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Crexendo, Inc. (NYSEMKT:EXE)

Q3 2012 Earnings Conference Call

November 6, 2012 08:30 AM ET

Executives

Steven Mihaylo - Chairman of the Board & Chief Executive Officer

Ron Vincent - Chief Financial Officer

Satish Bhagavatula - Chief Technology Officer & Chief Information Officer

Doug Gaylor - President & Chief Operating Officer

Dave Hodgson - Controller

Analysts

Austin Hopper - AWH Capital

Robin Lochner – Private Investor

Jeff Bash - Private Investor

Operator

Good day everyone and welcome to the Third Quarter Crexendo Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Steve Mihaylo, Chief Executive Officer, please go ahead sir.

Steven Mihaylo

Thank you, Lisa. Good morning everyone. I am Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome you to the Crexendo’s third quarter conference call. With me here today are Doug Gaylor, our President and Chief Operating Officer; Ron Vincent, our CFO; Satish Bhagavatula, our CTO and CIO; David Krietzberg, our Chief Administrative Officer; and Jeff Korn, our Chief Legal Officer. We also have Dave Hodgson, our Controller on the line with us too.

I am going to ask Jeff to read our Safe Harbor statement and after that I will give a brief overview of the quarter and some operational highlights. Ron will provide some additional granularity on the numbers. Satish will provide an update on the technical operations of the company, and we will wrap it up with Doug Gaylor who will give a business overview and sales update. Then we will open it up to questions. Jeff, would you please provide the Safe Harbor statement?

Jeffrey Korn

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 belief, expect, anticipate, estimate, will, and other similar statements of expectations 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 fiscal year ended December 31, 2011 and the Form 10-Q for the periods ending March 30, June 30, and September 30, 2012.

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 would now like to turn the call back to Steve. Steve?

Steven Mihaylo

Thank you, Jeff. Obviously the numbers speak for themselves. The most important number of course is our cash and the usage of cash. During the third quarter, we actually had cash which was generated of $248,000 compared to cash used for operations of $3,089,000. Going forward after we take the adjustments in Orem for the property up there and additional cost will be taken out of the company, I think our first quarter of 2013 will start to have some more meaningful look to it. You will be able to model the company based on the sales of our existing products, the new products, the telecom and the web services on a purely B2B basis. We will still have a little bit of the receivables that we are collecting. We have got approximately $5 million left in receivables and we should collect that over the next 12 months or so.

What I am going to do at this time is let Ron Vincent go through the granularity on the numbers and talk about that. Then we will have Satish talk about all of the technical operations of the company and then we will finish up with Doug Gaylor who is going to discuss the operations plus sales and marketing. Ron, do you want to go through the numbers?

Ron Vincent

Thanks, Steve. The trends we have seen in the third quarter are positive as we continue to see growth in bookings and revenue in our Network Service segment and continue to maintain a strong backlog for our Network Services segment. For the three months ended September 30, 2012, the StoresOnline revenue was $3.1 million. Crexendo Web Services segment revenue was $575,000 and Crexendo Network Services revenue was $235,000.

Total consolidated revenue was $3.9 million compared to $10.2 million for the third quarter of 2011 and $4.9 million for the second quarter of 2012. As you are aware, the decrease in revenue on a quarter-over-quarter and year-over-year basis is primarily due to the suspension of our direct mail seminar channel. Although we continue to collect our StoresOnline receivables from extended payment terms agreements entered into prior to July 2011, these agreements typically have a 24- to 36-month payment term. Our StoresOnline revenue will continue to decrease over time as customers complete their payment obligations.

StoresOnline segment revenue for the quarter decreased 23% to $3.1 million, from $4 million in the second quarter and decreased 68% from the prior year quarter of $9.5 million. StoresOnline revenue is broken down as follows. Cash collected on our accounts receivable balance was $2.1 million, a 19% decrease from second quarter which was $2.6 million and a 49% decrease over the third quarter of prior year, which was $4.2 million. The revenue stream will continue at a descending rate over the next year to 18 months. Based upon our current collection rates, we expect to collect approximately $4.7 million in revenue from our StoresOnline receivables over the next 12 to 18 months. Approximately $3.9 million in the next 12 months and the remaining $800,000 during the following year.

Interest income from receivables was $406,000, a 19% decrease from the second quarter, which was $504,000 and a 67% decrease from $1.2 million in the prior year quarter. We will continue to collect interest on receivables at a descending rate as the accounts receivable portfolio from the StoresOnline to realize.

Hosting revenue was $777,000, a 6% decrease from the second quarter which was $829,000 and 17% decrease from $940,000 in the prior year quarter. The decrease was attributed to attrition on our StoresOnline customer base.

Crexendo Web Services segment revenue decreased 17% to $575,000 from prior quarter of $692,000 and an 11% decrease from $648,000 in the prior year quarter. The majority of our revenue in the Web Services segment are generated from search engine optimization, one-time revenue and link building which is recurring in nature typically 6 to 12 month contracts. We continue to maintain a strong backlog of $900,000 as of September 30, 2012. Growth in this segment is largely dependent on our ability to generate quality leads and increase the productivity of our sales reps.

Crexendo Network Services segment revenue for the first, second and third quarter of 2012 was $75,000, $168,000, and $235,000 respectively. This is a 352% increase from $52,000 in the prior year quarter. We are excited about this positive trend in our Network Services segment revenue. Our Network Services segment revenue primarily relates to Hosted Telecommunications Services and the sale and lease of devices. We continue to experience significant growth in our Network Services backlog which increased to $2.2 million at September 30, 2012 compared to $1.3 million at June 30, 2012 and $155,000 at December 31, 2011. The majority of our Network Services contracts are 36 months contracts and as such the revenue associated with the bookings this quarter is expected to be recognized over the next 36 months.

Total operating expenses were $5.1 million for the quarter, a quarter-over-quarter decrease of 8% from $5.5 million in the second quarter and a 27% decrease from the prior year quarter of $6.9 million. The current quarter-over-quarter decrease falls an 8% decrease from first quarter to second quarter as we continue to look for ways to reduce expenses.

In summary, we generated revenue of $3.9 million for the third quarter of 2012 on a consolidated basis, a loss before income tax provision of $796,000, a net loss of $806,000 after income tax expense of $10,000. For the 9-month period ended September 30, 2012 we generated revenue of $14 million, a loss before income tax provision of $856,000, and a net loss of $726,000 after net tax benefit of $130,000.

As of September 30, 2012, we had cash and cash equivalents including restricted cash of approximately $9.6 million compared to $10.6 million at December 31, 2011. For the 9-month period ended September 30, we generated $248,000 in cash from operating activities compared to $3.1 million used in operations in the prior year. We used $1.1 million for investing activities primarily related to the purchase of fixed assets from prior year purchases and current year purchases, compared to $820,000 in the prior year 9-month period. And we used $143,000 for financing activities compared to $1.3 million in the prior year 9-month period.

We continue to have a strong working capital as of September 30 at $8.7 million compared to $8.4 million at December 31, 2011. Working capital excluding deferred revenue as of September 30 was $12.9 million compared to $17.7 million at December 31, 2011, a decrease primarily related to the collection of our accounts receivable balances outstanding for StoresOnline.

With that I will turn it back over to Steve Mihaylo.

Steven Mihaylo

Thank you, Ron. At this time, let me turn it over to Satish who will talk about our transition out of Orem into Phoenix. We have got all of our servers and all of our datacenter requirements here in Phoenix. This may not seem like much to you guys, but I can tell you that we accomplished something that’s never impossible. We moved all of our servers probably about 600 from Orem to Phoenix. We totally reconstructed our Web Services business, our telecom business, all of our accounting, all of our e-mail, all of our databases without any interruption in service. It’s just outstanding, the job they did. With that I am going to let Satish talk about it a little more and the fact that we’ve now got a state-of-the-art PCI compliant datacenter here in Phoenix and it actually houses three complete sets of servers and memory devices and so on, so that we have total redundancy and fail-safe capability here. Go ahead, Satish. Thank you.

Satish Bhagavatula

Thank you, Steve. Greetings everyone. We continue improving our Web and telecom platforms. One of the key aspects we continue to invest in is the usability of the product and making it easy for a new customer to sign-up and build their first website. We believe such improvements greatly improve Crexendo’s value proposition. On our telecom platform, we have made numerous enhancements to our call center features in the areas of call distribution, call presentation, and reporting and statistics. We also added IP 300G, a high end gigabit color display PoE form to our existing portfolio of a 2 line and a 6 line phone. This addition to our portfolio creates a greater value to the customer with a gigabit infrastructure. We recently added a new carrier in Canada to help us better serve our multi-location carrier customers with branches in the United States and Canada.

We continue to improve our mobile offering and features on our Crexendo mobile application as newer versions of Android devices with ICS and Jelly Bean come out to the marketplace. Our Crexendo mobile application is a virtual extension on a customer’s telecom deployment that allowed SIP calls anywhere from a mobile phone.

As a continued measure to improve efficiencies in our telecom network, we are constantly evaluating our existing contracts to bring the cost down while increasing our reach across US and Canada. We are constantly evaluating various tier-1 carriers to improve our presence throughout United States and Canada.

As part of our consolidation initiative in the business, we have made tremendous progress in relocating our primary datacenter to Arizona without making large capital investments. We believe Arizona is less prone to climatic disruptions and offers a good foundation to Crexendo as we grow our business. We are starting to look into more business automation by fully adopting call technologies which gives us greater operational efficiency and helps improve our margin.

With that I will now turn it over to Steve.

Steven Mihaylo

Thank you, Satish. Before Doug gives his report, I would like to make one small correction. At the beginning of this conference call, I said that the cash generated was $248,000 and used was, in the previous period, $3,089,000. However, I said it was for a three-month period, and it’s actually for a nine-month period.

So, would you go ahead, Doug, and then after that, we will open it up for questions, Lisa.

Doug Gaylor

Sure, thanks Steve, and thanks everyone for joining us on the call today. We continue working on our existing programs to expand or enhance our sales efforts. Sales are not yet quite where we want them to be; however, they are showing very encouraging trends. We continue to have success with our association in our trade group relationships and continue to see a nice increase in sales from the relationships with these organizations.

Our business development call center that we talked about on previous calls is completed staffed now and operational, with the business development manager and five business development reps calling on potential prospects and opportunities. The lead generation efforts from this group are producing a nice pipeline of opportunities that will positively affect future sales.

Our web coordinator that we hired at the end of Q2, started booking trade shows and association events in July. And in Q3, we recognized nearly $100,000 in sales from those efforts. We currently have 18 more events scheduled for Q4, and we are extremely excited about the future sales opportunities that will be generated from these events.

We increased the expansion of our university program with three current universities deploying our web marketing program in their semester, and we have quite a few additional universities lined up for the program for the spring semester. The program is being extremely well-received by the universities, being extremely well-received by the students and the clients of the program, and we are extremely excited about adding more universities in classes to the program.

Last month, we hired a director of dealer sales to roll out our reseller program for dealer sales initiatives to sell our telecom and web offerings. Initial response has been extremely favorable, with multiple dealers and sales opportunities already lined up for Q4. We will have a heavy concentration on building this department over the next two quarters, as there is a tremendous amount of growth opportunity that we had by adding B2B sales organizations with strong sales teams and existing customer bases already in place.

Our aggressive dealer program should be a great additional revenue stream for any B2B sales for us as a value-added offering, and we have designed our program to be an easy add-on sales solution to enhance a dealer’s existing sales efforts. The dealer sales network will complement our direct sales approach, affording us two revenue-generating sales channels.

Our direct sales division continues to mature and generate new clients at an increasing rate. We have slowed our growth of adding new additional direct sales reps, so we can spend more time on training and supporting the existing sales team, thereby increasing the productivity for sales rep without having to add additional layers of sales support and sales expenses.

We are constantly reviewing all of our expenses within the organization and making appropriate adjustments wherever possible to run as efficiently as possible. Our cost-cutting measures have consolidating services, downsizing lease base, relocating departments etcetera, have and will continue to have and help us manage our cash as we ramp up our revenues.

I am pleased with the amount of progress we have made on all of these initiatives. The growth that we are seeing in the telecom sector progressing at a very strong pace and I expect to see a continued success in our telecom efforts. Our lack of growth on our web services has triggered changes in our marketing and product packages, as well as the change in our fulfillment management.

We have hired an industry veteran from a large competitor to manage our web fulfillment process and offerings, and we are extremely excited about these changes and confidence they will bolster our web services revenues in the future.

So, with that, Steve, I will turn it back over to you.

Steven Mihaylo

Okay. Well, thank you Doug. At this time, operator, I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Austin Hopper with AWH Capital. Please go ahead, sir.

Steven Mihaylo

Good morning.

Austin Hopper - AWH Capital

Good morning, guys. Thanks for taking my questions. Could you tell us how many reps you added at the end of the quarter? And it sounds like you, maybe you kind of changed your strategy there and previously sort of under the impression, you are aggressively adding the reps, can you just give a sense for that?

Steven Mihaylo

Yes, that’s a great question, Austin, because now that we are far enough into the stat, we really understand every aspect of the market. All of them components of the market, we’re able to have a little bit better deal of what we are doing here. Number one, as you know, our university program is the marketing engine for the company. Through trade shows, we are going to actually start some advertising in the next month or two into specific zip codes around universities. We are generating a large quantity of leads that will be used to build websites for actual operating businesses in the universities. And we do this using students that are either in their final year or graduate students, and they are having a very, very positive experience.

With that, we feed those leads into the universities. They build websites, we built approximately nine or 10 websites this summer in the first class that we conducted in at the university, the California State University at Long Beach. We now have five universities on board, and we expect to build somewhere between 50 and 75 websites this semester. It will move up from there to 100 or two [ph] in the summer session, and then probably around 400 or 500 in the end of this year, the fall semester.

By the first semester of ‘14, we expect to be building over 1,000 websites per semester in summer school. So, you can see the numbers are going to grow exponentially. Once we publish those websites, they become a hosting customer. After they have a month or two to bake, then we call them up and we make sure they are having a positive experience. So far, our results our 100% of our customers of a very positive experience.

We will then let them know about the opportunity in our telecom area as far as providing telecommunication, Internet and so on at a lower price than they are currently paying. We will also talk to them about search engine optimization, link by link and training, which are up-sells and the cross-sell will be the telecommunications, because usually have a lower rate than what they are paying.

In addition to that, we have all of the trade show events that Doug talked about, which are also generating leads, and we have a business development department, which is generating leads. As we get more and more leads coming through, our university program will shift towards inside sales. Last but not least, we have identified two areas where we can grow dealers. One area would be web services and we believe that that’s probably more suited for advertising agencies and companies that are in the web building and SEO and other areas would be good dealers in that area. For the telecommunications, it’s off to supply products, companies that’s telecommunications, companies that’s data companies, that’s cabling companies, all sorts of companies.

This gets to me your question directly. We have noticed that out of our 27 current sales people, probably a half of dozen to eight of them are selling and getting good traction. The rest, we still have to give them training and so on and so forth. We have been training ever since they joined the company, but this is continuing process that we experienced at our previous company, and it took quite a while to build the sales force. We are actually coming out of the starting gate much quicker this time around.

For instance, we will have at least two or three dealers in the fourth quarter with mature sales department somewhere in the neighborhood of 10 to 20 salesmen. So, we pick up 30 to 60 salesmen in just three relationships, and this is where the shift is occurring. We are also spending a lot of time in training with the folks that are up to speed on our payroll. We are probably actually going to run about two teams of sales people at Crexendo that actually work for us, of around 10 each. So, you can see we are going to trim the pad a little bit here, but we are picking up sales people at an exponential rate with the dealers.

We are also going to, as we increase our flow from the universities, we are going to add more inside sales people. So, the net result is an exponential growth in that area. I am very optimistic about our direction here and I expect it will start to show up in the results this quarter and even more in the first quarter and as we go through all of 2013. I hope that answered your question. If you have got a follow-up question, I will be happy to answer that as well.

Austin Hopper - AWH Capital

Great, that’s very helpful. You mentioned that your cash flow, maybe operating cash flow was a positive for the nine months year-to-date period. I am just kind of confused, you essentially have one business that’s in liquidation and then two businesses that are in startup phase. Can you comment on what kind of the quarterly cash burn of the startup side of the business along with any necessary corporate expenses on top of that would be?

Steven Mihaylo

Yes. We are working on refined budgets right now, but we expect to reach breakeven sometime in the third or fourth quarter of ’13.

Austin Hopper - AWH Capital

Right. I am not actually asking about budgets, I am asking about what the experience is currently.

Steven Mihaylo

I was going to get to that, Austin. It meaningless currently because we just finally made the transition out of our operations in Orem, Utah. We have got a much smaller footprint in (inaudible) where we will have 20 to 30 employees. We have a building that we own here in Phoenix so we don’t pay rent. Our expenses will decrease approximately $150,000 to $200,000 a month, starting in the first quarter.

Our burn rate is significantly above that, but our sales, we are ramping up the same time. And our burn rate right now is about $0.5 million a month, and that will slow dramatically starting in the first quarter, just that expense levels will decrease by as much as $200,000 a month, which will bring our burn rate down to about $300,000 a month or $900,000 a quarter.

With the increase in sales, we expect to be at breakeven someplace near the end of the year. We have enough cash and receivables on our balance sheet, I calculate, to take us about 18 to 24 months with the acceleration in sales and deceleration in expenses, I think we are in very, very good shape. I will say this however, if we get a little thin in our cash, which I don’t expect if we do, all of our projections show worst-case scenarios and best-case scenarios and so on, aren’t prepared to put additional money into this company as a direct infusion into the company.

So, I don’t expect that to occur. I am also prepared to buy more stock this quarter, after we have had two days additional quiet period before I am able to buy additional stock. So, you know, everything is going according to plan. We moved our entire operations out of __0.04___ and approximately 100 days which is work-speed and we did it without dropping a single call. We did it without dropping a single click on our website and I am really excited about the future. I am more excited today than I have ever been at any time during this entire 4-year auto seat that I am now into.

I expected to be fishing, but I am sure I am enjoying this and fish we usually catch and release, but we are not releasing any of our customers, they’re all having a great experience and that is nice not to be fighting legal battles that we had in our StoresOnline division. Jeff Korn is going to become like the may-take repairmen, just sitting around waiting for calls, but we’re also changing a couple of the responsibilities of individuals here. David Krietzberg has been our Chief Administrative Officer, he is going to be our Business Development Officer and we’re going to utilize his talents more in the acquisition area and you say well how come a company like Crexendo acquire a company, it is surprising, but there is a lot of companies out there that the principals are either retiring or want to cash out. They have strong cash flow and there is a lot of companies we believe can be acquired through seller financing maybe a little bit of talks to go with it to make sure that they are self in the game for a little bit longer while we transition, but we can actually acquire customer basis mostly webhosting customers give them enhanced features by transitioning them over to our web builder and then up-selling them and cross-selling them into our other products.

We’ve identified several targets we’re being very deliberate in the way we go about it, but I would expect next year that will have one or two acquisitions during 2013, so when you put that together and with strong cash flow to go with it and a strong capability to help those customers have e-commerce and other things that they don’t currently have along with the potential for up-sells and cross-sells. I am very very excited about it. Now, also Jeff Korn who has been spending a lot of time in the past on the cleaning up the issues in the StoresOnline division is spending less time doing that and he’ll also be helping on the acquisition area. So, that is a long answer to a short question. I hope I answered your question.

Austin Hopper - AWH Capital

Yes. Thank you very much.

Operator

(Operator Instruction) and we do have a question from Robin Lochner of Private Investor.

Steven Mihaylo

Good morning Robin.

Robin Lochner – Private Investor

Good morning Steve. As we move forward through the end of this year into next year, what milestones do we be watching for, I guess specifically what I am thinking about is what events or what numbers or performance levels should we expect the company to achieve that, if they don’t achieve it by “x” date there is reasons to be concerned that the game plan isn’t being executed well or that those if these doesn’t unfolding as planned. So, I guess what milestones should be look for to be achieved if they happen we know things are on-track and if they don’t happen we know things are off the rails.

Steven Mihaylo

Well, I think the best thing to look at is backlog. We have a backlog of about a little over 900,000 in the telecom services area and network services area. We have a backlog of – in June of 1.3 million at the end of the June quarter. At the end of this quarter we’ve almost doubled to 2.2 million so you can see how fast we’re going to start ramping this. Now, the backlog, you have to fulfill it and that backlog you have to divide it by approximately 36 or so to get the monthly increase in sales, but that’s pretty significant. As we whittle away with that backlog and its going to keep increasing, we had $60,000 a month in revenue, which would be a 180,000 but it will actually be increasing so it’s about 200,000 a month in revenue, and we should see the revenue in the network services area increase from, I’m doing this by memory, so help me out Ron, but it should increase from about 265,000 in the third quarter to about 450,000 in the fourth quarter, is that correct?

Ron Vincent

Yes, that sounds about right.

Steven Mihaylo

Yeah, that’s pretty close, so you can see almost a doubling quarter over quarter, and the backlog is going to become very significant in both areas, the web services and the network services. Network services is actually a little bit more mature because we’re starting the university program (inaudible) so it’s going to be a while, we’re still going to have a little bit of attrition in the customers that are hosting with this from StoresOnline, the customers we’ve got left are pretty well established businesses that we expect the attrition rate to slowly decline over the next couple of quarters.

Once the university program kicks in, we’re going to start seeing an increase in the number of websites that we’re hosting and the opportunities for up-sell and cross-sell. I would expect we’ll see the low point on website hosting probably at the end of the June quarter, and then we’ll slowly start to see that increase in 2014 we’ll see an increase exponentially, so we’re going to see an exponential rate of increase in the web services starting in the third quarter. We’ll start seeing an exponential increase in telecom sales starting in the fourth quarter of this year, the third quarter of next year for web services, and it’s going to increase as we go along. I would say for at least a year or so we’re going to see real nice increases. I’m talking in the neighborhood of 100’s of percent. So, when it finally gets to where we expect it to be, maybe in the 50’s or 100% per year for another couple of years after that. Did that answer your question Robin?

Robin Lochner – Private Investor

Yeah and I think that was good, thank you.

Steven Mihaylo

And we may actually once, we get a hand on things we still got a little bit of work left on the automation of all of our systems here. So, we can really put the pedal to the metal but once we do we’ll start giving you numbers on the amount of hosted devices that we have, posted websites and hosted telecom devices. And telecom devices, everything from an adapter for a regular plain old telephone or a telephone that sits on the desk. So, if we sell a company with a 100 employees, they’ll usually have depending on what kind of a company they are, if they are services business, they’ll have a few extra (inaudible) than they have employees. They might have as many as 110 devices. If they are a manufacturing company with a 100 employees, they could have as low as 40 or 50 (inaudible) or devices, so and the devices are worth anywhere from $30 to $40 a month each. The websites also $30 to $40 each. Then the up sell potential is internet, we sell internet which is broadband to our customers and we also sell training, SEO, and link building on the web services side. So, you can see there is an awful lot of up sell potential. If we take our web customer with $30 or $40 a month and hosting revenue, and provide the additional services of training, optimization services, link building and telecom. We believe that we can increase the revenue by as much as 10 or 15 times what the hosting revenue would be. So, if they’re paying $30 a month we believe we can take it to around $300 or $400 a month and the up-sell potential and the cross-sell potential is huge and in most cases we’ll be providing our customers with better service at lower than they are currently paying their current vendors. So, we’re really excited about that.

Do you have a follow-up question or did that answer it Robin?

Operator

And hearing no response, we will move on to our next question. Our next question comes from Jeff Bash, Private Investor.

Steven Mihaylo

Good morning Jeff.

Jeff Bash - Private Investor

Hi Steve, how are you? I have a couple of questions. I noticed that the allowance of doubtful accounts and receivables went from about 1 million or 10% three months ago to 2.3 million or 32% of a smaller number now. Is there any special event that caused this to happen?

Steven Mihaylo

No, as you get those receivables decline, we are getting a better handle on the ones that are paying and the ones that are not paying. And actually the number has jumped around as many as high as over 50%. I would not be concerned at all about that, we are collecting the receivables pretty much as we expected to collect them. We expect – we are at 4.7 million in receivables that we’ll collect over the next 18 months. The bulk of that will be collected over the next 12 months and we’re very very satisfied with the collection rate and we expect going forward most of our customers are paying by credit cards so there is virtually no receivables. Every now and then when we do some SEO work and that sort of thing, it is not paid by credit card, but right now when we have -- the new receivables we have zero that are reserved. We’re collecting a 100% of the receivables, but per the legacy receivables that is still going to jump around a little bit. Would you agree with that Ron?

Ron Vincent

Yes, we still have an allowance of about 25% on the old legacy EPK receivables.

Jeff Bash - Private Investor

Okay, in order to get to this profitability by the end of 2013 it would mean that the university program might be more of a 2014 story and that to get there you’re probably relying on the multiplication of your sales force through the dealer program. Is that a fair statement?

Ron Vincent

That is a fair statement, but we’ve got a lot of other things going on that are going to help the university program. The trade shows, the advertising, all of that is going to help. We’re also going to add a few more people there as trainers and so on because we actually go into the classroom for the first semester to and we are going to be doing that by webinar which will allow us to multiply our capabilities in that area. You are right so, that will really stretch to see some interaction near the end of the third quarter of next year and into 2014.

On the telecom side, just by training the existing sales people that we have now we’re seeing a little bit higher size company a bigger company that we cater to. We have actually done work with companies that are 500 to 1,000 phones [ph]. We have got about five or six customers in that size range, and then we have an awful lot of customers in the 10 to 100 phone range. And that’s probably where the dealer sales are going to fall in. The bigger sales will come directly from our sales for us here, and of course, we have our business development folks, the five that Doug Gaylor spoke about.

So, all in all, we are pretty satisfied with the ramp that we are getting. And yes, Austin asked a question about, if we had refocused – we haven’t refocused, but we are finding that feet on the street are expensive and they are not effective for the first 90 or 120 days, and it’s better off to have seasoned people that are producing, dealers that are producing, business development that is producing, it’s less costly, and it’s a luxury we just can’t afford until we get to breakeven.

I am confident that we have enough cash to take us down the road for a long time, and we should still have ample cash when we hit breakeven, if not I am prepared to put more money into this company. Does that answer your question, Jeff?

Jeff Bash - Private Investor

Correct. And I just want to make one additional comment. Without mentioning names, my confidence in you and the management you have on board have led me to expose the company to a 600 or 700 phone opportunity, which shareholders will be interested to know that the company did sell in competition with other carriers, and I think that’s a tribute to the company’s capabilities as is mentioned in the release and during this call and opportunity for long-term success over their investment in Crexendo.

Steven Mihaylo

Thank you, Jeff. That was a very complex installation. They do have 500 to 700 phones. We have actually executed on about a third of that and it will be totally on board and online by the end of this year. And it’s not in the Phoenix area, it’s actually east of the Mississippi. So, you know, it shows you our capability. We have got quite a few customers in the north-east, all being served out of our datacenter here in Phoenix. We have plans to put another datacenter in soon, but we have three-way redundancy currently and we backup to another large carrier for alternate redundancy if one of our building is shipped by a plane or something, which I doubt that’s going to happen. But the beauty of being in Phoenix is the fact that we have very few natural disasters other than the heat and the summer, but this is a wonderful place to live and we are really starting to see a lot of traction all over the country, because some of our salesmen, approximately half of our sales force is not located in Phoenix. It’s disbursed all around the country. So, thank you for that comment.

Jeff Bash - Private Investor

Okay, that’s it from me, Steve.

Steven Mihaylo

All right. Any other questions, operator?

Operator

No, sir. There are no further questions at this time.

Steven Mihaylo

Okay. We appreciate everyone being on the call this morning. We are working diligently on sales and reducing expenses so that our cash will not be used as much as it has in the past. We expect to see breakeven sometime towards the end of next year 2013, which is just 13 to 14 months from now. And we are really excited about everything that’s happening technically, sales-wise, accounting-wise, systems-wise. We have taken a company that had some challenges. I will give you an example, we had over 30 people manually in our accounting department when the company was located up in Utah. We now have 10.

We have automated most of our systems, and that’s the reason why we are able to do more with less people. Same thing with sales. At the university program, fixing, inside sales will take care of the small deals and outside sales will take care of the larger deals. We have got sales engineers that are capable of going in and showing our customers how we can give better service and more functionality to our customers at lower price point or at least equal to any of our competitors out there. And we have, I would say in most of the cases, we have one or two competitors in a situation where we are winning more than we are losing to competition.

And then, a lot of our cases, we have no competitors. And in that case, we are winning 50%, 60% of the deals. There’s none that are actually dead, it’s just that they have been delayed. So, we are seeing some very good traction there. I am very optimistic about the future and I look forward to being with you sometime in February when we announce our December and 10-K numbers. Thank you everyone and we will talk to you next time. Thank you.

Operator

And that concludes today’s teleconference. Thank you for your participation.

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