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Edited Transcript of ROI.V earnings conference call or presentation 7-Nov-18 2:00pm GMT

Q3 2018 Route1 Inc Earnings Call

TORONTO Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Route1 Inc earnings conference call or presentation Wednesday, November 7, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter F. Chodos

Route1 Inc. - Executive VP, CFO & Director

* Tony P. Busseri

Route1 Inc. - CEO & Director

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Conference Call Participants

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* Jeff Silver

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Presentation

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Operator [1]

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Ladies and gentlemen, please standby, we're about to begin. Good morning and welcome to the Route1 Q3 2018 Investor Conference Call and Webcast. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Wednesday, November 7, 2018.

I would now like to turn the call over to Mr. Tony Busseri, Route1's Chief Executive Officer.

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Tony P. Busseri, Route1 Inc. - CEO & Director [2]

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Good morning everyone thank you for attending the call today. I'm joined by our Chief Financial Officer, Peter Chodos. Hopefully, you had a chance to review our press release from yesterday and the related filings; specifically Route1's financial statements and the file on the SEDAR; they're also available on our Website.

I need to take care of some formal requirements so just bear with me now. As described on the accompanying slides, I would like to inform listeners that this presentation contains statements that are not current or historical factual statements that may constitute forward-looking statements. These statements are based on certain facts and assumptions, including expected financial performance, business prospects, technological developments and development activities and like matters. While Route1 considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. These statements involve risks and uncertainties, including but not limited to, the risk factors described in the reporting documents filed by the company. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law.

Estimates used in this presentation are from company's sources. I also need to point out that on today's call, we use names that are either registered trademarks or trademarks of Route1 Inc., in the United States or Canada. So let's get going.

This presentation today is probably one that we've been waiting for as a group of shareholders. The company obviously had a record quarter and we'll talk today about high level concepts, strategy as well as talking about the numbers a little bit. So first off, I think it's important, as you are reviewing our financial results to keep in mind where we were about 15 months ago. We in the spring of 2017 described a pivot. The company was going to move from being simply a provider of secure remote access solution to something that was a little bigger and a little more diversified that would leverage our core competency around cybersecurity but also brings in opportunities to move beyond remote access. So, what's the consequence of that? Well, a lot of good things. As you saw with this quarter, some large growth in revenue but margins also were somewhat different and they reflect the diversified nature now of our sales or revenue. We're no longer a pure play software company which will mean the margins will vary differently from those that we saw 12, 18, 24 months ago. This is just natural as you bring in product sales and services into the software mix, you're going to have different margins related to those sales activities and there will be some swings in the revenue line item quarter over quarter because product sales and software sales aren't stable. They have ups and downs and we like the ups being large one-time orders like the one we described in July of this year for $5.9 million and (inaudible) during the quarter but please keep in mind when you're reviewing our information now that we're a broader more diversified company that focuses around providing a solution for our clients. And that solution deals with using their data to make better decisions. Ultimately we do still provide ultra secure remote access solutions, user authentication and data intelligence. So let's drill into that a little further.

The end goal for us is to help a client make better decisions using their data whether that's process optimization or [mission] accomplishment. Whether we're in this for profit or whether it's a government enterprise. And at the end of the day, if we can provide timely secure information to our clients and point to the areas how they can be more efficient, we think that's a good outcome for them and we think that's a business model that will work long-term. Some of the buzzwords that you've heard for sure is IIoT, or Industry 4.0 but in all cases they're about the data and no different than where we were two years ago. What's our secret sauce in this business? It's security. Security is core to all of our products and service offerings. And it's fair to say the products and services that address specific [misses] or mission objectives and have a strong security posture are generally perceived as superior. It's very hard to lead with security purely for the purpose of a sale but if security is core to who you are, it's a differentiator that helps close the sale.

Pete, maybe you'll go through those numbers?

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Peter F. Chodos, Route1 Inc. - Executive VP, CFO & Director [3]

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Sure. I can do this fairly quickly. You can -- I think that that slide shows that there's a significant bump up in revenue from -- at least from September 2018 and remember that's a 9-month number of $22 million of gross revenue. You'll note that the peak for our revenue over the last number of years [X] the award we had some time ago was fiscal 2016 and that represented the last year that we had CBP, as you can recall.

When we look at subscription revenue, which I think is quite important as a component of our overall revenue, on an annualized basis that's about $6.1 million annualized versus -- because remember that's a nine-month number, versus about $5.7 million last year for the entire fiscal year. So that's just an increase of 7.2% but I will caution you that that also represents, and we'll come to that in the next slide or two, that also represents a 6-month number with respect to about $400,000 or $500,000 worth of revenue from service revenue from Group Mobile.

So the growth rate is substantially or will be substantially more than that on a full year basis. You'll also note that the nine-month growth margin that we show on that slide is about 25% versus the 78% to 80% gross margins that we achieved in the past without the Group Mobile business and that relates exactly to what Tony was saying on the first slide in terms of the pivot of the business.

And then I think the last thing that I want to say is that our EBITDA number is growing and is -- will be substantially greater than in the past, that's certainly compared to last year once we complete the fiscal year of 2018. On the next slide, it just shows the operating performance on a quarterly basis so you can compare the quarters. I'll leave you to do that on your own but suffice it to say that the metrics in absolute terms, in cash flow terms, are growing as you can see.

One of the key things that we are not losing site of, unless anybody thinks to the contrary, is the subscription revenue and services component of our business. Clearly that component is the highest margin component of all of the businesses that we have in the company of all of the revenue base that we have in the company and you'll note that the application software component is about 71% of that in Q3 of 2018 whereas technology as a service and other services provided from, on an incremental basis, the Group Mobile business is the balance of 29%. Each of those businesses I have to emphasize or each of those components are very, very high margin business. So, when Tony talks about where we're going with leveraging the Group Mobile business base, we're going to talk about emphasis on subscription/recurring revenue opportunities and biases. The balance sheet, I think, speaks for itself. We have $2.3 million of cash. We have no debt, we have a strong working capital position and we have, excuse me, we have vastly improved our position in the trade. Paying our [VAD]s and our suppliers in less than the 30-day terms. So, we have a very strong balance sheet. We have a very strong operation and we have a very strong reputation. And I just want to point out one thing, everybody who has followed Route1 for the last number of years knows that our peak cash position has always been in March, April timeframe and for the rest of the year, or for the rest of the 12-month period, we draw down that cash. Right now in September we have approximately, at the end of September, we had approximately $2.3 million of cash and that's not quite double but pretty substantially greater than last year at this time. So, and every September back from time in memorial, again, other than the time we got the award, we -- this is a very, very strong cash position. So, I would just leave you with the financial statements being quite strong and we are well able to advance our objectives, as Tony will outline in a little bit. On the next slide, I just want to point out that we have 364.5 million shares outstanding. We -- if you remember, at March 22, we had 372 million in change outstanding. We bought back, since March, approximately eight million shares under our NCIB which all of you note that we renewed a couple of months ago. So we will continue to buy the stock when we see opportunity and when we see value.

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Tony P. Busseri, Route1 Inc. - CEO & Director [4]

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Thanks Peter. So let's revisit the plan we talked about a couple of times with a few comments from myself. Relative to the EBITDA generation from the Group Mobile International acquisition, there's no other way but to say it's been far better than planned. When you buy a company and one that had some broken elements to it, you put together a pro forma, you do your due diligence, you set out a plan and kudos to the team in Chattanooga and Arizona and Florida and kudos to the (inaudible) team in working hard to get to know the team and coming together. The results for the third quarter, second quarter and the fourth quarter coming up reflected the company has done a very good job of integrating and we're very excited about the opportunities in 2019.

When I talk about 2019, I'm specifically talking about the cross and up-selling opportunities. Great MBA terms. Can we take a client that historically was a Group Mobile client, or Group Mobile International client and make them an action plan user? Can we take a DOD account that we may have sold MobiKEY into and now provide them ruggedized devices. So we're quite excited about where this will lead and we don't think we've scratched the surface (inaudible) by any stretch of what the synergies are related to sales.

Peter will also talk about IP actualization a little later particularly as it pertains to the AirWatch litigation and I do want to point out under further expansion, we're going to talk about in a few slides new releases or software releases coming to market but we are actively looking and pursuing the next acquisition or acquisitions and we think 2019, in combination with stronger (inaudible) growth, we would expect to acquire revenue at the appropriate valuation.

So moving ahead, I want to revisit strategy because there's a new leg on this deal we're going to want to talk about on the following slide. You know that we fundamentally have three buckets; data security, data analytics and data visualization. And all three elements are how we deliver on our promise to our client base. It in no ways does it minimize the software applications that are core to us and in no way does it minimize the classic hardware reselling that Group Mobile and [Excalibur], another trade name, had done in years past. We think this model works extremely well but as I flip to now the fourth leg on the stool, we think this is an area that's going to bring growth in 2019 and that's data services. And data services currently for us is a small recurring revenue component of our sales model that Peter spoke to a couple of slides back when you broke, when we broke, down sales. But you'll notice the last bullet point or the third here, new services to be considered. We will launch some or all of these this quarter or early next year. We expect printing as a service and we're not talking about a printer that you have to copy a few sheets of paper with financial statements on them. We're talking about, excuse me, industrial printing as a service and that will be described in the quarters to come. Network monitoring as a service, carrier as a -- working with telephonic carries as a service. Principal year, we have clients that are asking us to deliver these, on these. We think there is good stable recurring revenue in margin that's associated with these and we will continue to push this.

I would also suggest that don't be surprised if there's a fifth leg of (inaudible) that shows up in the quarters to come called data implementation. And as my colleague Bob Hooper would say -- who's on the line but not part of the formal presentation, Bob would ultimately say it's turning the wrench. We may be able to capture the data, secure the data, analyze the data and provide it back to you but there is an element with some of our clients that we are going to need to implement or help implement. That's [thoughtfully] articulated on this slide but that's coming and when we say it's all about the data, be rest assured, we are all about the data.

It's worthwhile also to level set after last nights U.S. elections, our midterm elections. We would expect that the U.S. MCA, the predecessor to NAFTA to be signed. We think that's a positive thing for us because it takes away some uncertainty and instability here in Canada. Tariffs that are still standing in the automotive sector are distorting some investment decisions and we would hope as part of the ultimate signing of U.S. MCA, the tariff issue would be addressed for the -- for all sectors here in Canada. I also want to point out under (inaudible) technological, the fourth bullet, and historically I talked to you about one of the difficulties we've had in selling secure remote access technology is that principally security is seen as a vitamin not a medicine. There are some movements within the DOD that suggest there's a revisiting on their -- the current White House Administration around mobile devices and the risk that they pose in secure areas. And simply put, a lot of our devices now can capture information with camera's, etc., that are posing new security risks. We'll talk more about this in the quarters to come as policy if it does get implemented, is implemented. And we -- when we were pleasantly -- we were pleased to see there continues to be a consideration to what mobility means in context of the hardware devices and what's the best approach to mobility.

So I guess I'm giving a little heads up here but we are feeling a bit of a warm wind towards us coming in off the [ocean], maybe a bad metaphor there, but it's a little cold in Toronto, Canada today so I'm thinking about warm breezes. We'll talk about that in the quarters to come.

Quickly at a high levels sales and marketing, I know I'm going to disappoint many of you that would like to have the details on every MobiKEY account and hardware account that we have but I think what we can share with you is a strategy and one update on account that will be of interest for you. When it comes to MobiKEY, I think the pivot we've also made over the last 18 months, and more importantly under Bob Hooper's leadership, is to focus on enterprise licensing opportunities. Instead of looking for more entry points of 50 subscribers, a hundred subscribers, we're looking more quickly with potential clients to talk about bigger and larger opportunities. So, we think 2019 has the potential to be a year where we have some breakthrough with (inaudible) license sales.

[Mainly] I do want to update us, it's one of our oldest accounts and most important accounts and really I think there's a couple of little messages to deliver here. One, recently with the Department of the Navy's prime contractor, we ventured into an agreement to do a technology fresh so we are building new infrastructure. We would expect that would show up in our financial statements as CapEx and the first half of 2019 in installation to happen in mid-2019. This is going to take a lot of resources and focus for us but we're pretty excited about it is the Navy continues to operate on the infrastructure that was first used during the proof of concept. And at the same time, the Navy, not directly applicable to us, is going out and it's under a recompete or new contracts out there, RFP, to replace (inaudible) which is the current contract vehicle that they plan operates with. Bids are due in a couple of weeks and then there will ultimately be an award mid next year under a new eight-year agreement. Our technology is a line item with whoever wins so we don't necessarily see risk whether the current [client] wins again but we are building a -- we do have a strong relationship with the current [prime] and we work well with them.

So it's interesting, we will follow this and see what benefits will ultimately come out for us but building new infrastructure is a very good sign. As it pertains to hardware resale, the first thing I hope you'll appreciate, we don't use the terminology value-added reseller. We think that's a far overused term in the market today. We see ourselves as a solution provider, again, and under the data visualization element, why not sell the hardware that our clients are going to use to look at their data. And so yes we sell that but we also then sell them services and a lot of other things, as we've talked about. It is worthwhile highlighting that again, we continue to believe that the technology as a service model will grow which provides longer-term recurring contracts [with our] clients and then for sure we are seeing for our classic hardware accounts the ability to bring incremental opportunity or services and software to the table and providing refresh discussions and growth opportunities. So we don't think, again, it's just a simple business school of concept, we do think the unified message is going to translate into large new sales for us.

On a high level from the marketing and promotion perspective, I would like to talk about a couple of things. We've historically done very little SEO work, or lead generation work, because the nature of the software that we were selling, as a result of this new combined stronger business, we are going to initiate on that during this quarter, that is a new way to bring in relationships and new opportunities. We were recently at a conference in Atlanta, Georgia called The Southern Automotive Conference. If you follow us on Twitter, you'll see pictures of that event.

Bob Hooper was down there. We submitted an action plan for competition on best new technology. We are one of four finalists. Bob got to present in front of a few hundred people. We did extremely well and it's providing leads for us, one, but two it just reinforces that our view of data analytics is supported. The market sees the need for this technology; we're excited about where that will lead.

The last thing I would like to highlight is that if you go to shopgetac.com, it actually is our Website that we're hosting specifically for Getac where if they have parties that have identified they want to buy small lot sizes of their hardware, it's a way for that order to happen. We think the small initiatives will, again, provide us opportunities to create new relationships and create new sales.

From an operations update, I really want to focus on research and development and where we are. So we released this Version 2.3 of action plan. Why that's important is it really goes to the triangle opportunity within a plant. Generally you have ERP systems or your accounting and operating tools, you have labor and you have machine and the three need to work together to get the best margins and the best profitability. We obviously with our core action plan offering, have developed a technology that does an excellent job identifying where faults are and where one needs to go to correct those faults.

Another aspect of it is labor or the human element. We now through an RFID approach are able to apply labor to specific hardware or machinery providing management and operations better visibility in understanding why they're getting certain productivity or efficiency out of a particular [cell], line, etc. We think based off of client feedback and client input, this is going to be a winner. We just started obviously getting it all into the Street but we have six pilots that were T'd up prior to this that we're quite excited about where this will take us.

If I move forward, I'm going to come back to action plan in a second, MobiKEY we have a very important new release coming out in the next few weeks. MobiKEY 6.0. When I say improved latency what it does do is we continue to work on our protocol to address distance and we see that our approach here, that we now deployed without giving away the secret sauce, is improving the user experience, addresses bug fixes and other functionality our users are wanting when it comes to video support when they're remote, etc. This offering we think is a very good baseline for us going forward when it comes to remote access.

Talked about MobiKEY but it's more about the software application and less about how we authenticate the user. We've hinted at the support for (inaudible) purebred technology. We will be releasing this later this month or early in December and it positions us extremely well that where the Department of Defense does not want to use the TAC cards or full sized smart cards, we can work with their purebred technology that provides user authentication and still gets our secured remote access protocol.

I hint at the future and I think it's important because as you as shareholders you should know that, one of the important things that we're doing with action plan as we head into 2019 is looking at predictive analytics. It's very clear our clients, not just in the automotive space but you can pick theme park, you can pick food processing, there isn't a client that hasn't said to us, this is wonderful, I like the fact that I can [meet with this default], but how about the ability to predict default? How about the ability to tell me that my [name] in some machinery shouldn't just happen on a set calendar, it should happen based off of things that are happening and how the machinery is actually working.

So, one of the advancements for action plan will be the predictive analytics side, (inaudible), the team at HTM are very involved in this and it's where we're headed. We made a full-on commitment to data analytics and we think it's going to be a big winner for us in the quarters and years to come. Pete maybe if you -- I know people are waiting to hear about the AirWatch litigation where you can provide a quick update for that?

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Peter F. Chodos, Route1 Inc. - Executive VP, CFO & Director [5]

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Sure. It will be very quick. We are in the depths of fact discovery which includes depositions and that's basically where we are in the process of the lawsuit. A couple of things that are also sot of going on in the background and which obviously will be influenced by the deposition, deposition and the rest of document discovery etc., is the January 7 due date for the damages report and that is we are obviously working diligently on that and focusing some of the, obviously, some of the deposition activity on that. The other interesting development, I guess, is that both parties have agreed to a court-supervised mediation in -- scheduled for mid-March of 2019. There's no telling what will happen there but it is a result of the Markman Hearing that we had in July and that is, as I say, that's a product of that in the normal course of those hearings. And that's really the update that we have for the litigation.

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Tony P. Busseri, Route1 Inc. - CEO & Director [6]

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Okay, well lots going on for sure. Where we stand right now is we're -- we've delivered on some really strong results over the last couple of quarters. We think as the business continues to move forward, they will continue to produce similar and better results. So, at this point in time, Pete and I will be happy to take questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Jeff Silver with Corrado Financial Group.

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Jeff Silver, [2]

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Thanks Tony and Peter. That is a pretty overwhelmingly positive report you just gave with a lot of new information, a lot of stuff from all over. So rather than ask specific questions about what you said, let me ask you this just in general. What do you need to do internally in terms of processes, systems, hiring the talent to achieve this incredibly aggressive agenda? And I know that even in the wording of the release that as you mentioned during the call, it really sounds like there are acquisitions that are close and I know these things are never done until they're done or certainly identified in maybe discussions. How does that fit into the requirements that you have to achieve the things that you've spoken about? In other words, are you required, do you need to buy analytical talent or -- in order to achieve what you've -- what you're talking about achieving or are you set up internally to be able to do that? Just to sort of get a sense of -- what's the three -- the 4/5 of the iceberg that's sort of beneath the surface here to achieve the things that you're talking about?

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Tony P. Busseri, Route1 Inc. - CEO & Director [3]

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Yes, good morning Jeff and thanks for joining us. Interesting question. I would first address the following. When we integrated Group Mobile International from a system and processes perspective, as you're familiar with Jeff, we took the approach of building an infrastructure to support additional acquisitions. So, it wasn't just to get by and piecing it together. One of the reasons we haven't rushed out with a new Website is our view of doing it in such a way that the next acquisitions are easy to tuck into it. Let's call it -- so from an engineering perspective, we believe we have excellent talent here. That being said, as you get bigger, might we add additional Java developer or mobile app developer? Yes. Do we need it to accomplish our current agenda? No, but we're still a 40-person company. So it's not that we have a ton of [interest] using a baseball metaphor. But we would look as we grow to better match redundancy to the size of the revenue. That will be comment one on the predictive aspect of it. We think that that's partly developed internally and potentially it could deal with looking outward towards acquiring or licensing but as we get closer to that, we'll obviously communicate to the market on a broad stroke level how we're addressing it. But we have the ability to deal with it. And I would say on the M&A basis, I would ask you to think about that. What's really important to us is to accelerate the opportunity to talk to the larger players who can use our services, our software, and hardware. And so we're really looking at acquisitions that give us access to new enterprises, our new entry points, and that's where we're focused on. It's less about further diversification at this juncture.

If you provide a player, even if it was $2 million a year, that could advance your capability in the services area, you know, and I go back to an earlier presentation on whether it's printing as a service, etc., that would be something of interest to us. So growth just add revenue is not the model, both to add substance to critical mass to our [length] on our store are part of it. We will, there will, come times where a (inaudible) will tuck under acquisition makes sense because you're in the geography and you can pick up some clients without the burden of additional fixed costs. And so -- but what I really want to share with you right now, we think the next deals will continue to be accretive because of the infrastructure that we have today. This isn't going to be -- bear with us, we're laying more railroad track to get to the coast. This is very much that we think we have the infrastructure today that we can leverage and tuck under, tuck things into.

My last comment would be is from a sales perspective, business development perspective, you always can use new exceptional talent. And so we're always looking for that talent to add to, I think, a first class team that we have here. And I say that in the -- talked about sales and business development but in many ways that goes across the whole company. So -- but we are -- we don't feel short-handed at this juncture Jeff, we feel that we have the team and the tools to be able to go out and accomplish this agenda. Now, there's a lot of things where we're talking about taking advantage of and time is short because others are moving in similar areas. We have -- not everything that we've laid out will ultimately become perfectly executed on but the idea is to push these, all of these elements, and have success in a lot of areas because ultimately that diversification de-leverages risk for the inventor, investor, excuse me, as well as us as management and gives us a greater probability of success as we grow.

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Operator [4]

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(Operator Instructions) We'll go next to [Hugh Jackson with Grant Securities].

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Unidentified Analyst, [5]

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Good morning. Tony, you mentioned quite often in your presentation about the automotive vertical. Can you talk a little bit more about how you would leverage action plan across some other verticals, industry groups?

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Tony P. Busseri, Route1 Inc. - CEO & Director [6]

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Yes, I talked about the theme for our industry. It won't come as a surprise when you think about in simple terms, all of the sensors on our rollercoaster or as you go through the larger theme parks how they might know exactly how to manage lines of hundreds of people and how they get them through and they can tell you exactly your wait time is 22 minutes. We think we have the ability to work with basically any industry that has electrical input towards the advanced of their objective and that's greater profitability, improved safety for their clients, etc.

So amusement parks are the easiest, or theme parks, are the easiest one to come up with but for sure you can go -- it doesn't have to be process lines either. You can think about [CMC] machines and some of the more batch oriented manufacturing operations, maybe as a high end engine manufacturer. It's a food processor. So, we for sure have a number of pilots ongoing across sectors. Automotive obviously makes sense to us based off our relationship and experiences with HTM. It's an interesting sector, it will be productive for us but we also have stepped out into additional sectors. So, Hugh, I may not be giving you enough specifics but the amusement or theme park industry is probably the best example and easiest to visualize. Go ahead Paul, Peter.

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Peter F. Chodos, Route1 Inc. - Executive VP, CFO & Director [7]

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Also -- we also interestingly enough Hugh, have an opportunity from one of the key former who Group Mobile people who is now a Route1 person, but -- and that's in the food processing industry down in Southeastern United States.

So, there is a lot of, we believe, that there is a lot of opportunity with the clients that we now sell devices to and services to particularly in the Southeast where we're concentrated in terms of salespeople and infrastructure.

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Operator [8]

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(Operator Instructions) And at this time it appears there are no further questions. Mr. Busseri, I'd like to turn it back to you for any additional or closing remarks.

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Tony P. Busseri, Route1 Inc. - CEO & Director [9]

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Sure. Well, folks, I'll just summarize real quickly. When we started out with this pivot there was obviously some risk to it. I think based off of Q2 and -- with and on the phone -- where there's strength in the position that we have and we really look forward to the future. So, to wind this up I'll obviously -- since there's no further questions, again, I thank you for joining us today. For any of you who may have joined the call in progress, a replay is available. You can see these numbers on our news release that went out last night but if you have a pen handy, it will be available after 12:00 P.M. today. 1-844-512-2921 or 1-412-317-6671. The passcode is 1767112 and that replay will be available until midnight on November 21 of this year. A copy of this slide presentation will be put up on our Website shortly tonight and again, we look forward to speaking with you shortly. Stay tuned folks. Thanks.

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Operator [10]

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Ladies and gentlemen, that will conclude today's conference call.