Aratana Therapeutics, Inc. (NASDAQ:PETX)
Q2 2016 Earnings Conference Call
August 5, 2016 8:30 AM ET
Steven St. Peter – President, Chief Executive Officer and Director
Craig Tooman – Chief Financial Officer
Ernst Heinen – Chief Development Officer
Brent Standridge – Chief Operating Officer
Erin Wilson – Credit Suisse
Ethan Roth – Stifel
Carl Byrnes – Lake Street Capital Markets
Tim Lugo – William Blair
Douglas Tsao – Barclays
Good morning, and welcome to the Aratana Therapeutics Second Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Dr. Steven St. Peter, President and CEO. Please go ahead.
Steven St. Peter
Thank you, operator. Good morning. This is Steven St. Peter, President and CEO of Aratana Therapeutics. I'm here with Craig Tooman, our Chief Financial Officer; Ernst Heinen, our Chief Development Officer; and Brent Standridge, our Chief Operating Officer. Welcome to the second quarter 2016 financial results call. After prepared comments we are pleased to take questions.
Before we begin, I'd like to let you know that we will be making some forward-looking statements today. These statements involve uncertainties and risks and therefore should not be relied upon as predictions of future events. Actual events and circumstances, which may be beyond our control, may differ from today's forward-looking statements, including, but not limited to, as a result of the risks, uncertainties and other important factors set forth in our filings with the SEC.
I’ll begin today’s call by highlighting the progress that Aratana continues to make with respect to the clinical and regulatory milestones for our late-stage therapeutics.
First, we were pleased to receive our second FDA approval in May 2016, ENTYCE for appetite stimulation for dogs. We continue to anticipate the commercial launch in the first quarter of 2017, in conjunction with the North American Veterinary Conference and other conferences.
Second, we continue to anticipate our third FDA approval later this month. Nocita as a local post-operative analgesia for cranial cruciate ligament surgery in dogs, which is approved according to our previously disclosed timeframe, would unable us to launch in the fall of 2016.
Third, we are pleased to make progress, just certain of our cat programs. We have commenced enrolling cats in the pivotal field effectiveness study for AT-003 for post-operative pain management in cats.
AT-003 in cats contains the same active pharmaceutical as Nocita for dogs. We continue to look forward to initiate in the pivotal field effectiveness study for AT-002 with a cat specific formulation in late 2016. AT-002 in cats contains the same active pharmaceutical as ENTYCE for dogs.
Fourth, we continue to enroll safety study for AT-014, a therapeutic vaccine designed for the treatment of canine osteosarcoma, which we believe supports our anticipated USDA conditional licensure in the late 2016 or shortly thereafter. We are also very pleased that our license partner in human medicine for AT-014, Advaxis continues to partner the platform as illustrated in this week’s impressive deal with Amgen. Indeed Aratana continues to look at expanding the platform in animal health including AT-017 for canine lymphoma and other targets.
Fifth and finally, during the quarter we were pleased to reacquire global rights from Elanco’s AT-006 for feline herpes virus induced ophthalmic conditions. We plan to conduct an additional pilot study and complete certain formulation work before advancing the product in the pivotal field effectiveness study. In addition to making progress in clinical development, Aratana has been busy aligning the various business elements to ensure our commercial success.
In April, we announced a global strategic collaboration with Elanco on GALLIPRANT. We continue to believe that we have all the right components for a unique and very successful collaboration with Elanco. And we're very pleased with the progress today and we continue to believe that GALLIPRANT including the relationship with Elanco has the potential to be a major value driver for Aratana.
Given that Elanco was increasingly shouldering the work stream on GALLIPRANT, we have reallocated an extension to ENTYCE and Nocita. Through this weekend and early next week Aratana is at the American Veterinary Medical Association Convention in San Antonio. We will be at the Central Veterinary Conference later this month here in Kansas City. And then at the International Veterinary Emergency and Critical Care Symposium in September in Dallas.
And we are engaging our customers at several touch points in preparation for our product launches. Our regional sales leaders, national account managers and medical scientific liaisons have been hired and we commenced the hiring process for approximately two dozen therapeutic specialists or sales reps, which we anticipate to complete this quarter. The excitement and interest is comparable and tangible. For instance, Aratana has already received more than 100 inquiries for the approximately two dozen open sales positions.
Finally, during the quarter we named our Chief Operating Officer, Brent Standridge. With this change and subsequently there have been other organizational changes including the potential transition of our Chief Commercial Officer. Brent has been with us as a full-time commercial consultant since February and his appointment as CEO commenced on July 1 2016. However, this is the first call since Brent joined as an officer. We will let Brent introduce himself. Brent?
Thanks, Steven. Good morning, I’m pleased to join today’s call as Steven said my name is Brent Standridge. I've been in the animal health industry for almost three decades. Primarily with Fort Dodge Animal Health a division of Wyeth. During my career with Fort Dodge we grew to be one of the top animal health companies. I held several sales and marketing positions with increasing responsibility in both the Production Animal, Companion Animal business segments.For the last 11 years in my career at Fort Dodge I was Senior Vice President of Sales and Marketing for North America. When Pfizer purchased Wyeth Iexited the company as the Animal Health business was split betweenBoehringer Ingelheimand Pfizer Animal Health now the way it is.
Prior to joining Aratana I was a consultant for aprivate companion animal companyPutney which was recently acquired by Dechra. AsSteven said I joinedAratana in February 2016as full time consultantand beganmy role asChief Operating Officer on July 1. I'm very excited to be working with the Aratana team. Steven?
Steven St. Peter
Thank you, Brent. So needless to say Aratana is an exciting pivot point, we are very proud of what we have accomplished and we are confident about what is before us. Between now and our next financial results call in November, we believe that we will transition from the development company to a development in commercial company. We believe that we delivered three of three on the FDA approvals for the product candidate that we had at the time we became a public company GALLIPRANT, ENTYCE and Nocita.
And in the timeframe that we articulated at all in 2016, we have also achieved two USDA licenses and we are anticipating a third. Things that were not in the mix in June 2013 But our roadmap vision also includes commercial success and we will now pivot to that in the coming months. This concludes my prepared comments.
With that I’ll stop and Craig will update you on the financials, after which we will take questions.
Thank you and good morning, everyone. As noted in the earnings release issued last night. Aratana reported a net income of $21.2 million or $0.61 diluted net income per share. This compares to a net loss of $8 million or $0.23 diluted net loss per share, reported in the second quarter of 2015. As we announced and covered in detail in April, the company entered into a strategic collaboration with Elanco Animal Health or GALLIPRANT, which significantly impacted the second quarter 2016 earnings results.
In the three months ended June 30, 2016, we reported collaboration revenue of $38 million of the upfront $45 million received from the Elanco agreement. The residual $7 million is held on the balance sheet as it represents Aratana’s portion of shared R&D expenses that may be incurred.
As you recall, we agreed in the Elanco collaboration to fund 25% of the GALLIPRANT R&D expenses through December 31, 2018. In addition to the revenue from Elanco, we also reported $47,000 in revenue from product sales of BLONTRESS and TACTRESS in the second quarter of 2016.
For the six months of 2016, total revenues were $38.2 million versus $386,000 for the same six month period of 2015. We are very pleased with Aratana’s recent development and regulatory successes. Due to the FDA submission of our third product Nocita, we triggered $1 million milestone payments to our license partner in the second quarter of 2016.
Our R&D expenses, this quarter were $5.3 million compared to $6.1 million in the second quarter of 2015. The decrease is primarily a result of completed pivotal studies on GALLIPRANT, ENTYCE and Nocita in 2015. For the six months ending June 30, 2016, R&D expenses totaled $16.1 million versus $12.3 million for the same period in 2015. This increase for the first half of 2016 as result of $6 million in success milestones accrued for the submission of GALLIPRANT in the U.S. and EU. As well as ENTYCE and Nocita in the U.S.
We will continue to make investments in our development pipeline and have recently initiated a pivotal feline field effectiveness study for AT-003 and plans initiated a pivotal feline study for AT-002 in late 2016. Also as Steven mentioned, we regain control of global rights to AT-006 from Elanco in the second quarter of 2016 and look forward to advancing this program in the future.
As we pivot to commercialization of our lead products SG&A expenses increased by $1.3 million in the second quarter ended June 30, 2016 to $6.2 million. For the first half of 2016 SG&A expenses were $12.7 million versus $9.1 million in the corresponding period of 2015. In the first quarter of 2015 we incurred a non-recurring $1.2 million credit to reduce this fair of contingent consideration with Vet Therapeutics.
Excluding that adjustment in the first half of 2015, the residual increase for the first half of 2016 is primarily related to the continued investment in commercial activities to prepare for our launches. We have also invested additional $1 million in personnel costs in the first half of 2016 as a result of hiring additional experience commercial leaders including regional sales leaders and national account managers.
During the three months ended June 30, 2016 the company reported an impairment charge of $2.8 million for the acquired intangible assets related to updated sales expectations for TACTRESS and the reprioritization of AT-007 in the development program portfolio.
Now turning to our cash position as of June 30, 2016 we had approximately $109.9 million of cash, cash equivalents, restricted cash in short-term investments. This represents an increase in cash from December 31, 2015 of approximately $23 million, largely due to the up front payment received from Elanco of $45 million. For the second half of 2016, we anticipate net cash used in operating activities of approximately $35 million.
As a reminder, in the third quarter of 2016, we will pay the $6 million in milestones, which were expensed in the first half of 2016 earnings. We also anticipate additional cash usage for building of inventory for the upcoming commercial launches. These additional amounts of approximately $10 million in milestones and inventory will be partially offset by non-cash items such as stock compensation, depreciation and amortization expense.
And for the sake of clarity, the milestones, inventory and offsetting non-cash items are included in the guidance of the non-cash used in operating activities of approximately $35 million in the second half of 2016. To conclude, we are looking forward to pivoting toward becoming a fully integrated company with the anticipated product launches.
Now I’ll hand the call back to Steven for Q&A.
Steven St. Peter
Thanks, Craig it’s certainly been an exciting journey for us since 2010 and actually the second quarter marked our third anniversary as a public company. So as we prepare for the commercial launches it’s all becoming very tangible. As I mentioned it’s very palpable. So we look forward to keeping you posted as we enter this next phase of the company. And we believe and we assume from a very strong base with a clear path upward. Operator, we’ll take questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Erin Wilson of Credit Suisse. Please go ahead.
Hi, thanks for taking my questions. I was just looking at the queue that just came out. I haven’t been able to go through it all yet. How was the deal with Lilly structure as it relates to AT-006? I guess can you remind us how it’s different from what it was in the past and was there any sort of up front payment or incremental payment coming near-term that we should be aware of as relates to AT-006?
Great question, Erin. Actually there are no up fronts that were taken in association with that return of rights to us. It involves a very low double-digit royalty and, sorry, a single-digit – low-single-digit royalty and a low-single-digit million threshold that we would pay in total. So it is really based on success of the compound in the marketplace only.
Okay, great. And then how many sales reps have you hired so far as of now, and how is that progress – or how is that progressing? And then it seems you’re spending a little bit more in the second half. What’s incremental here in terms of expenses relative to maybe what you previously thought? And how much is related to GALLIPRANT in particular versus the other products?
So thanks, Erin. So as I mentioned we completed the hiring of the regional sales leaders national account managers and basically all the MSL’s. So what’s left is a couple dozen territory managers and, obviously, a lot of that is – based but also a lot of incentive compensation related to sales. We’ve picked our territories, we know where they’re all going. We’re actively interviewing candidates and hiring candidates. And as I mentioned the plan is to have them hired this quarter so we can launch the product and train the sales force.
And the sales force will be selling all of our products, including GALLIPRANT where we have a co-promotion but also focused on ENTYCE and NOCITA. So we’re getting each of the accounts not only territories, but individual targets in those territories and we’ll be turning that organization on as we launch the products over the coming months.
And Brent I don’t know if you have anything to add to that.
Craig, on the cost I don’t know if you want to make any cost on that. Other than to say the sales force will be incremental cost but as we move several of our programs through the pivotal stage, including the manufacturing and the milestones, obviously have impacted us greatly in 2016. So we’re, obviously, managing the overall cost and shifting cost as we mentioned last quarter from the development to commercial, to maintain the overall burn, but continuing to invest in innovation, which really is a core principal of Aratana. All anticipated in that $35 million number we provided.
Okay, great. And then if I could ask one last one, I guess it would be great to get some visibility or even just preliminary on conservative assumptions as to what we should expect as far as GALLIPRANT contributions for this year or even next. I guess how do you expect to roll-out of GALLIPRANT to take place, for instance is it going to be a soft launch and then a bolder launch with any we in January. And how it kind of really that relationship progressing there and how closely are you working with them on timeline?
Yes, so thanks, Erin for that. Now that we partnered with Elanco, well we still have co-promotion rights in the U.S., obviously, they are in charge of it and we literally we have communications daily with them on it and they – as I said, we are very pleased with what we’re seeing in terms of them moving to bring it to the market. But we won’t comment on the timing. But I think hopefully that will become more and clearer overtime. But we’re very pleased with the engagement and the resources that are going into the product. Frankly, I don’t think we could be happier than what we’re seeing.
Is there any change to the name or branding of the product? Just curious.
No. Not that we’re aware of. I mean I think GALLIPRANT the FDA approved name. So I think it would be unusual to see a change Brent is shaking his head, yes. So I think that’s the right answer we’d be very surprised to see any kind of change
Okay, great. Thank you so much.
Thank you, Erin.
The next question comes from Ethan Roth of Stifel. Please go ahead.
Hey, good morning and thanks for the questions here. Just a few on the cat programs. First, just on AT-003, the pivotal study for cats, can you share with us any details on the number of cats that will be enrolled? What surgical procedure will be evaluated and when you might expect to be able to provide the initial readout on top line results.
Hi, Ethan, good morning and thanks. So we’ve not said exactly what indication we’re studying for that product and typically a pivotal study. Ernst maybe you want to comment on the typical size, we’ve not given the exact size of the study but just as a gauge.
Typical size for the treatment crew is 100 and of course, a more and more make sure we’re mixing them but now it’s a placebo control studies so we have placebo arm positively entitled [ph]. So nothing special it’s a straight forward study – and surgical procedure is done every day in cats so we anticipate quick enrollment and no issues.
Yes, and the strategy with that product in particular we studied initial surgery but in time we do additional surgeries and if appropriate we expand the label and that’s just the way that we get this sort of product, how you evolve it. So the initial indication, obviously, in dogs now on approved product but as we continue to look at the product and look forward to the extent we do additional work to expand that label, kind of has always been part of the plan but it’s certainly starting in the more painful surgeries and making sure we’re training the doctors for an excellent outcome and that’s really the focus.
Got it, thanks. And then as you’re progressing through the development of AT-002 and AT-003 for cats, are there CMC technical sections any easier to secure due to the fact that they have been previously achieved in dogs?
So I think Steven mentioned it earlier that AT-003 is the same compound as in NOCITA. And AT-002 is couple more right in the same active ingredient than in ENTYCE. But in AT-002 cats are different as we always have told you guys and so we have a specific formulation for AT-002 for cats, for that indication.
Got it. And that actually dovetails well to my last question, here. By early 2017 you’ll have three drugs in the market approved for canines and understanding that one of your core strategies is to secure approvals for pet specific indications but off-label usage is pretty prevalent in the vet market. Can you just discuss the opportunity for off-label use of GALLIPRANT, ENTYCE and NOCITA and cats? Thanks.
So thanks, Ethan. One of the fundamental principles of Aratana is we do drug development in the individual species where the vet wants to use the product. Today veterinarians are stuck using human products for sort of 90% of the time. So the idea dog specific and cat specific products is important. So we don’t think that dogs are small humans and we don’t think cats are small dogs. So we do development in the species where we expect to see the product to be used.
But because of the fact that dogs we frequently have a safety package from the human development where dogs are a typical preclinical species, the dogs move more quickly, but then we move the cats along. So I think people should expect that where we want to see products used in any species we will do that work. Notwithstanding that, veterinarians until the products are approved in those species it’s their discretion to use the product. So that will be up to the veterinarians, but we clearly wouldn’t be promoting that, that’s really up to the veterinarians.
But one other comment I’ll make is one of the reasons we’re excited about AT-006 is it is a cat specific product. It will be the first antiviral [ph] that Aratana develops for cats specifically for cat and something that we want to do and ironically, antiviral disease cats sometimes are used in this drug development and we did get some data from that but we actually – that will be a cat-specific product.
So not only – ocular herpes that impacts cats doesn’t really affect dogs so it will be a cat-specific product so just to highlight that.
All right, thank you.
The next question comes from Carl Byrnes of Lake Street Capital Markets. Please go ahead.
Good morning, everyone. Just a couple of quick questions. And you covered my questions with respect to GALLIPRANT. But I’m wondering if you could give us any details on progress with respect to licensing outside the U.S. markets with respect to NOCITA and ENTYCE and maybe other products. And then shifting back to GALLIPRANT with respect to milestone payments around EU approval manufacturing; is it safe to assume that those would be 2017 time announce? Thanks.
Steven St. Peter
So why don't I start discussing the U.S. and Craig will talk about the milestones on the GALLIPRANT collaboration. So we pivoted based on the process that we ran and decided to do a GALLIPRANT only deal including the co-promote in the U.S. and we are extremely pleased with that decision especially as we see the resources from Elanco come to the table to help make that product a success that we believe it can be.
Whereas, the other product ENTYCE – and I'll remind you, we had also filed for a regulatory approval for GALLIPRANT in Europe. So it's great that we have Elanco taking the product outside the U.S. where that product is frankly deferred so long in Europe.
With respect to ENTYCE and NOCITA, while we will continue to interact with the regulatory agencies, those products won't be approved certainly in 2017. So we decided to do retain the rights those interests in those products, but we decided to retain the rights for ENTYCE and NOCITA at this point. But it's an important element that going forward. We think there's value to be unlocked in those products outside the U.S. especially given that they all have been launched in the U.S. So the strategy is to continue to make progress outside of the U.S. on ENTYCE and NOCITA and revisit partnering those in time.
So on the milestones for GALLIPRANTZ; obviously we work closely with our partner on a lot of these items. There is $4 million for the manufacturing milestone and $4 million for the EU approval with inflammation claim. We have alluded to those we think being in the nearer term, but we’ve never specifically given a year for those and a lot of that for manufacturing, it turns toward more of a commercial scale and things that we would have achieved on our own in order to successfully launch the drug over a period of time.
For the sales milestones, again, those are up to $75 million, and those turn from U.S. to worldwide. There are several milestones that comprise those and it just depends on a threshold that we might achieve in order to achieve those milestones in full. We have said that on our own, we would have achieved – in other words, without a partner, we would have achieved a portion of those milestones anyway. So we're very confident in the short term together with a partner like Elanco that we can achieve some of those.
In addition, as you know we have the co-promote and the royalties. So the combination really of the co-promotion, the royalties, the milestones and the very nice $45 million upfront payment that we received comprise that deal. Hopefully that's clear and if not I'm happy to spend more time with you afterwards.
Great. Thanks so much.
The next question comes from Tim Lugo of William Blair. Please go ahead.
Thanks for taking the question, guys. Can you discuss the timing of the management changes? Was it specifically something you wanted solidified before the NOCITA launch?
Steven St. Peter
Hi, Tim. So, the staffing plan of the company is an evaluated – sort of always in evolution on the niche. When I started the company, we’re obviously zero people; when I became CEO, there were about half a dozen; when we got public, there were 18; today there's more than 50, and this year we'll have approximately 75 by the time we hire the sales organization, and we've gone from a development to a manufacturing development and commercial organization. So it's been in the plan to continue to build out the organization and really make us successful. And that is something I think about every day, it's something our Board is engaged on, and we really are sort of making that happen.
So as we got closer to the – we are transitioning from a development organization to a development manufacturing and selling organization. And, no, all the products in the world and all the marketing and branding that go along with it. If you can't sell the product and then collect the payment for it, then you haven't delivered on the full cycle. So really integrating sales with marketing and making that report – having joined with that experience, also IT and other functions to really make the business work. That's the plan and we continue to step up to make that staffing happen and evolve the organization.
So hopefully that's some color for you. But the timing, Brent joined in about six months ago, initially he was a consultant and then eventually realizing that would be a great full time role for him, is just very consistent with the 10-year plan of the company. And I think since before we were public, the plan was three product approvals in 2016. And so we have been focused on that for years.
Understood. And I guess now that we're looking out a little bit further, you're going to end the year with 75, how do you continue to evolve the company over maybe that 2017, 2018 timeframe?
Steven St. Peter
Well, we'll continue to add sales territories kind of where appropriate. Of course, we’re looking at other alternatives, like distribution and maybe other agency agreements, potentially co-promote, although that's not in the current plan with ENTYCE. So, that's the way we would evolve the selling organization based on what we're seeing and where we can make prudent investments. And unfortunately, the infrastructure of the company we've invested heavily in that and that's sort of baked in – to what we've been doing. But the selling function will add additional cost. But as I like to remind everyone in the company, those are also the source of revenue.
So, you just have to find the right balance between the revenues that they bring and the costs that's associated with that. And we have a model in terms of compensation that's variable based on sales in the territory. So that’s how we're managing that, but the organization will continue to grow as we see the opportunity.
Okay. Maybe one last question. For the 003 in cats pivotal study, what's the timing of the readout for that?
Steven St. Peter
So we've not set the timing on that and what we typically do is once we have a good sense of the enrollment and where we are – we can give that, and it's a surgery indication, so it's a pretty quick readout. So in time we will be communicating that, but we're not doing that today.
All right. Thank you.
Steven St. Peter
You know cats pivotal involved in – with dogs there’s a lot more, there have been products developed for dogs and with cats little different, so we want to just make sure we understand where it is and you know we like to be very – as clear as we can about our timing and then hit back. So that what’s we intend to do, when do communicate.
Understood. Thanks for all the questions.
Steven St. Peter
[Operator Instructions] The next question comes from Douglas Tsao of Barclays. Please go ahead.
Hi, Stephen, thanks for taking my question. This may be following up on Tim's question in terms of the evolution of the management team. Should we interpret with this in any way in terms of the change in sort of strategy or execution, and obviously, in terms of some of the principles, the original sort of senior executives in the management team, this is going to be second departure we've had in the last 12 months. How are we sort of mitigating sort of the risk of disruption at really what is an important time for the company in terms of transition that preference a from development stage to a commercial stage organization? Thank you.
Steven St. Peter
Hi, Doug, thanks, I'm happy to discuss that. I think the first transition was the retirement of our Chief Scientific Officer. Dr. Heinen joined the company more than four years ago, previously ran Bares R&D organization and the former Chief Scientific Officer and I recruited Dr. Heinen. specifically with her retirement in mind and that was the plan. And on a day-to-day basis, Dr. Hienen has been running that. Dr. Rhodes remains a consultant to the company, but that was a very well planned kind of transition.
And similarly with the potential transition of our Chief Commercial Officer who we disclosed – indicated her sort of with reorganization, her intent to potentially leave, which we communicated in our 8-K, which we were required to do as a public company when we start those discussions, that building the commercial organization. We brought Brent in, obviously, six months ago, and he joined a little over a month ago, and we have been building that commercial organization to make sure that we have lots of ability to cover where we're going. I'll tell you that the overall organizational structure is something super important of the company and although I don't think I've ever talked about our Board, that's something that we engage our Board with. In fact, the Chairman of our Board, she formally was the Chief Marketing Officer of Merck and then at a different point ran HR for Merck.
And the Head of our Comp Committee was the Chief Commercial Officer of Cephalon. And so we’ve had a plan to evolve this company on this timeframe and we've been implementing that. And so it's always surprising when there's any change, but I think you've got to be focused on the evolution of the company and you put the company first and you deal with that and it’s a team and we all played our roles and that's the way that we go. We obviously, are – we don't see disruption. We see execution and that's how we're moving forward.
Okay. Thank you very much.
This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Steven St. Peter for any closing remarks.
Steven St. Peter
Well, thank you, operator. It's obviously a very exciting time for us at Aratana, and we look forward to keeping you updated.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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