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Edited Transcript of AJX.TO earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 Agjunction Inc Earnings Call

HIAWATHA Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Agjunction Inc earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Vaughn

AgJunction Inc. - CEO, President & Director

* Scott Steinman

AgJunction Inc. - CFO

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Conference Call Participants

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* Scott A. Billeadeau

Walrus Partners, LLC - Principal & Portfolio Manager

* William Fred Nicklin

Circle N Advisors, LLC - Senior Portfolio Manager

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for participating in today's conference call to discuss AgJunction Financial Results for the Third Quarter ended September 30, 2019.

Joining us today are AgJunction's President and CEO, Dave Vaughn; and CFO, Scott Steinman. Following their remarks, we'll open the call for your questions. All the materials, including the press release announcing the company's results, were issued and filed yesterday and are available on the SEDAR database or on the company's website at agjunction.com.

I'd like to remind you that this call is also available via webcast at the company's website, and a replay will be accessible until November 21st. Before we go further, I'm required to provide the following statements regarding forward-looking information which may be made on behalf of AgJunction by its representatives on this call.

Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is based on certain assumptions made by the management and are subject to known and unknown risks and uncertainties that may actual events or results to differ materially from those anticipated in such forward-looking information.

There is no assurance given that such forward-looking information will prove to be correct, and actual results could differ materially from those anticipated in such forward-looking information. Any forward-looking information is made as of the date of this call and AgJunction disclaims any intent or obligation to update any forward-looking information, whether because of new information, future events or results or otherwise, other than as required by applicable securities laws.

Please read the forward-looking information and risk factors section in the company's management's discussion and analysis dated September 30, 2019, and the forward-looking statements section of the company's press release dated November 6, 2019, as these sections outline the company's assumptions and the material factors which could cause or would cause actual results, events or performances to differ.

I'll now turn the call over to Dave Vaughn, AgJunction President and CEO.

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [2]

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Thank you, Sydney. Good morning, everyone, and welcome to our call. During the third quarter of 2019 uncertainty remained in the U.S. ag markets as tariff issues persisted and farmers began preparing to harvest crops planted during one of the most difficult growing seasons in recent history.

Having said that, we continue to focus on the things we have more control over, such as getting ready for the spring this next year, remaining focused on expense reductions and facility consolidation, driving brand recognition in our new direct-to-farmer channels, strengthening our indirect channels consisting of both our current and prospective VARs and OEM customers as they integrate and adopt our technology and expanding and enhancing our intellectual property portfolio. I would like to comment on the progress that we've made in these areas.

First, I want to start off with providing some updates on our direct business. I'm pleased to report that we continue to expand our reach during the quarter and now have sales from 31 states, with inquiries from farmers across the total of 44 states.

The amount of interest we have already generated since introducing the Wheelman lineup just over 9 months ago, has been impressive and gives us confidence that these cost effective, easy-to-use products have a significant amount of growth potential.

We also continue to generate interest from the ranching community after hosting over dozen ranchers at the JD Hemphill Ranch in July. This showcase how our Wheelman products assist with everyday tasks such as hay cutting and pasture management. We received a lot of positive feedback from the event, with ranchers commenting on the amount of time and efficiency that they could gain at incredibly affordable price points.

In addition to the interest, we continue to generate for our products, we're still heavily focused on providing the most up-to-date solutions. In fact, towards the end of the quarter, we launched a free update to our Whirl app that was highlighted by the addition of a task management feature. This new feature helps farmers keep track of different tasks they perform when using Wheelman products on their farm.

One of the most important benefits of this feature is to allow farmers to store data from previous tasks, including the name, type of task, crops worked done, date implemented, duration of the task and A and B guidelines that they use, which now they have access to review and reuse year-after-year.

Subsequent to the quarter, we announced a strategic 2-year partnership with Farmer Business Network or FBN that we believe will be instrumental in growing Wheelman's brand awareness with farmers across the U.S. and Canada. FBN is independent farmer-to-farmer network with nearly 9,000 members who utilize the platform's comprehensive ag data to better understand the current state of the market and improve their farm financial performance. Farmers are able to share relevant price data on crops, as well as purchase seed and chemicals directly from the producers through that platform.

With this partnership, the Wheelman Pro and Flex are now listed on the marketplace section of FBN's platform, introducing our autosteering solution to a broader audience of farmers. The partnership also gives us the opportunity to participate in FBN's community outreach events, which are held in local ag communities across the country. We will keep everyone up-to-date on when we plan to attend these events.

Similar to AgJunction, FBN is looking to disrupt the ag industry through innovative technology and cost effective pricing strategies. We are eager to be working with their partners that share the same mission as us and are optimistic about exposure this will bring to our direct-to-consumer offering.

In addition to our partnership with FBN, we also partnered with Agweek and Machinery Pete to further expand our brand reach. Agweek is a trusted and recognized print publication in the ag industry with over 85,000 loyal readers that ensure we are still continuing to reach farmers who utilize this medium to keep up-to-date on market trends.

Machinery Pete is a recognized brand and ag celebrity with nearly 300,000 subscribers of which the vast majority fit within our target demographics. He has a significant presence in the ag community across the variety of channels, including e-commerce websites, TV series and podcast. Machinery Pete be accompanying us to the upcoming FBN event to exclusively promote our Wheelman products, which we're very excited to have a well-known face in the industry directly associated with our brand and endorsing our value proposition. Overall, our direct channel remains an important part of our growth strategy, and we're confident we are heading in the right direction.

With that, let me move to the other main focus of our business strategy our indirect business. By increasing the speed of adoption in our indirect channels, we have completed several integration milestones with 2 new OEMs in EMEA and APAC during the quarter. By completing these important integration milestones, AgJunction is on track to deliver initial production units during the first half of 2020.

AgJunction is working on improving our technology to further increase the speed of integration and broader adoption for our indirect channel products. Within this segment, we also plan on leveraging the investments we've made in digital marketing for our direct business to better market and drive awareness of our components to OEMs and VARs.

While face-to-face networking is alive and well in the business-to-business world, it's increasingly important to have a strong online presence. We believe that combination of digital marketing and industrial marketing will be the most effective form of marketing to capture and educate a greater audience on the solutions we offer.

We know that over 80% of prospects today visit a website during their discovery phase before they ever engage directly with a company. And since the typical B2B sales cycle often involves many key players such as engineers and decision makers, and other folks who have to buy in to a purchase, websites are the easiest and straightforward way to share information about your company, expertise and product services.

Overall, we have a strong foundation of intellectual property and unique expertise to continue offering the most innovative and cost effective components on the market, which we believe will allow us to capitalize on the large pipeline of growth opportunities.

And now, I'd like to touch on our IP portfolio. During the quarter, we announced and issued -- and had issuance of 6 new patents as we continue to expand this important part of our business. These patents are seminal in the category of enhanced autosteering and critical to the commercial viability of our fully autonomous off road vehicles. We now hold approximately 200 patents and patent pendings worldwide.

We also remain diligent in building on our industry leading litigation tested IP portfolio and will continue to protect our products and customers through strategic enforcement of our intellectual property.

Also, I wanted to highlight our innovative engineering team, which was recently recognized for his cutting edge leading technology development by receiving the Innovator of the Year award for large companies from the Arizona Technology Council presented us last month at the 16th Annual Governor's Celebration of Innovation. I'm very proud of our team lead by Brett McMickell and we look forward to continuing to be the industry leader in this area of expertise.

Lastly, I wanted to go over the new additions we've made during the quarter to our senior leadership team and the continued consolidation of our facilities to Scottsdale. First, we appointed Scott Steinman as Chief Financial Officer. Scott is an experienced finance executive with impressive track record of implementing the necessary procedures and controls to drive significant growth, and we believe he will serve as an invaluable asset to our executive team going forward.

To round out our senior leadership team, we also elevated Brett McMickell to Chief Operating Officer. Brett was formerly our Senior Vice President of Global Product Development and has been instrumental in developing our array of autosteering solutions and creating a technology roadmap for the company.

In the areas of expense control and consolidation, we remain on schedule for the closure of both our Fremont and Brisbane facilities, which will complete our relocation to Arizona. These efforts will result in a leaner work force along with a substantial reduction in facility expense.

With the addition of Scott and Brett to the executive team, along with the continued consolidation of our facilities at Scottsdale, I believe we now have a strong foundation in place as we enter the next evolution of our business and significantly expand our reach to delivering autosteering to as many farms as possible.

With that, I'd like to pass the call over to our newly appointed CFO, Scott Steinman, to walk you through our financial results. Scott?

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Scott Steinman, AgJunction Inc. - CFO [3]

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Thank you, Dave and good morning, everyone. I would like to start off by saying we have an incredibly talented team over here at AgJunction with some of the most innovative precision agricultural components in the world.

So far I've been energized by the enthusiasm and urgency everyone shares to accomplish our mission of delivering affordable, easy-to-use autosteering solutions to all farms. I'm incredibly excited to be here at AgJunction and play significant role in returning this company to growth.

Before we go into the financial results, I want to remind everyone that we have completed the final shipments of our bulk purchase order this quarter. As a result, we had challenging financial comparisons during the quarter that will continue over the next year as we will no longer be generating revenues from the bulk purchase order.

Now jumping to our results. Total Revenue in the third quarter was $8.6 million compared to $17.9 million in a year ago quarter. This decline was primarily driven by the prior year period, including a higher portion of the revenue generated from the bulk purchase order.

Breaking down sales by geographic region, sales in EMEA were $5.7 million compared to $13.5 million in the prior period. The decline was primarily a result of the third quarter of 2018 having more revenue generated from the bulk purchase order. Sales in the Americas were $2.8 million compared to $3.9 million in the year ago quarter, primarily driven by the sale of the Outback and Satloc businesses. APAC was $0.2 million compared to $0.5 million in the third quarter of 2018 due to decreased demand in New Zealand and China.

Gross margin in the third quarter was 32.3% compared to 35.4% in the third quarter of 2018. The decline was primarily due to the reduction in revenue and the final shipments of the BPO carrying lower margins.

Total operating expenses were reduced to $5.3 million compared to $5.7 million 1 year ago. This was primarily driven by the elimination of costs related to the divestiture of Outback and Satloc, along with the continued focus on cost reductions corporate wide.

As a percentage of sales, operating expenses were 61.6% compared to 31.7% in the third quarter of 2018, reflecting a larger revenue base in the prior year period.

Net loss in the third quarter was $2.5 million or minus $0.02 per share compared to net income of $1.7 million or $0.01 per share in the year ago quarter.

EBITDA in the third quarter was minus $1.9 million compared to $2.1 million in the third quarter of 2018 and the decline was primarily a result of the aforementioned lower revenue.

Addressing our balance sheet, cash and cash equivalents at the end of the third quarter totaled $21.3 million compared to $21.4 million at the end of 2018. We also remained debt free and have full access to our $3 million line of credit.

Now a few comments about our outlook for the remainder of the year. As Dave mentioned, in the near term we expect to continue experiencing softness in the agricultural market. Despite what we believe to be short term headwinds, it is still our mission to aggressively market our easy-to-use, low-cost autosteering products, while providing best-in-class components to our OEM and VAR partners.

Looking beyond 2019, we are well positioned for the future given our innovative autosteering solutions and expansive IP portfolio needed for the next generation of farming equipment. I am confident in our team's ability to significantly grow the business and I look forward to providing updates on our progress.

With that, I'd now like to turn the call back over to Sydney for Q&A. Sydney?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from a line of Scott Billeadeau with Walrus Partners. (Operator Instructions)

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Scott A. Billeadeau, Walrus Partners, LLC - Principal & Portfolio Manager [2]

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I'm wondering, not sure what info you can give, but certainly with the bulk order going away you're going to be shutting down the facilities. What kind of is OpEx on an ongoing basis as you kind of get through this and there is probably still a couple -- at least a little bit of transition while you shutdown. Just trying to get a -- depending upon what you want to provide here basic R&D, sales and marketing, G&A, kind of where are you now and where -- what's the trajectory of those?

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Scott Steinman, AgJunction Inc. - CFO [3]

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Hi, Scott, it's Scott here. Not able to provide specific guidance to you on that. We're certainly working towards the goals that have been outlined by the organization and continue to pursue those throughout the remainder of this year and drive the performance into next, but unable to break it down specifically for you.

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Scott A. Billeadeau, Walrus Partners, LLC - Principal & Portfolio Manager [4]

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Well, I guess, maybe another quick are you -- in terms of sales, operation, marketing, are you still adding, tweaking, looking to figure out what's the best go -- sampling different go-to-market strategies, especially on the direct side?

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [5]

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Hi Scott, this is, Dave. So I think the -- what I can say about that is, we are still winding down several of the operation, so there's still some expense that gets improved. We're almost -- we've actually closed the facility in Australia. We still have the Fremont facility open and -- but by a month from now, the people will transferring or have transferred here. We do have a leaner workforce that will start to show up on the P&L going forward, while we're still carrying dual resources, some in -- that are in Fremont and some that are here. So I think that's a general direction.

And you and I've talked before about modeling since we don't give guidance. But if you looked at a business like ours on a long term basis, that we would expect as we remain as primary hardware supplier, your gross margin areas should be moving much closer to the high 40s and low 50s. And as we start transitioning to more of the software services side, you should see that number going up higher on the long term.

If you remember the nice thing about an adoption of a technology of moving from aftermarket full solution to built-in, designed in OEM product, they have a lot of the hardware already in position on these smart machines. And the real key to success, there is to let them use that and be able to load software instead. And so as you can imagine, the cost structure of a software company is substantially different than the way we've looked in the past. So from the long term, that's certainly the direction we're heading in. And we can see it today, and even though we're not shipping products into a number of these OEMs, we're passing the qualification and we have a pretty good idea of what it's going to look like from a cost profit structure.

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Scott A. Billeadeau, Walrus Partners, LLC - Principal & Portfolio Manager [6]

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And I guess just following on, you have -- you mentioned the APAC and the EMEA OEMs that you're working with going down the integration path. Maybe talk a little bit -- you mentioned you're going through the qualifications and so forth. I would think to the products you mentioned maybe being middle of next year, would those be kind of first samples or will these be kind of what do you -- maybe give us a little thought of what your expectations there are?

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [7]

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I've mentioned some of that on the last call as far as the time that it takes for adoption. One of the things we've been working really hard on is accelerating adoption and integration, making it easier for machines to take the technology in there. Design cycles for these machines still tend to be a little bit more like automobiles used to be. It's kind of 5 year type timeframes. They pick a model in the future and they say this one's going to come to market, being able to steer itself and there's not a lot you can do to rush to it.

But nice thing about working on ease of integration is that a couple of these OEMs that we're working with have already been in their design cycle for a couple of years. And normally, you wouldn't be able to get onto those machines, but we've designed it so that they can actually take a look at this and say, well, this will fit on this machine, and it's coming out in 3 years instead of 5 years.

So there's some good acceleration were we've got a number of them in the pipeline now that are late 2020-'21. We're actually working on some '22 and '23 already. So it's kind of a spread, but it's definitely a shift. And the message that I've been giving to the investors for the last year is that we spend a lot of our time inside these companies.

Obviously, if you're going to put this into the machine, you've got to be very pretty deep into the design cycle. And every one of them has somewhere on their long term roadmap, bringing machines to the marketplace that steer themselves. So it's exciting to see that level of adoption. It's something when you're really fortunate that something got adopted so well in the aftermarket that machines decide to start eating and that's what's happening, so it just takes time.

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Scott A. Billeadeau, Walrus Partners, LLC - Principal & Portfolio Manager [8]

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Yes, I mean, the combination of some time and a little better marketplace to sell into would be great.

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Operator [9]

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And our next question comes from Bill Nicklin from Circle N Advisors.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [10]

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Two things caught my eye within the last week. I was wondering if maybe I can get some comments from you folks. One is that there is a about an hour-long podcast on Climate Corp.'s FieldView product, something called RURAL AMERICA LIVE. And it really blew me away about how much data is now being used and combined to bring agriculture into an area where it looks to me like it's just as informed by data as the factory floor is. So I look at your task master and other things that you have commented on. And I was trying to get an idea of what your view is on data and if the data you're collecting on Wheelman at some point applicable to fusing in with the data that someone like Climate Corp. is doing out in the field to get efficiency?

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [11]

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So this is Dave. Hi, Bill. The -- it's been a reasonable separation of information. Most of the stuff that's pretty active today is on the performance of the machines, which is really critical. And as you move into the rest of precision ag, it gets down to using other data to make decisions. And that starts becoming really important as you start bringing things like AI to the machines.

There's -- as you know, there's a lot of technology revolutions happening right now and it's -- the days of actually being a leader in something and sitting back for 5 or 10 years and staying that way, they're gone. The technology that's coming out today is really extremely disruptive and it requires you to be focused and dedicated if you're going to stay leader of it.

And we started that process on communications about 2 years, 3 years ago with the decision that everything that we send out of our place who will have the ability to talk to us. We look at it more from the performance of the steering machine. In order to be the best steering machine you need real-time feedback on what the machine is doing. But, obviously, when the machine gets to a certain point, it has to do something -- it plants or sprays or does something like that. And there's a whole another revolution going on in that information and it's pretty exciting.

And you're right there is a change. It's taking information that only a farmer used to kind of know if he was living out on the field and today it makes it available to everybody and anybody that can use it. And it gives it you in a fashion that makes you much more efficient and helps you with the decisions of what to plant today versus what you planted last year. So we're committed to that.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [12]

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So to get a little more granular on that, just so I can get my mind totally wrapped around this. Is that -- will your equipment down the road be producing data that somebody like Climate Corp. that's owned by Monsanto can use in the farming operation as part of a mix. So in other words, climate started out with weather and now they are into all kinds of sensor data as far as productivity of the field and what to plant, where and so forth. So will AgJunction and the equipment you either have now or envision be part of that data stream at some point?

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [13]

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It is, yes, and that's actually what is the first step of what we announced. It's the ability to take that information off the machine, put it up in the cloud and then have the farmer pull it back down. So he knows the AB lines he used last year, he knows how long it took to plant, where to was planting. And if he really liked that result from that year he can duplicate it because he -- now he has all that information stored.

But on a bigger scale the part that we play in data is, all of the stuff on variability is contingent upon knowing where you are, you have to first know that and then there is a huge database being created that, well, if you're right there, then you should be doing the following. And we're 100% focused on being able to tell all the information banks in the world where am I.

I am on this field, on this day and it's important to know a whole bunch of things like did it rain here yesterday, is it the soil sandy or clay, all of those databases are dependent on where the machine actually is. And, obviously, to control the machine we have to be an expert in being able to answer that question where am I. So that's what we focus on.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [14]

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The second question I have which kind of really blew my mind is that there was a conference call on November 5 where a company that we're all familiar with Raven that made a bunch of announcements and kind of summarized it. They said that they're paying $65 million to acquire Smart Ag and some undetermined percentage interest in DOT Technology, both of which kind of are in the general realm of ag data and autonomy.

And they said they were paying $65 million for companies that had prototypes at the moment and would not have significant revenue ramp for 3 years. So I looked at that $65 million and then I looked at the market cap of AgJunction net less the cash and they are paying like 3x as much for 2 companies that only have prototypes and will not have significant revenue for 3 years according to their announcement. I'm trying to find out what the hell am I missing here.

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [15]

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Well, if you can figure that out I'd like to hear that for sure. I think that from previous announcements, our relationship with Raven and we know the crowd there very well. They are strategic partners of ours through their -- the agreements that we have over licensing on intellectual property. And so it's a different approach to -- of the future then we have and we wish Dan and his whole crew good luck on it and it should be interesting.

We on the other hand have -- we're focusing, back to my earlier comments about revolutions that are taken place in technology. We're focusing on being the best in steering and what we steer are machines. And we choose not to compete with the people who build the machines.

We want to be their steering partners and so our philosophy is that we're 100% focused on helping them do that. A number of assets that were required by Raven are very interesting and they like, you said, they got prototypes in the machine area of actually creating machines that can steer themselves. So it's a different approach, but we're -- like I said, we're 100% focused on steering those machines rather than building them.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [16]

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Number one I said I was kind of amazed, but I'm also little confirm in the sense that if somebody is willing to pay $60 million for that and looking what we've got, I'm little worried that we're vulnerable to someone coming in and just taking us over at a relatively cheap price. And I stress relatively given the $60 million that they paid for taking the different approach, particularly when precision ag now, I think, has really the big focus on it from a lot of different directions and different types of companies. So do you think we're vulnerable or not? And should we be paying more attention to informing investors about what's going on in the company so that the share price to me would seem more reasonable?

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [17]

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Well, that's obviously hard to answer. And When you asked that similar question or Scott asked it last time on the call, it's -- being a public company you are kind of always in that position. And -- or private companies you could argue they're getting out in that position. But you see those are family owned ones where the family has the ability to say no, no matter what. But when you have a lot of investors and you are public, decision on how vulnerable you are often is put back in the hands of the actual investors and you don't -- companies don't get too much to say about that often so --

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [18]

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I've served on a few Boards publics and private companies, and my advice to the Board always was, make sure that your shares are trading for more than you're worth and you won't have to worry about somebody taking you over.

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [19]

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Yes, that's interesting philosophy. Well, I agree with that and I share your view. So to the extent when can drive that I want to definitely drive that, so.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [20]

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All right, that's tip from me for this quarter.

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Scott Steinman, AgJunction Inc. - CFO [21]

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Thanks, Bill.

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [22]

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Okay. Well, thanks for your support, Bill.

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Operator [23]

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And at this time this concludes our question and answer session. I would now like to turn the call back over to Mr. Vaughn for closing remarks.

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David E. Vaughn, AgJunction Inc. - CEO, President & Director [24]

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Well, thanks, everybody, for spending the time with us this morning. I'd like to once again thank Peter Newton who had stepped in to be our interim CFO while we went onto the hunt for Scott. His last day will be next week and he really did a great job for us during this transition period. So thanks again for all the work that he's done. I look forward to addressing you again when we report our fourth quarter and full year results which will be in March. Thanks again for joining us.

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Operator [25]

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Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.