As filed with the Securities and Exchange Commission on September 11, 2020
Registration No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON [ ], 2000
REGISTRATION NO.: 333-[ ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETGATEWAY, INC.
(Exact
Crexendo, Inc.
(Exact name of Registrantregistrant as specified in its charter)
Nevada (State or other jurisdiction of 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 checkor until the following box. /X/ / /
If this form is filed to register additional securities for an offeringRegistration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Rule 462(b) 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(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. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
(1) Estimated pursuant to Rule 457(c)said Section 8(a), based on the average of the high and
low prices of a share of common stock of Netgateway on August 30, 2000
as reported on The Nasdaq Stock Market, Inc. solely for the purpose of
calculating the registration fee.
(2) Estimated pursuant to Rule 457(g) solely for the purpose of calculating
the registration fee, based upon the exercise price of the warrant
under which such shares of common stock are issuable.
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 OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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may determine.
The information in this preliminary prospectus is not complete and may be changed. WeThese securities may not sell these securitiesbe sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securitiesand it is not soliciting an offer to buy these securities in any statejurisdiction where the offer or sale is not permitted.
Subject to completion,Completion, dated September 7, 2000, 2020
PRELIMINARY PROSPECTUS
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NETGATEWAY, INC.
32,955,902 SHARES OF
3,500,000 Shares
COMMON STOCK
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- Our common stock, par value $0.001 per share, is traded on
The Nasdaq National Market under the symbol "NGWY." The closing
price on August 30, 2000 was $1.1875 per share. All of the shares
of common stock offered in this prospectus
We are being sold by the
selling stockholders listed on page 45 of this prospectus.
- This prospectus covers the resale of up to 32,955,902
shares of common stock, including common stock to be issued to the
selling stockholders upon conversion of a convertible debenture,
upon the exercise of warrants and upon exercise of our right to
selloffering 1,750,000 shares of our common stock to one of the selling
stockholders.
- King William, LLC, one ofand the selling stockholders is an
underwriter within the meaningnamed in this prospectus are offering 1,750,000 shares of the Securities Act of 1933our common stock in connection with this offering.
- We will not receive any of the proceeds from the sale of sharesour common stock by the selling stockholders. AN INVESTMENT IN THE SHARES OFFERED IN THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------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.
Public Offering Price | Underwriting Discounts and Commissions (1) | Proceeds, before expenses, to Crexendo | Proceeds to Selling Stockholders | |
Per share | $ | $ | $ | $ |
Total | $ | $ | $ | $ |
| (1) | We have also agreed to reimburse certain expenses of the underwriters. See “Underwriting” for a description of the compensation payable to the underwriters. |
We have granted the underwriters an option to purchase up to 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 [ ] __, 2000.
, 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 | 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 Consolidated Financial Statements....................................................... F-1
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT IS PROVIDED IN
GREATER DETAIL ELSEWHERE IN THIS PROSPECTUS. WE ENCOURAGE YOU TO CAREFULLY READ
THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "NETGATEWAY," "WE," "US" AND "OUR" AS USED IN THIS
PROSPECTUS INCLUDE NETGATEWAY, INC. AND ITS SUBSIDIARIES.
NETGATEWAY
We provide eCommerce servicesyou 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 enable companies of all sizeswe authorize to extend their businessesbe distributed to you. Neither we, the selling stockholders, nor the underwriters take any responsibility for, or can provide any assurance as to the Internet quicklyreliability 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 effectively with minimal
investment by developing, hosting, licensing and supporting a wide range of
built-to-order business-to business, business-to-consumer and
business-to-employee applications, including enterprise portals, e-retail,
e-procurement and e-marketplace solutions.
An integral component to our electronic offerings is the Netgateway
Internet Commerce Center-TM-, a secure, high performance e-Business
infrastructure. Our Internet Commerce Center supports a level of customization
unique to application outsourcing with solutions ranging from eCommerce sites
using an Internet storefront and e-mail order processes, to complex Web-enabled
transactions to facilitate inter- and intra-business processes, such as
corporate directories and purchasing workflows. We also permit e-Business
application licensing to accommodate those organizations that have significant
internal infrastructures and the desire to manage their own solutions.
Our mission is to advance the use of the Internet as an effective
business system by providing innovative solutions for our customers. Our
strategic vision is to be the preferred e-Business solution provider for
business-to-business, business-to-consumer and business-to-employee
transactions.
Wesales are located at 300 Oceangate, Suite 500, Long Beach, California
90802. Our telephone number is (562) 506-4600 and our Web site address is
WWW.NETGATEWAY.COM.not permitted. The information contained on our Web site does not constitute partin this prospectus is accurate only as of the date of this prospectus.
SERVICES OFFERED
We offerprospectus, unless the following services.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-to-business division delivers e-Business solutions
including enterprise portals, e-retail, e-procurementbusiness, financial condition, results of operations, and e-marketplace
solutions, as well as end-to-end consultingprospects may have and support servicesare likely to small to
medium sized businesses throughouthave 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. We developPersons outside the United States who come into possession of this prospectus must inform themselves about, and deploy our
e-Business proprietary applications on our Internet Commerce Center-TM-.
Our CableCommerce division partners with cable operators to combine the
power of cable advertising and local eCommerce. Our CableCommerce division
creates and launches cable-branded electronic malls, which are promoted hundreds
of times per month by cable operators. These e-Malls feature local
establishments, allowing visitors to locate convenient services and products. We
have launched eCommerce initiatives with leading cable operators such as AT&T,
CableOne, MediaOne and Cox Communications. CableCommerce e-Malls currently reach
more than 3.3 million households in over 22 markets across the nation.
We offer design, development, hosting and site management of e-Malls
and electronic storefronts sold through cable operators and delivered to local
merchants and subscribers. We provide training of the cable system sales
personnel, offers storefront creation and maintenance services. In addition, we
offer local and regional classified advertisements, community calendars and
coupons to optimize e-Mall content.
Our subsidiary, Galaxy Enterprises, Inc., offers educational eCommerce
seminars to merchants who want to bring their business ideas online. These
seminars offer strategies to successfully build, market and grow eCommerce
sites. Galaxy Enterprises also operates GalaxyMall, a popular online shopping
site at WWW.GALAXYMALL.COM, which hosts more than 3,700 merchants and manages
WWW.MATCHSITE.COM, an innovative meta-search engine that compiles
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and ranks the results of major search engines. GalaxyMall engages in the
business of selling to its customers Internet services and products which
include electronic home pages, or storefronts, on GalaxyMall, and hosts those
storefront sites on its Internet server. GalaxyMall's business is to assist
its customers in establishing their businesses on the Internet. Storefronts
designed and programmed by or for customers by Galaxy Enterprises are
displayed on the mall.
IMI, Inc., our subsidiary doing business under the name Impact Media,
offers state-of-the-art multi-media marketing messages using custom-cut compact
discs. IMI also creates full-motion CDs for Fortune 1000 companies. IMI designs,
manufactures and markets multimedia brochures, shaped compact disks and other
products and services to facilitate traditional marketing and to bridge the gap
between conventional and Internet marketing. These CDs are an advertising tool
and can be used by companies seeking to drive traffic to their Web site.
OUR MARKET
The new Internet economy has transformed the way that business is
conducted. Companies are now required to market dynamically, compete globally
and communicate with a network of consumers and partners. Introducing a businessobserve any restrictions relating to, the electronic world unleashes new opportunities in such areas as growth,
services, product innovation and operational efficiencies.
In 1999, Nielsen/NetRatings, Inc. and Mediamark Research, Inc. both
estimated that there were as many as 83 million Americans actively on-line. This
number represents 42 percentoffering of the total U.S. adult population (over 18) that
are now regular Internet users, up 20 percent from 1998. According to The Boston
Consulting Group/Shop.Org, business-to-consumer eCommerce reached $33.1 billion
in 1999 and an estimated 7 million consumers will have made their first online
purchase this year.
The North American Internet retailing segment is on pace to surpass
$29.3 billion in 2000, a 75 percent increase over 1999 revenue, according to
Gartner Group. Gartner Group reports that in 1999, North American online retail
sales totaled $16.8 billion, up 157 percent from 1998 revenue. According to
Forrester, by 2004, 49 million U.S. households are predicted to spend $184
billion online.
According to Dataquest, business-to-consumer e-Business initiatives
played a dominant role in the market in 1999. The majority of 1999 e-Business
implementations focused on Web enablement of basic business operations, basic
business-to-consumer functionality and customer relationship management.
Dataquest predicts extra-enterprise initiatives, including participation in
business-to-business supply chains and e-marketplaces, will be a major focus of
initiatives in 2000. Like business-to-consumer eCommerce, business-to-business
initiatives are forecast to grow dramatically over the next few years. The
United States Department of Commerce has estimated that business-to-business
commerce by means of the Internet will be a $300 billion dollar marketplace by
2002.
More than $6 trillion in online business-to-business trade is expected
by 2005, representing 42 percent of total U.S. business-to-business non-service
spending, according to research by Jupiter Communications. Jupiter's research
reveals that, while this year's Internet business-to-business trade will only
represent three percent of the total U.S. business-to-business non-service
market, or $336 billion, the online volume will grow twenty-fold over the next
five years opening the doors for new business models such as net markets and
coalition markets. Currently, the direct channel, a model of one seller to many
buyers, dominates 92 percent of the Internet business-to-business market,
according to Jupiter Communications. However, Jupiter Communications estimates
that, in 2005, 35% of the Internet business-to-business trade volume will be
conducted via a net market, a model of many buyers and many sellers, or through
a coalition market, comprised of a consortium of buyers or sellers.
As a result of the recent growth of business-to-consumer and
business-to-business eCommerce and eCommerce's acceptance as a mainstream medium
for commercial transactions, businesses are investing in the strategic use of
Internet solutions to transform their core business and technology strategies.
This, in turn, has created a significant and growing demand for third-party
Internet professional services and has resulted in a proliferation of companies
offering specialized solutions, such as connectivity, transaction reporting,
security and Web site design to business customers. This specialization has
resulted in a fragmented market that often requires the business customer to
seek solutions from a number of different providers using differing, or even
contradictory, strategies, models and designs.
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SIGNIFICANT STRATEGIC RELATIONSHIPS
CB RICHARD ELLIS. In March 1999, we entered into an eCommerce services
agreement with CB Richard Ellis, one of the world's largest building management
and real estate services companies with over 12,000 properties under management
and over $1 billion in revenue during 1998. Under this agreement, we developed,
managed and serviced CB Richard Ellis' Internet-based shopping mall and client
extranet. This Web site is designed to permit CB Richard Ellis personnel to
conduct all of their corporate materials purchasing, including computers and
building and maintenance supplies and all global facilities management by means
of the Internet. In addition, CB Richard Ellis plans to offer the tenants in the
buildings they manage volume-purchasing services on the Internet for a variety
of office products and supplies.
WIRELESS ONE. In June 1999, we entered into a reseller and mall
agreement with Wireless One, Inc. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Wireless One name, brand and
image and offer our storefront creation and maintenance services to Wireless
One's subscribers. We also provide marketing support, including development of
mall content, training of Wireless One sales people, development of Wireless One
branded collateral material and periodic distribution and updating of
advertising spots to promote their services. Wireless One promotes this mall
with a total of 1,000 30-second spots every month jointly developed by us and
Wireless One in all systems in which it is able to provide advertising.
FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller
and mall agreement with Frontiervision Media Services, a provider of cable
television programming services. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Frontiervision name, brand and
image and are offering our storefront creation and maintenance services to
Frontiervision's subscribers. We also provide marketing support, including
development of mall content, training of Frontiervision salespeople and
production of advertising spots to promote their services. Frontiervision
promotes this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.
MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator. Under the agreement, we design,
develop, host and manage Internet-based shopping malls in each of MediaOne's
cable television markets. These markets currently consist of more than five
million households throughout the United States. These shopping malls are
branded with the MediaOne name, brand and image, feature businesses local to
each market and offer additional online services, such as classified
advertisements, local community events calendars and coupons. MediaOne has
agreed to contribute commercial advertising time on their cable systems to
promote these malls. In connection with this agreement, MediaOne acquired 50,000 shares of our common stock and a warrant exercisable for up to 200,000 sharesthe distribution of our common stock. The warrant vests in four installments upon the satisfaction
of milestones relating to the scopethis prospectus outside of the launch of these Internet-based
shopping malls. As of June 30, 2000, MediaOne has launched shopping malls in 11
cable television markets representing more than 1.45 million subscriber
households.
BUYSELLBID.COM. In August 1999, we entered into a distributor mall and
reseller agreement with BuySellBid.com. UnderUnited States.
Unless otherwise stated or the agreement, we design and
develop Internet-based shopping malls for BuySellBid.com, which will in turn
resell and/or sublicense these Internet-based shopping malls, custom-branded, to
other resellers. In the alternative, BuySellBid.com offers to brand any such
Internet-based mall with the BuySellBid.com name, brand and image and offers our
storefront creation and maintenance services to its own subscribers. We provide
marketing support, including development of mall content and training of
BuySellBid.com salespeople.
CABLEONE. In August 1999, Netgateway entered into a cable reseller and
mall agreement with CableOne, a large cable television operator. Under the
agreement, we designed and developed an Internet-based shopping mall, branded
with the CableOne name, brand and image and are offering our storefront creation
and maintenance services to CableOne's subscribers. We also provide marketing
support, including development of mall content, training of CableOne sales
people and production of advertising to promote their services. CableOne
promotes this mall with a minimum of 400 cablecasts per broadcast month in each
broadcast market where the mall services are offered.
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BERGEN BRUNSWIG CORPORATION. In October 1999, we entered into an
Internet services agreement with Bergen Brunswig Corporation, a Fortune 100
company and the third largest pharmaceutical distributor in the United States.
Under this agreement, we designed and developed, and manage and service, an
Internet-based shopping mall branded with the Bergen Brunswig name, brand and
image. The site contains on-line storefronts for affiliated local pharmacies. We
are also responsible for training Bergen Brunswig personnel under the agreement.
Bergen Brunswig had a two-pronged business objective for its nationwide network
of 2,000 affiliated Good Neighbor Pharmacies. First, was to incorporate
business-to-business eCommerce features that directly connect Good Neighbor
Pharmacies ("GNPs") to Bergen Brunswig and other partner information and
services. Second, was to provide direct-to-consumer service on behalf of their
customers. In eight weeks, we launched more than 600 customized sites for Bergen
Brunswig's affiliated GNPs. Less than a year into the project, the myGNP.com
site represents 1,800 GNP stores and has established a strong competitive
Internet presence for both Bergen Brunswig and its affiliated GNPs. This site
also allows consumers to find the nearest Good Neighbor Pharmacy and link to
that pharmacy's site for pertinent information, pharmacists' biographies,
Bergen-provided services and specialty services, current product promotions and
pharmacy hours.
DIVERSITY ECOMMERCE.COM, INC., FORMERLY KNOWN AS LEADING TECHNOLOGIES.
In December 1999, we entered into an agreement with Diversity eCommerce.com Inc.
to develop, manage and service its Internet-based mall and client extranet.
AT&T MEDIA SERVICES. In January 2000, we entered into a reseller and
mall agreement with Intermedia Partners Southeast, an affiliate of AT&T Media
Services, to launch an electronic shopping portal in Nashville, Tennessee. Under
this agreement, we designed and developed an Internet-based shopping mall,
branded with Intermedia's name, brand and image, and are offering our storefront
creation and maintenance services to Intermedia's subscribers. We provide
marketing support, including development of Intermedia's branded collateral
material and periodic distribution and updating of advertising spots to promote
the branded online shopping mall and storebuilding services. Intermedia promotes
the mall with a total of 500 30-second spots every month in the Nashville
market, jointly developed by us and Intermedia.
PHARMERICA. In January 2000, we entered into an agreement with
PharMerica, a subsidiary of Bergen Brunswig Corporation that provides
professional, quality and cost effective pharmacy products and services to the
long-term care, assisted living, sub-acute and skilled nursing industries. Under
the agreement, we designed and developed, and manage and host, a patient
prospecting system, known as PMSIOnLine.com, in which sales professionals and
claims adjustors input prospective patient referrals directly into a secured
browser and submit these prospective patient referrals to PharMerica's legacy
systems for analysis and possible sales follow-up.
COX COMMUNICATIONS. In April 2000, we reached an agreement with
CableRep, Inc., an affiliate of Cox Communications, to launch one or more
electronic shopping malls in the Cox Communications cable television markets
designated by Cox Communications. Pursuant to this agreement, we are designing
and developing Internet-based shopping malls, branded with Cox Communications'
name, brand and image and are offering our storefront building and maintenance
services to Cox Communications' cable television subscribers. We are also
responsible for marketing support, including development of Cox Communications'
branded collateral material and periodic distribution and updating of
advertising spots to promote the branded online shopping mall and storefront
building services.
SBC INTERACTIVE. In June 2000, we entered into a professional services
agreement with SBC Interactive, a subsidiary of SBC Communications, Inc., under
which we design and develop custom Web sites for SBC's hundreds of yellow pages
merchants. We provide sales support to SBC, as well as full production and
maintenance support for all Web sites that we build under the agreement.
COMPLETE BUSINESS SOLUTIONS, INC.; COMPLETE BUSINESS SOLUTIONS, INDIA.
In March 2000, we entered into a systems integrator agreement with Complete
Business Solutions, Inc., a leading systems integrator and worldwide provider of
information technology services to large - and mid-sized organizations. Undercontext otherwise requires, the terms of the agreement, we provide CBSI with access to the Internet Commerce
Center development environment,“Crexendo®,” “the Company,” “we,” “us,” “our,” and allow CBSI to integrate individual
business-to-business customers of CBSI, primarily located in North America and
Mexico, into the Internet Commerce Center platform. We receive an upfront fee
from CBSI for each CBSI customer integrated into the Internet Commerce Center.
CBSI provides the integration services for each CBSI customer and collects
integration revenue from that customer. We share recurring fees for hosting,
transactions and advertising with CBSI. In April 2000, we entered into a similar agreement with Complete Business Solutions, India, an Indian subsidiary of CBSI.
This agreement contains similar terms to those described above and expands the
customer reach available for licensing of the Internet Commerce Center
internationally to include Europe, Asia and South America.
4
THE OFFERING
In August 2000, we entered into a private equity credit agreement with
King William, LLC ("King William"). Under the terms of the agreement, we have
the right to issue and sell to King William up to 19,248,167 shares of our
common stock, representing $10 million aggregate principal amount of our common
stock. King William may resell these shares of common stock under this
prospectus. In addition, for each 10,000 shares of common stock that we issue
and sell to King William, we will issue a warrant to King William to purchase
1,500 shares of our common stock. The shares issuable upon exercise of these
warrants may also be sold under this prospectus.
In July 2000, we entered into a securities purchase agreement with King
William. Under the terms of the agreement, we issued to King William an 8%
convertible debenture in the principal amount of $4.5 million. The debenture is
convertible into the number of shares of our common stock equal to the lower of
$1.79 or 80% of the average market price of the common stock during the 20
trading days prior to conversion. The purchase price for the debenture is
payable in two tranches, the first $2.5 million of which was paid at the closing
in July 2000. The remainder may be drawn down by us three business days after
the effective date of the registration statement of which this prospectus is a
part. In addition, we issued to King William a warrant to purchase 231,000
shares of common stock. In connection with the issuance of the debenture, we
also issued to Roth Capital Partners, Inc. a warrant to purchase 90,000 shares
of common stock and to Carbon Mesa Partners, LLC a warrant to purchase 10,000
shares of common stock. The shares of common stock issuable upon conversion of
the debenture and exercise of these warrants may be sold under this prospectus.
This prospectus covers the resale of up to 32,955,902 shares of
common stock by the selling stockholders namedreferences in this prospectus thatrefer 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 issuable under the termsproperty of their respective owners. Solely for convenience, the private equity credit agreement, upon
conversion of the debenturetrademarks and the exercise of the warrants described above.
We are required under the terms of our financing agreements with King William
to register 200% of the aggregate number of shares into which each of the
securities would be convertible. In addition, the number of shares being
registered for resale undertradenames in this prospectus is based onmay be referred to without the following
assumptions:
- The issuance® 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 331,000 shares of our common stock upon exercise
of warrants exercisable at $1.625 per share;
- The issuance of up to 10,489,510 shares of our common stock
upon conversion of the $4.5 million convertible debenture at $.858 per
share, which per share price is based on the closing price of our common
stock on August 30, 2000 and certain adjustments requiredus by, our financing
agreements with King William;
- The issuance of up to 19,248,167 shares of our common stock,
representing $10 million aggregate principal amount of our common stock at
$1.03906 per share which per share price is based on the closing price of
our common stock on August 30, 2000 and certain adjustments required by our
financing agreements with King William;
- The issuance of up to 2,887,225 shares of common stock upon
conversion of warrants to purchase $1.5 million aggregate principal amount of
our common stock at $1.03906 per share which per share price is based on the
closing price of our common stock on August 30, 2000 and certain adjustments
required by our financing agreements with King William.
these other companies.
i
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. |
3
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 | 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 | 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 | 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 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 | |||
| 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 | |||
| Trading symbol on the Nasdaq Capital Market | “CXDO” | |||
Unless otherwise indicated, the number of shares of our common stock to be ● 2,596,184 shares of common stock issuable upon the exercise of ● 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. |
4
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 | Year Ended December 31, | Six Months Ended June 30, | ||||
| (in thousands, except per share amounts) | 2018 | 2019 | 2019 | 2020 | ||
| 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, | |
2018 | 2019 | |
| 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 |
Year Ended December 31, | Six Months Ended June 30, | |||
(in thousands) | 2018 | 2019 | 2019 | 2020 |
| 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. | ||
As of June 30, 2020 | ||
Actual | As Adjusted (1) | |
(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 ● 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 | ||
Year Ended December 31, | Six Months Ended June 30, | |||
| (in thousands) | 2018 | 2019 | 2019 | 2020 |
| 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 |
7
RISK FACTORS
Investing in our common stock outstanding after this offering does not
include up to 5,737,551 sharesinvolves a high degree of common stockrisk. The following are certain risk factors that could be issued uponaffect our business, financial condition, and results of operations. You should carefully consider the exerciserisks 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 certain warrants and options outstanding as of June 30, 2000.
5
SUMMARY OF CONSOLIDATED FINANCIAL DATA
NETGATEWAY CONSOLIDATED FINANCIAL DATA
The following selected restated consolidated financial data should
be readthe other information contained in conjunction with thethis prospectus or incorporated by reference into this prospectus, including our audited consolidated financial statements and the related notes thereto and the "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations" section which are included elsewhereOperations” incorporated by reference in this document and reflectprospectus, before investing in our common stock. We cannot assure you that any of the acquisitionsevents discussed in the risk factors below will not occur. If any of Infobahn Technologies, LLC
d/b/a Digital Genesis completed on June 2, 1998, Spartan Multimedia, Ltd.
completed on January 15, 1999 and Galaxy Enterprises, Inc. completed on June
26, 2000. The acquisition of Galaxy Enterprises was accounted for as a
pooling-of-interests. Accordingly, all periods prior to the acquisition have
been restated. The consolidated statementfollowing risks are realized, in whole or in part, our business, financial condition, results of operations, data for eachand 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 years in the three-year period ended June 30, 2000 and the consolidated
balance sheet data at June 30, 2000, 1999 and 1998 are derived from the
consolidated financial statements of Netgateway which have been audited by
KPMG LLP, independent accountants, and are included elsewhere in this
document. Prior to the combination, Galaxy Enterprises' fiscal years ended
on December 31. In recording the pooling-of-interests, Galaxy Enterprises'
financial statements for the years ended December 31, 2000 and 1999 have been
restated to conform to Netgateway's fiscal years ended June 30, 2000 and
1999. The restatement of Galaxy Enterprises' results include a duplication of
operations for the period from July 1, 1998 to December 31, 1998. As a
result, Netgateway has eliminated the related income of $1,733,441 from
accumulated deficit for fiscal 1999, which includes $3.7 million in revenue.
Galaxy Enterprises' financial statements for the year ended December 31, 1998
have been combined with Netgateway's financial statements for the period from
March 4, 1998 (inception) through June 30, 1998. The unaudited consolidated
statement of operations data for the years ended June 30, 1997 and 1996 and
the consolidated balance sheet data at June 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Galaxy Enterprises,
Inc. as of December 31, 1997 and 1996 and eachglobal spread of the years indisease caused by the two-year
period ended December 31, 1997. InCOVID-19 pandemic on our business are evolving and difficult to predict. To date, the opinion of management, these
statements have been prepared onCOVID-19 pandemic has significantly and negatively impacted the same basis asglobal economy and it is unclear how long the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of
these periods. Historical results are not necessarily indicative of the
results to be expected in the future.
6
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER THE RISKS DESCRIBED BELOW AND OTHER RISKS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. THESE RISKS SHOULD BE CONSIDERED ALONG WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY BE
SERIOUSLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK MAY
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
OUR AUDITORS HAVE QUALIFIED THEIR REPORT ON OUR FINANCIAL STATEMENTS WITH
RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of KPMG LLP, our independent accountants, with respect to our
financial statements and the related notes, indicate that at the date of their
report, we had generated losses from operations and a net stockholders'
deficit. Accordingly, KPMG LLP qualified their report as of that date to
indicate that these matters raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from this uncertainty.
WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY, WE HAVE A HISTORY OF LOSSES AND
WE EXPECT FUTURE LOSSES.
We have incurred substantial losses and anticipate incurring substantial
losses for the foreseeable future. For the year ended June 30, 1999, we had a
working capital deficit of $9,291,719 and for the year ended June 30, 2000,
we had a working capital deficit of $14,844,854. Stockholders' deficit was
$8,106,375 and $10,776,300 at June 30, 1999 and June 30, 2000, respectively.
We generated revenues of $10,568,685 for the year ended June 30, 1999 and
$27,424,759 for the year ended June 30, 2000. For the year ended June 30,
1999 and the year ended June 30, 2000, we incurred net losses of $15,140,478
and $44,108,429, respectively. We may never achieve profitability. For the
year ended June 30, 1999 and the year ended June 30, 2000, we recorded
negative cash flows from operations of $6,971,091 and $16,639,773,
respectively.
To succeed, we must leverage existing relationships and develop new
relationships to substantially increase our revenue by providing more
comprehensive eCommerce services. We have historically invested heavily in sales
and marketing, technology infrastructure and research and development and expect
topandemic will continue to do so. AsTo 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 result, we must generate significant revenues to
achievematerial adverse impact on our operations. However, the continuation of WFH and maintain profitability. We expectother 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, expenses,
researchsales and development expensesother 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 generalfinancial markets; or
●
higher rate of losses on our accounts receivables due to credit defaults.
The COVID-19 pandemic has also caused significant uncertainty and administrative expenses will
continuevolatility in global and domestic financial markets and the trading prices for the common stock of technology companies, including us. Due to increase in absolute dollars and may increase as a percentage of
revenues. In addition, we may incur substantial expenses in connection with
future acquisitions. As a result,such volatility, we may not be able to achieve or sustain
profitability.
WE WILL REQUIRE ADDITIONAL FUNDING TO OPERATE AND GROW OUR BUSINESS
SUCCESSFULLY.
We will requireraise additional financing in the near future to meet our working
capital, needs. Additional financing may not be availableif needed, on favorable terms, or at all. If we raise additional funds by selling stock,Further adverse economic events resulting from the percentage ownership
of our then current stockholders will be reduced. If we cannot raise adequate
funds to satisfy our capital requirements, we may have to limit our operations
significantly. Our future capital requirements depend upon many factors,COVID-19 pandemic, including but not limited to:
- the rate at which we expand our sales and marketing operations and our
product and service offerings;
- the extent to which we develop and upgrade our technology and data
network infrastructure; and
- the occurrence, timing, size and success of acquisitions.
WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH
STRATEGY.
Given our limited operating history, there is little operating and
financial data about us, making evaluation of our business operations and
prospects more difficult. We are subject to the risks, expenses and
uncertainties frequently encountered by young companies operating exclusively in
the new and rapidly evolving markets for Internet products and services.
Successfully achieving our growth plan depends on our ability to:
- continue to develop and extend our brands;
- develop new media properties;
- maintain and increase the levels of traffic on our Internet sites;
- develop or acquire competitive services or products;
- effectively generate revenues through sponsored services and
placements;
- effectively integrate businesses or technologies into our operations;
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- successfully develop Web-based services to meet the specific
requirements of our customers; and
- continue to identify, attract, retain and motivate qualified
personnel.
Furthermore, the growth of our business depends on factors outside our
control, including:
- adoption by the market of the Internet, and more specifically, our
company as an effective Internet business;
- relative price stability for Internet-based advertising, despite
competition and other factors that could reduce market prices for
advertising; and
- acceptance of our basic outsourcing business model.
OUR BUSINESS MODEL IS UNPROVEN AND CHANGING.
Our business model consists of providing businesses and merchants with
eCommerce enabling solutions. We have limited experience as a company and,
additionally, the Internet, on which our business model relies, is still
unproven as a business medium. Accordingly, our business model may not be
successful, and may need to be changed. Our ability to generate sufficient
revenues to achieve profitability will depend, in large part, on our ability to
successfully market our eCommerce products and services to businesses and
merchants that may not be convinced of the need for an online presence or may be
reluctant to rely upon third parties to develop and manage their eCommerce
offerings and marketing efforts.
IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS AN
INCREASED VOLUME OF TRANSACTIONS.
We may be unable to effectively upgrade and expand our hardware and
software infrastructure or to integrate smoothly any newly developed or
purchased software with our existing systems. A key element of our business
strategy is providing a cost-effective means for our clients to generate a high
volume of eCommerce transactions through the use of our hardware and software
infrastructure. If the volume of transactions through our infrastructure
substantially increases, we will have to expand and further upgrade our
technology, transaction processing systems and hardware and software
infrastructure to accommodate these increases or our systems may suffer from:
- unanticipated system disruptions;
- slower response times;
- degradation in customer service;
- impaired quality and speed of transaction processing; and
- delays in reporting accurate financial information.
WE FACE SIGNIFICANT COMPETITION.
Our target market rapidly evolves and is subject to continuous
technological change. Our competitors may better address new developments or
react more favorably to changes, which could materially affect us. The market
for eCommerce services, while new, is already highly competitive and
characterized by an increasing number of entrants.
We compete on a number of factors, including the attractiveness of the
eCommerce services offered, the breadth and quality of these services, creative
design and systems engineering expertise, pricing, technological innovation and
understanding clients' strategies and needs. Existing or future competitors may
develop or offer eCommerce services providing significant technological,
creative, performance, price or other advantages over the services that we
offer.
Our competitors can be divided into several groups:
- large systems integrators;
- Internet service providers and portals;
- telecommunications companies;
- large information technology consulting services providers;
- computer hardware and service vendors;
- on-line malls; and
- strategic consulting firms.
Although most of these types of competitors have not offered a full range
of Internet professional services to date, many have announced their intention
to do so. These competitors at any time could elect to focus additional
resources in our target markets, whichsustained economic downturn, could materially and adversely affect us.
Manyour business, access to capital markets and the value of our currentcommon 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 competitorsimpact that the COVID-19 pandemic could have longer operating histories,
larger customer bases, longer relationships with clientson the other risk factors described in this “Risk Factors” section remain unclear and significantly
greater financial, technical, marketing and public relations resources than we
do. Competitors that have established relationships with large companies, but
have limited expertise in providing Internet solutions, may nonetheless be able
to successfully use their client relationships to enter our target market or
prevent our penetration into their client accounts. evolving.
We believe we have experienced some and may continue to experience greater delay and disruption in the demand for, our primary
competitors currently include, without limitation,
8
Broadvision, Open Market, Commerce One, Intel, Microsoft, AT&T, Intershop,
MCI, Yahoo! Stores, iCAT, GE Information Services, IBM,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 Internet Mall,
iMall, Cybreash, Clean Commercecontinued 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 smaller Internet services providers.
Manyoperating 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 competitorssuppliers 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 potential competitorsfinancial 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 substantial
competitive advantages, including:
- larger customermade 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 user bases;
-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 offer a wider arrayobtain external financing to fund our operations and capital expenditures. We may experience losses on our holdings of eCommerce productscash and solutions;
- greater name recognition and larger marketing budgets and resources;
- substantially greaterinvestments due to failures of financial technicalinstitutions and other resources;
- the ability to offer additional content and other personalization
features; and
- larger production and technical staff.
These advantagesparties. Adverse economic conditions may enable our competitors to adapt more quickly to new
technologies and customer needs, devote greater resources to the promotion or
sale of their products and services, initiate or withstand substantial price
competition, take advantage of acquisition or other opportunities more readily
or develop and expand their product and service offerings more quickly.
Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies. Some of these companies may be
larger and have greater financial and other resources than we have. Competition
for these acquisition targets could also result in increased pricesa higher rate of acquisition targets andlosses on our accounts receivables due to credit defaults. As a diminished pool of companies available for
acquisition.
There are relatively low barriers to entry into our business. We have no
patented, and onlyresult, a limited amount of other proprietary, technology that would
preclude or inhibit competitors from entering the eCommerce services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client services. The costs to develop and provide eCommerce services are
relatively low. Therefore, we expect that we will continually face additional
competition from new entrants into the marketcontinued downturn in the future. There is also the
risk that our employees may leave and start competing businesses. The emergence
of these enterprisesworldwide or domestic economy could have a material adverse effect on us.
IF WE DO NOT INCREASE BRAND AWARENESS OUR SALES MAY SUFFER.
Dueour business, results of operations, or financial condition.
Our quarterly and annual results of operations have fluctuated in partthe past and may continue to do so in the emerging naturefuture. 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 markets for eCommerce enabling
products and services and online marketplaces, together with the substantial
resources available to manyactions of our competitors, including pricing changes or the introduction of new solutions;
●
our opportunityability to achieveeffectively manage our growth;
●
our ability to successfully penetrate the market for larger businesses;
●
the mix of annual and maintain a significant market share may be limited. Developingmulti-year subscriptions at any given time;
●
the timing, cost, and maintaining
awareness of the Netgateway, StoresOnline.com and GalaxyMall brand names is
critical in achieving widespread acceptance of our eCommerce enabling products
and services and our online marketplaces. The importance of brand recognition
will increase as competition in our markets increases. Successfully promoting
and positioning our brands will depend largely on the effectiveness of our advertising and marketing efforts;
●
the timing, operating cost, and sales effortscapital 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 develop reliablesuccessfully manage any such acquisitions;
●
adverse weather conditions;
●
the impact of worldwide economic, political, industry, and useful
productsmarket conditions; and, services at competitive prices. If
●
our planned marketingability 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 sales
efforts fail, we may needannual results of operations. This variability and unpredictability could result in our failure to increase our financial commitment to thosemeet the expectations of research analysts or investors for any period, which could divert financialcause our stock price to decline. We sustained operating losses in prior years and management resources from other aspectscannot guarantee ongoing profitability. In addition, a significant percentage of our
business, or cause 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 increase disproportionatelymitigate 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 revenues. This could causecapital structure to expand our business, which may pose risks to our business and operating results to suffer.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE AND ABILITY TO
RAISE CAPITAL.
As a resultdilute the ownership of our limited operating history andexisting 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 emerging natureintegration of the marketsacquired businesses, the performance of the acquired products, services and capacities of the technologies acquired, as well as the personnel hired in which we compete, our operating results may fluctuate materially. As
a result, quarter-to-quarter comparisons ofconnection 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 meaningful.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 some future quarter, whetherthe 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 those
fluctuations or otherwise,circumstances that are not within our resultscontrol.
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 operations fall belowthese 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 expectationsadvantage of financial analysts and investors, the trading pricea large existing customer base. Because most of our common stock would
likely fall, impairing our ability to raise capital. You should not rely on our
results for any interim period as an indication of future performance.
Additionally, our quarterly results of operations may fluctuate significantly as
a result of a variety of factors, many of whichtarget customers are outside our control. Factors
which may cause our quarterly results to fluctuate include, among others:
- our ability to retain and attract clients;
- intense competition;
- Internet and onlinealready purchasing communications services usage levels and the rate of market
acceptancefrom one or more of these services for transacting commerce;
-providers, our ability to timely and effectively upgrade and develop our systems
and infrastructure;
-success is dependent upon our ability to attract train and retain skilled management, strategic,
technical and creative professionals;
9
- technical, legal and regulatory difficulties with respect to Internet
use;
- the amount and timing of costs relating to our expansion; and
- general economic conditions and economic conditions specific to
Internet technology usage and eCommerce.
INCREASED COMPETITION MAY EXERT DOWNWARD PRICING PRESSURE ON ECOMMERCE SERVICES.
The increase in competitors selling eCommerce services may increase pricing
pressure for the sale of our services and products, which could reduce our
revenues. In addition, our sales will suffer if our competitors offer superior
services that better target users.
OUR FUTURE SUCCESS DEPENDS ON CONTINUED GROWTH IN eCOMMERCE.
The eCommerce industry must achieve widespread acceptance by a broad base
of customers for us to attain success. If the Internet fails to be a viable
commercial marketplace, we will be adversely affected.
THE MARKET FOR OUR PRODUCTS IS NEW AND ITS GROWTH IS UNCERTAIN.
away from their existing providers.
The markets for our products and services have only recently developed, are rapidly evolvingcontinuing 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 expectedin the past or becomes saturated with competitors, or if ourany new products and services do not sustain market acceptance. WE MUST ATTRACT AND EXPAND OUR USER AND ADVERTISER BASE.
We must develop and maintain a brand identity for our products. The failure
to establish and maintain our brands could hurt our efforts to attract and
expand our user and advertiser base. We also believe that the importance of
brand recognition will increase due to the growingA number of eCommercevery 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 providersat comparable or lower pricing.
Pricing in the telecommunications industry is very fluid and the relatively low barrierscompetitive. Price is often a substantial motivation factor in a customer’s decision to entry. Promotion and enhancement ofswitch to our brands depends on our success in providing high-qualitytelephony products and services. To attractOur competitors may reduce their rates, which may require us to reduce our rates, which would affect our margins and retain Internet usersrevenues, 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 promotecustomers. Announcements, or expectations, as to the introduction of new products and maintaintechnologies by our brands, wecompetitors 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 needcause potential supply-chain disruptions in obtaining our desktop devices. This may increase pricing, slow delivery times or may force us to increase expendituresfind another third party manufacturer of our branded desktop devices.
The Crexendo branded desktop devices include firmware specifically designed for creatingour cloud telecommunications services and maintaining brand
loyalty.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 breachhigher price which could affect sales and margins.
Errors in our technology or alleged breach of securitytechnological issues outside our control could cause delays or privacy involvinginterruptions 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 or if any third party undertakes illegal or harmful actions using
our community, communications or eCommerce services, our brandshave experienced interruptions in the past and reputation
could suffer substantial adverse publicity and impairment.
WE MUST SUCCESSFULLY MANAGE OUR GROWTH AND THE INTEGRATION OF RECENTLY ACQUIRED
COMPANIES.
Our recent growth andmay experience interruptions in the recent merger with Galaxy Enterprises has
strained our managerial, operational and financial resources. To manage our
growth, we must continue to implement and improve our operational and financial
systems and to expand, train and manage our employee base. Further, we will need
to maintain relationships with various merchants and other third parties to be
successful.
The process of managing advertising within large, high traffic Web sites
such as StoresOnline.com and GalaxyMall.com is an increasingly important and
complex task. We rely on both internal and licensed third-party advertising
inventory management and analysis systems. To the extent that any extended
failure of our advertising management system results in incorrect advertising
insertions, we may be exposed to "make good" obligations which, by displacing
advertising inventory, could defer advertising revenues. Failure of our
advertising management systems to effectively scale to higher levels of use or
to effectively track and provide accurate and timely reports on advertising
results also could negatively affect our relationships with advertisers.
As part of our business strategy, we have completed several recent
acquisitions, including Galaxy Enterprises, Inc. and Spartan Multimedia, Ltd.
Acquisition transactions are accompanied by a number of risks, including:
- the difficulty of assimilating the operations and personnel of the
acquired companies;
- the potential disruption of our ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and
rights into our products and media properties;
- the negative impact on reported earnings if any of the transactions
which are expected to qualify for pooling-of-interests accounting
treatment for financial reporting purposes fail to so qualify;
- the correct assessment of the relative percentages of in-process
research and development expense which can be immediately written off
as compared to the amount which must be amortized over the appropriate
life of the asset;
- unanticipated expenses related to technology integration;
- the maintenance of uniform standards, controls, procedures and
policies;
10
- the impairment of relationships with employees and customersfuture as a result of integrationthese 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 management personnel;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 potential unknown liabilitiesInternet, 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 acquired businesses.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 may not successfully address these risks or any other problems
encounteredmaintain a fully redundant physical infrastructure in connection with such acquisitions.
OUR OPERATIONS COULD BE HURT BY A NATURAL DISASTER OR OTHER CATASTROPHIC EVENT.
Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, break-ins and similar events. In addition,
substantially all of our network infrastructure is locateddata center in southern
California, an area susceptible to earthquakes. We do not have multiple site
capacity if any catastrophic event occurs and, although we do have a redundant
network instructive system, thisTempe, 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.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 carry sufficient business interruption insurance at this time to compensate
for lossesbelieve that may occurwe have lost customers as a result of any of these events.
OUR INTELLECTUAL PROPERTY RIGHTS ARE COSTLY AND DIFFICULT TO PROTECT.
We regard our copyrights, trademarks, trade dress, trade secrets and
similar intellectual property as criticalconsequence, the harm to our success.reputation is difficult to assess. We rely upon trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. Effective trademark, copyright and trade secret protection
may not be available in every country in which our products and media properties
are distributed or made available through the Internet. In addition, while we
attempt to ensure that the quality of our brand is maintained by our licensees,
our licensees may take actions that could materially and adversely affect the
value of our proprietary rights or the reputation of our products and media
properties. We are aware that third parties have, from time to time, copied
significant portions of our directory listings for use in competitive Internet
navigational tools and services. Protection of our distinctive elements may not
be available under copyright law. We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH ARE
COSTLY TO DEFEND AND COULD LIMIT OUR ABILITY TO USE CERTAIN TECHNOLOGIES IN
THE FUTURE.
Many parties are actively developing search, indexing, eCommerce and other
Web-related technologies. We believe that these parties will continue to take steps to protect these technologies, including seeking patent protection. Asimprove our infrastructure to prevent service interruptions.
In addition to our physical infrastructure, we have a result, we believe that disputes regarding the ownership of these technologies
are likelycloud infrastructure deployment with Amazon Web Services which is intended to ariseprovide continuous service to our customers in the future. For example, we are aware thatevent of a number of
patents have been issued in the areas of:
- eCommerce;
- online auctions;
- Web-based information indexing and retrieval, including patents
recently issued to onedisaster or failure of our direct competitors;
- online direct marketing;
- fantasy sports;
- common Web graphics formats;
- mapping technologies; and
- custom cut CDs.
WE MAY INCUR SUBSTANTIAL EXPENSES IN DEFENDING AGAINST THIRD-PARTY INFRINGEMENT
CLAIMS REGARDLESS OF THEIR MERIT.
We anticipate that additional third-party patents will be issued in the
future. From time to time, parties may assert patent infringement claims against
us in the form of letters, lawsuits and other forms of communications. 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.physical infrastructure. If we decidefail to license patentsproperly maintain our infrastructure or other proprietary rights,
we cannot guarantee that we will be ableour third-party service providers fail to do so on reasonable termsmaintain these facilities properly, or at all.
If there isfail 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 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.
We are awareloss of lawsuits filed against two of our competitors regarding the
presentment of advertisements in response to search requests on "keywords" that
may be trademarks of third parties. It is not clear what, if any, impact an
adverse ruling in these recently filed lawsuits would have on us.
11
WE DEPEND ON KEY PERSONNEL THAT WE MAY NOT BE ABLE TO RETAIN.
If we do not succeed in attracting new personnel, or retaining and
motivating existing personnel, we will be adversely affected. We recently
announced a plan to move our headquarters from Southern California to the
existing facilities of our recently acquired subsidiary, Galaxy Enterprises,
in Orem, Utah. This consolidation maycustomers, (ii) adversely affect our reputation, (iii) cause negative publicity, (iv) negatively impact our ability to retain
certainacquire 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. For example,personnel, and a loss of these individuals could adversely impact our chief financial officer resigned
effective as September 1, 2000. In addition,ability to execute our general counselbusiness plan and corporate secretary will be resigning effective as of September 29, 2000. grow our business.
We depend on the continued services of our key personnel, including our founders, chief executive officer, presidentofficers and chief operating officer,
chief financial officer, chief information officer and executive vice
president-sales and marketing. We also substantially depend upon the
continued services of the key personnel of our subsidiaries, including Galaxy
Enterprises and IMI, Inc.certain engineers. Each of these individuals has acquired specialized knowledge and skills with respect to our operations. As a resultThe loss of the recent resignationsone or more of certainthese key personnel or the additional resignation of any of these
individuals,could negatively impact our performance. In addition, we could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any such
successor obtains the necessary training and experience. We expect that we
will need to hire additional personnel as we continue to execute our strategic plan, particularly if we are successful in all areas. The competitionexpanding 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 particularlychallenges in technical areas.
OUR COMPANY WILL BE SUBJECT TOconfiguring 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 FOREIGN GOVERNMENT REGULATION OF THE
INTERNET, THE IMPACT OF WHICH IS DIFFICULT TO PREDICT.
Any existingand 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 legislation applicablecustomers 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:
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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.
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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.
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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 substantial liability,liability.
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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.
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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 significant expenses necessarybut 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 suchindustry standards, FCC regulations, privacy laws as well as certain state and local jurisdiction specific regulations. Failure to comply with existing laws and regulations. Fewany 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 currently directlywhich 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 Internet. The relation between usGeneral 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 newregulations are intended to protect the privacy and security of personal data, including credit card information that is collected, processed, and transmitted in or existingfrom 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 issuesprivacy 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 user privacy, defamation, pricing,
advertising, taxation, gambling, sweepstakes, promotions, content regulation,
qualitynet operating loss carry-forwards.
Based on the outcome of productsexaminations 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 intellectual property ownershipprofits, and infringement is unclear.
Other nations, including Germany, have taken actionswe would incur legal fees in attempting to restrict the free
flow of material deemedrestore our customers' access to be objectionable on the Internet. The European Union
has recently adopted privacy and copyright directivesour services. Broadband internet access providers may also attempt to charge us or our customers additional fees to access services like ours that may impose additional
burdensresult 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 international operations. In addition, several
telecommunications carriers, including America's Carriers' Telecommunications
Association,costs and change certain aspects of our service.
Certain states take the position that offerings by VoIP providers are seekingintrastate and therefore subject to state regulation. We have telecommunications over the Webregistered as a competitive local exchange carrier (“CLEC”) in most states; however, our rates are not regulated by
the FCC in the same manner as othertraditional 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. Many areas with
high Internet use have begun to experience interruptions in phone service, and
local telephone carriers, such as Pacific Bell, have petitioned the FCC to
regulate internet service providers and online service providers and to impose
access fees.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services over the
Internet and certain states have taken measures to tax Internet-related
activities. Foreign countries also may tax Internet transactions. The taxation
of Internet-related activities could have the effect of imposing additional
costs on companies that conduct business over the Internet. This, in turn, could
lead to increased prices for products and services, which could decrease demand
for our solutions.
THE ADOPTION OF GOVERNMENT PROPOSALS TO REGULATE THE INTERNET COULD
SUBSTANTIALLY IMPAIR THE GROWTH OF THE INTERNET AND ADVERSELY AFFECT OUR
BUSINESS.
Several recently passed federal laws could have an adverseWe cannot predict how this issue will be resolved or its impact on our business. The Digital Millennium Copyright Act is intended to reducebusiness at this time.
Taxing authorities may successfully assert that we should have collected or in the liability of online service providers for listingfuture should collect sales and use, value added, or linking to third-party
Internet sites that include materials that infringe copyrights or other rights
of others. The Children's Online Protection Actsimilar taxes, and the Children's Online
Privacy Protection Act are intended to restrict the distribution of certain
materials deemed harmful to children and impose additional restrictions on the
ability of online services to collect user information from minors. In addition,
the Protection of Children From Sexual Predators Act of 1998 requires online
service providers to report evidence of violations of federal child pornography
laws under certain circumstances. We cannot currently predict the effect, if
any that this legislation will have on us. The legislation may impose
significant additional costs on us or subject us to additional liability.
We post policies concerning the use and disclosure of user data. Our
failure to comply with our posted privacy policiessuch assessments could adversely affect us.
Dueour 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 global natureenactment and enforcement of the Internet,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 governmentsSarbanes-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 statesinquiries 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 foreign countries might attemptinquiries 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 regulate its transmissionsreceive customer and agency claims and actions.
We could be liable for breaches of security on our website, fraudulent activities of our users, or prosecutethe 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 for violations of their laws.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 might unintentionally violate
such laws. Such laws may be modified,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 new laws enacted,disputed credit card transactions. We may also experience losses due to customer fraud and theft of service. Customers have, in the future. Any
such developmentspast, 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 us.
eCOMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES.
As part of our business, we may enter into agreements with sponsors,
content providers, service providersfinancial condition, and merchants under which we are entitled
to receive a share of revenue from the purchase of goods and services by users
of our online properties. In addition, we provide hosting and other services to
online merchants. These types of arrangements may expose us to additional legal
risks and uncertainties, including potential liabilities relating to the
products and services offered by those third parties.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent these types of claims do not
resultoperating results.
We could experience security breaches in material
12
liability, investigating and defending the claims is expensive.
INTERNET SECURITY POSES RISKS TO OUR BUSINESS.
The compromise of our security or misappropriation of proprietary
information could have a material adverse effect on us. Processing eCommerce
transactions involves 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 our 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. Security and privacy concerns may also inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. To the extent that our activities orwe experience breaches in the activities of
others involve the storage and transmissionsecurity of proprietary information security
breaches could damagewhich we store and transmit, our reputation could be damaged, and expose uswe could be exposed to a risk of loss or litigationlitigation.
We collect personal and possible liability. credit card information from our customers and employees could misuse this information.
The failurePCI 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 security measuressystems. Due to prevent security breaches maythe sensitive nature of retaining such information we have implemented policies and procedures to preserve and protect our data and our customers’ data against loss, misuse, corruption, misappropriation caused by systems failures, unauthorized access, or misuse. Notwithstanding these policies, we could be subject to liability claims by individuals and customers whose data resides in our databases for the misuse of that information. While the Company believes its systems meet or exceed industry standards, the Company does not believe it is required to meet PCI level 1 compliance and has not certified under that level. Failure to meet PCI compliance levels could negatively impact the Company’s ability to collect and store credit card information which could cause substantial disruption to our business. Notwithstanding the results of this assessment there can be no assurance that payment card brands will not request further compliance assessments or set forth additional requirements to maintain access to credit card processing services, which could incur substantial additional costs and could have a material adverse effect on our business.
We may incur substantial expenses in defending against third-party patent and trademark infringement claims regardless of their merit.
From time to time, parties may assert patent infringement claims against us in the form of letters, lawsuits, and other forms of communication. Third parties may also assert claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights or alleging unfair competition. If there is a determination that we have infringed third-party proprietary rights, we could incur substantial monetary liability and be prevented from using the rights in the future.
Risks Related to Our Common Stock
Our stock price may be volatile and may decline, resulting in a loss of some or all of your investment.
The trading price and volume of our common stock is likely to be volatile and could fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
●
actual or anticipated fluctuations in our results of operations due to, among other things, changes in customer demand, pricing, ordering patterns, and unforeseen operating costs;
●
announcements with respect to developments, status, and impact on us, our competitors, our constituents, and our suppliers of the COVID-19 global pandemic;
●
failure of research analysts to maintain coverage or the ability to get additional coverage, changes in financial estimates or ratings by any research analysts who follow us, or our failure to meet these estimates or the expectations of investors;
●
announcements by us or our competitors of significant technical innovations, substantial promotions, price reductions, acquisitions, strategic partnerships or joint ventures.
●
changes in operating performance and stock market valuations of other competitive companies generally, or those in the telecommunication and related services industry;
●
cyclical fluctuations
●
price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;
●
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
●
new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;
●
any major change in our management;
●
lawsuits threatened or filed against us; and
●
other events or factors, including those resulting from war, incidents of terrorism, the COVID-19 pandemic or responses to these events.
In addition, the market for telecommunication stocks and the stock markets in general have experienced extreme price and volume fluctuations. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The COVID-19 pandemic has also caused significant uncertainty and volatility in global and domestic financial markets and the trading prices for the common stock of technology companies, including us. SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DETER
TAKEOVER ATTEMPTS WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO
SELL THEIR SHARES ATIn 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 FAVORABLE PRICE.
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 certificatearticles 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'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 more costlycostlier an acquisition or a change in control of our company.
In addition, our board of directors is divided into two classes. The term
ofCompany.
20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, particularly the first class expires at the annual meeting following fiscal year 2000 and
the term of the second class expires following fiscal year 2001. At each annual
meeting following fiscal year 2000 and thereafter, the terms of one-half of the
directors will expire, and new directors will be elected to serve two years. It
will take at least two annual meetings to effectuate a change in control of the
board of directors because a majority of the directors cannot be elected at a
single meeting. This extends the time required to effect a change in control of
the board of directors and may discourage hostile takeover bids. These effects
are somewhat mitigated by the fact that a majority of the stockholders can
remove any or all directors, with cause, at a special meeting of stockholders or
by written consent.
Further, our certificate of incorporation authorizes the board of directors
to issue up to 5,000,000 shares of preferred stock, which may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by stockholders. Such terms may
include voting rights, including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. No shares of preferred stock are currently
outstanding and we have no present plans for the issuance of any preferred
stock. However, the issuance of any preferred stock could materially adversely
affect the rights of holders of our common stock, and therefore could reduce its
value. In addition, specific rights granted to future holders of preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The ability of the board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current stockholders'
control.
OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND
ATTRACTIVE.
The trading price of our common stock has been, and may continue to be,
subject to wide fluctuations. From November 18, 1999, when our stock first began
trading on The Nasdaq National Market, through August 15, 2000, the closing sale
prices ranged from $0.937 to $12.25. The stock price may fluctuate in response
to a number of events and factors, such as quarterly variations in operating
results, announcements of technological innovations or new products and services
by us or our competitors, changes in financial estimates and recommendations by
financial analysts, the operating and stock price performance of other companies
that investors may deem comparable, and news reports relating to trends in our
markets. In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price of
our stock, regardless of our operating performance.
MANAGEMENT BENEFICIALLY OWNS APPROXIMATELY 17% OF OUR COMMON STOCK AND THEIR
INTERESTS COULD CONFLICT WITH YOURS.
Our directors and executive officers beneficially own approximately 17%
of our outstanding common stock. As a result, the directors and executive
officers collectively are able to substantially influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
a large number of shares of its common stock in the market or the perception
that these sales could occur. These sales also might make it more difficult for
us to sell equity securities in the future at a time and at a price that we deem
appropriate. As of August 15, 2000, we had outstanding 21,677,090 shares of
common stock. As of August 15, 2000, 12,961,138 of these shares are freely
tradeable. Giving effect to applicable legal restrictions, the number of shares
of common stock and the dates when the remainder of these shares will become
freely tradeable in the market is as follows:
Astitled “Prospectus Summary,” “Risk Factors” and “Business,” and the documents incorporated herein by reference, contain forward-looking statements within the meaning of August 15, 2000 we have reserved an aggregate of 1,687,757 shares of
common stock issuable upon the exercise of outstanding warrants and convertible
or exchangeable securities. We also filed a registration statement to register
for issuance and resale 9,877,002 shares of common stock reserved for issuance
under our existing stock option plans, warrants and stock grants. Shares issued
upon the exercise of stock options granted under our stock option plans will be
eligible for resale in the public market from time to time subject to vesting
and, in the case of some options, the expirationSection 27A of the lock-up agreements
referredSecurities 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 preceding paragraph.
13
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We have madenegative 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 all of
which are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future business success or financial
results. The forward-looking statements include, but are not limited to, statements asabout:
●
our customer relationships and our ability to expectations regarding:
- future revenue opportunities;
- retain and expand our customer relationships and to increase sales;
●
the integrationsuccess, cost, and timing of Galaxy Enterprises;
-new products;
●
our ability to address market and customer demands;
●
anticipated trends, challenges and growth in our business and the developmentmarkets in which we operate;
●
the potential impact of the business-to-business eCommerce marketCOVID-19 pandemic on our business, including our revenue and other operating results, liquidity, and cash flows, and our anticipated responses thereto, and the future growthbusinesses of our customer base;
- future expense levels, including researchsuppliers and development,
selling, generalcustomers;
●
our expectations regarding our ability to maintain or increase revenues and administrative expenses, and amortization
of goodwill and other tangibles;
- strategic relationships and distribution relationships;
- future capital needs;
- the emergencemaintain expenses;
●
expected impact of new technologies;
- expansionlegislation 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 sales forces;
- investment in new product developmentfuture products;
●
our ability to acquire or partner with companies and enhancements;
- expansion into new markets;
- new distribution and customer acquisition models;
- acquisition of complementary products, technologies and
businesses; and
- future financial pronouncements.
When we use words like "believe," "expect," "anticipate" or similar
words or terms, we are making forward-looking statements.
You should note that an investmentour ability to integrate those acquisitions;
●
our expectations regarding competition in our common stock involvesexisting 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 that could affectuncertainties. 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 futuremanagement to predict all risks, nor can we assess the impact of all factors on our business success or financial
results. Ourthe extent to which any factor, or combination of factors, may cause actual results couldto differ materially from those anticipated
expressly or implicitlycontained 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 a resultpredictions of many
factors, including those set forth in "Risk Factors" and elsewhere in this
prospectus.
Wefuture events. Although we believe that it is important to communicate ourthe expectations to our
investors. However, there may be eventsreflected in the future thatforward-looking statements are reasonable, we are not able to
predict accurately or over which we have no control. You should be awarecannot guarantee that the occurrencefuture 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 events described in the risk factors and elsewhere in this
prospectus could materially and adversely affect our business, financial
condition and operating results.forward-looking statements. We undertake no obligation to update publicly update any forward-looking statements for any reason even if newafter the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.
21
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 becomes
available or other events occurfrom 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 future.
14
estimates made by the independent parties and by us.
22
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. Upon conversion of the debenture, we will benefit from the
termination of indebtedness
Each $ increase or decrease in the principal amountassumed public offering price of $4.5 million and$ per share, the accruallast reported sale price of interest at the rate of 8% per year. In addition, we will receive
proceeds from the sale of shares to be issued under the equity line of credit.
If we draw down the maximum commitment amount under the equity line of credit,
we will receive $10 million in proceeds. We will also receive proceeds upon the
exercise of warrants. However, the warrants have an exercise option that allows
the holder to exercise the warrants without paying the exercise price in cash.
Instead, the holder would receiveour common stock with a dollar value that is equal
toon the market price ofNasdaq Capital Market on , 2020, would increase or decrease the common stock minus the exercise price of the warrants
multiplied by the number of warrants exercised. Any 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 be usedactually 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.
23
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. Pending anyAny 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 uses, we intend to invest any net proceeds in
short-term, interest-bearing, investment grade securities.
MARKET PRICE AND DIVIDEND INFORMATION
Our common stock has traded on The Nasdaq National Market under the
symbol "NGWY" since November 18, 1999. From June 2, 1998 until November 18,
1999, our common stock traded on the Nasdaq OTC Bulletin Board under the symbol
"NGWY." restrictions.
24
CAPITALIZATION
The following table sets forth the range of highour cash and low bid prices
reported on The Nasdaq National Market or the Nasdaq OTC Bulletin Board, as
applicable, for the periods indicated.
The above bid prices indicate the prices that a market maker is willing
to pay. These quotations do not include retail markups, markdowns or other feescash equivalents, and commissions and may not represent actual transactions.
DIVIDENDS
We have never paid any cash dividends on our common stock and we
anticipate that we will continue to retain any earnings for the foreseeable
future for use in the common operation of our business.
15
CAPITALIZATION
The following table sets forth,capitalization as of June 30, 2000:
- our2020:
●
on an actual short-term debtbasis; and capitalization;
- our debt issuance as adjusted short-term debt, long-term
debt, and capitalization
●
on an as-adjusted basis, giving effect to $4.5 million in
proceeds from(i) the issuancesale of our 8% convertible debenture in
the principal amount of $4.5 million, of which $2.5 million
was paid upon closing and the remainder of which may be drawn
down by us upon effectiveness of this registration statement.
The debenture is net of the issuance of warrants to purchase
331,0001,750,000 shares of our common stock by us in this offering at $1.625an assumed public offering price of $ per share, and a
beneficial conversion feature. The warrants and beneficial
conversion feature have relative fair valuesthe last reported sale price of $370,000 and
$1,137,000, respectively; and
- our debt conversion as adjusted short-term debt and
capitalization giving effect to the conversion of the $4.5
million convertible debenture at the beneficial conversion
price per share of $0.95 per share. This beneficial
conversion price per share is equal to 80% of the share price
on August 30, 2000 of $1.19. The number of shares issuable
under the convertible debenture are limited to approximately
four million, prior to obtaining stockholder approval. In the
event the holders of the 8% convertible debenture are unable
to such debt to common stock because of the limitation
on the numberNasdaq 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 that mayto be issued, we maysold 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 required to redeem the debt,adjusted based on the conversion rate
in effectactual public offering price and other terms of this offering determined at the date of conversion.
Thispricing. You should read this table should be read in conjunctiontogether with "Management's“Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations"Operations” and our consolidated financial statements and the related notes and other financial information included elsewhereincorporated by reference in this prospectus.
As of June 30, | ||
Actual | As Adjusted | |
(unaudited) (in thousands) | ||
| Cash and cash equivalents | $ | |
| Debt and capital lease obligations | 3,081 | |
| Stockholders' equity: | 5,774 | |
| Preferred stock, | - | |
| Common stock, par value $0.001 per share - authorized 25,000,000 shares, 15,100,264 shares issued and outstanding | 15 | |
| Additional paid-in capital | 63,139 | |
| Accumulated | (57,380) | |
| Total stockholders' equity | 5,774 | |
| Total capitalization | $8,855 | |
| (1) | A $ |
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.
25
DILUTION
Our
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 deficitper share of our common stock immediately after this offering.
Our historical net tangible book value (deficit) as of June 30, 20002020, was $12,448,875,approximately $ million, or $(0.58)$ per share of our common stock. NetOur historical net tangible book value deficit per share represents(deficit) is the amount of netour total tangible assets less our total liabilities,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.
After giving effect to the conversion of 8% convertible debenture with an
aggregate principal amount of $4.5 million into 4,736,842 shares of common
stock and the exercise of warrants issued in connection with the debenture
for 331,000 shares of common stock based on the market price of the common
stockoutstanding as of AugustJune 30, 2000,2020.
As-adjusted net tangible book value is our net tangible book value deficit as(deficit), plus the effect of June
30, 2000 would have been $7,948,875, or $(0.30)(i) the sale of 1,750,000 shares of our common stock in this offering at an assumed public offering price of $ per share.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 suchthe as adjusted net tangible book value of $4,500,000$ per share to our existing stockholdersstockholder, and an immediate dilution of $0.28$ per share to purchasersnew investors participating in this offering. The following table illustrates this dilution on a per share dilution:
basis:
| Assumed public offering price per share | ||
| Net tangible book value | $0.34 | |
| Increase in as adjusted net tangible book value | ||
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 sets forth,summarizes, on an as adjusted basis as of June 30, 2000:
-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.
Shares Purchased | Total Consideration | Average Price | |||
Number | Percent | Amount | Percent | Per Share | |
| 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 issued; and
-held by new investors purchasing shares from us in the total consideration received on the convertible debentures
with a principal amount of $4.5 million and their subsequent
conversion:
16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected restated consolidated financial data shouldoffering would be read in conjunction with the consolidated financial statements and related
notes thereto and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section which are included elsewhere in
this document and reflect the acquisitions of Infobahn Technologies, LLC
(d/b/a Digital Genesis) completed on June 2, 1998, Spartan Multimedia, Ltd.
completed on January 15, 1999 and Galaxy Enterprises, Inc. completed on June
26, 2000. The acquisition of Galaxy Enterprises, Inc. was accounted for as a
pooling-of-interests. Accordingly, all periods priorincreased to the acquisition have
been restated. The consolidated statement of operations data for each% of the years in the three-year period ended June 30, 2000, and the consolidated
balance sheet data at June 30, 2000, 1999 and 1998 are derived from the
consolidated financial statements of Netgateway which have been audited by
KPMG LLP, independent accountants, and are included elsewhere in this
document. Prior to the combination, Galaxy Enterprises' fiscal years ended on
December 31. In recording the pooling-of interests, Galaxy Enterprises'
financial statements for the years ended December 31, 2000 and 1999 have been
restated to conform to Netgateway's fiscal years ended June 30, 2000 and
1999. The restatement of Galaxy Enterprises' results include a duplication of
operations for the period from July 1, 1998 to December 31, 1998. As a
result, Netgateway has eliminated the related income of $1,733,441 from
accumulated deficit for fiscal 1999, which includes $3.7 million in revenue.
Galaxy Enterprises' financial statements for the year ended December 31, 1998
have been combined with Netgateway's financial statements for the period
March 4, 1998 (inception) through June 30, 1998. The unaudited consolidated
statement of operations data for the years ended June 30, 1997 and 1996 and
the consolidated balance sheet data at June 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Galaxy Enterprises,
Inc. as of December 31, 1997 and 1996 and each of the years in the two-year
period ended December 31, 1997. In the opinion of management, these
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for the fair statement of the results of
these periods. Historical results are not necessarily indicative of the
results to be expected in the future.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
Effective October 1, 1999, we changed our method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. We believe that the percentage-of-completion method more accurately
reflects the current earnings process under our contracts. The
percentage-of-completion method is preferable according to Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating our
consolidated financial statements for prior periods in accordance with
Accounting Principals Board Opinion No. 20.
On June 26, 2000, we completed the merger of Galaxy Enterprises, Inc.
into a wholly owned subsidiary of Netgateway, Inc. The merger was accounted for
as a pooling-of-interests. Accordingly, our historical consolidated financial
statements and the discussion and analysis of financial condition and results of
operations for the prior periods have been restated to include the operations of
Galaxy Enterprises, Inc. as if it had been combined with our company at the
beginning of the first period presented.
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
In view of the rapidly evolving nature of our business and its limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance.
We cannot predict the degree to which we will experience seasonality in
our business because of our limited operating history and the fact that we
cannot identify which companies, if any, we will acquire in the foreseeable
future.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
REVENUE
Total revenues for the year ended June 30, 2000 increased to
$27,424,759 from $10,568,685 in the comparable period of the prior fiscal
year.
Service revenues include revenues from the design and development of
Internet Web sites and related consulting projects, revenues from the
Company's Internet training workshops (including attendance at the workshop,
rights to activate web sites and hosting), sales of banner advertising,
mentoring and transaction processing. Service revenues for the year ended
June 30, 2000 increased to $22,149,649 from $10,280,440 for the comparable
period of the prior year. Approximately $5.5 million of the increase can be
primarily attributed to the increase in the number of Internet training
workshops. The number of workshops increased to 250 workshops from 133 in
prior year. The average number of attendees at each workshop were comparable
for each year. In addition, approximately $2.3 million of increased revenues
can be attributed to increased revenues from banner advertising and $5.2
million relating to the design and development of Internet Web sites and
their hosting on our Internet Commerce Center.
Product sales, relating to the sale of our multimedia products, for
the year ended June 30, 2000 increased to $5,275,110 from $288,245 in the
comparable period of the prior fiscal year. Product sales relate to the sale
of our multimedia products. The multimedia product segment was acquired on
May 31, 1999 when Galaxy Enterprises, Inc. purchased IMI, Inc. and
accordingly, was only included in the results of fiscal 1999 for one month.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales,
which consists of the cost to program customer storefronts, project
development, customer support expenses and tangible products sold. Gross
profit for the fiscal year ended June 30, 2000 increased to $13,491,828 from
$6,498,990 in the comparable prior period. The increase in gross profit
primarily reflects our increased sales volume of services provided through
our Internet training workshops and the addition of several new customers to
the Internet Commerce Center. Gross margin percentages decreased over the
same periods due to the lower gross profit margin associated with the
multimedia product sales. The decrease was partially offset by the licensing
of our technology to one customer during the year, which has no significant
costs to sell the license.
18
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel and outside
contractors. Product development expenses for the fiscal year ended June 30,
2000 increased to $6,462,999 from $1,496,563 in the comparable prior period.
Product development expenses have increased as we continue to upgrade the
Internet Commerce Center, our core technology platform. No other significant
development costs for other projects have been incurred.
SELLING AND MARKETING
Selling and marketing expenses consist of payroll and related
expenses for sales and marketing and the cost of advertising, promotional and
public relations expenditures and related expenses for personnel engaged in
sales and marketing activities. Selling and marketing expenses for the fiscal
year ended June 30, 2000 increased to $18,901,847 from $8,730,366 in the
comparable prior period. The increases in selling and marketing expenses are
primarily attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of
our business.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees and other general corporate expenses. General and administrative expenses
for the fiscal year ended June 30, 2000 increased to $25,250,624 from
$11,595,071, in the comparable prior period. The increase in general and
administrative expenses is attributable primarily to non-cash compensation
expense from common stock issued to certain executives in December 1999 valued
at $11,775,000. The increases in general and administrative expenses are also
attributable to increased payroll-related and other infrastructure costs as we
expanded and incurred additional costs related to the growth of our business and
one-time merger related expenses of $889,757 in the fiscal year ended June 30,
2000.
INTEREST (INCOME) EXPENSE, NET
Interest expense consists primarily of amortization of debt issuance
costs and debt discount and interest in connection with our $1,000,000 of
secured convertible debentures due December 31, 1999 and $6,633,500 of our
series A 12% senior notes. The senior notes were issued in connection with our
May through October 1999 bridge financing private placements. Interest (income)
expense, net for the fiscal year ended June 30, 2000 increased to $4,575,141
from $933,097 in the comparable prior period. The increase in interest expense
for the fiscal year is attributable primarily to the amortization of promissory
note discounts incurred in conjunction with the bridge financing. All of the
convertible debentures were converted into common stock as of December 31, 1999.
The senior notes were repaid in full in November 1999.
INCOME TAXES
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes. The use of our net operating loss carry
forwards, which begin to expire in 2006, may be subject to certain limitations
under Section 382 of the Internal Revenue Code of 1986, as amended.
YEARS ENDED JUNE 30, 1999 AND 1998
REVENUE
Total revenues for the year ended June 30, 1999 increased to
$10,568,685 from $7,268,425 in the comparable period of the prior fiscal year.
Service revenues include revenues from the design and development of
Internet Web sites and related consulting projects, revenues from the
Company's Internet training workshops (including attendance at the workshop,
rights to activate web sites and hosting), sales of banner advertising,
mentoring and transaction processing. Service revenues for the year ended
June 30, 1999 increased to $10,280,440 from $7,268,425 for the comparable
period of the prior year. Approximately $1.3 million of the increase can be
primarily attributed to the increase in revenue from the Company's Internet
training workshops. The number of workshops increased to 133 workshops from
120 in prior year. The average number of attendees at each workshop were
comparable for each year. In addition, approximately $700,000 of the
increased revenues can be attributed to increased revenues from banner
advertising and approximately $400,000 can be attributed to increased
revenues from the mentor program.
Product sales, relating to the sale of our multimedia products, for
the year ended June 30, 1999 increased to $288,245. There were no product
sales in the comparable period of the prior fiscal year. Product sales
relate to the sale of our multimedia products. The multimedia product segment
was acquired on May 31, 1999 when Galaxy Enterprises, Inc. purchased IMI,
Inc. and accordingly, was only included in the results of fiscal 1999 for one
month.
19
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales,
which consists of the cost to program customer storefronts, customer support
expenses and tangible products sold. Gross profit for the fiscal year ended
June 30, 1999 increased to $6,498,990 from $4,735,887 in the comparable prior
period. The increase in gross profit primarily reflects the increased number
and attendance at our Internet training workshops. The decrease in gross
profit margin primarily reflects a slight decrease in gross profit margins
related to products sold through our Internet training workshops, and the
initial revenues from the design and development of Internet Web sites and
their hosting on our Internet Commerce Center, which did not generate a gross
profit.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel and outside
contractors. Product development expenses for the fiscal year ended June 30,
1999 increased to $1,496,563 from $25,047 in the comparable prior period.
Product development expenses have increased as we developed the Internet
Commerce Center, our core technology platform.
LICENSE FEE
License fee represents a one time, non-cash charge in fiscal year
1998 to amortize and write off a license that was acquired and subsequently
written off as we abandoned further development of the technology.
SELLING AND MARKETING
Selling and marketing expenses consist of payroll and related
expenses for sales and marketing and the cost of advertising, promotional and
public relations expenditures and related expenses for personnel engaged in
sales and marketing activities. Selling and marketing expenses for the fiscal
year ended June 30, 1999 increased to $8,730,366 from $6,495,547 in the
comparable prior period. The increases in selling and marketing expenses are
primarily attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of
our business.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees and other general corporate expenses. General and administrative expenses
for the fiscal year ended June 30, 1999 increased to $11,595,071 from $2,658,449
in the comparable prior period. The increases in general and administrative
expenses are attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of our
business.
INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net for the fiscal year ended June 30,
1999 increased to $933,097 from $23,277 in the comparable prior period. The
increase in interest expense for the fiscal year is primarily related to an
increase in notes payable.
INCOME TAXES
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes since our inception. The use of our net
operating loss carry forwards, which begin to expire in 2006, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $2,607,491 in cash on hand, an increase of
$1,639,819 from June 30, 1999.
Net cash used in operating activities was $16,639,773 for the fiscal
year ended June 30, 2000. Net cash used in operations was primarily attributable
to $44,108,429 in net losses and increases in assets, partially offset by
non-cash charges as well as increases in accounts payable and accrued expenses.
Increases in assets included $3,321,699 in accounts receivable resulting from
the growth in revenues during the fiscal year ended June 30, 2000. Non-cash
charges include $3,660,498 for common stock issued for services, $8,400,000 for
stock issued for cancellation of options and $4,022,550 from the amortization of
debt discount and debt issuance costs. Increases in liabilities included
$8,496,419 in deferred revenue resulting from the growth in billings during the
fiscal year ended June 30, 2000, $3,460,210 in accounts payable and accrued
expenses resulting primarily from the accrual of wages and benefits and balances
owed on expenditures.
Net cash used in investing activities was $2,916,055 for the fiscal
year ended June 30, 2000 and consisted primarily of purchases of property and
equipment for the upgrade of our technological infrastructure.
20
Net cash provided by financing activities of $21,196,316 for the fiscal
year ended June 30, 2000 resulted primarily from $1,114,950 in proceeds from the
issuance of senior notes and $25,313,863 in proceeds from the issuance of common
stock principally in connection with our secondary offering, which was completed
in November and December 1999. These proceeds were partially offset by
$6,433,500 used to repay the bridge financing loans in their entirety.
At June 30, 1999, we had $967,672 in cash on hand, an increase of
$688,357 from June 30, 1998.
Net cash used in operating activities was $6,971,091 for the fiscal
year ended June 30, 1999. Net cash used in operations was primarily
attributable to $15,140,478 in net losses, non-cash gain on extinguishments
of debt, and increases in assets, partially offset by non-cash charges as
well as increases in deferred revenue and accounts payable and accrued
expenses. The non-cash gain related to extinguishments of debt was
$1,653,232. Accounts receivable decreased $14,699. Increases in assets
included $44,133 in inventory and $325,887 in prepaid offering costs.
Non-cash charges include $1,262,200 for common stock issued for services,
$800,000 write off of note receivable, $535,535 of interest expense on
warrants issued as debt issue costs and $400,000 of stock compensation paid
by stockholders. Increases in liabilities included $1,617,563 in deferred
revenue resulting from the growth in billings during the fiscal year ended
June 30, 1999 and $1,787,550 in accounts payable and accrued expenses
resulting primarily from the accrual of wages and benefits and balances owed
on expenditures.
Net cash used in investing activities was $1,482,250 for the fiscal
year ended June 30, 1999 and consisted of a loan in exchange for a note
receivable, purchases of property and equipment and the purchase of equity
securities.
Net cash provided by financing activities of $7,411,855 for the fiscal
year ended June 30, 1999 resulted primarily from $2,506,000 in proceeds from the
issuance of notes payable and convertible debt and $5,782,760 in proceeds from
the issuance of common stock. These proceeds were partially offset by $990,630
used to repay notes to a related party.
At June 30, 1998, we had $279,315 in cash on hand, an increase of
$166,171 from June 30, 1997.
Net cash used in operating activities was $392,795 for the fiscal year
ended June 30, 1998. Net cash used in operations was primarily attributable to
$8,520,822 in net losses partially offset by non-cash charges as well as
increases in deferred revenue. Non-cash charges include $3,822,000 for the
amortization and write-off of license fees and $371,680 for common stock issued
for services. Increases in liabilities included $3,729,290 in deferred revenue
resulting from the growth in billings during the fiscal year ended June 30, 1998
and $109,620 in accounts payable and accrued expenses.
Net cash used in investing activities was $236,213 for the fiscal year
ended June 30, 1998 and consisted of a loan in exchange for a note receivable
and purchases of property and equipment.
Net cash provided by financing activities of $795,179 for the fiscal
year ended June 30, 1998 resulted primarily from $232,429 in proceeds from the
issuance of a note payables and $649,000 in proceeds from the issuance of common
stock. These proceeds were partially offset by $100,000 used to repay notes to a
related party.
As of June 30, 2000, we believe that our existing capital resources
are adequate to meet our cash requirements for at least the next three
months. In July 2000, we entered into a securities purchase agreement with
King William, LLC ("King William"). Under the terms of the agreement, we
issued an 8% convertible debenture in the principal amount of $4.5 million.
In August 2000, we entered into a private equity credit agreement with King
William. Under the terms of the agreement, we have the right to issue and
sell to King William up to $10 million of our common stock at the market
price at the time of sale, subject to certain conditions and adjustments. Thetotal number of shares issuable under the securities purchase agreementoutstanding after this offering.
The foregoing discussion and private
equity credit agreementtable are limited to approximately four million shares prior
to obtaining stockholder approval. In the event the holders of the 8%
convertible debenture are unable to convert such debt into common stock
because of the limitation on the number of shares that may be issued, we may
be required to redeem the debt based on the conversion rate in effect at the
date of conversion. We expect that these financings, together with an
anticipated growth in billings from our business and associated profits from
these increased revenues, will provide sufficient liquidity to fund our
business operations for the next twelve months.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
21
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 will require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. Netgateway will adopt SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal
year ending June 30, 2001. Management has not completed an evaluation of the
effects this standard will have on Netgateway's consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
Application of FIN 44 did not have an effect on Netgateway's financial
reporting.
RECENT EVENTS
In August 2000, we entered into a private equity credit agreement with
King William. Under the terms of the agreement, we have the right to issue and
sell to King William up to $10 million of our common stock at the market price
at the time of sale, subject to certain conditions and adjustments. King William
may resell these15,100,264 shares of common stock pursuantoutstanding as of June 30, 2020, plus 490,000 shares to the terms of the securities
purchase agreement and applicable securities laws. In addition, for each 10,000
shares of common stock that we issue and sell to King William, we will issue a
warrant to King William to purchase 1,500 shares of our common stock. The shares
issuablebe sold upon exercise of these warrants may be sold pursuant to the termsoptions in connection with this offering, and excludes, as of the securities purchase agreement and applicable securities laws.
In July 2000, we entered into a securities purchase agreement with King
William. Under the terms of the agreement, we issued an 8% convertible debenture
in the principal amount of $4.5 million. The purchase price of the debenture is
payable to us in two tranches. The first tranche, in the amount of $2.5 million,
net of closing costs of approximately $300,000, was paid at the closing in July
2000. The second tranche, in the amount of $2.0 million, may be drawn down by us
three business days after the registration statement registering the shares
issuable upon conversion has been declared effective. The debenture is
convertible into shares of our common stock at the lower of $1.79 per share or a
conversion rate of 80% of the market price at the time of conversion, subject to
certain conditions and adjustments. In addition, we issued to King William
warrants to purchase 231,000 shares of common stock. We also issued to Roth
Capital Partners, Inc. warrants to purchase 90,000 shares of common stock and to
Carbon Mesa Partners, LLC warrants to purchase 10,000 shares of common stock.
TheJune 30, 2020:
●
2,596,184 shares of common stock issuable upon conversion of the debenture and exercise of these warrants may alsostock options having a weighted-average exercise price of $2.72 per share from our 2013 Plan (which excludes 490,000 shares to be sold pursuant to the termsin this offering by certain selling stockholders upon exercise of the
securities purchase agreementoptions in connection with this offering);
●
129,256 unvested restricted stock units under our 2013 Plan; and applicable securities laws.
In June 2000, we completed the merger of Galaxy Enterprises into one
of our wholly owned subsidiaries of ours. In the merger, we issued 3,929,988
●
1,486,049 shares of our common stock reserved for future issuance under our 2013 Plan, as well as any automatic increases in exchange for allthe number of the outstandingshares of common stock reserved for future issuance under our 2013 Plan.
We may choose to raise additional capital through the sale of Galaxy Enterprises.
In April 2000,equity or convertible debt securities due to market conditions or strategic considerations even if we reached an agreement with CableRep, Inc.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”), an
affiliate of Cox Communications, to launch one or more electronic shopping
portals in Cox Communications cable television markets designated by Cox
Communications. Pursuant to this agreement, we will designcall center, collaboration services, and develop
Internet-based shopping malls, to be branded with Cox Communications' name,
brand and image, and will offer our storefront building and maintenanceother cloud business services to Cox Communications' cable television subscribers. We will also be responsible
for marketing support, including development of Cox Communications' branded
collateral material and periodic distribution and updating of advertising spots
to promote the branded online shopping mall and store building services.
In March 2000, we entered into a systems integrator agreement with
Complete Business Solutions,any size business at affordable monthly rates.
Company Overview
Crexendo, Inc., a leading systems integrator and worldwide is an award-winning premier provider of information technologycloud communications, UCaaS, call center, collaboration services, and other cloud business services that are designed to provide enterprise-class cloud services to largeany size business at affordable monthly rates. The Company has two operating segments, which consist of Cloud Telecommunications and mid-sized
organizations. Under the terms of the agreement, we will provide CBSI with
access toWeb 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 Commerce Center development environment. We will also
allow CBSI to integrate individual business-to-business customersor cloud. Each of CBSI,
primarily located in North America and Mexico, into the Internet Commerce Center
platform. We receive an upfront fee from CBSI for each CBSI customer integrated
into to the Internet Commerce Center. CBSIour calling plans provides the integration services for
each CBSI customer and collects integration revenue from that customer. We and
CBSI share recurring fees for hosting, transactions and advertising. In April
2000, we entered into a similar agreement with Complete Business Solutions,
India, an Indian subsidiarynumber of CBSI. This agreement contains similar terms to
those described above and expands the customer reach available for licensing of
the Internet Commerce Center internationally to include Europe, Asia and South
America.
In January 2000, we entered into an agreement with PharMerica, a
subsidiary of Bergen Brunswig Corporation, the nation's foremost provider of
professional, quality and cost effective pharmacy products and services to the
long-term care, assisted living, sub-acute and skilled nursing industries. Under
the agreement, we will design, develop, manage and host a patient prospecting
system, known as PMSIOnLine.com, in which sales professionals and claims
adjustors will input prospective patient referrals directly into a secured
browser session and submit these prospective patient referrals to PharMerica's
legacy systems for analysis and possible sales follow-up.
In January 2000, we also reached an agreement with Intermedia
Partners Southeast, an affiliate of AT&T Media Services, to launch a local
electronic shopping portal in Nashville, Tennessee. Under this agreement, we
will design and develop an Internet-based shopping mall, to be branded with
Intermedia's name, brand and image. We will also offer our storefront
building and maintenance services to Intermedia's branded collateral material
and periodic distribution and updating of advertising spots to promote the
branded online shopping mall and storebuilding services.
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BUSINESS
GENERAL
We provide eCommerce services that enable companies of all sizes to
extend their businesses to the Internet quickly and effectively with minimal
investmentbasic features typically offered by developing, hosting, licensing and supportingtraditional telephone service providers, plus a wide range of built-to-order business-to-business, business-to-consumerenhanced 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 business-to-employee applications,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 enterprise portals, e-retail,
e-procurement and e-marketplace solutions.
Netgateway, Inc. was incorporated underthose from sales-type leases, are recognized at the lawstime of sale or at the inception of the Statelease, 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 Nevada
on April 13, 1995 under the name Video Calling Card, Inc. In June 1998,
Netgateway, Inc. acquired allsmartphones and tablets that offer much of the outstanding capital stockfunctionality of Netgateway,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 Nevada corporation formerly known as eClassroom.com,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 exchange for 5,900,000
sharescloud technologies have enabled a new generation of its common stock. At the same time, Netgateway, Inc. acquired the
assets of Infobahn, LLC d/b/a Digital Genesis, an electronic commerce
applications developer, in exchange for 400,000 shares of its common stock.
In January 1999, StoresOnline.com, Ltd., a Canadian corporation and a
wholly owned subsidiary of Netgateway, Inc., acquired all of the outstanding
capital stock of Spartan Multimedia, Ltd., an Internet storefront developer and
storefront service provider, in exchange for 371,429 shares of Class B common
stock of StoresOnline.com. The Class B common stock is exchangeable on a
one-to-one basis for shares of common stock of Netgateway, Inc.
In November 1999, Netgateway, Inc. reincorporated under the laws of the
State of Delaware.
In June 2000, we acquired all of the outstanding capital stock of
Galaxy Enterprises, Inc., a Nevada corporation, in exchange for approximately
3,900,000 shares of our common stock. Galaxy Enterprises was organizedbusiness software to be delivered as a corporation underservice over the lawsInternet. 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 Statebenefits of Nevada on March 3, 1994. Galaxy
Enterprises was originally formed undercloud computing to provide next-generation, cloud-based business communications solutions that address the name Cipher Voice, Inc.,new realities of workforce mobility, multi-device environments and was
incorporated formulti-channel communications, thereby enabling people to communicate the purposeway they do business
Our Solutions and Technology
Our goal is to provide a broad range of developing, producing and marketing equipment
related to computer hardware security, known as a digital voice
encryption-decryption electronic device. Galaxy Enterprises was unsuccessful in
developing the technology and subsequently ceased operations.
In December 1996, Galaxy Enterprises acquired all of the issued and
outstanding common stock of GalaxyMall, Inc., a Wyoming corporation, in exchange
for 3,600,000 shares of Galaxy Enterprises common stock. As a result of this
stock acquisition, Galaxy Mall became a wholly owned subsidiary of Galaxy
Enterprises. On December 16, 1996, Galaxy Enterprises changed its name from
Cipher Voice, Inc. to Galaxy Enterprises, Inc.
Effective May 31, 1999, Galaxy Enterprises, through its wholly owned
subsidiary IMI, Inc., acquired substantially all of the assets of Impact Media,
L.L.C., a Utah limited liability company engaged in the design, manufacture and
marketing of multimedia brochure kits, shaped compact discs and similarcloud-based products and services intendedthat nearly eliminate the cost of a businesses’ technology infrastructure and enable businesses of any size to facilitate conductingmore 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 the Internet. The
assets acquired included, amongany 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 things, equipment, inventorycloud technologies through our partnerships.
Crexendo’s cloud telecommunication service offers a wide variety of essential and finished
goods, intellectual property, computer programs and cash and accounts
receivable. The primary useadvanced features for businesses of all sizes. Many of these assets relatefeatures 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 design, manufactureUnited States and marketingCanada, 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 Impact Media'sthese 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 services.
INDUSTRY BACKGROUND
The new Internet economyweb 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 transformed the way thatchanged in today’s world and Crexendo’s platform is designed to allow business is
conducted. Companies are now required to market dynamically, compete globallycommunicate anywhere, any time and communicate with a network of consumers and partners. Introducingon 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 electronic world unleashes new opportunitiescosts 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 such areas as growth,
services, product innovationremote work environments using voice, video, collaboration, SMS/text, chat and operational efficiencies.
In 1999, Nielsen/NetRatings, Inc. and Mediamark Research, Inc. both
estimated that there were as many as 83 million Americans actively on-line. This
number represents 42 percentmobility.
Some of the total U.S. adult population (over 18)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 are now regular Internet users, up 20 percenthas 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 1998. According to The Boston
Consulting Group/Shop.Org, business-to-consumer eCommerce reached $33.1 billion
in 1999 and an estimated 7 million consumers will have made their first online
purchase this year.
The North American Internet retailing segment is on pace to surpass
$29.3 billion in 2000, a 75 percent increase over 1999 revenue, according to
Gartner Group. Gartner Group reports that in 1999, North American online retail
sales totaled $16.8 billion, up 157 percent from 1998 revenue. According to
Forrester, by 2004, 49 million U.S. households are predicted to spend $184
billion online.
According to Dataquest, business-to-consumer e-Business initiatives
played a dominant role in the market in 1999. The majority of 1999 e-Business
implementations focused on Web enablement of basic business operations, basic
business-to-consumer functionality and customer relationship management.
Dataquest predicts extra-enterprise initiatives, including participation in
23
business-to-business supply chains and e-marketplaces, will be a major focus of
initiatives in 2000. Like business-to-consumer eCommerce, business-to-business
initiatives are forecast to grow dramatically over the next few years. The
United States Department of Commerce has estimated that business-to-business
commerce by means of the Internet will be a $300 billion dollar marketplace by
2002.
More than $6 trillion in online business-to-business trade is expected
by 2005, representing 42 percent of total U.S. business-to-business non-service
spending, according to research by Jupiter Communications. Jupiter's research
reveals that, while this year's Internet business-to-business trade will only
represent three percent of the total U.S. business-to-business non-service
market, or $336 billion, the online volume will grow twenty-fold over the next
five years opening the doors for new business modelsmanufacturers such as net marketsPolycom, Yealink, Cisco, H-tek, and coalition markets. Currently,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 direct channel,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 model of one seller to many
buyers, dominates 92 percent of the Internet business-to-business market,
according to Jupiter Communications. However, Jupiter Communications estimates
that, in 2005, 35% of the Internet business-to-business trade volume will be
conducted via a net market, a model of many buyers and many sellers, or through
a coalition market, comprised of a consortium of buyers or sellers.
As a result of the recent growth of business-to-consumer and
business-to-business eCommerce and eCommerce's acceptancedisaster such as a mainstream medium
for commercial transactions, businesses are investing in the strategic use of
Internet solutions to transform their core business and technology strategies.
This, in turn, has created a significant and growing demand for third-party
Internet professional services and has resulted in a proliferation of companies
offering specialized solutions, such as connectivity, transaction reporting,
security and Web site design to business customers. This specialization has
resulted in a fragmented market that often requires the business customer to
seek solutions from a number of different providers using differing, or even
contradictory, strategies, models and designs.
Companies face significant challenges in successfully adapting theirpandemic, hurricane, fire, etc. is critical. Our platform allows businesses to conduct commerce by means of the Internet. These include systems
engineering, technical, commercial, strategic and creative design challenges and
an understandingfunction wherever they need to. The massive shift to remote workforces that Covid-19 created is a great example of how the Internet transforms relationships between businesses
and their internal organizations, customers andCrexendo solution easily addresses the rapid shift from office to home without skipping a beat or losing features or functionality.
Whether a business partners. Companies
facing technology investment decisions often need outside technical expertise to
recognize viable Internet tools, develop feasible architectures and implement
strategies. Companies must also be able to integrate new Internet applications
within their existing systems. Finally, a successful solution requires that the
Internet application, particularly the user interface, be engaging and easy to
use.
We believe that few of the existing eCommerce service providers have
the range of skills required to assist their clients in a coordinated
transformation of the way they use technology and implement Internet solutions.
Accordingly,has 5 employees or 5,000 employees, we believe that organizationsCrexendo’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 increasingly searchingsupported 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 professional services firms offering turn-key business-to-business and
business-to-consumer eCommerce solutions, including integrated strategy,
technology and creative design, connectivity, transaction processing, data
warehousing, transaction reporting, help desk and consulting and training.
Furthermore, we believe that organizations will increasingly look to Internet
solutions providers that can leverage industry and client practices, increase
predictability of success for Internet solutions and decrease risks associated
with implementation by providing low-cost, scalable solutions with minimal
lead-time.
OUR BUSINESS
We are an e-Business solution provider offering application
outsourcing, software solutions, custom development and comprehensive services
for a full spectrum of electronic business transactions and processes.
An integral component to our electronic offerings is the Netgateway
Internet Commerce Center-TM-, a secure, high performance e-Business
infrastructure. Our Internet Commerce Center supports a level of customization
unique to application outsourcing with solutions ranging from eCommerce sites
using an Internet storefront and e-mail order processes, to complex Web-enabled
transactions to facilitate inter- and intra-business processes, such as
corporate directories and purchasing workflows. We also permit e-Business
application licensing to accommodate those organizations that have significant
internal infrastructures and the desire to manage their own solutions.
Our mission is to advance the use of the Internet as an effective
business system by providing innovative solutions for our customers. Our
strategic vision is to be the preferred e-Business solution provider for
business-to-business, business-to-consumer and business-to-employee
transactions.
BUSINESS STRATEGY
Key elementsmore than 5% of our business strategy are described below.
- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We
designedtotal revenues in fiscal 2018 or 2019 or during any period presented in this prospectus. To date, we have focused our operations and business model to focusprincipal efforts on the e-Business services of highest value to our clients. These
services would require significant capitalmarket for small and resource
investments, including technical expertise, if clients
provided the services themselves. By offering these services
to
24
a number of clients simultaneously and by creating and
using reusable software modules, we can spread the relatively
fixed costs associated with the creation, purchase or
customization of the software, processes, procedures or
computer hardware over a larger volume of e-Business
transactions. This permits us to offer these services to our
clients on a highly cost effective basis.
- LEVERAGE RELATIONSHIPS WITH SYSTEMS INTEGRATIONS TO MAXIMIZE
GROWTH. We have embraced a channel strategy with systems
integrators to expand our market reach. We have found that
this particular strategy matches well with systems integrators
that have existing client relationships where adding an
e-Business solution for that client strengthens the
relationship.
- PROVIDE EASY ACCESS TO SCALABLE ECOMMERCE FUNCTIONALITY. We
designed our Internet Commerce Center and its hardware and
software infrastructure to permit scalable
business-to-business and business-to-commerce eCommerce
solutions. We can offer incremental services to our clients
through the activation of additional software capabilities
that quickly provide additional services and added
functionalitymedium-sized businesses (“SMB”) in response to client growth or commercial
requirements.
- INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS
PRIOR INVESTMENT. We structured our Internet Commerce Center
infrastructure and developed e-Business applications to permit
the easy interconnection of a customer's existing legacy
environment with our environment. As a result, we can offer
e-Business solutions that incorporate the sales and other
practices of our customers and their industries, as well as
maintain the customers' prior investment in creating and
maintaining a Web presence.
- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek
strategic acquisitions of, and investments in, businesses and
technologies that we believe will enhance the functionality of
our solutions and services, operations and competitive
position.
SERVICES OFFERED
We have the following four operating subsidiaries or divisions, each of
which serves as a channel to market, sell and deliver our e-Business solutions.
BUSINESS-TO-BUSINESS
Our business-to-business division delivers e-Business solutions
including enterprise portals, e-retail, e-procurement and e-marketplace
solutions, as well as end-to-end consulting and support services to small to
medium sized businesses throughout the United States. We developbelieve that there is strong additional growth opportunity in the SMB markets as well as the small enterprise business markets and deploywill continue to focus our e-Business applicationsprimary 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 Internet Commerce Center.
We maintain a libraryservices. Since we have our customers on long-term agreements, our sales department is also in charge of application components dynamically updated
within one shared repository. Pre-assembled or custom e-Business application
components are easily tailored to meet industry or market specific protocols.
Our component strategy goes beyond simply reusing code - rather, our Internet
Commerce Center application components incorporate complex design, interface,
documentationongoing sales and testing that are often underestimated in e-Business
implementations. The sophisticated, component-based framework of the Internet
Commerce Center allowssupport for the configuration of virtually unlimited e-Business
scenarios withoutnew customers after the need to reengineer components or compromise performance.
We host and maintain our Internet Commerce Center and its e-Business
applications minimizing clients' technology investment while leveraging their
competitive advantage.implementation process is complete. We also permit e-Business application licensinghave 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 accommodate those larger organizations that have significant internal
infrastructuresgenerate lead opportunities and support our messaging to the desireSMB business space.
Manufacturing
We outsource the manufacturing of our Crexendo branded desktop devices. This outsourced manufacturing approach allows us to self-manage their solutions.
CABLECOMMERCE
Our CableCommerce division partners with cable operators to combinefocus our resources on the powerdesign, sale, and marketing of cable advertising and local eCommerce. Our CableCommerce division
creates and launches cable-branded electronic malls, which are promoted hundreds
of times per month by cable operators. These e-Malls feature local
establishments, allowing visitors to locate convenient services andour products. We
have launched eCommerce initiatives with leading cable operators such as AT&T,
CableOne, MediaOne and Cox Communications. CableCommerce e-Malls currently reach
more than 3.3 million households in over 22 markets across the nation.
We offer design, development, hosting and site management of e-Malls
and electronic storefronts sold through cable operators and delivered to local
merchants and subscribers. We provide training of the cable system sales
personnel, offers storefront creation and maintenance services. In addition, we offer localbelieve that outsourcing many of our manufacturing and regional classified advertisements, community calendarsassembly activities provides us with the flexibility needed to respond to new market opportunities and couponsscale for customer demand, simplifies our operations, and significantly reduces our capital commitments.
We subject our third-party manufacturing contractors to optimize e-Mall content.
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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 a professionally designed Web sitecontinued investment in research and development is critical to expanding our leadership position within the successcloud-based business communications solutions market. We devote the majority of business customers desiringour research and development resources to transact eCommerce. We offer Web site
development, design and maintenance servicesoftware development. Our engineering team has significant experience in various disciplines related to our business customers, including
theplatform, such as voice, text, video and fax processing, mobile application development, IP networking and design of graphical interfacesinfrastructure, user experience, security and applications necessary to
fully integrate each customer's Web siterobust multi-tenant cloud-based system architecture.
Our development methodology, in combination with its order and payment processing,
order confirmation and fulfillment centers. Ourour software for Web site and
electronic storefront development features its own template system, multiple
product search engines, multiple price sets and catalogues and support for
multiple currencies. We intend to further develop and enhance this technology
and to aggressively market these services through our cable company partners.
We believe that the use of e-Malls is critical to create an effective
eCommerce marketplace. Through the creation and use of private labeled Internet
malls, users of our services can take advantage of both the pre-existing
relationships and marketing efforts of the reseller sponsoring the private
labeled mall, thereby increasing traffic to, and exposure of, their site. In
addition, we have developed and feature an eCommerce search engine that searches
within each Internet mall, as well as across all Internet malls served by the
Internet Commerce Center. We believe the use of e-Malls and the availability of
our robust eCommerce search engine adds substantial value to individual stores
and resellers alike. For our customers not otherwise affiliated with any e-Mall,
we provide access to our own e-Mall as a value-added service.
GALAXY ENTERPRISES
Our subsidiary, Galaxy Enterprises, offers educational eCommerce
seminars to merchants who want to bring their business ideas online. These
seminars offer strategies to successfully build, market and grow eCommerce
sites. Galaxy Enterprises also operates GalaxyMall, a popular online shopping
site at WWW.GALAXYMALL.COM, which hosts more than 3,700 merchants and manages
WWW.MATCHSITE.COM, an innovative meta-search engine that compiles and ranks the
results of major search engines.
GalaxyMall engages in the business of selling to its customers Internet
services and products which include electronic home pages, or storefronts, on
GalaxyMall, and hosts those storefront sites on its Internet server. Galaxy
Mall's business is to assist its customers in establishing their businesses on
the Internet. Storefronts designed and programmed by or for customers by Galaxy
Enterprises are displayed on the mall.
Galaxy Enterprise's MatchSite.com search engine allows Internet users
to locate sites of interest on the Web. When a Web user types in a search
request, MatchSite sends the query to several different resources, including
several leading, major search engines. The responses are then returned to the
user organized into a uniform format and ranked by relevance.
GalaxyMall contracts with consultants and independent contractors, or
creates and produces in-house, various products and services which are used by
its customers in marketing their own products or services. Galaxy Mall's
products and services include the following:
- COMMERCIAL WEB SITES/WEB HOSTING
GalaxyMall programs commercial web sites with the most current
types of Internet programming, such as HTML, JavaScript and Perl.
Each site programmed by GalaxyMall for its customer/merchants has
available on-line ordering capabilities. All orders processed
on-line are supported by encrypted security, which provides
merchants and their customers confidence in the safety of ordering
products and services on-line. GalaxyMall either hosts the sites
on the mall itself, or provides virtual hosting, which gives the
customer/merchant's site the appearance of having its own server
and a non-GalaxyMall IP address.
- AUTO-RESPONDERS
GalaxyMall sets up e-mail addresses for its merchants that send
back to the individual requesting information an instant reply,
then forwards the original message to the owner of the
auto-responder. Similar to fax-on-demand, auto-responders are a
powerful marketing tool for merchants offering products or
services. A merchant can write advertising copy for its product
and when someone inquires to the merchant's auto-responder e-mail
address, the ad copy is immediately sent to the potential
customer.
- TRACKING SOFTWARE
GalaxyMall provides software for a merchant's web site that tracks
the volume of traffic to that web site. It also provides the
merchant with information concerning the derivation of its
potential customer and such person's referring universal resource
locator, or URL. This enables the merchant to track its marketing
efforts to determine if its potential customer found the merchant
through the merchant's Internet advertisements or its listings in
search directories.
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- INTERNET CLASSIFIED ADVERTISEMENTS
GalaxyMall sells 200-word ads on its classified ad network. Each
classified ad runs on the network for 90 days. This classified ad
network is comprised of thousands of listings.
- MERCHANT ACCOUNTS
GalaxyMall sells merchant accounts combined with software that
allows the customer to have real time on-line processing for
credit cards and checks.
- BANNER COURSE/BANNER LICENSE
The banner course consists of over 200 pages and 10 audio
cassettes of instruction. Banners are the equivalent of billboards
on the Internet. They are graphical images placed throughout the
Internet advertising specific Web pages. Internet users click on
the banner image when it is displayed and they are taken
immediately to the site the image is advertising. The purpose of
this course is to help merchants better understand how banner
advertising works on the Internet. They enhance their own Internet
business by learning how to properly use banner advertising to
promote their Internet site. The banner license, which is sold in
conjunction with the course, allows the customer to put banners on
multiple sites within the GalaxyMall banner network, as well as
benefit from ongoing discounts for future impression and banner
purchases.
- BANNER/IMPRESSIONS
GalaxyMall designs and programs banners for its customers. These
banners are then advertised on GalaxyMall's network of over 20,000
Internet sites. The number of banner impressions is determined by
the number of times the banner advertisement is uploaded, or
displayed, on one of the banner network's Internet sites.
GalaxyMall's customer purchases a number of impressions based upon
its specific marketing and advertising needs. The GalaxyMall
banner network currently markets in excess of one million banner
impressions daily to businesses doing commerce on the Internet.
- EXECUTIVE MENTOR PROGRAM
GalaxyMall's mentoring program is a ten week program in which a
select number of GalaxyMall's customers become involved. This
program provides a personal coach to the customer who works with
the customer one-on-one to help the customer build its business on
the Internet. These services are provided by Professional
Marketing International, Inc. on a contract basis.
IMI
IMI, our subsidiary doing business under the name Impact Media, offers
state-of-the-art multi-media marketing messages using custom-cut compact discs.
IMI also creates full-motion CDs for Fortune 1000 companies.
IMI designs, manufactures and markets multimedia brochures, shaped
compact disks and other products and services to facilitate traditional
marketing and to bridge the gap between conventional and Internet marketing.
These CDs are an advertising tool and can be used by companies seeking to drive
traffic to their Web site. Through the use of custom cut CDs, businesses can
deliver a multimedia presentation of their corporate image or product or tell
their story and market their products in an inexpensive, broadband-like format.
A link can be embedded on a custom cut CD which activates a local Internet
connection and browser to connect a customer to that company's Web page, thereby
allowing that company's customer to place an order or find out the latest
information about that company and generally interact with that company's Web
site. Custom cut CDs have also been introduced to the trading card industry to
turn traditional trading cards into a multimedia presentation or an Internet
experience for collectors.
IMI's products and services include the following:
- MULTIMEDIA PRESENTATIONS. IMI creates custom multimedia
presentations which allow a company or individual to deliver its
message using sound, video, text, photos, and which can link to a
corporate Web site when provided on a CD.
- CUSTOM CDS. IMI works with clients to design shaped CD-Roms which
IMI then sells to its clients.
- WEB SITES. IMI designs and develops custom built web sites for
small and medium sized companies.
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SUPPORT SERVICES
Our CableCommerce and business-to-business clients are provided with
toll free, telephone technical assistance 24 hours per day and seven days per
week by a support services staff of approximately 24 individuals. We also
provide customers with access to information and customer support services by
means of the Internet.
TRANSACTION PROCESSING
We offer solutions that capture and transact customer orders according
to the business rules and specific "back office" needs of the particular client.
Our eCommerce system solutionservice (“SaaS”) delivery model, allows us to receiveprovide new and process ordersenhanced capabilities on a regular basis. Based on feedback from our customers and payments, provide order confirmationprospects and reporting and organize order
fulfillment. We can also provide support for eCommerce transactions using
checks, credit cards, electronic funds transfers, purchase orders and other
forms of payment. We currently provide this capability in conjunction with
certain third-party vendors, including PaymentNet in San Jose, California,
AuthorizeNet in Salt Lake City, Utah, Clear Commerce in Austin, Texas, eCommerce
Exchange in Laguna Hills, California and Card Services International in Agoura
Hills, California. We intend to pursue our own secured transaction clearing
solutions as well as a strategic alliance or acquisition of a secured
transaction-processing center.
CONNECTIVITY SOLUTIONS
For businesses to effectively engage in eCommerce, they must be
connected to the Internet. We assist our business clients in structuring and
obtaining high-speed Internet connectivity solutions to improve their
business-to-business communications by meansreview of the Internet. We provide these
connectivity solutions tobroader business communications and SaaS markets, we continuously develop new functionality while maintaining and enhancing our business customers in conjunction with third party
Internet access providers. Our connectivity solutions also include the ability
to host clients' Web sites and provide clients with security measures necessary
for secure transmissions over the Internet. We support our hosted Web sites by a
connectivity enhancing, high-performance, high-bandwidth server system.
We anticipate that, as our business continues to grow, we will compile
large amounts of transactional and other data with respect to our clients and
their businesses, markets, customers and eCommerce transactions. We have the
capability to automatically generate reports relating to order confirmation,
inventory tracking, fulfillment, transaction details, customer data, market
research and other sophisticated management reports based on the transactions
facilitated through our hardware and software infrastructure. We are continuing
to further develop these capabilities.
ADVERTISING
We have an agreement with Engage Technologies, Inc. to manage national
banner advertising in our Internet-based shopping malls. We share advertising
revenues with the respective mall owner on whose Web site the advertisement
resides.
CLIENTS AND STRATEGIC RELATIONSHIPS
Our strategy is to build relationships with key customers that are
embracing business-to-business, business-to employee and business-to-consumer
eCommerce initiatives. We are currently processing electronic transactions for
over 2,300 clients. Our clients are geographically dispersed across the United
States and represent a mix of businesses and industries. Each of our clients
generally enters into a standard e-Business and/or eCommerce services agreement
or subscription agreement, as appropriate. These agreements vary significantly
based upon the terms and conditions of the particular client transaction, the
features of the proposed e-Business and/or eCommerce site, the levels of service
necessary for the client and other factors. The agreements may include
provisions for the payment to us of development fees, hosting fees, interchange
fees, transaction fees and other fees related to the services provided by us
under a particular agreement.
The following are descriptions of client contracts into which we have
entered:
CB RICHARD ELLIS. In March 1999, we entered into an eCommerce services
agreement with CB Richard Ellis, one of the world's largest building management
and real estate services companies with over 12,000 properties under management
and over $1 billion in revenue during 1998. Under this agreement, we developed,
managed and serviced CB Richard Ellis' Internet-based shopping mall and client
extranet. This Web site is designed to permit CB Richard Ellis personnel to
conduct all of their corporate materials purchasing, including computers and
building and maintenance supplies and all global facilities management by means
of the Internet. In addition, CB Richard Ellis plans to offer the tenants in the
buildings they manage volume-purchasing services on the Internet for a variety
of office products and supplies.
WIRELESS ONE. In June 1999, we entered into a reseller and mall
agreement with Wireless One, Inc. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Wireless One name, brand and
image and offer our storefront creation and maintenance services to Wireless
One's subscribers. We also provide marketing support, including
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development of mall content, training of Wireless One sales people,
development of Wireless One branded collateral material and periodic
distribution and updating of advertising spots to promote their services.
Wireless One promotes this mall with a total of 1,000 30-second spots every
month jointly developed by us and Wireless One in all systems in which it is
able to provide advertising.
FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller
and mall agreement with Frontiervision Media Services, a provider of cable
television programming services. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Frontiervision name, brand and
image and are offering our storefront creation and maintenance services to
Frontiervision's subscribers. We also provide marketing support, including
development of mall content, training of Frontiervision salespeople and
production of advertising spots to promote their services. Frontiervision
promotes this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.
MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator. Under the agreement, we design,
develop, host and manage Internet-based shopping malls in each of MediaOne's
cable television markets. These markets currently consist of more than five
million households throughout the United States. These shopping malls are
branded with the MediaOne name, brand and image, feature businesses local to
each market and offer additional online services, such as classified
advertisements, local community events calendars and coupons. MediaOne has
agreed to contribute commercial advertising time on their cable systems to
promote these malls. In connection with this agreement, MediaOne acquired 50,000
shares of our common stock and a warrant exercisable for up to 200,000 shares of
our common stock. The warrant vests in four installments upon the satisfaction
of milestones relating to the scope of the launch of these Internet-based
shopping malls. As of June 30, 2000, MediaOne has launched shopping malls in 11
cable television markets representing more than 1.45 million subscriber
households.
BUYSELLBID.COM. In August 1999, we entered into a distributor mall and
reseller agreement with BuySellBid.com. Under the agreement, we design and
develop Internet-based shopping malls for BuySellBid.com, which will in turn
resell and/or sublicense these Internet-based shopping malls, custom-branded, to
other resellers. In the alternative, BuySellBid.com offers to brand any such
Internet-based mall with the BuySellBid.com name, brand and image and offers our
storefront creation and maintenance services to its own subscribers. We provide
marketing support, including development of mall content and training of
BuySellBid.com salespeople.
CABLEONE. In August 1999, Netgateway entered into a cable reseller and
mall agreement with CableOne, a large cable television operator. Under the
agreement, we designed and developed an Internet-based shopping mall, branded
with the CableOne name, brand and image and are offering our storefront creation
and maintenance services to CableOne's subscribers. We also provide marketing
support, including development of mall content, training of CableOne sales
people and production of advertising to promote their services. CableOne
promotes this mall with a minimum of 400 cablecasts per broadcast month in each
broadcast market where the mall services are offered.
BERGEN BRUNSWIG CORPORATION. In October 1999, we entered into an
Internet services agreement with Bergen Brunswig Corporation, a Fortune 100
company and the third largest pharmaceutical distributor in the United States.
Under this agreement, we designed and developed, and manage and service, an
Internet-based shopping mall branded with the Bergen Brunswig name, brand and
image. The site contains on-line storefronts for affiliated local pharmacies. We
are also responsible for training Bergen Brunswig personnel under the agreement.
Bergen Brunswig had a two-pronged business objective for its nationwide network
of 2,000 affiliated Good Neighbor Pharmacies. First, was to incorporate
business-to-business eCommerce features that directly connect Good Neighbor
Pharmacies ("GNPs") to Bergen Brunswig and other partner information and
services. Second, was to provide direct-to-consumer service on behalf of their
customers. In eight weeks, we launched more than 600 customized sites for Bergen
Brunswig's affiliated GNPs. Less than a year into the project, the myGNP.com
site represents 1,800 GNP stores and has established a strong competitive
Internet presence for both Bergen Brunswig and its affiliated GNPs. This site
also allows consumers to find the nearest Good Neighbor Pharmacy and link to
that pharmacy's site for pertinent information, pharmacists' biographies,
Bergen-provided services and specialty services, current product promotions and
pharmacy hours.
DIVERSITY ECOMMERCE.COM, INC., FORMERLY KNOWN AS LEADING TECHNOLOGIES.
In December 1999, we entered into an agreement with Diversity eCommerce.com Inc.
to develop, manage and service its Internet-based mall and client extranet.
AT&T MEDIA SERVICES. In January 2000, we entered into a reseller and
mall agreement with Intermedia Partners Southeast, an affiliate of AT&T Media
Services, to launch an electronic shopping portal in Nashville, Tennessee. Under
this agreement, we designed and developed an Internet-based shopping mall,
branded with Intermedia's name, brand and image, and are offering our storefront
creation and maintenance services to Intermedia's subscribers. We provide
marketing support, including development of Intermedia's branded collateral
material and periodic distribution and updating of advertising spots to promote
the branded online shopping mall and storebuilding services. Intermedia promotes
the mall with a total of 500 30-second spots every month in the Nashville
market, jointly developed by us and Intermedia.
PHARMERICA. In January 2000, we entered into an agreement with
PharMerica, a subsidiary of Bergen Brunswig Corporation that provides
professional, quality and cost effective pharmacy products and services to the
long-term care, assisted living, sub-acute and skilled nursing industries. Under
the agreement, we designed and developed, and manage and host, a patient
prospecting system,
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known as PMSIOnLine.com, in which sales professionals and claims adjustors
input prospective patient referrals directly into a secured browser and
submit these prospective patient referrals to PharMerica's legacy systems for
analysis and possible sales follow-up.
COX COMMUNICATIONS. In April 2000, we reached an agreement with
CableRep, Inc., an affiliate of Cox Communications, to launch one or more
electronic shopping malls in the Cox Communications cable television markets
designated by Cox Communications. Pursuant to this agreement, we are designing
and developing Internet-based shopping malls, branded with Cox Communications'
name, brand and image and are offering our storefront building and maintenance
services to Cox Communications' cable television subscribers. We are also
responsible for marketing support, including development of Cox Communications'
branded collateral material and periodic distribution and updating of
advertising spots to promote the branded online shopping mall and storefront
building services.
SBC INTERACTIVE. In June 2000, we entered into a professional services
agreement with SBC Interactive, a subsidiary of SBC Communications, Inc., under
which we design and develop custom Web sites for SBC's hundreds of yellow pages
merchants. We provide sales support to SBC, as well as full production and
maintenance support for all Web sites that we build under the agreement.
We have also embraced a channel strategy with systems integrators to
expand our market reach. We have found that this particular strategy works well
with systems integrators that have existing clients for whom adding an
e-Business / eCommerce solution will strengthen the relationship. These
partnerships expand our market reach in the United States, Europe, Asia and
South America. Our system integrator partners gain the benefit of developing
rapid and comprehensive e-Business solutions using a robust, fully scalable
e-Business technology platform.
The following is a description of the systems integrator agreements
into which we have recently entered:
COMPLETE BUSINESS SOLUTIONS, INC.; COMPLETE BUSINESS SOLUTIONS, INDIA.
In March 2000, we entered into a systems integrator agreement with Complete
Business Solutions, Inc., a leading systems integrator and worldwide provider of
information technology services to large - and mid-sized organizations. Under
the terms of the agreement, we provide CBSI with access to the Internet Commerce
Center development environment, and allow CBSI to integrate individual
business-to-business customers of CBSI, primarily located in North America and
Mexico, into the Internet Commerce Center platform. We receive an upfront fee
from CBSI for each CBSI customer integrated into the Internet Commerce Center.
CBSI provides the integration services for each CBSI customer and collects
integration revenue from that customer. We share recurring fees for hosting,
transactions and advertising with CBSI. In April 2000, we entered into a similar
agreement with Complete Business Solutions, India, an Indian subsidiary of CBSI.
This agreement contains similar terms to those described above and expands the
customer reach available for licensing of the Internet Commerce Center
internationally to include Europe, Asia and South America.
SALES AND MARKETING
We sell and market our business-to-business services by means of a
combination of direct and indirect sales. Presently, we have a sales force of 12
full-time employees focusing on our business-to-business products and services.
We anticipate increasing this sales force substantially over the next year,
including creating a group within this sales force focused solely on partnering
with system integrators to deliver solutions to a broader range of clients. We
also have a marketing and sales support group of seven full time employees. Our
marketing team is focused on creating demand in the marketplace for our
business-to-business products and services. Our marketing team is also
responsible for product management, new market development, sales support and
lead generation programs.
Our CableCommerce division sells and markets its services by partnering
with the cable operator's sales force through partnership agreements with cable
operators. CableCommerce maintains a sales force of approximately seven
full-time employees. We have developed, and are continuing to develop, our
relationships with our cable company partners to sell entry-level Internet
Commerce Center services, such as simple Internet storefronts and services to
the cable company's customers. We will "private label" the Internet storefront
service and establish private branded Internet-based shopping malls to provide
our cable partners with the means to drive traffic to these storefronts. The
storefronts and mall will have the customized "look and feel" of the particular
cable company.
In July 1999, we established a call center in American Fork, Utah. As
part of our merger with Galaxy Enterprises, we have consolidated our American
Fork call center resources with our Galaxy Enterprises operations. As a result
of that consolidation, we have shut down our American Fork facility.
Most of the products of our GalaxyMall business are Internet related
and, consequently, do not use traditional distribution channels. GalaxyMall's
principal products involve delivering to its customers the ability to conduct
business over the Internet. GalaxyMall attracts its customers through Internet
marketing workshops. These workshops are presented several times a week during
most weeks of the year. GalaxyMall rents hotel conference rooms in various
cities throughout the United States in which it hosts its
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preview sessions and Internet training workshops. GalaxyMall uses a 90-minute
information seminar which previews the Internet, the "Registered Merchant"
section and the option to establish a storefront on the GalaxyMall and the
Internet marketing workshop. Preview attendees are invited to attend a one
day workshop at which GalaxyMall provides an intensive training course on
Internet marketing using e-mail, news groups, auto-responders, classified
ads, search engines and other Internet "tools" to market their products and
services on the Internet. Interested attendees are then offered the
opportunity to pay a fee to become a registered merchant with the option to
establish a "storefront" presence on the GalaxyMall to market their products
and services.
GalaxyMall advertises its preview sessions in direct mail solicitations
targeted to potential customers meeting certain demographic criteria established
by GalaxyMall. The direct mail pieces are mailed to persons and small businesses
located in cities scheduled to be visited by GalaxyMall's personnel. Mailing
lists approximating the demographics established by Galaxy Mall are obtained
from list brokers. Announcements of upcoming preview sessions also appear in
newspaper advertisements in scheduled cities.
GalaxyMall also uses a telemarketing effort to market GalaxyMall
products and services and also conducts its preview sessions and workshops for
audiences assembled by third parties at selected locations.
IMI primarily sells its products through two channels, consisting of
eight outside distributors and an inside sales force of seven employees
primarily engaged in outbound telemarketing. IMI has no long-term agreements
with its customers.
RESEARCH AND DEVELOPMENT
Since June 1998, we have conducted extensive research and development
with respect to our technology. During the year ended June 30, 1999, and during
the year ended June 30, 2000, we invested, on a consolidated basis,
approximately $1,496,563 and $6,462,999 respectively, in the research and
development of our technology. solution.
Our research and development efforts have:
- emphasized the development of advanced technologyexpenses were $0.8 million and new
services;
- focused on the enhancement$0.9 million in fiscal 2018 and refinement of existing services in
response to rapidly changing client specifications and industry
needs;
- introduced support for evolving communications methodologies and
protocols, software methodologies and protocols and computer
hardware technologies;
- improved functionality, flexibility, ease of use;
- and enhanced the quality of documentation, training materials and
technical support tools.
During the last two fiscal years, our Galaxy Enterprises subsidiary has
also engaged in extensive research and development activities, developing
various products and services, including the following:
- An on-line real time order processing system interface allowing
its customers to have real time verification and processing of
all their orders.
- A "shopping cart" system allowing unlimited products to be added
to an on-line order. It calculates the product price totals and
adds shipping, handling and other applicable charges.
- A "window shopping" feature allowing users to surf through
random storefronts with greater ease.
- Automated auto-responder software allowing a Galaxy Enterprises
customer to log in to make changes to the customer's
auto-responder text, rather than relying on Galaxy Enterprises
programmers to make such changes.
- A database driven merchant registration service allowing Galaxy
Enterprises to monitor and keep secure its "Merchants Only"
section of the GalaxyMall.
- Integrated directory database and billing database, providing
Galaxy Enterprises with faster and easier billing of its
customers.
- New banner exchange software allowing Galaxy to sell advertising
space based upon the impressions each site generates. The banner
exchange is located at bannersource.com.
31
- Development of "Quick-Links" for incorporation into multimedia
presentations to allow easy access to customer Web sites.
We intend to conduct additional research and development to, among
other things, further our strategy of developing cost effective services with
broad appeal, provide easy access to scalable e-Business services and offer
additional functionality of our Internet Commerce Center services and solutions.
COMPETITION
The e-Business market is becoming increasingly competitive as small to
large organizations recognize the need for a sophisticated Web-based solution.
Our competitors include application service providers, software vendors, systems
integrators and information technology consulting service providers.
Although most of these competitors have not yet offered a full range of
Internet professional services, many are currently offering some of these
services or have announced their intention to do so. These competitors at any
time could elect to focus additional resources in our target markets, which
could materially adversely affect our business, prospects, financial condition
and results of operations. Many of our current and potential competitors have
longer operating histories, larger customer bases, longer relationships with
clients and significantly greater financial, technical, marketing and public
relations resources than us. Competitors that have established relationships
with large companies, but have limited expertise in providing Internet
solutions, may nonetheless be able to successfully use their client
relationships to enter our target market or prevent our penetration into their
client accounts.
Additionally, in pursuing acquisition opportunities, we may compete
with other companies with similar growth strategies. Some of these competitors
may be larger and have greater financial and other 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. We have
limited proprietary technology that would preclude or inhibit competitors from
entering the e-Business services market. With regard to the business of our
subsidiary Galaxy Enterprises, we anticipate that new entrants will try to
develop competing Internet malls or new forums for conducting eCommerce that
could be deemed competitors. We believe, however, that we presently have a
competitive advantage due to our marketing strategies for GalaxyMall and our
other products. In 1995, certain of Galaxy Enterprises' principals, who at that
time were working with Profit Education Systems, were instrumental in creating
an Internet marketing workshop industry. Galaxy Enterprises obtained this
Internet marketing workshop expertise when it acquired Profit Education Systems.
To our knowledge, there were no other businesses engaged in the Internet
marketing workshop industry at that time. Due to the experience of Galaxy
Enterprises with such marketing workshops, we believe we enjoy a strong
competitive position in this industry. Prior to our acquisition, Galaxy
Enterprises used its position as a leader in the Internet marketing workshop
industry to establish its GalaxyMall as one of the largest malls on the
Internet. According to the December 1998 edition of Internet World, GalaxyMall
is considered "one of the large general malls."
We are aware of several companies previously active in the Internet
marketing workshop industry that no longer are connected with the industry. We
are aware of only three companies currently in the Internet marketing workshop
industry, and to our knowledge, none of these competitors have been engaged in
the industry as long as Galaxy Enterprises.
Anticipated and expected technology advances associated with the
Internet, increasing use of the Internet and new software products are welcome
advancements expected to attract more interest in the Internet and broaden its
potential as a viable marketplace and industry. We anticipate that we can
compete successfully, building on our three-year head start in our segments of
the industry, by relying on our infrastructure, existing marketing strategies
and techniques, systems and procedures, by adding additional products and
services in the future and by periodic revision of such methods of doing
business as we deem necessary.
The markets of our subsidiary IMI are relatively new and there is
little accumulated data or accurate means of assessing size but they are
believed to be highly fragmented. IMI competes with other providers of custom
cut CDs, as well as providers of regular CDs, zip disks and other means which
may be used to deliver a multimedia presentation to the end consumer. IMI's Web
site development business and multimedia presentation creation business compete
with many different businesses, including advertising agencies, Web development
houses and multimedia development houses as well as similar internal resources
of many businesses.
INTELLECTUAL PROPERTY
2019, respectively.
Intellectual Property
Our success depends uponin part on using and protecting our proprietary technology and other intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition,property. Furthermore, we must conduct our operations without infringing on the proprietary rights of third parties. We also intend to rely upon unpatented trade secrets and the know-how and expertise of our key employees. To protect our proprietary technology and other intellectual property, we rely primarily on a combination of the protections provided by applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing 32
arrangements. We have trademark applications pending with the United States
Patent and Trademark Office for:
- CableCommerce
- Netgateway
- Netgateway ICC
- Netgateway Internet Commerce Center
- Netgateway Knowledge and Commerce for the Digital Age
- Netgateway Where Business Does Business on the Internet
- StoresOnline
- StoresOnline.com
- StoresOnline.com Where Merchants Do Business on the Internet
- Merchant Mission Control
- two Netgateway logos. Although we believe that we have taken appropriate steps to protect our intellectual property rights, including requiring that 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 thatwhich we include in our services and products. If any of these licenses were to be 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, and Internet technology, and telecommunication industries are frequently involved in disputes relating to intellectual property. We may in the future 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 result in substantial costs to,be costly and a diversion of
effort by, us.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 condition and results of
operations.
The business of our subsidiary, Galaxy Enterprises, depends
significantly on intellectual property developed by Galaxy Enterprises and
intellectual property licensed from third parties. While Galaxy Enterprises
generally has not sought copyright and patent protection for its intellectual
property, it does endeavor to treat such property as trade secrets where
appropriate and has procedures in place to maintain their status as such. We
have been informed that certain of IMI's shaped CD products may infringe patents
of third parties. Prior to our acquisition of IMI, IMI's supplier of these CDs
agreed to indemnify Galaxy Enterprises with respect to these claims and IMI
currently plans to continue to sell these products pending further developments.
There can be no assurance that these products do not infringe these or other
patents.
EMPLOYEES
As of August 15, 2000, we had approximately 260 full-time employees,
including 13 executive personnel, approximately 97 in sales and marketing,
approximately 100 in the development of our e-Business solutions, approximately
24 in customer support and approximately 26 in general administration and
finance.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. In 1998, the United States
Congress established the Advisory Committee on eCommerce which is charged with
investigating and making recommendations to Congress regarding, the taxation of
sales by means of the Internet. The adoption of any such laws or regulations
upon the recommendation of this Advisory Committee or otherwise may decrease the
growth of the Internet, which could in turn decrease the demand for our products
or services, our cost of doing business or otherwise have an adverse effect on
our business, prospects, financial conditionposition, or results of operations. Moreover,
Competition
The market for cloud business communications services is large and increasingly competitive. We expect competition to continue to increase in the applicability to the Internetfuture. Some of existing laws governing issues
33
these competitors include:
●
traditional on-premise, hardware business communications providers such as property ownership, libelAlcatel-Lucent, Avaya Inc., Cisco Systems, Inc., Mitel, NEC, and personal privacy is uncertain. Future
federalSiemens Enterprise Networks, LLC, any of which may now or state legislationin 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 regulation could have a material adverse effect
on our business, prospects, financial conditionin the future also host their solutions through the cloud, and results of operations.
FACILITIES
In July 2000, we announced plans to consolidate our existing operationstheir 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 Southern California with those acquired through our merger with Galaxy
Enterprises. We intend to move our headquarters from Long Beach, California to
the existing facility occupied by Galaxy Enterprises in Orem, Utah. We expect
this consolidation to improve delivery capabilities and operational
efficiencies. We expect to complete the consolidation by November 1, 2000.
Restructuring changes are estimated to be approximately $275,000, which includes
$175,000 for severance packages, relocation expenses of $84,000 and equipment
moving costs of $15,000.
Galaxy Enterprises' principal office is located at 754 E. Technology
Avenue, Orem, Utah 84097. The property consists of approximately 12,700 square
feet leased from an unaffiliated third party for a period of five years with an
annual rental of $241,764. Our IMI business is located at 890 North Industrial
Park Drive, Orem, Utah 84057 in approximately 8,000 square feet leased from an
unaffiliated third party for a period of three years with annual rental of
$72,000. We maintain tenant fire and casualty insurance on our properties
located in these buildings in an amount that we deem adequate. We also rent on a
daily basis hotel conference rooms and facilities from time to time in various
cities throughout the United States, TELUS and others in Canada, at which it hosts its preview
session and Internet training workshops. We are under no long-term obligations
to such hotels.
CertainBT, Vodafone, and others in the United Kingdom, all of our sales and marketing and other personnel will remain at
300 Oceangate, 5th Floor, Long Beach, California 90802. These premises, which
occupy 16,360 square feet currently, are subject to a lease betweenwhom have significantly greater resources than us and an
unaffiliated third party. The lease expires on July 9, 2001do 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 monthly payments
under this leaseBlueFace), 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 currently approximately $25,900. We intendrelatively low barriers to sublease
excess space resulting from our consolidation in Utah to an unaffiliated third
party, as allowed under the terms of our lease.
We are also currently seeking to enter into a sublease agreement for
our American Fork, Utah location which was previously closed and consolidatedentry into our Galaxy Enterprises location in Orem, Utah during the fourth quarter of
fiscal year 2000.
To house and support the Internet Commerce Center,business. Our proprietary technology does not preclude or inhibit competitors from entering our markets. In particular, we maintain
equipment in Exodus' state-of-the-art data center in Irvine, California, which
provides a 24-hour per day, seven days per week accessible operating environment
with multiple redundant high-speed connectionsanticipate new entrants will attempt to the Internet backbone. The
hardware used at the Exodus data center includes Multiple Sun Spare Servers, Sun
Enterprise 3500 and 4500 servers and EMC storage. This data center features
raised floors, HVAC temperature control systems and seismically braced racks.
All systems are connected to high capacity uninterruptible power supplies, which
are in turn backed by a high output diesel generator. Main power is provided to
the facility through connectivity to two separate power grids. Non-stop
connectivity is provided through multiple fiber egresses using different
bandwidth providers. Facility security includes 24-hour per day, seven days per
week key card access, video monitors, motion sensors and staff members on-site.
LEGAL PROCEEDINGS
We are not a party to any material litigation or legal proceeding
relating to ourdevelop competing products and services or otherwise. Except as set forthnew 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 following paragraph,future. We believe we are not awarecan continue the operation of any material legal proceedings
threatened against us.
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 priorwe 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 acquisition of Galaxy Enterprises,
Galaxy Enterprises received inquiries from attorneys general officesdiscontinued seminar operations and other
regulators about civil and criminalconcern compliance matters with various city, county, state, and
federal regulations. These inquiries sometimes rose to the level of
investigations and litigation. In the past, Galaxy Enterprises has received
letters of inquiry from and/or has beenfederal regulations involving sales, representations made, aware of investigations by the
attorneys general of Hawaii, Illinois, Nebraska, North Carolina, Utahcustomer service, refund policies, services and Texas
and from a regional office of the Federal Trade Commission. Galaxy Enterprises
has respondedmarketing practices. We respond to these inquiries and hashave generally been successful in addressing the concerns of these persons and entities, without a formal complaint or charge being made, although there is generallyoften no formal closing of the inquiry or investigation and certain of these, including
Illinois and Utah, are believed to be ongoing. Hawaii has taken the position
that Galaxy's marketing efforts, in their current form, must comply with its
"Door-to-Door Sale Law."
On June 18, 1998, the Commonwealth of Kentucky filed an action against
GalaxyMall, Inc. under the Kentucky business opportunity statute. On December
15, 1998, an order of dismissal was entered based on GalaxyMall agreeing to
advise the Kentucky Attorney General's office of any complaints from GalaxyMall
customers in Kentucky for a period of twelve months from the date of entry of
the order of dismissal.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 Galaxy
Enterprises'our business or operations.
34
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Set forthoperations, 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.
33
MANAGEMENT
Executive Officers and Directors
The following table below aresets forth the names, ages, and positions of the
current directors andour executive officers and directors as of Netgateway. None of the directors or
executive officers has any family relationship to any other director or
executive officer of Netgateway.
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 |
| 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 Marketing
Simon Spencer............................. 34 Chief Information Officer
Craig S. Gatarz........................... 38 General Counsel and Corporate Secretary*
Scott Beebe............................... 47 Director
John Dillon............................... 50 Director
Joseph Roebuck............................ 64 Director
* As a result of our consolidation to Orem, Utah, Mr. Gatarz will be
resigning his position with us effective as of September 29, 2000.
Set forth below is a brief description of the business experience for
the previous five years of all current directors and executive officers of
Netgateway.
KEITH D. FREADHOFF
Mr. Freadhoff has served as chairmanChairman 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, since
our inception in March 1998. He also served as chief executive officer from
March 1998 through October 1999. From November 1994 to November 1997, Mr.
Freadhoff was the co-founder, chairmanwell as being a member of the boardBig Bear High School Education Foundation, and is on the Dean’s Advisory Board of directors and chief
executive officer of Prosoft I-Net Solutions, a public company engaged in
development and provision of software and Internet training solutions. From
November 1993 to November 1994,California State University - Fullerton.
Doug Gaylor - Mr. Freadhoff served as the executive director
of Career Planning Center, a community based organization serving disadvantaged
populations with job training and social services. From 1993 to 1994, he also
served as president of the Focus Institute, a California based Microsoft
Authorized Training and Education Center. From 1991 to 1992, Mr. Freadhoff
served as a vice president of Frojen Advertising, an advertising and marketing
firm. From 1987 to 1991, Mr. Freadhoff founded and served as president of Oasis
Corporate Education and Training, a customized training company that developed
courseware for manufacturing, financial, service and public organizations. Mr.
Freadhoff completed graduate level work at the University of Southern California
and earned his undergraduate degree at the University of Nebraska.
ROY W. CAMBLIN III
Mr. CamblinGaylor has served as our chiefPresident 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 officer since October 1,
1999. He has beenmanagement with publicly held telecommunications companies making him a director since December 15, 1999. Mr. Camblin served as our
chief information officer from July 1999 until his appointment as chief
executive officer. subject matter expert in UCaaS, call center, and collaboration.
Prior to joining Netgateway, from May 1998 until July 1999,Crexendo, Mr. CamblinGaylor held positions of increasing responsibility, culminating with the position of Sr. Vice President, at Inter-Tel/Mitel where he was the global chief information officer, executive vice president
and an executive committee member of CB Richard Ellis. From January 1996 to
April 1998,originally hired in 1987. Mr. CamblinGaylor was the head of global operations and technology,
Investment Products Division at Citibank. From July 1993 to December 1995, Mr.
Camblin was the chief information officer and a senior vice president at Oracle
Corporation. From June 1989 until July 1993, Mr. Camblin was a senior vice
president at Wells Fargo Bank, responsible for operations and technologies for
wholesale banking and alsooverseeing the sales efforts in the Western United States where he was ultimately responsible for credit card technologies. Prior to
Wells Fargo,the activities of approximately 200 sales representatives. Under his leadership yearly sales for his region reached over $175 million annually. Mr. Camblin spent over five years at Charles SchwabGaylor holds a Bachelors of Arts in several
management positions, where he also obtained his Series 7. Other career
experiences included twelve years as an officer and pilot in the US Air Force,
including as chief of operations plans and chief of flight management for the
Pacific region. Mr. Camblin has a Bachelor of Science degree in marketing from
Florida State University and a Masters in Systems ManagementCommunications from the University of Southern California. Past recognitions have included "Visionary of the Year,"
awarded by Sun MicrosystemsHouston. He is an active board member for multiple non-profit organizations specializing in 1992.
35
DONALD M. CORLISS, JR.education and community support.
Ron Vincent - Mr. CorlissVincent has served as our president and a directorChief Financial Officer since March
1998. HeApril 2012. Prior to joining the Company, Mr. Vincent was appointed chief operating officer in March 2000. From 1993 to June
1998,employed by Ernst & Young, LLP (EY), as an audit senior manager, which concluded his fourteen year professional career as an auditor. Mr. Corliss was an independent investor and owned, developed and served in
senior management positions with several business and development ventures. From
July 1993 through June 1998, Mr. Corliss served as a vice president and a
director of Westover Hills Development, Inc., a real estate development company.
From August 1993 through June 1998, Mr. Corliss served as a vice president and a
director of the general partner of Brentwood Development, a residential real
estate development company, where he was responsible for management of
development projects. From August 1994 through March 1998, Mr. Corliss served as
a consultant and was a founder of Ice Specialty Entertainment, a developer of
ice arena complexes, where he was responsible for the structuring and
negotiation of the business and projects. From June 1995 to date, Mr. Corliss
served as a director and secretary of SHH Properties, Inc., a real estate
investment company. From 1996 to June 1998, Mr. Corliss served as a vice
president and a director of Brentwood Development III, Inc., a real estate
development company, which was one of two corporate general partners of
Inglehame Farm L.P. From 1997 through May 1998, Mr. Corliss served as a vice
president and a director of Executive Property Management Services, Inc. a
provider of executive management services relating to real estate development.
As co-founder in many of these projects, responsibilities included the
operation, management, structuring and implementation of business strategies and
plans, as well as the development and implementation of the general business and
accounting systems necessary for such business operations. From 1977 to 1993,
Mr. Corliss was engaged in private law practice. Mr. Corliss earned his LLM in
Taxation from New York University, his Juris Doctorate degree from the
University of Santa Clara and a Bachelor of Arts degree from the University of
California at Santa Barbara. Two real estate development ventures of Mr.
Corliss', Westover Hills Development, Inc. and Inglehame Farms L.P., sought
protection from creditors pursuant to Chapter 11 of the United States Bankruptcy
Code in 1997 and 1998, respectively. Westover has since emerged from Chapter 11
and has resumed operations.
JILL GLASHOW PADWA
Ms. Padwa has served as our executive vice president-sales and
marketing since December 1999. Ms. Padwa has more than 20 years experience in
information technology and has worked for such leading companies as
Hewlett-Packard and GartnerGroup, a leader in IT research and consulting
services. Ms. Padwa held numerous senior management positions at GartnerGroup
from January 1997 to December 1999 and directed the marketing and sales
strategies for the company's entry into the healthcare industry market. During
her tenure, the business recognized significant growth. Most recently, Ms. Padwa
was responsible for managing sales operations for GartnerGroup's North American
operations. Ms. Padwa also served as the business development manager for
Hewlett-Packard's Healthcare Information Management Division from October 1994
to December 1996. She managed the team that developed the worldwide product
strategies for Hewlett-Packard's successful entry and growth into new market
segments. Ms. Padwa held numerous positions with Hewlett-Packard, ranging from
technical to sales and marketing management positions. Ms. PadwaVincent received a Bachelor of Science degree in Computer ScienceBusiness from theIndiana University of Vermont in
1979 and a Masters of Science in Public Health Policy from Boston University in
1989.
SIMON SPENCER
Mr. Spencer has served as our chief information officer since March
2000. From September 1999 through February 2000, he served as our chief
technical officer. He has experience in Internet development in the financial
services industry as well as significant experience in the software development
industry. Mr. Spencer has been recognized internationally as a leader in the
field of information systems and information technology. In 1998, Mr. Spencer
was included in the International Who's Who of information technology
professionals. Prior to joining Netgateway, Mr. Spencer managed Emerging
Technologies within CitiGroup's investment technology organization and was
instrumental in the design and implementation of middleware and Internet
technologies supporting CitiGroup's new investment platforms. Mr. Spencer has
also worked with Oracle Corporation as a director of Global Productivity Systems
within their worldwide operations organization. He also was responsible for
engineering within their Knowledge Management, InterOffice and Internet
organizations.
FRANK C. HEYMAN
Mr. Heyman has served as our acting chief financial officer since
September 2000. Prior to that, he served as vice president, secretary,
treasurer and chief financial officer and a director of our subsidiary,
Galaxy Enterprises since 1997. Prior to that, since 1992, Mr. Heyman served
as vice president and chief financial officer of GC Industries, Inc.(Bloomington), a
manufacturer of calibration systems for toxic gas monitors. Prior to 1992,
Mr. Heyman served for twelve years as chief financial officer for Scan- Tron
Corporation, a manufacturer of optical mark reading equipment used in test
scoring by the educational community. From June 1992 to May 1996 he also
served as financial vice president and chief financial officer and a director
of NYB Corporation, a manufacturer of women's sports clothing. From June 1996
to April 1997 he was employed as controller of Provider Solutions, Inc., a
business consulting firm. Mr. Heyman is a graduate of the University of Utah
with a B.S. degree in accounting.
36
CRAIG S. GATARZ
Mr. Gatarz has served as general counsel since April 1999 and was
appointed our corporate secretary in February 2000. From March 1989 until March
1999, Mr. Gatarz was an attorney at the law firm of Jones, Day, Reavis & Pogue
where he specialized in corporate law, particularly corporate restructurings and
asset-based lending transactions. Mr. Gatarz received a Bachelor of Arts degree
in Political Science from Boston College in 1984 and his law degree in 1987 from
the University of VirginiaKelly School of Law. He is admitted to practiceBusiness in New
York, New Jersey and California. Mr. Gatarz serves on the board of directors of
BBMG Entertainment, Inc., a California-based film production company. As a
result of our consolidation to Orem, Utah, Mr. Gatarz will be resigning his
position with us effective as of September 29, 2000.
JOHN DILLON
Mr. Dillon has served as a director since December 1999. Mr. Dillon was
named president and chief executive officer of Salesforce.com in September 1999.
Before joining Salesforce.com, Mr. Dillon was interim president and chief
executive officer for Perfecto Technologies, a start-up company delivering
solutions for ensuring Internet application security. Prior to his employment
with Perfecto, he served as president and chief executive officer for Hyperion,
the global company formed through the merger of Arbor Software and Hyperion
Software. Mr. Dillon also spent five years with Arbor Software as vice president
of sales and then as president and chief executive officer. Earlier in his
career, Mr. Dillon was employed at Oracle Corporation and Grid Systems in
various sales management capacities and at EDS as a systems engineer. A graduate
of the United States Naval Academy at Annapolis, Mr. Dillon received a
bachelor's degree in engineering1998 and a Master of Business Administration degree from Golden State University. He served five yearsthe University of active dutyPhoenix. Mr. Vincent is a licensed Certified Public Accountant in the United
States Navy nuclear submarine service and retired with the rankState of commander
from the Naval Reserve.
R. SCOTT BEEBEArizona.
Non-Employee Directors
Jeffrey P. Bash - Mr. BeebeBash has served as a directormember of our Board since June 1998.August 2013. Mr. Bash has been a long time investor in Crexendo and has extensive investing and corporate finance experience. From April 1987
through June 1998,2008 to the present, Mr. Beebe servedBash has also worked as a consultant to the managing partnerprivate equity firm, FinTekk AP, LLC of Steps, Inc., an
investmentNewport Beach, CA, providing strategic planning, corporate finance, structure, analysis, research and consulting firm specializing in technology growthreport writing services, including advisory services, as needed, to small private companies. Since 1996, Mr. BeebeBash has been a private investor and advocate for stockholder interests with both managements and boards. Prior to 1996, Mr. Bash was a registered representativeCorporate Vice President & Actuary for New York Life Insurance Company, becoming a Fellow of the Society of Actuaries (FSA) from 1970 until his retirement in the securities industry from 1982
through 1998.1995. He has also been a Vice President of private, family-owned Richmont Corporation of Dallas, TX, providing corporate finance services. Mr. BeebeBash received his Bachelor of Arts degree in Englishmathematics 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 at BerkeleyState 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 1973.
JOSEPH ROEBUCK
Mr. Roebuck was appointedthe 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 in April 2000.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. RoebuckWilliams has been a director of the Company since May 2008. Since 2008, Mr. Williams has served as vice presidentthe 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 strategic sales of Sun Microsystems
Computer Systems Division since 1990. PriorPacific 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. Roebuck heldWilliams 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 positionCompany. 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 vice president for U.S.University of the Pacific. Mr. Williams graduated from Stanford University with a Master of Science degree in engineering finance and intercontinental sales for Asia, Latin
American and Canada at Sun Microsystems.a Bachelor of Science degree in biological science with honors.
Todd A. Goergen – Mr. Roebuck joined Sun Microsystems as
the vice president of sales in 1983. Prior to 1983, he served as director of
vertical marketing for Apple Computer. Mr. Roebuck previouslyGoergen has served as a lieutenant junior grademember 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 United States Navy. He receivedalternative investment industry. Prior to founding the RAM Funds in 2001, Mr. Goergen began his Bachelorcareer 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 Arts degreebuy 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 CornellWake Forest University with concentrations in Economics and completed the advanced management
program at Harvard Business School.
DIRECTOR COMPENSATION
On December 15, 1999,Political Science. Mr. Goergen sits on the board of directors approved cash
compensation for non-employee directors in the amount of $15,000 annually,
payable in four quarterly installments. At that time, the non-employee
directors of Netgateway were Messrs. Beebefollowing firms: Cura, Crexendo and Dillon, William BrockFragmob; and Ronald Spire. In addition, at that time, as part of their compensation
package for serving as directors, Messrs. Beebe, Dillon and Spire were each
granted 20,000 options to purchase common stock under the 1999 Stock Option
Plan for Non-Executives. The options vest quarterly over a two-year period
beginningis an observer on January 1, 2000. At the time of his appointment to the board of directors in July 1999,Heal. Additionally, Mr. Brock was granted options to purchase 150,000
sharesGoergen is an active member of common stock pursuantU.S. and International Advisory Councils to the 1999 Stock Option Plan for
Non-Executives. Mr. Brock's options vest as follows: 50,000 at July 20, 1999Global Leadership Foundation and the remainder in equal quarterly increments for 2 years. At the time of
his appointment to the board of directors in April 2000, Mr. Roebuck was
granted options to purchase 180,000 shares of common stock under the 1999
Stock Option Plan for Non-Executives. Mr. Roebuck's options vest annually
over a three year period from the date of the grant. In April 2000, Mr.
Dillon was granted options to purchaseis an additional 180,000 shares of common
stock under the 1999 Stock Option Plan for Non-Executives. Mr. Dillon's
options vest quarterly over a three-year period. In April 2000, Mr. Beebe was
granted options to purchase an additional 60,000 shares of common stock under
the 1999 Stock Option Plan for Non-Executives. Mr. Beebe's options vest
quarterly over a one-year period.
37
Messrs. Freadhoff and Camblin are Netgateway employees and are not
compensated for their services as directors.
All directors are reimbursed for reasonable expenses incurred in
connection with attending meetings of the board of directors.
ELECTION OF OFFICERS
Officers are elected annually by the board of directors and hold office
at the discretion of the board of directors. There are no family relationships
among our directors and executive officers.
EXECUTIVE COMPENSATION
The following table and discussion summarizes the compensation for our
named executive officers, who are the individuals who served as chief executive
officer during fiscal year 2000 and the four most highly compensated executive
officers, other than the chief executive officers, who were serving as executive
officers at the end of fiscal year 2000.
- ----------
(1) Subsequent to June 30, 1999, Netgateway terminated performance-based
stock options exercisable for an aggregate of 780,000 shares of common
stock and other stock options exercisable for an aggregate 1,200,000
shares of common stock granted to Messrs. Freadhoff, Corliss and
Bassett-Parkins and issued in lieu of these options restricted stock
awards of an aggregate of 1,200,000 shares of common stock.
(2) Mr. Freadhoff served as chief executive officer prior to Mr. Camblin's
appointment as chief executive officer in October 1999.
(3) During the year ended June 30, 1999, Mr. Freadhoff earned
performance-based stock options exercisable for an aggregate of 69,000
shares of common stock and other options exercisable for an aggregate
of 200,000 shares of common stock. Subsequent to June 30, 1999, all
performance and other options granted to Mr. Freadhoff, including the
options referencedactivist in the preceding sentence, were terminated. In lieupreservation of these options,African wildlife. Mr. Freadhoff received a restricted stock award of
400,000 shares of common stock.
(4) Mr. Camblin commenced his employment with us in August 1999.
(5) In November 1999, Mr. Camblin received a restricted stock award of
500,000 shares of our common stock.
(6) At June 30, 2000, Mr. Camblin held options exercisableGoergen is an avid wine enthusiast and has written columns for an aggregate
of 200,000 shares of common stock. Of these options, options
exercisable for 166,667 shares of common stock were declared vested as
of June 30, 2000.
(7) During the year ended June 30, 1999, Mr. Corliss earned
performance-based stock options exercisable for an aggregate of 64,000
shares of common stock and other options exercisable for an aggregate
of 200,000 shares of common stock. Subsequent to June 30, 1999, all
performance and other options granted to Mr. Corliss, including the
options referenced in the preceding sentence, were terminated. In lieu
of these options, Mr. Corliss received a restricted stock award of
400,000 shares of common stock.
(8) Mr. Bassett-Parkins no longer serves as our chief financial officer or
chief operating officer. On April 14, 2000, we received notice from Mr.
Bassett-Parkins of his intent to terminate his employment agreement for
"good reason," as that term is defined in his employment agreement,
effective as of June 7, 2000. Mr. Bassett-Parkins has alleged that,
under his employment agreement, he is entitled to a lump sum severance
payment as a result of terminating his employment for "good reason." We
are in negotiations with Mr. Bassett-Parkins regarding any severance
payments and it is not possible to determine the outcome of these
negotiations at this time.
(9) During the year ended June 30, 1999, Mr. Bassett-Parkins earned
performance-based stock options exercisable for an aggregate of 60,000
shares of common stock and other options exercisable for an aggregate
of 200,000 shares of common stock. Subsequent to June 30, 1999, all
performance and other options granted to Mr. Bassett-Parkins, including
the options referenced in the preceding sentence, were terminated. In
lieu of these options, Mr. Bassett- Parkins received a restricted stock
award of 400,000 shares of common stock.
(10) Mr. Spencer commenced his employment with us in September 1999.
(11) At June 30, 2000, Mr. Spencer held options exercisable for an aggregate
of 150,000 shares of common stock. Of these options, options
exercisable for 18,750 shares of common stock were declared vested as
of June 30, 2000.
(12) For the fiscal year ended June 30, 2000, Mr. Gatarz was granted options
to purchase 15,000 of common stock. None of these options were vested
as of June 30, 2000.
(13) At June 30, 2000, Mr. Gatarz held options exercisable for an aggregate
of 176,821 shares of common stock. Of these options, options
exercisable for 99,321 shares of common stock were declared vested as
of June 30, 2000.
38
EMPLOYMENT AGREEMENTS
The following table summarizes the key provisions of the employment
agreements of Netgateway's executive officers.
several magazines.
35
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning optionsknown to purchase our common stock that were granted in fiscal year 2000 tous, as of August 31, 2020, regarding the named
executive officers. We did not grant SARs in fiscal year 2000.
* Less than one percent.
(1) Calculated using the Black Scholes pricing model with the following
assumptions: (a) volatility-100%, (b) risk free rate-5%, (c) dividend
yield-0% and (d) time of exercise-10 years.
39
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table sets forth information concerning the year-end
number and value of unexercised options with respect to each of the named
executive officers. None of these individuals exercised any options during this
period.
- ----------
(1) Based on the closing sale pricebeneficial ownership of our common stock on the OTC bulletin
board at fiscal year endby:
●
each person, or group of $1.94 per share less the exercise price
payable for the shares. The fair market value of our common stock at
June 30, 2000 was determined on the basis of the closing sale price of
our common stock on that date.
(2) At June 30, 1999, Mr. Freadhoff held stock options under Netgateway
plans exercisable for an aggregate of 676,000 shares of common stock.
Subsequent to June 30, 1999, all of these options granted to Mr.
Freadhoff were terminated. In lieu of these options, Mr. Freadhoff
received a restricted stock award of 400,000 shares of common stock.
(3) At June 30, 2000, Mr. Camblin held no exercisable or unexercisable in
the money stock options.
(4) At June 30, 1999, Mr. Corliss held stock options under Netgateway plans
exercisable for an aggregate of 664,000 shares of common stock.
Subsequent to June 30, 1999, all of these options were terminated. In
lieu of these options, Mr. Corliss received a restricted stock award of
400,000 shares of common stock.
(5) At June 30, 1999, Mr. Bassett-Parkins held stock options under
Netgateway plans exercisable for an aggregate of 640,000 shares of
common stock. Subsequent to June 30, 1999, all of these options were
terminated. In lieu of these options, Mr. Bassett-Parkins received a
restricted stock award of 400,000 shares of common stock.
(6) At June 30, 2000, Mr. Spencer held no exercisable or unexercisable in
the money stock options.
(7) At June 30, 2000, Mr. Gatarz held no exercisable or unexercisable
in-the-money stock options and held unexercisable in-the-money stock
options.
STOCK OPTION PLANS
1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES
In December 1998, the board of directors adopted, and Netgateway's
stockholders approved, the 1998 Stock Option Plan for Senior Executives. This
plan provides for the grant of options to purchase up to 5,000,000 shares of
common stock to our senior executives. Options may be either incentive stock
options or non-qualified stock options under Federal tax laws.
This plan is administered by the compensation committee of the board of
directors, which currently consists of two non-employee directors of the board
of directors. The committee has appointed a plan administrator to address the
day-to-day administration of this plan. The committee determines, among other
things, the individuals who will receive options, the time period during which
the options may be partially or fully vested and exercisable, the number of
shares of common stock issuable upon the exercise of each option and the option
exercise price.
The exercise price per share of common stock subject to an incentive
option may not be less than the fair market value per share of common stock on
the date the option is granted. The per share exercise price of the common stock
subject to a non-qualified option may be established by the compensation
committee, but shall not be less than 50% of the fair market value per share of
common stock on the date the option is granted. The aggregate fair market value
of common stock for which any person may be granted incentive stock options
which first become exercisable in any calendar year may not exceed $100,000 on
the date of grant.
No stock option may be transferred by an optionee other than by will
or the laws of descent and distribution or, if permitted, pursuant to a
qualified domestic relations order and, during the lifetime of the optionee,
the option will be exercisable only by the optionee. In the event of
termination of employment by reason of death, disability or by us for cause,
as defined in each optionee's employment agreement, the optionee will have no
more than 365 days after such termination during which the optionee shall be
entitled to exercise the vested options, unless otherwise determined by the
board of directors. Upon termination of employment by us without cause or by
the optionee for good reason, as defined in the optionee's employment
agreement, the optionee's options remain exercisable to the extent the
options were exercisable on the date of such termination until the expiration
date of the options pursuant to the option agreement.
We may grant options under this plan within ten years from the
effective date of the plan. The effective date of this plan is December 31,
1998. Holders of incentive stock options granted under this plan cannot exercise
these options more than ten years from the date of grant. Payment of the
exercise price may be made by (1) delivery of cash or a check, bank draft or
money order, in United States dollars, payable to the order of Netgateway, (2)
through delivery to Netgateway of shares of common stock already owned by the
optionee with an aggregate fair market value on the date of exercise equal to
the total exercise price, (3) by having shares with an aggregate fair market
value on the date of exercise equal to the total exercise price (A) withheld by
us or (B) sold by a broker-dealer under the circumstances meeting the
requirements of 12 C.F.R. Section 220 or any successor thereof, (4) by any
combination of the above methods of payment or (5) by any other means determined
by the board of directors. Therefore, if it is provided in an optionee's option
agreement, the optionee may be able to tender shares of common stock to purchase
additional shares of common stock and may theoretically exercise all of his
stock options with no additional investment other than the purchase of his
original shares.
Any unexercised options that expire or terminate upon an optionee's
ceasing to be employed by us become available again for reissuance under this
plan.
As of June 30, 2000, options exercisable for an aggregate of 850,714
shares of common stock were outstanding pursuant to this plan at a weighted
average exercise price of $6.73 per share.
40
1998 STOCK COMPENSATION PROGRAM
In July 1998, the board of directors adopted the 1998 Stock
Compensation Program. The program was approved by our stockholders in December
1998. This program provides for the grant of options to purchase up to 1,000,000
shares of common stock to officers, employees, directors and independent
contractors and agents. Options may be either incentive stock options or
non-qualified stock options under Federal tax laws.
This program is administered by the compensation committee of the board
of directors, which currently consists of two non-employee directors of the
board of directors. The committee has appointed a plan administrator to address
the day-to-day administration of this plan. The compensation committee
determines, among other things, the individuals who will receive options, the
time period during which the options may be partially or fully vested and
exercisable, the number of shares of common stock issuable upon the exercise of
each option and the option exercise price.
The exercise price per share of common stock subject to an incentive
option may not be less than the fair market value per share of common stock on
the date the option is granted. The aggregate fair market value of common stock
for which any person may be granted incentive stock options which first become
exercisable in any calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment for reasons other than the death or disability of the optionee, the
option shall terminate immediately; provided, however, that the board of
directors may, in its sole discretion, allow the option to be exercised, to the
extent exercisable on the date of termination of employment or service, at
anytime within 60 days from the date of termination of employment or service. In
the event of termination of employment by reason of the death or disability of
the optionee, the option may be exercised, to the extent exercisable on the date
of death or disability, within one year from such date.
We may grant options under this program within ten years from the
effective date of the plan. The effective date of this program is July 31, 1998.
Holders of incentive stock options granted under this program cannot exercise
these options more than ten years from the date of grant. Payment of the
exercise price may be made by (1) delivery of cash or a check, bank draft or
money order, in United States dollars, payable to the order of Netgateway, (2)
through delivery to Netgateway of shares of common stock already owned by the
optionee with an aggregate fair market value on the date of exercise equal to
the total exercise price, (3) by having shares with an aggregate fair market
value on the date of exercise equal to the total exercise price (A) withheld by
Netgateway or (B) sold by a broker-dealer under the circumstances meeting the
requirements of 12 C.F.R. Section 220 or any successor thereof, (4) by any
combination of the above methods of payment or (5) by any other means determined
by the board of directors. Therefore, if it is provided in an optionee's option
agreement, the optionee may be able to tender shares of common stock to purchase
additional shares of common stock and may theoretically exercise all of his
stock options with no additional investment other than the purchase of his
original shares.
Any unexercised options that expire or that terminate upon an
optionee's ceasing to be employed by us become available again for reissuance
under this program.
This program permits us to grant, in addition to incentive stock
options and non-qualified stock options:
- rights to purchase shares of our common stock to employees;
- restricted shares of our common stock;
- stock appreciation rights; and
- performance shares of common stock.
However, we have not issued any other type of compensation under this program
other than non-qualified stock options and have agreed not to do so in the
future.
As of June 30, 2000, options exercisable for an aggregate of 698,833
shares of common stock were outstanding pursuant to this program at a weighted
average exercise price of $3.59 per share.
41
1999 STOCK OPTION PLAN FOR NON-EXECUTIVES
In July 1999, the board of directors adopted the 1999 Stock Option Plan
for Non-Executives. This plan was approved by the stockholders in May 2000. This
plan is administered by the compensation committee of the board of directors,
which currently consists of two non-employee directors of the board of
directors. The compensation committee has appointed a plan administrator to
address the day to day administration of this plan. The compensation committee
determines, among other things, the individuals who will receive options, the
time period during which the options may be partially or fully vested and
exercisable, the number of shares of common stock issuable upon the exercise of
each option and the option exercise price.
The exercise price per share of common stock subject to an option is
determined on the date of grant, and is generally fixed at 100% of the fair
market value per share at the time of grant. The exercise price of any option
granted to an optionee who owns stock possessing more than 10% of the voting
power of our outstanding capital stock must equal at least 110% of the fair
market value of the common stock on the date of grant. Payment of the exercise
price may be made by (1) delivery of cash or a check, bank draft or money order
in United States dollars, payable to the order of Netgateway, (2) through
delivery to us of shares of common stock already owned by the optionee with an
aggregate fair market value on the date of exercise equal to the total exercise
price (3) by having shares with an aggregate fair market value on the date of
exercise equal to the total exercise price (A) withheld by us or (B) sold by a
broker-dealer under circumstances meeting the requirements of 12 C.F.R. Section
220 or any successor thereof, (4) by any combination of the above methods of
payment or (5) by any other means determined by the board of directors.
Options granted to employees under the 1999 Stock Option Plan for
Non-Executives generally become exercisable in increments, based on the
optionee's continued employment with us, over a period of up to three years. The
form of option agreement generally provides that options granted under the 1999
Stock Option Plan for Non-Executives is not transferable by the optionee, other
than by will or the laws of descent and distribution, and are exercisable during
the optionee's lifetime only by the optionee. In the event of termination of
employment for reasons other than the death or disability of the optionee, the
option shall terminate immediately; provided, however, that the board of
directors may, in its sole discretion, allow the option to be exercised, to the
extent exercisable on the date of termination of employment or service, at
anytime within 60 days from the date of termination of employment or service. In
the event of termination of employment by reason of the death or disability of
the optionee, the option may be exercised, to the extent exercisable on the date
of death or disability, within one year from such date. Generally, in the event
of a merger of Netgateway with or into another corporation or a sale of all or
substantially all of our assets, all outstanding options under the 1999 Stock
Option Plan for Non-Executives shall accelerate and become fully exercisable
upon consummation of such merger or sale of assets.
The board may amend the 1999 Stock Option Plan for Non-Executives at
any time or from time to time or may terminate the 1999 Stock Option Plan for
Non-Executives without the approval of the stockholders, provided that
stockholder approval is required for any amendment to the 1999 Stock Option Plan
for Non-Executives requiring stockholder approval under applicable law as in
effect at the time. However, no action by the board of directors or stockholders
may alter or impair any option previously granted under the 1999 Stock Option
Plan for Non-Executives. The board may accelerate the exercisability of any
option or waive any condition or restriction pertaining to such option at any
time.
Any unexercised options that expire or that terminate upon an
optionee's ceasing to be employed by us become available for reissuance under
this plan.
In May 2000, our stockholders approved an amendment to this plan to
increase the number of shares available for grant under the plan from 2,000,000
to 5,000,000.
As of June 30, 2000, options exercisable for an aggregate of 1,899,630
shares of common stock were outstanding pursuant to this plan at a weighted
average exercise price of $7.34.
GALAXY ENTERPRISES STOCK OPTION PLAN
Pursuant to the terms of the merger with Galaxy Enterprises, each
outstanding option to purchase shares of Galaxy Enterprises common stock under
Galaxy Enterprises' 1997 Employee Stock Option Plan was assumed by us, whether
or not vested and exercisable. We assumed options exercisable for an aggregate
of 1,665,815 shares of common stock of Galaxy Enterprises.
In addition, we assumed certain outstanding warrants to purchase shares
of Galaxy Enterprises common stock. These include the Invest Linc Emerging
Growth Fund I Warrant dated March 18, 1999 exercisable for 250,000 shares of
common stock and the Bridgewater Corporation Warrant dated January 11, 1999
exercisable for 50,000 shares of common stock.
Each Galaxy Enterprises stock option and warrant assumed by Netgateway
is subject to the same terms and conditions that were applicable to the stock
option or warrant immediately prior to the merger, except that:
- each Galaxy Enterprises stock option will be exercisable for
shares of Netgateway common stock and the number of shares of
Netgateway common stock issuable upon exercise of any given option or
warrant will be determined by multiplying 0.63843 by the number of
shares of Galaxy Enterprises common stock underlying such option or
warrant; and
- the per share exercise price of any such option or warrant will
be determined by dividing the exercise price of the option immediately
prior to the effective time of the merger by 0.63843.
Therefore, the total amount of options assumed in the merger are now
exercisable for approximately 1,069,890 shares of Netgateway common stock and
the total amount of warrants assumed in the merger are now exercisable for
approximately 191,529 shares of Netgateway common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From our inception on March 1, 1998 through September 30, 1998, we did
not have a compensation committee. Messrs. Beebe and Dillon currently are
members of the compensation committee. No interlocking relationships exist
between our compensation committee and board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. There are no interlocking relationships between Netgateway
and other entities that might affect the determination of the compensation of
our directors and executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and/or bylaws include provisions to
(1) indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law including circumstances under which
indemnification is otherwise discretionary and (2) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty, except for liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law or for any transaction from which the director
derived an improper personal benefit. Netgateway believes that these provisions
are necessary to attract and retain qualified directors and officers.
We have directors and officers liability insurance in an amount of not
less than $15 million.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controllingaffiliated persons, pursuant to
the foregoing provisions or otherwise, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
42
RELATED PARTY TRANSACTIONS
In July 1998 and August 1998, we loaned $600,000 and an additional
$200,000, respectively, to Admor Memory Corp., a California-based computer
memory maker, during our then pending acquisition of Admor. The acquisition
was not consummated. This loan was due and payable on December 31, 1999 and
accrued interest at the rate of 9.5% per annum until October 1999 and 10% per
annum thereafter. In August 1998, we agreed to subordinate this obligation to
a credit facility obtained by Admor and to receive payment of this obligation
from the net income and the proceeds of equity sales of Admor. Subsequently,
Admor defaulted on this credit facility and entered receivership. We reduced
the value of this loan in our financial statements to $0 effective December
31, 1998. Keith D. Freadhoff, chairman of the board of directors and chief
executive officer, and Scott Beebe, one of our directors, beneficially own
less than 1% and 2.89%, respectively, of the outstanding capital stock of
Admor. Donald Danks, one of our stockholders, owned approximately 1.6% of the
outstanding common stock of Admor. These individuals did not directly or
indirectly receive any of the proceeds of these loans.
From our inception on March 1, 1998 until June 1998, our business plan
was to engage in the licensing and distribution of software support materials
for the governmental and educational markets. In June 1998, we changed our
business model to the development of technology to enable businesses and other
organizations to engage in eCommerce. In connection with the implementation of
our initial business plan, we entered into sublicensing agreements related to
proprietary courseware of ProSoft, an Internet training solutions provider based
in Austin, Texas. ProSoft entered into a courseware reproduction and licensing
agreement with Steps Inc., an investment and consulting firm, under which it
granted Steps the exclusive right to sell courseware to the federal government.
This licensing obligation was personally guaranteed by Mr. Beebe. ProSoft also
entered into a courseware reproduction and licensing agreement with Training
Resources International, granting an exclusive right to sell courseware in the
education market. This licensing obligation was personally guaranteed by Michael
Khaled, one of our significant stockholders. We entered into exclusive
sublicense agreements with each of Steps and Training Resources with the consent
of ProSoft. In consideration of the sublicense from Training Resources, we
agreed to assume the minimum royalty payments required under their master
license, totaling $1,600,000. In consideration of the sublicense from Steps, we
- assumed the minimum royalty payments required under their master
license, totaling $1,500,000;
- assumed Steps' $200,000 obligation to Vision Holdings, Inc., which
had advanced funds to Steps in connection with its master license;
and
- issued 1,000,000 shares of our common stock to Steps.
Of this aggregate obligation of $3,300,000, we paid approximately
$1,500,000. Due to a lack of revenue derived from these licenses, we terminated
the licenses and entered into a settlement agreement in December 1998, under
which we were released from all further obligations with respect to the
remaining amounts payable. Steps is substantially owned by Mr. Beebe and
Training Resources is owned by Mr. Khaled. Mr. Freadhoff was a founder of
ProSoft and ProSoft's chief executive officer and a director until his
resignation in November 1997. Mr. Freadhoff beneficially owns approximately
3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our
president and a director, and Mr. Beebe, each beneficially own less than 1% of
the outstanding common stock of ProSoft. Mr. Danks was an officer, director, and
significant stockholder of ProSoft until early 1998.
During the period from March 2, 1998 through June 30, 1998, Mr.
Freadhoff loaned us $132,429, $100,000 of which was converted into a capital
contribution in June 1998. The remaining balance of $32,429 is non- interest
bearing and is repayable upon demand. During the year ended June 30, 1999,
$30,630 was repaid.
During the period from March 2, 1998 through June 30, 1998, Messrs.
Khaled and Danks and Lynn Turnbow, another stockholder, paid to ProSoft pursuant
to its master licenses $200,000, $100,000, and $100,000, respectively, in
exchange for an aggregate of 600,000 shares of our common stock.
In May 1999, Mr. Freadhoff loaned us $100,000. This loan was
non-interest bearing. This loan was repaid with a portion of the proceeds of our
summer 1999 private placement. In June 1999, we loaned Mr. Freadhoff $30,000
which was repaid in July 1999.
In November 1998, we issued warrants exercisable for an aggregate of
300,000 shares of common stock and 50,000 shares of common stock to each of
Messrs. Freadhoff, Beebe, Danks and Vanderhoff, and 100,000 shares of common
stock to Mr. Khaled. The warrants were issued to reimburse Messrs. Freadhoff,
Beebe, Danks, and Vanderhoff for voluntarily transferring to Mr. Khaled an equal
number shares of common stock to settle a dispute with Mr. Khaled.
These warrants are exercisable at $1.00 per share and expire in November 2000.
In December 1998, Messrs. Freadhoff, Beebe, Danks and Vanderhoff
contributed to a master trust 450,000, 100,000, 100,000, and 100,000 shares of
common stock, respectively. The trustee of the master trust is Mr. Freadhoff and
these individuals are the beneficiaries of the master trust. The master trust
sold 350,000 of these shares to each of two trusts of which Mr. Freadhoff is the
trustee in exchange for a promissory note from each of these trusts in the
principal amount of $350,000. Mr. Corliss is the beneficiary of one of the
trusts and David Bassett-Parkins, our former chief financial officer and chief
operating officer, is the beneficiary of the other. The master trust sold the
remaining shares in exchange for a promissory note from this trust in the
principal amount of $50,000 to a trust of which Mr. Freadhoff is the trustee and
the beneficiary of which is Hanh Ngo, formerly our executive vice
president-operations. The individual trusts of which Messrs. Corliss and
Bassett-Parkins and Ms. Ngo are beneficiaries are, by their terms, permitted to
deliver the shares of common stock to their beneficiaries in three equal
installments for a purchase price of $1.00 per share on or after January 1,
2000, 2001, and 2002 (subject to acceleration in the event of a change of
control of Netgateway), provided that the individual beneficiary of the
individual trust in question has not voluntarily terminated their employment
with Netgateway prior to these dates. These individuals will satisfy the
purchase price for their shares by means of the repayment of their respective
promissory note to the respective individual trust. In the event that any of
these beneficiaries should so terminate their employment with us prior to these
dates, the trustee of the respective individual trust will return these shares
in individual trust to the master trust in satisfaction of the promissory note
from this individual trust to the master trust. The master trust will then
deliver these shares to its beneficiaries in proportion to their contributions
of shares of common stock to the master trust. In January 2000, a new individual
trust was formed, of which Mr. Freadhoff is the trustee and the beneficiary of
which is Mr. Camblin. At that time, the master trust contracted to sell to Mr.
Camblin's trust 100,000 shares of common stock in exchange for a promissory note
in the amount of $425,000. Messrs. Freadhoff and Beebe contributed 50,000 shares
of common stock each to the master trust in respect of this sale to Mr.
Camblin's trust. The terms of Mr. Camblin's trust are substantially similar to
the description of the other individual trusts set forth above.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 30, 2000:
- each person who is known by us to beneficially own more than 5% of the outstanding shares of our common stock;
●
each of our named executive officers (collectively, our “Executive Officers”);
●
each of our directors;
●
all of our current Executive Officers and directors as a group; and
●
each of the other selling stockholders.
The percentage ownership information under the column “Percentage of shares beneficially owned prior to this offering” is based on 15,247,649 shares of common stock outstanding as of August 31, 2020. The percentage ownership information under the column “Beneficial Ownership of Shares After the Offering” is based on (i) the sale of 1,750,000 shares of our common stock in this offering, and (ii) the issuance of 490,000 shares of common stock to be sold upon exercise of options in connection with this offering. The table below assumes no exercise of the ownerunderwriters’ 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 outstanding common
stock;
- eachrules 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 named executive officers;
- allcommon stock issuable upon the vesting of our current directorsrestricted 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 executive officers as a
group; and
- the number of shares of common stock beneficially owned by eachthe person and group andholding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the outstandingpurpose 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 each person and group.
them, subject to applicable community property laws.
Except as otherwise noted below, the address of each ofperson identified in the persons in
thefollowing table is c/o Netgateway,Crexendo, Inc., 300 Oceangate, Suite 500, Long Beach,
California 90802.
- ----------
* Less than 1 percent.
1615 South 52nd Street, Tempe, Arizona, 85281.
| Name of Beneficial Owner | Beneficial Ownership of Shares Before the Offering | Number of | Beneficial Ownership of Shares After the Offering | ||
Number (1) | Percent | Shares Offered | Number (2) | Percent | |
| 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) Reflects warrants or options that will be vested as of June 30, 2000 or
within 60 days thereafter.
(2)
Beneficial ownership is determined in accordance with the rules of the SEC.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 June 30, 2000August 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. Unless otherwise indicated in the footnotes to this table, theThe persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite such stockholder'sstockholder’s name.
(3) Includes 456,666
(2)
Beneficial ownership is determined in accordance with the rules of the SEC, based upon 17,487,649 shares of common stock currently heldto be outstanding after this offering. In computing the number of shares beneficially owned by a person and the individual trustspercentage ownership of which Mr. Freadhoff is trustee and over which Mr.
Freadhoff has beneficial ownership.
(4) Netgateway's current directors and executive officers include: Keith D.
Freadhoff, Roy W. Camblin III, Donald M. Corliss, Jr., Simon Spencer,
Frank C. Heyman, Jill Padwa, Craig S. Gatarz, John Dillon, Scott Beebe
and Joseph Roebuck.
44
SELLING STOCKHOLDERS
The following table sets forth the name of the persons or entities that are offering theirperson, 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.
36
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 being offeredlisted 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 each selling stockholder.
the over-allotment option described below.
| Underwriters | Number of Shares |
| 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 1 percent
(1) Computation$ 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 percentages is based on conversionany 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 entire $4.5
million convertible debenturepublic offering price. These amounts are shown assuming both no exercise and full exercise of all warrantsthe 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.
Per Share | 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 the issuanceeach of the maximum numberour directors and officers have agreed not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of shares under the
private equity credit agreement.
(2) Includes (1) 10,489,510any shares of common stock issuable upon conversion
of the $4.5 millionor any securities convertible debenture based on a conversion price of
$.858 per share multiplied by 200%, (2) 19,248,167into or exchangeable for shares of common stock issuable underwithout the private equity credit agreement based uponprior written consent of B. Riley Securities, Inc. for a purchase
priceperiod of $1.03906 per share multiplied by 200% and (3) 2,887,225 shares of
common stock issuable upon exercise of warrants at an exercise price of
$1.03906 per share multiplied by 200% and (4) 231,000 shares of common
stock issuable upon exercise of warrant at an exercise price of $1.625
per share.
(3) All of such shares are issuable upon exercise of warrants.
PLAN OF DISTRIBUTION
We are registering the resale of our common stock on behalf of the
selling stockholders. A selling stockholder includes donees, transferees and
pledges selling shares of common stock received from a named selling stockholder90 days after the date of this prospectus. This prospectusThese lock-up agreements provide limited exceptions and their restrictions may also be usedwaived at any time by transfereesB. 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 by other persons acquiringpurchasing shares including brokers who borrowin the shares to settle short salesopen market.
In addition, the underwriters may stabilize or maintain the price of our common stock.stock by bidding for or purchasing shares in the open market and may impose penalty bids. If any of thepenalty bids are imposed, selling stockholders transfer any of their shares, each
transferee must be boundconcessions allowed to the same restrictions and limitations that apply to
the selling stockholders describedbroker-dealers participating in this prospectus. We will bear all costs,
expenses and feesoffering 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 registration of the shares offered in
this prospectus. The selling stockholders will bear all brokerage commissions
and similar selling expenses associated with the sale of the shares.
The selling stockholders may offer their sharesmarket price of our common stock at various times in one or more of the following transactions:
- on The Nasdaq National Market;
-a level above that which might otherwise prevail in the over-the-counter market;
- in transactions other than onopen market. The Nasdaq National Market or in the
over-the-counter market;
- in negotiated transactions or otherwise, including an underwritten
offering;
- in connection with short sales of the shares of our common stock;
- by pledge or by grantimposition of a security interest inpenalty bid may also affect the shares to
secure debts and other obligations;
- in ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
- in connection with the writing of non-traded and exchange-traded
call or put options, in hedge transactions and in settlement of
other transactions in standardized or over-the-counter options;
- in a block trade in which a broker-dealer, as principal, may
resell a portion of the block, as principal, in order to
facilitate the transaction;
- in a purchase by a broker-dealer, as principal, and resale by the
broker-dealer for its account; or
- in a combination of any of the above transactions.
In connection with hedging transactions, the selling stockholders may:
- enter into transactions in which broker-dealers or other financial
institutions may in turn engage in short salesprice of our common stock into the courseextent that it discourages resales of hedging the positions they assume with the
selling stockholders;
- sell shares short themselves and redeliver such stock to close out
their short positions;
- loanour common stock. The magnitude or pledge the shares to a broker-dealer, who may sell the
loaned stock, or in the eventeffect of default, sell the pledged stock;
or
45
- enter into optionsany stabilization or other transactions with broker-dealers or
other financial institutions that require the delivery to such
broker-dealer or other financial institution of the shares offered
by this prospectus, which sharesis uncertain. These transactions may be resold undereffected on the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.
In connection with this prospectus or any prospectus supplemented or amended to reflect
such transaction.
Theoffering, the underwriters and selling stockholdersgroup members may sell their shares atalso engage in passive market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. Each of the selling
stockholders reserves the right to accept, and together with their agents from
time to time, to reject,making transactions in whole or in part, any proposed purchase of theour common stock to be made directly or through agents.
The selling stockholders may sell their shares aton the Nasdaq Capital Market. Passive market prices
prevailing atmaking consists of displaying bids on the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices. The selling stockholders may
use broker-dealers to sell their shares. If this happens, broker-dealers will
either receive discounts, commissions or concessions from purchasers of shares
for whom they acted as agents. Broker-dealers engagedNasdaq Capital Market limited by the selling
stockholders may allow other broker-dealersprices of independent market makers and effecting purchases limited by those prices in response to participate in resales.
King William, LLC is an underwriter within the meaning of Section 2(11)
of the Securities Act of 1933 with respect to any shares of common stock that it
sells. The other selling stockholders and any broker-dealers or agents that act
in connection with the sale of shares might be deemed to be underwriters and any
commissions received by such broker-dealers and any profit on the resale of the
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. Because King
William, LLC is an underwriter within the meaning of Section 2(11) of the
Securities Act and because the other selling stockholders might be deemed to be
underwriters, they will be subject to the prospectus delivery requirements of
the Securities Act. We have informed the selling stockholders that the
anti-manipulative provisionsorder flow. Rule 103 of Regulation M promulgated underby the Securities
Exchange ActSEC limits the amount of 1934net purchases that each passive market maker may apply to their sales of our common stock inmake and the market.
In addition to selling shares of our common stock under this
prospectus, the selling stockholders may:
- resell all or a portion of their shares in open market
transactions in reliance upon Rule 144 under the Securities
Act, provided that they meet the criteria and conform to the
requirements of Rule 144;
- agree to indemnify any broker-dealer or agent against certain
liabilities related to the selling of the common stock,
including liabilities arising under the Securities Act; or
- transfer their common stock in other ways not involving market
makers or established trading markets, including directly by
gift, distribution or other transfer.
Upon being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus if required under Rule 462(b) of the Securities
Act disclosing:
- the namedisplayed size of each such selling stockholder andbid. Passive market making may stabilize the participating broker-dealer;
- the number of shares involved;
- themarket price at which the shares were sold;
- the commissions paid or discounts or concessions allowed to
such broker-dealers, where applicable; and
- other facts material to the transaction.
In addition, upon being notified by a selling stockholder that a donee
or pledgee intends to sell more than 500 shares, we will file a supplement to
this prospectus.
DESCRIPTION OF OUR CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 250,000,000 shares of
common stock, par value $0.001 per share and 5,000,000 shares of preferred
stock, par value $0.001 per share. As of August 15, 2000, there were
21,677,090 shares of common stock outstanding held by 507 holders. This
number does not include 38,825,306 shares of common stock issuable (1) upon
conversion of the convertible debenture, (2) upon exercise of warrants to
purchase common stock, (3) under the terms of the equity line credit
agreement (4) upon exercise of employee stock options that were outstanding
as of June 30, 2000 or (5) upon the exercise of convertible subsidiary common
stock.
The following is a description of our capital stock and the material
provisions of our certificate of incorporation and bylaws. The following
discussion summarizes those documents. For a complete description of our capital
stock, you should review our certificate of incorporation and bylaws, copies of
which have been incorporated by reference as exhibits to the registration
statement of which this prospectus is a part.
COMMON STOCK
Holders of shares of our common stock are entitled to one vote per
share on all matters to be voted on by stockholders. Subject to preferences that
may be applicable to any outstanding preferred shares, the holders of shares of
common stock are entitled to receive such dividends, if any, as may be declared
from time to time by our board of directors out of funds legally available for
that purpose. Upon liquidation or dissolution,
46
the holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the rights of holders of
any outstanding shares of preferred stock. The holders of our common stock
have no preemptive or similar rights or subscription rights. There are no
redemption or sinking fund provisions applicable to the shares of common
stock.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder
approval, to issue from time to time up to 5,000,000 shares of preferred stock
in one or more series and to fix or alter the designations, powers and
preferences and relative, participating, optional or other special rights, if
any, and qualifications, limitations or restrictions for the preferred stock.
This includes the authority to set dividend rights, dividend rates, conversion
rights, terms of redemption, including sinking fund provisions, redemption price
or prices, liquidation preferences and the number of shares constituting any
series or designations of those series. No shares of preferred stock are
currently outstanding and we presently have no plans to issue any shares of
preferred stock.
WARRANTS
To date, we have issued warrants representing the right to purchase up
to 1,555,904 shares of our common stock at exercise prices ranging from $1.00 to
$11.04. The expiration dates range from March 11, 2001 to July 31, 2005. A total
of 331,000 shares of common stock issuable upon exercise of these warrants are
being registered pursuanta 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 registration statementdirection or magnitude of which this prospectus
is a part.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 obligated to issue warrants to purchase 1,500
sharesfull 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 common stockbusiness with us or our affiliates. The underwriters may in the future receive customary fees and commissions for each 10,000 sharesthese transactions.
In the ordinary course of common stock issued undertheir various business activities, the termsunderwriters 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 private equity credit agreement. A totalissuer. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of 2,887,225
sharessuch 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 common stock issuable upon exercisethis offering online directly or through one of these warrants are also
being registered pursuant to the registration statement of which thistheir affiliates. In those cases, prospective investors may view offering terms and a prospectus is a part.
online and place orders online or through their financial advisors.
Electronic Offer, Sale and Distribution
In connection with this offering, the merger with Galaxy Enterprises, we assumedunderwriters or certain outstanding warrantsof 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 purchasecertain of its Internet subscription customers. The underwriters may allocate a totallimited number of 300,000 sharessecurities 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 Galaxy
Enterprises common stock. These warrants are exercisable for 191,529 sharesthe underwriters is not part of ourthis prospectus.
Listing
Our common stock at exercise prices ranging from $4.45 to $11.04. The expiration
dates range from March 11, 2001 to January 8, 2002.
REGISTRATION RIGHTS
Underis listed on the terms of the debenture and the equity line of credit
agreement, King William, RothNasdaq Capital and Carbon Mesa have registration rights
for the shares of common stock that they receive. This prospectus and the
registration statement to which it relates include the shares of common stock
issuableMarket under the terms of the private equity credit agreementsymbol “CXDO.”
Transfer Agent and the shares
of common stock issuable upon conversion of the debenture and exercise of the
warrants.
ELECTION AND REMOVAL OF DIRECTORS
Our certificate of incorporation and bylaws provide for the division of
our board of directors into two classes. The term of the first class expires at
the annual meeting following the end of fiscal year 2000 and the term of the
second class expires following the end of fiscal year 2001. At each annual
meeting following the end of fiscal year 2000, the terms of half of the
directors will expire and new directors will be elected to serve two years. This
classification system increases the difficulty of replacing a majority of the
directors and may tend to discourage a third party form making a tender offer or
otherwise attempting to gain control of us. It also may maintain the incumbency
of our board of directors.
TRANSFER AGENT AND REGISTRAR
Registrar
The transfer agent and registrar for theour common stock is Colonial Stock
Transfer.
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.
42
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 balance sheets of Netgateway, Inc.financial statements and subsidiariesrelated schedules as of June 30, 2000,December 31, 2019 and 19992018 and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for each of the years then ended incorporated by reference in the three-year period ended June 30, 2000, have been included hereinthis prospectus and in the registration statement have been so incorporated in reliance on the report of KPMG LLP,Urish Popeck & Co., LLC., an independent certifiedregistered public accountants, appearing elsewhereaccounting firm, incorporated herein and uponby reference, given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters
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 validityshares of common stock being offered by this prospectus. This prospectus, which constitutes part of the sharesregistration statement, does not contain all of Netgatewaythe information in the registration statement and its exhibits. For further information with respect to us and the common stock offered hereby will be passed upon for Netgateway by Nida & Maloney, LLP, Santa Barbara, California. Nida & Maloney, LLPthis 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 the
record and beneficial owner of 15,000 shares of Netgateway common stock.
47
WHERE YOU CAN FIND MORE INFORMATIONqualified in all respects by this reference. We are a reporting company and file annual, quarterly and current reports, proxy materialsstatements 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 read andalso request a copy these reports, proxy materials and other information at:
You can request copies of these documentsfilings, 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.
43
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 payingyou should read it with the same care that you read this prospectus. Any statement contained in a feedocument 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 copying costs. Please callfiscal year ended December 31, 2019 (filed with the SEC at 1-800-SEC-0330on March 3, 2020);
●
our Quarterly Report on Form 10-Q for more information about the operation offiscal quarter ended March 31, 2020 (filed with the public reference room. Our SEC filings are also available aton May 5, 2020);
●
our Quarterly Report on Form 10-Q for the SEC's internet web site at
"http:\\www.sec.gov." Our common stock is quotedfiscal quarter ended June 30, 2020 (filed with the SEC on The Nasdaq National Market.August 10, 2020);
●
our Current Reports proxy statements and other information concerning us may also be
inspected at The Nasdaq Stock Market, Reports Section, at 1735 K Street, N.W.,
Washington, D.C. 20006.
We haveon Form 8-K as filed with the SEC a registrationon January 30, 2020, April 27, 2020, July 6, 2020 and August 11, 2020, respectively;
●
our definitive proxy statement on Form S-1 underSchedule 14A filed with the Securities ActSEC 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 1933, as amended. This prospectus, which is a part of that
registration statement, omits certain informationour common stock contained in our Registration Statement on Form 8-A filed with the registration
statement. Statements made in this prospectus asSEC 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 contents of any
contract, agreementcontrary) made with the SEC pursuant to Sections 13(a), 13(c), 14 or other document are not necessarily complete. With respect
to each contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to that exhibit for a more complete
description15(d) of the matter involved, and each statement is deemed qualified in
its entirety to that reference.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
48
INDEX TO FINANCIAL STATEMENTS
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the consolidated financial statements of Netgateway, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimatesExchange Act, including those made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Netgateway, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ending June 30, 2000 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, present fairly, in all material respects, the information
set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 3 to the financial statements, the
Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Los Angeles, California
August 21, 2000
F-2
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999
See accompanying notes to consolidated financial statements.
F-3
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
F-4
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
F-5
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
F-6
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-7
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
F-8
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-9
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS; SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Netgateway, Inc. and subsidiaries ("Netgateway" or the "Company"),
was formed on March 4, 1998 as a Nevada corporation. Netgateway provides
eCommerce services designed to enable clients to extend their business to
the Internet quickly and effectively, with minimal investment. Netgateway
develops, hosts, licenses, and supports a wide range of built-to-order
business-to-business, business-to-consumer and business-to-employee
applications, including enterprise portals, e-retail, e-procurement and
e-marketplace solutions.
In June 2000, the Company acquired Galaxy Enterprises, Inc. ("Galaxy
Enterprises")for a total consideration of 3,929,988 shares. Among other
things, Galaxy Enterprises, through its subsidiary Galaxy Mall, Inc., engages
in the business of selling electronic home pages, or "storefronts" on its
Internet shopping mall, and hosts those storefront sites on its Internet
server. Galaxy Enterprises also conducts Internet training seminars throughout
the United States for its customers and for others interested in extending
their businesses to the Internet.
The following is a summary of our significant accounting principles:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Netgateway and its wholly owned subsidiaries. As more fully
described in Note 2, the Company's acquisition of Galaxy Enterprises
on June 26, 2000 was accounted for under the pooling-of-interest
method and accordingly all periods prior to the acquisition have
been restated to include the accounts and results of operations of
Galaxy Enterprises for all periods presented. All Galaxy Enterprises
common stock and common stock option information has been adjusted
to reflect the exchange ratio. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of manufactured multimedia
products.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed principally on the straight-line method in amounts
sufficient to write off the cost of depreciable assets over their
estimated useful lives ranging from 3 to 5 years. The cost of
leasehold improvements is being depreciated using the straight-line
method over the shorter of the estimated useful life of the asset or
the terms of the related leases. Depreciable lives by asset group
are as follows:
Normal maintenance and repair items are expensed as incurred. The
cost and accumulated depreciation of property and equipment sold or
otherwise retired are removed from the accounts and gain or loss on
disposition is reflected in net income in the period of disposition.
F-10
(d) Intangible Assets
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
(d) Research and Development Expenditures
Research and development costs are expensed as incurred.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(g) Financial Instruments
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities and current portion of notes
payable at June 30, 2000 and 1999 approximated fair value due to the
short maturity of those instruments. All financial instruments are
held for purposes other than trading.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
The asset and liability method recognizes deferred income taxes for
the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Deferred tax assets are to be recognized for temporary differences
that will result in deductible amounts in future years and for tax
carryforwards if, in the opinion of management, it is more likely
than not that the deferred tax assets will be realized.
(i) Accounting for Stock Options
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its fixed plan employee stock
options. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. Compensation expense related to stock
options granted to non-employees is accounted for under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," whereby compensation expense is
recognized over the vesting period based on the fair value of the
options on the date of grant.
F-11
(j) Revenue Recognition
Revenues from the design and development of Internet Web sites and
related consulting projects are recognized using the
percentage-of-completion method. Unbilled receivables represent
time and costs incurred on projects in progress in excess of amounts
billed, and are recorded as assets. Deferred revenue represents
amounts billed in excess of costs incurred, and is recorded as a
liability. To the extent costs incurred and anticipated costs to
complete projects in progress exceed anticipated billings, a loss is
recognized in the period such determination is made for the excess.
Revenue from Internet training workshops (which entitle the
customer to attend the workshop, activate web sites and receive
customer web site hosting) is deferred and recognized over a
twenty-four month period which represents the twelve months in which
a customer can activate a web site plus twelve months of free
hosting upon activation. Revenue from web site hosting rights that
expire is recognized at the point of expiration.
Revenue from manufactured multimedia products is recognized when
products are shipped.
Fees received from the sale of third-party merchant credit card
processing services are recognized as services provided and
reported on a net basis.
Revenues from banner advertising and mentor services are
recognized when delivered.
(k) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130)
establishes standards for reporting and displaying comprehensive
income (loss) and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise
classify items of other comprehensive income (loss) by their nature
in a financial statement and display the accumulated balance of
other comprehensive income (loss) separately from retained earnings
and additional paid-in capital in the equity section of a statement
of financial position. The Company has components of other
comprehensive income (loss), which are classified in the statement
of stockholders' deficit.
(l) Business Segments and Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131) establishes standards for the
way public business enterprises are to report information about
operating segments in annual financial statements and requires
enterprises to report selected information about operating segments
in interim financial reports issued to stockholders. It also
establishes standards for related disclosure about products and
services, geographic areas and major customers. It replaces the
industry segment" concept of SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," with a "management approach"
concept as the basis for identifying reportable segments. The
Company has only two principal business segments, as presented in
Note 17. Substantially all the Company's business operations are in
the United States.
(m) Investment Securities
The Company accounts for investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS no. 115). SFAS No. 115 requires investments to be
classified based on management's intent in one of the three
categories: held-to-maturity securities, available-for-sale
securities and trading securities. Held-to-maturity securities are
recorded at amortized cost. Available-for-sale securities are
recorded at fair value with unrealized gains and losses reported as
a separate component of stockholders' equity and other comprehensive
income (loss). Trading securities are recorded at market value with
unrealized gains and losses reported in operations. The Company's
investment securities have been classified as available-for-sale.
(n) Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd., have been translated into U.S. dollars from
its functional currency in the accompanying consolidated financial
statements in accordance with SFAS No. 52, "Foreign Currency
Translation." Balance sheet accounts of StoresOnline.com, Ltd. are
translated at period-end exchange rates while income and expenses
are translated at actual exchange rates onafter the date of the transaction. Translation gains or losses that related to
StoresOnline.com, Ltd.'s net assets are shown as a separate
component of stockholders' equity and other comprehensive income
(loss). There were no gains or losses resulting from realized
foreign currency transactions (transactions denominated in a
currency other than the entity's functional currency) during the
twelve months ended June 30, 2000, 1999 and 1998.
(o) Loss Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted average
number of common shares outstanding during the period in accordance
with SFAS No. 128 "Earnings Per Share". Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earningsinitial filing of the entity. Diluted earnings (loss)
per share is computed similarly to fully diluted earnings (loss) per
share pursuant to Accounting Principles Board (APB) Opinion No. 15.
There were 4,512,647 optionsregistration statement of which this prospectus forms a part and 1,224,904 warrants to purchase
shares of common stock and 131,853 shares of convertible subsidiary
common stock that were outstanding as of June 30, 2000 which were
not included in the computation of diluted loss per share because
the impact would have been antidilutive. There were 4,089,766
options and 1,941,629 warrants to purchase shares of common stock
and 371,429 shares of convertible subsidiary common stock that were
outstanding as of June 30, 1999 which were not included in the
computation of diluted loss per share because the impact would have
been antidilutive. There were 756,711 options and 73,000 warrants
to purchase shares of common stock that were outstanding as of
June 30, 1998 which were not included in the computation of diluted
loss per share because the impact would have been antidilutive.
(p) Costs of Start-Up Activities
Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all the costs of
start-up activities as incurred.
(q) Use of Estimates
F-12
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the balance
sheet date and the reporting of revenues and expenses during the
reporting periods to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(r) Reclassifications
Certain amounts have been reclassified to conform with current year
presentation.
(2) BUSINESS COMBINATION
On June 26, 2000, Netgateway, Inc. issued 3,929,988 shares of its common stock
in exchange for all of the outstanding common stock of Galaxy Enterprises. This
business combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for periods prior to the combination have been restated to includeeffectiveness of such registration statement, until we file a post-effective amendment that indicates the accounts and results of operations
of Galaxy Enterprises.
Prior to the combination, Galaxy Enterprises' fiscal year ended December 31.
In recording the pooling-of-interests combination, Galaxy Enterprises'
financial statements for the twelve months ended June 30, 1999, were combined
with Netgateway's financial statements for the same period and Galaxy
Enterprises' financial statements for the year ended December 31, 1998 were
combined with Netgateway's financial statements for the year ended June 30,
1998. An adjustment has been made to stockholders' equity to eliminate the
effect of including Galaxy Enterprises' results of operations for the six
months ended December 31, 1998, in both the years ended June 30, 1999 and
June 30, 1998. The adjustment results in the Company eliminating the related
net income of $1,733,441 from accumulated deficit in fiscal year 1999, which
includes $3.7 million in revenue.
The results of operations as previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
Prior to completiontermination of the combination between Netgatewayoffering of the common stock made by this prospectus and Galaxy
Enterprises on January 7, 2000,such future filings will become a part of this prospectus from the Company advanced $300,000 in bridge
financing to Galaxy Enterprises for working capital purposes and for the
payment of certain professional fees incurred by Galaxy Enterprises in
connectionrespective dates that such documents are filed with the merger. On February 4, 2000, the Company advanced an
additional $150,000SEC.
Upon written or oral request, we will provide, without charge, to Galaxy Enterprises for working capital purposes and
for the payment of certain professional fees incurred by Galaxy Enterprises
in connection with the merger. Each loan was secured byeach person, including any beneficial owner, to whom a pledge of Galaxy
Enterprises common stock from John J. Poelman, the chief executive officer
and largest shareholder of Galaxy Enterprises prior to the merger. The notes
bore interest at 9.5% and were due and payable on the earlier of June 1, 2000
or the consummation date of the merger. The maturity date of the notes was
later extended to the earlier of September 1, 2000 or the consummation date
of the merger.
After completion of the merger, the Company forgave these loans to its
subsidiary, Galaxy Enterprises, and released the pledges securing those loans.
Prior to the consummation of the merger, the Company entered into certain
transactions in the normal course of business with Galaxy Enterprises. For
the twelve months ended June 30, 2000, Netgateway generated revenue of
$470,000 from Galaxy Enterprises. For the twelve months ended June 30, 2000,
Galaxy Enterprises generated revenue of $350,000 from Netgateway. The
revenue and expenses associated with these intercompany transactions have
been eliminated in the combination of these entities.
F-13
(3) LIQUIDITY
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As of the datecopy of this report, the Company has generated
significant losses. The Company has relied upon private placementsprospectus is delivered a copy of its
stock and issuances of debt to generate funds to meet its operating needs and
plans to continue pursuing financing in this manner during the next year.
However, there are no assurances that such financing will be available when
and as needed to satisfy current obligations. As such, substantial doubt
exists as to whether the Company will continue as a going concern.
(4) ACQUISITIONS
On June 2, 1998, Video Calling Card, Inc. ("VCC"), a Nevada public shell
corporation, acquired 100 percent of the outstanding common stock of Netgateway
in exchange for 5,900,000 shares of common stock of VCC. Immediately prior to
the acquisition, VCC had 450,000 shares of common stock outstanding and
Netgateway had 590,000 shares of common stock outstanding. Since the
stockholders of Netgateway received the majority voting interests in the
combined company, Netgateway is the acquiring enterprise for financial reporting
purposes. The transaction was recorded as a reverse acquisition using the
purchase method of accounting whereby equity of Netgateway was adjusted for the
fair value of the acquired tangible net assets of VCC. The historical financial
statements of Netgateway since March 4, 1998 (inception) have been adjusted
retroactively to reflect the equivalent number of shares received in the
business combination prior to the reverse acquisition. The 450,000 shares of
common stock issued in the reverse acquisition have been included in the
weighted-average common shares outstanding since the date of acquisition, June
2, 1998.
Also on June 2, 1998, the Company acquired certain assets and liabilities of
Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited
liability company, in exchange for 400,000 shares of common stock of the Company
valued at $400,000. The consideration was allocated based on the relative fair
values of the tangible and intangible assets and liabilities acquired, including
acquired technology of $120,000, with the excess consideration of $235,193
recorded as goodwill. The operations of Digital Genesis are included in the
consolidated statements of operations of the Company since the date of
acquisition, June 2, 1998.
In January 1999, the Company acquired 100% of the outstanding stock of Spartan
Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares of
common stock of StoresOnline.com, Ltd., a wholly-owned Canadian subsidiary
valued at $557,145. The shares are convertible on a one-to-one basis into common
stock of the Company. The issuance of an additional 185,715 shares was
contingent upon the attainment of certain performance standards in future
periods. In April 1999, the Board of Directors approved the issuance of the
contingent shares and waived the performance standards. Accordingly, the
consideration increased to $1,392,858. The acquisition of Spartan Multimedia,
Inc. was recorded using the purchase method of accounting. The consideration was
allocated based on the relative fair values of the tangible and intangible
assets and liabilities acquired. The operations of Spartan Multimedia, Inc. are
included in the consolidated statement of operations of the Company from January
15, 1999 through June 30, 1999.
The StoresOnline.com Ltd. shares held by third parties has been recognized as
a minority interest until such time the shares are converted to the Company's
common stock. As of June 30, 2000, 239,345 shares had been converted and
recorded in stockholders deficit.
Effective May 31, 1999, Galaxy Enterprises acquired substantially all the net
assets of Impact Media, LLC ("Impact") using the purchase method of
accounting by assuming the liabilities of Impact. The purchase of Impact
resulted in the recording of goodwill in the amount of $117,655, which was
the extent to which liabilities assumed exceeded the fair values of the
assets acquired. The terms of the Impact Media acquisition provide for
additional consideration of up to 250,000 shares of common stock to be paid
if certain agreed-upon targets are met during the years ended May 31, 2000
and May 31, 2001. As of June 30, 2000, one of the targets had been met and
119,706 shares of Netgateway, Inc. common stock was transferred to the former
owners of Impact Media. The value of the shares issued was recorded as
$138,625 in goodwill and $138,625 as an additional investment in Galaxy
Enterprises subsidiary, IMI, Inc. If in the future any of the targets
are met and the additional consideration becomes issuable, it will be
recorded as additional goodwill.
Following are the summarized unaudited proforma combined results of operations
for the years ended June 30, 1999 and 1998, assuming the acquisitions had taken
place at the beginning of each of those years.
F-14
(5) CHANGE IN METHOD OF ACCOUNTING FOR REVENUE
Effective October 1, 1999, the Company changed its method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. The Company believes the percentage-of-completion method more
accurately reflects the current earnings process under the Company's
contracts. The percentage-of-completion method is preferable according to
Statement of Position 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, issued by the American Institute of
Certified Public Accountants. The new method has been applied retroactively
by restating the Company's consolidated financial statements for prior
periods in accordance with Accounting Principles Board Opinion No. 20.
The impact of the accounting change was a decrease in net loss and loss per
share as follows:
(6) PROPERTY AND EQUIPMENT
Property and equipment balances at June 30, 2000 and 1999 are summarized as
follows:
Amounts included in property and equipment for assets capitalized under
capital lease obligations at June 30, 2000 and 1999 are $172,472 and $18,346,
respectively. Accumulated depreciation for the items under capitalized leases
was $40,594 and $2,072 at June 30, 2000 and 1999, respectively.
(7) INTANGIBLE ASSETS
Intangible asset balances at June 30, 2000 and 1999 are summarized as follows:
(8) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER
In July 1998 and August 1998, the Company advanced $800,000 to an entity with
which the Company was in merger discussions. Certain Company officers and
directors were minor stockholders of the potential merger entity. The merger
was not consummated and the advance was deemed uncollectible in December 1998
and written-off. During June 1999, the Company issued its chief executive
officer, Keith Freadhoff, a non-interest bearing $30,000 note receivable. The
note was repaid in July 1999.
(9) LICENSE AGREEMENTS
F-15
In March 1998, the Company entered into a sublicense agreement related to
proprietary courseware with Training Resources International (TRI), which is
wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for
the assumption of TRI's obligation of $1,600,000 to the original licensor,
ProSoft I-Net Solutions, Inc. (ProSoft). Michael Khaled personally guaranteed
the repayment of the Company's obligation under the sublicense agreement with
TRI to ProSoft. TRI entered into the original license agreement with ProSoft
in January 1998.
In April 1998, the Company entered into a sublicense agreement related to
proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary
stockholder is Scott Beebe, a stockholder and director of the Company, in
exchange for (1) the assumption of Steps' remaining obligation of $1,500,000
to the original licensor, ProSoft, (2) the assumption of Step's obligation of
$200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had
advanced funds to Steps, and (3) the issuance of 1,000,000 shares of common
stock valued at $220,000 to Steps. Scott Beebe personally guaranteed the
repayment of the Company's obligation under the sublicense agreement with
Steps to ProSoft. Additionally, the Company acquired supplies, books and
other materials related to the licensed technology from Vision in exchange
for $84,000. The Company had previously entered into a separate loan
agreement for $100,000 with Vision. The Company's chief executive officer,
Keith Freadhoff, was the chief executive officer at ProSoft when the original
license agreement with Steps was entered into. Don Danks is a stockholder of
the Company and was an officer of ProSoft at the time the original license
agreements were entered into.
In April 1998, the Company converted the $300,000 obligation to Vision into
1,900,000 shares of common stock, valued at $418,000. As a result, license
fees of $418,000 were recorded for the incremental increase of the stock
exchanged for the note payable cancellation.
In June 1998, the Company changed its business plan and began focusing on
developing technology to enable businesses and other organizations to conduct
commerce over the Internet. Therefore, the Company determined that the
license fees would not ultimately be recoverable. Accordingly, the costs of
acquiring the sub-license agreements and related supplies are included as
license fees expense in the accompanying consolidated statements of
operations for the year ended June 30, 1998.
(10) NOTES PAYABLE AND CONVERTIBLE DEBENTURES
During the year ended June 30, 1998, an officer and stockholder loaned the
Company $132,429 of which $100,000 was converted into a capital contribution
in June 1998. During the year ended June 30, 1999, the Company repaid $30,630
of the note payable.
The non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under
license agreements due December 31, 1999, is net of imputed interest of
$112,378 at June 30, 1998.
In August 1998, the notes payable agreements to ProSoft I-Net Solutions, Inc.
(ProSoft) aggregating $2,387,622 were amended whereby the scheduled principal
payments of $2,100,000 and $400,000 due in fiscal years 1999 and 2000, were
changed to $1,800,000 and $700,000, respectively. During the year ended June
30, 1999, the Company repaid $700,000 of the notes payable to ProSoft. In
December 1998, ProSoft released the Company of its remaining obligation under
the notes payable agreements. As of December 1998, the Company recognized
$35,488 of imputed interest as interest expense. The remaining imputed
interest balance was expensed upon extinguishment of the debt in December
1998. Additionally, Michael Khaled and Scott Beebe, who personally guaranteed
repayment of the Company's obligations to ProSoft, paid ProSoft $200,000 in
the aggregate to terminate their individual personal guarantees of the notes
payable which was recorded as a capital contribution upon extinguishments of
debt. Accordingly, the Company recognized $1,653,232 as gain on
extinguishments of debt during the year ended June 30, 1999.
During December 1998 and January 1999, the Company issued $1,000,000 of
convertible debentures bearing interest at the 90-day Treasury Bill rate plus
4 percent and issued 274,350 detachable stock purchase warrants valued at
$405,395. The debentures are convertible into the Company's common stock at
$2.50 per share at the Company's option. The Company recorded interest
expense of $151,000 related to the beneficial conversion feature. The
debentures were due in December 1999. As of June 30, 2000, all of the
convertible debentures had been converted into shares of common stock. The
convertible debentures were secured by the Company's accounts receivable and
intellectual property.
In March 1999, Keith Freadhoff, the chief executive officer of the Company,
loaned the Company $100,000 which was due within 10 days of the close of
bridge financing. In March 1999, the Company issued $160,000 of non-interest
bearing notes payable to third parties, which were due within 10 days of the
close of bridge financing. The notes were repaid in June 1999.
In May and June 1999, the Company obtained bridge financing whereby 12%
senior notes payable and 288,000 shares of common stock were issued
generating proceeds of $2,592,000, net of $288,000 of issuance costs. The
senior notes payable are due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
144,000 warrants to purchase an equivalent number of shares of common stock
at an exercise price of $10 per share as additional issuance costs. The
warrants are exercisable for a period of four years commencing May 18, 2000.
The fair value of the warrants on the dates of issuance was estimated to be
$301,300 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 2 years. The net proceeds from the bridge
financing were allocated to the senior notes payable and common stock based
on their relative fair values, taking into consideration recent debt and
equity transactions. Accordingly, $1,346,000 was recorded as notes payable,
$1,488,952 as equity, net of $346,349 of stock issuance costs and $302,952 as
debt issuance costs. Under the Securities Act, the rules and regulations
under the Securities Act, and the interpretations of the Commission, we may
be required to offer rescission to investors in our May through September
1999 private placement. If the Company is required to rescind the May through
September private placement in its entirety, the Company would be required to
refund all of the gross proceeds of the May through September private
placement to investors. Even following the repayment of the notes, based on
the Securities Act, the rule and regulations under the Securities Act, and
the interpretations of the Commission, the investors in the May through
September private placement may have the right to require the Company to
repurchase the shares of common stock which they received in the May through
September private placement if they can successfully argue that those shares
were issued in lieu of a higher interest rate on those notes.
In June 1999, the Company issued a 12% senior note payable of $150,000 and
15,000 shares of common stock valued at $75,000 as settlement of a legal fee
obligation. The note is due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
3,750 warrants to purchase an equivalent number of shares of common stock at
an exercise price of $10 per share. The warrants are exercisable for a period
of four years commencing May 18, 2000. The fair value of the warrants on the
dates of issuance was estimated to be $7,098 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of 2
years. As a result, $7,098 of additional legal expense was recorded in the
accompanying consolidated financial statements.
In August and September 1999, the Company obtained bridge financing whereby
12% senior notes payable and 357,850 shares of common stock were issued
generating proceeds of $2,744,290, net of $803,612 of issuance costs. The
senior notes payable are due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
149,375 warrants to purchase an equivalent number of shares of common stock
at an exercise price of $10 per share as additional issuance costs. The
warrants are exercisable for a period of four years commencing May 18, 2000.
The fair value of the warrants on the dates of issuance was estimated to be
$469,402 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 2 years. The net proceeds from the bridge
financing were allocated to the senior notes payable and common stock based
on their relative fair values. Accordingly, $957,450 was recorded as notes
payable, $2,035,140 as equity, net of $555,313 of stock issuance costs, and
$248,299 as debt issuance costs. In September 1999, the Company issued a 12%
senior note payable of $500,000 and 50,000 shares of common stock valued at
$350,000 stock, the proceeds of which were received in October 1999. The note
is due the earlier of April 30, 2000 or upon the close of a public sale of
the Company's common stock. In October 1999, the Company issued a 12% senior
note payable of $25,000 and 2,500 shares of common stock valued at $17,500
generating net proceeds of $22,500. The note is due the earlier of April 30,
2000 or upon the close of a public sale of the Company's common stock. The
Company also granted 1,250 warrants valued at $3,349. The net proceeds were
allocated to the senior notes payable and common stock based on their
relative fair value.
In November 1999, the Company repaid all of the $6,633,500 12% senior notes
payable. Upon repayment of the senior notes, the remaining debt discount
balance of $3,253,469 was recognized as interest expense.
F-16
In October and November 1999, $200,000 of convertible debentures were
converted into 80,000 shares of common stock. Notes payable and notes payable
to related parties at June 30, 2000 and 1999 consists of the following:
Interest paid during the years ended June 30, 2000 and June 30, 1999 was
approximately $883,139 and $933,097, respectively. Interest expense for the year
ended June 30, 2000 includes amortization of debt issuance costs of
approximately $3,692,002.
The note payable of $102,326 matures in 2001. There are no other obligations
thereafter.
(11) CAPITAL LEASES
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum payments as of
June 30, 2000:
(12) COMMITMENTS AND CONTINGENCIES
The Company leases certain of its equipment and corporate offices under
long-term operating lease agreements expiring at various dates through 2004.
Future aggregate minimum obligations under operating leases as of June 30, 2000,
exclusive of taxes and insurance, are as follows:
F-17
Rental expense totaled approximately $720,954 and $241,071 for the years ended
June 30, 2000 and 1999, respectively.
The Company is involved in various legal proceedings arising in the normal
course of its business. In the opinion of management, the liabilities, if any,
resulting from these matters will not have a material effect on the consolidated
financial statements of the Company.
From time to time, prior to the acquisition of Galaxy Enterprises, Galaxy
Enterprises received inquiries from attorneys general offices and other
regulators about civil and criminal compliance matters with various state and
federal regulations. These inquiries sometimes rose to the level of
investigations and litigation. In the past, Galaxy Enterprises has received
letters of inquiry from and/or has been made aware of investigations by the
attorneys general of Hawaii, Illinois, Nebraska, North Carolina, Utah and
Texas and from a regional office of the Federal Trade Commission. Galaxy
Enterprises has responded to these inquiries and has generally been
successful in addressing the concerns of these persons and entities, although
there is generally no formal closing of the inquiry or investigation and
certain of these, including Illinois and Utah, are believed to be ongoing.
Hawaii has taken the position that Galaxy's marketing efforts, in their
current form, must comply with its "Door-to-Door Sale Law."
On June 18, 1998, the Commonwealth of Kentucky filed an action against
GalaxyMall, Inc. under the Kentucky business opportunity statute. On December
15, 1998, an order of dismissal was entered based on GalaxyMall agreeing to
advise the Kentucky Attorney General's office of any complaints from
GalaxyMall customers in Kentucky for a period of twelve months from the date
of entry of the order of dismissal. There can be no assurance that these or
other inquiries and investigations will not have a material adverse effect on
Galaxy Enterprises' business or operations.
(13) INCOME TAXES
Income tax expense for the year ended June 30, 2000 and 1999 represents the
California state minimum franchise tax and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Income tax expense attributable to loss from operations during the year ended
June 30, 2000 and 1999, differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to loss from operations as a result of the
following:
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2000 and
1999 are presented below:
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assetsreports 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, be realized. The ultimate realizationhowever, send exhibits to those documents, unless the exhibits are specifically incorporated by reference in those documents. You may also access these documents, free of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled
F-18
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Basedcharge on the projections
for future taxable income overSEC’s website at www.sec.gov or on the periods which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will not realize the benefits“Investors” page of these deductible differences. Such potential
future benefits have been fully reserved, and accordingly, there are no net
deferred tax assets.
As of June 30, 2000, the Company had approximately $34,707,304 and 24,137,952
of net operating loss carryforwards available for Federal and state income
tax purposes, respectively, which expire between 2006 and 2020. The ultimate
realization of the net operating loss carryforwards will be limited by
Section 382 of the Internal Revenue Code as a result of a change of control.
(14) STOCK OPTION PLAN
In June 1998, the Board of Directors approved, for future grants, 500,000
options to acquire an equivalent number of shares of common stockour website at an
exercise price of $1 per share to certain senior management.
In June 1998, the Board of Directors granted 100,000 options to acquire an
equivalent number of shares of common stock at an exercise price of $6 per
share as consideration for legal fees. The options vest ratably as services
are provided and expire on April 30, 2005. During the year ended June 30,
1999, under the anti-dilution clause of the agreement, the number of options
increased to 240,000www.crexendo.com. Our website and the exercise price was decreasedinformation contained on, or connected to, $2.50 per share.
As a result, compensation for the fair value of the options aggregating
$479,708 was recorded. The fair value of the options on the date of repricing
was estimated using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 1.5 years.
In June 1998, the Company granted a consultant 100,000 options to purchase an
equivalent number of shares of common stock at an exercise price of $3.50 per
share as compensation for services. The options vest upon the consultant
achieving certain sales goals related to the sale of training courses under
the ProSoft license agreementour website is not incorporated by June 1999. The options expire on June 1,
2003. The fair value of the options on the date of the grant was estimated to
be $0.59 per share using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%; risk-free interest rate of
5.50%; volatility of 100%; and an expected life of 5 years. Subsequent to
June 30, 1998, these options were canceled.
In July 1998, the Board of Directors adopted the 1998 Stock Compensation
Program ("Program") which consists of, among other things, a non-qualified
stock option plan. An aggregate of 1,000,000 shares were reserved for
issuance under the Program. During the year ended June 30, 1999, the Company
granted 983,348 options under the Program at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.00 to $13.30 per share. The weighted-average fair value
of options granted during the year ended June 30, 1999 under the Program was
$3.44 per share. During the year ended June 30, 2000, the Company granted
126,416 options under the Program at exercise prices greater than and below
the estimated market price of the Company's common stock on the date of grant
ranging from $3.50 to $6.00 per share. The weighted-average fair value of
options granted during the year ended June 30, 2000 under the Program was
$3.59 per share. As of June 30, 2000, 27,870 options were available for
future grants under the Program.
In December 1998, the Board of Directors adopted the 1998 Stock Option Plan
for Senior Executives. An aggregate of 5,000,000 shares were reserved for
issuance under the Plan. During the year ended June 30, 1999, the Company
granted 2,546,667 options under the Plan at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.00 to $6.50 per share. The weighted-average fair value
of the options granted under the Plan during the year ended June 30, 1999 was
$2.69 per share. Subsequent to June 30, 1999, 2,246,667 of these options were
cancelled. During the year ended June 30, 2000, the Company granted 550,714
options under the Plan at exercise prices greater than and below the
estimated market price of the Company's common stock on the date of grant
ranging from $3.50 to $9.25 per share. The weighted-average fair value of the
options granted under the Plan during the year ended June 30, 2000 was $6.73
per share. As of June 30, 2000, there were 4,149,286 options available for
future grants under the Plan.
In July 1999, the Board of Directors adopted the 1998 Stock Option Plan for
Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan; the reserve amount was later increased to 5,000,000 shares.
During the year ended June 30, 2000, the Company granted 2,237,832 options
under the Plan at exercise prices greater than and below the estimated market
price of the Company's common stock on the date of grant ranging from $1.78
to $14.50 per share. The weighted-average fair value of the options granted
under the Plan during the year ended June 30, 2000 was $7.34 per share. Also
during the year ended June 30, 2000, 279,779 of these options were cancelled.
As of June 30, 2000, there were 3,041,947 options available for future grants
under the Plan.
Pursuant to the terms of the Company's merger with Galaxy Enterprises, each
outstanding option to purchase shares of Galaxy Enterprises' common stock under
Galaxy Enterprises' 1997 Employee Stock Option Plan was assumed by the Company,
whetherreference into this prospectus or not vested and exercisable. The Company assumed options exercisable
for an aggregate of 1,063,470 shares of Netgateway common stock.
F-19
The following is a summary of stock option activity under the Company's stock
option plans:
The following table summarizes information about shares under option at June 30,
2000:
The Company applies APB Opinion No. 25 in accounting for stock options granted
to employees under which no compensation cost for stock options is recognized
for stock option awards granted at or above fair market value. During the year
ended June 30, 1999, the Company recognized $282,052 of compensation expense for
options granted below fair market value. During the year ended June 30, 2000,
the Company recognized $652,825 of compensation expense for options granted
below fair market value.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below for the
year ended June 30, 2000:
F-20
(15) STOCKHOLDERS' EQUITY
During the year ended June 30, 1998, the Company sold 1,057,545 shares of
common stock for $503,000 in cash. In June 1998, the Company sold 73,000
units in exchange for $146,000.
During the the year ended June 30, 1998, the Company issued 1,645,455 shares
of common stock valued at $362,000 to certain officers and employees in
exchange for compensation. The shares vested immediately upon grant. In April
1998, the Company granted 100,000 shares of common stock under a consulting
agreement in exchange for services valued at $22,000. Compensation expense of
$7,920 was recognized for the value of the shares which vested immediately
upon grant. Under the agreement, the Company may repurchase up to 64,000
shares of common stock issued to the consultant. The shares eligible for
repurchase vest ratably over a 24-month period upon performance of services
under the consulting agreement. Deferred compensation of $14,080 was recorded
in the accompanying consolidated statement of changes in stockholders'
deficit to reflect the unearned compensation. During the year ended June 30,
1998, 8,000 of the shares eligible for repurchase vested resulting in $1,760
of compensation. During the year ended June 30, 1999, 8,000 of the shares
eligible for repurchase vested and the consulting agreement was subsequently
canceled. As a result, $1,760 of additional compensation was recorded and the
48,000 remaining common shares were forfeited.
During the year ended June 30, 1998, Michael Khaled, Don Danks and Lynn
Turnbow, stockholders of the Company, paid, on behalf of the Company,
$400,000 of scheduled payments under the $3,000,000 notes payable to ProSoft
in exchange for 600,000 shares of common stock valued at $400,000.
In March 1998, an officer and stockholder of the Company, Keith Freadhoff,
loaned the Company $100,000. In June 1998, the note was contributed to
capital.
In June 1998, $184,000 of notes payable to third parties was converted into
184,000 shares of common stock valued at $185,533, including $1,533 of
accrued interest.
In June 1998, the Company issued 100,000 shares of common stock to an
employee in exchange for services valued at $100,000. Half of the shares
vested on July 1, 1998 with the remaining shares vesting ratably over a
12-month period. Accordingly, deferred compensation of $100,000 was recorded
at June 30, 1998. During the year ended June 30, 1999, the 100,000 shares
vested resulting in compensation of $100,000.
During the year ended June 30, 1999, the Company sold 1,564,134 units in
exchange for $4,200,978. Each unit consisted of one share of common stock and
one warrant to purchase an equivalent number of shares of common stock at an
exercise price of $4.00. The warrants were exercisable at anytime prior to
September 1, 1998. The estimated fair value of the warrants on the date of
the grant was estimated to be $.02 using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 0%; risk free
interest rate of 5.16%; volatility of 100%; and an expected life of two
months. The warrants were subsequently repriced at $2.00 per share and the
exercise date was extended to October 1, 1998. The estimated fair value of
the warrants on the date of repricing remained consistent with the fair value
on date of grant. In October 1998, 132,100 warrants were exercised to
purchase 132,100 shares of common stock generating proceeds of $264,200.
During the year ended June 30, 1999, the Company issued 366,500 shares of
common stock valued at $1,262,200 as payment of consulting and legal
services.
During the year ended June 30, 1999, the Company issued warrants as
consideration for various consulting fees and debt issue costs associated
with the convertible debentures. The warrants were exercisable within two
years from the dates of issuance. The fair value of the warrants on the dates
of issuance was estimated to be $3,169,839 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of 2
years. Accordingly, compensation expense of $2,340,720 in 1999 and $53,534 in
2000, debt issuance costs of $240,050 and interest expense of $535,535 was
recorded in the accompanying consolidated financial statements.
In November 1998, the Company entered into a settlement agreement with
Michael Khaled, a stockholder of the Company, whereby four stockholders of
the Company contributed 200,000 shares of common stock valued at $400,000 to
Mr. Khaled. Additionally, the Company granted warrants to purchase 100,000
shares of common stock to the four stockholders who contributed their stock.
The fair value of the warrants on the issuance date was estimated to be
$420,000 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 2 years. Accordingly, compensation expense of
$820,000 was recognized in the accompanying consolidated financial statements.
During March 1999, the Company issued 30,000 shares of common stock valued at
$127,500 as payment of debt issuance costs associated with the issuance of
$160,000 of notes payable.
In May 1999, the Company issued 35,000 shares of common stock valued at
$175,000 to acquire internal-use software from UnitNetImaging (Shopping
Planet). The value of the technology was capitalized in the accompanying
consolidated financial statements.
In January 1999, Galaxy Enterprises sold a $500,000 convertible promissory
note bearing interest at 7% per annum to an institutional investor. During
1999, the note was converted into 108,017 shares of common stock for
outstanding debt of $450,000. Along with the convertible promissory note,
Galaxy Enterprises issued the institutional investor warrants to purchase
31,922 shares of common stock. The warrants are exercisable at $11.04 per
share and expire January 11, 2002.
During February and March 1999, Galaxy Enterprises entered into an agreement
with an institutional investor, whereby the investor invested $1 million in
exchange for 159,608 shares of Netgateway common stock. The investor was also
issued warrants to purchase up to 159,608 additional shares of Netgateway
common stock at an exercise price of $4.45 per share. The warrants expire
March 18, 2001.
In May 1999, the Company authorized the issuance of 5,000,000 shares of
preferred stock, $.001 par value, and approved an increase in the authorized
number of common shares to 40,000,000.
F-21
In July 1999, the Company entered into a Cable Reseller and Mall agreement
with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to
MediaOne 50,000 shares of common stock and warrants to purchase 200,000
shares of common stock. The exercise price of the warrants is dependent upon
the market price of the Company's common stock on the date that the warrants
are earned under certain performance criteria. As of June 30, 2000, the
performance criteria had not been met.
During the year ended June 30, 2000, the Company issued 538,598 shares of
common stock valued at $3,660,498 for services, of which 500,000 shares were
issued to the chief executive officer of the Company.
In November and December 1999, the Company sold 4,155,350 shares of common
stock in a public offering generating net proceeds of $25,313,863. The
Company also granted 190,250 warrants as stock issuance costs.
In October 1999, the Company issued 1,188,773 shares of common stock upon the
cashless exercise of warrants, and 1,200,000 shares of common stock valued at
$8,400,000 to three executives upon the cancellation of 1,980,000 options.
During the period December 1999 through June 2000, the Company issued 239,576
shares of common stock upon the exchange of common stock of its
StoresOnline.com, Ltd. Subsidiary, pursuant to the terms of the original
issuance of StoresOnline.com Ltd.'s common stock.
During the year ended June 30, 2000, Galaxy Enterprises sold 145,926 shares
of common stock in exchange for cash of $300,000.
(16) RELATED ENTITY TRANSACTIONS
The Company utilizes the services of Electronic Commerce International, Inc.
("ECI"), a Utah corporation, which provides merchant accounts and leasing
services to small businesses. ECI processes the financing of Company
merchants' storefront leases and also wholesales software to the Company used
for on-line, realtime processing of credit card transactions. John J.
Poelman, President, Chief Executive Officer and a Director of the Company is
the sole stockholder of ECI. Total fees paid to ECI during the years ended
June 30, 2000 and 1999 totaled approximately $1,110,404 and $483,387,
respectively. The Company also has a receivable from ECI for leases in
process of $152,060 and $47,190 as of June 30, 2000 and 1999, respectively.
(17) SEGMENT INFORMATION
The Company has two principal business segments (Internet services and
multimedia products). The first is primarily engaged in the business of
providing its customers the ability to (i) acquire a presence on the Internet
and (ii) to advertise and sell their products or services on the Internet.
The second is primarily engaged in providing assistance in the design,
manufacture and marketing of multimedia brochure kits, shaped compact discs
and similar products and services intended to facilitate conducting business
over the Internet. Management evaluates segment performance based on the
contributions to earnings of the respective
F-22
segment. An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows:
(18) SUBSEQUENT EVENTS (Unaudited)
In July 2000, Netgateway announced plans to consolidate its existing
operations with those acquired through its merger with Galaxy Enterprises.
Netgateway intends to move its headquarters from Long Beach, CA to the
existing facility acquired by Galaxy Enterprises in Orem, UT. Restructuring
charges are estimated to be approximately $275,000 which includes $175,000
for severance packages, relocation expenses of $84,000 and equipment moving
costs of $15,000.
In July 2000, the Company entered into a securities purchase agreement with
King William, LLC ("King William"). Under the terms of the agreement, the
Company issued an 8% convertible debenture in the principal amount of $4.5
million. The purchase price of the debenture is payable to the Company in two
tranches. The first tranche, in the amount of $2.5 million, net of closing
costs of approximately $300,000, was paid at the closing in July 2000. The
second tranche, in the amount of $2.0 million, may be drawn down by the
Company three (3) business days after the registration statement registering
the shares issuable upon conversion has been declared effective. The
debenture is convertible into shares of the Company's common stock at the
lower of $1.79 per share orwhich this prospectus forms a conversion rate of 80% of the market price at
the time of conversion, subject to certain conditions and adjustments. This
conversion feature represents a beneficial conversion feature. Accordingly,
the value of the beneficial conversion feature will be recorded as capital
and a reduction of debt and will be recorded as interest expense from the
earliestpart.
44
3,500,000 Shares
COMMON STOCK
B. Riley Securities | Colliers Securities LLC |
The date of conversion. The beneficial conversion feature on the first
tranchethis prospectus is approximately $625,000. In addition, the Company issued to King
William warrants to purchase 231,000 shares of common stock. The Company also
issued to Roth Capital Partners, Inc. warrants to purchase 90,000 shares of
common stock and to Carbon Mesa Partners, LLC warrants to purchase 10,000
shares of common stock. The shares of common stock issuable upon conversion
of the debenture and exercise of these warrants may be sold pursuant to the
terms of the securities purchase agreement and applicable securities laws.
In August 2000, the Company entered into a private equity credit agreement
with King William. Under the terms of the agreement, the Company has the
right to issue and sell to King William up to $10 million of the Company's
common stock at the market price at the time of sale, subject to certain
conditions and adjustments. The number of shares issuable under the
securities purchase agreement (convertible debt and warrants) and the private
equity credit agreement are limited to approximately 4 million shares of
common stock, subject to stockholder approval. Accordingly, prior to
stockholder approval, the Company may be limited in the number of shares it
may issue under the private equity credit agreement. King William may resell
these shares of common stock pursuant to the terms of the securities purchase
agreement and applicable securities laws. In addition, for each 10,000 shares
of common stock that the Company issues and sells to King William, the
Company will issue a warrant to King William to purchase 1,500 shares of the
Company's common stock at an exercise price equal to the market price of the
Company's common stock on the put date. The shares issuable upon exercise of
these warrants may also be sold pursuant to the terms of the securities
purchase agreement and applicable securities laws.
F-23
NETGATEWAY, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
, 2020.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other Expenses of Issuance and Distribution.
The following table sets forth theall 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 SECSecurities and Exchange Commission, (the “SEC”), registration fee and the NASDFinancial Industry Regulatory Authority, Inc. (“FINRA”) filing fees.
fee.
Amount | |
| SEC registration | $ |
| FINRA filing fee | $5,319.76 |
| Printing and engraving expenses | * |
| Legal fees and expenses | * |
| Accounting fees and | * |
| Transfer agent and registrar fees and | * |
| Miscellaneous fees and expenses | * |
| Total | * |
* To be providedfiled by amendment
ITEMamendment.
Item 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware General Corporation Law, Section 102(b)(7), enables a
corporation in its original certificate of incorporation, or an amendment
thereto validly approved by stockholders, to eliminate or limit personal
liability of members of its Board
Indemnification of Directors for violations of a director's
fiduciary duty of care. However,and Officers.
Nevada Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the eliminationpower to indemnify any person who is or limitation shall not
apply where there has been a breach of the duty of loyalty, failurewas our director, officer, employee or agent. The person entitled to actindemnification must have conducted himself in good faith, intentional misconductand must reasonably believe that his conduct was in, or not opposed to, our best interests. In a knowing violationcriminal 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 a dividendexpenses 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 approvalrestrictive amendment of a stock repurchase which is deemed
illegalthese Bylaws provisions with respect to events occurring prior to such rescission or an improper personal benefit is obtained. Netgateway's Certificateamendment; and shall be interpreted on the basis of Incorporation includesapplicable law in effect at the following language:
Netgateway's certificatetime of incorporation and/the occurrence of the event or bylaws includeevents 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 (1) indemnifysurvive the directorstermination of such agreements, which provided for indemnification of such officers consistent with that permitted by NRS and officersour 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 Delaware General Corporation Law including circumstancesadvancement 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 which indemnificationapplicable 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 otherwise discretionaryset forth under “Exhibit Index” at the end of this registration statement and (2) eliminateis 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 | |||||||||
10.1* | 2013 Long-Term Incentive Plan | 14-A | 4/30/13 | |||||||
10.2* | Crexendo, Inc. Stock Option Agreement Pursuant to the 2013 Long-Term Incentive Plan (Incentive Stock Options) | X | ||||||||
10.3* | 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 personal liability of directors and officersinformation called for monetary damages resulting
from breaches of their fiduciary duty, except for liability for breaches ofis not required or is shown either in the duty of loyalty, acts,financial statements or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under
Section 174 of the Delaware General Corporation Law or for any transaction
from which the director derived an improper personal benefit. We believe that
these provisions are necessary to attract and retain qualified persons as
directors and officers.
We have in place directors and officers liability insurance in an
amount of not less than $15 million.
notes thereto.
Item 17.
Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of Netgatewaythe Registrant pursuant to the foregoing provisions, or otherwise, Netgatewaythe Registrant has been advised that in the opinion of the Securities and
Exchange Commission,SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below in chronological order is information regardingIn the numbersevent that a claim for indemnification against such liabilities (other than the payment by the Registrant of shares of common stock soldexpenses incurred or paid by Netgateway, the number of options
issued by Netgateway, and the principal amount of debt instruments issued by
Netgateway since March 4, 1998 (inception), the consideration received by
Netgateway for such shares, options and debt instruments and information
relating to the sectiona director, officer, or controlling person of the Securities ActRegistrant in the successful defense of any action, suit, or rule of the Securities and
Exchange Commission under which exemption from registration was claimed. None
of these securities was registered under the Securities Act. Except as
otherwise indicated, no sales of securities involved the use of an
underwriters and no commissions were paidproceeding) is asserted by such director, officer, or controlling person in connection with the sale of any
securities.
From Netgateway's inception on March 4, 1998 through June 2, 1998,
Netgateway issued to its founding stockholders a total of 2,800,000 shares of
common stock at a price of $.001 per share.
II-1
From Netgateway's inception on March 4, 1998 to June 30, 1998,
Netgateway issued 600,000 shares of common stock to several of its existing
stockholderssecurities being registered, the Registrant will, unless in order to reimburse such stockholders for satisfying $400,000
of obligations of Netgateway. The certificates evidencing the shares of
common stock were appropriately legended. In the opinion of Netgateway,its counsel the offer andmatter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the salequestion of the shares was exemptwhether such indemnification by virtue of Section 4(2) ofit is against public policy as expressed in the Securities Act and will be governed by the rules promulgated thereunder. Eachfinal adjudication of these
stockholders were "accredited investors" as defined in Rule 501 under the
Securities Act.
In April 1998, Netgateway issued 1,000,000 sharessuch issue.
The undersigned Registrant hereby undertakes that:
(a)
For purposes of common stock to
S.T.E.P.S., Inc., the primary stockholder of which is Scott Beebe, a Director
of Netgateway, in connection with the granting by Steps to Netgateway of a
sublicense relating to proprietary courseware. The certificates evidencing
the shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 1,900,000 shares of common stock to
Vision Holdings, Inc. as consideration of the cancellation of $300,000 of
indebtedness owed by Netgateway to Vision. The certificates evidencing the
shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 100,000 shares of common stock to
Eric Richardson in payment for legal consulting services. Of such shares of
common stock, 36,000 vested immediately and 64,000 vested upon performance of
consulting services by Mr. Richardson. An aggregate of 52,000 shares of
common stock were issued to Mr. Richardson pursuant to this arrangement. The
certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
In June 1998, Netgateway issued 100,000 shares to Alex Chafetz, an
employee of Netgateway, in payment for services. The certificates evidencing
the shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In June 1998, Netgateway issued 184,000 shares of common stock to
unaffiliated third party creditors of Netgateway as consideration of the
cancellation of $185,333 of indebtedness owed by Netgateway to such
creditors. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On June 2, 1998, Netgateway issued 400,000 shares of common stock
(including contingent issuances) in connection with the acquisition of
Digital Genesis. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
In June 1998, Netgateway closed a private offering of 687,000 shares
of its common stock. The shares were sold at the price of $1.00 per share,
resulting in gross proceeds of $687,000. Each of the investors agreed to
acquire the shares for investment purposes only and not with a view to
distribution. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. Of the investors in the offering 16 were
"accredited investors" as defined in Rule 501determining any liability under the Securities Act, and 11
were not accredited investors.
In connection with the Legal Fees Services Option Agreement, dated
as of June 3, 1998 with Nida & Maloney P.C., Netgateway issued to such firm
options to purchase 100,000 shares of common stock (subsequently adjusted
through certain antidilution provisions to be 240,000 shares of common stock)
at a strike price of $2.50 per share. In the opinion of Netgateway, the offer
and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In July 1998, Netgateway closed a private offering of 1,022,800 units,
each unit consisting of one share of common stock and one common stock purchase
warrant entitling the holder to acquire one share of common stock at a price of
$4.00 per share (subsequently repriced to $2.00 per share). The units were sold
at $2.00 per unit. These warrants were exercisable through September 30, 1998,
but were extended through October 30, 1998. Warrants exercisable for an
aggregate of 132,100 shares were exercised prior to expiration of the warrants.
The certificates evidencing the securities
II-2
underlying the units were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder. Of the investors in the
offering 75 were "accredited investors" as defined in Rule 501 under the
Securities Act and 22 were not accredited investors.
In connection with the Consulting and Advisory Agreement, dated
October 20, 1998, with Burchmont Equities Group, Inc., Netgateway issued
100,000 shares of common stock the Burchmont Equities Group, Inc. in payment
for advisory services. The shares will vest upon the happening of all of the
following events: (1) Netgateway becomes listed on the Nasdaq SmallCap
Market, (2) Netgateway files a Registration Statement on Form S-1 for its
existing shares including these shares, and (3) Netgateway files a Form 10
and becomes a 12(g) reporting company.
On October 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 225,000 shares of common stock to Dean Dumont and 75,000 shares
of common stock to Maylena Burchmont in payment of consulting services. The
certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On October 21, 1998, Netgateway issued warrants exercisable for an
aggregate of 300,000 shares of common stock to Howard Effron in payment of
consulting services. The certificates evidencing the warrants and any
securities underlying the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of
the Securities Act and the rules promulgated thereunder.
In connection with a Consulting and Advisory Agreement with Richard
Berns, on October 21, 1998, Netgateway issued 25,000 shares of common stock
in payment of advisory services. The certificates evidencing the securities
underlying the units were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In payment for merger and acquisition advisory services related to
the acquisition of Spartan Multimedia, in November 1998, Netgateway issued
10,000 shares of common stock to the Chaffetz Family Trust. The certificates
evidencing the securities underlying the units were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of
the Securities Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe,
Donald D. Danks, and Michael Vanderhoff and (ii) 100,000 shares to Michael
Khaled. The certificates evidencing the warrants and any securities
underlying the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 100,000 shares to Ronald Spire in payment for consulting
services. The certificates evidencing the warrants and any securities
underlying the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In connection with the Consulting and Advisory Agreement, dated
November 1, 1998, with North Coast Securities Corp., Netgateway issued 10,000
shares of common stock to North Coast Securities Corp. in payment for
advisory services. The certificates evidencing the shares of common stock
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with a Consulting and Advisory Agreement with Gerold
Czuchna, on December 14, 1998, Netgateway issued 5,000 shares of common stock in
payment of advisory services. The certificates evidencing the securities
underlying the units were appropriately legended. In the opinion of Netgateway,
the offer and the sale of the units (and the securities constituting the units)
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
II-3
In connection with the Consulting Agreement, dated as of December
24, 1998, between Netgateway, Inc. and Glashow Associates LLC, Netgateway
issued 170,000 shares of common stock and warrants exercisable for an
aggregate of 150,000 shares to such firm in payment for consulting services.
The certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the units
(and the securities constituting the units) was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In connection with acquisition of Spartan Multimedia, in January
1999, StoresOnline.com Ltd. issued 371,429 shares of class B common stock,
each of which is convertible into one share of Netgateway common stock. The
certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the units
(and the securities constituting the units) was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In connection with the Consulting Agreement, dated as of January 26,
1999, with Stock Maker, Inc., Netgateway issued 40,000 shares to such firm in
payment for advisory services. The certificates evidencing the shares of
common stock were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the units (and the securities constituting the units)
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder. This consulting agreement was terminated in June 1999
and Stock Maker returned these shares to the authorized, but unissued, common
stock of Netgateway.
In connection with Netgateway's then pending private offering of
convertible debentures, on February 15, 1999, Netgateway issued warrants
exercisable for an aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750
shares to Todd Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv)
4,250 to John Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to
Roxanne Melotte, and (vii) 32,500 shares to Michael Vanderhoff. The
certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
In payment for financial consulting services, on February 15, 1999,
Netgateway issued an aggregate of 30,000 shares of common stock to two
individuals. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the units (and the securities constituting the units) was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
These shares were subsequently returned to the authorized, but unissued,
common stock of Netgateway.
In March 1999, Netgateway closed a private offering of $1 million
principal amount of convertible debentures for gross proceeds of $1 million.
The debentures are convertible into shares of common stock at the conversion
price of $2.50 per share. These debentures mature December 31, 1999. The
certificates evidencing debentures, as well as any shares of common stock
issued upon the conversion thereof, were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the debentures was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors"
as defined in Rule 501 under the Securities Act.
On March 17, 1999, Netgateway issued warrants exercisable for an
aggregate of 25,000 shares of common stock to XOOM.com, Inc. These warrants
were exercisable at $12.00 per share and were exercisable on a cashless
basis. The warrants were exercised in full on a cashless basis on April 14,
1999 for an aggregate of 2,570 shares of common stock. The certificates
evidencing the warrants, as well as any shares of common stock issued upon
the exercise thereof, were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the debentures was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On March 31, 1999, Netgateway issued 600 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway.
On March 31, 1999, Netgateway approved the issuance of 5,000 shares
of common stock to Gerold Czuchna and 5,000 shares of common stock to Web
Walker Media Link, in connection with Mr. Czuchna performing consulting
services. The certificates evidencing the shares were appropriately legended.
In the opinion of Netgateway, the offer and sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On March 31, 1999, Netgateway approved the issuance of 10,000 shares
of common stock to Jason E. Chaffetz and Julie Marie Chaffetz, Trustees of
the Chaffetz Family Trust, udo 4/14/96, as compensation for Mr. Chaffetz's
efforts in
II-4
connection with the acquisition of Spartan Multimedia, Inc. The certificates
evidencing the shares were appropriately legended. In the opinion of
Netgateway, the offer and sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In April 1999, Netgateway closed a private offering of 329,000
shares of its common stock. The shares were sold at the price of $3.00 per
share, resulting in gross proceeds of $987,000. Each of the investors agreed
to acquire the shares for investment purposes only and not with a view to
distribution. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. All of the investors in the offering were
"accredited investors" as defined in Rule 501 under the Securities Act.
On April 1, 1999, Netgateway issued warrants exercisable for an
aggregate of 5,000 shares of common stock to Andrew Glashow in order to
induce such individual to make a loan to Netgateway. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 1, 1999, Netgateway issued warrants exercisable for an
aggregate of 26,050 shares of common stock to Richard Berns in connection
with Netgateway's convertible debenture private offering. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 16, 1999, Netgateway authorized the issuance of warrants to
purchase 50,000 shares of common stock of Netgateway to each of Donald Danks,
Keith Freadhoff, Michael Vanderhoof and Scott Beebe, all in connection with
the settlement of a dispute between Michael Khaled and Netgateway concerning
the issuance of certain common stock of the corporation to Khaled. In
addition, Netgateway authorized the issuance of a warrant to purchase 100,000
shares of common stock of Netgateway to Michael Khaled in connection with the
settlement. The certificates evidencing the warrants were appropriately
legended. In the opinion of Netgateway, the offer and sale of the warrants
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Berns Capital, L.P. for consulting services provided by Richard A. Berns.
The certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Todd Torneo for consulting services provided by Mr. Torneo. The
certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Joseph Py in consideration for Mr. Py making available $150,000 to
Netgateway. The certificates evidencing the shares were appropriately
legended. In the opinion of Netgateway, the offer and sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On April 26, 1999, Netgateway issued an aggregate of 30,000 shares
of common stock in order to induce Joseph Py and Robert Ciri to make loans to
Netgateway. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the debentures was exempt by virtue of Section 4(2) of the Securities Act
and the rules promulgated thereunder.
On May 3, 1999, Netgateway issued warrants exercisable for an
aggregate of 5,000 shares of common stock to GMR for consulting services. The
certificates evidencing the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On May 15, 1999, Netgateway issued to Shopping Planet 35,000 shares of
common stock in connection with the acquisition by Netgateway of the technology
of Shopping Planet.
II-5
On May 18 and June 4, 9, and 22, 1999, Netgateway closed a private
offering of an aggregate of 57.6 units, and in August and on September 24,
1999 Netgateway conducted another closing of this offering of 71.57 units, in
each case each unit consisting of $50,000 principal amount of Series A 12%
Senior Notes due 2000 and 5,000 shares of common stock. The notes mature on
the earlier of April 30, 2000 and the date of the closing of this offering.
The units were sold at the price of $50,000 per unit, resulting in gross
proceeds of $6,608,500. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the securities underlying the units were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. All of the investors in the offering were
"accredited investors" as defined in Rule 501 under the Securities Act. In
addition, in connection with this private offering, Netgateway granted to
Cruttenden Roth and the other agents responsible for placing such securities
warrants exercisable for an aggregate of 147,750 shares of common stock at an
exercise price of $10.00 per share.
In June 1999, Netgateway issued to Nida & Maloney, a law firm, three
units identical to the units described in the immediately preceding
paragraph, in satisfaction of its obligation for legal fees.
On June 15, 1999, Netgateway approved the issuance of 70,000 shares
of common stock to Glashow Associates LLC in consideration for consulting
services rendered to Netgateway, which shares were issued at the direction of
Glashow Associates as follows: 30,000 shares to Andrew Glashow, 3,000 shares
to Diana Glashow, 2,000 shares to Bernard Brown and 35,000 shares to Robert
Ciri. In connection with the services rendered by Glashow Associates,
Netgateway also approved the issuance of 150,000 warrants for the purchase of
common stock in the following amounts: 37,500 to Andrew Glashow, 37,500 to
Robert Ciri and 75,000 to Corporate Management Consultants, Inc. The
certificates evidencing the securities were appropriately legended. In the
opinion of Netgateway, the offer and sale of the securities was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On June 16, 1999, Netgateway approved the issuance of 125,000
warrants for the purchase of common stock to Howard P. Effron for consulting
services provided by Mr. Effron, which warrants were issued as follows at the
direction of Mr. Effron: 92,000 to Mr. Effron and 33,000 to Richard A. Berns.
The certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the warrants was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On July 26, 1999, Netgateway issued 50,000 shares of common stock
and warrants for the purchase of up to an additional 200,000 shares of common
stock to MediaOne of Colorado, Inc. in connection with the consummation of a
business transaction between Netgateway and MediaOne. The certificates
evidencing the securities were appropriately legended. In the opinion of
Netgateway, the offer and sale of the securities was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On July 26, 1999, Netgateway issued 700 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway. The certificates evidencing the shares
were appropriately legended. In the opinion of Netgateway, the offer and sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On July 26, 1999, Netgateway issued 28,000 warrants for purchase of
common stock to Burchmont Equities Group for consulting services performed.
The certificates evidencing the warrants were appropriately legended. In the
opinion of Netgateway, the offer and sale of the warrants was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In October 1999, Netgateway issued to each of Keith D. Freadhoff, its
Chairman of the Board of Directors, Donald M. Corliss, its President, and David
Bassett-Parkins, its Chief Financial and Chief Operating Officer, 400,000 shares
of common stock, subject to forfeiture in exchange for options granted to such
individuals under its existing stock option plans.
In October 1999, Netgateway issued an aggregate of 962,444 shares of
common stock upon the exercise on a cashless basis of an aggregate of
1,184,730 warrants then outstanding. Each of such transactions was exempt
from registration under the Securities Act by virtue of the provisions of
Section 4(2) and/or Section 3(b) of the Securities Act. Each purchaser of the
securities described below has represented that he/she/it understands that
the securities acquired may not be sold or otherwise transferred absent
registration under the Securities Act or the availability of an exemption
from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will
bear upon issuance a legend to that effect.
II-6
During the period December 1999 through June 2000, the Company
issued 239,576 shares of common stock upon the exchange of common stock of
its subsidiary, StoresOnline.com, Ltd.. The certificates evidencing the
shares were appropriately legended. In the opinion of Netgateway, the offer
and sale of the shares was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
During the period January 2000 through June 2000, the Company issued
218,963 shares of common stock upon the cashless exercise of warrants and
25,500 shares of common stock upon the exercise of warrants for $27,500. The
certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of section 4(2) of the Securities Act and the rules promulgated thereunder.
In connection with certain Consulting Agreements, each dated as of
January 1, 2000, between Netgateway, Inc. and Daniel V. Angeloff and Shawn
Sedaghat, on or about January 1, 2000, Netgateway issued 5,000 shares of
common stock to each of Messrs. Angeloff and Sedaghat in payment for
consulting services. The certificates evidencing the shares were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On February 14, 2000, Netgateway issued 1,250 shares of common stock
to MediaOne of Colorado, Inc., in connection with its participation on
Netgateway's CableCommerce Advisory Board. The certificates evidencing the
shares were appropriately legended. In the opinion of Netgateway, the offer
and sale of the shares was exempt by virtue of Section 4(2) of Securities Act
and the rules promulgated thereunder.
On March 3, 2000, Netgateway issued 900 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway. The certificates evidencing the shares
were appropriately legended. In the opinion of Netgateway, the offer and sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
In connection with the Consulting Agreement dated as of May 25, 2000
between Netgateway, Inc. and Star Associates LLC, on May 31, 2000, Netgateway
issued 20,000 shares of common stock to such firm in payment for consulting
services. The certificates evidencing the shares were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On July 31, 2000, we privately issued an 8% convertible debenture in
the aggregate principal amount of $4.5 million to King William, LLC, a Cayman
Islands limited liability company, pursuant to a securities purchase
agreement dated July 31, 2000. The debenture is convertible into shares of
common stock at the lower of $1.79 per share or 80% of the average current
market price during the 20-day trading period immediately preceding the
conversion date. The offering was made pursuant to Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933 in a negotiated transaction.
The purchaser of the debenture is an accredited investor with access to
information regarding the registrant. In connection with the issuance of the
debenture, we also issued to King William warrants to purchase 231,000 shares
of common stock at an exercise price of $1.625 per share. Warrants to
purchase an additional 90,000 and 10,000 shares were issued to Roth Capital
Partners, Inc. and Carbon Mesa Partners, LLC, respectively, at an exercise
price of $1.625. The recipients of the warrants are accredited investors with
access to information regarding the registrant.
ITEM 16. EXHIBITS.
See Index of Exhibits on page II-4.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation form the low or high end of the estimated maximum offering range
may be reflected inomitted from the form of prospectus filed withas part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the CommissionRegistrant pursuant to Rule 424(b) if, in(1) or (4) or 497(h) under the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price set
forth in the "CalculationSecurities Act shall be deemed to be part of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in thethis registration statement or any material change to such information inas of the registration
statement.
(2) That, fortime it was declared effective.
(b)
For the purpose of determining any liability under the Securities Act, of 1933, each such 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and
Exchange Commission such indemnification is against public policy as
expressed in the 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 whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-7
48
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 cityCity of Long Beach,
CaliforniaTempe, State of Arizona, on Septemer 7, 2000.
NETGATEWAY, INC.
BY: /s/ ROY W. CAMBLIN III
--------------------------------
Roy W. Camblin III
CHIEF EXECUTIVE OFFICER
POWERSeptember 11, 2020.
| Crexendo, Inc. | |||
| By: | /s/ Steven G. Mihaylo | ||
| Steven G. Mihaylo | |||
| Chairman and Chief Executive Officer | |||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the personsperson whose names appearsignature appears below constitutes and appoints Steven G. Mihaylo and constitutes Roy W. Camblin III and Donald M.
Corliss, Jr.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, andor stead, in any and all capacities, to executesign any and all amendments to the withinthis Registration Statement includingon Form S-1 (including post-effective amendments,amendments), and to sign any and allnew registration statements relating tostatement for the same offering of securities ascovered by this Registration Statement on Form S-1 that are filedis to be effective upon filing pursuant to Rule 462(b) ofpromulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each said attorney-in-fact and agent,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 each said attorney-in-factattorneys-in-fact and agentagents, 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, as
amended, this registration statement has been signed by the following persons
in the capacities indicated below and as of the dates indicated.
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 | ||
/s/ Ronald Vincent Ronald L. Vincent | Chief Financial Officer (Principal Financial and Accounting Officer) | September | ||
/s/ Todd Goergen Todd Goergen | Director | September | ||
/s/ Jeffrey P. Bash Jeffrey P. Bash | Director | September | ||
/s/ David Williams David Williams | Director | September | ||
/s/ Anil Puri Anil Puri | Director | September | ||
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