont Corporation
of Dallas, TX, providing corporate finance services. Mr. Bash
received his Bachelor of Arts degree in mathematics from Oberlin
College.
Anil Puri - Dr. Puri has served as a
member of our Board since November 2009. Dr. Puri is director of
the Woods Center for Economic Analysis and Forecasting at
California State University - Fullerton. He served as provost for
the university and dean for the Mihaylo College of Business and
Economics. Prior to becoming Dean in 1998, Dr. Puri was department
chair and professor of economics at California State University -
Fullerton. Dr. Puri is a noted economist and scholar who has served
as the Executive Vice President of the Western Economic Association
International, the second largest professional association of
economists in the United States and is a member of the American
Economic Association, and the National Association of Business
Economists. Dr. Puri brings to the board of directors extensive
business and financial experience. Dr. Puri has previously served
and counseled public boards and he is a panel member of the
National Association of Business Economists' Survey of Economic
Conditions.
David Williams - Mr. Williams has been a
director of the Company since May 2008. Since 2008, Mr. Williams
has served as the Chairman and Chief Executive Officer at Equity
Capital Management Corp, which provides asset management, and tax
oriented consulting and financing for real estate investors. In
addition, Mr. Williams serves as Counsel and Chief Financial
Officer of Pacific Equities Capital Management Corporation, a real
estate holding company. From 1996 to 2008, Mr. Williams acted as an
independent consultant in taxation, real estate transactions and
venture capital. Mr. Williams served as Chief Financial Officer and
tax counsel at Wilshire Equities Corp. from 1987 to 1990 and as
President from 1990 to 1996. From 1980 to 1987, Mr. Williams rose
from a junior staff member to director position at Arthur Young
& Co., a public accounting firm. The board of directors
recognizes Mr. Williams’ business, finance and tax experience
and values his contributions to board discussions and to the
Company. Mr. Williams is a certified public accountant in
California, Nevada and Washington, and holds a juris doctorate
degree in law from the McGeorge Law School of University of the
Pacific. Mr. Williams graduated from Stanford University with a
Master of Science degree in engineering finance and a Bachelor of
Science degree in biological science with honors.
Todd A. Goergen – Mr. Goergen has
served as a member of our Board since November 2006. Mr. Goergen is
Founder and Managing Partner of The Ropart Asset Management Funds
and serves on the Investment Committee of Ropart Investments, LLC.
Mr. Goergen's primary responsibilities include the management of
the private equity portfolio, assisting in asset allocation and
oversight of the firm’s outside investment managers.
Additionally, Mr. Goergen has been responsible for many of the
firm's strategy decisions including; active versus passive
management, impact of investment manager returns and broader
investor trends in the alternative investment industry. Prior to
founding the RAM Funds in 2001, Mr. Goergen began his career in
Mergers and Acquisitions and corporate finance at Donaldson,
Lufkin, and Jenrette (“DLJ”). While at DLJ, Mr. Goergen
was involved with over several billion dollars of buy side and sell
side transactions. After DLJ, Mr. Goergen was Director of Mergers
and Acquisitions at Blyth, Inc., a leading global designer and
marketer of personal and decorative products. Mr. Goergen graduated
from Wake Forest University with concentrations in Economics and
Political Science. Mr. Goergen sits on the board of directors for
the following firms: Cura, Crexendo and Fragmob; and is an observer
on the board of Heal. Additionally, Mr. Goergen is an active member
of U.S. and International Advisory Councils to the Global
Leadership Foundation and is an activist in the preservation of
African wildlife. Mr. Goergen is an avid wine enthusiast and has
written columns for several magazines.
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table
sets forth certain information known to us, as of August 31, 2020,
regarding the beneficial ownership of our common stock
by:
●
each person, or group of affiliated persons, who is known by us to
beneficially own more than 5% of the outstanding shares of our
common stock;
●
each of our named executive officers (collectively, our
“Executive Officers”);
●
each of our directors;
●
all of our current Executive Officers and directors as a group;
and
●
each of the other selling stockholders.
The percentage
ownership information under the column “Percentage of shares
beneficially owned prior to this offering” is based on
15,247,649 shares of common stock outstanding as of August 31,
2020. The percentage ownership information under the column
“Beneficial Ownership of Shares After the Offering” is
based on (i) the sale of 1,750,000 shares of our common stock in
this offering, and (ii) the issuance of 490,000 shares of common
stock to be sold upon exercise of options in connection with this
offering. The table below assumes no exercise of the
underwriters’ option to purchase additional shares from us in
the offering.
There were
approximately 1,344 holders of record of our shares of common stock
as of August 31, 2020. The number of holders does not include
individual participants in security positions
listings.
Information with
respect to beneficial ownership has been furnished by each
director, officer, or beneficial owner of more than 5% of our
common stock. We have determined beneficial ownership in accordance
with the rules of the SEC. These rules generally attribute
beneficial ownership of securities to persons who possess sole or
shared voting power or investment power with respect to those
securities. In addition, the rules include shares of our common
stock issuable upon the vesting of restricted stock units or
pursuant to the exercise of stock options that will vest or are
either immediately exercisable or exercisable within 60 days of
August 31, 2020. These shares are deemed to be outstanding and
beneficially owned by the person holding those options for the
purpose of computing the percentage ownership of that person, but
they are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless otherwise
indicated, the persons or entities identified in this table have
sole voting and investment power with respect to all shares shown
as beneficially owned by them, subject to applicable community
property laws.
Except as otherwise
noted below, the address of each person identified in the following
table is c/o Crexendo, Inc., 1615 South 52nd Street, Tempe,
Arizona, 85281.
Name
of Beneficial Owner
|
Beneficial
Ownership of Shares Before the Offering
|
|
Beneficial
Ownership of Shares After the Offering
|
|
|
|
|
|
|
Named
Executive Officers and Directors
|
|
|
|
|
|
Steven
G. Mihaylo (3)
|
10,866,220
|
69.0%
|
1,060,000
|
9,806,220
|
54.5%
|
Todd
Goergen (4)
|
480,587
|
3.1%
|
-
|
480,587
|
2.7%
|
Jeffrey
Bash (5)
|
256,737
|
1.7%
|
-
|
256,737
|
1.5%
|
David
Williams (6)
|
136,745
|
0.9%
|
50,000
|
86,745
|
0.5%
|
Anil
Puri (7)
|
120,246
|
0.8%
|
40,000
|
80,246
|
0.5%
|
Doug
Gaylor (8)
|
507,800
|
3.2%
|
200,000
|
307,800
|
1.7%
|
Ron
Vincent (9)
|
341,009
|
2.2%
|
200,000
|
141,009
|
0.8%
|
All
current directors and executive officers as a group (7
persons)
|
12,709,344
|
74.7%
|
1,550,000
|
11,159,344
|
59.5%
|
Other Selling Stockholders
|
|
|
|
|
|
The
Steven and Lois Mihaylo Children's Trust (fbo Sarah
Mihaylo)(10)
|
505,000
|
3.3%
|
100,000
|
405,000
|
2.3%
|
The
Steven and Lois Mihaylo Children's Trust (fbo Emily
Mihaylo )(11)
|
504,500
|
3.3%
|
100,000
|
404,500
|
2.3%
|
(1)
Beneficial ownership is determined in accordance with the rules of
the SEC, based upon 15,247,649 shares of common stock outstanding
on August 31, 2020. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that
are currently exercisable or become exercisable within 60 days
following August 31, 2020 and restricted stock units that are
scheduled to vest within 60 days of August 31, 2020 are deemed
outstanding. These shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other
person. The persons and entities named in the table have sole
voting and sole investment power with respect to the shares set
forth opposite such stockholder’s name.
(2)
Beneficial ownership is determined in accordance with the rules of
the SEC, based upon 17,487,649 shares of common stock to be
outstanding after this offering. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that
person that are currently exercisable or become exercisable within
60 days following August 31, 2020 and restricted stock units that
are scheduled to vest within 60 days of August 31, 2020 are deemed
outstanding. These shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other
person. The persons and entities named in the table have sole
voting and sole investment power with respect to the shares set
forth opposite such stockholder’s name.
(3)
Consists of 547,322 shares held personally, 9,671,182 shares in The
Steven G. Mihaylo Trust dated August 19, 1999, as amended, of which
Steven G. Mihaylo is the Trustee, 140,000 shares in The Steven
Mihaylo and Lois Mihaylo Foundation and 507,716 shares subject to
options that are currently exercisable or become exercisable within
60 days following August 31, 2020.
(4)
Consists of 8,842 shares held personally, 355,000 shares held by
his family’s private equity firm Ropart Asset Management FD
II LLC and 116,745 shares subject to options that are currently
exercisable or become exercisable within 60 days following August
31, 2020.
(5)
Consists of 169,992 shares held personally and 86,745 shares
subject to options that are currently exercisable or become
exercisable within 60 days following August 31, 2020.
(6)
Consists of 20,000 shares held personally and 116,745 shares
subject to options that are currently exercisable or become
exercisable within 60 days following August 31, 2020.
(7)
Consists of 13,501 shares held personally and 106,745 shares
subject to options that are currently exercisable or become
exercisable within 60 days following August 31, 2020.
(8)
Consists of 5,999 shares held personally, 500,801 shares subject to
options that are currently exercisable or become exercisable within
60 days following August 31, 2020 and 1,000 restricted stock units
that are scheduled to vest within 60 days of August 31,
2020.
(9)
Consists of 9,371 shares held personally, 330,054 shares subject to
options that are currently exercisable or become exercisable within
60 days following August 31, 2020 and 1,584 restricted stock units
that are scheduled to vest within 60 days of August 31,
2020.
(10)
Consists of shares held in The Steven and Lois Mihaylo
Children’s Trust (fbo Sarah Mihaylo), of which Sarah Mihaylo
is the sole beneficiary.
(11)
Consists of shares held in The Steven and Lois Mihaylo
Children’s Trust (fbo Emily Mihaylo), of which Emily Mihaylo
is the sole beneficiary.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
OF OUR COMMON STOCK
The following is a
summary of the material U.S. federal income tax consequences
relating to the acquisition, ownership, and disposition of common
stock acquired pursuant to this offering by non-U.S. holders (as
defined below). This summary deals only with common stock held as a
capital asset (within the meaning of Section 1221 of the Code) and
does not discuss the U.S. federal income tax consequences
applicable to a non-U.S. holder that is subject to special
treatment under U.S. federal income tax laws, including, but not
limited to: a dealer in securities or currencies; a broker-dealer;
a financial institution; a qualified retirement plan, individual
retirement plan, or other tax-deferred account; a regulated
investment company; a real estate investment trust; a tax-exempt
organization; an insurance company; a person holding common stock
as part of a hedging, integrated, conversion, or straddle
transaction or a person deemed to sell common stock under the
constructive sale provisions of the Code; a trader in securities
that has elected the mark-to-market method of tax accounting; an
accrual method taxpayer subject to special tax accounting rules
under Section 451(b) of the Code; an entity that is treated as a
partnership for U.S. federal income tax purposes; a person that
received such common stock in connection with services provided; a
corporation that accumulates earnings to avoid U.S. federal income
tax; a corporation organized outside the United States, any state
thereof or the District of Columbia that is nonetheless treated as
a U.S. taxpayer for U.S. federal income tax purposes; a person that
is not a non-U.S. holder; a “controlled foreign
corporation;” a “passive foreign investment
company;” or a U.S. expatriate.
This summary is
based upon provisions of the Code, its legislative history,
applicable U.S. Treasury regulations promulgated thereunder,
published rulings, and judicial decisions, all as in effect as of
the date hereof. We have not sought, and will not seek, any ruling
from the Internal Revenue Service, or IRS, with respect to the tax
consequences discussed herein, and there can be no assurance that
the IRS will not take a position contrary to the tax consequences
discussed below or that any position taken by the IRS would not be
sustained. Those authorities may be repealed, revoked, or modified,
perhaps retroactively, or may be subject to differing
interpretations, which could result in U.S. federal income tax
consequences different from those discussed below. This summary
does not address all aspects of U.S. federal income tax, does not
deal with all tax considerations that may be relevant to
stockholders in light of their personal circumstances, and does not
address any state, local, foreign, gift, estate (except to the
limited extent set forth herein), or alternative minimum tax
considerations.
For purposes of
this discussion, a “U.S. holder” is a beneficial holder
of common stock that is for U.S. federal income tax purposes: an
individual citizen or resident of the United States; a corporation
(or any other entity treated as a corporation for U.S. federal
income tax purposes) created or organized in or under the laws of
the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or a trust if it (1) is subject
to the primary supervision of a court within the United States and
one or more U.S. persons have the authority to control all
substantial decisions of the trust, or (2) was in existence on
August 20, 1996 and has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S.
person.
For purposes of
this discussion, a “non-U.S. holder” is a beneficial
owner of common stock that is neither a U.S. holder nor a
partnership (or any other entity or arrangement that is treated as
a partnership) for U.S. federal income tax purposes regardless of
its place of organization or formation. If a partnership (or an
entity or arrangement that is treated as a partnership for U.S.
federal income tax purposes) holds common stock, the tax treatment
of a partner will generally depend upon the status of the partner
and the activities of the partnership. A partner of a partnership
holding common stock is urged to consult its own tax
advisors.
PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL INCOME, ESTATE, AND OTHER TAX CONSEQUENCES OF
ACQUIRING, OWNING, AND DISPOSING OF OUR COMMON STOCK IN LIGHT OF
THEIR SPECIFIC SITUATIONS, AS WELL AS THE TAX CONSEQUENCES ARISING
UNDER ANY STATE, LOCAL, OR NON-U.S. TAX LAWS AND ANY OTHER U.S.
FEDERAL TAX LAWS (INCLUDING THE U.S. FEDERAL ESTATE AND GIFT TAX
LAWS).
Distributions
on Our Common Stock
Distributions with
respect to common stock, if any, generally will constitute
dividends for U.S. federal income tax purposes to the extent paid
out of current or accumulated earnings and profits, as determined
for U.S. federal income tax purposes. Any portion of a distribution
in excess of current or accumulated earnings and profits will be
treated as a return of capital and will first be applied to reduce
the holder’s tax basis in its common stock, but not below
zero. Any remaining amount will then be treated as gain from the
sale or exchange of the common stock and will be treated as
described under “—Disposition of Our Common
Stock” below.
Distributions
treated as dividends that are paid to a non-U.S. holder, if any,
with respect to shares of our common stock will be subject to U.S.
federal withholding tax at a rate of 30% (or such lower rate as may
be specified in an applicable income tax treaty) of the gross
amount of the dividends unless the dividends are effectively
connected with the non-U.S. holder’s conduct of a trade or
business in the United States subject to the discussion below
regarding foreign accounts. If a non-U.S. holder is engaged in a
trade or business in the United States and dividends with respect
to the common stock are effectively connected with the conduct of
that trade or business and, if required by an applicable income tax
treaty, are attributable to a U.S. permanent establishment, then
although the non-U.S. holder will generally be exempt from the 30%
U.S. federal withholding tax, provided certain certification
requirements are satisfied, the non-U.S. holder will be subject to
U.S. federal income tax on those dividends on a net income basis at
regular graduated U.S. federal income tax rates in the same manner
as if such holder were a resident of the United States. Any such
effectively connected income received by a foreign corporation may,
under certain circumstances, be subject to an additional branch
profits tax equal to 30% (or lower applicable income tax treaty
rate) of its effectively connected earnings and profits for the
taxable year, as adjusted under the Code. To claim the exemption
from withholding with respect to any such effectively connected
income, the non-U.S. holder must generally furnish to us or our
paying agent a properly executed IRS Form W-8ECI (or
applicable successor form). In the case of a non-U.S. holder that
is an entity, Treasury regulations and the relevant tax treaty
provide rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends will be treated as paid to
the entity or to those holding an interest in that entity. If a
non-U.S. holder holds stock through a financial institution or
other agent acting on the holder’s behalf, the holder will be
required to provide appropriate documentation to such agent. Such
holder’s agent will then be required to provide certification
to us or our paying agent.
A non-U.S. holder
of shares of common stock who wishes to claim the benefit of a
reduced rate of withholding tax under an applicable treaty must
furnish to us or our paying agent a valid IRS Form W-8BEN or
IRS Form W-8BEN-E (or applicable successor form) certifying
such holder’s qualification for the exemption or reduced
rate. If a non-U.S. holder is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty and does not
timely file the required certification, it may obtain a refund of
any excess amounts withheld by timely filing an appropriate claim
for refund with the IRS. Non-U.S. holders are urged to consult
their tax advisors regarding their entitlement to benefits under a
relevant income tax treaty.
Disposition
of Our Common Stock
Subject to the
discussion below regarding backup withholding, a non-U.S. holder
generally will not be subject to U.S. federal income tax on any
gain from a sale, exchange or other disposition of our stock
unless: (a) that gain is effectively connected with the non-U.S.
holder’s conduct of a trade or business in the United States
(and, if required by an applicable income tax treaty, is
attributable to a U.S. permanent establishment maintained by the
non-U.S. holder); (b) the non-U.S. holder is a nonresident alien
individual who is present in the United States for 183 days or more
in the taxable year of that disposition, and certain other
conditions are met; or (c) we are or have been a “United
States real property holding corporation” within the meaning
of Code Section 897(c)(2) for U.S. federal income tax purposes at
any time during the shorter of the five-year period preceding the
date of disposition or the holder’s holding period for our
common stock, and certain other requirements are met. Although
there can be no assurance, we believe that we are not, and we do
not anticipate becoming, a United States real property holding
corporation for U.S. federal income tax purposes. Even if we are
treated as a United States real property holding corporation, gain
realized by a non-U.S. holder on a disposition of our common stock
will not be subject to U.S. federal income tax so long as (1) the
non-U.S. holder owned, directly, indirectly and constructively, no
more than five percent of our common stock at all times within the
shorter of (x) the five-year period preceding the disposition, or
(y) the holder’s holding period, and (2) our common stock is
regularly traded on an established securities market. There can be
no assurance that our common stock will continue to qualify as
regularly traded on an established securities market. If any gain
on your disposition is taxable because we are a United States real
property holding corporation and your ownership of our common stock
exceeds five percent, you will be taxed on such disposition
generally in the manner applicable to U.S. persons and in addition,
a purchaser of your common stock may be required to withhold tax
with respect to that obligation.
If a non-U.S.
holder is described in clause (a) of the preceding paragraph, the
non-U.S. holder will generally be subject to tax on the net gain
derived from the disposition at the regular graduated U.S. federal
income tax rates in the same manner as if such non-U.S. holder were
a U.S. person, unless an applicable income tax treaty provides
otherwise. In addition, a non-U.S. holder that is a corporation may
be subject to the branch profits tax at a rate equal to 30% (or
lower applicable income tax treaty rate) of its effectively
connected earnings and profits. If the non-U.S. holder is an
individual described in clause (b) of the preceding paragraph, the
non-U.S. holder will generally be subject to a flat 30% tax on the
gain derived from the disposition, which may be offset by
U.S.-source capital losses even though the non-U.S. holder is not
considered a resident of the United States, provided that the
non-U.S. holder has timely filed U.S. federal income tax returns
with respect to such losses.
U.S.
Federal Estate Tax
The estate of a
nonresident alien individual is generally subject to U.S. federal
estate tax on property it is treated as the owner of, or has made
certain life transfers of, having a U.S. situs. Because we are a
U.S. corporation, our common stock will be U.S. situs property and
therefore will be included in the taxable estate of a nonresident
alien decedent for U.S. federal estate tax purposes, unless an
applicable estate tax treaty between the United States and the
decedent’s country of residence provides
otherwise.
Information
Reporting and Backup Withholding Tax
We report to our
non-U.S. holders and the IRS certain information with respect to
any dividends we pay on our common stock, including the amount of
dividends paid during each fiscal year, the name and address of the
recipient, and the amount, if any, of tax withheld. All
distributions to holders of common stock are subject to any
applicable withholding. Information reporting requirements apply
even if no withholding was required because the distributions were
effectively connected with the non-U.S. holder’s conduct of a
U.S. trade or business or withholding was reduced by an applicable
income tax treaty. This information also may be made available
under a specific treaty or agreement with the tax authorities in
the country in which the non-U.S. holder resides or is established.
Under U.S. federal income tax law, interest, dividends, and other
reportable payments may, under certain circumstances, be subject to
“backup withholding” at the then applicable rate
(currently, 24%). Backup withholding, however, generally will not
apply to distributions on our common stock to a non-U.S. holder,
provided the non-U.S. holder furnishes to us or our paying agent
the required certification as to its non-U.S. status, such as by
providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or
IRS Form W-8ECI, or certain other requirements are met.
Notwithstanding the foregoing, backup withholding may apply if
either we or our paying agent has actual knowledge, or reason to
know, that the holder is a U.S. person that is not an exempt
recipient. Backup withholding is not an additional tax but merely
an advance payment, which may be credited against the tax liability
of persons subject to backup withholding or refunded to the extent
it results in an overpayment of tax and the appropriate information
is timely supplied to the IRS.
Information
reporting and backup withholding will generally apply to the
proceeds of a disposition of our common stock by a non-U.S. holder
effected by or through the U.S. office of any broker, U.S. or
foreign, unless the holder certifies its status as a non-U.S.
holder and satisfies certain other requirements, or otherwise
establishes an exemption. Generally, information reporting and
backup withholding will not apply to a payment of disposition
proceeds to a non-U.S. holder where the transaction is effected
outside the United States through a non-U.S. office of a broker.
However, information reporting but not backup withholding will
apply in a manner similar to dispositions effected through a U.S.
office of a broker, if a non-U.S. holder sells our common stock
through a non-U.S. office of a broker that has certain connections
with the United States.
Foreign
Accounts
Certain withholding
taxes may apply to certain types of payments made to “foreign
financial institutions” (as specially defined under these
rules) and certain other non-U.S. entities if certification,
information reporting and other specified requirements are not met.
A 30% withholding tax may apply to “withholdable
payments” if they are paid to a foreign financial institution
or to a non-financial foreign entity, unless (a) the foreign
financial institution undertakes certain diligence and reporting
obligations and other specified requirements are satisfied, or (b)
the non-financial foreign entity either certifies it does not have
any substantial U.S. owners or furnishes identifying information
regarding each substantial U.S. owner and other specified
requirements are satisfied. “Withholdable payment”
generally means any payment of interest, dividends, rents, and
certain other types of generally passive income if such payment is
from sources within the United States. U.S. Treasury Regulations
proposed in December 2018 (and upon which taxpayers and withholding
agents are entitled to rely) eliminate possible withholding under
these rules on the gross proceeds from any sale or other
disposition of our common stock, previously scheduled to apply
beginning January 1, 2019. If the payee is a foreign financial
institution, it must enter into an agreement with the U.S. Treasury
requiring, among other things, that it undertake to identify
accounts held by certain U.S. persons or U.S.-owned foreign
entities, annually report certain information about such accounts
and withhold 30% on payments to account holders whose actions
prevent it from complying with these reporting and other
requirements, or comply with comparable requirements under an
applicable inter-governmental agreement between the United States
and the foreign financial institution’s home jurisdiction. If
an investor does not provide us with the information necessary to
comply with these rules, it is possible that distributions to such
investor that are attributable to withholdable payments, such as
dividends, will be subject to the 30% withholding tax. Holders
should consult their own tax advisers regarding the implications of
these rules for their investment in our common stock.
UNDERWRITING
We and the selling
stockholders are offering the shares of common stock described in
this prospectus through the underwriters listed below. B. Riley
Securities, Inc. and Colliers Securities LLC are acting as joint
book-running managers of this offering. The underwriters named
below have agreed to buy, subject to the terms of the underwriting
agreement, the number of shares of common stock listed opposite
their names below from us and the selling stockholders. The
underwriters are committed to purchase and pay for all of the
shares if any are purchased, other than those shares covered by the
over-allotment option described below.
Underwriters
|
|
B. Riley
Securities, Inc.
|
|
Colliers Securities
LLC
|
|
|
|
Total
|
3,500,000
|
The underwriters
have advised us that they propose to offer the shares of common
stock to the public at a price of
$
per share. The underwriters propose to offer the shares of common
stock to certain dealers at the same price less a concession of not
more than
$
per share. After the offering, these figures may be changed by the
underwriters.
The shares sold in
this offering are expected to be ready for delivery on or about
, 2020, against payment in immediately available funds. The
underwriters may reject all or part of any order.
We have granted to
the underwriters an option to purchase up to an additional 525,000
shares of common stock from us at the same price to the public, and
with the same underwriting discount, as set forth in the table
below. The underwriters may exercise this option any time during
the 30-day period after the date of this prospectus, but only to
cover over-allotments, if any. To the extent the underwriters
exercise the option, the underwriters will become obligated,
subject to certain conditions, to purchase the shares for which
they exercise the option.
The table below
summarizes the underwriting discounts that we and the selling
stockholders will pay to the underwriters. The underwriting
discounts and commissions per share are equal to the public
offering price per share of common stock less the amount paid by
the underwriters to us and the selling stockholders per share of
common stock. The underwriting discounts and commissions are 7% of
the public offering price. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option. In
addition to the underwriting discount, we have agreed to pay up to
$150,000 of the fees and expenses of the underwriters, which may
include the fees and expenses of counsel to the underwriters. The
fees and expenses of the underwriters that we have agreed to
reimburse are not included in the underwriting discounts set forth
in the table below. The underwriting discount and reimbursable
expenses the underwriters will receive were determined through
arms’ length negotiations between us and the
underwriters.
|
|
Total
with no Over Allotment
|
Total
with Over Allotment
|
Underwriting
discount to be paid by us
|
$
|
$
|
$
|
Underwriting
discount to be paid by the sellin g stockholders
|
$
|
$
|
$
|
We estimate that
the total expenses of this offering, excluding underwriting
discounts, will be $276,898. This includes $150,000 of fees and
expenses of the underwriters. These expenses are payable by
us.
We and the selling
stockholders also have agreed to indemnify the underwriters against
certain liabilities, including civil liabilities under the
Securities Act of 1933, as amended, or to contribute to payments
that the underwriters may be required to make in respect of those
liabilities.
No
Sales of Similar Securities
We, the selling
stockholders, and each of our directors and officers have agreed
not to offer, sell, agree to sell, directly or indirectly, or
otherwise dispose of any shares of common stock or any securities
convertible into or exchangeable for shares of common stock without
the prior written consent of B. Riley Securities, Inc. for a period
of 90 days after the date of this prospectus. These lock-up
agreements provide limited exceptions and their restrictions may be
waived at any time by B. Riley Securities, Inc.
Price
Stabilization, Short Positions and Penalty Bids
To facilitate this
offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of our common
stock during and after the offering. Specifically, the underwriters
may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of common stock
than we and the selling stockholders have sold to the underwriters.
The underwriters may close out any short position by either
exercising their option to purchase additional shares or purchasing
shares in the open market.
In addition, the
underwriters may stabilize or maintain the price of our common
stock by bidding for or purchasing shares in the open market and
may impose penalty bids. If penalty bids are imposed, selling
concessions allowed to broker-dealers participating in this
offering are reclaimed if shares previously distributed in this
offering are repurchased, whether in connection with stabilization
transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price of our common stock at a
level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of our
common stock to the extent that it discourages resales of our
common stock. The magnitude or effect of any stabilization or other
transactions is uncertain. These transactions may be effected on
the Nasdaq Capital Market or otherwise and, if commenced, may be
discontinued at any time.
In connection with
this offering, the underwriters and selling group members may also
engage in passive market making transactions in our common stock on
the Nasdaq Capital Market. Passive market making consists of
displaying bids on the Nasdaq Capital Market limited by the prices
of independent market makers and effecting purchases limited by
those prices in response to order flow. Rule 103 of Regulation M
promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of our common
stock at a level above that which might otherwise prevail in the
open market and, if commenced, may be discontinued at any
time.
Neither we nor the
underwriters make any representation or prediction as to the
direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In
addition, neither we nor the underwriters make any representation
that the underwriters will engage in these transactions or that any
transaction, if commenced, will not be discontinued without
notice.
Affiliations
The underwriters
and their affiliates are full service financial institutions
engaged in various activities, which may include securities
trading, commercial and investment banking, financial advisory,
investment management, investment research, principal investment,
hedging, financing and brokerage activities. The underwriters may
in the future engage in investment banking and other commercial
dealings in the ordinary course of business with us or our
affiliates. The underwriters may in the future receive customary
fees and commissions for these transactions.
In the ordinary
course of their various business activities, the underwriters and
their affiliates may make or hold a broad array of investments and
actively trade debt and equity securities (or related derivative
securities) and financial instruments (including bank loans) for
their own account and for the accounts of their customers, and such
investment and securities activities may involve securities and/or
instruments of the issuer. The underwriters and their affiliates
may also make investment recommendations and/or publish or express
independent research views in respect of such securities or
instruments and may at any time hold, or recommend to clients that
they acquire, long and/or short positions in such securities and
instruments.
The underwriters
may facilitate the marketing of this offering online directly or
through one of their affiliates. In those cases, prospective
investors may view offering terms and a prospectus online and place
orders online or through their financial advisors.
Electronic
Offer, Sale and Distribution
In connection with
this offering, the underwriters or certain of the securities
dealers may distribute prospectuses by electronic means, such as
e-mail. In addition, the underwriters may facilitate Internet
distribution for this offering to certain of its Internet
subscription customers. The underwriters may allocate a limited
number of securities for sale to its online brokerage customers. An
electronic prospectus is available on the Internet websites
maintained by any such underwriter. Other than the prospectus in
electronic format, the information on the websites of the
underwriters is not part of this prospectus.
Listing
Our common stock is
listed on the Nasdaq Capital Market under the symbol
“CXDO.”
Transfer
Agent and Registrar
The transfer agent
and registrar for our common stock is Issuer Direct
Corporation.
Selling
Restrictions
Canada. The
securities may be sold in Canada only to purchasers purchasing, or
deemed to be purchasing, as principal that are accredited
investors, as defined in National Instrument 45 106 Prospectus Exemptions or subsection
73.3(1) of the Securities Act (Ontario), and are permitted clients,
as defined in National Instrument 31 103 Registration Requirements, Exemptions and
Ongoing Registrant Obligations. Any resale of the securities
must be made in accordance with an exemption from, or in a
transaction not subject to, the prospectus requirements of
applicable securities laws.
Securities
legislation in certain provinces or territories of Canada may
provide a purchaser with remedies for rescission or damages if this
prospectus (including any amendment thereto) contains a
misrepresentation, provided that the remedies for rescission or
damages are exercised by the purchaser within the time limit
prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable
provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult
with a legal advisor.
Pursuant to section
3A.3 of National Instrument 33 105 Underwriting Conflicts (NI 33 105), the
underwriters are not required to comply with the disclosure
requirements of NI 33 105 regarding underwriter conflicts of
interest in connection with this offering.
European Economic
Area. In relation to each Member State of the European
Economic Area which has implemented the Prospectus Directive (each,
a “Relevant Member State”) an offer to the public of
any shares of our common stock may not be made in that Relevant
Member State, except that an offer to the public in that Relevant
Member State of any shares of our common stock may be made at any
time under the following exemptions under the Prospectus Directive,
if they have been implemented in that Relevant Member
State:
|
●
|
|
to any legal entity
which is a qualified investor as defined in the Prospectus
Directive;
|
|
●
|
|
to fewer than 100
or, if the Relevant Member State has implemented the relevant
provision of the 2010 PD Amending Directive, 150, natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive), as permitted under the Prospectus Directive,
subject to obtaining the prior consent of the representatives for
any such offer; or
|
|
●
|
|
in any other
circumstances falling within Article 3(2) of the Prospectus
Directive, provided that no such offer of shares of our common
stock shall result in a requirement for the publication by us or
any underwriter of a prospectus pursuant to Article 3 of the
Prospectus Directive.
|
For the purposes of
this provision, the expression an “offer to the public”
in relation to any shares of our common stock in any Relevant
Member State means the communication in any form and by any means
of sufficient information on the terms of the offer and any shares
of our common stock to be offered so as to enable an investor to
decide to purchase any shares of our common stock, as the same may
be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State, the expression
“Prospectus Directive” means Directive 2003/71/EC (and
amendments thereto, including the 2010 PD Amending Directive, to
the extent implemented in the Relevant Member State), and includes
any relevant implementing measure in the Relevant Member State, and
the expression “2010 PD Amending Directive” means
Directive 2010/73/EU.
United Kingdom. Each
underwriter has represented and agreed that:
|
●
|
|
it has only
communicated or caused to be communicated and will only communicate
or cause to be communicated an invitation or inducement to engage
in investment activity (within the meaning of Section 21 of the
Financial Services and Markets Act 2000 (the “FSMA”))
received by it in connection with the issue or sale of the shares
of our common stock in circumstances in which Section 21(1) of the
FSMA does not apply to us or the selling stockholders;
and
|
|
●
|
|
it has complied and
will comply with all applicable provisions of the FSMA with respect
to anything done by it in relation to the shares of our common
stock in, from or otherwise involving the United
Kingdom.
|
Switzerland. The
shares may not be publicly offered in Switzerland and will not be
listed on the SIX Swiss Exchange (the “SIX”) or on any
other stock exchange or regulated trading facility in Switzerland.
This document has been prepared without regard to the disclosure
standards for issuance prospectuses under art. 652a or art. 1156 of
the Swiss Code of Obligations or the disclosure standards for
listing prospectuses under art. 27 ff. of the SIX Listing Rules or
the listing rules of any other stock exchange or regulated trading
facility in Switzerland. Neither this document nor any other
offering or marketing material relating to the shares or the
offering may be publicly distributed or otherwise made publicly
available in Switzerland.
Neither this
document nor any other offering or marketing material relating to
the offering, or the shares have been or will be filed with or
approved by any Swiss regulatory authority. In particular, this
document will not be filed with, and the offer of shares will not
be supervised by, the Swiss Financial Market Supervisory Authority
FINMA, and the offer of shares has not been and will not be
authorized under the Swiss Federal Act on Collective Investment
Schemes (“CISA”). Accordingly, no public distribution,
offering or advertising, as defined in CISA, its implementing
ordinances and notices, and no distribution to any non-qualified
investor, as defined in CISA, its implementing ordinances and
notices, shall be undertaken in or from Switzerland, and the
investor protection afforded to acquirers of interests in
collective investment schemes under CISA does not extend to
acquirers of shares.
Australia. No
placement document, prospectus, product disclosure statement or
other disclosure document has been lodged with the Australian
Securities and Investments Commission (“ASIC”), in
relation to the offering.
This prospectus
does not constitute a prospectus, product disclosure statement or
other disclosure document under the Corporations Act 2001 (the
“Corporations Act”), and does not purport to include
the information required for a prospectus, product disclosure
statement or other disclosure document under the Corporations
Act.
Any offer in
Australia of the shares may only be made to persons (the
“Exempt Investors”) who are “sophisticated
investors” (within the meaning of section 708(8) of the
Corporations Act), “professional investors” (within the
meaning of section 708(11) of the Corporations Act) or otherwise
pursuant to one or more exemptions contained in section 708 of the
Corporations Act so that it is lawful to offer the shares without
disclosure to investors under Chapter 6D of the Corporations
Act.
The shares applied
for by Exempt Investors in Australia must not be offered for sale
in Australia in the period of 12 months after the date of allotment
under the offering, except in circumstances where disclosure to
investors under Chapter 6D of the Corporations Act would not be
required pursuant to an exemption under section 708 of the
Corporations Act or otherwise or where the offer is pursuant to a
disclosure document which complies with Chapter 6D of the
Corporations Act. Any person acquiring shares must observe such
Australian on-sale restrictions.
This prospectus
contains general information only and does not take account of the
investment objectives, financial situation or particular needs of
any particular person. It does not contain any securities
recommendations or financial product advice. Before making an
investment decision, investors need to consider whether the
information in this prospectus is appropriate to their needs,
objectives and circumstances, and, if necessary, seek expert advice
on those matters.
LEGAL
MATTERS
The validity of the
shares of common stock being offered by this prospectus will be
passed upon for us by Jeffrey Korn, General Counsel to the
Registrant. The underwriters have been represented in connection
with this offering by Faegre Drinker Biddle & Reath LLP,
Minneapolis, Minnesota.
The consolidated
financial statements and related schedules as of December 31, 2019
and 2018 and for the years then ended incorporated by reference in
this prospectus and in the registration statement have been so
incorporated in reliance on the report of Urish Popeck & Co.,
LLC., an independent registered public accounting firm,
incorporated herein by reference, given on the authority of said
firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
We have filed with
the SEC a registration statement on Form S-1, including
exhibits and schedules, under the Securities Act, with respect to
the shares of common stock being offered by this prospectus. This
prospectus, which constitutes part of the registration statement,
does not contain all of the information in the registration
statement and its exhibits. For further information with respect to
us and the common stock offered by this prospectus, we refer you to
the registration statement and its exhibits and schedules filed as
a part of the registration statement. Statements contained in this
prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we
refer you to the copy of the contract or other document filed as an
exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. We are a reporting
company and file annual, quarterly and current reports, proxy
statements and other information with the SEC. You can read our SEC
filings, including the registration statement, over the Internet at
the SEC’s website at www.sec.gov. You may also request a copy
of these filings, at no cost, by writing us at 1615 South
52nd
Street, Tempe, Arizona 85281. We also maintain a website at
www.crexendo.com, at which
you may access these materials free of charge as soon as reasonably
practicable after they are electronically filed with, or furnished
to, the SEC. Information contained on or accessible through our
website is not a part of this prospectus, and the inclusion of our
website address in this prospectus is an inactive textual reference
only.
INCORPORATION
OF DOCUMENTS BY REFERENCE
The SEC permits us
to “incorporate by reference” information into this
prospectus, which means that we can disclose important information
to you by referring you to another document filed separately with
the SEC rather than by including them in this prospectus.
Information that is incorporated by reference is considered to be
part of this prospectus and you should read it with the same care
that you read this prospectus. Any statement contained in a
document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this prospectus to the
extent that a statement contained herein modifies or supersedes
such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a
part of this prospectus.
This prospectus
incorporates by reference the documents listed below:
●
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (filed with the SEC on March 3,
2020);
●
our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2020 (filed with the SEC on May 5, 2020);
●
our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2020 (filed with the SEC on August 10, 2020);
●
our Current Reports on Form 8-K as filed with the SEC on
January 30, 2020, April 27, 2020, July 6, 2020 and August 11, 2020,
respectively;
●
our definitive proxy statement on Schedule 14A filed with the SEC
on June 22, 2020 and our additional definitive proxy materials on
Schedule 14A filed with the SEC on June 22, 2020 (in each case,
other than information furnished rather than filed);
and
●
the description of our common stock contained in our Registration
Statement on Form 8-A filed with the SEC on July 2, 2020,
including any amendment or report filed for the purpose of updating
such description.
We also incorporate
by reference any future filings (other than current reports
furnished under Item 2.02 or Item 7.01 of Form 8-K and
exhibits filed on such form that are related to such items unless
such Form 8-K expressly provides to the contrary) made with
the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act, including those made after the date of the initial
filing of the registration statement of which this prospectus forms
a part and prior to the effectiveness of such registration
statement, until we file a post-effective amendment that indicates
the termination of the offering of the common stock made by this
prospectus and such future filings will become a part of this
prospectus from the respective dates that such documents are filed
with the SEC.
Upon written or
oral request, we will provide, without charge, to each person,
including any beneficial owner, to whom a copy of this prospectus
is delivered a copy of any or all of the reports or documents that
have been incorporated by reference in this prospectus that are not
delivered with this prospectus. You may request a copy of any or
all of the documents incorporated by reference but not delivered
with this prospectus, at no cost, by writing or telephoning us at
the following address and number: Crexendo, Inc., Attention:
Secretary, 1615 South 52nd Street, Tempe,
Arizona 85281, telephone: (602) 714-8500. We will not, however,
send exhibits to those documents, unless the exhibits are
specifically incorporated by reference in those documents. You may
also access these documents, free of charge on the SEC’s
website at www.sec.gov or on the “Investors” page of
our website at www.crexendo.com. Our website and the
information contained on, or connected to, our website is not
incorporated by reference into this prospectus or the registration
statement of which this prospectus forms a part.
3,500,000
Shares
COMMON STOCK
|
|
|
|
|
|
|
|
B. Riley Securities
|
|
|
|
Colliers Securities
LLC
|
|
|
|
|
|
|
|
|
The date of this
prospectus is
,
2020.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13.
Other Expenses of Issuance and Distribution.
The following table
sets forth all costs and expenses, other than underwriting
discounts and commissions, payable by Crexendo, Inc., or the
Registrant, in connection with the sale of the common stock being
registered. All amounts shown are estimates except for the
Securities and Exchange Commission, (the “SEC”),
registration fee and the Financial Industry Regulatory Authority,
Inc. (“FINRA”) filing fee.
|
|
SEC
registration fee
|
$ 4,242,25
|
FINRA
filing fee
|
5,656.02
|
Printing
and engraving expenses
|
5,000.00
|
Legal
fees and expenses
|
225,000.00
|
Accounting
fees and expenses
|
30,000.00
|
Transfer
agent and registrar fees and expenses
|
2,000.00
|
Miscellaneous
fees and expenses
|
5,000.00
|
|
|
Total
|
$ 276,898.27
|
Item
14.
Indemnification of Directors and Officers.
Nevada Revised
Statutes (“NRS”) Sections 78.7502 and 78.751 provide us
with the power to indemnify any person who is or was our director,
officer, employee or agent. The person entitled to indemnification
must have conducted himself in good faith, and must reasonably
believe that his conduct was in, or not opposed to, our best
interests. In a criminal action, the indemnified person must also
not have had reasonable cause to believe that his conduct was
unlawful. In addition, any person who is or was our director,
officer, employee or agent is entitled to indemnification if such
person is successful on the merits or otherwise in defense of any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative against
actual and reasonable expenses incurred in connection with
defending such action.
Under NRS Section
78.751, advances for expenses may be made by agreement if the
director or officer affirms in writing to repay the expenses if it
is determined that such officer or director is not entitled to be
indemnified.
Our Bylaws provide
that we shall indemnify each director or officer, whether or not in
office, and any person whose testator or intestate was such a
director or officer, for the defense of, or in connection with, any
threatened, pending or completed actions or proceedings and appeals
therein, whether civil, criminal, administrative or investigative,
to the fullest extent permitted under the NRS, against all
judgments, fines, amounts paid in settlements, and all expenses
actually and reasonably incurred by such person as a result of such
action or proceeding, or actually and reasonably incurred by such
person (a) in making an application for payment of such expenses
before any court or other governmental body, (b) in otherwise
seeking to enforce these Bylaws provisions, or (c) in securing or
enforcing such person’s right under any policy or director or
officer liability insurance provided by us.
Our Bylaws further
provide that we may pay expenses incurred by a director or officer
in connection with any action or proceeding as to which
indemnification may be given in advance of the final disposition of
such action or proceeding upon (a) the receipt of an undertaking by
or on behalf of such director or officer to repay such advancement
in case such director or officer is ultimately found not to be
entitled to indemnification as authorized by our Bylaws and (b)
approval by the board of directors acting by a quorum consisting of
directors who are not parties to such action or proceeding or, if
such a quorum is not obtainable, then approval by the stockholders,
and to the extent permitted by law, the board of directors or, if
applicable, the stockholders, shall not be required to find that
the director or officer has met the applicable standard of conduct
provided by law for indemnification in connection with such action
or proceeding before the corporation makes any advance payment of
expenses hereunder.
The rights of
indemnification and to the advancement of expenses provided by our
Bylaws are contractual and shall be available with respect to
events occurring prior to the adoption of these Bylaws provisions;
continue to exist after any rescission or restrictive amendment of
these Bylaws provisions with respect to events occurring prior to
such rescission or amendment; and shall be interpreted on the basis
of applicable law in effect at the time of the occurrence of the
event or events giving rise to the action or proceeding or, at the
sole discretion of the person entitled to indemnification, on the
basis of applicable law in effect at the time such rights are
claimed.
In addition to
indemnification provided in our Bylaws, we entered into employment
agreements with certain prior officers with indemnification
provisions to survive the termination of such agreements, which
provided for indemnification of such officers consistent with that
permitted by NRS and our Bylaws. We also have an indemnification
agreement with a current officer, which provides, among other
things, for indemnification to the fullest extent permitted by law
against any and all expenses, judgments, fines, penalties and
amounts paid in settlement of any claim arising from his officer
status. The indemnification agreement also provides for the
advancement or payment of all expenses to the indemnitee and for
the reimbursement to us if it is found that such indemnitee is not
entitled to such indemnification under applicable law.
Item
15. Recent Sales of Unregistered Securities.
The Registrant has
not issued and sold any unregistered securities within the past
three years.
Item
16. Exhibits and Financial Statement Schedules.
(a)
Exhibits.
The list of
exhibits is set forth under “Exhibit Index” at the end
of this registration statement and is incorporated herein by
reference.
EXHIBIT
INDEX
Exhibit
No.
|
|
Exhibit
Description
|
|
Incorporated
By Reference
|
|
Filed
Herewith
|
|
|
Form
|
|
Date
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form of
Underwriting Agreement
|
|
|
|
|
|
|
|
X
|
|
|
Articles of
Incorporation
|
|
8-K
|
|
12/14/16
|
|
3.1
|
|
|
|
|
Bylaws
|
|
8-K
|
|
12/14/16
|
|
3.2
|
|
|
|
|
Description of
Capital Stock
|
|
10-K
|
|
3/3/20
|
|
4.3
|
|
|
|
|
Opinion of
Jeffrey Korn, General Counsel to the
Registrant
|
|
|
|
|
|
|
|
X
|
|
|
2013 Long-Term
Incentive Plan
|
|
14-A
|
|
4/30/13
|
|
|
|
|
|
|
Crexendo, Inc.
Stock Option Agreement Pursuant to the 2013 Long-Term Incentive
Plan (Incentive Stock Options)
|
|
S-1
|
|
9/11/20
|
|
|
|
|
|
|
Crexendo, Inc.
Stock Option Agreement Pursuant to the 2013 Long-Term Incentive
Plan (Non-qualified Stock Options)
|
|
S-1
|
|
9/11/20
|
|
|
|
|
|
|
Purchase and Sale
Agreement, dated January 27, 2020, by and among SGM EXE, LLC,
Seller and Crexendo, Business Solutions, Inc.
Purchaser
|
|
8-K
|
|
1/29/20
|
|
10.1
|
|
|
|
|
Loan Agreement,
dated January 22, 2020, between Bank of America, N.A. and Crexendo
Business Solutions, Inc.
|
|
8-K
|
|
1/29/20
|
|
10.2
|
|
|
|
|
Note, dated April
21, 2020, issued by Crexendo, Inc. to. Infinity Bank
|
|
8-K
|
|
4/27/20
|
|
10.1
|
|
|
|
|
Subsidiaries of
Crexendo, Inc.
|
|
10-K
|
|
3/3/20
|
|
21.1
|
|
|
|
|
Consent of Urish
Popeck & Co., LLC, independent registered public accounting
Firm
|
|
|
|
|
|
|
|
X
|
23.2
|
|
Consent of
Jeffrey Korn,
General Counsel to the Registrant (included in
Exhibit 5.1)
|
|
|
|
|
|
|
|
X
|
|
|
Power of Attorney
(included on signature page to the Registration Statement on
Form S-1)
|
|
S-1
|
|
9/11/20
|
|
|
|
|
———————
* Indicates a
management contract or compensatory plan or
arrangement.
(b)
Financial Statement Schedules.
No financial
statement schedules are provided because the information called for
is not required or is shown either in the financial statements or
the notes thereto.
Item
17. Undertakings.
Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted
by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned
Registrant hereby undertakes that:
(a) For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(b) For
the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to
Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Tempe, State of Arizona, on September 21,
2020.
|
Crexendo,
Inc.
|
|
|
|
|
|
|
By:
|
/s/ Steven G.
Mihaylo
|
|
|
|
Steven G.
Mihaylo
|
|
|
|
Chairman and Chief
Executive Officer
|
|
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been
signed by the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/s/ Steven G. Mihaylo
Steven G.
Mihaylo
|
|
Chief Executive
Officer, Chairman of the Board of Directors
(Principal Executive Officer)
|
|
September
21, 2020
|
|
|
|
/s/ Ronald Vincent
Ronald L.
Vincent
|
|
Chief Financial
Officer
(Principal Financial and Accounting Officer)
|
|
September
21, 2020
|
|
|
|
/s/
*
Todd
Goergen
|
|
Director
|
|
September
21, 2020
|
|
|
|
/s/
*
Jeffrey P.
Bash
|
|
Director
|
|
September
21, 2020
|
|
|
|
/s/
*
David
Williams
|
|
Director
|
|
September
21, 2020
|
|
|
|
/s/
*
Anil
Puri
|
|
Director
|
|
September
21, 2020
|
*By:
/s/ Steven G.
Mihaylo
Steven G.
Mihaylo
Attorney-in-Fact
49