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OURPETS CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains various "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act), which represent our expectations or beliefs concerning future events.
Forward-looking statements generally include words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions and
statements. Although we believe these forward-looking statements are based on
reasonable assumptions, statements made regarding future results are subject to
a number of assumptions, uncertainties and risks that could cause future results
to be materially different from the results stated or implied in this document.
Uncertainties, risks, and other factors that may cause actual results or
performance to differ materially from any results of performance expressed or
implied by forward-looking statements in this Form 10-Q include: (1) our ability
to manage our operating expenses and realize operating efficiencies, (2) our
ability to maintain and grow our sales with existing and new customers, (3) our
ability to retain existing members of our senior management team and to attract
additional management employees, (4) our ability to manage fluctuations in the
availability and cost of key materials and tools of production, (5) general
economic conditions that might impact demand for our products, (6) competition
from existing or new participants in the pet products industry, (7) our ability
to design and bring to market new products on a timely and profitable basis,
(8) challenges to our patents or trademarks on existing or new products, (9) our
ability to secure access to sufficient capital on favorable terms to manage and
grow our business, or (10) we may experience impairment charges of our goodwill
and other intangible assets. We caution that these risk factors are not
exclusive. Additionally, we do not undertake to update any forward looking
statements that may be made from time to time by or on behalf of us except as
required by law.
Overview
OurPet's develops, designs, produces and markets a broad line of consumer brands
containing innovative, high-quality accessory and consumable pet products for
improving the health, safety, comfort and enjoyment of pets. The products sold
have increased from the initial "Big Dog Feeder" to approximately 600 products
for dogs, cats and wild birds. These products form our portfolio of brands,
including Play-N-Squeak®www.playnsqueak.com, SmartScoop® www.smartscoop.com,
ecoPure Naturals® www.ecopurenaturals.com, Flappy® Dog Toys
www.flappydogtoys.com, Go! Cat Go!® cat toys, Clipnosis® cat products, Durapet®
premium stainless steel bowls, Pet Zone® dog waste management products, Cosmic
Pet® catnip and cat toy products, and a variety of raised feeders.
These products are manufactured by domestic and foreign subcontractors and then
sold by us to retailers and distributors who then sell the products to the end
consumer. According to the 2011/2012 APPA National Pet Owners Survey,
approximately 72.9 million U.S. households currently own a pet with an estimated
pet population of 78.2 million dogs, 86.4 million cats and 16.2 million birds..
12
As discussed below and in Liquidity and Capital Resources on Pages 15 through
17, we have funded our operations principally from operating activities for the
year ended December 31, 2011 and for the nine months ended September 30, 2012.
Under our credit facilities with our bank we can borrow up to $5,000,000 based
on the level of qualifying accounts receivable and inventories. At September 30,
2012 we had a balance due of $2,704,996 under the line of credit with the bank
at an interest rate of prime plus .50%.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011
In the following discussion all references to 2012 are for the three months
ended September 30, 2012 and all references to 2011 are for the three months
ended September 30, 2011.
Net revenue for 2012 was $4,269,952, a decrease of 5.5% in revenue from
$4,516,078, in 2011, consisting of net sales of proprietary products for the
retail pet business. This decrease of approximately $246,000 resulted from the
net of: (i) increased sales to our largest customer of approximately $50,000,
(ii) increased sales to new customers of approximately $64,000, (iii) net
decreased sales to one club stores customer of approximately $307,000, and (iv)
decreased sales to all other customers of approximately $53,000.
Total sales to all customers of new products in the third quarter of 2012 were
approximately $102,000. These included approximately (i) $83,000 of new
Play-N-Squeak® products, and (ii) $19,000 of other new products. Our sales to
foreign customers decreased by approximately $43,000, or 8%, from 2011 mainly
due to decreased sales to customers in Canada.
Cost of goods sold decreased by approximately $632,000 or 16.4%, from $3,848,527
in 2011 to $3,216,957 in 2012. Approximately $406,000 of this decrease was due
to the one-time charge for establishing a reserve for excess and obsolete
inventory in the third quarter of 2011 that was not incurred in 2012. Other
reasons for the decrease in cost of goods sold were the following: (i) the cost
of purchased products sold and freight decreased 4.2%, or approximately
$112,000, due to lower sales, (ii) salaries, wages, payroll taxes and benefits
expenses for operations decreased by approximately $81,000, and (iii) other
operating expenses decreased by approximately $33,000, mainly due to decreased
depreciation. Our variable and fixed warehouse and overhead costs decreased by
16.0% from the comparable quarter in 2011 due to decreased payroll and
depreciation expenses.
The net revenue decrease of 5.5% offset by the larger decrease in the cost of
goods sold of 16.4% resulted in our gross profit on sales increasing by 57.7%,
or $385,444, from $667,551 in 2011 to $1,052,995 in 2012. Gross profit margin
increased from 14.8% in 2011 to 24.7% in 2012. This 9.9% increase in gross
profit margin mostly came from not needing to recognize as large of an inventory
reserve compared to the $450,000 recorded in the third quarter of 2011.
Selling, general and administrative expenses in 2012 were $1,200,874, an
increase of 12.7%, or $135,565, from $1,065,309 in 2011. This increase resulted
from (i) an increase of approximately $52,000 in marketing expenses primarily
due to increased customer rebate costs and relocation expenses, (ii) an increase
of approximately $53,000 in salary and payroll expenses, (iii) an increase of
approximately $24,000 in IT expenses mainly related to our ERP system and EDI
activity, (iv) a decrease in bad debt expense of approximately $21,000, and (v)
an increase in remaining selling, general and administrative expenses of
approximately $28,000.
"Loss from operations" improved by $249,879 from a loss of $397,758 in 2011 to a
loss of $147,879 in 2012. This improvement is largely attributed to the increase
in gross profit on sales due to the lower inventory reserve expense.
Other income was negligible in 2012 compared to $12,883 in 2011. Other income in
2011 was primarily from our receipt of $13,333 as settlement from a competitor
in connection with a patent infringement lawsuit we had filed against them.
Interest expense for 2012 was $36,019, a decrease of $7,126, from $43,145 in
2011. This change was due to (i) an increase in interest expense for our bank
line of credit of approximately $3,200, resulting from a higher average balance
of approximately $2,763,000 in 2012 from $2,473,000 in 2011 (interest rate
remained the same at 3.75%), (ii) an increase in interest expense of
approximately $1,400 from the addition of a $225,000 State of Ohio 166 loan
obtained in September 2011, and (iii) an increase in interest expense of
approximately $300 from a lease obtained for inventory scanning equipment. These
increases were offset by (i) a decrease in interest expense of approximately
$6,900 related to the reduction during the end of 2011 of outstanding balances
of contributor notes from $767,500 to $300,000 and (ii) a decrease in interest
expense of approximately $5,100 from the reduced principal balances of existing
term loans.
Income tax benefit decreased by $89,096 from $142,965 in 2011 to $53,869 in
2012. The reduction was primarily due to (i) a decrease in federal income tax
benefit for 2012 versus 2011 of approximately $81,000 due to a larger loss in
2011, (ii) a decrease in the estimate of local tax benefit of approximately
$18,000, and (iii) a decrease in Maryland state income tax expense of
approximately $10,000.
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Net loss for 2012 was $130,097 as compared to a net loss of $285,055 for 2011,
or an increase in profitability of $154,958. This increase was a result of the
following changes from 2011 to 2012:
Net revenue decrease of 5.5% $ (246,126 )
Cost of goods sold decrease of 16.4% 631,570
Gross profit on sales increase of 57.7% 385,444
Selling, general and administrative expenses increase of 12.7% (135,565 )
Income from operations, increase 249,879
Other income and expense, net decrease (12,951 )
Interest expense decrease of 16.5% 7,126
Income tax benefit decrease (89,096 )
Increase in Profitability $ 154,958
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011
In the following discussion all references to 2012 are for the nine months ended
September 30, 2012 and all references to 2011 are for the nine months ended
September 30, 2011.
Net revenue for 2012 was $14,213,342, a decrease of 1.9% in revenue from
$14,490,499 in 2011, consisting of net sales of proprietary products for the
retail pet business. This decrease of approximately $277,000 was the net result
of (i) a one- time promotional sale of $1,710,000 in 2011 that did not occur
this year, (ii) increased sales to new customers of approximately $556,000,
(iii) increased sales to our top five largest existing customers of
approximately $868,000, and (iv) a net increase of approximately $9,000 of sales
to all other customers.
Total sales to all customers of new products in 2012 that were not sold in 2011
were approximately $1,879,000. These included $975,000 of new Play-N-Squeak
products, $446,000 of new Durapet fashion bowls, $277,000 of new Cosmic
products, and approximately $181,000 of all other new products. Our
Play-N-Squeak and Cosmic Pet product sales increased approximately $1,129,000
and $556,000 respectively over the same period a year ago. Our sales to foreign
customers increased by approximately $364,000, or 26%, from 2011 mainly due to
increased sales to customers in Brazil, Japan, and the United Kingdom.
Cost of goods sold decreased by 1.3%, from $10,893,987 in 2011 to $10,758,318 in
2012. Comprising this approximately $136,000 decrease in cost of goods sold were
the following: (i) the cost of purchased products sold and freight increased
3.6%, or approximately $296,000, despite the decrease in sales, mainly due to
sales of slower moving inventory and increased freight out costs, (ii) reserves
for excess and slow moving inventory decreased approximately $318,000, (iii)
salary and payroll expenses decreased approximately $211,000, and (iv) other
operating expenses increased by approximately $97,000 and are mostly attributed
to the Cosmic Pet facility and included increased warehouse rent and moving
expenses. Our variable and fixed warehouse and overhead costs decreased by 3.4%
from the comparable nine months in 2011 due to the lower payroll expenses.
The net revenue decrease combined with the slight decrease in cost of goods,
resulted in our gross profit on sales decreasing by 3.9%, or $141,488, from
$3,596,512 in 2011 to $3,455,024 in 2012. Gross profit margin remained fairly
constant changing from 24.8% in 2011 to 24.3% in 2012.
Selling, general and administrative expenses in 2012 were $3,395,142, an
increase of 11.5%, or $350,786, from $3,044,356 in 2011. This increase was a
result of (i) an increase in salaries and wages, payroll taxes, and employee
benefits of approximately $162,000, (ii) an increase in sales and marketing
expenses of approximately $100,000, mainly due to increased expenses related to
Smartscoop® advertising and new employee relocation expenses, (iii) an increase
in travel and entertainment expenses of approximately $45,000, (iv) an increase
in IT costs of approximately $54,000 as we invested in upgrading our IT
infrastructure and software support, and (v) an increase in other expenses of
approximately $19,000. These increases were offset by a decrease in bad debt
expense of approximately $29,000.
Income from operations decreased by $492,274 from $552,156 in 2011 to $59,882 in
2012, as a result of our gross profit on sales decreasing by $141,488, or 3.9%,
and selling, general and administrative expenses increasing by $350,786 or
11.5%. Approximately 29% of the decrease came from the decrease in gross profit
on sales with the other 71% coming from the increased selling, general and
administrative costs.
Other income for 2012 was $8,344, compared to $22,868 in 2011. In June, 2012,
the Company was awarded a $7,000 grant from the City of Mentor towards its
relocation of the Cosmic Pet operation to Mentor, Ohio. Other income in 2011was
primarily from our receipt of settlements from competitors in connection with
patent infringement lawsuits we had filed against them.
14
Interest expense for 2012 was $119,174, a decrease of $16,461 from $135,635 in
2011. For 2012, we experienced (i) an increase in interest expense for our bank
line of credit of approximately $10,200, resulting from a higher average balance
of approximately $2,913,000 in 2012 from approximately $2,583,000 in 2011
(interest rate remained the same at 3.75%), (ii) an increase in interest expense
of approximately $4,500 from the addition of a $225,000 State of Ohio 166 loan
obtained in September 2011, and (iii) an increase in interest expense of
approximately $300 from a lease obtained for inventory scanning equipment .
However, these increases were offset by (i) a decrease in interest expense of
approximately $19,000 related to the reduction during 2011 of outstanding
balances of contributor notes from $767,500 to $300,000 and (ii) a decrease in
interest expense of approximately $11,300 from the reduced principal balances of
existing term loans. A decrease of miscellaneous finance charges accounted for
the other approximately $1,100 in lower interest expense from 2012 to 2011.
Income tax benefit in 2012 was $11,033 compared to an income tax expense of
$166,060 in 2011. The $177,093 decrease was mainly due to (i) a decrease in
federal income tax expense for 2012 versus 2011 of approximately $170,900 due to
a loss in 2012, (ii) a decrease in state tax expense of approximately $9,800,
and (iii) a decrease in local income tax benefit of approximately $3,600.
Net loss for 2012 was $39,915 as compared to net income of $273,329 for 2011, or
a decrease in profit of $313,244. This decrease was a result of the following
changes from 2011 to 2012:
Net revenue decrease of 1.9% $ (277,157 )
Cost of goods sold decrease of 1.3% 135,669
Gross profit on sales decrease of 3.9% (141,488 )
Selling, general and administrative expenses increase of 11.5% (350,786 )
Income from operations , decrease
(492,274 )
Other income, net decrease (14,524 )
Interest expense decrease of 12.1% 16,461
Income tax expense decrease 177,093
Decrease in profitability $ (313,244 )
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities provide cash from the sale of our products to customers
with the principal use of cash being for the payments to suppliers that
manufacture our products and for freight charges for shipments to our warehouse
and to our customers. Our investing activities use cash mostly for the
acquisition of equipment such as tooling, computers, and software. Our financing
activities provide cash, if needed, under our line of credit with our bank that
had $310,740 in available funds at September 30, 2012 based upon the balance of
accounts receivable and inventories at that date.
As of September 30, 2012, we had $3,468,383 in principal amount of indebtedness
consisting of:
Bank line of credit - $5,000,000 Prime plus .5% $ 2,704,996
Bank term note ($500,000 original balance) 4.18% 145,340
Contributor notes payable Prime plus 2% 300,000
Capitalized Leases Various 31,799
Ohio 166 Loan 3.00% 186,248
Other notes payable Prime plus 3% & 10% 100,000
The bank line of credit indebtedness is $2,704,996 which is comprised of a
single line of credit under which we can borrow up to a total of $5,000,000
based on the level of qualifying accounts receivable and inventories. Total
eligible collateral at September 30, 2012 was $3,015,736. The $5,000,000 line of
credit is a two year revolver and therefore is classified as a long term
liability on our balance sheet. Prior to the quarter ending June 30, 2011, the
line of credit had always been a one year agreement and therefore classified as
a current liability.
Under our agreement with the bank we are required to: (i) maintain a debt
service coverage ratio of at least 1.15; (ii) maintain a tangible net worth of
no less than $3,000,000 through the quarter ending September 30, 2011,
thereafter increasing to $4,500,000 starting with the quarter ending December
31, 2011; and (iii) obtain the bank's permission to incur additional
indebtedness, make any expenditures for property and equipment in excess of
$500,000 in any fiscal year, redeem any of our capital stock, pay cash dividends
other than dividends on our preferred stock (subject to meeting the debt service
coverage ratio), or repay any subordinated debt and accrued interest.
15
On March 26, 2012, our bank amended how we calculate the debt service coverage
ratio for the reporting periods ending March 31, 2012, June 30, 2012 and
September 30, 2012. A copy of the "Loan Amendment" was filed as Exhibit 10.66
with the Company's 10-K as filed on April 4, 2012. At September 30, 2012, we
were not in compliance with the covenant and default provisions under the
amended agreement with the bank and had a debt service coverage ratio of 0.75
and a tangible net worth of $4,676,948. We have received a covenant waiver from
our bank for the trailing twelve months ended September 30, 2012, whereby the
bank waived its rights and remedies of our breaches of the covenants described
above A copy of the waiver is attached as Exhibit 10.70 to this report. Our bank
is also in the process of amending how our debt service financial covenant will
be calculated.
The Company is presently finalizing a commitment from its bank for two
facilities: (1) an extension of the $5,000,000 line of credit facility to June
30, 2014, and (2) a new $500,000 loan with a 3 year term at a fixed interest
rate of approximately 5.35%. Approximately $145,000 of this new term loan will
be used to pay off the remaining balance on an earlier bank term loan originated
in July, 2010. In return for their personal guarantee of OurPet's repayment of
both facilities, Dr. Steven Tsengas and Evangelina Tsengas will be issued
375,000 warrants, which is a ratio of one warrant to every eight dollars of
additional obligation they guarantee. The Tsengas's had previously provided
personal guarantees of up to $2,500,000 of the line of credit facility. The
warrants will vest immediately, have an exercise price equal to the market share
price on the day of loan closing, and will have a five year term. The warrant
issuance is consistent with how the Company has in the past compensated loan
guarantors.
On October 2, 2009, we obtained an $800,000 term loan from our bank. The term
loan has a fixed interest rate of 4.61% and was payable monthly over a three
year period in equal installments of $23,859 that include interest. The loan was
secured by our accounts receivable, inventory, equipment, trademarks, patents
and the personal guarantee of certain stockholders. At September 30, 2012, this
loan was completely paid off.
On July 16, 2010, we obtained an additional $500,000 term loan from our bank in
connection with our 2010 asset purchase of Cosmic Pet. The loan is payable in
equal monthly installments of $14,817 over a three year term at a fixed interest
rate of 4.18%. This loan is secured by accounts receivable, inventory,
equipment, trademarks, patents and the personal guarantee of certain
stockholders. At September 30, 2012, the principal balance outstanding was
$145,340.
Contributor notes totaling $1,367,500 were issued in 2008 to fund patent
litigation expenses related to a lawsuit filed against us by a competitor. In
February 2010, the amount of $600,000 was retired from the notes through a cash
payment of $329,988 and conversion of $270,012 of the notes to Preferred Stock.
Of the remaining $767,500 in outstanding contributor notes, $317,500 was paid
off in July, 2011; $100,000 was paid off in August, 2011; and $50,000 was paid
off in October, 2011. At September 30, 2012, the outstanding amount of
contributor notes was $300,000. On October 31, the Company had $300,000 of
subordinated debt and approximately $63,000 of accrued interest become due and
payable to one note holder. The original obligation was a four year term loan
with interest accruing at a rate of prime plus 200 basis points (5.25%) as of
October 31, 2012. As of the date of this report, the Company has not paid this
outstanding balance since to do so would put the Company in further violation of
its debt service ratio coverage as required by its bank The Company fully
intends on repaying this loan as permitted upon compliance with its bank's
financial covenants. Effective November 1, 2012, the interest rate on this loan
increased to prime plus 500 basis points (8.25% as of the date of this report).
On July 29, 2010, the Company assumed two capital leases for equipment purchased
from Cosmic Pet. The capital leases were payable in monthly payments of $2,424
through September 2011 and $1,527 through October 2012. At September 30, 2012,
the remaining balance on these capital leases totaled $1,528.
On June 11, 2012, the Company entered into a capital lease for equipment
purchased in connection with our total warehouse logistics initiatives. This
equipment will facilitate wireless connectivity throughout our Fairport Harbor
facility. The capital lease is payable in 48 monthly payments of $838 per month
from July 2012 through June 2015. As of September 30, 2012, the remaining
balance on this capital lease totaled $30,271.
On September 30, 2011, the Company incurred $225,000 of long term debt payable
to the State of Ohio under its 166 loan program. Funds were used to purchase new
tooling for our raised feeder product line. The Loan is payable in equal monthly
installments of $4,043 over a five year term at a fixed interest rate of 3.00%
plus an additional .25% servicing fee. Payments begin on November 1, 2011 with a
maturity date of October 1, 2016. At September 30, 2012, this loan had a
principal balance outstanding of $186,248.
The other notes payable are due in the amount of $75,000 on December 1, 2013, to
Beachcraft L.P. and $25,000 on November 1, 2013, to Over the Hill Ltd., plus
accrued interest. Our indebtedness, which is secured by liens on our assets, was
used to finance our equipment and working capital requirements. The agreements
related to such indebtedness contain the customary covenants and default
provisions.
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The note payable to Beachcraft L.P. was originally for $150,000, $75,000 of
which was repaid in 2003. As of February 1, 2004, a new note payable to
Beachcraft L.P. was issued to replace the $75,000 remaining balance. The
replacement note is due in December 2012 with interest payable quarterly at
prime plus 3%. In consideration for this refinancing we issued warrants for the
purchase of 56,250 shares of common stock to Beachcraft L.P. at an exercise
price of $0.30 per share with an expiration date of February 1, 2010. Subsequent
to their issuance the warrants were adjusted to 57,204 warrants exercisable at
$0.295 per share in accordance with the anti-dilution provisions of the
warrants. These warrants were exercised in 2007.
On November 8, 2012, the Company received $350,000 in funds and issued $350,000
of subordinated notes to four parties. A copy of the form of note issued to each
party is attached to this report as Exhibit 10.68. The Notes have a three year
term, accrue interest at a variable rate of prime plus three percent (currently
6.25%) and are payable with accrued interest on November 8, 2015. In connection
with these new notes, the Company also issued 350,000 warrants to the loan
participants at a ratio of one warrant for each one dollar of funds loaned. The
warrants vest immediately, have an exercise price of $.50 per share and have a
five year term expiring on November 8, 2017. A copy of the form of warrant
issued to each party is attached to this report as Exhibit 10.69.
Our short-term and long-term liquidity will continue to depend on our ability to
achieve cash-flow break even on our operations and to increase sales of our
products. In 2011, although inventories increased by approximately $535,000, we
relied primarily on funds from operating activities to fund operations.
For the remainder of 2012, we should be able to fund our operating cash
requirements primarily through inventory reductions and net income. Based on our
bank's amended loan covenants we expect to meet the debt service coverage ratios
and tangible net worth required by our bank to maintain our line of credit
facility. We have no material commitments for capital expenditures.
Net cash provided by operating activities for the nine months ended September
30, 2012 was $863,882. Cash of $464,065 was provided by the net loss for the six
months of $39,915, plus the non-cash charges for depreciation of $446,229,
amortization of $30,751, stock option expense of $18,000 and warrant expense of
$9,000. Cash was provided by the net change of $399,816 in our operating assets
and liabilities as follows:
Accounts receivable decrease $ 299,223
Inventories decrease 695,357
Prepaid expenses increase (18,343 )
Patent costs increase (44,970 )
Deposits and other assets increase (9,883 )
Accounts payable decrease (498,264 )
Accrued expenses decrease (12,270 )
Deferred Tax liability, decrease (11,034 )
Net change $ 399,816
Net cash used in investing activities for the nine months ended September 30,
2012 was $275,482. This cash was used for the acquisition of property and
equipment. Cash used in financing activities for the nine months ended September
30, 2012 was $733,266 and consisted of payments on the bank line of credit of
$380,968 and by principal payments on debt of $352,298.
Net cash provided by operating activities for the nine months ended September
30, 2011 was $834,922. Cash was provided by the net income for the nine months
of $273,329, as well as the non-cash charges for depreciation of $396,189,
amortization of $28,195, stock option expense of $18,000, and warrant expense of
$18,000. Cash was also provided by the net change of $101,209 in our operating
assets and liabilities.
Net cash used in investing activities for the nine months ended September 30,
2011 was $549,029, which was used for the acquisition of tooling, computer
software and equipment. Cash used in financing activities for the nine months
ended September 30, 2011 was $288,357 and consisted of $263,964 in net bank line
of credit borrowing, $225,000 in additional term debt borrowings from the state
of Ohio 166 program, and $325 in issuance of common stock resulting from the
exercise of stock options. Cash from financing activities was reduced by
$777,646 in principal payments of term debt consisting of $417,500 of
contributor's notes with the balance being the reduction of bank term loans,
capital leases, and installment notes.
CRITICAL ACCOUNTING POLICIES/ESTIMATES
We prepare our consolidated financial statements in accordance with United
States generally accepted accounting principles. We have identified the
accounting policies below as critical to our business operations and
understanding of our results of operations. For a detailed discussion on the
application of these and other accounting policies, see the footnote captioned
Summary of Significant Accounting Policies accompanying our unaudited
consolidated financial statements included elsewhere in this quarterly report on
Form 10-Q. The application of these policies may require management to make
judgments and estimates that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Management uses historical experience and all available
information to make these estimates and judgments, and different amounts could
be reported using different assumptions and estimates.
17
In our Form 10-K for the fiscal year ended December 31, 2011, our most critical
accounting policies and estimates upon which our financial status depends were
identified as those relating to revenue recognition, research and development
costs, income taxes, impairment, intangible assets, inventory and inventory
reserves. We reviewed our policies and determined that those policies remain our
most critical accounting policies for the three and nine months ended September
30, 2012.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have or are likely to have a
current or future effect on our financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
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