UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

  X .QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013

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  X . 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  X . 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	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      . No  X .

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 February 7, 2014
Common Stock, $.001		52,506,958

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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	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	17
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
SIGNATURES		18

2

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of December 31, 2013 (unaudited) and September 30, 2013

(In thousands, except dollar per share amounts)

		December 31, 2013			September 30, 2013
Assets
Current Assets:
Cash		$	12,195		$	12,453
Accounts receivable, net of allowances of $4,745 and $4,502, respectively			9,589			7,836
Inventory, net of allowance for obsolete inventory of $321 and $308, respectively			2,482			2,187
Deferred tax assets			2,112			2,067
Prepaid and other current assets			626			219
Total Current Assets			27,004			24,762
Property and equipment, net of accumulated depreciation of $3,637 and $3,492, respectively			944			1,044
Deferred advertising, net			23,311			22,705
Intangible assets, net of accumulated amortization of $194 and $169, respectively			388			414
Other assets			170			174
Total Assets		$	51,817		$	49,099
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	6,381		$	4,915
Accrued liabilities			1,569			1,354
Dividends payable			1,572			1,569
Income tax payable			1,681			1,195
Other current liabilities			93			111
Total Current Liabilities			11,296			9,144
Deferred tax liabilities			8,487			8,561
Credit line facility			1,500			1,500
Other long-term liabilities			51			63
Total Liabilities			21,334			19,268
Stockholders’ Equity:
Common stock, $.001 par value, 200,000 shares authorized, 52,757 and 52,637 shares issued, respectively; 52,403 and 52,283 shares outstanding at December 31, 2013, and September 30, 2013, respectively			53			53
Additional paid-in capital			35,215			35,111
Accumulated deficit			(4,305)			(4,853)
Treasury stock, at cost; 354 shares at December 31, 2013, and September 30, 2013			(480)			(480)
Total Stockholders’ Equity			30,483			29,831
Total Liabilities and Stockholders’ Equity		$	51,817		$	49,099
See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2013 and 2012
(Unaudited)
(in thousands, except per share amounts)

		Three Months Ended December 31,
		2013			2012
Net Sales		$	18,637		$	17,551
Cost of Sales			6,882			6,573
Gross Profit			11,755			10,978
Operating Expenses
Payroll, taxes and benefits			3,657			3,843
Advertising			2,326			2,203
Bad debts			824			1,278
Depreciation and amortization			171			164
General and administrative			1,277			1,232
Total Operating Expenses			8,255			8,720
Income from Operations			3,500			2,258
Other Expenses			(13)			(21)
Income before Income Taxes			3,487			2,237
Provision for Income Taxes			1,367			885
Net Income		$	2,120		$	1,352
Basic earnings per share:
Weighted average shares outstanding			52,358			48,147
Earnings per share		$	0.04		$	0.03
Diluted earnings per share:
Weighted average shares outstanding			53,228			52,143
Earnings per share		$	0.04		$	0.03
Dividends declared per common share		$	0.03		$	-
See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the three months ended December 31, 2013

(Unaudited)

(in thousands)

							Additional									Total
		Common Stock					Paid			Accumulated			Treasury			stockholders’
		Shares		Amount			In Capital			Deficit			Stock			Equity
Balance at October 1, 2013		52,283		$	53		$	35,111		$	(4,853)		$	(480)		$	29,831
Options issued to employees and directors		-			-			32			-			-			32
Common stock issued for exercise of employee stock options		120			-			72			-			-			72
Net income		-			-			-			2,120			-			2,120
Cash dividends declared, $0.03 per share		-			-			-			(1,572)			-			(1,572)
Balance at December 31, 2013		52,403		$	53		$	35,215		$	(4,305)		$	(480)		$	30,483
See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the three months ended December 31, 2013 and 2012

(Unaudited)

(in thousands)

		Three Months Ended December 31,
		2013			2012
Cash flow from operating activities:
Net Income		$	2,120		$	1,352
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,482			2,310
Equity based compensation			32			10
Provision for doubtful accounts and contractual adjustments			1,027			1,335
Deferred income taxes			(120)			805
Reserve for inventory obsolescence			13			53
Changes in operating assets and liabilities:
Accounts receivable			(2,779)			(169)
Deferred advertising			(2,918)			(2,753)
Inventory			(307)			148
Other assets			(402)			(57)
Accounts payable			1,952			(2,013)
Accrued liabilities			215			393
Other liabilities			(8)			3
Net Cash Flow Provided by Operating Activities			1,307			1,417
Cash flow from investing activities:
Purchase of property and equipment			(51)			(308)
Proceeds from sale of property and equipment			4			-
Net Cash Flow Used in Investing Activities			(47)			(308)
Cash flow from financing activities:
Proceeds from employee stock purchase plan			-			13
Proceeds from exercise of employee stock options			72			-
Cash dividends paid			(1,569)			-
Payments of capital lease obligations			(22)			(17)
Net Cash Flow Used in Financing Activities			(1,518)			(4)
Net increase (decrease) in cash			(258)			1,105
Cash at beginning of period			12,453			3,326
Cash at end of period		$	12,195		$	4,431
Supplemental disclosure of cash flow information:
Cash paid for interest		$	15		$	21
Cash paid for income taxes		$	1,000		$	5
Supplemental schedule of non-cash financing activities:
Cash dividends declared, but not yet paid		$	1,572		$	-
See accompanying notes to unaudited condensed consolidated financial statements.

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 Liberator Medical Holdings, Inc. and Subsidiaries

Notes To The Unaudited Condensed Consolidated Financial Statements

December 31, 2013

 

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, 2013, that was filed with the SEC on December 23, 2013. The results of operations for the three months ended December 31, 2013, 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., Practica Medical Manufacturing, Inc., and Tri-County Medical & Ostomy Supplies, Inc., its wholly-owned subsidiaries.

 

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, 2013. There were no material changes to our significant accounting policies during the interim period ended December 31, 2013.

 

 Note 3 — 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 expires in February 2015.

 

The PNC Credit Line Facility requires the Company to comply with certain financial covenants which are defined in the credit agreement. As of December 31, 2013, 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 December 31, 2013, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility. As of December 31, 2013, the availability under the PNC Credit Line Facility was $6,202,000 with an outstanding balance of $1,500,000. The interest rate for the outstanding balance as of December 31, 2013, was 2.92%.  For the three months ended December 31, 2013 and 2012, the Company incurred $11,000 and $19,000, respectively, in interest expense related to the PNC Credit Line Facility.

  

Note 4 — Stockholders’ Equity

 

Employee and Director Stock Options

 

The Company granted 150,000 and 100,000 options during the three months ended December 31, 2013 and 2012, respectively. The weighted-average grant date fair values of the options granted were $0.50 and $0.29, for the three months ended December 31, 2013 and 2012, respectively.  There were 120,000 options exercised during the three months ended December 31, 2013, and none exercised during the three months ended December 31, 2012. The total intrinsic value of options exercised during the three months ended December 31, 2013, was approximately $203,000.

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The fair values of stock-based awards granted during the three months ended December 31, 2013 and 2012, were calculated with the following weighted-average assumptions:

		2013		2012
Risk-free interest rate:		0.68%		0.34%
Expected term:		2.99 years		3.12 years
Expected dividend yield:		5.60%		0.00%
Expected volatility:		48.34%		50.58%

For the three months ended December 31, 2013 and 2012, the Company recorded $32,000 and $5,000, 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 December 31, 2013, there was $88,000 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 1.75 years.

Stock option activity for the three months ended December 31, 2013, is summarized as follows:

2007 Stock Plan:		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at October 1, 2013		1,450,500		$	1.07		1.98		$	1,401,445
Granted		150,000			2.15		-			-
Exercised		(120,000)			.60		-			-
Expired or forfeited		(20,000)			.60		-			-
Options outstanding at December 31, 2013		1,460,500		$	1.23		2.24		$	4,491,010
Options exercisable at December 31, 2013		1,178,000		$	1.18		1.73		$	3,464,210
Options vested or expected to vest at December 31, 2013		1,460,500		$	1.23		2.24		$	4,491,010

Note 5 — 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 months ended December 31, 2013 and 2012 (in thousands, except per share amounts):

		For the three months ended December 31,
		2013			2012
Numerator:
Net income — basic and diluted		$	2,120		$	1,352
Denominator:
Weighted average shares outstanding — basic			52,358			48,147
Effect of dilutive securities:
Stock options and warrants			870			3,996
Weighted average shares outstanding — diluted			53,228			52,143
Earnings per share — basic		$	0.04		$	0.03
Earnings per share — diluted		$	0.04		$	0.03

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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 months ended December 31, 2013 and 2012 (in thousands):

	For the three months ended December 31,
	2013		2012
Stock options	-		1,650
Warrants	-		5,407
Totals	-		7,057

Note 6 — Income Taxes

 

The provision for income taxes was $1,367,000 for the three months ended December 31, 2013.  The effective tax rate was approximately 39% of income before income taxes of $3,487,000, 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 $885,000 for the three months ended December 31, 2012.  The effective tax rate was approximately 40% of income before income taxes of $2,237,000, 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.

Note 7 — Subsequent Events

On January 31, 2014, the Company’s Board of Directors approved a cash dividend of $0.03 per common share to its shareholders. The dividend will be paid on April 10, 2014, to all shareholders of record as of the close of business on March 26, 2014. The total dividend is expected to be approximately $1.6 million.

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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. Forward-looking statements speak only as of the date made. Various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of distributing or marketing activities, competitive and regulatory factors, and additional factors set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, 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, 2013, 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.

 

Company Overview

 

Liberator Medical Supply, Inc. (“Liberator Medical”), 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. Accredited by The Joint Commission, 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 by our patients on a recurring basis, generally on a continual basis for a lifetime, 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 who require a continuous supply of medical products that we can provide at attractive gross margins. Our advertising efforts do not represent an effort to target new markets or sell new products, but are a continuation of our efforts to acquire new customers in the markets we currently serve. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers.

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 with us within three to six months from the time we receive initial contact from the customer. 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.

The following table shows our revenue streams, including new and recurring orders, for the three months ended December 31, 2013 and 2012, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

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New and recurring revenues generated		For the three months ended December 31,
from customer leads received during:		2013			2012
Pre-FY 2009		$	2,678		$	2,953
FY 2009			2,912			3,279
FY 2010			2,720			3,086
FY 2011			3,059			3,365
FY 2012			3,141			3,398
FY 2013			3,006			1,010
FY 2014			882			n/a
Total Revenues *			18,398			17,591
Other Sales and Adjustments			239			(40)
Net Sales		$	18,637		$	17,551
* Revenues include orders from new and recurring customers, net of contractual allowances. Revenue from new customers will impact comparisons between the periods for fiscal year 2014 and the corresponding periods from fiscal year 2013, especially revenue from new customers

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 months ended December 31, 2013 and 2012 (dollars in thousands):

		2013					2012
		Amount			%		Amount			#
Net Sales		$	18,637		100.0		$	17,551		100.0
Cost of Sales			6,882		36.9			6,573		37.5
Gross Profit			11,755		63.1			10,978		62.5
Operating Expenses			8,255		44.3			8,720		49.7
Income from Operations			3,500		18.8			2,258		12.8
Other Expenses			(13)		(0.1)			(21)		(0.1)
Income before Income Taxes			3,487		18.7			2,237		12.7
Provision for Income Taxes			1,367		7.3			885		5.0
Net Income		$	2,120		11.4		$	1,352		7.7

Revenues

Net sales for the three months ended December 31, 2013, increased by $1,086,000, or 6.2%, to $18,637,000, compared with net sales of $17,551,000 for the three months ended December 31, 2012.  The increase in net sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base.

Our direct-response advertising expenditures for the three months ended December 31, 2013, were $2,918,000 compared with $2,753,000 for the three months ended December 31, 2012. We acquired 3,008 and 3,908 new customers during the three months ended December 31, 2013 and 2012, respectively.

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three months ended December 31, 2013 and 2012 (dollars in thousands):

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		2013			2012
New Customers *		$	1,670		$	1,984
Recurring Customer Base			16,728			15,607
Total Revenues, net of contractual allowances			18,398			17,591
Other Sales and Adjustments			239			(40)
Net Sales		$	18,637		$	17,551
*We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For the three months ended December 31, 2013, $882 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2013. For the three months ended December 31, 2012, $1,010 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2012. The remaining net sales from new customers acquired were generated from leads received during prior periods.

The number of new customers acquired and the amount of revenue generated by new customers during a particular quarter is impacted by the amount of advertising spend in the current quarter and in the previous quarters. Our direct-response advertising spend for the two quarters immediately preceding the three months ended December 31, 2013, averaged $2.0 million per quarter. For the two quarters immediately preceding the three months ended December 31, 2012, our direct-response advertising spend averaged $3.5 million per quarter, which contributed to the higher number of new customers and revenues generated by new customers during the three months ended December 31, 2012.

Gross Profit

Gross profit for the three months ended December 31, 2013, increased by $777,000, or 7.1%, to $11,755,000, compared with gross profit of $10,978,000 for the three months ended December 31, 2012.  The increase was attributed to our increased sales volume for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

As a percentage of sales, gross profit increased by 0.6% to 63.1% for the three months ended December 31, 2013, compared with gross profit of 62.5% for the three months ended December 31, 2012. The increase in gross profit as a percentage of sales was primarily attributed to a reduction in product costs from one of our vendors pursuant to a three-year agreement, effective November 1, 2013.

Operating Expenses

The following table provides a breakdown of our operating expenses for the three months ended December 31, 2013 and 2012, (dollars in thousands):

		2013					2012
		Amount			%		Amount			%
Operating Expenses:
Payroll, taxes and benefits		$	3,657		19.6		$	3,843		21.9
Advertising			2,326		12.5			2,203		12.6
Bad debts			824		4.4			1,278		7.3
Depreciation and amortization			171		0.9			164		0.9
General and administrative			1,277		6.9			1,232		7.0
Total Operating Expenses		$	8,255		44.3		$	8,720		49.7

Payroll, taxes and benefits decreased by $186,000, or 4.8%, to $3,657,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The decrease was due to a reduction in the number of employees as a result of  process and system enhancements implemented during fiscal year 2013. As of December 31, 2013, we had 317 active employees, compared with 348 at December 31, 2012.

Advertising expenses increased by $123,000, or 5.6%, to $2,326,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

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The majority of our advertising expenses is 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 months ended December 31, 2013 and 2012 (dollars in thousands):

		2013			2012
Advertising Expenses:
Amortization of direct-response costs		$	2,311		$	2,147
Other advertising expenses			15			56
Total Advertising Expenses		$	2,326		$	2,203

Direct response advertising costs are accumulated into quarterly cost pools and amortized separately. The amortization is the amount 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 four 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 amortized over a period of approximately six years based on probable future net revenues updated at each reporting period.

The table below shows our historical direct response advertising spend and a breakdown of the amortization expense associated with the respective accumulated advertising cost pools for the three months ended December 31, 2013 and 2012. For presentation purposes, the quarterly advertising cost pools prior to fiscal year 2013 have been aggregated into fiscal years (dollars in thousands):

Actual Advertising			Grouped by Fiscal or		Amortization Expense for the three months ended December 31,						Deferred Advertising Balance @
Spend			Interim Period		2013			2012			12/31/2013
$	1,567		FY2008		$	-		$	10		$	-
	4,191		FY2009			43			66			141
	10,808		FY2010			283			343			1,560
	15,245		FY2011			589			668			4,833
	13,113		FY2012			621			867			7,250
	2,753		FY2013-Q1			144			193			1,874
	2,187		FY2013-Q2			126			—			1,611
	2,036		FY2013-Q3			125			—			1,622
	2,024		FY2013-Q4			162			—			1,720
	2,918		FY2014-Q1			218			—			2,700
	Total Amortization Expense				$	2,311		$	2,147		$	23,311

Bad debt expense decreased by $454,000, or 35.5%, to $824,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The decrease in bad debt expense was due to increased accounts receivable collection efforts. During the last quarter of fiscal year 2012, we implemented improvements to our billing and collection processes, including system enhancements, and increased the number of employees in our accounts receivable department. As a result of these efforts, the number of days outstanding of gross accounts receivables, excluding reserves, decreased by 3.7 days to 69.2 days as of December 31, 2013, compared with 72.9 days as of December 31, 2012, which reduced our bad debt reserve requirements for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

 

Depreciation and amortization expenses increased by $7,000, or 4.3%, to $171,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

Purchases of property and equipment totaled $51,000 and $308,000 during the three months ended December 31, 2013 and 2012, respectively.    

 

General and administrative expenses increased by $45,000, or 3.7%, to $1,277,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The increase was primarily due to fees associated with the listing our common stock on the NYSE MKT and an increase in professional fees. These increases were partially offset by reductions in software support costs.

 

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Income from Operations

 

Income from operations for the three months ended December 31, 2013, increased by $1,242,000, or 55.0%, to $3,500,000, compared with the three months ended December 31, 2012. The increase in operating income is primarily attributed to increased gross profits driven by our increased sales volumes and decreased operating expenses discussed above.

Other Expenses

 

The following table shows a breakdown of other expense for the three months ended December 31, 2013 and 2012 (dollars in thousands):

		2013			2012
Other Expenses:
Interest Expense		$	(12)		$	(21)
Loss on sale of assets			(1)			-
Total Other Expenses		$	(13)		$	(21)

Interest expense decreased by $9,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012, due to a reduction of $1.0 million in borrowings under our credit line facility. The outstanding borrowings under our credit line facility were $1.5 million during the three months ended December 31, 2013, compared with outstanding borrowings of $2.5 million under our credit line facility during the three months ended December 31, 2012.

 

Income Taxes

 

The following table provides a breakdown of our income tax expenses for the three months ended December 31, 2013 and 2012 (dollars in thousands):

		For the three months ended December 31,
		2013			2012
Current income tax expense:
Federal		$	1,262		$	46
State			224			34
Total current income tax expense		$	1,486		$	80
Deferred income tax expense (income):
Federal		$	(104)		$	702
State			(15)			103
Total deferred income tax expense (income)		$	(119)		$	805
Provision for Income Taxes		$	1,367		$	885

Our taxable income for fiscal year 2013 exceeded our net operating loss carry-forwards from fiscal year 2012, and substantially all of our net operating loss carry-forwards were utilized to reduce our federal and state income tax liabilities for fiscal year 2013. As a result, our income tax expense for the three months ended December 31, 2013, consisted of a larger proportion of current income tax expense versus deferred income expense (income) compared with the three months ended December 31, 2012.

The following table provides a breakdown of our income tax liabilities by current and deferred as of December 31, 2013, and September 30, 2013 (dollars in thousands):

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		As of December 312013			As of September 30, 2012
Current income tax liabilities		$	1,681		$	1,195
Deferred income tax liabilities:
Deferred tax liability		$	8,487		$	8,561
Less: Deferred tax assets, current portion			(2,112)			(2,067)
Net deferred tax liabilities:		$	6,375		$	6,494

The provision for income taxes was $1,367,000 for the three months ended December 31, 2013.  The effective tax rate was approximately 39.2% of the income before income taxes of $3,487,000, 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 $885,000 for the three months ended December 31, 2012.  The effective tax rate was approximately 40% of the income before income taxes of $2,237,000, 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.

 Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended December 31, 2013 and 2012 (dollars in thousands): 

		2013			2012
Cash Flows:
Net cash provided by operating activities		$	1,307		$	1,417
Net cash used in investing activities			(47)			(308)
Net cash used in financing activities			(1,518)			(4)
Net increase (decrease) in cash			(258)			1,105
Cash at beginning of period			12,453			3,326
Cash at end of period		$	12,195		$	4,431

The Company had cash of $12,195,000 at December 31, 2013, compared with cash of $12,453,000 at September 30, 2013, a decrease of $258,000. The decrease in cash for the three months ended December 31, 2013, was due to $1,518,000 of cash used in financing activities and $47,000 of net cash used in investing activities, partially offset by $1,307,000 of cash provided by operating activities.

Operating Activities

Cash provided by operating activities was $1,307,000 for the three months ended December 31, 2013, which represents a decrease of $110,000 compared with cash provided by operating activities of $1,417,000 for the three months ended December 31, 2012. The decrease in operating cash flows for the three months ended December 31, 2013, was the result of an increase of $2,610,000 in the change in accounts receivable due to an increase in Medicare pre-payment audits and increased sales levels; a decrease in non-cash charges of $1,079,000 primarily related to the reduction of deferred income tax expenses; an increase of $455,000 in the change in inventory; a decrease of $345,000 in the change in other assets; an increase of $165,000 in direct-response advertising spend, partially offset by an increase of $3,479,000 in the change in accounts payable, caused primarily by a change in the billing practices of one of our vendors, and an increase in net income of $769,000.    

In late September 2013, Region C of Medicare began conducting pre-payment audits for catheter claims submitted by all suppliers. As a result of Region C's pre-payment audits for catheter claims, during the three months ended December 31, 2013, we experienced an increase of $981,000 in the amount of claims delayed due to Medicare pre-payment audits. The results of these audits have not generated a significant number of denials and/or adjustments, and we expect to receive payment for most of these claims from Medicare. However, we have experienced a delay of up to 45 to 90 days in receiving payments for these Medicare claims. As of December 31, 2013, we had approximately $1,606,000 of Medicare claims delayed due to pre-payment audits by all Medicare regions.

In January 2014, Region C decreased the level of pre-payment audits for catheter claims, which decreased the number of our Medicare claims subject to the pre-payment audits. If Region C maintains its reduced levels of prepayment audits for catheter claims, we expect the amount of our Medicare claims delayed due to the pre-payment audits to decrease by approximately $750,000 to $1,000,000 during the second quarter of fiscal year 2014.    

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Due to the increase in Medicare pre-payment audits during the three months ended December 31, 2013, the number of days of gross accounts receivable outstanding increased by 5.1 days to 69.2 days as of December 31, 2013, compared with 64.1 days as of September 30, 2013.

Investing Activities

 

During the three months ended December 31, 2013 and 2012, we purchased $51,000 and $308,000, respectively, of property and equipment to support our continued growth. The $51,000 of purchases during the three months ended December 31, 2013, was for computer equipment, website enhancements, and other software.  The $308,000 of purchases during the three months ended December 31, 2012, was for leasehold improvements and computer equipment, related to the build-out of a 6,400 square-foot facility, which was completed in January 2013.

 

Financing Activities

 

During the three months ended December 31, 2013, cash used in financing activities was $1,518,000, which included cash dividends paid of $1,569,000 and payments of $22,000 for capital lease obligations, partially offset by $72,000 of proceeds received from the exercise of employee stock options.

 

During the three months ended December 31, 2012, cash used in financing activities was $4,000, which included $13,000 of proceeds from our employee stock purchase plan, offset by capital lease payments of $17,000.

Outlook

We have increased sales by $1.0 million, or 6.2%, to $18.6 million for the three months ended December 31, 2013, compared with sales of $17.6 million for the three months ended December 31, 2012. Our operating income increased by $1.2 million, or 55.0%, to $3.5 million for the three months ended December 31, 2013, compared with the operating income of $2.3 million for the three months ended December 31, 2012.  Our operating margins improved from 12.9% to 18.8% for the same periods.

We will continue to manage the levels of our direct response advertising spend to maximize profitability and cash flows for fiscal year 2014, which may result in slower top-line sales growth. We continue to explore potential acquisition targets during fiscal year 2014 that allow us to acquire new customers at competitive rates and are accretive to our earnings.  Based on investments we have made in our employees, infrastructure, and technology, we will continue to implement process improvements designed to increase our operating margins during fiscal year 2014.

As of December 31, 2013, we had $12.2 million of cash and $6.2 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 operations, will be sufficient to meet our cash requirements during the next twelve months.

At December 31, 2013, our current assets of $27,004,000 exceeded our current liabilities of $11,296,000 by $15,708,000.

We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider, primarily focused on supplying medical supplies to chronically ill patients.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2013, 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 Annual Report on Form 10-K for the year ended September 30, 2013, 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 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 December 31, 2013. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.

 

Change in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2013, 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, 2013. 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 4. Mine Safety Disclosures

 

Not applicable.

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		February 12, 2014
Mark A. Libratore
/s/ Robert J. Davis		Chief Financial Officer		February 12, 2014
Robert J. Davis

 

 

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