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QUALYS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with (1) our condensed consolidated financial statements (unaudited) and the related notes included elsewhere in this report, and (2) the audited consolidated financial statements and the related notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or SEC, on March 5, 2013. In addition to historical information, this Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, it is possible to identify forward-looking statements because they contain words such as "anticipates," "believes," "contemplates," "continue," "could," "estimates," "expects," "future," "intends," "likely," "may," "plans," "potential," "predicts," "projects," "seek," "should," "target" or "will," or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are a pioneer and leading provider of cloud security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber attacks and achieve compliance with internal policies and external regulations. Our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Our integrated suite of security and compliance solutions delivered on our QualysGuard Cloud Platform enables our customers to identify their IT assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, recommend remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions delivered on our QualysGuard Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures. We were founded in December 1999 with a vision of transforming the way organizations secure and protect their IT infrastructure and applications and initially launched our first cloud solution, QualysGuard Vulnerability Management, in 2000. This solution has provided the substantial majority of our revenues to date, representing 85% and 88% for the three months ended March 31, 2013 and 2012, respectively. As this solution gained acceptance, we introduced new solutions to help customers manage increasing IT security and compliance requirements. In 2006, we added our PCI Compliance solution, and in 2008, we added our Policy Compliance solution. In 2009, we broadened the scope of our cloud services by adding Web Application Scanning. We continued our expansion in 2010, launching Malware Detection Service and Qualys SECURE Seal for automated protection of websites. We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access our cloud solutions. We invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. Historically, we have experienced significant revenue growth from existing customers as they renew and purchase additional subscriptions. We market and sell our solutions to enterprises, government entities and to small and medium size businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. In the three months ended March 31, 2013 and 2012, approximately 70% and 67%, respectively, of our revenues were derived from customers in the United States. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed service providers, value-added resellers and consulting firms in the United States and internationally. We have had strong revenue growth in the three months ended March 31, 2013 compared to the same period in 2012. Our revenues increased to $24.9 million in the three months ended March 31, 2013 from $21.2 million for the comparable period in 2012, representing a period-over-period increase of $3.7 million, or 17%. 20-------------------------------------------------------------------------------- Table of Contents Key Metrics In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. Four-Quarter Bookings We monitor Four-Quarter Bookings, a non-GAAP financial measure, which is calculated as revenues for the preceding four quarters plus the change in current deferred revenues for the same period. We believe this metric provides an additional tool for investors to use in assessing our business performance in a way that more fully reflects current business trends than reported revenues and reduces the variations in any particular quarter caused by customer subscription renewals. We believe Four-Quarter Bookings reflects the material sales trends for our business because it includes sales of subscriptions to new customers, as well as subscription renewals and upsells of additional subscriptions to existing customers. Since over 80% of our subscriptions are one year in length, we use current deferred revenues in this metric in order to focus on revenues to be generated over the next four quarters and to exclude the impact of multi-year subscriptions. Under our revenue recognition policy, we record subscription fees as deferred revenues and recognize revenues ratably over the subscription periods. For this reason, substantially all of our revenues for a period are typically generated from subscriptions commencing in prior periods. In addition, subscription renewals may vary during the year based on the date of our customers' original subscriptions, customer requests to modify subscription periods or other factors. The following unaudited table presents the reconciliation of revenues to Four-Quarter Bookings for the four quarters ended March 31, 2013 and 2012: Four Quarters Ended March 31, 2013 2012 (in thousands, except percentages) Revenues $ 95,112 $ 79,713 Deferred revenues, current Beginning of the Four-Quarter Period 48,354 37,773 Ending 58,356 48,354 Net change 10,002 10,581 Four-Quarter Bookings $ 105,114 $ 90,294 Percentage change from prior year period 16 % 25 % Adjusted EBITDA We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We calculate Adjusted EBITDA as net income before (1) other (income) expense, net, which includes interest income, interest expense and other income and expense, (2) provision for income taxes, (3) depreciation and amortization of property and equipment, (4) amortization of intangible assets and (5) stock-based compensation. 21-------------------------------------------------------------------------------- Table of Contents The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2013 and 2012: Three Months Ended March 31, 2013 2012 (in thousands, except percentages) Net loss $ (603 ) $ (285 ) Other (income) expense, net 260 77 Provision for income taxes 70 78 Depreciation and amortization of property and equipment 2,012 1,648 Amortization of intangible assets 107 102 Stock-based compensation 949 676 Adjusted EBITDA $ 2,795 $ 2,296 Percentage of revenues 11 % 11 % Limitations of Four-Quarter Bookings and Adjusted EBITDA Four-Quarter Bookings and Adjusted EBITDA, non-GAAP financial measures, have limitations as analytical tools, and should not be considered in isolation from or as a substitute for the measures presented in accordance with U.S. GAAP. Some of these limitations are: • Four-Quarter Bookings reflects the amount of revenues over a four-quarter period, plus the net change in the current portion of deferred revenues, while revenues are recognized ratably over the subscription periods; • Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring; • Adjusted EBITDA does not reflect income tax payments that reduce cash available to us; • Adjusted EBITDA excludes depreciation and amortization of property and equipment and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and • Other companies, including companies in our industry, may calculate Four-Quarter Bookings or Adjusted EBITDA differently or not at all, which reduces their usefulness as a comparative measure. Because of these limitations, Four-Quarter Bookings and Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income and our financial results presented in accordance with U.S. GAAP. 22-------------------------------------------------------------------------------- Table of Contents Key Components of Results of Operations Revenues We derive revenues from the sale of subscriptions to our security and compliance solutions, which are delivered on our cloud platform. We generate the substantial majority of our revenues through the sale of subscriptions to our QualysGuard Vulnerability Management solution, and we also have a growing number of customers who have purchased our additional solutions. Subscriptions to our solutions allow customers to access our cloud security and compliance solutions through a unified, web-based interface. Customers generally enter into one year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for our solutions. Customers are required to return physical scanner appliances if they do not renew their subscriptions. We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our condensed consolidated balance sheet as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represents the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods. Cost of Revenues Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our data centers and provide support services to our customers. Other expenses include depreciation of data center equipment and physical scanner appliances provided to certain customers as part of their subscriptions, expenses related to the use of third-party data centers, amortization of third-party technology licensing fees, shipping costs, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to make significant capital investments to expand our data center operations, which will increase the cost of revenues in absolute dollars. Operating Expenses Research and Development Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, amortization of intangibles related to prior acquisitions and overhead allocations. All research and development costs are expensed as incurred. We expect to continue to devote substantial resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and expect that research and development expenses will increase in absolute dollars. 23-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel and overhead allocations. All costs are expensed as incurred, including sales commissions. Sales commissions are expensed in the quarter in which the related order is received and are paid in the month subsequent to the end of that quarter, which results in increased expenses prior to the recognition of related revenues. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel and the rate at which they generate incremental revenues may affect our future operating results. We expect that sales and marketing expenses will increase in absolute dollars. General and Administrative General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our executive, finance and accounting, legal, human resources and internal information technology support teams, professional services fees, insurance, certain other corporate governance-related expenses, and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel to support our growth and operate as a public company. Other Income (Expense), Net Our other income (expense), net consists primarily of foreign exchange gains and losses, the majority of which result from fluctuations between the U.S. dollar and the Euro, British pound and Japanese yen, interest expense associated with our capital leases, and interest and investment income. Provision for Income Taxes Our provision for income taxes consists primarily of corporate income taxes resulting from profits generated in foreign jurisdictions by wholly-owned subsidiaries, along with state income taxes payable in the United States. The provision for income taxes also includes changes to unrecognized tax benefits related to uncertain tax positions. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax impact of timing differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the statutory rate change is enacted into law. We maintain a valuation allowance on our U.S. federal and state deferred tax assets. Our cash tax expense is impacted by each jurisdiction's individual tax rates, laws on timing of recognition of income and deductions and availability of net operating losses and tax credits. Given the valuation allowance and sensitivity of current cash taxes to local rules, our effective tax rate could fluctuate significantly on a quarterly basis, to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. Our effective tax rate could also change due to changes in our earnings projections, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, or accounting principles, as well as certain discrete items. 24-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth selected condensed consolidated statements of operations data for each of the periods presented. Three Months Ended March 31, 2013 2012 (in thousands) Consolidated Statements of Operations Data: Revenues $ 24,883 $ 21,191 Cost of revenues (1) 5,795 4,160 Gross profit 19,088 17,031 Operating expenses: Research and development (1) 5,297 5,101 Sales and marketing (1) 10,168 9,246 General and administrative (1) 3,896 2,814 Total operating expenses 19,361 17,161 Loss from operations (273 ) (130 ) Other income (expense), net (260 ) (77 ) Loss before provision for income taxes (533 ) (207 ) Provision for income taxes 70 78 Net loss $ (603 ) $ (285 ) ____________________(1) Includes stock-based compensation as follows: Three Months Ended March 31, 2013 2012 (in thousands) Cost of revenues $ 93 $ 54 Research and development 208 148 Sales and marketing 283 199 General and administrative 365 275 Total stock-based compensation $ 949 $ 676 25-------------------------------------------------------------------------------- Table of Contents The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues. Three Months Ended March 31, 2013 2012 Revenues 100 % 100 % Cost of revenues 23 20 Gross profit 77 80 Operating expenses: Research and development 21 24 Sales and marketing 41 44 General and administrative 16 13 Total operating expenses 78 81 Loss from operations (1 ) (1 ) Other income (expense), net (1 ) -Loss before provision for income taxes (2 ) (1 ) Provision for income taxes - - Net loss (2 )% (1 )% Comparison of Three Months Ended March 31, 2013 and 2012 Revenues Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Revenues $ 24,883 $ 21,191 $ 3,692 17 % Revenues increased $3.7 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to new customer subscriptions entered into after March 31, 2012 and from an increase in the purchase of subscriptions from existing customers. Of the total increase of $3.7 million, $3.2 million was from customers in the United States and the remaining $0.5 million was from customers in foreign countries. The growth in revenues reflects increased demand for our solutions. Cost of Revenues Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Cost of revenues $ 5,795 $ 4,160 $ 1,635 39 % Percentage of revenues 23 % 20 % Gross profit percentage 77 % 80 % 26-------------------------------------------------------------------------------- Table of Contents Cost of revenues increased $1.6 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increased personnel expenses of $0.6 million, principally driven by the addition of employees in our operations team; $0.4 million of higher depreciation expenses related to additional data center equipment and physical scanner appliances deployed to customers; and $0.3 million related to increased data center costs, driven by expanded storage and other data center-related costs. The decrease in gross profit percentage reflects the impact of continued increased investments to expand our data center infrastructure and to add capacity to deploy new solutions on our cloud platform. Research and Development Expenses Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Research and development $ 5,297 $ 5,101 $ 196 4 % Percentage of revenues 21 % 24 % Research and development expenses increased $0.2 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in personnel expenses due to the addition of employees as we continue to invest in enhancing our platform and developing new solutions. Sales and Marketing Expenses Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Sales and marketing $ 10,168 $ 9,246 $ 922 10 % Percentage of revenues 41 % 44 % Sales and marketing expenses increased $0.9 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in personnel expenses of $0.9 million, principally driven by the addition of employees as we continue to expand our domestic and international sales and marketing efforts and higher performance-based compensation as a result of higher bookings. We also incurred increased marketing program and event expenses, partially offset by lower travel related costs. 27-------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) General and administrative $ 3,896 $ 2,814 $ 1,082 38 % Percentage of revenues 16 % 13 % General and administrative expenses increased $1.1 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in personnel expenses of $0.6 million principally due to the addition of employees to support the growth of our business and building out of our infrastructure to support the requirements of being a public company; an increase of $0.3 million related to insurance, director fees and other fees; and $0.1 million in professional services. Other Income (Expense), Net Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Other income (expense), net $ (260 ) $ (77 ) $ (183 ) 238 % Percentage of revenues (1 )% - % Other expense increased $0.2 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to foreign exchange losses of $0.3 million, partially offset by $0.1 million of investment income. Provision for Income Taxes Three Months Ended March 31, Change 2013 2012 $ % (in thousands, except percentages) Provision for income taxes $ 70 $ 78 $ (8 ) (10 )% Percentage of revenues - % - % Provision for income taxes was relatively constant in the three months ended March 31, 2013 and 2012. Although the loss before provision for income tax was higher in the three months ended March 31, 2013, as we had a valuation allowance in the United States, the provision for income taxes was primarily recorded for taxes on income in foreign jurisdictions and did not change significantly from the same quarter a year ago. 28-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources At March 31, 2013, our principal source of liquidity was cash, cash equivalents, and short-term and long-term investments of $125.2 million, including $1.6 million held outside of the United States by our foreign subsidiaries. We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. However, if we repatriate these funds, we could be subject to U.S. income taxes on such amounts, less applicable foreign tax credits. We have experienced positive cash flows from operations during the three months ended March 31, 2013 and 2012. We believe our existing cash and cash from operations will be sufficient to fund our operations for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our spending on research and development efforts, international expansion and investment in data centers. We may also seek to invest in or acquire complementary businesses or technologies. Cash Flows The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report: Three Months Ended March 31, 2013 2012 (in thousands) Cash provided by operating activities $ 10,059 $ 9,628 Cash provided by (used in) investing activities 1,743 (2,927 ) Cash provided by (used in) financing activities 490 (578 ) Effect of exchange rate changes on cash and cash equivalents (72 ) (25 ) Net increase in cash and cash equivalents $ 12,220 $ 6,098 Cash Flows from Operating Activities In the three months ended March 31, 2013, operating activities provided $10.1 million in cash related to a decrease of accounts receivable of $5.5 million due to lower bookings in the first quarter compared to the fourth quarter of the prior year and an increase of $1.1 million in deferred revenues, attributable to our continued growth. These working capital increases are partially offset by a net loss of $0.6 million, adjusted by non-cash items including depreciation and amortization of $2.1 million and stock-based compensation of $0.9 million. In the three months ended March 31, 2012, operating activities provided $9.6 million in cash related to a decrease of accounts receivable of $5.2 million due to lower bookings in the first quarter compared to the fourth quarter of the prior year and an increase of $2.7 million in deferred revenues, attributable to our continued growth and also due to an increase in subscriptions exceeding one year. These working capital increases were partially offset by a net loss of $0.3 million, adjusted by non-cash items such as depreciation and amortization of $1.7 million and stock-based compensation of $0.7 million. Cash Flows from Investing Activities In the three months ended March 31, 2013 , investing activities provided $1.7 million. This increase is primarily attributable to the sale of investments of $65.3 million, partially offset by the purchase of investments of $59.9 million, and the use of $3.7 million of cash for capital expenditures, including computer hardware and software for our data centers to support our growth and development, and to purchase physical scanner appliances provided to certain customers as part of their subscriptions. 29-------------------------------------------------------------------------------- Table of Contents In the three months ended March 31, 2012, we used $2.9 million of cash for capital expenditures, including computer hardware and software for our data centers to support our growth and development, and to purchase physical scanner appliances provided to certain customers as part of their subscriptions. Cash Flows from Financing Activities In the three months ended March 31, 2013, cash provided by financing activities of $0.5 million was primarily attributable to $0.8 million of proceeds from the exercise of stock options, partially offset by repayments on our capital lease obligations of $0.3 million. In the three months ended March 31, 2012, cash used in financing activities of $0.6 million was primarily attributable to repayments on our capital lease obligations of $0.7 million, partially offset by $0.2 million of proceeds from the exercise of stock options. Contractual Obligations Our principal commitments consist of obligations under our outstanding leases for office space and third-party data centers, capital lease and third-party software maintenance obligations. The following table summarizes our contractual cash obligations, including future interest payments, at March 31, 2013 and the effect such obligations are expected to have on our liquidity and cash flows in future periods: Payment Due by Period Remainder of Contractual Obligations Total 2013 2014-2015 2016-2017 2018 and thereafter (in thousands) Operating lease obligations (1) $ 10,682 $ 2,769 $ 4,949 $ 2,876 $ 88 Capital lease obligations (2) 1,691 876 815 - - Maintenance obligations (3) 1,368 684 684 - - Total $ 13,741 $ 4,329 $ 6,448 $ 2,876 $ 88 (1) Operating lease obligations represent our obligations to make payments under the lease agreements for our facilities, data centers, and office equipment leases. During the three months ended March 31, 2013, we made regular payments on our operating lease obligations of $0.9 million (2) Capital lease obligations represent financing on computer software purchases. During the three months ended March 31, 2013, we made regular payments on our capital lease obligations of $0.3 million. (3) Maintenance obligations relate to third-party software licenses. During the three months ended March 31, 2013, we made regular payments on our maintenance obligations of $0.2 million. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Recent Accounting Pronouncements See Note 1 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on 10-Q for a discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. 30 -------------------------------------------------------------------------------- We believe that of our significant accounting policies, which are described in the notes to our condensed consolidated financial statements, the accounting policies related to revenue recognition, goodwill and intangibles, income taxes and stock-based compensation involve the greatest degree of judgment and complexity and have the greatest potential impact on our consolidated financial statements. A critical accounting policy is one that is material to the presentation of our consolidated financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 5, 2013. 31-------------------------------------------------------------------------------- Table of Contents |