Steve Mihaylo - Chairman and Chief Executive Officer Doug Gaylor - President and Chief Operating Officer Ron Vincent - Chief Financial Officer Jeff Korn - Chief Legal Officer

Good day and welcome to the Crexendo Third Quarter 2016 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Steve Mihaylo, CEO and Chairman of Crexendo. Please go ahead, sir.

Thank you, Melissa. Good afternoon, everyone. I am Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo third quarter 2016 conference call. Joining me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our Chief Legal Officer. I am going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief general overview comments relative to the quarter. Ron will provide some granularity on the numbers, Doug will provide a business and sales update and then we will open it up to questions. Jeff, would you please provide the Safe Harbor statement?

Yes, 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 such as like, believe, expect, anticipate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based upon assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. The 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, 2015, and the Forms 10-Qs for 2016. 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. With that, I’d like to turn the call back to Steve. Steve?

Thank you, Jeff. We continue to make progress and grow Crexendo year-over-year. Our progress is steady. Q3 2016 Hosted Telecommunications Services revenue increased 31% to $2 million compared to $1.5 million for the third quarter of 2015, another quarter of solid growth year-over-year. We have also continued to – increasing sequential quarterly revenue and backlog, which is a very promising metric. Another very promising metric is that this is solid growth that has been combined with a decrease in costs. Consolidated operating expenses for the third quarter of 2016 decreased 3% to $2.9 million compared to $3 million for the third quarter of 2015. This is quite remarkable that we could increase sales 31% while decreasing costs. We continue to watch expenses very carefully and have completed a thorough review of costs. We have targeted cost reductions for software programs that we can cancel and others that we will replace with significantly more effective replacements – cost effective replacements. We have also implemented other cost reduction initiatives. Altogether, we should be able to reduce costs by as much as $400,000 next year with the initiatives that we have taken. We believe that these will be very beneficial to our future growth. Some of the cost reductions will be permanent. Some of them will be deferred until we reach GAAP cash flow breakeven. These actions should allow us to accelerate the path of growth, cash flow and breakeven. While there are – while these are good results, we continue to work to achieve better results. Our investment in engineering and infrastructure has given us what I believe are the best products and services in the industry. I am very satisfied with what we sell. What we can do better and we will do better is marketing and sales. We are working on improving and accelerating our marketing campaign. I believe these increases – these increased marketing will be able to show more potential customers that we have solutions and products that fully meet their needs in most circumstances and saving them substantial amounts of money. We continue to market enterprise customers with multi-location installations. And I might add that the bigger the customer, the longer it takes to close it. We have systematically built and prepared these solutions, which should allow us to increase our sales in this market and fuel our future growth. Enterprise sales have strong quarter-to-quarter variances in both closing sales and installation time, but we believe our continual targeting of this market will be in our long-term interest of the company and shareholders. We continue to work to add qualified sales associates and dealer partners. I will continue to be optimistic about our long-term growth and reaching GAAP cash flow breakeven next year. I continue to look forward – look for accretive appropriate acquisitions while working to increase our organic growth. With that, I will turn the call over to Ron Vincent. Ron, can you go ahead and give us some granularity on the numbers?

Thank you, Steve. Consolidated revenue for the third quarter of 2016 increased 18% to $2.3 million compared to $2 million for the third quarter of the prior year. Approximately 86% of this revenue for the quarter was generated from our Hosted Telecommunications segment, as Steve mentioned, grew to $2 million for the quarter. Year-to-date consolidated revenue increased 19% to $6.8 million compared to $5.7 million for the same period of the prior year. The telecommunications segment contributed 84% of this year-to-date number. While we are pleased with our 18% growth in revenue, we are equally pleased that our operating expenses for the quarter – third quarter decreased 3% or $82,000 when compared to the third quarter of the prior year. Year-to-date consolidated operating expenses decreased 2% to $9 million compared to $9.2 million for the same period of the prior year. On a GAAP basis, we reported a net loss of $621,000 for the third quarter or a loss of $0.05 per diluted common share compared to a net loss of $1 million or a loss of $0.08 per diluted common share for the third quarter of the prior year. Year-to-date, we reported a net loss of $2.3 million for the nine months or a loss of $0.17 per diluted common share compared to a net loss of $3.3 million or a loss of $0.25 per diluted common share – a $1 million reduction in our loss. Non-GAAP net loss was $353,000 loss for the third quarter or a $0.03 loss per diluted common share compared to a non-GAAP net loss of $742,000 or $0.06 loss per diluted common share for the third quarter of the prior year. Year-to-date, the company reported non-GAAP net loss of $1.4 million or a loss of $0.11 per diluted common share compared to $2.2 million and a $0.17 loss per diluted common share for the same period of the prior year. EBITDA for the third quarter was $573,000 loss compared to a $1 million loss for the third quarter of the prior year. Adjusted EBITDA for the third quarter was $363,000 loss compared to a $738,000 loss for the third quarter of the prior year. EBITDA for the nine months ended September 30 was a net loss of $2.1 million compared to a net loss of $3.3 million for the same period of the prior year. Adjusted EBITDA for the same period was a net loss of $1.5 million compared to a net loss of $2.3 million for the same period of the prior year. Total cash and cash equivalents, excluding restricted cash, at September 30, 2016 was $854,000 compared to $1.5 million at December 31, 2015. During the year, we used cash for operating activities for the nine months of $737,000 compared to $2 million for the same period of the prior year. We used cash for investing activities of $20,000 during 2015 nine-month period compared to $11,000 provided by investing activities during the nine months ended September 30, 2016. Cash provided by financing activities for the nine months was $83,000 compared to $678,000 provided in the same period of the prior year. With that, I will turn it over to Doug Gaylor for some operating results highlights.

Thanks, Ron. We continue to have growth in telecom revenue, although not at the levels that we would like to see. For the quarter, we also saw increases in telecom backlog and overall revenue, while we continued reducing expenses and lowering our costs. Q3 delivered a 3% overall revenue increase quarter-over-quarter and a 5% increase in telecom revenue quarter-over-quarter. Our backlog also increased 4% from Q2 and 33% year-over-year, which indicates that we are building a strong foundation for the future. We continue to focus on our direct and partner sales efforts as we progress towards cash flow breakeven and GAAP profitability. We have recently hired additional direct sales representatives and partner channel managers in our effort to grow our sales numbers considerably. As we continue to increase the volume of traffic on our network, we are constantly negotiating additional cost savings for our rates from our providers that are evident in our reduced costs quarter-over-quarter on higher revenues. We started seeing the impact of our cost recovery fees that we implemented in September to help offset our network costs and we will continue to see those fees help improve our margins going forward. We realize that sales growth is our top priority and we are focusing all our sales efforts on selling larger accounts and increasing our partner sales contributions. We added 12 new partners to our program in Q3 and are excited about the potential contributions from these partners. As we have discussed previously, we are targeting larger, well-established partners in our recruiting efforts. With the addition of new channel managers, we were able to tap into their existing relationships to land new partners that realize the tremendous opportunity they have by adding Crexendo to their product portfolio. Many of the new partners we are adding do not have a current cloud offering, so we had a perfect addition for them as they previously had a huge void without a cloud offering. We are proud that we received a 2016 TMC Communications Solutions Product of the Year Award for our Crexendo 430 model telephone during the quarter. This industry leading publication recognized our product as a truly innovative product and is amongst the best solutions brought to market in the past 12 months that facilitates business transforming voice and data communications. Our product offering has never been stronger and we are hopeful that receiving additional awards for this – for our solution during this quarter. The fact that we have custom designed our phones allows us to see better margins, which is evident in Q3 as we increased to a 57% gross margin during the quarter, up from 55% and 52% in the previous two quarters respectively. And this trend will help accelerate our path to profitability. In addition, we continue to have additional success in Q3 with our BYOD, which is bring-your-own-device ability that we began this year that allows new customers to migrate their Polycom and [indiscernible] telephone devices over to Crexendo’s platform. We have successfully migrated many customers from our competitors that would otherwise not have migrated if they were required to buy new telephones. The BYOD is also helping us to recruit new partners who are selling a competitive solution as we offer a more stable, but robust platform with a more lucrative earning opportunity. We saw a 13% decrease in our general and administrative expenses year-over-year, also an 18% total increase in our revenue numbers over the same period of time, as we continue to demand more economies of scale out of our business. These efforts are also helping our cash flow as we reduced our net cash used for operations by 63% for the first nine months of 2016 compared to the first nine months of 2015, a trend that will continue as we work diligently to get to cash flow breakeven. Although our growth is not happening as quickly as we would like, we are encouraged with the continued quarter-over-quarter and year-over-year revenue increases and backlog increases we have seen, and we are confident that, that trend will continue. Our product and our solution is the strongest in the industry and we are focused on getting the message out to end users via our direct and partner channels. As we continue to successfully execute our plans to increase our revenues and decrease our costs, we are well positioned to get to cash flow breakeven and profitability. I am confident we are on the right track and I am excited to continue and execute on our growth plans in the future. I will now turn it over to Steve for any additional comments.

Thank you, Doug. I might point out that some of our cost-cutting created the delay for this quarter in reporting our earnings. Other than that, everything is on track, and we are very satisfied with where we’re going and the efforts we’re putting forth as we go forward here. At this time, Melissa, I’d like to open this up to questions to the group and to me specifically.

Alright. Well, I want to thank everyone for participating in this call and we look forward to – hold on just a second. We may have a question here. Yes, we have a question that was texted into our website. The delay was to give our new auditors a chance to have a full review of our numbers and the quarterly numbers and our progress going forward. There is – other than that that was just part of our cost savings along with the other ones that I mentioned previously. We are very happy with [indiscernible], which is part of the BDO Seidman Group, one of the largest CPA firms in the world. They have been doing our taxes for years and now they are doing our audit as well. So we have everything under one roof. Other than that, I have no further comments, but we will allow folks to ask a question if there are any. Has anyone asked a question, Melissa?

I show no questions at this time.

Okay. Well, with that in mind, we will get the holidays underway here and we’ll keep working on customers. It’s usually a tough period in the year with everyone out for Thanksgiving and the winter holidays. But I would like to wish all of you a great holiday and we will talk to you after we have our year end numbers available sometime probably in late February or early March. Thank you, and goodbye.

That does conclude our conference for today. Thank you for your participation.