NEW YORK SÃO PAULO SHANGHAI INVESTMENT HIGHLIGHTS () Technology Services - Internet Software/Services October 26, 2017 operates in a rapidly-growing industry; global demand for VoIP services was valued at over $83 billion in 2015 and is expected to reach more than $140 billion in 2021. Crexendo uniquely develops all its products and firmware in-house, allowing the company to post frequent firmware updates and to achieve higher margins from in-house designing, engineering, and support. Crexendo has yet to post profits and positive cash flow from operating activities because it essentially operates as a start-up company, with major inherent risks and uncertainties. COMPANY DESCRIPTION provides website hosting, hosted telecommunications services, e-commerce software, website development software, and broadband internet services for businesses and entrepreneurs. Its services are designed to make enterprise-class hosting services available to small, medium-sized and enterprise-sized businesses at affordable monthly rates. It operates through Hosted Telecommunications Services and Web Services segments. The Hosted Telecommunications Services segment provides transmit calls using internet protocol or cloud technology, which converts voice signals into digital data packets for transmission over the Internet or cloud. The Web Services segment offers search engine optimization services, link building, paid search management services, conversion rate optimization services, and website design and development. The company was founded on April 13, 1995 and is headquartered in Tempe, AZ. COMPANY DATA KEY FINANCIALS (in $ millions, except EPS) 52-Week Range ($) 1.36-2.01 FY13A FY14A FY15A FY16A Shares Outstanding (mn) 13.83 Revenue 10.33 7.59 7.82 9.12 Market Cap ($mn) 27.8 EPS (0.46) (0.57) (0.35) (0.21) 3-Mo. Average Volume (mn) 0.02 Net Income (4.96) (6.38) (4.54) (2.79) Total Cash ($mn) 0.72 EBIT (4.87) (6.60) (4.83) (2.76) Total Debt ($mn) 1.03 EBITDA (3.73) (5.93) (4.56) (2.62) Dividend Yield (%) 0.00 Short Interest (%) N/A Insider Ownership (%) 76.84 SHARE PRICE PERFORMANCE 2.5 2 1.5 1 0.5 ONE- YEAR PRICE AND VOLUME HISTORY 80,000 60,000 40,000 20,000 0 0 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 volume close 845 Third Avenue Fl 6, New York, NY 10022 646.688.3131 research@jgrcap.com
BULL CONSIDERATIONS Significant opportunities in a fast-growing voice over Internet Protocol (VoIP) industry Crexendo () operates in a fast-growing VoIP services industry as a full-service cloud solutions provider that delivers critical voice and data technology infrastructure services to the start-up, medium-sized, and small business enterprise markets. Global demand for VoIP services was valued at over $83 billion in 2015, according to a Zion Market Research report, and is expected to reach more than $140 billion in 2021; growing at a CAGR of above 9.1% from 2016 to 2021. 1 grew its telecom segment s revenue at a massive 48% CAGR from 2013 to 2016, while posting 30% revenue growth in 2016 and 16% in H1 2017. Moreover, it has increased its telecom backlog and gross margin every year since entering the telecom market. Combined with substantial organic growth, is looking to make accretive acquisitions to ensure incremental growth. s in-house products and firmware offer a key competitive advantage develops all its products and firmware in-house, unlike most competitors, who do not offer their own suites of cloud telecom services but rather sell third-party solutions and offerings. Such in-house product development capabilities allow the company to post frequent firmware updates (every six to eight weeks), improving the customer experience and providing itself with a key competitive advantage. Moreover, the company is able to achieve higher margins from in-house designing, engineering, and support for handsets and other systems. produces greater efficiencies, driven by its superior technology infrastructure and virtual network operation center that is built and managed on industry-standard computing, storage, data, and platforms. Synergies between web and telecom protocols such as TCP/IP, HTTP, XML, and SIP, and innovations in computing, load balancing, and redundancy, and high availability of related technologies offer it a unique advantage for seamless service delivery. s cloud business phone system received the Internet Telephony Excellence award for a fifth year in a row in 2017, validating its excellent products and services. Executive management team brings over 100 years of industry experience CEO Steve Mihaylo has around 46 years of extensive telecom industry experience, and President and COO Doug Gaylor has around 30 years of telecom experience. s effective management team established a low-cost, recurring-revenue business model that is competitive in any market. Management has facilitated significant organic growth while keeping a tight control on operating expenses, reducing its losses and negative cash flow every year. In the most recent quarter, the telecom segment s revenue increased 16%, while expenses fell 6% YoY. The company is working 1 Global VoIP Services Market Set for Rapid Growth, to Reach Around USD 140 Billion By 2021, May, 02, 2016, Link research@jgrcap.com 2
intensively on upgrading the sales teams and processes to accelerate growth in new sales bookings. recently appointed Neil Lichtman (EVP Sales and Marketing) for growing and managing both the direct and channel partner sales teams. Zultys, Inc., where he was CEO prior to, grew by around 400% during his seven-year tenure. aims to break even on both a cash flow and net income basis by end-2017. BEAR CONSIDERATIONS Substantial management control could limit potential growth CEO Steve Mihaylo held a major stake of 68% of the company s common stock as of December 31, 2016. We believe a major control ownership could narrow management s objectives and limit the company s potential growth. Mihaylo also has the right to determine the outcome of matters submitted for shareholder approval, including the election of directors and any merger, amalgamation, consolidation or sale of company assets. He could exercise substantial corporate control, which may not always be in the interests of general shareholders. Moreover, the company is actively looking for an accretive acquisition, and Mihaylo would have a higher control over strategic decisions that may not align with the company s general interests. Previously, Mihaylo was the founder and CEO of $500 million Inter-Tel, Inc.; he sold it for $740 million in 2007. Adverse revenue effect of changes to business model and strategies Major changes to the company s business model and product strategies may adversely affect revenue. is already facing the effect of declining revenues from its discontinued seminar sales model. In addition, hosting fees from websites have continued to decline since the termination of direct seminar sales. The company has not actively marketed its website development software, and new hosting fees from websites have been minimal. has been the frequent subject of government inquiries and investigations related to its discontinued seminar sales model and business practices; it may therefore be required to pay refunds, damages or fines that could negatively affect its financial results or ability to conduct business. research@jgrcap.com 3
Continued losses and uncertain funding essentially operates as a start-up company, with major inherent risks and uncertainties surrounding funding operations until profitability is achieved. The company has not been able to post profits and positive cash flow from operating activities. Due to historical losses and constant cash burn, including a range of internal forecast outcomes, its cash balance of $929k at June 30, 2017, does not appear to be adequate to meet near-term obligations. Such fluctuations in operating results could affect s stock price and ability to raise capital in the near future. Net loss and non-gaap net loss 2014 2015 2016 YTD 6/30/17 $8,500,000 $7,500,000 $6,500,000 $5,500,000 $4,500,000 NN MRR $3,500,000 $2,500,000 $1,500,000 $500,000 Source: s September 2017 presentation research@jgrcap.com 4
FINANCIAL AND VALUATION OVERVIEW P/E EPS Growth (vs. Previous Quarter) Sales Growth (vs. Previous Quarter) P/E (2016) NM 3Q2017-0.50% 3Q2017 NM P/E (ttm) NM 2Q2017 0 2Q2017 NM PEG Ratio NM 1Q2017-0.20% 1Q2017 NM Price Ratios (ttm) ROE ROA Price/Book 6.66 3Q2017-262.84% 3Q2017-47.26% Price/Cash Flow NM 2Q2017-237.67% 2Q2017-55.83% Price/Sales 2.12 1Q2017-205.37% 1Q2017-60.74% Current Ratio Quick Ratio Operating Margin 3Q2017 1.16 3Q2017 1.04 3Q2017-9.86% 2Q2017 1.19 2Q2017 1.05 2Q2017-21.72% 1Q2017 1.03 1Q2017 0.94 1Q2017-21.71% Net Margin Pre-Tax Margin Book Value 3Q2017-11.31% 3Q2017-11.15% 3Q2017 0.03 2Q2017-23.17% 2Q2017-22.99% 2Q2017 0.04 1Q2017-22.39% 1Q2017-22.35% 1Q2017 0.04 Inventory Turnover Debt-to-Equity Debt-to-Capital 3Q2017 18.54 3Q2017 301.40% 3Q2017 75.09% 2Q2017 17.25 2Q2017 201.38% 2Q2017 66.82% 1Q2017 24.82 1Q2017 200.39% 1Q2017 66.71% research@jgrcap.com 5
Income Statement 4Q2016 1Q2017 2Q2017 3Q2017 2013 2014 2015 2016 ($ in millions) Total Revenue 2.33 2.35 2.34 2.49 10.33 7.59 7.82 9.12 % growth 1% 0% 6% 316% -26% 3% 17% Total Cost of Revenue 0.97 0.90 0.83 0.85 5.24 4.25 3.85 3.77 % of sales 38% 35% 34% 51% 56% 49% 41% Gross Profit 1.37 1.45 1.52 1.63 5.09 3.35 3.98 5.35 Margin % 59% 62% 65% 66% 49% 44% 51% 59% R&D 0.19 0.19 0.19 0.19 0.78 0.78 0.78 0.83 % of sales 8% 8% 8% 7% 8% 10% 10% 9% SG&A 84.61 83.37 86.35 75.49 96.49 130.96 112.54 88.95 % of sales NM NM NM NM NM NM NM NM EBIT (0.61) (0.51) (0.51) (0.25) (4.87) (6.60) (4.83) (2.76) Margin % -26% -22% -22% -10% -47% -87% -62% -30% Interest Expense 0.04 0.03 0.04 0.04 0 0 0.03 0.14 EBT (0.65) (0.54) (0.54) (0.28) (4.87) (6.60) (4.86) (2.90) Tax Expense -0-0 -0 0-0 0-0 0.012 Tax Rate % -1% -1% -1% 0% -2% 1% 0% 0% EBITDA (0.57) (0.47) (0.48) (0.22) (3.73) (5.93) (4.56) (2.62) Margin % -25% -20% -21% -9% -36% -78% -58% -29% Net Income Applicable to Common Shareholders (0.62) (0.53) (0.54) (0.28) (4.96) (6.38) (4.54) (2.79) Margin % -27% -22% -23% -11% -48% -84% -58% -31% Basic Shares 13 13 14 14 11 11 13 13 Dil Shares 13 13 14 14 11 11 13 13 EPS - Basic (0.05) (0.04) (0.04) (0.02) (0.46) (0.57) (0.35) (0.21) EPS - Dil (0.05) (0.04) (0.04) (0.02) (0.46) (0.57) (0.35) (0.21) Balance Sheet 4Q2016 1Q2017 2Q2017 3Q2017 2013 2014 2015 2016 ($ in millions) Current Assets 2.37 2.05 2.52 2.45 5.64 4.86 3.30 2.05 Total Assets 4.41 3.53 3.63 3.45 9.61 7.51 5.66 3.53 Current Liabilities 2.66 1.99 2.12 2.11 2.79 2.70 2.30 1.99 Total Liabilities 3.72 3.02 3.12 3.10 2.91 2.97 3.46 3.02 Shareholders' Equity 0.69 0.52 0.51 0.36 6.70 4.54 2.20 0.52 Total Liabilities and Shareholders' Equity 4.41 3.53 3.63 3.45 9.61 7.51 5.66 3.53 research@jgrcap.com 6
Cash Flow Statement 4Q2016 1Q2017 2Q2017 3Q2017 2013 2014 2015 2016 ($ in millions) Cash from operating activities (0.03) (0.39) (0.05) (0.09) (5.38) (4.34) (2.97) (1.13) Cash from investing activities 0 0 0.25 0 0.86 2.15 (0.03) (0.00) Cash from financing activities (0.04) 0.15 0.15 0.05 0.16 2.02 1.57 0.24 Net Change in Cash (0.07) (0.24) 0.35 (0.04) (4.36) (0.17) (1.43) (0.89) Cash at beginning of the year 1.02 0.95 0.72 1.07 NM 3.56 3.04 1.61 Cash at the end of the year 0.95 0.72 1.07 1.03 3.56 3.04 1.61 0.72 Valuation Data Sales EPS ($ in millions) Ticker 2016 2017E 2016 2017E RingCentral, Inc. Class A RNG 379.7 609.2 (0.4) 0.3 BroadSoft, Inc. BSFT 341.0 431.6 0.0 2.6 8x8, Inc. EGHT 253.4 351.4 (0.1) 0.1 Vonage Holdings Corp. VG 955.6 1,017.3 0.1 0.3 9.1 NM (0.2) NM Insider / Stakeholders %OS Position (000) MIHAYLO STEVEN G 72.90 10,079 GOERGEN TODD A 2.60 360 BASH JEFFREY P 0.98 135 KORN JEFFREY G 0.19 26 WILLIAMS DAVID R 0.15 20 Total 76.8 10,620 research@jgrcap.com 7
COMPANY INFORMATION research@jgrcap.com 646.688.3131 DISCLOSURE This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the Risk Factors section in the SEC filings available in electronic format through SEC Edgar filings at www.sec.gov. The research analysts principally responsible for this research preparation do not receive compensation that is based upon any specific investment banking services or recommendations and can be compensated based on factors relating to the overall profitability of the JGR Capital ( firm ). As of the date of research distribution, neither the firm nor the principal research analysts beneficially own 1% or more of any class of common equity securities for this issuer (including, without limitation, any option, right, warrant, future, long or short position). The securities of the issuer(s) discussed in this research may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is no guarantee of future results. This research does not constitute a personal trading recommendation or take into account the particular investment objectives, financial situation or needs of an individual reader of this report, and does not provide all of the pertinent information to make an investment decision. JGR Capital does not provide investment banking services nor has it received compensation for investment banking services from the issuers covered in this research content. The firm does not make a market in the issuer s securities. It has received compensation from the issuer for providing non-investment banking services to this issuer. The noninvestment banking services provided to the issuer includes investor relations advisory and services, production of this research content, comprehensive reporting analytics, and financial analysis. The fees for these services vary on a per-client basis and are subject to the amount and category of provided services. For the services provided to the issuer covered in this report, engagement commenced on April 18th, 2017, for a 3-month period within the typical $1,000 to $9,000 compensation structure for the services engaged by this issuer. Firm analysts and members of the research production team are prohibited from holding or trading securities in the issuer. Additional information is available upon request. JGR Capital s research contents are based on data obtained from sources that it believes to be reliable and does not purport to be a complete statement of all material factors. This report is for informational purposes and is not a solicitation of orders to purchase or sell securities. No part of this material may be copied, photocopied or duplicated in any form or by any means, or redistributed without prior written consent from JGR Capital. All rights reserved. research@jgrcap.com 8