SharpSpring, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Greetings and welcome to the SMTP Fourth Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator instructions.) As a reminder this conference is being recorded. It’s now my pleasure to introduce your host, Jeffrey Goldberger. Thank you, sir, you may begin.

[Jeffrey Goldberger:]

Thank you, Kevin, good morning, everyone, and thank you for joining SMTP’s fourth quarter and yearend 2014 earnings conference call. Representing the company today are Jon Strimling, Chief Executive Officer and Ed Lawton, Chief Financial Officer. Before beginning I would like to remind you that the information provided during this call may contain statements that constitute forward-looking statements. These statements reflect the company’s current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors including those discussed under the heading Risk Factors and elsewhere in the company’s annual report on Form 10-K that may cause actual results, performance or achievements to be materially different from any future results, performances or achievements anticipated or implied by these forward-looking statements. The company does not undertake to revise any forward-looking statements to reflect future events or circumstances. Also note that during this conference call management will make reference to adjusted EBITDA, which is a non-GAAP financial measure presented as a supplemental measure of the company’s performance. A reconciliation of net income or loss to adjusted EBITDA is included for your reference in the financial section of the Q4 2014 earnings press release and made available on the company’s website. With that it is my pleasure to turn the call over to Jon Strimling. Jon, the floor is yours.

[Jon Strimling:]

Thank you, Jeffrey, and welcome, everyone. Before turning the call over to Ed to discuss our financial results, I’ll provide a review of our overall operations including the technical and business integration of GraphicMail and SharpSpring and discuss our outlook for 2015. I am pleased to report that during the fourth quarter and throughout 2014 we executed successfully on our long-term growth strategy. It has been our goal to expand the breadth and reach of the SMTP platform in order to accelerate growth while preserving our lean cost structure. In 2014 the completion of the GraphicMail and SharpSpring acquisitions transformed the company from a leader in the email delivery space into a global contender in email services and marketing automation. This enables us to target higher recurring revenue customers and added a global distribution network for all of our products. While SMTP’s core relay services business has long been a leader in the email delivery space, this product served only a narrow portion of the market. The addition of GraphicMail and SharpSpring now allows us to offer a comprehensive range of solutions including campaign management, marketing automation and analytics all supported by SMTP’s proven email delivery capabilities. This enables SMTP to effectively compete against the largest players in the industry and to address a much larger portion of the market. SMTP is now positioned to address the needs of more than 90% of email marketers and positioned to do so globally. Turning to the integration of GraphicMail and SharpSpring in less than six months after closing both acquisitions we’ve successfully completed several critical milestones. We are excited about the successful rapid integration of both subsidiaries’ front end applications with our proven SMTP email delivery capabilities. This allows both SharpSpring and GraphicMail to target high volume, high valued customers while concurrently allowing us to eliminate certain costs that both companies had previously incurred in email delivery. In terms of the benefits of SMTP’s relay services, the improved deliverability is already benefiting both SharpSpring and GraphicMail customers and resulting in higher response rates and higher conversion rates. As just one example our recent successes in [indiscernible] a French company that provides radio frequency identification systems as an alternative to traditional luggage tags. The company recently migrated between GraphicMail’s email platforms to newly integrated SMTP technology and has already seen its deliverability rates more than double on the enhanced platform. In the past GraphicMail’s limited email delivery capabilities constrained its abilities to sign large volume senders. With the completed integration of SMTP’s delivery platform and the addition of SMTP’s expertise in tackling deliverability issues, GraphicMail is already achieving sales with significantly higher valued customers. For example Edgar’s Group, one of the company’s largest clients in South Africa, had grown to the point where the volume of email sent was exceeding GraphicMail’s historic sending capacity and the client was planning to migrate to a higher volume service. However as a result of the integration of SMTP’s relay services onto GraphicMail’s platform, GraphicMail was able to retain the client, who has grown to represent annual revenue of over $100,000. This is a promising trend that we’re continuing to track as we move forward into 2015. As we have described previously GraphicMail had a history of profitable operations and a comprehensive product suite, but in addition the acquisition brought us an expansive global sales network. Specifically GraphicMail provided additional sales channels where our country partners could now sell a product in 14 countries on all 6 populated continents. In addition we recently deployed our first SharpSpring direct sales operations in the United Kingdom and South Africa. We started training in South Africa immediately after closing on GraphicMail in October with the goal of accelerating SharpSpring sales in South Africa. We achieved our first sale in Q4 and we’ve made four additional sales so far in Q1 in South Africa. While this only represents $25,000 in annual occurring revenues, South Africa is a small market and only one of several we can pursue. We initiated training of our sales forces in other territories in Q1 and expect sales to start closing in Q1 in those territories as well, although the typical purchase cycle ranges anywhere from 30 to 90 days. We also believe that as awareness of our offerings in these new global markets grows and as we start country specific marketing programs in the coming months, we can further accelerate international sales. Shifting our attention more specifically to SharpSpring, we acquired this small firm because it was already winning customers from major industry players like Marketo and HubSpot when we made the acquisition in August. In Q4 alone we were able to accelerate the rate at which SharpSpring signed up new customers by 50% resulting in the signing of over $700,000 in new annual recurring revenues in Q4 alone. Based on what we’re seeing SharpSpring is on track to reach $5 million or more in annualized recurring revenue by the end of 2015, which is consistent with our goals for the acquisitions. SharpSpring’s revenues have primarily come from domestic customers through Q4. However the addition of GraphicMail’s international sales network, as previously mentioned, is driving the rapid launch of SharpSpring globally. While we are excited about the recent additions to SMTP, we have not forgotten our roots. With over ten years in the email delivery business, SMTP remains one of the largest and strongest providers of email delivery services. During Q4 we consolidated the GraphicMail and SMTP sales teams and cross-trained our account executives to sell both products and we expect these investments to bear fruit and growing both products sales. Moving onto our outlook for the first quarter and trends for 2015, we expect continued strong growth in revenue in Q1 led by SharpSpring’s growth. During the fourth quarter SharpSpring signed 100 new customers mostly marketing agencies bringing the total number of agency customers to over 250. These agencies resell our products and provide our software to more than 1,000 cumulative end users. As agencies continue to add additional end users to our platform, it is important to note that this trend also has the effect of increasing our revenues from existing agency customers. Because this is a recurring revenue subscription-based business, the annual contract value we are generating via SharpSpring sales growth is extremely valuable, but the realization of GAAP revenues lag this with [indiscernible] customers. As a result we plan to continue to report on the growth of the annual recurring revenue for SharpSpring each quarter. Turning to a discussion about margins, SMTP has a long track record of profitable growth, so before I say anything else, let me make clear that our mindset has not changed. We’ll remain committed to building a profitable business and we are not pursuing growth for the sake of growth alone. But based on the tremendous traction that SharpSpring has been achieving in the marketing automation market, we made the conscious decision to make a series of up front investments to capitalize on this compelling market opportunity. In the short term our margins have been negatively impacted, but we have no doubt that this was the appropriate decision to build for long-term value for our shareholders. We are already demonstrating that these acquisitions will provide a powerful strategic platform for revenue growth, and we remain confident that our lean operations will ultimately provide healthy levels of profitability. To be more specific about our investments during the fourth quarter and continuing to the first quarter, we restructured our US and overseas sales organizations and onboarded a significant number of new hires, particularly in the areas of sales, marketing and support. We started cross-training of international sales personnel and signed up international country partners to sell new products. We invested in technical integration and successfully migrated SharpSpring and GraphicMail onto the SMTP semi-platform. We integrated financial reporting of two companies operating on a global basis; although external costs directly related to the acquisitions and severance costs are called out as acquisition costs to restructuring charges, employee labor costs on these transition efforts, as describe above, are not captured as an acquisition-related cost. While these transition and integration costs are impacting earnings in Q4 and will continue to be a factor in Q1, we have and we continue to build our company on an entirely different cost structure than our competition. Our technology teams' high productivity has allowed us to be head-on with Marketo and HubSpot, winning customers at a fraction of their developing customers. We continue to track customers that are familiar with HubSpot and Marketo with a fraction of their marketing spend, too. Aside from the other investments referenced above, we're investing and building our customer support infrastructure out of our cost advantage locations. This is all being pursued for the focus on cost efficiency even as we rapidly accelerate sales growth. In addition, we successfully rolled out a modest price increase on SharpSpring during the fourth quarter, with sales velocity actually increasing despite the higher pricing. We are also pricing the products higher as we launch in European markets during Q1. Finally, now that integration with SMTP is complete, we expect to be able to start landing larger and more valuable clients for both SharpSpring and GraphicMail, which again brings in higher revenues per installation. Over the long term our goal is to be a disruptive force in the industry in two regards. First, we are offering innovative new technology which is groundbreaking in the marketing automation industry by combining the functions of marketing automation, CRM and call tracking. Just as the iPhone combined the functions of a phone, camera and computer in one device, our solution is today giving marketers a 360° view of their customers that they can't get anywhere else at any price. But secondly, our lean cost structure positions us well to continue to take share from players like Marketo and HubSpot. Both firms' products are priced well above ours, but ironically, both of those firms are also much farther from profitability. Our expectation is that by the end of the year we will demonstrate both strong growth and improving profitability. Just as our strong product offering and affordable pricing attract customers, we believe that our lean cost structure and profitability is a critical element of our long-term strategy for attracting investors. At the point where mainstream investors start to recognize us as a credible threat to companies like HubSpot and Marketo, we expect that it will be our track record of growing while generating cash that will really distinguish our firm. If nothing else, we believe that we certainly will continue to attract attention as a reasonable hedge for investors who want to bet on the growth of the marketing automation sector as a whole, which we remain convinced has enormous growth potential. While we remain focused on prudent spending, we have acknowledged that the increased investments are necessary to support the expanding growth opportunities we see in front of us. It is with this in mind that the board of directors voted to suspend the dividend. Historically, SMTP returns substantial amounts of capital to our shareholders each year, but with the growth opportunities GraphicMail and SharpSpring continue to produce, we believe reinvesting capital into the business will result in stronger returns for our long-term shareholders. With these comments complete, it is now my pleasure to turn the call over to Ed. Ed, the call is yours.

[Ed Lawton:]

Thank you, Jon, and thank you everyone for joining us on today's call. I'm happy to report on our results for the fourth quarter. During Q4 we recorded revenue of $2.9 million, a year-over-year increase of 91% compared to $1.5 million in the fourth quarter of 2013. For the full year 2014, the company recorded revenue of $7.5 million, a year-over-year increase of 30% compared to the $5.8 million for 2013. The increase in revenue is primarily attributable to the combined contribution of the recently acquired SharpSpring and GraphicMail subsidiaries, but was strengthened by the organic growth of those products over prior periods. SharpSpring, which was launched in early 2014, continues to experience particularly strong customer acquisition growth. During the fourth quarter, SharpSpring accelerated rate at which it added new customers by 50%, which resulted in signing new accounts representing over $700,000 in annual recurring revenues. The company remains on pace to meet or exceed its goal of having $5 million in annualized recurring revenues for SharpSpring by the end of 2015. This growth will be driven by continued direct sales, new international sales channels being added in Q1, and growth generated through roughly 300 agencies already using SharpSpring today as they add clients to the platform. While SharpSpring had an excellent quarter in terms of adding new customers, this only had a minor impact on revenues for the fourth quarter. That said, we now have greater visibility to revenue increases for 2015 from customers closed in Q4, and we also expect to continue to accelerate the rate at which we add new recurring revenues. SMTP closed the acquisition of GraphicMail in mid-October. Although it only contributed partial quarter of revenue, GraphicMail had $1.1 million of revenue during the quarter, which was about $300,000 higher than the company's previous estimates. The $300,000 increase was a result of US GAAP accounting rules, which require us to recognize revenue that is sold through third-party resellers on a gross basis as opposed to the net basis as recognized by GraphicMail prior to the acquisition. The increase in revenue does not impact profit due to corresponding increase in costs associated with the reseller fees. During the fourth quarter we incurred significant acquisition related costs related to the acquisitions of SharpSpring and GraphicMail. Specifically, we increased the liability for our SharpSpring earn-out by $682,000 as it has become more likely that SharpSpring will reach its earn-out and achieve our goals. This adjustment was reflected in the P&L during the fourth quarter per GAAP accounting rules. In the future on a quarterly basis during 2015, we will reevaluate both the SharpSpring and GraphicMail earn-out liabilities that were established in-purchase accounting and make any adjustments through the P&L. This may cause some large fluctuations in our GAAP expenses during 2015 as the earn-outs for our prior acquisitions are evaluated. Getting back to ongoing operating costs, we've made investments to bolster our sales and marketing efforts as we continue to pursue growth on a global basis for our combined product suite. With SharpSpring now deploying its services using SMTP's delivery platform, we are launching SharpSpring internationally leveraging GraphicMail's international distribution network to broaden our addressable market and target larger, more profitable customers. Our sales and marketing spend increased $676,000 from last quarter, driven by our acquisitions of GraphicMail and SharpSpring and, additionally, and additional new sales and marketing resources. These increases reflect the promising growth potential that we see in our business in 2015. For the fourth quarter 2014, SMTP recorded a GAAP loss of $1.1 million or a loss of $0.21 per diluted share, compared to net income of approximately $342,000 or $0.11 per diluted share for the same period of last year. For the full year 2014, the company recorded a GAAP loss of $841,000 or a loss of $0.17 per share compared to net income of approximately $1.3 million or $0.41 per diluted share last year. For the fourth quarter 2014, SMTP had adjusted EBITDA of negative $52,000 compared to positive $646,000 for the corresponding period in 2013. Q4 adjusted EBITDA, added back stock compensation expenses of $197,000, acquisition-related expenses of $762,000 in addition to depreciation and amortization of $307,000. As a growth company, we believe that adjusted EBITDA provides useful information for investors to assist in understanding our financials. Cash was $2.8 million on December 31, 2014, compared to $5.9 million on September 30, 2014. While the company maintained positive cash flow from operations, the reduction in overall cash primarily relates to the $2.5 million cash component of the GraphicMail acquisition in October and our dividend payment in December. As we mentioned on the previous call, we expect our costs to normalize in 2015 as SharpSpring and GraphicMail are integrated into SMTP. While we have made some reductions in costs, including eliminating personnel redundancies and removing external email deliverability costs through the integration of SMTP's relay services, we will continue to sensibly invest in the company. Adjusted EBITDA will remain near breakeven during the first quarter of 2015, but is expected to improve throughout the year. Looking back, we are very pleased with the success of the company in 2014. We successfully transformed SMTP from a slow-growing niche email relay provider that was trading over the counter into a NASDAQ-listed marketing technology company with high growth potential. In 2015, we plan to continue our domestic and international expansion, with the goal of securing greater market share and additional recurring revenue streams. We look forward to a promising 2015 and are confident that we can capitalize on the growth opportunities in front of us. That concludes our prepared remarks. Operator, will you please open the call to questions?

[Operator:]

Thank you. We will be conducting a question and answer session. (Operator instructions.) Our first question today is coming from Eric Martinuzzi from Lake Street Capital Markets. Please proceed with your question.

[Eric Martinuzzi:]

Thanks for taking my questions, and congratulations on the good finish to 2014. You guys have done a ton of work, Jon, I know over the last year and a half. You're out there evaluating opportunities. You negotiated and you're closing the GraphicMail and the SharpSpring transaction. As far as now they're in the family, you've done some integration work, could you talk to maybe some things that either pleasant or unpleasant surprises since you brought the two other entities into the fold?

[Jon Strimling:]

Eric, first of all, thank you for the question and for joining us today. Generally speaking, we've been pleased with the progress with the integration and how these companies should fit together. We had a slide in one of our presentations that showed pieces of puzzle, and we found that these businesses are highly complementary in a number of ways. First of all, in terms of the product offering we offer out to the market, the combination has greatly expanded the reach of our products, and we find in particular that GraphicMail, which was sold as a mid-range product, it benefits from the scalability that SMTP is providing, and also provides sales channels and sales opportunities for SharpSpring. So, there are certainly customers that have been using traditional email service platforms, such as GraphicMail that are migrating upmarket. Previously, GraphicMail sales people might run into situations where they had a customer that was looking for a higher-end solution, but they didn't have an answer. Today they have that answer at SharpSpring and we can make those sales. In addition, the traditional ESP providers are actually seeing competition from SMTP relay providers, and so by again offering that as part of the suite of services, the largest sales force we have in the company, which is the GraphicMail sales force all over the world can effectively sell all three products. So first and foremost, we had hoped that this combination will lead to revenue growth and that's happening. We're also encouraged that the early investments we're making in marketing and sales with SharpSpring are bearing fruit. So, when you acquire a company, you certainly hope that you will see the kind of revenue growth that we're experiencing. The fact that we are seeing it has given us confidence to frankly increase our level of investments a little bit to drive further growth and to accelerate what we've determined as really compelling market opportunity. The final facet of how the companies have fit together is really the team, so we have a team that has come together through this acquisition that's working together effectively that encompasses the leadership of SharpSpring and the leadership of GraphicMail, who are an integral part of our future together and who are working hand-in-hand to make this combined business a success. And just for those that may not be familiar with the structure of those transactions in addition to the earn-outs, each of the primary players in GraphicMail and SharpSpring also will have a vested interest in the success of SMTP in terms of stock participation and we're working together as a team, really incredibly capable team, that came along with these acquisitions is helping us launch this combined enterprise. So that's all been actually quite positive.

[Eric Martinuzzi:]

Okay. And then you talked a little bit about the competitive landscape. I know I've seen a table in your investor slide deck that talks about I think it's based on a VentureBeat study of new accounts opened up. But beyond that, what are you seeing? What's the evidence that you're competing successfully versus HubSpot and Marketo? What do you point to?

[Jon Strimling:]

Sure. I think that what we point to is our revenue growth. So we are a new entrant into the marketing automation market, so SharpSpring was launched in 2014; and as such, we're competing with large incumbent players that are spending tens of million dollars on marketing and advertising. And we are winning customers from them every day that often hadn't heard of us until recently, but quickly grow confidence in the platform and what it provides. They check references. They look at HubSpot and Marketo and they come back and they buy from us, so fundamentally it's actually the revenue growth which gives us confidence in the strength of this platform.

[Eric Martinuzzi:]

Okay. And then a question for Ed on the margins, particularly the gross margins. If I look at 2013, it was the legacy business, that was 82% gross margin; 2014 you have a bit of a blend at yearend, you're down to 78% gross margin. Q4 was 76%. Is that what we should be thinking about for a go-forward gross margin assumption in the year ahead?

[Ed Lawton:]

Yes, I think that's probably a pretty good range, Eric. North of 75% I think would be probably where we'll fall out quarterly going forward.

[Eric Martinuzzi:]

Okay. I appreciate you taking my questions and congratulations again on the Q4.

[Operator:]

[Operator instructions.] Our next question today is coming from Lisa Thompson from Zacks Investment Research. Please proceed with your question.

[Lisa Thompson:]

Good morning. First, I just want to go to clarify something in your adjusted EBITDA number. You have acquisition-related charges of $762,000. That includes the $682,000.

[Ed Lawton:]

It does, yes, so the two components of that or the two big components of that are the deal closure costs from GraphicMail and $682,000 of the earn-out liability adjustment for SharpSpring.

[Lisa Thompson:]

Okay. And for the earn-out adjustment, how much is left to get to that end number, for the $5 million?

[Ed Lawton:]

So, our earn-out liability for SharpSpring specifically right now is about $7.7 million. We created the initial earn-out liability of about $7 million on the balance sheet when we acquired the entity, and then we became more confident that they were going to hit the goals that we set for the acquisition during the fourth quarter, so we increased that by about $682,000. So, the total potential would be $10 million for SharpSpring, so the differential is still about $2.3 million that we would have to recognize in the future.

[Lisa Thompson:]

Okay. And that will get spread out in some way over the next four quarters, right?

[Ed Lawton:]

Yes. We will have to reevaluate it each quarter once it becomes evident and we're 100% confident that that will be met, by the accounting definition, I would say, then we will increase the liability to that full amount at that point in time. The accounting rules essentially require you to take different scenario approaches. You'd have to run multiple scenarios, so it would probably be phased in over the course of the next year is the easiest way to say it.

[Lisa Thompson:]

Okay. And for Q1, how much revenue will you get from GraphicMail based on the fact that it's a full quarter instead of a partial?

[Ed Lawton:]

So, we announced roughly $1.1 million in Q4. There was a little bit of acquisition impact to that and it was not a full quarter. I would think it would tick up by about $100,000 or $200,000 in the first quarter naturally. However, Q4 is actually a stronger quarter seasonally for that business as well, so we should take that into account. There'll be a little bit of an offset because of the seasonality when retailers push out their yearend programs for the holidays, we do see a bump-up in revenue during our fourth quarter.

[Lisa Thompson:]

So do you want to give us a range for Q1 revenues?

[Ed Lawton:]

We're not going to disclose Q1 probably specific. It will increase from the $1.1 million because of the full quarter and some of the, like I said, some of the acquisition impact that we experienced last quarter. I think an increase of a couple of hundred thousand dollars would be in the right range.

[Lisa Thompson:]

So is Q1 overall total revenue is going to be up from Q4, or is it seasonally weak and not?

[Ed Lawton:]

It is a seasonally weaker quarter. However, we're experiencing strong growth for SharpSpring. The $700,000 of customers that we added last quarter, that's an annualized number, will come in and benefit our Q1 revenues, so overall total company revenues will definitely increase quarter-over-quarter.

[Lisa Thompson:]

Okay. And going back to something interesting you said that your business model is so different from Marketo and HubSpot. Can you talk a little bit about their prices versus your prices and their cost of marketing versus yours? Because I think it's kind of a thing that I think lately people are starting to freak out that there's so many public companies out there that just don't make money and don't look like they're ever going to make money, so I think this would be reassuring to hear a different story.

[Ed Lawton:]

Yes, we feel absolutely the same way, Lisa, so that is definitely one of the themes that we want to build on with our company is the history of profitability and making sure we're building a profitable business for the future. I don't have the Marketo or HubSpot financials right in front of me, but from memory I think they were spending a considerable amount on their sales and marketing efforts, probably in the 60% to 70% of revenue range from memory. We're just nowhere near that, and we don't want to grow for growth's sake and have to support a revenue growth number with that much cost. Jon, I don't know if you have anything else on that one.

[Jon Strimling:]

Yes, I think it's important today that there's absolutely a sense of cost across the organization. We do run international operations. We absolutely have a US presence, but we also have a global presence. And most of our people are overseas, which does provide us a cost-advantaged position in the market. We also run very lean in technology development and what the SharpSpring team has achieved under their phenomenal CTO very rapidly to build a product which is competing head-on against the industry leaders like Marketo and HubSpot is pretty amazing. So, we will continue to follow-up and we intend to continue to generate positive cash flow through the business and to continue to improve the profitability of the business even as we grow.

[Lisa Thompson:]

All right. You said that you increased prices a little bit recently. How much did you increase it and how does that look versus the competition now versus where it was before?

[Jon Strimling:]

So the comment I made on increased prices related to SharpSpring, which did push through a modest price increase in Q4, the product still sells at a substantial discount to Marketo or HubSpot, so for end users, the product can be in the range of a third the price for comparable installation. And for agencies it can actually be less expensive than that relative to some of the competitive products. However, we do believe that the agencies are a strategic value to us as we grow the business and that they bring us rapid penetration to the market and additional assets to end users. The increase that we pushed through was relatively modest. We have been crediting back prior to the acquisition and up through potentially the end of the third quarter, we had been crediting back some initial training costs, training charges that we would provide training to customers. It represented approximately an $1,800 cost to customers against about a $6,000 annual recurring revenues per customer on the agency side. We stopped crediting those fees back in the fourth quarter and actually saw an acceleration of sales despite charging a little bit more to the agency customers when we did that. We also had gone overseas and had priced more aggressively in Europe where the competition is at a higher pricing. We’ve also increased our pricing there as we go to market.

[Lisa Thompson:]

Great. Well, that sure sounds like a good sign.

[Jon Strimling:]

The other thing to reiterate is, as these agency customers add end-users, they wind up paying more to us on a monthly basis because their usage is increasing. Also as we take on higher volume customers, the fees I just described there for a small business are relatively low volume sender. As we take higher volume senders on the SharpSpring platform, we’ll also see additional charges and additional improvements in the revenue per customer as the sending volumes increase. And that's what's been enabled by the SMTP sending platform.

[Lisa Thompson:]

So, shouldn't that push up gross margins then?

[Jon Strimling:]

So, that should push up gross margins. Some of the revenue recognition rules, which Ed could comment on further had a countervailing impact, which is to say that when we recognized those additional revenues as Ed had alluded to earlier related to growth rather than net sales to resellers, there are some costs associated with those reseller costs that wind up hitting the margins. Ed, do you want to comment on that further?

[Ed Lawton:]

Yes, exactly. So, I was mentioning in my script the $300,000 of increased revenue, there's also $300,000 of increased costs related to those resellers as gross-up of revenue and costs. The $300,000 of costs is actually split between sales and marketing expense and costs to support the customers, so the resellers are also providing frontline support to the customer base. So, there is an impact there to our margins. However, we do expect to remain, like I said earlier, north of 75% from a gross margin perspective, and then you'd naturally see that tick up over time as you get more and more customers on to the SaaS platforms that we have, you'd expect gross margins to increase over time.

[Lisa Thompson:]

Great. Thanks. That's all my questions for now.

[Operator:]

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Mr. Goldberger for any further or closing comments.

[Jeffrey Goldberger:]

Great. Thank you, Kevin, and thank you everybody for participating on this morning's call. Management will make itself available throughout the day for additional questions should you have any. And we look forward to future communications. Thank you again