Edited Transcript of AJX.TO earnings conference call or presentation 24-Mar-20 3:00pm GMT

I joined AgJunction because of its history of groundbreaking innovation and a strong foundation in machine management and control. I saw precision agriculture adopting more automation and moving towards more autonomy and firmly believe the AgJunction is well positioned to provide incredible automation technology to a market that is in rapid transformation.

Before getting into the company’s financial results, I’d like to provide some more information about our refined strategy and key priorities. After completing an extensive evaluation of our business over the past several months, our new team has implemented a refined strategy that we believe best suits the evolving needs of manufacturers and suppliers adapting to a rapid transforming market.

I will discuss 3 key priorities of this refined strategy. One, refocus on manufacturers and suppliers; two, offering flexibility through modularization; three, a realignment of our capital resources. My goal is to leave you with a better understanding of the realignment of our strategy and where AgJunction is going in the future.

Our first priority of refocusing on manufacturers and suppliers will provide long-term sustainable growth to drive shareholder value. As the level of vehicle automation increases, deeper integration is required. AgJunction is focusing on suppliers and manufacturers because they are in the position to integrate more of our automation modules. This integrated level of automation can be uniquely supplied by AgJunction. Most manufacturers and suppliers do not want to develop everything by themselves, and they need partners to bring new automated applications to the market quickly and affordably. Not all manufacturers and suppliers are exactly alike. Some have strong internal software development capabilities while others have exceptional hardware components, and we have the ability to fill in these technology gaps and are able to offer products that align with those needs.

Secondly, AgJunction is taking a novel approach to meeting our customers’ needs by offering flexibility through modularization. We’ve already begun offering our hardware and software functionality at its individual modules, in addition to offering complete automation solutions to our customers. Our modules are designed from the inception to be flexible, to be seamlessly integrated into our customers’ systems. This reduces cost and expands the salability and improves customer experience, which are all competitive advantages.

AgJunction has a strong patent-protected portfolio of solutions and advanced tack planning, headland automation, implement control and predictive algorithms, which allows us to provide our customers with some of the most innovative modules on the market.

We’ve also developed a powerful cloud platform and mobile applications with Whirl. That provides connectivity, remote management, data analysis, support and updates. Our modular approach enables us to partner with a wider range of manufacturers and suppliers, rather than providing a full system such as a full autonomous platform. For example, our new electronic steering system, the MDU-G5 high-torque can be purchased as a capable steering actuator, and it can be combined with our ECU-S1 to provide a more complete autosteering solution. By combining our display, automation software, ECU-S1 and MDU-G5 high-torque, our customers can purchase a full precision agricultural system or they can pick and choose the modules that best fit their unique needs.

Realignment of our capital resources is our third priority. We have significantly reduced spending on our eStore and are focusing on regions and technologies that will grow our revenue and profit. Last year, we completed several important internal priorities that will set us up for success going forward, including rightsizing our organization and consolidating facilities to our corporate headquarters in Scottsdale, Arizona. Our consolidation has allowed us to reduce cost while increasing the agility of our development team.

Looking ahead, we are regionalizing our sales and customer support to significantly expand our customer base. In fact, we’ve inserted regional general managers in our EMEA and APAC regions, whom our sales representatives and field service engineers will be reporting to directly. By aligning our sales and customer support teams regionally, we’ll be able to improve our ability to provide better customer responsiveness. We’ve already identified many potential customers that are interested in our capabilities and have the need for flexible modules, including solutions outside of autosteering, such as obstacle detection and implement control. For example, our recent announcement of our deal with ISTI to provide auto — an autosteering solution is a direct result of our regionalization approach.

Next, I want to discuss our eStore e-commerce store. As many of you know, we put significant resources toward our direct-to-consumer efforts through handsfreefarm.com, selling our 2 Wheelman products and our Whirl software application. As of today, we are satisfied with our eStore platform and the award-winning Wheelman products designed for this channel. We are now focusing our resources on expanding our product outreach by meeting the needs of manufacturers and suppliers. The Wheelman products and handsfreefarm.com should be viewed as another channel for our overall modularization approach. The Wheelman products and the Whirl platform were designed with modularization in mind. For example, the new MDU-G5 high-torque is derived directly from our Wheelman technology. Additionally, we recently announced that GeoSurf is launching a precision agricultural solution for rice and onion transplanters based on our Wheelman technology and using our Wheelman — our Whirl cloud infrastructure.

AgJunction’s engineering team has developed features in the Whirl cloud, specifically for manufacturers and suppliers, such as support access to their customers and over-the-air updates. GeoSurf is our first supplier customer to utilize our new Wheelman-based technology and new Whirl cloud features.

Our refined strategy is building and providing modules for our customer. It takes advantage of AgJunction’s rich technology foundation and provides us with a competitive advantage in a rapidly transforming market. We are positioning ourselves as a trusted partner to manufacturers and suppliers, providing advanced automation that is flexible to our customers’ needs. As we identify new customers, we remain committed to investing in research and development as we continue producing state-of-the-art technology that aligns with our new strategy.

I would also — I would have liked — I would also like to stress that AgJunction remains committed to protecting products — its products and partners by continuing to enforce its right against unlicensed use. As you may have noticed, AgJunction recently agreed with Kubota to a 60-day stay in the patent infringement lawsuit it filed against the tractor manufacturer in August of last year. We are looking forward to this time to discuss a mutually beneficial path forward, including expanding commercial discussions between AgJunction and Kubota. Overall, we are very confident that we have the team, IP portfolio, balance sheet and technological capabilities in place to support this strategy, grow AgJunction and provide value to our shareholders.

Finally, I’d like to comment on the coronavirus outbreak. We’ve implemented a work from home policy to protect our employees, and we’ll continue to follow all protocols issued by the government at local, state and federal levels. Although we have not seen any major disruption in our operations, supply chain or customer demand, there is significant uncertainty as to the likely effects of this outbreak, which may, among other things, impact our supply chain and may negatively impact the global agricultural market. At this time, we are unable to quantify the potential impact that this pandemic may have on our future financial statements.

With that, I’d like to pass the call over to our interim CFO, Deborah Mack, to walk you through the financial results. Deborah, please go ahead.

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Deborah Mack, AgJunction Inc. – Interim CFO [3]

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Thank you, Brett, and good morning, everyone. Before we go into the financial results, I want to remind everyone that we completed the final shipments of our bulk purchase order in the third quarter of 2019. As a result, we had challenging financial comparisons during the fourth quarter that will continue over the next year as we no longer will be generating revenue from the bulk purchase order.

Now jumping into our results. Total revenue in the fourth quarter was $3.3 million compared to $17.1 million in the year ago quarter. This decline was primarily driven by the prior year period, including revenue generated from the bulk purchase order.

Breaking down sales by regions. Sales in EMEA regions were $0.2 million compared to $14.5 million in the prior period year. The decline was due to the fourth quarter of 2018 having significant revenue generated on the bulk purchase order.

Sales in America increased 34% to $3.0 million compared to $2.3 million in the year ago quarter, primarily driven by an increase in sales in our direct-to-consumer channel. And APAC region remained flat at $0.1 million for both 2018 and 2019 fourth quarters.

Gross margin in the fourth quarter was 45.9% compared to 30.9% in the fourth quarter of 2018. The lower margins in Q4 2018 were directly related to the sales under the bulk purchase order, which completed shipments during the quarter ended September 30, 2019.

Total operating expenses were $4.7 million compared to $4.4 million in the year-ago quarter. This increase was primarily driven by site closure costs, partially offset by lower compensation, consultant and recruitment costs.

Net loss in the fourth quarter was $3.1 million or a loss of $0.03 per share compared to net income of $3.1 million or $0.03 per share in the year ago quarter. The decline was primarily a result from the sale of our APAC and Satloc divisions.

EBITDA in the fourth quarter was negative $2.3 million compared to positive $3.4 million in the fourth quarter 2018. And the decline was primarily a result of the aforementioned lower revenue resulting from the completion of the bulk purchase order.

Now addressing our balance sheet. Cash and cash equivalents at the end of 2019 totaled $17.2 million compared to $21.4 million at the end of 2018. And we also remain debt free and have access to our full $3 million line of credit.

With that, I’d now like to turn the call back over to the operator for Q&A, and Brett will first be addressing several common questions that we’ve received in the past several weeks. And then we will be opening up the call to Q&A from participants. Operator?

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Questions and Answers

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Operator [1]

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As Ms. Deborah stated, Dr. McMickell would like to first answer a few questions the company received over the past several weeks.

Question one, sir. What triggered the Board action to put you in the CEO position?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [2]

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I believe the Board felt that Dave and I both have the same confidence in the strength of the company’s employees, its ability to execute and its industrial-leading IP portfolio. Dave did a great job merging our various entities, cleaning up assets and reinvigorating the balance sheet and technology. But the Board felt that it was time to make a change to allow us to execute the vision that we have built for the market and technology.

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Operator [3]

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Question two. How does the size of the opportunity change or nature of the opportunity?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [4]

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AgJunction’s refined strategy opens up more opportunities by expanding the customer base. Some companies that were previously viewed as competitors, now become customers with our new strategy. Our increased regional focus also opens up the opportunity to onboard new customers in growing markets.

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Operator [5]

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Question three. What is going on relative to intellectual property? Can that become an even more significant revenue source? Or is it mainly a competitive fence?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [6]

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Our IP is critical to our sales process. We have over 200 patents and patents pending, many of which have been refreshed or positively amended recently. Our customers depend on our ability to protect our IP and provide them with the freedom to operate. We are an operating company with a great IP portfolio, not a company just trying to get licenses.

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Operator [7]

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Question four. What evidence do we have that automation within the agriculture market is the next big opportunity?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [8]

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Well, the ecosystem of manufacturers and suppliers, which includes our OEM and VAR customers, are either building it into their systems or demanding it from us and others. And yes, fully autonomous solutions are still down the road a bit, but there is clear evidence of increasing automation and autonomy in farms. Just as with our cars, agricultural vehicles are adopting more automation. Guidance, tack planning, steering are all foundations for this automation, which AgJunction has years of experience with and is continuing to build on these capabilities.

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Operator [9]

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Now we’d like to open the call up to participants for Q&A. (Operator Instructions) Our first question or comment comes from the line of Benj Gallander from Contra the Heard.

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Benj Gallander;Contra the Heard, [10]

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I am a long-term shareholder. And I guess, at the end of the day, all I’ve done is lost money. I’m wondering if the negotiations with Kubota could possibly lead to a settlement where they actually buy the company.

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [11]

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Right now, I mean, I can’t comment on the details of the discussion. We’re in a stay, and we’re in the early part of this discussion with Kubota as to what — where we’re going. The focus right now is on something that’s mutually beneficial and looking at building on our commercial deals between us and Kubota.

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Operator [12]

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(Operator Instructions) Our next question is coming — comes from the line of Bill Nicklin from Circle N Advisors.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [13]

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I’ve got a bunch of questions. I’ll try to put them in some kind of logical order. One that comes to mind is that we built up customer relationships over the years under, I guess, one existing model and under kind of guidance and steering. And now we’re looking at prospective customers in selling components into what we hope will become the autonomous market. How does what we had already help us in that? Maybe you could explain kind of the segue. And how much — are we going to lose a lot of business from old customers as we move toward the new customer? How does all of that kind of mash up, if you will?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [14]

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Yes. Thanks, Bill. No, we’re not going to lose our old customers because of this strategy. A matter of fact, I mean, the purpose here is to — is growth and to become a trusted partner with our manufacturers and suppliers. So the strategy actually builds on the relationships we’ve had on the past and the technology that we’ve been offering. Our strength has been in autosteering. We’ve had tack planning, the guidance. Knowing where you are and how to steer a vehicle off-road is critical to autonomy. And AgJunction’s been doing it for a long time and has the IP around how to do this really well.

And more importantly, that is — has the experience and the proven experience that we can do it. So while there are others looking into this area, we’ve already got something that will allow these autonomy companies to come to market faster by building on our foundation. What we’re offering now are additional autonomy modules or automation modules that will further expand our offering beyond just autosteering. We’ve been doing this — we’ve been controlling automation on the vehicle for some time, but maybe just not highlighting it. We’ve had implement control, our ISOBUS technology has been around for quite some time. And so what we’re doing now is expanding that product offering, modularizing it so that customers can digest it in ways that make sense to them.

As I mentioned in my statement, not all of the OEMs are the same. Some of them have core capabilities in certain areas, and they want to protect those areas. And so what we do is we, as a trusted partner, come in, work with them on an optimal strategy and implement the modules that make sense for that OEM.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [15]

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All right. I spend a lot of time trying to figure out what’s going on in this industry. It looks like all of the majors kind of have a path of their own. So is that what you’re talking about how we fit into their path rather than trying to alter it?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [16]

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Exactly. Because we’re providing the core technology needed for either increased automation or some companies are going for higher levels of autonomy. We are — we play with all of the people as they go and explore this rapidly changing market, and so we don’t have to pick a winner. And they’re going to be maybe niche applications that work really well for certain crops or certain markets. And we’ll — we can also provide them with solutions. So rather than build, for instance, our own vertically integrated autonomous platform and try to push that into the market, what we’re doing is working with the suppliers and manufacturers to increase their autonomy. And not only the established players, but looking to the future as you have startups looking into this space and exploring autonomy. We’ve got the proven technology that will allow new entrants to come into the market as well as existing entrants increase their automation and move towards autonomy.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [17]

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All right. Raven told their shareholders that they thought autonomy was going to open a total addressable market about 5x what Raven has been able to address in the past. Do you have any thoughts on that 5x versus what’s been going on in AgJunction recently?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [18]

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I think — I mean, I’m not going to comment specifically on Raven or Raven’s strategy. But I can say that the overall need for autonomy is there, and there is a broad market for autonomy. There’s a broader market, I think, even for the automation. As you look for the application of autonomy, it makes sense for certain areas, for certain crop types, for certain applications, but not necessarily for all applications. Not to mention that there’s a large segment of the agricultural industry that still has little automation and hasn’t been a focus. So I think there is a broad need for general automation. And so there’s a very large market that even goes beyond the autonomy market. But the autonomous market does open up some opportunities for growth. And we look at — to all the suppliers and manufacturers, we want to help them move into this market rapidly.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [19]

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All right. So if I remember — my memory serves me correctly, that one of the recent deals you did, I can’t remember, it was something sure. With the company you did with, that’s a Hexagon company. Is that correct? And do you think — if that’s true, does that open more opportunities with Hexagon, who’s probably Trimble’s biggest competitor?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [20]

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We’ve announced a few different partnerships in terms of going to the market. We’re always looking for partners, back to this modularization approach. We will work with partners to go and solve a particular problem, where we feel that the partner’s technology is — helps us and is aligned to where we want to go, provide us an advantage for that particular application. So we’re looking at many different strategies as we go in and address the suppliers and manufacturers and with the different partnerships. We’ve announced a couple. One that was announced not too long ago was Swift on the GNSS side. And so we look for other partnerships as well, where they make sense and give us a bolt-on that we can use to provide a solution to an OEM for a particular application.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [21]

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Does this — if I looked at the partnerships you just announced and the orders, it seems to me that those same folks were, in some way, addressing the construction market. So is that also where we’re headed? And could that be significant? Or with our technology, is it just more directed toward the ag side of what those customers are trying to do?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [22]

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Yes. There’s a broad market of off-road vehicles out there. I think there’s — you mentioned the growth potential in agriculture. Right now, we’re really focused on growing our agricultural market, but there’s an even broader market that could benefit from our automation modules, and the flexibility allows us to quickly go into adjacent markets as they make sense.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [23]

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We talked about the Kubota stay, which, to me, makes a lot of sense, better off kind of settling than fighting. And I think we had a similar situation going with Raven and I think that got settled. Are you looking for similar outcomes with Kubota as Raven? Or how did the Raven thing go? Or do you think that the Kubota is a bigger opportunity than Raven?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [24]

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As I mentioned earlier, I mean, we’re really early in the discussions. My focus is really looking for that mutual beneficial path forward, whatever that may be. We haven’t got very deep into discussions with Kubota yet. But I really — I’m really looking on building on the commercial partnership that we’ve had in the past, and that’s really my focus.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [25]

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Okay. And in the past, my — one of my earlier questions was about existing customers. So we’ve been doing business with Ag Leader, Spraying Systems, ARAG and so forth. Are those deals kind of all still in place and offer potential?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [26]

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Right now, I mean, we’re working with all of our VARs. And I think the list that you just named was our VARs. And so the VARs that we had in the past, we’re in discussions with about using the — our flexible modular approach and figuring out how we can better suit the VAR for the suppliers’ needs. As an example, I mean, going back to the GeoSurf. GeoSurf is a supplier. And they had a particular need on the rice transplanters. And as we’ve mentioned in previous calls, AgJunction has done a lot of research around rice transplanters. And we found that the fastest path forward in order to provide a really comprehensive solution for them was to build on our Wheelman technology. And because we designed it to be modular, we are able to go and address that problem rather quickly.

We’re having similar discussions with other VARs. Many of the VARs are looking at specific needs. And they are — they’re value-add is in different areas. And so the flexibility is also really important with the VAR market because not all VARs are the same. I mean their value-adds are all different. What they want to — what they view as really critical, and the types of problems that they serve and the types of customers they serve are different. And so the flexibility approach resonates really well with them. And so we’re in the early stages of this refined strategy, but we’re having conversations with our VARs and working with them in a different way to grow this business.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [27]

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By the way, GeoSurf is the Hexagon company that you got the order from I was trying to think about. So great. You’ve got this pile of cash. We’ve got big opportunities. We’re losing money at a pretty hefty rate. So — and capital allocation, we’ve mentioned. So how do you allocate this capital you have most efficiently so that the shareholders will get the biggest benefit out of it?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [28]

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Right. We do right now have a good cash position. As I mentioned, we’re always focused on the R&D, but we’re also exploring all options. Given the uncertainty that we’re looking at right now, our balance sheet is actually a big strength for us. And — but we’re still looking at all of the opportunities in order to provide value to the shareholders. And that’s definitely top of mind when we’re having the conversations about how we’re going to deploy it, and what we’re going to do in the future. So all the options are available. But I do want to stress that given the uncertainty that we’re currently facing with the coronavirus, I would say, our balance sheet provides us a really — a nice protection and it’s a nice place to be, given this uncertainty.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [29]

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I guess customers probably look at it the same way.

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [30]

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I hope they do.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [31]

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When they want to give you business.

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [32]

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They definitely pay attention to the balance sheet, of course. And so yes, absolutely, strong balance sheet definitely helps with our customer interactions.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [33]

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All right. Now the biggest question. Given where we are, how long do you think it will be, in your mind or the Board’s mind, of getting to cash flow positive from operations?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [34]

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It’s a good question. We’ve never provided forward guidance. I know there’s a desperate desire for numbers and that level of guidance. But I’ll tell you, right now, most of the companies are pulling guidance. So I don’t think now is the time for us to change on providing forward guidance. So unfortunately, I can’t give you the forward guidance. I can tell you that I’m very confident in our strategy, and I think it’s the right way to go. I really like the team that we’ve got, and we’re deploying our strategy quickly. And as you can see by the press releases, there’s a lot going on, a lot of positive news with our new product launch as well as some new APAC VAR, suppliers and manufacturers. So I’m really positive on the outlook. But unfortunately, I can’t give you the forward guidance that you’re asking for.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [35]

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All right. I’ll ask it in a different way, so you won’t be giving me guidance. Given the pile of cash you have, do you feel that that’s sufficient to execute your plan and maybe even have a little leftover at some point?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [36]

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Right now I’m really comfortable with where our balance sheet is, and I’m very comfortable with our strategy and the executability of our strategy. So I hope that at least gives you some comfort and answers your question.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [37]

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All right. Now I don’t want to keep going on and on, but I’d like to get some idea of what I should be watching so I can make up my mind if, in fact, the strategy you have in mind and the Board has in mind is executable and being executed upon?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [38]

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It’s a great question. I mean I think one thing that we’ve mentioned before and you’re going to continue to see is margin. As our margin improves, that will be an indicator that things are working. That shows that we have competitive advantage in the market and that our customers are valuing what we have to offer. And then as you — as we go forward, we’re going to get increased customer adoption. And so you’re going to see increased revenue in the future as well.

There’s been comments in the past that’s somewhat linked to this, about the OEM adoptions. And we’ve got to keep in mind that it does take a little while for OEMs to evaluate a solution, do — go through their — all of their development gates, test pilots before introducing it into their vehicle. So there’s a bit of lag as we look into the OEM — into the OEM customers between that initial interaction or even the selection of your technology before you see the big uptick in revenue. But we’ve got — and still say, look at revenue growth and look at margin expansion.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [39]

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Right. Then just one quick one on the side. The farmers that had the Wheelman, I recognize that the big use of Wheelman is going to be the components with OEM customers and orders like you’ve had recently. But is the Wheelman that was sold direct to the farmers, the farmers that are using them, do they still appreciate them? Or do they look at that as a novelty or a lesser solution or a big deal we’ve made out of the fact that farmers are paying — I won’t say you’ve made this. There’s a big deal now going on that farmers are buying old tractors because they like them better than a lot of the newer tractors for a whole host of reasons. Are we still seeing that? And is that still an opportunity for Wheelman sold direct?

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [40]

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Yes. The used tractor market’s pretty robust, and that’s good for the direct-to-farmer business. The users that we have, like the Wheelman for the application, and it allows farmers to use these older tractors and yet get some of the advantages of the autosteering and some of the advanced features. And so yes, positive feedback from the Wheelman application, and we look forward to continuing to support our eStore. Although we’re moving the resources into focusing and growing on the manufactured suppliers, we continue to maintain the eStore. And so handsfreefarm.com, you can still order and we’re still supporting our customers.

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William Fred Nicklin, Circle N Advisors, LLC – Senior Portfolio Manager [41]

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All right. I don’t want to wear you out, so I think that’s good for me. And I think it’s a good overview.

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Operator [42]

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At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Dr. McMickell for closing remarks.

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M. Brett McMickell, AgJunction Inc. – President, CEO, COO & Director [43]

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Thank you, Howard. And thank you for spending time with us this morning. I look forward to addressing you again when we report our first quarter results in May. Thanks again for joining us.

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Operator [44]

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