Active Power's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Active Power, (ACPW)

Active Power, Inc. (NASDAQ:ACPW)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 08:30 AM ET

Executives

Mark Ascolese - President and CEO

Jay Powers - CFO and VP of Finance

Analysts

Matt Koranda - Roth Capital

Carter Driscoll - Ascendiant Capital Markets

JinMing Liu - Ardour Capital Investments

Operator

Good morning everyone. Thank you for participating in today's conference call to discuss Active Power's Financial Results for our First Quarter ending on March 31, 2014.

With us today is Mr. Mark A. Ascolese, President and Chief Executive Officer of Active Power and Mr. Jay Powers, Chief Financial Officer and Vice President of Finance. Following their remarks, we will open up the call for questions.

I would like to take a moment to read the company's Safe Harbor statement. The company's management on this call may make statements that relate to future results and events, including statements about Active Power's future financial and operating performance, anticipated customers demand for and our products and our ability to increase sales.

Our forward-looking statements based on Active Power's current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of number of risks and uncertainties which are discussed in the company's filing with the Securities and Exchange Commission and in the cautionary not regarding forward-looking statements in the company's press release. Active Power assumes no obligation to update these forward-looking statements.

On today's call, the company will be referring to the adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is reconciled to GAAP net loss in the company's press release which we encourage you to review. Unless stated otherwise, all comparisons are to the period ending in March 31, 2013 as we stated.

I'd like to remind everyone, today's conference is being recorded and a replay of today's conference will be made available via Active Power's website at www.activepower.com.

I'd now like to turn the call over to the President and Chief Executive Officer of Active Power, Mr. Mark Ascolese. Please go ahead, sir.

Mark Ascolese

Good morning everyone. Thank you for joining us today. We issued a press release earlier announcing our results for our first quarter ended March 31, 2014.

The first quarter of 2014 represents the first full quarter with a new executive team and sales organization in place and our execution against the new strategy which we began rolling out in December.

During the quarter we shipped a large UPS order to ABN AMRO, a Dutch state-owned bank, for deployment at one of the bank's facilities located south of Amsterdam.

Financial institutions are generally conservative in terms of the critical power infrastructure they deploy. So this is truly a breakthrough win for our sales efforts in Europe.

I'm also happy to share, we booked our first order for Caterpillar for our CleanSource HD UPS for shipment to one of the largest medical centres in the Netherlands.

We successfully completed and oversubscribed public offering of our common stock and raised approximately $10.5 million in equity in early March. The story we shared with more than 40 accounts we met with was simple.

Active Power competes in large growing end markets delivering elegant technology to mark a global customer base that is supported by our passionate employees.

These points all seem to resonate with those we met with based on their interest and participating in the offering.

To help strengthen Active Power's voice in the mission critical and energy storage markets, we appointed David Fiedler, Chief Knowledge Officer. David has a deep technical experience in data centre design, planning, and consulting, having previously held positions at Modular Power Solutions, Hewlett-Packard and PageSoutherlandPage.

He would help you evangelize Active Power in our products and solutions to education, messaging, innovation and continuous interaction with various communities.

Now for a few comments about first quarter sales. We're not surprised by our sluggish sales in the quarter which we believe is partially attributed to delays in customer's deployment schedules and a cautious economic out climate.

We are generally not seeing project cancellations, but rather customer's capital spend on critical infrastructure equipment is being deferred.

This results in opportunities taking longer to close and is indicative of the long sales cycle inherent in our business.

It is consistent what the others in the industry are reporting. This said though, we are taking deliberate action and support to our three key priorities which include, generating increased bookings and more consistent sales performance, leveraging the products and solutions we have in place now to grow the business, and an approximately $2.7 billion serve addressable market and positioning Active Power as mission critical and energy storage company.

Our success is driven in large part in our ability to increase bookings and strengthen our backlog. We booked more orders than we shipped in the first quarter of 2014 and bookings exceeded what we recorded in the fourth quarter of 2013.

A number of these bookings were made up of large UPS and modular power system orders from our key customers anticipated to shift way to this year.

Before we go further, I'd like to turn the call over to Jay to give us financial details about the quarter. I'll then come back to share a specific actions we have taken in support of our priorities and state progress we're making on a number of funds. Jay?

Jay Powers

Thank you, Mark. Revenue totalled $10.9 million for the quarter, this was a decrease of 22% sequentially and a decrease of 24% from the prior year quarter. The sequential decrease that came from both our MIS and service revenue, which were down $2.6 million and $1.1 million respectively.

Both MIS and service revenue in the fourth quarter of 2013 benefited from a single large project that did not repeat in the first quarter of 2014. These declines were partially offset by an increase in UPS revenue.

By region, revenue for the quarter was $7.9 million in the Americas, down 30% compared to the fourth quarter 2013. In EMEA, revenue was $2.1 million which was up 48% compared to the fourth quarter 2013 due to the previously mentioned shipment ABN AMRO.

In Asia revenue was $900,000, down 26%. Please refer to supplemental information on our press release for more details on our revenue split by product and geography.

Now continuing down the income statement, gross margin this quarter was 26.8%, compared to 30% in the fourth quarter 2013. The decline compared to previous quarter and to the first quarter of 2013 was primarily due to higher unabsorbed production cost in 2014.

Total operating expenses were $6.6 million for the quarter, down $1.4 million sequentially and up $900,000 versus the first quarter 2013. The sequential decrease was due to reduction of expenses including severance, management transition cost, stock-based compensation, relocation, and legal fees. These unexpected costs amounted to approximately $1.4 million in the fourth quarter of 2013.

The year-over-year increase was due to engineering expenses associated with the introduction of our CleanSource HD UPS product and stock compensation expense as well as higher severance cost and professional fees.

Net loss for the first quarter 2014 was $3.9 million, a loss of $0.19 per share. This compares to a net loss of $4.1 million or a loss of $0.21 per share in the prior quarter and a net loss of $1.4 million or a loss of $0.07 per share in the first quarter 2013.

Adjusted EBITDA was negative $3.1 million in the first quarter of 2014 compared to a negative $1 million in the first quarter 2013 and a negative $3 million in the previous quarter. The year-over-year decrease in adjusted EBTIDA is due to the larger net earnings loss that occurred in 2014 partially offset by higher stock compensation expense. Our press release contains details on how we calculate adjusted EBITDA.

Now turning to the balance sheet; we ended the first quarter of 2014 with $18.7 million in cash, an increase of $6.4 million from the fourth quarter 2013. The increase was due to cash raised in our recent public offering offset by a decrease in operating cash flow $4.1 million. The change in operating cash flow was primarily due to higher net cash loss for the period with the neutral impact from changes in working capital.

Inventory increased $900,000 primarily due to inventory in transit. Receivables were up $271,000 and acute expenses decreased $1.1 million as a result of payments made on compensation and benefits and professional fees.

These changes were partially offset by $1.4 million source of cash related to an increase in payables due to increase in raw material purchases in more favourable vendor payment terms.

I want to remind everyone, our 2014 annual shareholder meeting is taking place May 28th, at 9 AM Central Time at Active Power's headquarters in Austin, Texas.

As a reminder and as we mentioned last quarter, we will not provide guidance due to the continued variability in our business. However, we will continue to provide perspective on market trends that impact our business and growth prospects. This completes the financial portion of our presentation.

I'd now like to turn the call back over to Mark.

Mark Ascolese

Thank you, Jay. We're taking deliberate steps to put the sales infrastructure in place that we believe will enable us to increase bookings and improve consistency in order flow.

Our aim here is to strengthen our backlog and book more orders than we ship on quarterly basis. In fact we achieved this in the first quarter of 2014 as important but it is critical we continue on this path.

First, and to support this effort we continue to staff our field sales organization with technical sales professionals who have deep experience in a critical power in UPS space. We added a second sale professional to serve as an area sales manager in Northeastern, United States.

But as I mentioned last quarter is a significant market for Active Power and one of the largest data centre markets in the country. We are confident with the sales talent we currently have in place and recognize it will take time to see the fruits of these organizational changes due to the businesses long sales cycles.

We now have in place four manufacture representatives all located in this region. We have strong talent with the electrical contracting and design build communities. These are tier one firms made up of highly talented sales professionals, who know the critical power infrastructure space well and will work to uncover new opportunities for the business.

On the federal sales front, we signed our new partners to help us to identify government projects wherein are indeed of clean efficient critical power solutions.

Second, we're diversifying our capability and flexibility to build custom modular infrastructure solutions the experience we've gained in the build-out of these products. We can support various types of configurations and designs from customers including outdoor IT enclosures, outdoor scales containing critical power equipment, indoor IT enclosures and fully containerized data centres. This is important as we anticipate an increase in MIS sales as we move through the year.

Third, we strengthen our sales leadership in China with the appointment of a new sales and marketing director. This individual brings to the table more than 18 years of sales and marketing experience by critical power infrastructure in energy markets having worked for a number of large multi-national UPS buyers.

I've personally worked with this individual in the past and I'm confident in the value he brings to the business. His initial focus will be to identify our crude sales personnel, qualify and engage new partners and maximize our relationships with existing distributors and partners in China to accelerate sales.

I had the opportunity to travel to China earlier this month and met with a number of customers and key partners, including one of our long standing distributors. This particular distributor integrates our CleanSource UPS products into truck based modular power systems, which they then sell or rent to utilities all across China, to support a variety of applications including event support, a temporary critical power needs following a severe weather.

This unique application of our product, demonstrates the value we're able to offer this distributor would say in turn deliver to their customers.

We are providing the distributor competitive advantage they cannot get anywhere else in terms of power density, or liability and total cost of ownership.

This time the deployment also demonstrates our product's unique design, future benefits which enable Active Power to support a variety of power quality type applications, including manufacturing, healthcare and broadcast.

Lastly we're exploring the feasibility by deploying our flywheel technology in the Microgrids as the global revenue for energy storage technologies for these applications grows. To put numbers to this, sales or forecast are to increase for more than $650 million in 2014 to more than $4 billion in 2024 according to the report from Navigant Research published earlier this year.

The deployment affordable take in wind farms both requires some type of storage to enable this in investments to deliver on their promised of a more resilient and clean Microgrid. We are investigating the possibility of deploying our technology to extend battery life and to reduce their overall footprint.

I also recently travelled to the Bahamas and visited two Microgrid projects interested in deploying our technology. One of particular interest is on an island called Over Yonder Cay for demonstration Microgrid is currently operational and supports a 100% of the islands electrical needs, the affordable take wind and battery technologies.

As Microgrids become more sophisticated and demanding, I believe our technology could become integral part of this type of configuration. We will continue to identify and evaluate power projects and other opportunities similar to Over Yonder Cay.

Summary, we're focused on executing against our strategy aimed at increasing bookings to scale the business and improve factory utilization which in turn will help us improve our profitability.

Now, with that, we'll be happy to open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll now go to Matt Koranda from Roth Capital.

Matt Koranda - Roth Capital

Good morning, guys. Thanks for taking my questions.

Mark Ascolese

Good morning.

Jay Powers

Good morning, Matt.

Matt Koranda - Roth Capital

It looks like there is a bit of an air pocket in the MIS segment in Q1 guys. Was this a function of orders slipping into Q2? How can we think about MIS revenues during the balance of 2014 and kind of how they compare to 2013?

Jay Powers

For MIS revenues generally speaking are very lumpy as the business associated with that comes from a couple of our large OEM partners HP and Dell. We also do what I call transactional business with individual companies. We did book some of that business in the first quarter which we'll be shipping this quarter.

But that is the lumpiest part of our business quite honestly and hangs on whether or not money is stamped in the timeframe that we anticipate to be spent or whether it gets pushed out.

We did anticipate more bookings in the MIS sector in the first quarter that got pushed into the second quarter.

Matt Koranda - Roth Capital

Okay. That's helpful. And then in terms of gross margins, you guys started higher unabsorbed production cost, as the reason for that sequential decline. Can we try to quantify the unabsorbed production cost a bit and maybe you can give us a sense for where utilization stood in Q1 and how the trend going forward? Where does utilization have to be to get gross margins back to that 30% range?

Mark Ascolese

Yeah. In the quarter we actually was growth of the decline in revenues and our conscious decision not to necessarily build ahead, the production through the factory was about 30% less than what we expected.

So, that reduction in hours and units produced resulted in our inability to fully absorb for us. And the volume is depended in terms of the type of product come to the shop, there is not just one mathematical formula, it really depends on the volume come to the shop, (manual) [ph] labor hours that entails and the components that the project makes up - there is not an easy model can give you other than the increased in volume would result in higher level absorption and increase of margins.

Matt Koranda - Roth Capital

Okay. That's helpful guys. One more here if I may guys. I know you guys have mentioned that you're holding off on providing guidance for a bit here to get the sales strategy in place. Do you think there is a chance in the next couple of quarters that you maybe able to provide bookings or backlog figures that would help to quantify the progress that you guys are making. There are point time later this year when you think you'll enough comfort around that strategy to share bookings?

Jay Powers

I guess the short answer to that is, there is obviously a point in the future where we'll be doing that but I'm not willing to put numbers out there that we're not comfortable, have a high level of confidence that we absolutely deliver on.

So we need to make sure that our internal process are in place, and we're getting a cadence and attraction in the field, it allows us to do that. And as soon as that occurs, we'll share the information on ongoing basis with it.

Matt Koranda - Roth Capital

Okay. That's it from me guys. Thank you.

Operator

And with our next question we'll now move to Carter Driscoll from Ascendiant Capital.

Carter Driscoll - Ascendiant Capital Markets

Good morning guys.

Mark Ascolese

Good morning.

Jay Powers

Good morning.

Carter Driscoll - Ascendiant Capital Markets

Sorry, I had technical difficulty and I missed most of the prepared remarks, for I keep myself - I apologize in advance.

Just one question I want to talk about - I'm not sure if the EBITDA level declined, you talk about within the UPS the composition of - something older legacy versus the newer version that you qualified last year in terms of what made up that revenues right there, the 750 and 625?

Jay Powers

So the bulk of our shipments in the first quarter - I guess I had to characterize that as more to the 300 platform and the 250 platform.

Carter Driscoll - Ascendiant Capital Markets

In terms of sequentially, I know you just had initial shipments in the fourth quarter - did the iteration than more versions they grow on a sequential basis? Could you just quantify that?

Mark Ascolese

I did say in the prepared remarks that we took our first two order from Caterpillar for - new 750, is going to deploy in Europe.

The 750 product, it just goes into large kind of collocation, large data centre applications, as you know Carter, and the sales cycle those are relatively longer than they are for the lower rated products.

The fact, that we had a couple of missteps on the deployment of that technology over the last, let's say 14 months or so, has caused us to, -- when we re-entered the market late last year, announced that for shipment and we announced - reengage the sales teams, gave them two different training classes to the sales teams and are starting to see more activity come through the pipeline.

I would have characterize it is a lot of interest and a lot of activity for the 750 and is kind of going through the normal sales cycle.

Carter Driscoll - Ascendiant Capital Markets

I'm just scrolling up on that. Could you talk about the spending environment, maybe breakdown, with some color, the different stream, what you're seeing on the data centre, which is mainly a collocation market, is there any fabrication in terms of what you're seeing in terms of, going just to spend between those two markets?

Jay Powers

I would characterize it as a bit of a malaise in the entire market, I wouldn't say it as, it's one or the other, I would say that the activity is, while the activity is there for quotes, and for future projects and for existing projects, for some reason, the decision making process has become elongated.

And typically what we see is, we eventually get the order and we eventually get the order and it maybe a little bit lower than, in terms of value, than what we'd anticipated when we first, starting track the opportunity.

And my interpretation that is, and we won't know for certain till a couple of quarters from now yet, from now I'm sure, but my interpretation to that, there has been some slowdown in compute activity based on space.

But we've had a number of -- potential customers come through here in the last couple of three months, that are - I would characterize them as close that are very bullish on what they're doing and there's a lot of opportunity in their mind and if they're going to be placing orders in the future.

So, the individual running those businesses are so very confident that the business is going to do well and going to proceed

Carter Driscoll - Ascendiant Capital Markets

Okay. And as you are, going back to your previous comment about the longer sales cycle of the 750 product, but I'm assuming that as that activity increases just because of their nature of the end market, the deal size, even if it may or not meet initial expectations should begin to trend up and that might lead to more confident and consistency in the orders shown in backlog and that will allow you to become more public about those metrics. You've got a fair calculation?

Mark Ascolese

I could not have said it better myself.

Carter Driscoll - Ascendiant Capital Markets

Okay. Just a couple of quick ones. So, we'll have to breakdown just geographically characterize the spending environment, I think the last quarter you talked about, in Europe they are been weak but maybe improving certainly Asia doing a little bit better in U.S. still little hesitant for those comments, still characteristic of what you're seeing or has there been incremental or any change positively and negatively, just maybe to talk generically by the region, let's say by country?

Jay Powers

I think that the - what I said, last quarter is still in place today, the market and the activity in U.S is stronger than it is in Europe. The activity is Asia is starting to trend up but remember because of all kind of issues we had there last year and now having to rebuild the organization that may or may not reflect what's actually that's going on in the market there.

During my visit earlier this month, I've had the opportunity to talk to a number of customers and distributors in the area and they are very bullish on the future there and on the activity. So in my mind, Asia could be somewhat messed by the fact that we're doing organization there.

There has been no material change in what I see in the market over the last -- since the last time we spoke.

Carter Driscoll - Ascendiant Capital Markets

Understood. And then just lastly, again, I apologize, if you've addressed this already, would you, position to me - I guess, the new management position that you created, we talk about that at all?

Mark Ascolese

We did. We talked about Chief Knowledge Officer, Danny and David Fiedler.

We would like very much as I said in the prepared remark, we like very much to position Active Power as we go to institution in the market when you want to talk about energy transmission, critical applications, around flywheel technology or rotary technology.

And David is here to facilitate that, he has a very strong and long background in design engineering and (indiscernible) in the modular power systems business and a very smart individual.

So you'll be saying some content flow from us. We have a website lodge another activity and he's becoming engaged in.

Carter Driscoll - Ascendiant Capital Markets

And then just lastly, I'd like to maybe tag a little bit detail in the Microgrid opportunity, obviously it sounds like a very compelling potential opportunity in terms of - long during battery life. Can you think that, the battery providers or those current solutions might develop a threaten value coming in and maybe that might be - have some competitive push where you could maybe actually displace the battery and not just the complementary between that.

What are you initial discussions dealing in terms of positive or negative and during the acceptance of flywheel and extra care application?

Jay Powers

So Carter I've been talking about Smart Grid and Microgrids since the first call back in November, December.

What I've learned since then, and that's clear to me, I said this back then, it was unclear to me what the application would be for us and I was thinking it would be a DC application.

What I've learned since then is very clearly there is opportunity for our AC products to enhance the performance of the batteries and to enable a wider acceptance of renewables in Microgrids and even in Smart Grid applications.

What we're learning is that there's this absolute spot for both of the technologies that we have here, both the AC and the DC technologies and that people are interested in deploying them because it enables the Microgrid to operate at much more efficient and effective manner.

Now, time will only tell that we do a couple of pilots and get data on all this. Time will tell whether or not that market develops at the pace that the current research would indicate that it's going to.

I can tell you that, I've been involved in that market for the last five or six years and this is the first time that I've been able to go somewhere and actually see a fully operational Microgrid with renewable energy sources providing all the electricity that's required and with an overnight system, totally run of a battery plant.

That was very impressive, the technologies there, it works, we can enhance that technology, we can have help lower the cost of the implementation of the Microgrids that appears and we're, people interested in talking to us about our technology and deploying it. It's encouraging -

Carter Driscoll - Ascendiant Capital Markets

Who do you find actually engage in the current process? The project manager is a,-- would you go in and jointly sell with the existing battery provider, I'm just trying to understand, who it happens that, approval from and who actually would make the final approval of the sale?

Jay Powers

So we're engaged today with a couple of different client tails let's say, one, I would characterize as a systems integrator that has come up with a design and a configuration and a number of partners to bring a complete solution to a location for a Microgrid application.

The other would be more of a OEM type relationships with the battery company that's interested in - maybe marrying our technology with their solution for batteries in that application.

And the third is, what I will characterize as an investor that is providing a financing for Smart Grid applications affordable take. Well will it become an integral part or a bit process with the financial investor to deploy large solo farm. Those kind of a spectrum of companies that we're talking to and opportunities that want to cover.

Carter Driscoll - Ascendiant Capital Markets

That's very helpful. Thank you for that detailed guys. I'll get back in the queue.

Operator

(Operator Instructions) And we'll now move to JinMing Liu from Ardour Capital.

JinMing Liu - Ardour Capital Investments

Good morning, thanks for taking my question.

Jay Powers

Good morning JinMing.

Mark Ascolese

Good morning.

JinMing Liu - Ardour Capital Investments

First, just follow up on the Microgrid application. It sounds like to me that your products are more suitable for, manage the change in production of electricity from renewable resources. So are you competing against other senior products like the ultra capacitor, it's that the, it's like they have the right understanding?

Jay Powers

Actually JinMing I have not seen in the Microgrid's that I have visited and the people that I have spoken with, I've not seen -- super caps deployed. And then, and probably for two reasons, one, it is the cost issue but secondarily it's a power issue. What we're talking about quarter half and full megawatts of power and I don’t think that super caps compete in that space at this point at those power rating.

JinMing Liu - Ardour Capital Investments

Okay. I see. Okay, because I have heard all the company talking about the forming application for renewable, so, that’s why I asked. In terms of booking I understand that you're not ready to give out numbers but can you share with us some trends booking whether by application or by region?

Jay Powers

Not really. I did mentioned -- we are very cautious I guess about the details of what we have we have here, but I did mention in prepared remarks that we booked more than we shipped, that’s a positive trend and as I stated we need to - that needs to continue and increase in terms of the delta between the bookings and the shipping.

If we're going to increase the backlog as I've been talking about and become much more consistent in our ability to predict revenues et cetera we have to increase the bookings rate.

JinMing Liu - Ardour Capital Investments

Okay. Lastly, as you mentioned that you're increasing ARPUs selling to the federal government market I know they understand the federal government is pushing for distributed generation. How should I understand your efforts on that front?

Jay Powers

Our efforts on that front right now are focused on finding opportunities to deploy our core clean source UPS type products.

And if there is an application at a military base for affordable take or win to maybe think about our CleanSource DC product.

We are not engaged at this point in any significant way or continuous power generation or marginal power business although that is definitely on the radar and I believe personally that that will be large number to commend that - those types of opportunities at some point in the future.

But today we're talking about - we're basically talking about our UPS products and our CleanSource DC product.

JinMing Liu - Ardour Capital Investments

Okay. Got that. Thanks a lot.

Operator

And that concludes our question and answer session. I would now like to turn the call back over to Mr. Ascolese.

Mark Ascolese

Thank you. Thank you all for being on our call this morning. On behalf of the entire senior management team, our employees and our board, I would like to express our appreciation for your interest in Active Power. Thanks for your continued support and we're looking forward to speaking you again next quarter.

Operator

This now concludes today's call. Thank you for joining us. You may now disconnect.

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