Crexendo, Inc. (CXDO) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Crexendo’s Third Quarter 2019 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Mr. Steve Mihaylo, Chairman and CEO. Sir, the floor is yours.

Thank you, Chris. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo’s third quarter 2019 conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. I'm going to ask Jeff to read the Safe Harbor statement. After that, I will give some brief general comments about the quarter. Ron will provide more details on the numbers, Doug will provide a business and sales update and then we will open the call up to questions. Jeff, would you please read the Safe Harbor statement.

Thank you, Steve. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call other than statements of historical fact are forward-looking statements. Forward-looking statements include but are not limited to, words like believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2018 and the quarterly statements as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I'd now like to turn the call back to Steve, Steve?

Thank you, Jeff. I am very excited to discuss our results with you today. As you will recall last year I told you that 2019 would be a very important year for us, and that we would be profitable. We have delivered on those expectations. This is the third quarter in a row that we have done GAAP profitable. This is a remarkable accomplishment one that I and the rest of the team are very, very proud of. We had very strong results in our cloud telecommunication. UCaaS service revenue segment. Our Q3, 2019 saw 24% increase compared to the third quarter of 2018, and we did it without giving away the farm like some of our biggest competitors had done and we were GAAP profitable. On a GAAP basis we reported net income of $334,000 during the third quarter of 2019, or $0.02 per basic and diluted common share compared to net loss of $199,000 or $0.01 per basic and diluted common share for the third quarter of 2018. Another great improvement. We continue to do a great job of generating cash and restricted cash as of September 30, 2019, our cash was $3.4 million as compared to $1.9 million at December 31, 2018. We almost doubled our cash in less than one year is another highly impressive accomplishment. All-in-all, we continue to execute on our plan. We work every day to improve shareholder value and it shows by the fact that our cash improved dramatically. Our current ratio improved our gross margin expanded and we've talked about that in the past, and our shareholder equity had a substantial increase. When you consider this happened with our expenses increasing at a much lower rate than our revenue growth, you realized we had a very good reason to be proud. Expect these improvements to continue for the foreseeable future. We will continue to manage the business carefully and I expect to continue to be very -- I expect our results to be very strong. Our team works hard everyday and it is shown by both our results and by the fact that we have the best UCaaS product and service in the industry. And it is not just us saying this; these results are confirmed by independent organizations by awarding us award every year. We will continue to grow the company organically and we are carefully looking at potential accretive acquisition. I am confident we will continue to impress. We believe there are three basic criteria when an acquisition has to have. An acquisition has to have audited financial statements. An acquisition has to be accretive from day one and it should be more accretive as we garner improvements in the operation. And an acquisition has to have some good people that will strengthen our team. With that I'll turn the call over to Ron. Ron?

Thanks Steve. Consolidated revenue for the third quarter of 2019 increased 19% to $3.6 million, as compared to $3 million for the third quarter of the prior year. Service revenue for the third quarter of 2019 increased 10%, to $3.3 million, compared to $2.7 million reported for the third quarter of the prior year. We continue to see strong growth in our Cloud Telecommunication segment. Service revenue for the quarter increased 24% as Steve mentioned or $591,000 to $3.1 million, compared to $2.5 million reported for the third quarter of the prior year. Our Web Services segment revenue for the quarter decreased 22% or $44,000 to a $159,000, as compared to $203,000 reported for the third quarter of the prior year. Product revenue for the third quarter of 2019 increased 9%, $343,000, as compared to $314,000 reported for the third quarter of the prior year. Consolidated operating expenses for the third quarter of 2019 increased nearly 1%, to $3.3 million, compared to $3.2 million for the third quarter of the prior year. Net income for the third quarter was $334,000 or $0.02 per basics and diluted common share, as compared to a net loss of $199,000, or $0.01 per basic and diluted common share for the third quarter of the prior year. Non-GAAP net income for the third quarter was $454,000 or $0.03 per basic and diluted common share, as compared to net loss of $12,000 or breakeven per basic and diluted share for the same period of the prior year. EBITDA for the third quarter was $361,000 as compared to a loss of $167,000 for the same period of the prior year. Adjusted EBITDA for the quarter was $468,000 as compared to $2,000 for the same period of the prior year. For the nine months period, consolidated revenue increased 22% to $10.7 million, as compared to $8.8 million for the same period of the prior year. Our service revenue increased 22% to $9.4 million for the nine months periods as compared to $7.7 million reported for the same period of the prior year. Our Cloud Telecommunication segment service revenue for the nine months period increased 26% or $1,854,000 to $8.9 million compared to $7.1 million reported for the same period of the prior year. Our Web Services segment revenue for the nine months period decreased 21% or $134,000 to $502,000 as compared to $636,000 reported for the same period in the prior year. Our product revenue increased 16% to $1.3 million for the nine months period as compared to $1.1 million for the same period of the prior year. Consolidated operating expenses for the nine month period increased 9% to $9.8 million, compared to $9 million for the same period the prior year. Net income for the nine months period was $911,000 or $0.06 per basic and diluted common share, as compared to a net loss of $215,000 or $0.02 loss per diluted common share reported for the same period of the prior year. Non-GAAP net income for the nine months period of $1.2 million or $0.09 per basic common share and $0.08 per diluted common share, as compared to a non-GAAP net income of $183,000 or $0.01 per basic and diluted common share reported for the same period of the prior year. EBITDA for the nine months period was $986,000, as compared to a loss $140,000 reported for the same period of the prior year. Adjusted EBITDA for the nine months period of $1.3 million, as compared to $204,000 reported for the same period of the prior year. Cash, cash equivalents and restricted cash at September 30, 2019 was $3.4 million, as compared to $1.9 million reported at December 31, 2018. Operating activities provided $1.2 million in cash, cash equivalents and restricted cash. Our investing activities utilized $72,000 in cash, cash equivalent primarily for the purchase of property and equipment. And our financing activities provided $374,000 of cash, cash equivalent and restricted cash. Those activities primarily are due from exercises of employee stock options. With that, I'll turn it over to Doug Gaylor, our President and COO for additional comments on sales and operations.

Thanks Ron. I'm very pleased with the momentum and results that we delivered in Q3. For the third consecutive quarter, we had substantial increases in UCaaS which is unified communication as service revenue and backlog while delivering GAAP net income and significant increases in our cash balances illustrating that we continue to execute well on our business plan. Year-to-date, our UCaaS service revenue is up 26% year-over-year. Our net income year-to-date of $911,000 represent $1.2 million increase over the prior year-to-date loss of $215,000 in Q3 of 2018. Our strong net income is a culmination of consistently managing our plan to grow profitably. As I have previously mentioned, our recurring revenue model combined with our relatively fixed cost structure has allowed us to model the business well and consistently obtain GAAP profitability this year. We continue to expand our partner program and have seen nice increases in sales, as well as increases in partners reselling our platform. We're launching additional incentives and marketing programs in Q4 to continue that momentum and are excited about the opportunities being pursued by the new partners joining the Crexendo team. Our backlog continues to grow and increase 17% year-over-year to $25.3 million. Our installations are strong and we are very pleased at the momentum we are seeing. We had a nice increase in our telecom gross margins for the quarter increasing margins to 71% as we saw an increase in soft phone sales during the period and are seeing a heavier adoption of our hardware as a service offering. All of these metrics also help increase our cash balances by 79% for the first three quarters of the year. I'm very pleased with the strong positive cash flow we have been able to inject into the business this year. And I am confident that those trends will continue and will allow us to invest more in sales and marketing efforts. In Q2, we were awarded the 2019 Unified Communications Product of the Year award and we are proud to announce that we followed that up with another award in Q3 by winning the 2019 Communication Solutions Product of the Year award in September. Our in-house engineering team is continually enhancing our platform with leading-edge capabilities, including texting, chat, cell phone collaboration and call center applications. And our platform is one of the strongest UCaaS offerings in the industry and we are proud to continually be recognized by some of these leading authorities in the industry. As I previously stated, we have reached an inflection point for the company where we can concentrate on consistent growth and GAAP profitability. We've now had three consecutive strong quarters of revenue growth and GAAP earnings, and we are focused on increasing those trends and investing more in our sales programs and marketing initiatives, by reinvesting our positive cash flow in the sales and marketing efforts, we can accelerate future sales growth. The industry still has tremendous growth opportunity with estimates at 65% to 70% of the business market still is using legacy premise-based equipment. It's not a matter of if these businesses migrate to the cloud, but rather when and we are in a prime position to assist in their migration to the cloud. I'm proud of the efforts of the entire Crexendo team and our partners. And I am very excited and confident in our ability to continue executing on our plans as we finish out 2019 and set our sights on 2020. I will now turn it back over to Steve for any additional comments.

Thank you Doug and thank you Ron for the comments that you made. Christy, I have no additional comments at this time. We'll open it up to questions.

[Operator Instructions] Our first question from William Gibson with ROTH Capital. Please go ahead.

Thank you. Doug perhaps you could give a little more color just on the growth of the partners you've got. Is there any way you can put a number on that or percentage increase? And basically also maybe some color on how the existing partners you had or their growth path?

Yes. We don't breakout exact numbers, Bill, but I will tell you that that we had an increase in sales consecutively for the last three quarters with our partner program. So we're seeing more and more traction with our partners. Those numbers continue to get enhanced. We continue to bring on new partners, adding I think this quarter we added additional nine or ten partners to our stead. And so as we add these partners on, they are obviously bringing on their sales teams and getting trained and on-boarded with our program. So when we look at where we are today with our partner channel, our partner channel continues to grow and the sales that we're seeing from the partners continue to increase. As you know, we've got some larger partners and at the smaller partners I really break our partners down into three different categories. We've got our traditional telecom partners. We've our B2B partners that don't sell telecom as a core item, but have added it to their product offering. Then we've data bars and managed service providers. So those three components make up our partner channel and we're actually seeing a lot of growth in the B2B sector with our partners today.

Good. And the gross profit you mentioned that increasing. I assume that trend continues into the fourth quarter and next year.

That's correct, Bill. This is Steve Mihaylo speaking. We expect it to increase it. It's not going to be a straight line but we do expect it to increase next year to probably in the range of 72% to 74% or maybe just a little bit better for the entire year. So you're going to see probably 2% or 3% increase over the next 12 -months in our gross margin, that's correct. Thank you, Ron.

And our next question comes from Kevin Dede with HCW. Please go ahead.

Hi, good afternoon, guys. I'm great. Happy to be on this call, excited to see the numbers you're putting up, Steve. But I got to tell you this is about the Steve Mihaylo. I know I'm looking at the segment financial data and your web services business posted. I guess it probably took the business down right for the first nine months of the year.

That's correct. We have 22% decreases.

Yes. I'm wondering, okay, listen, I know it's peanuts compared to what you have going on. I'm just wondering how you're thinking about it in these days?

Well, we made a conscious decision back in July of 2011 to discontinue that segment. And we've been running off the receivables which are now about zero. And the revenue is getting close to zero. In fact, it's becoming insignificant probably sometime next year we will stop even breaking that out. But for the time being, it's still a little bit more net income than the rules allow. But I think in the first or second quarter, it'll probably be below that. So we'll stop reporting that and just the company itself will be reporting the one segment which is recurring revenue. Having said that our push is going to be for marketing next year, so that we can get the word out and we'll probably be will see a slight or even a substantial uptick in the company's ability to produce year-over-year results. I would say that Doug mentioned that we're going to spend more money in the fourth quarter. You're actually going to see a significant improvement going in the next year. I don't know how much that'll be, but it will be better than the 24% that you've seen this year. I'm trying to think of -- there's just a multitude of things we're going to do on the marketing side. But I'm going to let Doug address that, if you could, Doug?

Yes. I mean, Kevin, thanks but obviously as Steve said, the Web Services is just a smaller, smaller piece of the puzzle and everything is being concentrated on the telecom segment. So as we look at that growth now that we've got a nice cash flow. We can put some of that cash back into incentives and sales and marketing programs. And that's really the key for us, up until this point we've been a little stunted in the fact that we didn't have that additional cash flow to put back into the business. Now that we have that for the doors because we've got a lot of great initiatives claim for Q4 and for the next year. And so by putting that money and reinvesting it back into the business, we anticipate that we'll be able to have nice growth from the sales perspective.

Okay. I follow you gentlemen but that is on developing the UCaaS side not Web Services side. I was just wondering if you, okay, granted it goes away from a reporting standpoint, but it's still sucking money out of the business. And I know that's not how you operate these. So I am just kind of wondering what you're thinking about.

I'm going to let Ron handle that one. But just a comment, it's not sucking any money out of the business.

You're right, Steve. It is truly a profit center for us. We're continuing to provide hosting services for websites that are hosting our data centers. So there's not a lot of cost associated with running that division, but what you find is you have allocate a portion of your expenses for running the business and your segment reporting and so the results [Multiple Speakers] yes, it's really a profit center for us.

Good, okay, thank you, Steve. Apologies for the confusion on my end.

Not a problem.

All right. So now that you've got cash and you plan on investing it and growing the UCaaS side, tell us about what you see in the overall environment whether or not things have changed. I know, Doug, I think your market share numbers changed a little bit. I'm just wondering what you see as you look across your competitors and I guess maybe some of the other smaller companies that might not want to be in the business anymore. Tell us a little bit about what you're seeing out there and what you think the appetite for some of these smaller players might be to consolidate with a winner?

Great question, Kevin. I think that as you and I have discussed it at previous investor conferences, there's a lot of opportunity out there. The 65% to 70% of the customers that haven't migrated to the cloud yet that was a number that I quoted from the Cloud Communication Summit that I recently attended where Frost & Sullivan did a presentation and those are the numbers they were quoting. So there's still a lot of runway left for us to get customer acquisitions. And with that growth in the space is really allowing a lot of our competitors including ours to have remarkable growth. So when we talk about 24% UCaaS growth year-over-year. That's great; some of our competitors are having a similar type success. But they're not putting any money to the bottom line. So we are proud of the fact that we're having similar type growth with profits to the bottom line to boost. When we talk about the competition out there, it's still a very, very competitive marketplace. So when we see a lot of our competitors throwing all of their resources and not having any debt income at the end of the day, that model only goes so far and so at the end of the day you have to pay the piper. So when we look at the bigger ones out there that are losing money, they've got a lot of bankroll behind them. But there are a lot of smaller players out there that haven't reached profitability or struggling to get to profitability. Most of them in the private sector, but there's lots of opportunities. We continue to look at opportunities and feel confident that there's some good opportunities out there that if we can find the right one that's accretive and fits those three criteria that Steve mentioned that we will roll it into the organization. But we're going to be very picky about what we choose and how we move forward. But I think there are plenty of opportunities out there and Ron and myself and Steve are constantly looking for the right fit for Crexendo.

Yes. I'd like to add a little bit to that. Doug is absolutely correct. There are a lot of smaller players that either don't have their own platform, which is most of them. Some of our bigger competitors do but we're one of only maybe a handful of companies out there that have their own platform. And we continue to enhance it. The other thing is these folks that don't have their platform; we can move them over to our platform if they meet the three criteria that I pointed out earlier. Audited statements, of course, they've got to be an accretive but just moving them onto our platform will make them accretive. And then the final thing is because the environment is competitive and because a lot of our smaller competitors. And I'm talking about $5 million, $10 million, $15 million, $20 million companies, they haven't reached profitability yet. There's going to be consolidation in this industry. And we've identified probably four or five acquisition targets. I'm not going to talk about that today, but the point is you will see some kind of acquisition from us in the next 12 to 24 months and probably several. Having said that, you know what our criteria is, what the potential is, by just moving them onto our platform it's going to be an increase in gross margin and that there's going to be redundancies and synergies that we're going to be able to capitalize on. So I'm very, very optimistic about that segment of our business and of course with the marketing effort, we're going to be getting the word out more and that's should increase our rate of sales over the next 12 to 24 months. So I'm a lot more optimistic than I've been on any of these other calls. And I appreciate your asking, Kevin.

Yes, no, my pleasure. A couple more questions if you don't mind. One is on just the equipment side, can you talk about the growth that you see there? When the next hardware refresh comes? And how you think that side of your business stacks up to some of these other guys that you've mentioned, Steve? Sort of in that $5 million to $10 million range. It's not I guess common for me to see the smaller guys such as yourselves providing proprietary equipment and I see that as a differentiator. And I'm just kind of wondering how you guys see it.

Well I'm going to let Doug answer most of this question, but there are a few comments I want to make. I consider the proprietary equipment as mostly being a marketing or branding situation. We do brand it on both sides of the phone and having said that we get decent margins and whereas a lot of our smaller competitors and I'm talking to $5 million, $10 million, $15 million, $20 million companies are selling somebody else's phone, they're selling Cisco or they're selling Polycom or Yale Inc or one of these other phones. And they don't have the margins that we have. So as long as folks are using phones on the desktop, we're going to be selling phones on the desktop eventually and I don't know if that happens in the next 5 or 10 or a 100 years eventually I think the phones are going to away. And I know that Doug has a little bit different take on that, but that's some of my thinking. I'd like to turn this over to Doug and get his opinion on it.

Yes. I think that first and foremost the phones that we do manufacture, Kevin, are not proprietary. They are they are SIP phones and so they are compatible with broad soft and Meta switch and other platforms. We do have a unique proposition in the fact that we do make the phone and so we give extra incentives and extra warranties and extra provisions. So it really does have a differentiating factor, but from a customer's perspective they're not proprietary to whereas if they go with Crexendo today, they can use those phones should something change in the future. So that's always a winning proposition for the customer. Hardware is and Steve and I do have a little bit of a disagreement on this. And the fact that we've been talking about the death of the black phone for 20 years now. And quite frankly, we're seeing more and more adoption of soft phones. You notice that in my comments earlier about our gross margins and the fact that we've got more soft phones being deployed and more bring-your-own-device where somebody already has a SIP phone and we're just moving their Polycom or their Yale ink or their Cisco phone over to our platform. And so obviously that helps our margins because the hardware is actually good margins for us, but not nearly as good as the service portion of our gross margins. So I think hardware is always going to be an important part of our piece of the equation. It does allow us to differentiate ourselves. We continue to come out with new models. We actually just released two new models this month that have Bluetooth and Wi-Fi capabilities built into them. So we're constantly enhancing our phone sets as well. So when we look at where the telephone technology is today, the phone does that the software tells it to do so very similar to the mobile phone industry. And the iPhone 11 does the same thing the iPhone 8 does, but they come out with new enhancements just to give you a new camera with more pixels et cetera, but quite frankly the iPhone 8 does just as much and as just as practical. We come out with new phones and we do add some enhancements like Bluetooth and Wi-Fi capabilities with our newest models that we just released. So that's a true winning advantage for us with our customers that need those capabilities, but for the customers that have three and four year old phones for us, we still warranty those for the life that they're with us. And so those customers don't have any worry about being obsolete, if a phone breaks. We replace it and the benefit for them is that if we don't have the older phone in stock, we replace it with a newer phone.

And, Kevin, there's one thing I want to clarify. You were gracious enough to compliment me on the growth of this company. I don't have as much to do with it as Doug and Ron and Jeff and all the other good people that we have here. I'm just sort of the orchestra director. Thank you.

Well, yes, no, that's a standard Mihaylo question, the humble response. I appreciate it, Steve. One last one if I'm, gentleman. Okay, so sort of it within the context of Crexendo as an investment. You gentlemen all understand that it is difficult for investors to trade the stock because it is so thin. And if you expand on that and consider some of your commentary about business dev and especially on the M&A side, how I guess how do you plan on trying to make I guess the merger equation more attractive for some of those you might negotiate with. I mean aside from just writing a cash check.

Yes. A couple of things. Number one, we recognized that our stock is thinly traded. On the other hand, today we got a recommendation by a firm and 25,000 shares traded. And we're seeing our folks and this is typical, folks that have options from time to time sell those options, which add more liquidity to the company. But as I mentioned earlier, four or five companies that we've identified will expand the float as well. So there are a lot of things that we're doing to expand the float. And the stock price is getting to the point that we might do a small offering which would also increase the float. It would increase the liquidity in the stock. It would probably get us analysts' coverage. I'm not counting on that but that's pretty much been in the way it works. And I haven't been going to any of these investor conferences. Doug and Ron have been going to those conferences. Maybe you guys would like to add some color to the whole thing as well.

Yes. I think when we look at the liquidity in the stock, obviously, that's a question that comes up often. The stock does trade when there's desire for people who buy into the stock as evidences of today's movement that we saw. But I think that is something that we realized that if we do a deal out there and get more shares issued that will have more liquidity out there. So I think we're always looking for ways to increase that, but we're not going to do anything to dilute the shareholders, we're going to try and grow the business and grow it organically.

And it will be accretive. So I -- we consider any dilution which expands shares is really not dilution at all if you're expanding earnings per share on a GAAP basis .

And we'll move back to [Indiscernible]GEO Investing.

Great, thank you. And thanks for taking the call. A question. I have a one quick question here and I just wanted to know if you could get into the environment a little bit in terms of how the RingCentral, Avaya deal might be affecting it? And how you see that playing out and do you see opportunity for you in that development or do you see more risk for you as you compete in the environment now? So this was --

I'm going to let Doug handle that one since he's out in the field every day.

Yes. As I think today, I think it's a great opportunity for us. I think it creates a lot of uncertainty for the future of Avaya customers out there. I think Avaya has partnered with RingCentral that gave every RingCentral basically a hunting license to go after their customer base out there. So I think Avaya is kind of playing the card that, hey, I'm just kind of putting my feelings into this or my thoughts into this is that Avaya didn't feel like they had a comparable cloud product offering out there. So they partnered with RingCentral feeling that, hey, if their customers are going to be migrating to the cloud which invariably they will be and Avaya didn't have a cloud platform that they felt comfortable putting out there. They partnered with one of the bigger players in the market. And so I think that that creates a lot of opportunity for us to go after those Avaya customers. We are proactively going after the customers today. We're proactively going after the Avaya partners today to hopefully get them to realize that they could sell Crexendo and maybe have a better offering than having RingCentral have an open season pass on their customer base out there. So I think a winning proposition for RingCentral. I don't think it's a winning proposition for Avaya. That's just my personal opinion, but I think RingCentral getting an open season path to go out and take those via customers to their platform is good for them. I think it also allows those Avaya customers to realize that cloud is the way of the future and for us talking to those customers. I think we're going to have the equal opportunity. I think when we compete against RingCentral; I think we've got more competitive offering. I think we've got a better price point. And so I think if RingCentral is creating the interest out there with their marketing and their efforts out there, and we get to play in the same competitive environment. I think we're going to win more often than not against RingCentral.

And you talk about having a profitable platform type of solution. So when you look at your solution versus like a RingCentral solution, how long will it take RingCentral versus someone like you to get to be able to serve a customer's needs to give you transfer to the cloud?

Yes. I think when you look at the traditional premise based customer; they've got their hardware installed. They've got their lines coming in from the local telephone company. So migrating him over to the cloud, the migration process for us and the migration process for RingCentral and 8X8 and Vonage, it is very similar and very comparable. So moving into the cloud as a matter of getting them out of their proprietary system and moving them to the cloud now with a RingCentral, Avaya phones are in most cases digital or in some cases the older platforms analog phones that only work with the Avaya platform. So those analog and digital phones that Avaya customers have won't just migrate to the RingCentral platform. So they're talking about a complete forklift upgrade. That would be the same with us or any of our competitors. So an Avaya customer that's got an older platform that's not using SIP phones today, it's a complete forklift upgrade. For those customers that do have IP phones on newer Avaya platforms, those IP phones aren't necessarily SIP environment, so it's going to take a lot of work for them to put those Avaya phones on the RingCentral platform if it's even worth while for them to do. So I would imagine that they're going to be pushing for them to migrate to RingCentral cells primarily Polycom and Cisco and getting phones. And so I would think that for that customer considering options, they're not going to see an easier migration path to go to RingCentral than they are to go to Crexendo or any of our other competitors out there. So I think we still have a great opportunity for those Avaya customers that are looking to make a change to the cloud to migrate to Crexendo. And we do a really nice job of hand-holding those customers when they do migrate to the cloud. I think a much better job than a lot of our competitors because we came from a premise environment. So we have a different implementation approach than a lot of our competitors. I like to joke about the fact that our competitors have a plug and prey type approach where they hope you plug it in they pray that it works. We really walk you through the whole implementation process, so that when it does get plugged in that it's plug and talk and not plug and pray.

Our next question comes from Michael Kaufman with MK Investments.

Hi, Steve and Doug. Great job and growing the business profitably. I think that with 70-plus percent gross margins and a solid base, I think the whole idea is to grow the top-line and the stock price will rocket from this. I wouldn't be out there trying to sell stock in the open market at this level. But question is how many people in the company in total now?

As of the end of the quarter we had 53 employees.

So I mean somehow I guess we have to add some sales and marketing and people that can hold the hands of the customer to bring on to these new opportunities. Because as you said, it's a land grab and now that we have a proven machine, the idea is to get it into as many hands as possible. So judiciously adding to the organization and maybe not growing the profits as much, but reinvesting the cash flow that you got. I think we'll be better served in terms of the overall return for the shoulders that you have.

Yes. Michael, that's one of the things as I pointed out earlier, we're going to --especially in the first quarter and beyond, we're going to put the pedal to the metal and really spend some money on marketing. The whole idea is to get the word out there and as you said, we're going to have to add salespeople, but we're also going to have to add engineers to keep our platform refreshed and to continue leading the pack as far as our platform goes. There's one of the things that we do that. I can't speak to other competitors, but I don't think they do it and that's non-recurring engineering for a specific customer. If we get a customer with a 100 telephones or more preferably more we will do free recurring I mean non-recurring engineering for them providing they make the decision to go with us. And that's something we can also offer to additional customers down the road. And it gives us a tremendous ability to play in the bigger market.

So the whole idea is to hold their hands until you got a successful installation and then you have the long-term cash flow that you're looking for. So adding engineering talent, sales and marketing as long as you're slightly profitable, the idea is to grow the top-line and then the market capital grows disproportionately.

You've identified exactly what our thinking is.

Well. I think the company is in great hands. I feel very comfortable in my position and God speak.

Our next question comes from Kevin O'Connell with Sprint Tech AP.

Hey, Steve. How are you doing? Listen, great job by everybody at the company pushing forward with great year-over-year results. Question for you specifically, what are the company's intentions on up listing at some point to a national exchange and what are your thoughts on gaining institutional interest along the way?

A couple of things. Number one, up listing is definitely on our roadmap. We would probably up list organically, we're going to meet the requirements by probably at the end of this quarter. I'll let Ron give a little bit more color on that. And we will probably up list in the first or second quarter of next year. As far as getting institutional coverage, I think with up listing and maybe a small offering, although I agree with Michael's comment that you don't want to dilute shareholders. So I would probably require a little bit higher stock price but by doing that we should be able to get institutional coverage, analyst coverage, all of those things are on our roadmap. Do you want to add to that, Ron?

Yes. Absolutely. Hi, Kevin. One of the requirements that we've been looking at that we needed to improve on to meet their listing standards was our shareholder equity. And there's a requirement of 4 million shareholder equity. At the end of 2018, we had $2 million in shareholder equity because there are accumulated losses as of 9/30 we had increased at $3,000,651. So we're just shy of the $4 million in shareholder equity required. And we think we're going to attain that by the end of the year. So we should be able to meet the requirements by the end a year or first quarter of next year.

And there's also another thing that will increase shareholder equity. And that's when our auditors give us the green light. And we're getting pretty close on that to bring some of our operating loss carryforwards into the picture, which will improve our balance sheet and our equity. So the combination of that along with operating increases, we're going to meet that for sure in the first or second quarter. End of Q&A

And there appear to be no further questions at this time. So I'll turn it back over to management for any closing remarks.

All right. Thank you, Christy. And thank you for all of you for being on the call today. We're working very, very hard for all of you especially those of you that are shareholders already or intend to be in the coming months and years. With that I'm going to tell you this, nobody here is going to lie down on the job and feel that we've made it. Far from that, I think fourth quarter; the one that we are currently in is going to impress all of you. And I believe going forward 2020 and 2021 and beyond we will impress you even more. So with that I want to thank everyone for being here today. And we look forward to announcing fourth quarter which will probably be the end of February or the first part of March because it is our year-end. And we have K ones to get out and all other stuff that goes with it. So it's going to be probably four or five weeks pass what we normally do it. With that, I want to thank everyone and we look forward to talking you in late February or early March. Appreciate it. Thank you and Good day.

The event playback has concluded. Thank you.