As filed with the Securities and Exchange Commission on September
11, 2020
Registration No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Crexendo, Inc.
(Exact
name of registrant as specified in its charter)
|
Nevada
(State
or other jurisdiction of incorporation
or
organization)
|
4813
(Primary
Standard Industrial
Classification
Code Number)
|
87-0591719
(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
|
|
|
|
|
|
|
|
Common
Stock, $0.001 par value per share
|
3,762,500
|
$8.54
|
$32,131,750
|
$4,170.70
|
|
(1)
|
Includes
262,500 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 4,
2020.
|
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
, 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 10, 2020, the last reported sale price
of our common stock on the Nasdaq Capital
Market was $8.98 per share. Steven G. Mihaylo currently owns
approximately 69% of our outstanding common stock. Upon completion
of this offering, Mr. Mihaylo will own approximately
% of our outstanding common stock
(approximately
% 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
|
|
|
$
|
$
|
$
|
$
|
|
|
$
|
$
|
$
|
$
|
|
(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 262,500
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 262,500 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 17,602,764 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
$ million (or
approximately $
million if the underwriters exercise their option to purchase
additional shares in full), based on an assumed public offering
price of
$ per
share, which was the last reported sale price of our common stock
on the Nasdaq Capital Market
on ,
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 262,500 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):
|
Year Ended December 31,
|
|
|
|
|
|
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)
|
433
|
1,718
|
859
|
1,297
|
|
|
|
|
|
|
(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
|
|
|
Working
capital
|
3,658
|
|
|
Total
assets
|
11,626
|
|
|
Total
debt
|
3,081
|
|
|
Total
liabilities
|
5,852
|
|
|
Total
stockholders' equity
|
5,774
|
|
|
|
|
|
|
|
(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
$
per share, which was the last reported sale price of our common
stock on the Nasdaq Capital Market on
,
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
$
increase (decrease) in the assumed public offering price of
$
per share would increase (decrease) cash and cash equivalents,
total stockholders’ equity, and total capitalization by $
,
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
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 $
. Similar,
each
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 $
.
|
|
|
|
|
|
|
|
|
|
|
|
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;
●
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 $ 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
$ 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 % of the total consideration
paid to us by our stockholders to purchase million shares of common
stock to be sold by us in this offering, in exchange for acquiring
approximately % of our total outstanding shares as of after giving
effect to 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 his ownership
interest should decrease to approximately %. 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 $
million (or approximately
$ 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 $
per share, the last reported
sale price of our common stock on the Nasdaq Capital Market on
, 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 $
increase or decrease in the assumed public offering price of $
per share, the last reported
sale price of our common stock on the Nasdaq Capital Market
on
, 2020, would increase or decrease the net proceeds that we receive
from this offering by approximately $
, 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
shares in the number of
shares offered by us would increase or decrease the net proceeds
that we receive from this offering by approximately $
, 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 $ per share, the
last reported sale price of our common stock on the Nasdaq Capital
Market on
, 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
|
|
|
|
|
|
|
Debt
and capital lease obligations
|
3,081
|
|
|
Stockholders'
equity:
|
5,774
|
|
|
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
|
|
|
Additional
paid-in capital
|
63,139
|
|
|
Accumulated
deficit
|
(57,380)
|
|
|
Total
stockholders' equity
|
5,774
|
|
|
|
|
|
|
Total
capitalization
|
$8,855
|
|
|
(1)
|
A $
increase (decrease)
in the assumed public offering price of $
per share, which was the
last reported sale price of our common stock on the Nasdaq Capital
Market on
, 2020, would increase (decrease) cash and cash equivalents, total
stockholders’ equity, and total capitalization by
$
, 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
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 $
. Similar, each 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
$
.
|
|
|
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
$
million, or
$
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 $
per share,
the last reported sale price of our common stock on the Nasdaq
Capital Market on
, 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 $
per share to our existing
stockholder, and an immediate dilution of $
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
|
|
|
|
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
|
|
|
As
adjusted net tangible book value per share after giving effect to
this offering
|
|
|
|
|
|
|
|
As
adjusted dilution per share to investors participating in this
offering
|
|
|
If the
underwriters exercise their option to purchase an additional
262,500 shares from us in full at the assumed public offering price
of $ per share,
the as-adjusted net tangible book value will increase to
$
per share, representing an immediate increase in the as- adjusted
net tangible book value to our existing stockholders
of $
per share, and an immediate decrease of dilution of
$
per share to new investors participating in this
offering.
Each
$
increase or decrease in the assumed public offering price of
$
per share, the last reported sale price of our common stock on the
Nasdaq Capital Market on
, 2020, would increase or decrease the dilution per common share to
new investors participating in this offering by
$
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
shares in the number of shares offered by us
and the selling stockholders would increase or decrease the
dilution to new investors by
$
and
$
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 $ per
share, the last reported sale price of our common stock on the
Nasdaq Capital Market on
, 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%
|
|
|
|
|
New
investors purchasing shares from us in this offering
|
1,750,000
|
10%
|
|
|
|
|
Shares
to be sold upon exercise of options in connection with this
offering
|
490,000
|
3%
|
|
|
|
|
Total
|
17,340,264
|
100%
|
|
|
|
The
table above assumes no exercise of the underwriters’ option
to purchase up to an additional 262,500 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 % 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 % 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”);
●
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%
|
|
|
|
|
Todd
Goergen (4)
|
480,587
|
3.1%
|
-
|
|
|
|
Jeffrey
Bash (5)
|
256,737
|
1.7%
|
-
|
|
|
|
David
Williams (6)
|
136,745
|
0.9%
|
|
|
|
|
Anil
Puri (7)
|
120,246
|
0.8%
|
|
|
|
|
Doug
Gaylor (8)
|
507,800
|
3.2%
|
|
|
|
|
Ron
Vincent (9)
|
341,009
|
2.2%
|
|
|
|
|
All
current directors and executive officers as a group (7
persons)
|
12,709,344
|
74.7%
|
|
|
|
|
Other Selling Stockholders
|
|
|
|
|
|
|
Sarah
Mihaylo (10)
|
505,000
|
3.3%
|
|
|
|
|
Emily
Mihaylo (11)
|
504,500
|
3.3%
|
|
|
|
(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 262,500 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
$ . 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 Squire Patton Boggs (US)
LLP, Phoenix, Arizona. 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
|
$4,170.70
|
|
FINRA
filing fee
|
$5,319.76
|
|
Printing
and engraving expenses
|
*
|
|
Legal
fees and expenses
|
*
|
|
Accounting
fees and expenses
|
*
|
|
Transfer
agent and registrar fees and expenses
|
*
|
|
Miscellaneous
fees and expenses
|
*
|
|
|
|
|
Total
|
*
|
* To be
filed by amendment.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1#
|
|
Form of
Underwriting Agreement
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
5.1#
|
|
Opinion
of Squire Patton Boggs (US) LLP
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
X
|
|
|
|
Crexendo,
Inc. Stock Option Agreement Pursuant to the 2013 Long-Term
Incentive Plan (Non-qualified Stock Options)
|
|
|
|
|
|
|
|
X
|
|
|
|
Purchase
and Sale Agreement, dated January 27, 2020, by and among SGM EXE,
LLC, Seller and Crexendo, Business Solutions, Inc.
Purchaser
|
|
8-K
|
|
1/29/2020
|
|
10.1
|
|
|
|
|
|
Loan
Agreement, dated January 22, 2020, between Bank of America, N.A.
and Crexendo Business Solutions, Inc.
|
|
8-K
|
|
1/29/2020
|
|
10.2
|
|
|
|
|
|
Note,
dated April 21, 2020, issued by Crexendo, Inc. to. Infinity
Bank
|
|
8-K
|
|
4/27/2020
|
|
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 Squire Patton Boggs (US) LLP. (included in Exhibit
5.1)
|
|
|
|
|
|
|
|
|
|
|
|
Power
of Attorney (included on signature page)
|
|
|
|
|
|
|
|
X
|
———————
# To be
filed by amendment.
*
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.
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 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 11, 2020.
|
|
Crexendo,
Inc.
|
|
|
|
|
|
|
|
By:
|
/s/ Steven G.
Mihaylo
|
|
|
|
|
Steven G.
Mihaylo
|
|
|
|
|
Chairman and Chief
Executive Officer
|
|
KNOW
ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven G. Mihaylo and Ronald
Vincent, and each or any one of them, as his or her true and lawful
attorney-in-fact and agent, each with the full power of
substitution and resubstitution, for him or her and in his or her
name, place, or stead, in any and all capacities, to sign any and
all amendments to this Registration Statement on Form S-1
(including post-effective amendments), and to sign any new
registration statement for the same offering covered by this
Registration Statement on Form S-1 that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his
or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this
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
11, 2020
|
|
|
|
|
|
/s/
Ronald
Vincent
Ronald
L. Vincent
|
|
Chief
Financial Officer
(Principal Financial and Accounting Officer)
|
|
September
11, 2020
|
|
|
|
|
|
/s/
Todd
Goergen
Todd
Goergen
|
|
Director
|
|
September
11, 2020
|
|
|
|
|
/s/
Jeffrey P.
Bash
Jeffrey
P. Bash
|
|
Director
|
|
September
11, 2020
|
|
|
|
|
|
/s/
David
Williams
David
Williams
|
|
Director
|
|
September
11, 2020
|
|
|
|
|
|
/s/
Anil
Puri
Anil
Puri
|
|
Director
|
|
September
11, 2020
|
Grafico Azioni Crexendo (NASDAQ:CXDO)
Storico
Da Gen 2025 a Feb 2025
Grafico Azioni Crexendo (NASDAQ:CXDO)
Storico
Da Feb 2024 a Feb 2025
