On Track Innovation's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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 |  About: On Track Innovations Ltd (OTIV)
by: SA Transcripts

Operator

Welcome to the 2012 Second Quarter Financial Results Conference call for On Track Innovations, which we refer to as OTI. On today’s call are Mr. Oded Bashan, Chairman and CEO, Mr. Ohad Bashan, President, and Ms Tanir Horn, CFO. Today’s conference call is being recorded and will be available for replay until September 6, 2012 in the Investor Relations section of our website along with the copy of today’s prepared remarks.

I will now turn the call over to Garth Russell of KCSA Strategic Communications.

Garth Russell

Thanks Rachel. Thank you everyone for joining us today. You should have received a copy of the first half 2012 press release issued earlier this morning. If you’re not on our distribution list, please contact us at info@otiglobal.com and we will be happy to add for future information.

Before turning the call over to management for their prepared remarks, I must state that today’s call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Whenever we use such words as believe, expect, anticipate, intend, plan, estimate, or similar expressions, we are making forward-looking statements. Because such statements deal with future events and are based on OTI’s current expectations, they are subject to certain risks and uncertainties and actual performance or achievements of OTI could differ materially from those described in or implied by these statements on this call.

For example, forward-looking statements include statements regarding our goals, beliefs, future performance strategies, objectives, products, plans, revenue targets, profitability, potential opportunities, expansions, pipeline or current expectations. Forward-looking statements could be impacted by the effects of protracted evaluation, validation material periods in the U.S. and other markets for contactless payment cards, market acceptance of new and existing products, and our ability to execute production on orders, as well as risks and uncertainties, including those discussed in the risk factors section and elsewhere in our annual report on Form 20-F for the year ended December 31, 2011 and in subsequent filings with the Securities and Exchange Commission.

Although, we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Except as otherwise required by law, OTI disclaims any intention or obligation to update or revise any forward-looking statements which speak only as of the date hereof, whether as a result of new information, future events or circumstances, or otherwise.

This call contains certain non-IFRS measurements namely adjusted EBITDA. Adjusted EBITDA represents earnings before interest tax, income tax, depreciation and amortization and future eliminations and further eliminates the effect of share based compensation expense. The company believes that adjusted EBITDA could be considered in evaluating the company’s operations, since they provided clear indication the company’s operating results. This measure should be considered in addition to the results prepared in accordance with IFRS and should not be not be considered as a substitute for IFRS results. The non-IFRS measure included in this calls have been reconciled for IFRS result in a table in the press release issued earlier today.

With that, it’s now my pleasure to turn the call over to Ohad Bashan, President of OTI.

Ohad Bashan

Thank you Garth and welcome everyone. Thank you for joining us today. We are disappointed with the results for the first half of the year, as they do not yet reflect the multiple agreements the company has recently signed across its different operating segments and instead reflects impacts upon our business outside of our control.

The main reason for the decrease in our revenues compared to the same period last year is the ongoing Thailand, and its ongoing impact that the Thailand flooding had on our company’s actions which could continue for the remainder of the year. I would like to stress that we have established multiple sources of production and we are now back to normal production capability. While these haven’t allowed us to overcome the lost orders for this year, it will help us regain customer confidence in our supply chain.

OTI has an insurance policy that covers it against loss of profit. Thus far, under the policy we have filed claims for $11 million and we mentioned to the (inaudible). If these claims are paid, the long term impacts of these events will be minimal from a cash flow’s standpoint. And as we previously stated, we are also working on covering consequential damages, we’ve received the small initial payment for direct damages and we believe we’ll recover additional funds.

At the same we continue to focus on establishing our U.S. presence, being more aggressive with the sales and marketing of our solutions in the U.S. with focus on introducing EasyPark, NFC solutions and MediSmart. Elsewhere, we’ll continue to expand our multiple forms for each of our solutions and continue to grow our business overall and create new sources of revenues. While this progress is ahead of our expectations from just a year ago, we don’t expect it to be reflective in our financials until we meet 2013. It is because the lead time for many of our products is long and going from the contracting phase and into implementation takes an average of 9 to 12 months. Therefore, we believe our business is on solid grounds as our technology is leading in our expected markets and we are looking forward to 2013 and beyond.

I will now the turn the call to Tanir for a full review of the financial results, Tanir please.

Tanir Horn

Thank you Ohad and welcome everyone. Total revenue for the first half decreased 24% to $20.3 million compared to $26.7 million for the first half of 2011. Our revenue breakdown for the first 6 months of 2012 is as follows. Revenue from SmartID is $9.8 million representing 48% of total revenue. Revenue from payment was $4.2 million representing 21% of total revenue. Petroleum was $2.6 million and representing 13% of total revenue and OEM $3.7 and representing 18% of total revenue.

Our decline in revenue is compared to this period last year is mainly attributable to the flooding in Thailand late last year. It’s estimated that the 2012 Thailand floods rank as one of the costliest disaster the world has ever seen and unfortunately OTI was affected too. The main impact of this natural disaster has been on the supplies part for our ID and Payment Cards and as consequences of these resulted in delaying of shipments to customers. While the manufacturing is now back to full capacity, earlier delays to customers resulted in additional orders which we anticipated for 2012 to be awarded to other suppliers. We are working with these customers on infrastructure equipment and service order.

The geographic breakdown of our revenue would, the America is $7.4 million representing 36% of total revenues. Europe generated $6.2 million, 34% of total revenues. Africa generated $4.6 million or 23% of total revenues. Israel generated $1 million or 5% of total revenues. Asia generated $0.4 million or 2% of total revenues.

Our operating expenses for the first half of 2012 decreased by 2% to $15.2 million compared to $15.5 million for the first half of 2011. We are in the process of implementing certain cost cuttings. Net loss for the first half of 2012 was $5.7 million or $0.18 per share compared to net loss of $2.3 million or $0.07 per share for the first half of 2011. And adjusted EBITDA which referred to earnings before interest, taxes, depreciation and amortization and stock based compensation for the second quarter of 2012 was a lot of $3.6 million compared to a profit of $43,000 for the first half of 2011. While the net loss is disappointing it’s important to note that we were cash flow positive from continuing operation activities for the 6 months period ended June 30, 2012 with net cash provided by operating activities of just $46,000.

Turning to the balance sheet, we reported cash, cash equivalent and short term investments of $22.1 million as of June 30, 2012. This is compared to $28.5 million as of December 31, 2011. This change in cash, cash equivalent and short term investment is mostly attributable to a new line item long term restricted deposit which was $3.1 million which partially offset the employee benefit obligation of $5.5 million we have to our employees. In addition, during the first half of 2012, we paid approximately $1.3 million of a long term bank loan circulated with some of our projects.

Now, I will turn the call to Ohad Bashan for a view of business development for this period. Ohad?

Ohad Bashan

Thank you Tanir. I’ll now review our position in each of our vertical markets of SmartID payments and petroleum. In the SmartID markets, we are pleased to report that deployment in Panama has commenced. As a reminder, in the first quarter we announced a new agreement in Panama for the initial supply of electronic integration control systems totally $6.9 million. We believe this project has the potential for additional revenues in future years from follow-on contracts.

Moving to our other operations, beginning with payment segment. At the end of the first quarter we received an order for 30,000 NFC and contractor’s payment readings that have to be deployed across the U.S. We have since received an order for an additional 17,000 readings that have to be deployed across Europe. These total orders of 47,000 of our readers is evidence that the increasing views and implementation of NFC enabled devices across the world. It is foreseen that the market for NFC technology will grow within products and unique applications in the next few years and the sales of NFC readings in the market is expected to grow significantly.

Additionally, the main competition we face in the readers market. ViVOtech, has divested its reader business. These disruption in the market represents a significant opportunity for OTI. In fact, we’ve already experienced the positive impact in our business as received initial customer orders.

Within our parking segment, we are happy to report this morning that the City of Dover, New Hampshire would deploy EasyPark soon. The unanimous decision by Dover’s Parking Commission to implement EasyPark highlights the mounting recognition by a municipality across the U.S. of EasyPark’s effectiveness in managing park and payment collection. With the implementation of EasyPark in Austin underway. The adoption of EasyPark by Dover’s is another important milestone in the expansion of EasyPark within the U.S. As Dover will be first city to utilize EasyPark in the Northeast.

Our rollout strategy for the U.S. is to initiate use of EasyPark in these and other larger cities and then expand into the surroundings of it. Additionally, the use of the EasyPark vehicle device is just being launched for its initial (inaudible). We expect to announce the adoption of OTI EasyPark solution by more cities and campuses in the coming months.

For EasyPark in Europe, we are making the necessary changes to rollout business and have recently appointed a new General Manager of Car Express [ph].

The new GM has been asked with executing the implementation of EasyPark in the major cities that have already signed agreements for the solution. While customer’s adoption of EasyPark in France has been slower than anticipated. He believes this is an issue with execution of the programs, as our former leadership of the program was focused on signing new municipalities. Under this new leadership, we expect to see a meaningful change in customer adoption of our solution in this markets. Also, we recently announced EasyPark Private, a separate but complimentary service to our EasyPark Solution that enables owners of privately owned parking spaces to rent these out at times of their choosing when they are not in use. This is being initially launched in Israel and is part of OTI’s wider business strategies within these segments to expand EasyParks customer base and to generate new streams of recurring revenues.

And drivers using EasyPark Private will pay ILS7.5 for every parking hour, plus ILS 4.5 will go to the parking spot owner and ILS3 will go to EasyPark as a service rule. In our petroleum division OTI’s five-year alliance with Wright Express enables OTI to offer existing and potential customers with sophisticated back-end system to manage the automated vehicle identification programs. As a leading global provider of payment processes and information management services, Wright Express’ Quantum+ solution complements OTI’s EasyFuel System and this is expected to increase OTI’s revenues from license free and transaction free.

Finally, OTI’s robust IP portfolio has received another boost via the addition of two new patents that has been issued to OTI by the United States’ Parkings and Trademark Office. These two new patents relates to NFC and contactless payment technology.

The first, entitled Retrofit Contactless Smart SIM Functionality in mobile communicators relates to the addition of NFC and contactless payment capabilities to existing mobile handsets through the connection of a device through a phone's existing SIM card.

As mentioned earlier NFC technology’s now being increasingly used all over the world in the addition of this technology to mobile handset is part of this phenomenon. This technology is the perfect solution that solves the gap between the increasing adoption of NFC technology across the world with the millions of existing mobile handsets that were not manufactured with embedded NFC technology.

The second patent, entitled Multi-Application Contactless Smart Card relates to supporting multiple applications and/or payment mechanisms on a single contactless device and operating system. These patents are further recognition of OTI’s creative thinking and leadership in NFC.

Relating to our IP, as mentioned in the previous call, OTI is taking steps to ensure that our intellectually property is upheld. As you know, we have embarked on an enforcement of this via a lawsuit against T-Mobile USA for the infringement of our patent that covers the design critical for implementing NFC in the mobile handsets. For its part, T-Mobile USA denies infringing OTI patents and contends that the patent is invalid. The lawsuit is in the early stages of discovery and the court hearing is scheduled for February 2013. We are confident that that once all the relevant facts come to light, OTI’s patent will be found to be valid and infringed.

Please note that while these proceedings are ongoing, it is OTI’s policy not to comment on the progress of ongoing legal matters, despite information that is available publicly. We will inform investors of any meaningful developments as determined by the board of directors. With that roundup of our operational progress and as we wrap up the midway point of fiscal 2012, we are steadily building on the strategic goals that we set.

The first of these was to continue to expand our new customer base globally, which we are in the process of doing and as demonstrated with agreements that create solid pipeline for future growth, such as the SmartID contract for Panama, the agreements for EasyPark in three separate U.S locations, including two cities, the substantial orders totaling 47,000 NFC readers that will be deployed in the U.S and across Europe and the agreements with Wright Express.

The second goal for 2012 was to continue with the growth of our licensing and transaction fee segment. Our strategic agreement with Wright Express that spans a five year period shows that this goal is also on track. These goals also include the protection of our intellectual property and our successful applications for patent covering our proprietary technology in the NFC space. As mentioned before, our enforcement strategy to leverage these assets remains ongoing. The third and final strategic goal for 2012 was to achieve lower operating expenses. As a result of the cost cutting program and streamlining of operations.

As such, we remain on track to achieve quarterly OpEx levels of about $6 million by the end of the year. We therefore update our guidance for 2012 to be between $40 to $42 million. We remain optimistic about 2013 and beyond. We appreciate your continued interest on OTI and we welcome your questions.

Question-and-Answer Session

(Operator Instructions) The first question is from Marc Silk of Silk Investment Advisors, please go ahead.

Marc Silk - Silk Investment Advisors

Thanks for taking my question. So, Ohad, basically an observation. Out of the last 6 years, 5 of them you guided lower from your existing revenues or anticipated revenues and you come up with these excuses but the fuss stops here. It’s management that obviously is not executing. Can you comment on that?

Ohad Bashan

Well, the first thing I can tell you Marc is that the purpose of the call is for shareholders not really to voice their personal opinion, but you can ask questions about the financial performance. If you have any questions about the financial performance we will be happy to take them.

Marc Silk - Silk Investment Advisors

Perfect. Oded, are you there?

Oded Bashan

Yes.

Marc Silk - Silk Investment Advisors

Okay. This is going to be for you. Despite repeated claims of possessing leading technology it is important in growing market and despite repeated predictions of being on the verge of turning the corner to profitability, during the 22 years of the company’s existence, the company under the leadership of Oded Bashan has never been able to generate a GAAP profit. In addition, based on government filings, current management has managed to burn through $61.4 million of shareholders money since my clients have been shareholders in the fall of 2006 I credited back 2 million for the buyback, in addition you have burnt through 13 million since the 16.7 million secondary which diluted your shareholders I credited back 900,000 for the buyback. So, despite having been loyal long-term value investor since 2006 my clients and I no longer can trust management left with its own devices to chart and execute a course that will bring significant value to the company’s owners, its long suffering, and largely underwater shareholders. Accordingly, we cannot support management in the chord unless they adopt major changes and how the company conducts business, I am getting to my question, engages its shareholders to enhance shareholder value.

Oded Bashan

Where is your question Marc?

Marc Silk - Silk Investment Advisors

I would like to explore your willingness to intent or say some of these changes, for instance, intellectual property. As I see it, the company’s two major assets are cash and intellectual property, primarily –

Operator

The next question is from Edward Schwartz of Schwartz Investments, please go ahead.

Edward Schwartz - Schwartz Investments

Good morning. Ohad, your guidance is down 20% for this year from the previous guidance of 50 million?

Ohad Bashan

The company’s guidance is 40 million to 42 million, correct.

Edward Schwartz - Schwartz Investments

And you gave previous guidance of 50 million, is that correct?

Ohad Bashan

As far as we recall, yes, in the first quarter, yes.

Edward Schwartz - Schwartz Investments

I didn’t hear you. Could you just talk a little louder please?

Ohad Bashan

Correct.

Edward Schwartz - Schwartz Investments

Okay. Regarding your readers, is it true that you used to sell readers to one of your competitors’ VeriFone?

Ohad Bashan

I can’t really comment on anything that we haven’t publicly disclosed.

Edward Schwartz - Schwartz Investments

Alright. So, are you saying that we are making a sale –

Operator

Ladies and gentlemen, the questioner has disconnected. The next question is from Bernie Sandford of Winslow, Evans & Crocker, please go ahead.

Bernie Sandford - Winslow, Evans & Crocker

Good morning.

Oded Bashan

Good morning.

Bernie Sandford - Winslow, Evans & Crocker

I had a question myself and my shareholders, my clients have been shareholders since about 2006. In reading some of the past 20 Fs the risk factors from 2002, “although we anticipate becoming profitable in the second half of 2003” we are still struggling for profitability. I wonder if you could explain that here we are 10 years later?

Oded Bashan

To get a specific regarding the financial performance of the company right now?

Bernie Sandford - Winslow, Evans & Crocker

Yes. Why are we still struggling to achieve profitability now?

Oded Bashan

As we indicated, some of the contracts that we had signed are not yet evident mainly because of the long lead time that it takes between the contract to mature and the implementation cycle. We believe taking the necessary steps in order to bring the company to profitability we have indicated in previous calls that we expect the company achieve all those to road to be profitable starting mid next year, according to the progress of the projects that we announced in the implementation phase and according to our cost cuttings and streamlining operations program.

Bernie Sandford - Winslow, Evans & Crocker

I do understand that the company does get involved in projects to have long sales cycles but this has been, it’s been 6 years for my clients and going back to the 2002 20 Fs, so the sales cycles – that would indicate these sales cycles are longer than 10 years, is that correct or not?

Oded Bashan

I wouldn’t refer to long sales cycles of 10 years or more. I really don’t want to comment on what we did in 2002, it’s hard to discuss this right now. But where we stand today we believe that we are able to streamline our operations to a level that will be very efficient and we will be able to support our existing and future projects. We do expect to grow in the pipeline that we are building. We believe that the company is on its right path to profitability. This is what I can say at the moment of where we stand right now. It is true that this year we have suffered that’s indicated in the court from events that are not within our control.

Bernie Sandford - Winslow, Evans & Crocker

Right, I understand that. But some of these comments about future profitability and expected growth in second half of the year, these have been made by you and management many, many, many, many times. I am still a shareholder and my clients are still shareholders, but we have heard that term used for 5 years now and I just need you to hear that on behalf of my clients. My next question is in regards to the Starbucks mobile payment application. It is now processing approximately 1 million transactions per week. Is there any valid reason you were asked about that application in the first quarter of 2010 earnings call and you were not aware of that application. You quote in that call was I am not familiar with it. Is there any good reason that you would not have been familiar with it and if in fact you were not that nobody else from management answered that question at that time?

Oded Bashan

I don’t know exactly what you are referring to. I can tell you that I am familiar with the Starbucks payment program, but it’s not using the same technology that OTI uses. So, maybe that was the answer. So, I don’t want to go back and drill exactly on the quotes that you are referring to because I really don’t recall such a quote. I am familiar with the Starbucks program. And I will also know that it’s using the OTI technology. But it’s using a different technology and it is not using NFC, which is really where we are focusing.

Bernie Sandford - Winslow, Evans & Crocker

No, that’s fine. As shareholders, we are relying on you to know this stuff and depth and it just surprised me that at that time you were not aware of it and it’s now, I think everybody probably knows about that Starbucks mobile application now. So I am glad you know about it now. My next question, is in regards to the executive compensation. The time that we have been shareholders 2005 to 2011, executive compensation has increased 263%, revenues have only increased approximately 44%, the stock price is obviously down about 70% and at the same time shares outstanding have increased 175%. So to simply put my question is with the condition of the company as it stands right now why is executive compensation increased dramatically?

Oded Bashan

This compensation is decided and this is to give fair compensation what is to be given today’s executive by the Board and by the shareholders. The shareholders have also approved part of the executive.

Bernie Sandford - Winslow, Evans & Crocker

That’s all technically correct but that makes it okay even though right now as long time shareholders my clients are suffering, yet management has made out more than well and that makes it okay? That’s my question.

Ohad Bashan

I think the observation is not absolutely accurate. I don’t want to refer to it. As Oded indicated everything was brought and approved and I really don’t want to refer to the numbers that you have raised, I am not sure that they are absolutely 100% apples-to-apples. But if there is any other questions regarding the financial performance we will be happy to face them.

Bernie Sandford - Winslow, Evans & Crocker

Why is it so hard in your business to just achieve a cash flow positive state?

Ohad Bashan

I think for every company that is default with projects that are in the initial period of implementation. But as we said, all along our business assumes lumpiness in terms of the revenues that it generates. In terms of some of the projects that are moving from a pilot to commercial deployments not everything is within our control. It’s challenging. I consider that we are taking the right steps and I can tell you one of the most important things that you can see today is the fact that OTI is diversified. We are benefitting from being active in the petroleum, in the ID and in the payment segment. As you have seen, some of our competitors that were mainly active in one vertical and not in the other verticals and are mainly active in one or two products had to sell their business or some of them (inaudible). OTI is not in that position. OTI is well established. OTI has a nice pipeline of projects and products that it’s launching all in high growth markets and yes, sometimes it is frustrating because it takes long. I believe as management that we are on the right path to bring this company to profitability.

Bernie Sandford - Winslow, Evans & Crocker

I hope that’s the case too. Do you acknowledge though that we as shareholders have heard that before and you know, we are very frustrated because we own our shares outright, we have gone out in the open market and purchased them? Do you acknowledge that this has been going on for quite some time now?

Oded Bashan

I don’t know as to what you are referring.

Bernie Sandford - Winslow, Evans & Crocker

The promises of profitability tomorrow. I just want you to acknowledge that we have heard this many times and if there is in fact –

Oded Bashan

I don’t think you have heard it many times. Since that we have voiced our roadmap, and we have voiced our plan, and we have tried our best to meet the expectations that we have created. We haven’t voiced specifically anything about profitability before. So, is there any other questions?

Operator

The next question is from Edward Schwartz of Schwartz Investments, please go ahead.

Edward Schwartz - Schwartz Investments

I am sorry, I am on a cellphone and we got cut here. I lost the signal on the last call. Oded, are you there?

Oded Bashan

Yes.

Edward Schwartz - Schwartz Investments

Okay. Mr. Bashan, the shareholders in December at your annual meeting this year will have to vote on your dual role as CEO and Chairman of the Board according to Israeli company law. Are you going to run for a CEO and Chairman, or have you decided, otherwise what are your plans?

Oded Bashan

Yes. This isn’t a management update call and not call to review issue pertaining to Board governance issue. Do you have any other questions?

Edward Schwartz - Schwartz Investments

So you declined to answer that question.

Oded Bashan

I just wanted to return to next question, but the content of the proxy will not be disclosed until it is filed with the SEC and all items of concerns.

Edward Schwartz - Schwartz Investments

Okay. Oded, I noticed on your company website that two Directors, Ora Setter and Eliezer Manor are no longer Directors. So you are down to six Directors. When you nominated Ora Setter in 2009 for the Board there was a filing which stated that if under Israeli company law if all the Board members are male there has to be one female Director. Currently, it appears to me that there are no female Directors and that the company is in violation of Israeli company law. Your comments please?

Oded Bashan

My comment is that the company is not in violation under Israeli law.

Edward Schwartz - Schwartz Investments

But the Israeli law states that you have to have a female Director.

Oded Bashan

Ed, you want to hear the answer or you don’t want? I am telling you that the company is not in violation of the Israeli law. In the next shareholders meeting –

Edward Schwartz - Schwartz Investments

This is for Oded, not Ohad.

Oded Bashan

Oded is answering you.

Ohad Bashan

Oded is answering you.

Edward Schwartz - Schwartz Investments

Okay, go ahead.

Oded Bashan

Sorry, I don’t know what you heard, but certainly I have to repeat. The purpose is that results are not all governance issue but to answer to your question, we are not in violation of any regulation of the Israeli law. In the shareholders meeting that will be this year we will have to take care about this issue. This is according the law.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Bashan to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the US please dial 1-888-295-2634. In Israel, please dial 1-800-270-077. Internationally, please dial 972-3925-5938. Mr. Bashan would you like to make a concluding statement?

Oded Bashan

Thank you all for listening to our call today and we hope to see you in our next quarterly call. Thank you and have a great day. Bye, bye.

Operator

Thank you. This concludes OTI’s second quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.

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