UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 þ   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 þ   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 þ
					(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 þ

 

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 August 10, 2012
Common Stock, $.001		48,143,257

 

 

TABLE OF CONTENTS

 

		Page
PART I — FINANCIAL INFORMATION
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	17
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
SIGNATURES		19
EX-31.1
EX-31.2
EX-32.1
EX-32.2

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2012 (unaudited) and September 30, 2011
(In thousands, except dollar per share amounts)

 

		June 30,				September 30,
		2012				2011
Assets
Current Assets:
Cash		$	2,559			$	3,016
Accounts receivable, net of allowances of $4,425 and $4,177, respectively			10,041				7,860
Inventory, net of allowance for obsolete inventory of $242 and $144, respectively			2,567				3,009
Deferred taxes, current portion			1,998				1,877
Prepaid and other current assets			674				333
Total Current Assets			17,839				16,095
Property and equipment, net of accumulated depreciation of $2,725 and $2,186, respectively			1,292				1,626
Deferred advertising			20,524				17,191
Intangible assets, net of accumulated amortization of $74 and $25, respectively			256				305
Other assets			95				163
Total Assets		$	40,006			$	35,380
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	4,988			$	5,008
Accrued liabilities			1,420				1,119
Other current liabilities			70				103
Total Current Liabilities			6,478				6,230
Deferred tax liability			4,676				3,347
Credit line facility			2,500				1,500
Other long-term liabilities			101				48
Total Liabilities			13,755				11,125
Stockholders’ Equity:
Common stock, $.001 par value, 200,000 shares authorized, 48,232 and 48,135 shares issued, respectively; 48,143 and 48,046 shares outstanding at June 30, 2012, and September 30, 2011, respectively			48				48
Additional paid-in capital			34,700				34,504
Accumulated deficit			(8,447	)			(10,247	)
Treasury stock, at cost; 89 shares at June 30, 2012, and September 30, 2011			(50	)			(50	)
Total Stockholders’ Equity			26,251				24,255
Total Liabilities and Stockholders’ Equity		$	40,006			$	35,380

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three and nine months ended June 30, 2012 and 2011
(Unaudited)
(in thousands, except per share amounts)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2012				2011				2012				2011
Sales		$	14,961			$	13,319			$	44,427			$	38,203
Cost of Sales			5,836				5,237				17,526				14,450
Gross Profit			9,125				8,082				26,901				23,753
Operating Expenses
Payroll, taxes and benefits			3,526				3,072				10,567				8,843
Advertising			1,956				2,132				5,896				6,052
Bad debts			1,028				1,098				3,001				2,867
Depreciation and amortization			206				191				615				528
General and administrative			1,242				1,205				3,738				3,354
Total Operating Expenses			7,958				7,698				23,817				21,644
Income from Operations			1,167				384				3,084				2,109
Other Income (Expense)
Interest expense			(21	)			(3	)			(53	)			(35	)
Change in fair value of derivative liabilities			—				—				—				(902	)
Gain on sale of assets			—				—				—				2
Interest income			—				1				—				5
Total Other Income (Expense)			(21	)			(2	)			(53	)			(930	)
Income before Income Taxes			1,146				382				3,031				1,179
Provision for Income Taxes			470				292				1,231				982
Net Income		$	676			$	90			$	1,800			$	197
Basic earnings per share:
Weighted average shares outstanding			48,098				48,018				48,081				47,809
Earnings per share		$	0.01			$	0.00			$	0.04			$	0.00
Diluted earnings per share:
Weighted average shares outstanding			52,279				54,175				52,273				53,751
Earnings per share		$	0.01			$	0.00			$	0.03			$	0.00

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the nine months ended June 30, 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			—				—				115				—				—				115
Common stock issued for employee stock purchase plan			97				—				81				—				—				81
Net income			—				—				—				1,800				—				1,800
Balance at June 30, 2012			48,143			$	48			$	34,700			$	(8,477	)		$	(50	)		$	26,251

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30, 2012 and 2011
(Unaudited)
(in thousands)

 

		Nine Months Ended
		June 30,
		2012				2011
Cash flow from operating activities:
Net Income		$	1,800			$	197
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			6,386				6,458
Change in fair value of derivative liabilities			—				902
Equity based compensation			115				328
Provision for doubtful accounts and contractual adjustments			3,039				3,059
Non-cash interest related to convertible notes payable			—				21
Deferred income taxes			1,208				982
Reserve for inventory obsolescence			98				28
Gain on sale of assets			—				(2	)
Changes in operating assets and liabilities:
Accounts receivable			(5,220	)			(4,326	)
Deferred advertising			(9,104	)			(12,765	)
Inventory			344				(622	)
Other assets			(252	)			(36	)
Accounts payable			(20	)			1,667
Accrued liabilities			326				60
Other liabilities			(78	)			(58	)
Net Cash Flow Used in Operating Activities			(1,358	)			(4,107	)
Cash flow from investing activities:
Purchase of property and equipment			(112	)			(306	)
Acquisition of SGV Medical Supplies (see Note 3)			—				(466	)
Proceeds from the sale of assets			—				3
Net Cash Flow Used in Investing Activities			(112	)			(769	)
Cash flow from financing activities:
Proceeds from employee stock purchase plan			56				64
Proceeds from credit line facility			1,000				500
Costs associated with credit line facility			(21	)			(51	)
Payments of debt and capital lease obligations			(22	)			(613	)
Net Cash Flow Provided by (Used in) Financing Activities			1,013				(100	)
Net decrease in cash			(457	)			(4,976	)
Cash at beginning of period			3,016				7,428
Cash at end of period		$	2,559			$	2,452
Supplemental disclosure of cash flow information:
Cash paid for interest		$	51			$	51
Cash paid for income taxes		$	—			$	5
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures funded by capital lease borrowing		$	120			$	—
Common stock issued for conversion of debt		$	—			$	5,100

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

Liberator Medical Holdings, Inc. and Subsidiaries

 

Notes To The Unaudited Condensed Consolidated Financial Statements

June 30, 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 nine months ended June 30, 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.

 

 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 $466,000.

 

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.

 

The following table summarizes the allocation of the purchase price consideration paid to the fair value of the assets acquired as of the date of the acquisition (in thousands):

 

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 June 30, 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 June 30, 2012, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility. As of June 30, 2012, the availability under the PNC Credit Line Facility was $4,706,000 with an outstanding balance of $2,500,000. The outstanding balance has been classified as non-current since the due date under the credit line facility is February 2014, and a borrowing base in excess of amounts outstanding as of June 30, 2012, will be maintained as a result of expected collateral levels. The interest rate as of June 30, 2012, for the outstanding balance was 3.00%. For the nine months ended June 30, 2012 and 2011, the Company incurred $50,000 and $1,000, respectively, 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 warrant had a term of 3 years and was exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share. The warrant expired in October 2011.

 

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 nine months ended June 30, 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 Derivative 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 nine months ended June 30, 2011.

 

Note 7 — Stockholders’ Equity

 

Warrants

 

A summary of warrants issued, exercised and expired during the nine months ended June 30, 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 June 30, 2012				5,532,333			$	1.09

 

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 June 30, 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 nine months ended June 30, 2011, was $0.40. There were no options granted during the nine months ended June 30, 2012. There were no options exercised during the nine months ended June 30, 2012 and 2011. The fair values of stock-based awards granted during the nine months ended June 30, 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 nine months ended June 30, 2012 and 2011, the Company recorded $92,000 and $305,000, 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 June 30, 2012, there is $4,000 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 0.3 years.

 

 

Stock option activity for the nine months ended June 30, 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 June 30, 2012			2,035,000			$	0.97				1.99			$	221,400
Options exercisable at June 30, 2012			1,912,500			$	0.95				1.90			$	221,400
Options vested or expected to vest at June 30, 2012			2,035,000			$	0.97				1.99			$	221,400

 

2009 Employee Stock Purchase Plan

 

The Employee Stock Purchase Plan (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 June 30, 2012, 371,188 shares of the Company’s common stock have been purchased through the ESPP, using $293,000 of proceeds received from employee payroll deductions. For the nine months ended June 30, 2012 and 2011, the Company received $56,000 and $64,000, respectively, through payroll deductions under the ESPP.

 

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 nine months ended June 30, 2012 and 2011, the Company recognized $23,000 and $23,000, 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 nine months ended June 30, 2012 and 2011 (in thousands, except per share amounts):

 

		For the three months								For the nine months
		ended June 30,								ended June 30,
		2012				2011				2012				2011
Numerator:
Net income — basic & diluted		$	676			$	90			$	1,800			$	197
Denominator:
Weighted average shares outstanding — basic			48,098				48,018				48,081				47,809
Effect of dilutive securities:
Stock options and warrants			4,181				6,157				4,192				5,942
Weighted average shares outstanding — diluted			52,279				54,175				52,273				53,751
Earnings per share — basic		$	0.01			$	0.00			$	0.04			$	0.00
Earnings per share — diluted		$	0.01			$	0.00			$	0.03			$	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 nine months ended June 30, 2012 and 2011 (in thousands):

 

		For the three and nine months
		ended June 30,
		2012				2011
Stock options			1,150				640
Warrants			5,532				358
Totals			6,682				998

 

Note 9 — Income Taxes

 

The provision for income taxes was $1,231,000 for the nine months ended June 30, 2012. The effective tax rate was approximately 41% of the income before income taxes of $3,031,000, 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 $982,000 for the nine months ended June 30, 2011. The effective tax rate was approximately 83% of the income before income taxes of $1,179,000, 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 nine months ended June 30, 2011.

 

 

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, 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 revenue streams, including new and recurring orders, for the three and nine months ended June 30, 2012 and 2011, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

 

Customer leads		For the three months ended June 30,								For the nine months ended June 30,
received during		2012				2011				2012				2011
Pre-FY 2008		$	635			$	701			$	1,981			$	2,183
FY 2008			2,246				2,474				6,980				7,776
FY 2009			3,219				3,483				9,981				10,955
FY 2010			3,046				3,390				9,368				10,975
FY 2011			3,368				3,329				11,009				6,453
FY 2012			2,622				n/a				5,204				n/a
Total Revenues*			15,136				13,377				44,523				38,342
Other Sales & Adjustments			(175	)			(58	)			(96	)			(139	)
Net Sales		$	14,961			$	13,319			$	44,427			$	38,203

 

* Revenues include orders from new and recurring customers. Revenue from new customers will impact comparisons between the three and nine-month periods for fiscal year 2012 and the corresponding periods from fiscal year 2011, especially revenue from new customers acquired during the latter portion of the fiscal years.

 

 

We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We 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 nine months ended June 30, 2012 and 2011, including percentage of sales (dollars in thousands):

 

		For the three months ended June 30,																For the nine months ended June 30,
		2012								2011								2012								2011
		Amount				%				Amount				%				Amount				%				Amount				%
Sales		$	14,961				100.0			$	13,319				100.0			$	44,427				100.0			$	38,203				100.0
Cost of Sales			5,836				39.0				5,237				39.3				17,526				39.4				14,450				37.8
Gross Profit			9,125				61.0				8,082				60.7				26,901				60.6				23,753				62.2
Operating Expenses			7,958				53.2				7,698				57.8				23,817				53.6				21,644				56.7
Income from Operations			1,167				7.8				384				2.9				3,084				7.0				2,109				5.5
Other Expense			(21	)			(0.1	)			(2	)			0.0				(53	)			(0.1	)			(930	)			(2.4	)
Income before Income Taxes			1,146				7.7				382				2.9				3,031				6.9				1,179				3.1
Provision for Income Taxes			470				3.1				292				2.2				1,231				2.8				982				2.6
Net Income		$	676				4.5			$	90				0.7			$	1,800				4.1			$	197				0.5

 

Revenues

 

Sales for the three months ended June 30, 2012, increased by $1,642,000, or 12.3%, to $14,961,000, compared with sales of $13,319,000 for the three months ended June 30, 2011. Sales for the nine months ended June 30, 2012, increased by $6,224,000, or 16.3%, to $44,427,000, compared with sales of $38,203,000 for the nine months ended June 30, 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.

 

Our direct-response advertising expenditures for the nine months ended June 30, 2012, were $9,104,000 compared with $12,765,000 for the nine months ended June 30, 2011.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2012, increased by $1,043,000, or 12.9%, to $9,125,000, compared with gross profit of $8,082,000 for the three months ended June 30, 2011. For the nine months ended June 30, 2012, gross profit increased by $3,148,000, or 13.3%, to $26,901,000, compared with gross profit of $23,753,000 for the nine months ended June 30, 2011. The increase was attributed to our increased sales volume for the three and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011.

 

As a percentage of sales, gross profit increased by 0.3% for the three months ended June 30, 2012, and decreased by 1.6% for the nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011. The decrease of 1.6% for the nine months ended June 30, 2012, was due to an increase in our ostomy supply sales, which have lower gross margins than our other product lines, as a percentage of our total product mix compared with the nine months ended June 30, 2011.

 

Operating Expenses

 

The following table provides a breakdown of our operating expenses for the three and nine months ended June 30, 2012 and 2011, including percentage of sales (dollars in thousands):

 

		For the three months ended June 30,																For the nine months ended June 30,
		2012								2011								2012								2011
		Amount				%				Amount				%				Amount				%				Amount				%
Operating Expenses:
Payroll, taxes, & benefits		$	3,526				23.5			$	3,072				23.1			$	10,567				23.8			$	8,843				23.1
Advertising			1,956				13.1				2,132				16.0				5,896				13.2				6,052				15.9
Bad debts			1,028				6.9				1,098				8.3				3,001				6.8				2,867				7.5
Depreciation and amortization			206				1.4				191				1.4				615				1.4				528				1.4
General and administrative			1,242				8.3				1,205				9.0				3,738				8.4				3,354				8.8
Total Operating Expenses		$	7,958				53.2			$	7,698				57.8			$	23,817				53.6			$	21,644				56.7

 

 

Payroll, taxes and benefits increased by $454,000, or 14.8%, to $3,526,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. Payroll, taxes and benefits increased by $1,724,000, or 19.5%, to $10,567,000 for the nine months ended June 30, 2012, compared with the nine months ended June 30, 2011. The increase was due to an increase in the number of employees to support our increased sales volume. As of June 30, 2012, we had 313 active employees, compared with 277 at June 30, 2011.

  

Advertising expenses decreased by $176,000, or 8.3%, to $1,956,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months ended June 30, 2012, advertising expenses decreased by $156,000, or 2.6%, to $5,896,000, compared with the nine months ended June 30, 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 nine months ended June 30, 2012 and 2011 (dollars in thousands):

 

		For the three months ended June 30,								For the nine months ended June 30,
		2012				2011				2012				2011
Advertising Expenses:
Amortization of direct-response costs		$	1,918			$	2,095			$	5,770			$	5,929
Other advertising expenses			38				37				126				123
Total Advertising Expenses		$	1,956			$	2,132			$	5,896			$	6,052

 

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 June 30, 2012, we had $20,524,000 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 during the first three quarters of fiscal year 2012 our costs to acquire new customers decreased, compared with the first three quarters of fiscal year 2011. As a result of our decreased costs to acquire new customers, our advertising expense, as a percentage of sales, decreased by 2.9% and 2.7%, respectively, for the three and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011.

 

Bad debt expenses decreased by $70,000, or 6.4%, to $1,028,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months ended June 30, 2012, bad debt expenses increased by $134,000, or 4.7%, compared with the nine months ended June 30, 2011. As a percentage of sales, bad debt expense decreased by 1.3% and 0.7%, respectively, for the three and nine months ended June 30, 2012, as a result of improvements in our billing and collection efforts.

 

Depreciation and amortization expenses increased by $15,000, or 7.9%, to $206,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months ended June 30, 2012, depreciation expense increased by $87,000, or 16.5%. 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 $232,000 and $306,000 during the nine months ended June 30, 2012 and 2011, respectively.

 

General and administrative expenses increased by $37,000, or 3.1%, to $1,242,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months ended June 30, 2012, general and administrative costs increased by $384,000, or 11.5%, compared with the nine months ended June 30, 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 0.7% and 0.4%, respectively, for the three and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011.

 

 

Income from Operations

 

Income from operations for the three months ended June 30, 2012, increased by $783,000, or 203.9%, to $1,167,000, compared with the three months ended June 30, 2011. For the nine months ended June 30, 2012, income from operations increased by $975,000, or 46.2%, to $3,084,000, compared with the nine months ended June 30, 2011. The increase in operating income is primarily attributed to increased gross profits driven by 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 an increase in payroll expenses.

 

Other Income (Expense)

 

The following table shows a breakdown of other income (expense) for the three and nine months ended June 30, 2012 and 2011 (dollars in thousands):

 

		For the three months ended June 30,								For the nine months ended June 30,
		2012				2011				2012				2011
Other Income (Expense):
Interest Expense		$	(21	)		$	(3	)		$	(53	)		$	(35	)
Change in fair value of derivative liabilities			—				—				—				(902	)
Gain on disposal of assets			—				—				—				2
Interest income			—				1				—				5
Total Other Income (Expense)		$	(21	)		$	(2	)		$	(53	)		$	(930	)

 

Other income (expense) for the three and nine months ended June 30, 2012, was interest expense related to our outstanding balance on our credit line facility.

 

Other income (expense) for the nine months ended June 30, 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 nine months ended June 30, 2011, totaled $923,000.

 

Interest expense increased by $18,000 for the three months and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011, respectively.

 

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 nine months ended June 30, 2011.

 

 Income Taxes

 

The provision for income taxes was $1,231,000 for the nine months ended June 30, 2012. The effective tax rate was approximately 41% of the income before income taxes of $3,031,000, 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 $982,000 for the nine months ended June 30, 2011. The effective tax rate was approximately 83% of the income before income taxes of $1,179,000, 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 nine months ended June 30, 2011.

 

 Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing, and financing activities for the nine months ended June 30, 2012 and 2011 (dollars in thousands): 

 

 

 

		For the Nine Months Ended
		June 30,
		2012				2011
Cash Flows:
Net cash used in operating activities		$	(1,358	)		$	(4,107	)
Net cash used in investing activities			(112	)			(769	)
Net cash provided by (used in) financing activities			1,013				(100	)
Net increase (decrease) in cash			(457	)			(4,976	)
Cash at beginning of period			3,016				7,428
Cash at end of period		$	2,559			$	2,452

 

The Company had cash of $2,559,000 at June 30, 2012, compared with cash of $3,016,000 at September 30, 2011, a decrease of $457,000. The decrease in cash for the nine months ended June 30, 2012, is primarily due to $1,358,000 of cash used in our operating activities for the nine months ended June 30, 2012 partially offset by $1,000,000 of borrowings from the credit line facility.

 

During the three months ended June 30, 2012, we saw a significant increase in the number of Medicare pre-payment audits for claims that were submitted to one of the four Medicare regions. The results of these audits have not generated a significant number of denials or adjustments, and we expect to receive payment for these claims from Medicare. However, we have experienced a delay of up to 45 to 90 days in receiving payments for these claims, resulting in an increase of our accounts receivable and a decrease in our cash of approximately $1.0 million during the three months ended June 30, 2012.

 

Operating Activities

 

During the nine months ended June 30, 2012, cash used by operations was $1,358,000, as a result of net income of $1,800,000 plus non-cash charges of $10,846,000 less changes in operating assets and liabilities of $14,004,000. The non-cash charges consist primarily of $5,770,000 for amortization of deferred advertising costs, $3,001,000 for bad debt expenses $1,208,000 for deferred income taxes, $616,000 for depreciation and amortization, $98,000 for inventory reserve, and $115,000 for equity-based compensation associated with employee and director stock options. The changes in operating assets and liabilities for the nine months ended June 30, 2012, consist of $9,104,000 of deferred advertising expenditures related to our direct response advertising efforts, increases for accounts receivable of $5,220,000 as a result of our increased sales, partially offset by decreases in inventory and accrued expenses of $344,000 and $326,000, respectively.

 

During the nine months ended June 30, 2011, cash used in operations was $4,107,000, as a result of net income of $197,000 plus non-cash charges of $11,776, 000 less changes in operating assets and liabilities of $16,080,000. The non-cash charges consist primarily of $5,929,000 for amortization of deferred advertising costs, $2,867,000 for bad debt expense, $902,000 for the change in fair value of derivative liabilities, $982,000 for deferred income taxes, $529,000 for depreciation, $328,000 for equity-based compensation associated with employee and director stock options, and $192,000 for an increase in the reserve for contractual adjustments. The changes in operating assets and liabilities for the nine months ended June 30, 2011, consist of $12,765,000 of deferred advertising expenditures related to our direct response advertising efforts, increases for accounts receivable of $4,326,000 and inventory of $622,000 as a result of our increased sales, partially offset by an increase in accounts payable of $1,667,000 due to increased purchases and improved vendor payment terms for our higher volume items.

 

Investing Activities

 

During the nine months ended June 30, 2012 and June 30, 2011, we purchased $112,000 and $306,000, respectively, of property and equipment to support our continued growth. In addition, during the nine months ended June 30, 2011, we used $466,000 of cash for the acquisition of SGV Medical Supplies.

 

Financing Activities

 

During the nine months ended June 30, 2012, cash provided by financing activities was $1,013,000, which included proceeds of $1,000,000 from our credit line facility and $56,000 of proceeds from our employee stock purchase plan, partially offset by payments of $22,000 towards capital lease obligations and $21,000 for costs associated with the renewal of our PNC Credit Line Facility.

 

During the nine months ended June 30, 2011, cash used in financing activities was $100,000, which included payments of $613,000 towards our debt obligations and payment of $51,000 for costs associated with the PNC Credit Line Facility, partially offset by $500,000 of proceeds from our credit line facility and $64,000 of proceeds from our employee stock purchase plan.

 

Outlook

 

As of June 30, 2012, we had $2.6 million of cash and $4.7 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 June 30, 2012, our current assets of $17,839,000 exceeded our current liabilities of $6,478,000 by $11,361,000.

 

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 systems to improve our inventory management processes;

 

·

Continue to invest in the expansion of our infrastructure; and

 

·

Continue to increase our accounts receivable collection efforts.

 

Off-Balance Sheet Arrangements

 

As of June 30, 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.

 

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 Securities Exchange Act of 1934 (“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 June 30, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

 

Change in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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

 

 

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		August 14, 2012
Mark A. Libratore
/s/ Robert J. Davis		Chief Financial Officer		August 14, 2012
Robert J. Davis