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QUIDEL CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 24, 2014]

QUIDEL CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) In this quarterly report, all references to "we," "our" and "us" refer to Quidel Corporation and its subsidiaries.

Future Uncertainties and Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those that may be described or implied in the forward-looking statements. As such no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation, fluctuations in our operating results resulting from seasonality, the timing of the onset, length and severity of cold and flu seasons, government and media attention focused on influenza and the related potential impact on humans from novel influenza viruses, adverse changes in competitive conditions in domestic and international markets, the reimbursement system currently in place and future changes to that system, changes in economic conditions in our domestic and international markets, changes in sales levels as it relates to the absorption of our fixed costs, lower than anticipated market penetration of our products, the quantity of our product in our distributors' inventory or distribution channels, changes in the buying patterns of our distributors and changes in the health care market and consolidation of our customer base; our development and protection of intellectual property; our development of new technologies, products and markets; our reliance on a limited number of key distributors; our reliance on sales of our influenza diagnostics tests; our ability to manage our growth strategy, including our ability to integrate companies or technologies we have acquired or may acquire; intellectual property risks, including but not limited to, infringement litigation; limitations and covenants in our senior credit facility; that we may incur significant additional indebtedness; our need for additional funds to finance our operating needs; volatility and disruption in the global capital and credit markets; acceptance of our products among physicians and other healthcare providers; competition with other providers of diagnostic products; adverse actions or delays in new product reviews or related to currently-marketed products by the U.S. Food and Drug Administration (the "FDA"); changes in government policies; compliance with other government regulations, such as safe working conditions, manufacturing practices, environmental protection, fire hazard and disposal of hazardous substances; third-party reimbursement policies; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance and exposure to other litigation claims; interruption to our computer systems; competition for and loss of management and key personnel; international risks, including but not limited to, compliance with product registration requirements, exposure to currency exchange fluctuations and foreign currency exchange risk sharing arrangements, longer payment cycles, lower selling prices and greater difficulty in collecting accounts receivable, reduced protection of intellectual property rights, political and economic instability, taxes, and diversion of lower priced international products into US markets; volatility in our stock price; dilution resulting from future sales of our equity; and provisions in our charter documents and Delaware law that might delay stockholder actions with respect to business combinations or the election of directors. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate," "plan," "intend," "goal," "project," "strategy," "future," and similar words, although some forward-looking statements are expressed differently. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the remainder of the 2014 fiscal year; projected capital expenditures for the remainder of the 2014 fiscal year, including the components thereof, and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals and objectives; including, among others, continuing to make substantial investment in research and development and sales and marketing; that we may enter into additional foreign currency exchange risk sharing arrangements; our exposure to claims and litigation; expectations regarding grant revenues and expenditures in the remainder of 2014; that we will continue to incur substantial royalty and license expenses; the exposure of our money market assets to market fluctuation risk; and our intention to continue to evaluate technology and Company acquisition opportunities. The risks described under "Risk Factors" in Item 1A of this Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013, and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the "SEC") from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. The following should be read in conjunction with the Consolidated Financial Statements and Notes thereto beginning on page 3 of this Quarterly Report. We undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, except as required by law.



16-------------------------------------------------------------------------------- Table of Contents Overview We have a leadership position in the development, manufacturing and marketing of rapid diagnostic testing solutions. These diagnostic testing solutions primarily include applications in infectious diseases, women's health and gastrointestinal diseases. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, public health laboratories, leading universities, retail clinics and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors and a direct sales force. Internationally, we sell and market primarily through distributor arrangements.

Outlook We continue to see momentum in sales of our Sofia and molecular assays. For the remainder of 2014, we will continue to focus on prudently managing our business and delivering long-term sustainable growth through the creation of a broader-based diagnostic company serving our existing customers as well as targeting larger and faster growing markets. We anticipate continued and significant investment in research and development, focused primarily on our Sofia and molecular programs. In addition, we continue to invest in our U.S.


sales organization and related marketing programs, both of which are associated with recent product launches. We also will continue to evaluate opportunities to acquire new product lines, technologies and companies that would enable us to more quickly build a broader-based diagnostic company.

Three months ended September 30, 2014 compared to the three months ended September 30, 2013 Total Revenues The following table compares total revenues for the three months ended September 30, 2014 and 2013 (in thousands, except percentages): For the three months ended September 30, Increase (Decrease) 2014 2013 $ % Infectious disease net product sales $ 26,301 $ 22,468 $ 3,833 17 % Women's health net product sales 8,760 8,118 642 8 % Gastrointestinal disease net product sales 1,995 1,449 546 38 % Other net product sales 74 502 (428 ) (85 )% Royalty, license fees and grant revenue 3,727 1,002 2,725 272 % Total revenues $ 40,857 $ 33,539 $ 7,318 22 % For the three months ended September 30, 2014, total revenue increased to $40.9 million from $33.5 million compared to the prior period. We realized strong growth in infectious disease, women's health, and gastrointestinal disease. The increase in infectious disease was primarily due to stronger Influenza, Strep A, and Respiratory Syncytial Virus (RSV) sales, largely driven by product sales on the Sofia platform.

The increase in the women's health category was driven by double-digit growth for our Autoimmune/Complement and Thyretain product lines. The increase in the gastrointestinal disease category was driven by market share gains on our molecular platforms. The decrease in other revenues was driven by timing of orders for our veterinary products.

Royalty, license fees and grant revenue increased primarily due to $3.4 million in grant revenues earned in the three months ended September 30, 2014 in conjunction with the Bill and Melinda Gates Foundation grant as compared to $0.6 million in three months ended September 30, 2013. The increase in grant revenue is due to the amended grant agreement with the Bill and Melinda Gates Foundation signed on September 10, 2014 providing additional funding up to $12.6 million in order to accelerate the development of the Savanna MDx platform in the developing world. The amendment resulted in an incremental increase in grant revenue of $2.8 million over the previous year.

Cost of Sales Cost of sales was $16.8 million, or 41% of total revenues for the three months ended September 30, 2014 compared to $15.3 million, or 46% of total revenues for the three months ended September 30, 2013. The decrease in cost of sales as a percentage of total revenues is primarily driven by improved product mix (including increased grant revenues) and higher 17-------------------------------------------------------------------------------- Table of Contents production volumes resulting in an increased leverage of fixed overhead costs.

The improvement in margin was slightly offset by the unfavorable impact of higher excess and obsolete inventory expense.

Operating Expenses The following table compares operating expenses for the three months ended September 30, 2014 and 2013 (in thousands, except percentages): Three months ended September 30, 2014 2013 As a % of As a % of Operating total Operating total Increase (Decrease) expenses revenues expenses revenues $ % Research and development $ 11,506 28 % $ 7,462 22 % $ 4,044 54 % Sales and marketing $ 11,060 27 % $ 8,658 26 % $ 2,402 28 % General and administrative $ 5,879 14 % $ 5,622 17 % $ 257 5 % Amortization of intangible assets from acquired businesses and technology $ 2,207 5 % $ 2,171 6 % $ 36 2 % Impairment loss $ 3,558 9 % $ - - % $ 3,558 N/A Facility restructuring charge $ - - % $ 124 - % $ (124 ) N/A Research and Development Expense Research and development expense for the three months ended September 30, 2014 increased from $7.5 million to $11.5 million primarily due to an increase of $3.8 million for the Savanna project (our fully integrated molecular system program), a portion of which is funded by the Gates grant.

Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation. We expect our research and development costs to be significant as we move other product candidates into preclinical and clinical trials and advance our existing development programs and product candidates into later stages of development.

Sales and Marketing Expense Sales and marketing expense for the three months ended September 30, 2014 increased from $8.7 million to $11.1 million driven primarily by additional investment in our sales organization through expansion and training of a larger sales force in 2014 relative to 2013. Other key components of this expense relate to continued investment in customer marketing programs.

General and Administrative Expense General and administrative expense for the three months ended September 30, 2014 increased slightly from $5.6 million to $5.9 million due primarily to an increase in personnel costs of $0.4 million. This was partially offset by a reduction of $0.1 million in professional services related to business development activities.

Amortization of Intangible Assets from Acquired Businesses and Technology Amortization of intangible assets from acquired businesses consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisitions of Diagnostic Hybrids, Inc., BioHelix, and AnDiaTec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

Impairment Loss During the three months ended September 30, 2014, we determined we would not be able to recover the carrying value of certain capitalized software, purchased in-process research and development and manufacturing line assets related to the Project Stella (Bobcat) assets and related technology. As a result, we recorded an impairment loss totaling $3.6 million. See further discussion in Note 12 in the Notes to the Consolidated Financial Statements.

18-------------------------------------------------------------------------------- Table of Contents Facility Restructuring Charge In 2013, we announced a plan to relocate our Santa Clara, California manufacturing operations to our facility in Ohio. Restructuring expense amounted to $0.1 million in the three months ended September 30, 2013. No such expenses were incurred during the three months ended September 30, 2014.

Interest Expense, net Interest expense primarily relates to interest paid on fees associated with the unused portion of the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility.

Income Taxes Our effective tax rate for the three months ended September 30, 2014 and 2013 was 44% and 29%, respectively. We recognized an income tax benefit of $4.6 million and $1.8 million for the three months ended September 30, 2014 and 2013, respectively. For the three months ended September 30, 2014, the effective tax rate was higher largely as a result of discrete items. Additionally, on January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research credit for the 2012 and 2013 years. The benefit related to 2013 research activities was included in the 2013 full year effective tax rate. The federal research credit expired for costs incurred subsequent to December 31, 2013, and as a result, there was no such federal research credit for the three months ended September 30, 2014.

Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 Total Revenues The following table compares total revenues for the nine months ended September 30, 2014 and 2013 (in thousands, except percentages): For the nine months ended September 30, Increase (Decrease) 2014 2013 $ % Infectious disease net product sales $ 80,400 $ 89,199 $ (8,799 ) (10 )% Women's health net product sales 25,581 25,112 469 2 % Gastrointestinal disease net product sales 5,558 4,804 754 16 % Other net product sales 1,759 3,140 (1,381 ) (44 )% Royalty, license fees and grant revenue 5,720 2,985 2,735 92 % Total revenues $ 119,018 $ 125,240 $ (6,222 ) (5 )% For the nine months ended September 30, 2014, total revenue decreased to $119.0 million from $125.2 million. The decrease in total revenues was primarily due to a weaker cold and flu season during the first quarter of 2014 adversely affecting Influenza and Strep A product sales by $19.8 million. The decrease in total revenues was also driven by $1.5 million lower veterinary product sales.

This was partially offset by an increase in Influenza, Strep A, and RSV sales of $10.7 million in the second and third quarters of 2014, as compared to prior year, largely driven by product sales on the Sofia platform.

Royalty, license fees and grant revenue increased primarily due to $4.7 million grant revenues earned in the nine months ended September 30, 2014 in conjunction with the Bill and Melinda Gates Foundation grant as compared to $1.9 million earned in the nine months ended September 30, 2013. The increase in grant revenue is due to the amended grant agreement with the Bill and Melinda Gates Foundation signed on September 10, 2014 providing additional funding of up to $12.6 million in order to accelerate the development of the Savanna MDx platform in the developing world. The amendment resulted in an incremental increase in grant revenue of $2.8 million over the previous year.

Cost of Sales Cost of sales was $52.9 million, or 44% of total revenues for the nine months ended September 30, 2014 compared to $48.3 million, or 39% of total revenues for the nine months ended September 30, 2013. The increase in cost of sales as a percentage of total revenues is primarily driven by product mix, with higher costs associated with products other than Influenza, and decreased volumes due to the weaker cold and flu season during the first quarter of 2014. Additional contributing factors included lower production volumes resulting in a decreased leverage of fixed overhead costs, increased depreciation expense related to Sofia instruments, and higher excess and obsolete inventory expense. Partially offsetting these factors is the favorable impact of increased grant revenues during the period.

Operating Expenses The following table compares operating expenses for the September 30, 2014 and 2013 (in thousands, except percentages): Nine months ended September 30, 2014 2013 As a % of As a % of Operating total Operating total Increase (Decrease) expenses revenues expenses revenues $ % Research and development 28,714 24 % 22,896 18 % $ 5,818 25 % Sales and marketing 30,380 26 % 24,162 19 % $ 6,218 26 % General and administrative 18,949 16 % 18,828 15 % $ 121 1 % Amortization of intangible assets from acquired businesses and technology 6,623 6 % 5,957 5 % $ 666 11 % Impairment loss 3,558 3 % - - % $ 3,558 N/A Facility restructuring charge - - % 493 - % $ (493 ) N/A Research and Development Expense Research and development expense for the nine months ended September 30, 2014 increased from $22.9 million to $28.7 million primarily due to an increase of $4.6 million in spend on our Savanna platform. Also contributing to the increase was a reduction in the reimbursement of research and development costs associated with a third-party collaboration agreement of $1.0 million for the nine months ended September 30, 2014 as compared to the prior year.

Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation. We expect our research and development costs to be significant as we move other product candidates into preclinical and clinical trials and advance our existing development programs and product candidates into later stages of development.

Sales and Marketing Expense Sales and marketing expense for the nine months ended September 30, 2014 increased from $24.2 million to $30.4 million driven primarily by an additional investment in our sales organization through expansion and training of a larger sales force in 2014 relative to 2013, resulting in increased costs of $6.0 million. Other key components of this expense relate to continued investment in customer marketing programs.

General and Administrative Expense General and administrative expense for the nine months ended September 30, 2014 increased slightly from $18.8 million to $18.9 million related to increases in personnel costs of $1.2 million. These increases were partially offset by decreases in medical device excise tax of $0.2 million and professional services related to business development activities of $0.9 million.

Amortization of Intangible Assets from Acquired Businesses and Technology Amortization of intangible assets from acquired businesses consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisitions of Diagnostic Hybrids, Inc., BioHelix, and AnDiaTec. Amortization of intangible assets from acquired technology consists primarily of expense associated with purchased technology.

19-------------------------------------------------------------------------------- Table of Contents Impairment Loss During the nine months ended September 30, 2014, we determined we would not be able to recover the carrying value of certain capitalized software, purchased in-process research and development and manufacturing line assets related to the Project Stella (Bobcat) assets and related technology. As a result, we recorded an impairment loss totaling $3.6 million. See further discussion in Note 12 in the Notes to the Consolidated Financial Statements.

Facility Restructuring Charge In 2013, we announced a plan to relocate our Santa Clara, California manufacturing operations to our facility in Ohio. Restructuring expense amounted to $0.5 million in the nine months ended September 30, 2013. No such expenses were incurred during the nine months ended September 30, 2014.

Interest Expense, net Interest expense primarily relates to interest paid on borrowings under the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility.

Income Taxes For the nine months ended September 30, 2014 and 2013, we recognized an income tax benefit of $8.9 million and $2.7 million, respectively. Our effective tax rates for the nine months ended September 30, 2014 and 2013 of 39% and (77)%, respectively. For the nine months ended September 30, 2014, the effective tax rate was higher largely as a result of discrete items. During the second quarter of 2013, the Company was notified by the Internal Revenue Service that the Congressional Joint Committee of Taxation had completed its review and proposed no changes to the Company's tax returns filed for the tax periods 2008 through 2010. As a result, the Company released tax reserves and related interest of approximately $3.5 million as a discrete item, which had the effect of increasing our tax benefit. Additionally, on January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research credit for the 2012 and 2013 years. Accordingly, the benefit related to the 2012 federal research credit of approximately $0.5 million was recorded in the first quarter of 2013 as a discrete item. The benefit related to 2013 research activities was included in the 2013 full year effective tax rate. The federal research credit expired for costs incurred subsequent to December 31, 2013, and as a result, there was no such benefit for the nine months ended September 30, 2014.

Liquidity and Capital Resources As of September 30, 2014 and December 31, 2013, the principal sources of liquidity consisted of the following (in thousands): September 30, December 31, 2014 2013 Cash and cash equivalents $ 17,365 $ 8,388 Restricted cash 6,047 969 Cash, cash equivalents, and restricted cash $ 23,412 $ 9,357 Working capital including cash, cash equivalents, and restricted cash $ 58,599 $ 54,610 Amount available to borrow under the Senior Credit Facility $ 39,600 $ 140,000 During the three months ended September 30, 2014, the Company received $10.6 million, pursuant to a grant agreement, which was restricted as to use until expenditures contemplated in the grant were incurred or committed. The Company recorded this restricted cash as a current asset as the Company anticipates making expenditures under the grant within one year. As of September 30, 2014, restricted cash was $6.0 million.

Cash provided by operating activities was $17.5 million during the nine months ended September 30, 2014. We had a net loss of $14.2 million, including non-cash charges of $20.6 million of depreciation and amortization of intangible assets and property and equipment, impairment loss of $3.6 million, and stock-based compensation of $4.8 million. We also had a decrease in accounts receivable of $5.5 million due to the seasonal nature of our business. Cash provided by operating activities was $24.2 million during the nine months ended September 30, 2013. We had net income of $6.3 million, including non-cash charges of $23.9 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation.

Our investing activities used $8.6 million during the nine months ended September 30, 2014 primarily related to the acquisition of production equipment, Sofia instruments available for lease and building improvements. Our investing activities used $29.8 million during the nine months ended September 30, 2013 primarily related to the $9.2 million of net cash used for the acquisition of BioHelix. In addition, we used cash for investing activities associated with the acquisition of production and scientific equipment, and building improvements.

20-------------------------------------------------------------------------------- Table of Contents We are planning approximately $3.0 million in capital expenditures for the remainder of 2014. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, purchase instruments, implement facility improvements, and purchase or develop information technology. We plan to fund these capital expenditures with cash flow from operations and other available sources of liquidity.

Cash provided by financing activities was $0.1 million during the nine months ended September 30, 2014 and was primarily related to repurchases of common stock of $2.0 million and payments on acquisition related contingencies of $2.1 million. These amounts were partially offset by proceeds from issuance of common stock of $4.5 million. Cash provided by financing activities was $0.9 million during the nine months ended September 30, 2013 and primarily related to proceeds from issuance of common stock of $6.3 million, partially offset by repayments under our Senior Credit Facility of $5.0 million.

On August 10, 2012, we entered into an amended and restated $140.0 million Senior Credit Facility, which matures on August 10, 2017. The Senior Credit Facility amended and restated our $120.0 million senior secured credit facility dated October 8, 2008. As part of this amendment, we incurred an additional $1.0 million in deferred financing costs related to the Senior Credit Facility. We had previously recorded $0.6 million related to the original credit facility. As of September 30, 2014 and December 31, 2013, we had $0.9 million and $1.2 million of deferred financing costs included as a portion of other non-current assets. The Senior Credit Facility bears interest at either LIBOR or the base rate, plus, in each case, the applicable margin. The base rate is equal to the highest of (i) the lender's prime rate, (ii) the federal funds rate plus one-half of one percent and (iii) LIBOR plus one percent. The applicable margin is generally determined in accordance with a performance pricing grid based on our leverage ratio and ranges from 1.25% to 2.50% for LIBOR rate loans and from 0.25% to 1.50% for base rate loans. The agreement governing the Senior Credit Facility is subject to certain customary limitations, including among others: limitation on liens; limitation on mergers, consolidations and dispositions of assets; limitation on debt; limitation on dividends, stock redemptions and the redemption and/or prepayment of other debt; limitation on investments (including loans and advances) and acquisitions; and limitation on transactions with affiliates. We are also subject to financial covenants which include a funded debt to adjusted EBITDA ratio (as defined in the Senior Credit Facility) not to exceed 3:1 as of the end of each fiscal quarter, and an interest coverage ratio of not less than 3:1 as of the end of each fiscal quarter. The Senior Credit Facility is secured by substantially all of our present and future assets and properties. Our ability to borrow under the Senior Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the facility and our funded debt to adjusted EBITDA ratio. The Company had $39.6 million available under the Senior Credit Facility as of September 30, 2014. As of September 30, 2014 and December 31, 2013, the Company had no borrowing outstanding under the Senior Credit Facility. As of September 30, 2014, the Company was in compliance with all financial covenants.

Our cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. In addition, we intend to continue to evaluate candidates for acquisitions or technology licensing. If we determine to proceed with any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete the transactions. Based on our current cash position and our current assessment of future operating results, we believe that our existing sources of liquidity will be adequate to meet our operating needs during the next 12 months.

Off-Balance Sheet Arrangements At September 30, 2014, we did not have any relationships or other arrangements with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncement In May 2014, the FASB issued guidance codified in ASC Topic 606, Revenue Recognition - Revenue from Contracts with Customers, which amends the guidance in former ASC Topic 605, Revenue Recognition. This guidance is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to 21-------------------------------------------------------------------------------- Table of Contents include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance is effective for annual reporting periods beginning after December 15, 2016, with early adoption prohibited. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2017.

In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40), Presentation of Financial Statements - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will have to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity's ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450, Contingencies.

The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company is currently evaluating the impact of this guidance and expects to adopt the standard for the annual reporting period ended December 31, 2016.

Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, customer programs and incentives, bad debts, inventories, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

A comprehensive discussion of our critical accounting policies and management estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013.

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