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EXCEL - IDEA: XBRL DOCUMENT - LIBERATOR MEDICAL HOLDINGS, INC. | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | v312014_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | v312014_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | v312014_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | v312014_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
R | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-05663
LIBERATOR MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA (State or other jurisdiction of incorporation or organization) |
87-0267292 (I.R.S. Employer Identification No.) |
2979
SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (Zip Code)
(772) 287-2414
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes R No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes R No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company R | ||||
(Do not check if a smaller reporting company) |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No R
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of May 10, 2012 | |
Common Stock, $.001 | 48,088,034 |
TABLE OF CONTENTS
Page | ||
PART I — FINANCIAL INFORMATION | 3 | |
Item 1. | Condensed Consolidated Financial Statements | 3 |
Notes to Condensed Consolidated Financial Statements | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 17 |
Item 4. | Controls and Procedures | 18 |
PART II — OTHER INFORMATION | 19 | |
Item 1. | Legal Proceedings | 19 |
Item 1A. | Risk Factors | 19 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
Item 3. | Defaults Upon Senior Securities | 19 |
Item 5. | Other Information | 19 |
Item 6. | Exhibits | 19 |
SIGNATURES | 20 | |
EX-31.1 | ||
EX-31.2 | ||
EX-32.1 | ||
EX-32.2 |
2 |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Balance Sheets
As of March 31, 2012 (unaudited) and September 30, 2011
(In thousands, except dollar per share amounts)
March | September | |||||||
31, 2012 | 30, 2011 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 4,767 | $ | 3,016 | ||||
Accounts receivable, net of allowance of $4,597 and $4,177, respectively | 8,757 | 7,860 | ||||||
Inventory, net of allowance for obsolete inventory of $255 and $144, respectively | 2,756 | 3,009 | ||||||
Deferred taxes, current portion | 1,976 | 1,877 | ||||||
Prepaid and other current assets | 467 | 333 | ||||||
Total Current Assets | 18,723 | 16,095 | ||||||
Property and equipment, net of accumulated depreciation of $2,536 and $2,186, respectively | 1,369 | 1,626 | ||||||
Deferred advertising | 18,897 | 17,191 | ||||||
Intangible assets, net of accumulated amortization of $58 and $25, respectively | 272 | 305 | ||||||
Other assets | 121 | 163 | ||||||
Total Assets | $ | 39,382 | $ | 35,380 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 5,982 | $ | 5,008 | ||||
Accrued liabilities | 1,110 | 1,119 | ||||||
Other current liabilities | 60 | 103 | ||||||
Total Current Liabilities | 7,152 | 6,230 | ||||||
Deferred tax liability | 4,189 | 3,347 | ||||||
Credit line facility | 2,500 | 1,500 | ||||||
Other long-term liabilities | 44 | 48 | ||||||
Total Liabilities | 13,885 | 11,125 | ||||||
Stockholders’ Equity: | ||||||||
Common stock, $.001 par value, 200,000 shares authorized, 48,177 and 48,135 shares issued, respectively; 48,088 and 48,046 shares outstanding at March 31, 2012, and September 30, 2011, respectively | 48 | 48 | ||||||
Additional paid-in capital | 34,622 | 34,504 | ||||||
Accumulated deficit | (9,123 | ) | (10,247 | ) | ||||
Treasury stock, at cost; 89 shares at March 31, 2012, and September 30, 2011 | (50 | ) | (50 | ) | ||||
Total Stockholders’ Equity | 25,497 | 24,255 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 39,382 | $ | 35,380 |
See accompanying notes to unaudited condensed consolidated financial statements.
3 |
Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Operations
For the three and six months ended March 31, 2012 and 2011
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Sales | $ | 14,670 | $ | 12,664 | $ | 29,466 | $ | 24,884 | ||||||||
Cost of Sales | 5,687 | 4,774 | 11,690 | 9,213 | ||||||||||||
Gross Profit | 8,983 | 7,890 | 17,776 | 15,671 | ||||||||||||
Operating Expenses | ||||||||||||||||
Payroll, taxes and benefits | 3,577 | 2,930 | 7,041 | 5,771 | ||||||||||||
Advertising | 1,972 | 2,019 | 3,940 | 3,920 | ||||||||||||
Bad debts | 843 | 877 | 1,973 | 1,769 | ||||||||||||
Depreciation and amortization | 210 | 171 | 409 | 337 | ||||||||||||
General and administrative | 1,243 | 1,224 | 2,496 | 2,149 | ||||||||||||
Total Operating Expenses | 7,845 | 7,221 | 15,859 | 13,946 | ||||||||||||
Income from Operations | 1,138 | 669 | 1,917 | 1,725 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (20 | ) | (1 | ) | (32 | ) | (32 | ) | ||||||||
Change in fair value of derivative liabilities | — | — | — | (902 | ) | |||||||||||
Gain on sale of assets | — | — | — | 2 | ||||||||||||
Interest income | — | 2 | — | 4 | ||||||||||||
Total Other Income (Expense) | (20 | ) | 1 | (32 | ) | (928 | ) | |||||||||
Income before Income Taxes | 1,118 | 670 | 1,885 | 797 | ||||||||||||
Provision for Income Taxes | 448 | 361 | 761 | 690 | ||||||||||||
Net Income | $ | 670 | $ | 309 | $ | 1,124 | $ | 107 | ||||||||
Basic earnings per share: | ||||||||||||||||
Weighted average shares outstanding | 48,088 | 47,996 | 48,073 | 47,704 | ||||||||||||
Earnings per share | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Weighted average shares outstanding | 52,285 | 53,773 | 52,286 | 53,502 | ||||||||||||
Earnings per share | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 |
See accompanying notes to unaudited condensed consolidated financial statements.
4 |
Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the six months ended March 31, 2012
(Unaudited)
(in thousands)
Additional | Total | |||||||||||||||||||||||
Common Stock | Paid in | Accumulated | Treasury | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | Equity | |||||||||||||||||||
Balance at October 1, 2011 | 48,046 | $ | 48 | $ | 34,504 | $ | (10,247 | ) | $ | (50 | ) | $ | 24,255 | |||||||||||
Options issued to employees and directors | — | — | 81 | — | — | 81 | ||||||||||||||||||
Common stock issued for employee stock purchase plan | 42 | — | 37 | — | — | 37 | ||||||||||||||||||
Net income | — | — | — | 1,124 | — | 1,124 | ||||||||||||||||||
Balance at March 31, 2012 | 48,088 | $ | 48 | $ | 34,622 | $ | (9,123 | ) | $ | (50 | ) | $ | 25,497 |
See accompanying notes to unaudited condensed consolidated financial statements.
5 |
Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 2012 and 2011
(Unaudited)
(in thousands)
Six Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Cash flow from operating activities: | ||||||||
Net Income | $ | 1,124 | $ | 107 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 4,262 | 4,172 | ||||||
Change in fair value of derivative liabilities | — | 902 | ||||||
Equity based compensation | 81 | 236 | ||||||
Provision for doubtful accounts and contractual adjustments | 1,994 | 1,865 | ||||||
Non-cash interest related to convertible notes payable | — | 21 | ||||||
Deferred income taxes | 743 | 690 | ||||||
Reserve for inventory obsolescence | 111 | 28 | ||||||
Gain on sale of assets | — | (2 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,891 | ) | (2,561 | ) | ||||
Deferred advertising | (5,558 | ) | (8,954 | ) | ||||
Inventory | 141 | (458 | ) | |||||
Other assets | (72 | ) | (179 | ) | ||||
Accounts payable | 974 | 2,409 | ||||||
Accrued liabilities | (13 | ) | (308 | ) | ||||
Other liabilities | (51 | ) | (37 | ) | ||||
Net Cash Flow Provided by (Used in) Operating Activities | 845 | (2,069 | ) | |||||
Cash flow from investing activities: | ||||||||
Purchase of property and equipment | (101 | ) | (163 | ) | ||||
Proceeds from the sale of assets | — | 3 | ||||||
Net Cash Flow Used in Investing Activities | (101 | ) | (160 | ) | ||||
Cash flow from financing activities: | ||||||||
Proceeds from employee stock purchase plan | 41 | 44 | ||||||
Proceeds from credit line facility | 1,000 | — | ||||||
Costs associated with credit line facility | (21 | ) | (51 | ) | ||||
Payments of debt and capital lease obligations | (13 | ) | (598 | ) | ||||
Net Cash Flow Provided by (Used in) Financing Activities | 1,007 | (605 | ) | |||||
Net increase (decrease) in cash | 1,751 | (2,834 | ) | |||||
Cash at beginning of period | 3,016 | 7,428 | ||||||
Cash at end of period | $ | 4,767 | $ | 4,594 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 31 | $ | 49 | ||||
Cash paid for income taxes | $ | — | $ | 5 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Capital expenditures funded by capital lease borrowing | $ | 18 | $ | — | ||||
Common stock issued for conversion of debt | $ | — | $ | 5,100 |
See accompanying notes to unaudited condensed consolidated financial statements.
6 |
Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Unaudited Condensed Consolidated Financial Statements
March 31, 2012
Note 1 — Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the “Company”) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, that was filed with the SEC on December 29, 2011. The results of operations for the six months ended March 31, 2012, are not necessarily indicative of the results to be expected for the full year.
The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and Wellness, Inc., and Practica Medical Manufacturing, Inc., its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Note 2 — Summary of Significant Accounting Policies
The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.
Recent Accounting Pronouncements
In July 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that requires health care entities to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional disclosures relating to a company’s sources of patient revenue and its allowance for doubtful accounts related to patient accounts receivable will also be required. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. Upon adoption of this guidance on October 1, 2012, we will reclassify the provision for bad debts related to prior period patient service revenue as a deduction from patient service revenue as required by this guidance. The adoption of this guidance is not expected to have a material impact on our financial condition, overall results of operations or cash flows.
In May 2011, the FASB issued amendments to its accounting guidance related to fair value measurements in order to more closely align its disclosure requirements with those in the International Financial Reporting Standards. This guidance clarifies the application of existing fair value measurement and disclosure requirements and also changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial condition, overall results of operations or cash flows.
Note 3 — Acquisition
On May 13, 2011, the Company entered into an Asset Purchase Agreement with Kruin Medical Products, Inc., a California corporation, which had been doing business as SGV Medical Supplies ("SGV"), and its sole shareholder. Under the Asset Purchase Agreement, the Company purchased SGV's customer list, inventory, and website (the "Purchased Assets") used in its ostomy supply business. The purchase price for the Purchased Assets was $716,000, of which the Company paid $466,000 in cash and $250,000 pursuant to a non-interest bearing promissory note due on November 13, 2011, subject to the Company's right of setoff based on the number of SGV customers that purchase ostomy supplies from the Company within six months following the acquisition date. Based on the number of SGV customers that purchased and/or placed orders for supplies from the Company within six months from the date of the acquisition, there were no additional payments due pursuant to the terms of the promissory note as of November 13, 2011.
With the acquisition of SGV's ostomy supply customers, the Company was able to acquire new customers at a cost that was below the Company's advertising costs per acquired customer, which is consistent with the Company's growth strategy.
The fair values of the customer list and the website acquired were estimated using an income approach and incorporate significant inputs not observable in the market, which are Level 3 fair value inputs. Key assumptions in the estimated valuation included: (1) a discount rate of 18.92%; (2) the number of SGV customers expected to place orders with the Company; and (3) net cash flow projections over the projected life of the assets.
7 |
The following table summarizes the estimated fair value of consideration paid and the preliminary allocation of purchase price to the fair value of assets acquired as of the date of the acquisition (in thousands):
Purchase Price Consideration: | ||||
Cash | $ | 466 | ||
Promissory note, net of right of setoff | — | |||
Total fair value of consideration | $ | 466 | ||
Purchase Price Allocation: | ||||
Intangible assets (customer list) | $ | 330 | ||
Inventory | 33 | |||
Property and equipment (website) | 103 | |||
Total assets acquired | $ | 466 |
Disclosure of supplemental pro forma information for revenue and earnings related to the acquired assets, assuming the acquisition was made at the beginning of the earliest period presented, has not been disclosed since the effects of the acquisition would not have been material to the results of operations for the periods presented.
Note 4 — Credit Line Facility
On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the “PNC Credit Line Facility”) with PNC Bank, National Association ("PNC"). Pursuant to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal property, including inventory and accounts receivable. Interest is payable on any advance at LIBOR plus 2.75%. Advances under the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Company’s accounts receivable and inventory that can constitute the permitted borrowing base. The PNC Credit Line Facility originally expired in February 2013; however, in January 2012 the expiration was extended to February 2014, with all other terms and conditions remaining the same.
The PNC Credit Line Facility requires the Company to comply with certain financial covenants which are defined in the credit agreement. As of March 31, 2012, these financial covenants included:
· | The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a ratio of Senior Funded Debt to EBITDA of less than 2.0 to 1; and |
· | The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a Fixed Charge Coverage Ratio of at least 1.25 to 1. |
As of March 31, 2012, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility. As of March 31, 2012, the total availability under the PNC Credit Line Facility was $4,427,000 with an outstanding balance of $2,500,000. The outstanding balance under the credit line facility has been classified as non-current since the due date of the outstanding balance is February 2014, and, due to expected collateral levels, a borrowing base in excess of amounts outstanding as of March 31, 2012, will be maintained. The interest rate for the outstanding balance as of March 31, 2012, was 2.99%. For the six months ended March 31, 2012, the Company incurred $29,000 in interest expense related to the PNC Credit Line Facility.
Note 5 — Convertible Notes Payable
October 2008 Convertible Note
On October 17, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $2,500,000. The note was convertible into shares of our common stock at an initial conversion price of $0.75 per share, subject to adjustment, and matured on October 17, 2010. The note was a senior unsecured obligation of ours and accrued interest at the rate of 3% per annum, paid semi-annually on each October 15 and April 15. The note was unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of the note could have been reduced if, among other things, we issued shares of common stock or securities exercisable, exchangeable or convertible for or into shares of common stock (“common stock equivalents”) at a price per share less than both the conversion price then in effect and $0.75, subject to certain exclusions. The Company concluded that the adjustment feature for the conversion price of the note was not indexed to the Company’s own stock and, therefore, was an embedded derivative financial liability that required bifurcation and separate accounting. The warrants have a term of 3 years and are exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share. The exercise price of the warrants will be reduced if, among other things, we issue shares of our common stock or common stock equivalents at a price per share less than both the exercise price then in effect and the closing sale price of our common stock for any of the 10 consecutive trading days immediately preceding such issuance, subject to certain exclusions. The Company has concluded that the adjustment feature for the exercise price of the warrants is indexed to the Company’s own stock, and, accordingly, has classified the warrants as equity instruments. In addition, we issued a warrant to the placement agent exercisable for up to 266,667 shares of our common stock on terms substantially similar to the warrants issued in connection with the note described above.
8 |
On October 15, 2010, the $2,500,000 note was converted into 3,333,333 shares of the Company’s common stock at a conversion price of $0.75 per share.
Interest expense related to the October 2008 convertible note was $0 and $24,000 for the six months ended March 31, 2012 and 2011, respectively.
Note 6 — Derivative Liabilities
The October 2008 convertible note, discussed above in Note 5, contained an embedded adjustment feature whereby the conversion price could have been adjusted if the Company had issued additional shares of common stock or securities exercisable, exchangeable, or convertible into shares of common stock at a price per share less than both the conversion price then in effect and $0.75. The embedded adjustment feature was not indexed to the Company’s own stock and, therefore, was an embedded derivative financial liability (the “Embedded Derivative”) that required bifurcation and separate accounting. Accordingly, the Company recorded a cumulative effect adjustment to the opening balance of retained earnings on October 1, 2009. Subsequently, the Company adjusted the Embedded Derivatives to fair value at each interim period and recognized the changes in fair value as a charge or a benefit to earnings included in the Other Income (Expense) section of the Company’s Consolidated Statement of Operations.
As of September 30, 2010, the fair value of the Embedded Derivative for the October 2008 Note was $1,698,000. The fair value as of September 30, 2010 was calculated using a Monte Carlo simulation model with the following assumptions:
October 2008 Note | ||||
Risk-free interest rate: | 0.14 | % | ||
Expected term: | 17 days | |||
Expected dividend yield: | 0.00 | % | ||
Expected volatility: | 49.30 | % | ||
Probability of triggering reset provision: | 0.01 | % | ||
Existing conversion price per share | $ | 0.75 | ||
Company’s stock price per share | $ | 1.26 |
On October 15, 2010, the October 2008 convertible note was converted into shares of our common stock at a conversion price of $0.75 per share. The fair value of the embedded derivative on October 15, 2010, was $2,600,000, which was the intrinsic value of the conversion, based on the Company’s stock price as of the conversion date. As a result of the increase in fair value of the embedded derivative from September 30, 2010, to the date of conversion, $902,000 was recorded as an additional non-cash charge to earnings for the six months ended March 31, 2011.
Note 7 — Stockholders’ Equity
Warrants
A summary of warrants issued, exercised and expired during the six months ended March 31, 2012, is as follows:
Weighted | ||||||||
Avg. | ||||||||
Exercise | ||||||||
Warrants: | Shares | Price | ||||||
Balance at October 1, 2011 | 6,965,667 | $ | 1.12 | |||||
Issued | — | — | ||||||
Exercised | — | — | ||||||
Expired | (1,433,334 | ) | 1.25 | |||||
Balance at March 31, 2012 | 5,532,333 | $ | 1.09 |
9 |
Options
In connection with conversion of $1,589,000 of debt to equity and under the terms of the reverse merger in June 2007, Mr. Libratore, the Company’s founder, principal shareholder and President, received options to purchase 4,541,009 shares of the Company’s common stock at an exercise price of $0.0001. As of March 31, 2012, a total of 3,921,009 options were outstanding.
Employee & Director Stock Options
The weighted-average grant date fair value of options granted during the six months ended March 31, 2011, was $0.40. There were no options granted during the six months ended March 31, 2012. There were no options exercised during the six months ended March 31, 2012 and 2011. The fair values of stock-based awards granted during the six months ended March 31, 2011, were calculated with the following weighted-average assumptions:
2011 | ||||
Risk-free interest rate: | 1.05 | % | ||
Expected term: | 3 years | |||
Expected dividend yield: | 0.00 | % | ||
Expected volatility: | 48.91 | % |
For the six months ended March 31, 2012 and 2011, the Company recorded $63,000 and $216,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of March 31, 2012, there is $33,000 in total unrecognized compensation expense related to non-vested employee and director stock options granted under the 2007 Stock Plan, which is expected to be recognized over 0.6 years.
Stock option activity for the six months ended March 31, 2012, is summarized as follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
2007 Stock Plan: | Shares | Price | Life (Years) | Value | ||||||||||||
Options outstanding at October 1, 2011 | 2,085,000 | $ | 0.99 | 2.75 | $ | 141,750 | ||||||||||
Granted | — | — | ||||||||||||||
Expired or forfeited | (50,000 | ) | 2.18 | |||||||||||||
Options outstanding at March 31, 2012 | 2,035,000 | $ | 0.97 | 2.24 | $ | 274,500 | ||||||||||
Options exercisable at March 31, 2012 | 1,887,500 | $ | 0.94 | 2.13 | $ | 274,500 | ||||||||||
Options vested or expected to vest at March 31, 2012 | 2,035,000 | $ | 0.97 | 2.24 | $ | 274,500 |
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (the “ESPP”) became effective June 10, 2009, the effective date of the registration statement filed on Form S-8 with the SEC. The ESPP provides a means by which employees of the Company are given an opportunity to purchase common stock of the Company through payroll deductions. The maximum number of shares to be offered under the ESPP is 500,000 shares of the Company’s common stock, subject to changes authorized by the Board of Directors of the Company. Shares are offered through consecutive offering periods with durations of approximately six (6) months, commencing on the first trading day on or after June 1 and November 30 of each year and terminating on the last trading day before the commencement of the next offering period. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. The ESPP allows employees to designate up to 15% of their cash compensation to purchase shares of the Company’s common stock at 85% of the lesser of the fair market value at the beginning of the offering period or the exercise date, which is the last trading day of the offering period. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of the Company’s common stock are not eligible to participate in the ESPP.
As of March 31, 2012, 315,965 shares of the Company’s common stock have been purchased through the ESPP, using $249,000 of proceeds received from employee payroll deductions. For the six months ended March 31, 2012 and 2011, the Company received $41,000 and $44,000, respectively, through payroll deductions under the ESPP.
10 |
The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares expected to be issued under the ESPP at the grant date, the beginning date of the offering period, and recognizes compensation expense ratably over the offering period. If an employee elects to increase their payroll withholdings during the offering period, the increase is treated as a modification to the original option granted under the ESPP. As a result of the modification, the incremental fair value, if any, associated with the modified award is recognized as compensation expense at the date of the modification. Compensation expense is recognized only for shares that vest under the ESPP. For the six months ended March 31, 2012 and 2011, the Company recognized $17,000 and $19,000, respectively, of compensation expense related to the ESPP.
Note 8 — Basic and Diluted Earnings per Common Share
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three and six months ended March 31, 2012 and 2011 (in thousands, except per share amounts):
For the three months | For the six months | |||||||||||||||
ended March 31, | ended March 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator: | ||||||||||||||||
Net income — basic | $ | 670 | $ | 309 | $ | 1,124 | $ | 107 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding — basic | 48,088 | 47,996 | 48,073 | 47,704 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and warrants | 4,197 | 5,777 | 4,213 | 5,798 | ||||||||||||
Weighted average shares outstanding — diluted | 52,285 | 53,773 | 52,286 | 53,502 | ||||||||||||
Earnings per share — basic | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 | ||||||||
Earnings per share — diluted | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 |
The following table summarizes the number of weighted shares outstanding for each of the periods presented, but not included in the calculation of diluted income per share because the impact would have been anti-dilutive for the three and/or six months ended March 31, 2012 and 2011 (in thousands):
For the three months | For the six months | |||||||||||||||
ended March 31, | ended March 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Stock options | 1,150 | 640 | 680 | 640 | ||||||||||||
Warrants | 358 | 358 | 358 | 358 | ||||||||||||
1,508 | 998 | 1,038 | 998 |
Note 9 — Income Taxes
The provision for income taxes was $761,000 for the six months ended March 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $1,885,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.
The provision for income taxes was $690,000 for the six months ended March 31, 2011. The effective tax rate was approximately 87% of the income before income taxes of $797,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes, primarily consisting of $902,000 of expense related to the change in fair value of derivative liabilities recorded for the six months ended March 31, 2011.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. When used in this quarterly report, in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements.” The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of manufacturing, distributing or marketing activities, competitive and regulatory factors, and those factors set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, under the caption “Risk Factors,” could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated by any forward-looking statements.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company, included in our Annual Report on Forms 10-K for the year ended September 30, 2011, filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Business Overview
Liberator Medical Supply, Inc. (“LMS”), a wholly-owned subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies to Medicare-eligible seniors. An Exemplary Provider™ accredited by The Compliance Team, our Company’s unique combination of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase medical supplies needed on a regular, ongoing, repeat-order basis, with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet; repeat orders are confirmed with the customer and shipped when needed.
We market our products directly to consumers through our direct response advertising efforts. We target consumers with chronic conditions requiring a continuous supply of medical products that we can provide at attractive gross margins. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers. Since our inception, we have demonstrated our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that can last for periods of greater than ten years.
We receive initial contact from prospective customers in the form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place their initial order within three to six months from the time of the customer’s initial contact with us. The following table shows our quarterly revenue streams, including new and recurring orders, for the six months ended March 31, 2011 and 2012, based on the fiscal year we received the initial order lead from these customers (dollars in thousands):
Quarterly Revenue Streams:
For the six months ended March 31, 2011 | For the six months ended March 31, 2012 | |||||||||||||||||||||||
Customer Order Leads Received | FY2011-Q1 | FY2011-Q2 | YTD FY2011 | FY2012-Q1 | FY2012-Q2 | YTD FY2012 | ||||||||||||||||||
Pre-FY 2008 | $ | 775 | $ | 707 | $ | 1,482 | $ | 748 | $ | 598 | $ | 1,346 | ||||||||||||
FY 2008 | 2,665 | 2,637 | 5,302 | 2,395 | 2,339 | 4,734 | ||||||||||||||||||
FY 2009 | 3,789 | 3,683 | 7,472 | 3,474 | 3,288 | 6,762 | ||||||||||||||||||
FY 2010 | 4,021 | 3,564 | 7,585 | 3,278 | 3,044 | 6,322 | ||||||||||||||||||
FY 2011 | 998 | 2,126 | 3,124 | 4,113 | 3,528 | 7,641 | ||||||||||||||||||
FY 2012 | n/a | n/a | n/a | 890 | 1,692 | 2,582 | ||||||||||||||||||
Total Revenues | 12,248 | 12,717 | 24,965 | 14,898 | 14,489 | 29,387 | ||||||||||||||||||
Other Sales & Adjustments | (28 | ) | (53 | ) | (81 | ) | (102 | ) | 181 | 79 | ||||||||||||||
Net Sales | $ | 12,220 | $ | 12,664 | $ | 24,884 | $ | 14,796 | $ | 14,670 | $ | 29,466 |
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We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We also are able to adjust our advertising spend relatively quickly to respond to changing market conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase, we continue to focus on improving operational efficiencies to increase profitability.
Results of Operations
The following table summarizes the results of operations for the three and six months ended March 31, 2012 and 2011, including percentage of sales (dollars in thousands):
For the three months ended March 31, | For the six months ended March 31, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Sales | $ | 14,670 | 100.0 | $ | 12,664 | 100.0 | $ | 29,466 | 100.0 | $ | 24,884 | 100.0 | ||||||||||||||||||||
Cost of Sales | 5,687 | 38.8 | 4,774 | 37.7 | 11,690 | 39.7 | 9,213 | 37.0 | ||||||||||||||||||||||||
Gross Profit | 8,983 | 61.2 | 7,890 | 62.3 | 17,776 | 60.3 | 15,671 | 63.0 | ||||||||||||||||||||||||
Operating Expenses | 7,845 | 53.5 | 7,221 | 57.0 | 15,859 | 53.8 | 13,946 | 56.1 | ||||||||||||||||||||||||
Income from Operations | 1,138 | 7.7 | 669 | 5.3 | 1,917 | 6.5 | 1,725 | 6.9 | ||||||||||||||||||||||||
Other Income (Expense) | (20 | ) | (0.1 | ) | 1 | 0.0 | (32 | ) | (.1 | ) | (928 | ) | (3.7 | ) | ||||||||||||||||||
Income before Income Taxes | 1,118 | 7.6 | 670 | 5.3 | 1,885 | 6.4 | 797 | 3.2 | ||||||||||||||||||||||||
Provision for Income Taxes | 448 | 3.0 | 361 | 2.9 | 761 | 2.6 | 690 | 2.8 | ||||||||||||||||||||||||
Net Income | $ | 670 | 4.6 | $ | 309 | 2.4 | $ | 1,124 | 3.8 | $ | 107 | 0.4 |
Revenues
Sales for the three months ended March 31, 2012, increased by $2,006,000, or 15.8%, to $14,670,000, compared with sales of $12,664,000 for the three months ended March 31, 2011. Sales for the six months ended March 31, 2012, increased by $4,582,000, or 18.4%, to $29,466,000, compared with sales of $24,884,000 for the six months ended March 31, 2011. The increase in sales was primarily due to our continued emphasis on our direct response advertising campaign to obtain new customers and our customer service to maximize the reorder rates for our recurring customer base.
Effective January 1, 2012, BCBS of Florida stopped accepting our out-of-state insurance claims filed for customers that reside outside the state of Florida. As a result of this change by BCBS of Florida, our recurring orders decreased by approximately $434,000 for the three and six months ended March 31, 2012. This reduction was partially offset by an increase in Medicare rates that became effective January 1, 2012, which resulted in approximately $254,000 of additional revenue during the three and six months ended March 31, 2012.
Our direct-response advertising expenditures for the six months ended March 31, 2012, were $5,558,000 compared with $8,954,000 for the six months ended March 31, 2011.
Gross Profit
Gross profit for the three months ended March 31, 2012, increased by $1,093,000, or 13.9%, to $8,983,000, compared with gross profit of $7,890,000 for the three months ended March 31, 2011. For the six months ended March 31, 2012, gross profit increased by $2,105,000, or 13.4%, to $17,776,000, compared with gross profit of $15,671,000. The increase was attributed to our increased sales volume for the three and six months ended March 31, 2012, compared with the three and six months ended March 31, 2011.
As a percentage of sales, gross profit decreased by 1.1% and 2.7%, respectively, for the three and six months ended March 31, 2012, compared with the three and six months ended March 31, 2011. An increase in our ostomy supply sales, which have lower gross margins than our other product lines as a percentage of sales, contributed to a decline of 2.7% and 2.8%, respectively, for the three and six months ended March 31, 2012. An increase in shipping costs contributed to a decrease of 0.1% and 0.7%, respectively, for the three and six months ended March 31, 2012. These decreases, as a percentage of sales, were partially offset by an increase in Medicare rates, described above, that became effective January 1, 2012.
Operating Expenses
The following table provides a breakdown of our operating expenses for the three and six months ended March 31, 2012 and 2011, including percentage of sales (dollars in thousands):
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For the three months ended March 31, | For the six months ended March 31, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Payroll, taxes, & benefits | $ | 3,577 | 24.4 | $ | 2,930 | 23.1 | $ | 7,041 | 23.9 | $ | 5,771 | 23.2 | ||||||||||||||||||||
Advertising | 1,972 | 13.5 | 2,019 | 15.9 | 3,940 | 13.3 | 3,920 | 15.7 | ||||||||||||||||||||||||
Bad debts | 843 | 5.7 | 877 | 6.9 | 1,973 | 6.7 | 1,769 | 7.1 | ||||||||||||||||||||||||
Depreciation and amortization | 210 | 1.4 | 171 | 1.4 | 409 | 1.4 | 337 | 1.4 | ||||||||||||||||||||||||
General and administrative | 1,243 | 8.5 | 1,224 | 9.7 | 2,496 | 8.5 | 2,149 | 8.6 | ||||||||||||||||||||||||
Total Operating Expenses | $ | 7,845 | 53.5 | $ | 7,221 | 57.0 | $ | 15,859 | 53.8 | $ | 13,946 | 56.0 |
Payroll, taxes and benefits increased by $647,000, or 22.1%, to $3,577,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Payroll, taxes and benefits increased by $1,270,000, or 22.0%, to $7,041,000 for the six months ended March 31, 2012, compared with the six months ended March 31, 2011. The increase was due to an increase in the number of employees to support our increased sales volume. As of March 31, 2012, we had 299 active employees, compared with 250 at March 31, 2011.
Advertising expenses decreased by $47,000, or 2.3%, to $1,972,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, advertising expenses increased by $20,000, or 0.5%, to $3,940,000, compared with the six months ended March 31, 2011. The majority of our advertising expenses are associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expenses is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expenses for the three and six months ended March 31, 2012 and 2011 (dollars in thousands):
For the three months Ended March 31, | For the six months Ended March 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Advertising Expenses: | ||||||||||||||||
Amortization of direct-response costs | $ | 1,929 | $ | 1,990 | $ | 3,853 | $ | 3,835 | ||||||||
Other advertising expenses | 43 | 29 | 87 | 85 | ||||||||||||
Total Advertising Expenses | $ | 1,972 | $ | 2,019 | $ | 3,940 | $ | 3,920 |
The amortization of direct-response advertising costs is computed using the ratio that current period revenues for each direct-response advertising cost pool bear to the total of current and estimated future benefits for that direct-response advertising cost pool. We have persuasive evidence that demonstrates future benefits are realized from our direct-response advertising efforts beyond ten years. Since the reliability of accounting estimates decreases as the length of the period for which such estimates are made increases, we estimate future benefits for each advertising cost pool for a period of no longer than four years at each reporting period, which creates a “rolling” type amortization period. Once a particular cost pool has been amortized to a level where the difference between amortizing the cost pool over a “rolling” four-year period and amortizing the cost pool on a “straight-line” basis over a period shorter than four years is de minimis, we amortize the costs over a fixed time period based on current and expected future revenues. As a result of this policy, our direct-response advertising costs are typically amortized over a period between four and six years.
As of March 31, 2012, we had $18,897,000 of deferred advertising costs that will be expensed over a period between four and six years based on probable future net revenues for each cost pool, updated at each reporting period and expected to result directly from such advertising.
Similar to past direct-response advertising efforts, when we decreased our advertising spend in the first two quarters of fiscal year 2012, our costs to acquire new customers decreased. As a result of our decreased costs to acquire new customers, our advertising expense, as a percentage of sales, decreased by 2.4% for the three and six months ended March 31, 2012, compared with the three and six months ended March 31, 2011.
Bad debt expenses decreased by $34,000, or 3.9%, to $843,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, bad debt expenses increased by $204,000, or 11.5%, compared with the six months ended March 31, 2011. The increase in bad debt expenses for the six months ended March 31, 2012, is due to our increased sales levels, partially offset by improvements in our collection efforts during the three months ended March 31, 2012.
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Depreciation and amortization expenses increased by $39,000, or 22.8%, to $210,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, depreciation expense increased by $72,000, or 21.4%. The increase in depreciation expense is primarily attributed to the purchase of additional computer equipment to support the additional staff added as a result of our sales growth. Purchases of property and equipment totaled $119,000 and $163,000 during the six months ended March 31, 2012 and 2011, respectively.
General and administrative expenses increased by $19,000, or 1.6%, to $1,243,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, general and administrative costs increased by $347,000, or 16.2%, compared with the six months ended March 31, 2011. The increase is due to additional costs incurred for software, answering service expenses, selling expenses and postage to support the growth of our business. As a percentage of sales, general and administrative expenses have decreased by 1.2% and 0.1%, respectively, for the three and six months ended March 31, 2012, compared with the three and six months ended March 31, 2011.
Income from Operations
Income from operations for the three months ended March 31, 2012, increased by $469,000, or 70.1%, to $1,138,000, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, income from operations increased by $192,000, or 11.1%, to $1,917,000, compared with the six months ended March 31, 2011. The increase in operating income is primarily attributed to our increased sales volumes as well as a reduction as a percentage of sales in advertising, bad debt and general and administrative expenses, partially offset by reduced gross profit margins, as a result of our increased ostomy supply sales.
Other Income (Expense)
The following table shows a breakdown of other income (expense) for the three and six months ended March 31, 2012 and 2011 (dollars in thousands):
For the three months ended March 31, | For the six months ended March 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Other Income (Expense): | ||||||||||||||||
Interest Expense | $ | (20 | ) | $ | (1 | ) | $ | (32 | ) | $ | (32 | ) | ||||
Change in fair value of derivative liabilities | — | — | — | (902 | ) | |||||||||||
Gain (Loss) on disposal of assets | — | — | — | 2 | ||||||||||||
Interest income | — | 2 | — | 4 | ||||||||||||
Total Other Income (Expense) | $ | (20 | ) | $ | 1 | $ | (32 | ) | $ | (928 | ) |
Other income (expense) for the six months ended March 31, 2012, was primarily interest expense related to our outstanding balance on our credit line facility.
Other income (expense) for the six months ended March 31, 2011, was predominantly non-cash charges associated with the amortization of discounts on our convertible debt, recorded as interest expense, and non-cash charges associated with the change in fair value of derivative liabilities embedded within our convertible debt. Non-cash charges to other income (expense) for the six months ended March 31, 2011, totaled $923,000.
Interest expense increased by $19,000 for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. For the six months ended March 31, 2012, interest expense remained the same as six months ended March 31, 2011.
We were required to adjust the embedded derivative liabilities to fair value at each balance sheet date, or interim period, and recognize the changes in fair value as a non-cash charge or benefit to earnings. As of September 30, 2010, the fair value of the embedded derivative liability included in the October 2008 Convertible Note was $1,698,000. On October 15, 2010, the convertible note was converted into shares of our common stock at a conversion price of $0.75 per share. The fair value of the embedded derivative on October 15, 2010, was $2,600,000. As a result of the increase in fair value of the embedded derivative from September 30, 2010, to the date of conversion, $902,000 was recorded as an additional non-cash charge to earnings for the six months ended March 31, 2011.
Income Taxes
The provision for income taxes was $761,000 for the six months ended March 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $1,885,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.
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The provision for income taxes was $690,000 for the six months ended March 31, 2011. The effective tax rate was approximately 87% of the income before income taxes of $797,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes, primarily consisting of $902,000 of expense related to the change in fair value of derivative liabilities recorded for the six months ended March 31, 2011.
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended March 31, 2012 and 2011 (dollars in thousands):
For the Six Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Cash Flows: | ||||||||
Net cash provided by (used in) operating activities | $ | 845 | $ | (2,069 | ) | |||
Net cash used in investing activities | (101 | ) | (160 | ) | ||||
Net cash provided by (used in) financing activities | 1,007 | (605 | ) | |||||
Net increase (decrease) in cash | 1,751 | (2,834 | ) | |||||
Cash at beginning of period | 3,016 | 7,428 | ||||||
Cash at end of period | $ | 4,767 | $ | 4,594 |
The Company had cash of $4,767,000 at March 31, 2012, compared with cash of $3,016,000 at September 30, 2011, an increase of $1,751,000. The increase in cash for the six months ended March 31, 2012, is primarily due to $845,000 of cash generated through our operating activities for the six months ended March 31, 2012, and $1,000,000 of borrowings from the credit line facility.
Operating Activities
During the six months ended March 31, 2012, cash provided by operations was $845,000, as a result of net income of $1,124,000 plus non-cash charges of $7,191, 000 less changes in operating assets and liabilities of $7,470,000. The non-cash charges consist primarily of $3,853,000 for amortization of deferred advertising costs, $1,973,000 for bad debt expenses, $743,000 for deferred income taxes, $409,000 for depreciation and amortization, $111,000 for inventory reserve, and $81,000 for equity-based compensation associated with employee and director stock options. The changes in operating assets and liabilities for the six months ended March 31, 2012, consist of $5,558,000 of deferred advertising expenditures related to our direct response advertising efforts, increases for accounts receivable of $2,891,000 as a result of our increased sales, partially offset by an increase in accounts payable of $974,000 due to improved vendor payment terms for our higher volume items.
During the six months ended March 31, 2011, cash used in operations was $2,069,000, as a result of net income of $107,000 plus non-cash charges of $7,912, 000 less changes in operating assets and liabilities of $10,088,000. The non-cash charges consist primarily of $3,835,000 for amortization of deferred advertising costs, $1,769,000 for bad debt expense, $902,000 for the change in fair value of derivative liabilities, $690,000 for deferred income taxes, $337,000 for depreciation, $236,000 for equity-based compensation associated with employee and director stock options, and $96,000 for an increase in the reserve for contractual adjustments. The changes in operating assets and liabilities for the six months ended March 31, 2011, consist of $8,954,000 of deferred advertising expenditures related to our direct response advertising efforts, increases for accounts receivable of $2,561,000 and inventory of $458,000 as a result of our increased sales, and a decrease of $308,000 for accrued expenses primarily related to the payment of management incentives in October 2010, partially offset by an increase in accounts payable of $2,409,000 due to increased purchases and improved vendor payment terms for our higher volume items.
Investing Activities
During the six months ended March 31, 2012 and March 31, 2011, we purchased $101,000 and $163,000, respectively, of property and equipment to support our continued growth.
Financing Activities
During the six months ended March 31, 2012, cash provided by financing activities was $1,007,000, which included proceeds of $1,000,000 from our credit line facility and $41,000 of proceeds from our employee stock purchase plan, partially offset by payments of $21,000 for costs associated with the renewal of our PNC Credit Line Facility (see Item 1. Financial Statements, Note 4) and payments of $13,000 towards capital lease obligations.
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During the six months ended March 31, 2011, cash used in financing activities was $605,000, which included payments of $598,000 towards our debt obligations and payment of $51,000 for costs associated with a new PNC Credit Line Facility, partially offset by $44,000 of proceeds from our employee stock purchase plan.
Outlook
The second quarter of our fiscal year is typically a challenging quarter for us each year due to the annual renewal of our customers’ insurance coverage, primarily Medicare Part B coverage, and calendar year deductibles that must be met by the majority of our customers at the beginning of each calendar year. Compounding our challenges this year, effective January 1, 2012, BCBS of Florida stopped accepting our out-of-state insurance claims filed for our customers that reside outside of Florida. As a result of this change by BCBS of Florida, our recurring orders from our BCBS customers decreased by approximately $434,000 during the second quarter of this year. Late last year, we began reaching out to the BCBS plans outside of Florida. To date, we have contracted with an additional 18 BCBS plans. We are in the process of finalizing contracts with 2 additional BCBS plans, and plan to continue to expand into as many states as we can to increase our potential customer base.
During the second quarter of fiscal year 2012, we were able to generate $2.7 million of cash through operating activities, compared with $1.9 million of cash used for operating activities during the first quarter of fiscal year 2012. We were able to increase our cash during the quarter by submitting claims to our insurance carriers earlier than in previous quarters due to a more efficient claims process implemented over the last two quarters and increasing the balance of our accounts payable at quarter end. We expect to continue to manage our working capital requirements as needed in order to fund our direct response advertising efforts to facilitate future growth.
As of March 31, 2012, we had $4.8 million of cash and $4.4 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from the collection of accounts receivable and the sale of products, will be sufficient to meet our cash requirements during the next twelve months.
At March 31, 2012, our current assets of $18,723,000 exceeded our current liabilities of $7,152,000 by $11,571,000.
Our plan for the next twelve months includes the following:
· | Continue our advertising and marketing efforts; |
· | Increase our customer base; |
· | Continue to service our current customer base and increase the reorder rates; |
· | Increase the number of contracted insurance plans to expand our “in network” provider list; |
· | Continue fine tuning our processes and systems to improve efficiencies; |
· | Explore new inventory and shipping systems to improve our inventory management process and optimize shipping alternatives; |
· | Continue to invest in the expansion of our infrastructure; and |
· | Continue to increase our accounts receivable collection efforts. |
Off-Balance Sheet Arrangements
As of March 31, 2012, we had no off-balance sheet arrangements.
Critical Accounting Policies
See “Summary of Significant Accounting Policies” in the Notes to the unaudited condensed consolidated financial statements and our current Annual Report on Form 10-K for the year ended September 30, 2011, for a discussion of significant accounting policies, recent accounting pronouncements, and their effect, if any, on the Company.
Effect of Inflation
We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.
Change in Internal Control over Financial Reporting
During the three months ended March 31, 2012, the Company implemented the following changes in internal controls over financial reporting:
· | Documentation of Accounting Review and Approval Processs: The Company completed two full quarters with the revised review and approval process without any identified failures in our internal controls related to the accounting review and approval process. |
· | Inventory Controls: The Company adjusted the cost of goods sold journal entries to eliminate the unit of measure issues identified at the end of fiscal year 2011. The Company conducted physical inventory counts as of November 30, 2011 and March 31, 2012, and performed additional analytical and cut-off procedures during the six months ended March 31, 2012. We are in the process of evaluating new perpetual inventory systems and expect to implement a new inventory system during the remaining six months of fiscal year 2012. Until a new perpetual inventory system is implemented and the appropriate inventory controls are in place, the Company will continue to conduct quarterly physical inventories at quarter end and perform additional analytical and cut-off procedures to mitigate any material weaknesses associated with the lack of a perpetual inventory system. |
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.1 — Section 302 Certificate of Chief
Executive Officer
Exhibit 31.2 — Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 — Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 — Section 906 Certificate of Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
/s/ LIBERATOR MEDICAL HOLDINGS, INC.
Registrant
/s/ Mark A. Libratore | President | May 15, 2012 | ||
Mark A. Libratore | ||||
/s/ Robert J. Davis | Chief Financial Officer | May 15, 2012 | ||
Robert J. Davis |
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