ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as "anticipate", "believe", "expect", "plan", "intend", "seek", "estimate", "project", "could", "may" or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report and some of which are discussed in our other periodic filings with the Securities and Exchange Commission. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Business Overview & Recent Developments
The China Food and Drug Administration (“CFDA”) promulgated Good Manufacturing Practices for Pharmaceutical Products (2010 revised version) (the “New GMP Standards”) on February 12, 2011, which became effective on March 1, 2011. The New GMP Standards outlines the basic principles and standards for the manufacturing of pharmaceutical products and the management of quality controls in the manufacturing process in the PRC. Pursuant to those mandatory requirements, the upgrading of our two sterilization production lines were required to be completed by the end of 2013; and the upgrading of our oral solution production lines is required to be completed by the end of 2015. In November 2014, we received new GMP certificates for the four new injectable production lines in our new factory and initiated production on those lines. In January 2015, we also received new GMP certificates for the tablet and capsule production lines in our old factories. We plan to upgrade the granule and cephalosporin production line in our old factories by the end of 2015 while the dry powder injectable production line in our old factory is expected to be upgraded next year.
The new products in our pipeline have experienced delays. The CFDA has enhanced its approval criteria and processes, resulting in additional supplemental materials and trials, higher cost, and longer approval time for certain applications across all pharmaceutical products including all of our product types. We commenced leading formulation screening, new technology exploration and technical criteria improvement activities in 2013. We expect this new model will improve our developments timelines and expand our exploration channels for our pipeline products.
The status of our pipeline products remains the same as we reported in our Annual Report on Form 10-K for the year ended December 31, 2014.
Market Trends
It is noteworthy that in 2014 there were certain state policy changes, such as the intention to release the control over drug prices, the release of restrictions on Internet drug sales, and the promotion of market-oriented reform of health care, which invigorated the traditional Chinese medicine industry. The logic behind these policies was to allow the market to play a decisive role in the allocation of resources, so as to improve operational efficiency and solve the problem of the inaccessibility of medicine and medical care that was experienced by a lot of people. The development of the pharmaceutical industry seems to fit the characteristics of the new normal Chinese economy: the growth enters into the shift period, from high-speed growth to the medium-speed growth and the development of the industry relies on reformation, restructuring and innovation.
Currently, the health insurance fund spending accounts for more than 30% of total health expenditure, which is one of the main forces driving the development of the pharmaceutical industry in recent years. However, faced with huge health care expenses, the health insurance fund shortfall problem needs to be addressed urgently. Medicare cost control has been the focus of the government. The National Development and Reform Commission issued "Promote Drug Price Reform Program (Draft)" on November 25, 2014, which intends to control medical costs through Medicare spending and bidding, form drug prices by market competition, and abolished the maximum retail price restriction of drugs commencing on January 1, 2015. Some analysts believe that, when this reform program is implemented fully, Medicare rights will be enhanced and the bargaining power of medical institutions and other relevant parties will also be improved. Consequently, our whole industry will face even more severe price pressure.
China’s pharmaceutical industrial output growth continued to slow down from the second half of 2013. In addition, the industry growth in 2014 experienced significant decline compared to the previous years due to certain medicare cost controls, and the upgrading requirements under the New GMP Standards. The Company believes that this trend will continue. Southern Medicine Economic Institute promulgated by CFDA predicts by 2015 China’s pharmaceutical industry output growth of 15%, sales growth of 13%, and profit growth of 11%. Concerning the terminal market, China’s pharmaceutical terminal market is expected to reach RMB 1.407 trillion, an increase of 12.9% in 2015.
Results of Operations for the Three Months Ended June 30, 2015
Revenue
Revenue for the three months ended June 30, 2015 was $5.7 million, a decrease of 7% from $6.1 million for the three months ended June 30, 2014. This was mainly because we were in the middle of the GMP upgrading process in 2014 and, as a result, we missed some drug tenders in several provinces, thus affecting the sales of subsequent quarters.
Set forth below are our revenues by product categories in millions USD for the three months ended June 30, 2015 and 2014:
| |
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
Product Category
|
|
2015
|
|
|
2014
|
|
|
Net Change
|
|
|
% Change
|
|
|
CNS Cerebral & Cardio Vascular
|
|
|
0.91 |
|
|
|
0.99 |
|
|
|
-0.08 |
|
|
|
-8 |
% |
|
Anti-Viro/ Infection & Respiratory
|
|
|
3.74 |
|
|
|
4.18 |
|
|
|
-0.44 |
|
|
|
-11 |
% |
|
Digestive Diseases
|
|
|
0.21 |
|
|
|
0.45 |
|
|
|
-0.24 |
|
|
|
-53 |
% |
|
Other
|
|
|
0.81 |
|
|
|
0.50 |
|
|
|
0.31 |
|
|
|
61 |
% |
“Other” category increased by $0.31 million to $0.81 million in the second quarter of 2015 compared to $0.50 million in the same period 2014, which was mainly due to the sales increase in Vitamin B6 for Injection.
The most significant decrease in revenue was in our “Anti-Viro/ Infection & Respiratory” product category, which generated $3.74 million in sales revenue in the second quarter of 2015 compared to $4.18 million in the same period a year ago, a decrease of $0.44 million. This decrease was mainly caused by the decrease in sales of Cefaclor and Andro-grapholide due to market fluctuation.
Sales of the “Digestive Diseases” decreased by $0.24 million to $0.21 million in the second quarter in 2015 compared to $0.45 million in the same period of 2014, mainly due to the decrease in sales of Tiopronin, which were primarily affected by market volatility.
Our “CNS Cerebral & Cardio Vascular” category generated $0.91 million of sales in the second quarter in 2015, remaining fairly comparable to $0.99 million in the same period of last year.
In the three months ended June 30, 2015, revenue breakdown by product category stayed close to the condition in the same period of 2014. Sales of the “Anti-Viro / Infection & Respiratory” products category represented 68% of total sales in the three months ended June 30, 2015, compared to 66% in the same period last year. The “CNS, Cerebral & Cardio Vascular” category represented 16% of total revenue in the three months ended June 30, 2015 and 2014. The “Other” category represented 9% of total revenue in the three months ended June 30, 2015, compared to 15% in the same period last year. The “Digestive Diseases” category represented 7% and 3% of revenues in three months ended June 30, 2015 and 2014, respectively.
Cost of Revenue
For the three months ended June 30, 2015, our cost of revenue was $4.5 million, or 80% of total revenue, which represented an increase of $0.8 million from $3.7 million, or 61% of total revenue, in the second quarter of 2014. The increase in cost of revenue in the second quarter of 2015 was mainly due to the new GMP standards for quality control improvement, which lead to an increase in our production costs, such as energy consumption, and depreciation.
Inventory Obsolescence
There was $1.2 million of inventory obsolescence recorded for the three months ended June 30, 2015, and no inventory obsolescence for the three months ended June 30, 2014. We started recording inventory obsolescence allowance on a quarterly basis during the first quarter of 2015 as we believe it may result in material modification in our financial statements; while previously, we tested and recorded inventory obsolescence allowance on an annual basis.
Gross Profit (Loss) and Gross Margin
Gross loss for the three months ended June 30, 2015 was $0.06 million, compared to gross profit of $2.4 million in the same period of 2014. Our gross loss margin in the second quarter of 2015 was (1%) compared to gross profit margin of 39% in the same period of 2014. Without considering the effect of inventory obsolescence in the three months ended June 30, 2015, management estimates that our gross profit margin would have been approximately 20% in this period. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, increased lower margin products sold in this period, as well as the inventory obsolescence incurred in the second quarter 2015.
Selling Expenses
Our selling expenses for the three months ended June 30, 2015 were $1.0 million, compared to $0.6 million in the same period last year. Selling expenses accounted for 18% of the total revenue in the second quarter 2015 compared to 10% in the same period 2014. Due to many adjustments in our selling processes under healthcare reform policies, despite the decrease in sales, we still rely on fixed personnel and expenses to support our revenue and collection of accounts receivable. In addition, once received new GMP certificate, we are aiming to recover our market and therefore requires more sales expenses and marketing efforts.
General and Administrative Expenses
Our general and administrative expenses for the three months ended June 30, 2015 were $0.5 million, compared to $0.4 million in the same period 2014. General and administrative expenses accounted for 8% and 6% of our total revenues in the three months ended June 30, 2015 and 2014, respectively.
Research and Development Expenses
Our research and development expenses for the three months ended June 30, 2015 was $0.2 million, compared to $1.9 million in the same period last year. The change in research and development expenses was mainly due to the costs related to testing of the new production lines in the second quarter 2014, while no such expenses incurred in this period because we have received the GMP certificates for those production lines.
Bad Debt Expenses
Our bad debt expense for the three months ended June 30, 2015 and 2014 were $2.1 million and $8.0 million, respectively. The decrease in bad debt expense was mainly due to the decrease in aged accounts receivable balance which hasn't been allowed against previously during the three months ended June 30, 2015 as compared to the same period of 2014.
In general, our normal credit or payment terms extended to customers are 90 days. This has not changed in recent years. Due to the peculiarity of the Chinese pharmaceutical market environment, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are a normal phenomenon. Our customers are primarily pharmaceutical distributors who sell products to mostly government-backed hospitals. Therefore, the age of our receivables from our customers tends to be long. Although these customers typically pay after the due date of the receivables, since the majority of hospitals in China are backed by the government, management believes that the deferred payments from state-owned hospitals are secured and will eventually be collected.
The amount of accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $16.5 million and $23.6 million as of June 30, 2015 and December 31, 2014, respectively. The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2015 and December 31, 2014.
| |
June 30,
|
|
December 31,
|
|
| |
2015
|
|
2014
|
|
|
1 - 90 Days
|
|
|
4.0 |
% |
|
|
5.2 |
% |
|
90 - 180 Days
|
|
|
3.5 |
% |
|
|
4.5 |
% |
|
180 - 360 Days
|
|
|
8.7 |
% |
|
|
6.9 |
% |
|
360 - 720 Days
|
|
|
14.4 |
% |
|
|
29.7 |
% |
|
> 720 Days
|
|
|
69.4 |
% |
|
|
53.7 |
% |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Our bad debt allowance estimate is currently the sum of 3.5% of accounts receivable that are less than 365 days old, 10% of accounts receivable that are between 365 days and 720 days old and 100% of accounts receivable that are greater than 720 days old.
In order to collect cash to support the construction of our new plant to meet the policy requirements for new GMP upgrading, we have shifted to prudent sales strategies in the recent two years. This strategy strengthened the preference on sales to customers with good credit performance, while reduced the supplement to customers with poor credit. On the one hand, this strategy contributed to the recovery of funds; on the other hand, it negatively impacted our sales and indirectly prolonged the payment from the estranged customers. These two factors resulted in increased proportion of our older-aged accounts receivable balance.
Loss from Operations
Our operating loss for the three months ended June 30, 2015 was $3.8 million, compared to operating loss of $8.5 million in the same period of 2014. The decrease in operating loss was primarily due to the decrease in bad debt expense and partially offset by the inventory obsolescence recognized in the second quarter of 2015.
Income Tax (Benefit)
For the three months ended June 30, 2015 and 2014, our income tax rate was 15%. Income tax benefit was ($0.02) million for the three months ended June 30, 2015 and 2014. The income taxes recognized for the three months ended June 30, 2015 and 2014 were related to net changes in long-term deferred tax assets and liabilities. We renewed our "National High-Tech Enterprise" status ("National HT Status") from the PRC government in the third quarter of 2013. With this designation, for the years ended December 31, 2015 and 2016, we will continue to enjoy a preferential tax rate of 15% which is notably lower than the statutory income tax rate of 25%.
Net Loss
Net loss for three months ended June 30, 2015 and 2014 was $4.1 million and $8.6 million, respectively. The decrease in net loss was primarily due to the decrease in bad debt expenses and partially offset by the inventory obsolescence recognized in the second quarter 2015.
For the three months ended June 30, 2015, loss per basic and diluted common share was $0.09, compared to loss per basic and diluted share of $0.20 for the same period in 2014.
The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for the three months ended June 30, 2015 and 2014, respectively.
Six Months Ended June 30, 2015 and 2014
Revenue
For the six months ended June 30, 2015, our sales revenue was $11.4 million, which represented a decrease of $1.9 million, or 14%, from the $13.2 million in the corresponding period of 2014.
Set forth below are our revenues by product categories in millions USD for each of the six months ended June 30, 2015 and 2014.
Sales Revenue by Major Category (Dollars in Millions)
|
Product Category
|
Six Months June 30,
|
Net Change
|
% Change
|
|
2015
|
2014
|
|
CNS Cerebral & Cardio Vascular
|
1.61
|
1.90
|
(0.29)
|
-15%
|
|
Anti-Viro/Injection & Respiratory
|
7.79
|
9.15
|
(1.36)
|
-15%
|
|
Digestive Diseases
|
0.36
|
0.77
|
(0.41)
|
-54%
|
|
Other
|
1.61
|
1.41
|
0.20
|
14%
|
“Other” category increased by $0.20 million to $1.61 million in the first half of 2015 compared to $1.41 million in the same period of 2014 and the increase was mainly due to the sales increase in Vitamin B6 for Injection.
The most significant decrease in revenue was in our “Anti-Viro/ Infection & Respiratory” product category, which generated $7.79 million in sales revenue in the first half of 2015, compared to $9.15million in the same period a year ago, a decrease of $1.36 million. This decrease was mainly caused by the decrease in sales of Cefaclor due to market fluctuation.
Sales of the “Digestive Diseases” decreased by $0.41 million to $0.36 million in the first half of 2015, compared to $0.77 million in the same period of 2014, mainly due to the decrease in sales of Tiopronin, which were primarily affected by market volatility.
Our “CNS Cerebral & Cardio Vascular” category generated $1.61 million of sales in the first half of 2015, compared to $1.90 million in the same period last year, which represented a decrease of $0.29 million. This decrease was mainly do the sales decrease of Candesartan due to market fluctuation.
Cost of Revenue
For the six months ended June 30, 2015, our cost of revenue was $8.9 million, or 79% of total revenue, which represented an increase of $0.7 million from $8.2 million, or 62% of total revenue, in the same period of 2014. The increase in cost of revenue in the second quarter of 2015 was mainly due to the new GMP standards for quality control improvement, which lead to an increase in our production costs, such as energy consumption and depreciation.
Inventory Obsolescence
There was $1.4 million inventory obsolescence recorded for the six months ended June 30, 2015, and no inventory obsolescence for the six months ended June 30, 2014. We started recording inventory obsolescence allowance on a quarterly basis since the first quarter of 2015 as we believe it may result in material modification to our financial statements; while previously, we tested and recorded inventory obsolescence allowance on an annual basis.
Gross Margin and Gross Profit
Gross profit for the six months ended June 30, 2015 was $1.0 million, compared to $5.0 million in the same period of 2014. Gross profit margin for the six months ended June 30, 2015 and 2014 were 9% and 38%, respectively. Without considering the effect of inventory obsolescence in the first half of 2015, management estimates that our gross profit margin would have been approximately 21%. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, more lower margin products sold in this period, as well as the inventory obsolescence incurred in the first half of 2015.
Selling Expenses
Our selling expenses for the six months ended June 30, 2015 were $2.0 million, an increase of $0.6 million, or 38%, compared to $1.4 million for the same period 2014. This increase was mainly due to many adjustments in our selling processes under healthcare reform policies. Despite the decrease in sales, we still rely on comparable personnel and expenses to support our revenue and collection of accounts receivable. In addition, once received new GMP certificate, we are aiming to recover our market and therefore requires more sales expenses and marketing efforts.
General Administrative Expenses
Our general and administrative expenses for the six months ended June 30, 2015 were $0.9million, an increase of $0.1 million, or 15%, compared to $0.8 million for the same period 2014.
Research and Development Expenses
Our research and development expenses for the six months ended June 30, 2015 was $0.3 million, compared to $2.3 million in the same period 2014. The change in research and development expenses was mainly due to the costs related to testing of the new production lines in the first half 2014, while no such expenses incurred in this period because we have received the GMP certificates for those production lines.
Bad Debt Expenses
Our bad debt expenses for the six months ended June 30, 2015 was $9.2 million, compared to $11.3 million for the same period 2014. Please see additional discussion of bad debt and account receivables in the section above named "Bad Debt Expenses".
We recognize bad debt expenses per actual write-offs as well as the changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize bad debt expenses for the difference between the two periods; when the current allowance is lower than that of the previous period, we recognize bad debt benefits for the difference. The allowance for doubtful accounts was $42.8 million and $33.4 million as of June 30, 2015 and December 31, 2014, respectively. Therefore, the changes in the allowance for doubtful accounts during the six months ended June 30, 2015 and 2014 were as follows:
| |
|
For the Six Months Ended |
|
|
| |
|
June 30, |
|
|
| |
|
2015
|
|
2014
|
|
|
|
Balance, Beginning of Period
|
|
|
$ |
33,350,109 |
|
|
|
13,301,622 |
|
|
Bad debt expenses (benefits)
|
|
|
|
9,206,214 |
|
|
|
11,340,444 |
|
|
Foreign currency translation adjustment
|
|
|
|
287,722 |
|
|
|
(142,705 |
) |
|
Balance, End of Period
|
|
|
$ |
42,844,045 |
|
|
|
24,499,361 |
|
Loss from Operations
Our operating loss for the six months ended June 30, 2015 was approximately $11.5 million, compared to $10.9 million for the same period of 2014, which represented a deterioration of $0.6 million. The deterioration in operating income performance was primarily due to lower revenue and inventory obsolescence in the current period compared to the corresponding period one year ago.
Net Loss
Our net loss for the six months ended June 30, 2015 and 2014 was $12.1 million and $11.0 million, respectively, which represented a deterioration of $1.1 million. The increase in net loss was primarily due to lower revenue, inventory obsolescence and increased selling expenses recognized in the first half of 2015, which was partially offset by the decreased R&D expenses and bad debt expenses in the current period compared to the corresponding period one year ago.
Liquidity and Capital Resources
Our principal sources of liquidity are cash generated from operations and short-term bank loans. Our cash and cash equivalents were $4.5 million, which represents 4% of our total assets as of June 30, 2015, as compared to $5.3 million, which represents 4% of our total assets as of December 31, 2014. All of the $4.5 million of cash and cash equivalents at June 30, 2015 is considered to be reinvested indefinitely in Helpson and is not expected to be available for payment of dividends, for other payments to our parent company or to its shareholders. As of June 30, 2015, we had a principal balance of $4.9 million in short-term bank loans. The amounts advanced under the line of credit are due on November 24, 2015. In addition, we have $1.6 million of short-term debt related to the current portion of our construction loan facility. The loan requires interest only payments for the first two years. Beginning July 11, 2015, the balance of the principal will be due in annual installments which are due prior to July 10 of the following year over the next six years through July 11, 2021. No principal payments have been made under the facility as of the date of this report on Form 10-Q. The cash flow generated from operating activities was used to fund the market-share-recovering of our current existing products.
Based on our current operating plan, management believes that our cash provided by operations will be sufficient to meet our operating capital needs and our anticipated capital expenditures, including expenditures for new formula acquisitions and GMP upgrading related construction and equipment, for the next twelve months. However, if events or circumstances change and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, when we regard market conditions are most advantageous, we may seek additional financing as necessary for expansion purposes, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash used by operating activities was $0.5 million in the six months ended June 30, 2015, compared to $2.4 million generated for the same period in 2014.
At June 30, 2015, our accounts receivable was $17.2 million, a decrease of $7.7 million from $24.9 million at December 31, 2014, which was due to the decrease in sales, increase in allowance for doubtful accounts and our enhanced collection efforts.
At June 30, 2015, total inventory was $13.6 million, a decrease of $1.7 million from $15.3 million at December 31, 2014. This decrease was mainly due to the inventory obsolescence recognized in the first half of 2015.
Investing Activities
During the six months ended June 30, 2015, net cash used in investing activities was $0.3 million, compared to $4.5 million in the same period 2014. The investment spending in the first half of 2015 was much lower compared to the same period in 2014 due to the GMP upgrading related construction and equipment invested in 2014.
Financing Activities
There were no financing activities for the six months ended June 30, 2015, and $0.6 million was generated from financing activities for the same period in 2014.
According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of June 30, 2015 and December 31, 2014, the net assets of Helpson were $56,501,000 and $124,226,000, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that were designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, were $8,182,770 and $8,182,770 (50% of registered capital) on June 30, 2015 and December 31, 2014, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 14.5% and 6.6%, respectively, of its total net assets, this reserve does not have a major impact on our liquidity. There were no allocations to the statutory surplus reserve accounts during the six months ended June 30, 2015.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with applicable invoices and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of Helpson, our PRC subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.
Off Balance Sheet Arrangements
As of June 30, 2015 we did not have any off-balance sheet arrangements.
Commitments
At June 30, 2015, we were obligated to pay laboratories and others approximately $4.2 million over the next four years upon completion of the various phases of contracts to provide CFDA production approval of medical formulas.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 1 to our consolidated financial statements, “Organization and Significant Accounting Policies”, is incorporated herein by reference.