UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

  X .

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

For the fiscal year ended September 30, 2014

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		87-0267292
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2979 SE Gran Park Way, Stuart, Florida 34997

(Address of principal executive offices)

(772) 287-2414

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes      . No  X .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes      . No  X .

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X .

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	X .
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	.

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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 .

The aggregate market value of the voting and non-voting shares of the Company’s Common Stock held by non-affiliates based on the last sale of the Common Stock on March 31, 2014, was $126,328,353.

The number of shares outstanding of the issuer’s Common Stock as of December 11, 2014, was 53,166,209.

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LIBERATOR MEDICAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I
Item 1. Business		4
Item 1A. Risk Factors		8
Item 1B. Unresolved Staff Comments		10
Item 2. Properties		10
Item 3. Legal Proceedings		10
Item 4. Mine Safety Disclosures		10
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		11
Item 6. Selected Financial Data		12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		24
Item 8. Financial Statements and Supplementary Data		24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
Item 9A. Controls and Procedures		24
Item 9B. Other Information		25
PART III
Item 10. Directors, Executive Officers and Corporate Governance		26
Item 11. Executive Compensation		28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		33
Item 13. Certain Relationships and Related Transactions, and Director Independence		34
Item 14. Principal Accountant Fees and Services		34
PART IV
Item 15. Exhibits and Financial Statement Schedules		35
Signatures		36
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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FORWARD-LOOKING STATEMENTS

Some of the information contained in this Report constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include current expectations of future events based on certain assumptions and statements that do not directly relate to any historical or current fact. When used in this Annual 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, on the Company’s website, 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,” “plans,” “believes,” or similar expressions are intended to identify forward-looking statements. The Company’s forward-looking statements are based on management’s current expectation and assumption regarding the Company’s business and performance, the economy, and other future conditions and forecasts of future events, circumstances and results. As with any projection statement or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include 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 out under “Risk Factors,” below, 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 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.

PART I

Item 1. Business

Overview

Throughout this Report we use the terms “we,” “our Company,” and “us” to refer to Liberator Medical Holdings, Inc., and its wholly-owned consolidated subsidiaries, Liberator Medical Supply, Inc. (which is sometimes called “Liberator Medical”), Liberator Health and Education Services, Inc., Liberator Health and Wellness, Inc., Practica Medical Manufacturing, Inc. and Tri-County Medical & Ostomy Supplies Inc.

We were organized in December 1906 in the State of Utah and changed our domicile to Nevada in 1999. In June 2007 we acquired Liberator Medical, a Florida corporation located in Stuart, Florida. Our Principal offices are located at 2979 SE Gran Park Way, Stuart, Florida 34997. Our telephone number is 772-287-2414 and our internet address is www.liberatormedical.com.

We are a leading national direct-to-consumer provider of quality medical supplies, primarily to Medicare-eligible seniors. Liberator Medical, a wholly-owned subsidiary of the Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits. 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 Medical is recognized for offering a simple, reliable way to purchase medical supplies needed on a recurring basis, with the convenience of direct billing to Medicare and private insurance. Our employees communicate directly with our patients and their physicians regarding patients’ prescriptions and supply requirements on a regular basis. We bill Medicare and third-party insurers on behalf of our patients. Liberator Medical markets products directly to consumers, primarily through targeted media, direct-response television, Internet, and print advertising throughout the United States. Customer service representatives are specifically trained to communicate with patients, in particular seniors, helping them to follow their doctors’ orders and manage their chronic diseases. Our operating platforms enable us to efficiently collect and process required documents from physicians and patients and bill and collect amounts due from Medicare, other third party payers and directly from patients.

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Market

According to the Centers for Medicare and Medicaid Services (“CMS”), U.S. domestic healthcare spending is expected to increase by approximately $2.3 trillion from $2.9 trillion in 2013 to $5.2 trillion in 2023.

The Company markets its products to individuals with chronic illnesses who require continuous and reliable access to medical devices and supplies. As the baby boomer population ages, CMS estimates that the number of Americans over the age of 65 will increase from an estimated 43.7 million in 2013 to 60.3 million in 2023. The Centers for Disease Control estimates that 80% of older adults have at least one chronic condition and 50% have at least two.

We are a quasi-medical distributor providing home health care services. The products that we distribute are classified as Durable Medical Equipment (“DME”). CMS estimates that the national expenditures within the DME market will increase by over $30 billion from $42.3 billion in 2013 to $71.3 billion in 2023. The number of DME companies billing Medicare less than $300,000 per year has been declining, or consolidating, over the last few years according to HME News, primarily as a result of increased Medicare accreditation, bonding requirements and Medicare Competitive Bidding. We have been able to attract new customers, looking for new suppliers, as a result of consolidation within the DME market over the last few years.

Liberator’s revenue comes from supplying products to meet the growing requirements for general medical supplies, primarily urological catheters, ostomy supplies, mastectomy fashions, and diabetic supplies. Customers may purchase by phone, mail, or Internet, with repeat orders confirmed with the customer and shipped when needed.

Urological Catheters

The majority of our revenue is generated from urological catheters, primarily intermittent catheters. Our sales growth was accelerated in April 2008, when the Medicare permitted utilization of intermittent catheters was increased from four catheters per month to two hundred catheters per month.

An aging population and a rising incidence of various urological problems (i.e. neurogenic bladder), will drive continued growth in the global and U.S. urological catheter market, according to a report from Technavio (Global Urinary Catheters Market 2014-2018) published in June 2014. The advent of advanced catheters aimed at minimizing invasiveness and lowering infection risk and other complications, as well as the adoption of favorable reimbursement policies, are also expected to fuel market growth in the U.S. According to CMS data reported by HME News the utilization of straight tip catheters by Medicare beneficiaries increased by 11.5% from 2012 to 2013.

According to data released by CMS for Medicare claims paid in 2013, Liberator Medical is the leading supplier of urological intermittent catheters for Medicare patients.

Competition consists primarily from 180 Medical, Inc., Medical Direct Club, LLC, MP Total Care Medical, Inc., Liberty Medical Supply, Inc., and many independent dealers and retail stores.

Ostomy Supplies

According to a November 15, 2011 report from Transparency Market Research, the North American ostomy drainage bags market was approximately $884 million in 2011 and expected to grow at a CAGR of 3.4% from 2012 to 2018. The aging population in the U.S. and the rising incidence of diseases such as colorectal cancer, inflammatory bowel diseases, and bladder cancer, among others, has increased the demand for ostomy supplies. The United Ostomy Association estimates that over 500,000 Americans have some type of stoma due to a colostomy, ileostomy, and/or urostomy.

Many smaller DME companies have refused to accept assignment of insurance benefits for ostomy supplies due to low reimbursement rates from Medicare and other insurance providers, which may result in higher out-of-pocket costs to the patient. We have been able to leverage our increased ostomy supply volumes to negotiate lower prices from our vendors, which has enabled us to accept assignment from an increased number of insurance carriers and gain share in the ostomy supply market.

Competition exists primarily from two major national competitors for ostomy supplies: Edgepark Medical Supplies and Byram Healthcare.

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Mastectomy Fashions

Liberator Medical has been accepting assignment of insurance benefits for mastectomy fashions for over ten years. We are the only medical supply company that combines a comprehensive product catalogue, which is available on-line and in hard copy, and direct billing to Medicare and other insurance providers.

According to data released by CMS for Medicare claims paid in 2013, Liberator Medical is the leading supplier of mastectomy fashions for Medicare patients by more than four times the payments received by the second leading supplier in the combined top three product categories. Although, the overall market size has stabilized as the number of mastectomies performed each year has declined in recent years due to the advancement of breast-conserving surgeries and breast cancer treatments, an emerging market for partial forms has developed for breast restorations, which is covered by Medicare and most insurance plans.

Competition in this area is limited mostly to small specialty shops. Most small boutiques require the customer to walk in and discuss this sensitive matter with a stranger. For many, this may be inconvenient or an unacceptable option. Instead, our approach provides the level of privacy many customers desire. In addition, many small boutiques have chosen to exit the Medicare market due to increased regulation and bonding requirements, which provides us with additional opportunities to gain customers.

Diabetic Supplies

Diabetic supplies are a small portion of our total revenue. In 2008, we elected not to participate in the Medicare competitive bidding process that was implemented in certain U.S. metropolitan areas in 2009 and nationally in 2012 due to the low reimbursement rates provided under the program for diabetic supplies. If customers have insurance other than traditional fee for service Medicare, we will consider providing supplies and accepting assignment of insurance if reimbursement rates are deemed acceptable.

Sales and Marketing

The Company focuses on making the buying process easy and convenient. Customers can purchase by phone, mail, or over the Internet. This produces an annuity-like revenue stream with a high return on advertising dollars. Our growth will depend upon the success of our advertising campaigns. Management believes that it has developed a method of capturing initial and recurring sales through use of local, regional and national ad placement.

With an average customer tenure of between four to six years, we believe our strategy should provide predictable, recurring income. Management is constantly evaluating and testing new products for direct marketing to various targeted customers. As these new and innovative products come to market, we anticipate being positioned to bring them to the public quickly with the right marketing, intake, processing, and third-party billing mechanisms.

Suppliers

The Company distributes products from hundreds of manufacturers, including all of the largest U.S. suppliers. As the Company’s sales volumes have increased, we have been able to develop partnerships with the larger manufacturers, enabling the Company to obtain preferred pricing and maintain a readily available supply of products for our customers’ medical necessities.

Medicare and Third-party Insurers

Our Medicare and insurance relationships are essential to our customer enrollment and retention process. Currently, we are enrolled with all four of the Part B Medicare regions and five of the top seven insurance carriers in the U.S. We are able to accept assignment of insurance benefits for approximately 70% of the customers that respond to our advertisements and choose to become customers. Currently, we are a provider for over 700 insurance plans and continually adding plans to our insurance networks.

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Government Regulation

The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. The healthcare regulatory environment is also subject to frequent change. Laws and regulations in the healthcare industry are extremely complex. While our management believes we are in substantial compliance with all of the existing laws and regulations applicable to us, such laws and regulations are subject to rapid change and often are uncertain in their application In addition, the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, which amended PPACA (collectively, the "Health Reform Law"), may have a considerable impact on the financing and delivery of health care and conceivably could have a material adverse effect on our business.

Among the various federal and state laws and regulations which may govern, or impact, our current and planned operations are the following:

Medicare and Medicaid Reimbursement

Many of the products that we provide are reimbursed by Medicare and state Medicaid programs and are therefore subject to extensive government regulation. Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older and for some disabled persons with certain specific conditions.

Medicaid provides medical benefits to groups of low-income and disabled individuals, some who may have inadequate or no medical insurance. Although the federal government establishes general guidelines for the program, Medicaid is a state-administered program and each state sets its own guidelines regarding eligibility and covered services, subject to certain minimum federal requirements.

Congress often enacts legislation that affects, positively or negatively, the reimbursement rates of Medicare providers and also may impact Medicaid providers. Generally, Medicare provider payment modifications occur in the context of budget reconciliation; however, Medicare changes also may occur in the context of broader healthcare policy legislation, including the Health Reform Law. In the last several years, Congress has reduced Medicare reimbursement for various providers. We are also subject to regulatory reductions and reimbursement for our products.

Approximately 73.4% of our revenue for the year ended September 30, 2014, was derived directly from Medicare, Medicaid or other government-sponsored healthcare programs. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, our direct reimbursements from government-sponsored healthcare programs could be adversely affected.

Regulation of Client Confidentiality

We are subject to the Health Insurance Portability and Accountability Act, or HIPAA, which established comprehensive federal standards with respect to the use and disclosure of protected health information, and the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, which was passed as part of the American Recovery and Reinvestment Act and which strengthens many of the requirements applicable to privacy and security, among other things. We provide extensive training to our staff with respect to compliance with patient confidentiality requirements and have additional systems in place to further comply with those requirements. However, the failure to meet regulatory standards concerning patient confidentiality could subject us to criminal and civil sanctions. See “Risk Factors.”

Litigation

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Employees

As of September 30, 2014, we had 319 employees. None of our employees are members of any union or covered by collective bargaining agreements. We believe that the relations between our management and employees are good.

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Item 1A. Risk Factors

Current and potential shareholders should consider carefully the risk factors described below. Any of these factors, or others, many of which are beyond the Company’s control, could negatively affect the Company’s revenues, profitability or cash flows in the future. These factors include:

Risks Relating to Our Business

·

Sales of a significant portion of our products depend on the continued availability of reimbursement of our customers by government and private insurance plans. Any reduction in Medicare reimbursement currently available for our products would reduce our revenues. Without a corresponding reduction in the cost of such products, the result would be a reduction in our overall gross profit. Similarly, any increase in the cost of such products would reduce our overall gross profit unless there was a corresponding increase in Medicare reimbursement. Our profits could also be affected by the imposition of more stringent regulatory requirements for Medicare reimbursement. The regulations that govern Medicare reimbursement are complex and our compliance with these regulations may be reviewed by federal agencies, including the Department of Health and Human Services, the Department of Justice, and the Food and Drug Administration (“FDA”). These agencies conduct audits of most companies and periodic investigations of some companies billing Medicare. Negative findings or results of audits are subject to appeals and judicial review and are often overturned at various levels. The Company is routinely audited by Medicare and other insurance companies. There is always the possibility that the Company could be the subject of an accelerated audit or investigation as it performs a substantial amount of Medicare billing each year. Medicare audits or investigations could possibly lead to recoupment of monies paid to the Company, fines, off-sets on future payments and even loss of Medicare billing privileges. Since its inception, the Company has had no fines or penalties but the Company has been audited by all four regional Medicare carriers and from time-to-time been asked to repay amounts on claims previously paid for various reasons such as billing errors, lack of medical records in physician offices, insufficient patient diagnoses, patients receiving home health care, patients having similar equipment, patients not seen by physician recently enough, and lack of adequate medical necessity, which is common to all Medicare providers. Although the Company has set aside reserves for contractual adjustments, demands for repayment could exceed Company reserves and the Company could be unable to pay them, which would adversely affect the Company.

·

A significant portion of the Company’s revenues is generated from the sale of urological supplies. As a result, changes in the external environment, including regulatory changes, could be detrimental, depending on market conditions.

·

We believe that we are able to control our level of expansion as well as the costs associated with our growth plans. However, (i) some expansions can create significant demands on our administrative, operational and financial personnel and other resources; (ii) a large expansion into existing or new markets could strain these resources and increase our need for capital; and (iii) our personnel, systems, procedures, controls and existing space may not be adequate to support a substantial expansion.

·

We generally incur negative cash flow with respect to the first order from a new customer for chronic care products, due primarily to the marketing and regulatory compliance costs associated with initial customer qualification. Accordingly, the profitability of these product lines depends, in large part, on recurring and sustained reorders. Reorder rates are inherently uncertain due to several factors, many of which are outside our control, including changing customer preferences, competitive price pressures, customer transition to extended care facilities, customer mortality, and general economic conditions.

·

We could be liable for harm caused by products that we sell. The sale of medical products entails the risk that users will make product liability claims. A product liability claim could be expensive. While management believes that our insurance provides adequate coverage, no assurance can be made that adequate coverage will exist for these claims.

·

Our growth is dependent upon a robust marketplace with affordable television and Internet advertising opportunities. The effects of competitors entering the marketplace may increase the costs of our advertising efforts and have a negative impact on our growth. We could lose customers as a result of more effective and higher volumes of advertising by competitors. We could lose customers and revenues to new or existing competitors who have greater financial or operating resources.

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·

Many of the products that we sell are regulated by the FDA and other regulatory agencies. If any of these agencies mandate a suspension of production or sales of our products or mandate a recall, we may lose sales and incur expenses until we are in compliance with the regulations or change to another acceptable supplier.

·

Our future results may vary significantly depending on a number of factors, including:

o

changes in reimbursement guidelines and amounts;

o

changes in regulations affecting the healthcare industry;

o

changes in the mix or cost of our products;

o

the timing of customer orders;

o

the timing, cost, and levels of our advertising spend; and

o

the timing of the introduction or acceptance of new products and services offered by us or our competitors.

·

We regularly review potential acquisitions of businesses and products. Acquisitions involve a number of risks that might adversely affect our financial and operational resources, including:

o

diversion of the attention of senior management from important business matters;

o

difficulty in retaining key personnel of an acquired business;

o

failure to assimilate operations of an acquired business;

o

failure to retain the customers of an acquired business;

o

possible operating losses and expenses of an acquired business;

o

exposure to legal claims for activities of an acquired business prior to acquisition; and

o

incurrence of debt and related interest expense.

·

The success of the Company will largely be dependent on Mark Libratore, the Company’s founder and our President and Chief Executive Officer, who is responsible for the day-to-day management of the business. Loss of Mr. Libratore’s services, either through retirement, incapacity or death, may have a material adverse effect on the Company. The Company has $4,000,000 of key man insurance on Mr. Libratore’s life, with the Company as the beneficiary of $3,000,000 and his wife the beneficiary of $1,000,000.

·

As of November 30, 2014, Mark Libratore, our President and Chief Executive Officer, held 19,710,867 shares of common stock, or 37.1% of our outstanding common stock, excluding his options to purchase up to 75,000 shares of our common stock. As a result, Mr. Libratore has the ability to exercise substantial control over all corporate actions requiring shareholder approval, including the following actions:

o

the election of directors;

o

the adoption of stock option plans;

o

the amendment of charter documents; and

o

the approval of certain mergers and other significant corporate transactions, including the sale of the Company.

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Risks Relating to Ownership of Our Common Stock

·

Our common stock has been listed on the NYSE MKT since November 20, 2013. Even though we expect our common stock to continue to be quoted on the NYSE MKT, we cannot predict changes in the trading market for our common stock, including changes in liquidity.

o

A large percentage of our outstanding shares are held by a relatively small number of investors, including our President and Chief Executive Officer.

o

Future sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could affect the market price of our common stock.

·

We will continue to retain future earnings to develop our business, as opportunities arise, and evaluate on a quarterly basis the amount and timing of future dividends based on the Company's operating results, financial condition, capital requirements and general business conditions. The amount and timing of any future dividends may vary, and the payment of any dividend does not assure that the Company will be able to pay dividends in the future.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company leases three facilities in Stuart, Florida and one facility in Johnson City, Tennessee.

The following table summarizes our leased properties as of September 30, 2014:

We believe that our existing facilities are suitable as office, shipping and warehouse space, and are adequate to meet our current needs. We also believe that our insurance coverage adequately covers our current interest in our leased space. We do not own any real property for use in our operations or otherwise.

Item 3. Legal Proceedings

From time-to-time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The Company’s common stock has been traded on the NYSE MKT since November 20, 2013, under the symbol “LBMH.” Prior to that date the Company’s stock was quoted on the OTC Bulletin Board under the same symbol. The following table reflects the range of the high and low closing sales prices per share of the Company’s common stock for each quarterly period during the fiscal years 2014 and 2013:

		Stock Price
Quarter Ended:		High			Low
December 31, 2012		$	0.84		$	0.56
March 31, 2013		$	1.09		$	0.68
June 30, 2013		$	1.40		$	0.91
September 30, 2013		$	2.42		$	1.28
December 31, 2013		$	4.60		$	1.82
March 31, 2014		$	6.00		$	3.45
June 30, 2014		$	4.48		$	3.22
September 30, 2014		$	3.81		$	2.30

As of November 30, 2014, the Company had approximately 1,291 shareholders of record of the Company’s common stock. Also, as of November 30, 2014, there were 53,520,458 shares of the Company’s common stock issued and 53,166,209 shares outstanding. The number of holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of broker-dealers and registered clearing agencies. The transfer agent of our common stock is New Jersey and Trust Company, Inc., 201 Bloomfield Avenue, Verona, New Jersey 07044.

Dividends

In April 2013, the Company’s Board of Directors established a policy to pay a sustainable quarterly dividend to shareholders of the Company’s common stock. During fiscal year 2013, the Company declared and, subsequently, paid three quarterly cash dividends, totaling $4,185,000, or $0.08 per common share. During fiscal year 2014, the Company declared and, subsequently, paid four quarterly cash dividends, totaling $6,473,000, or $0.1225 per common share.

In November 2014, the Company declared a cash dividend of $0.325 per common share to its shareholders of record as of the close of business on December 26, 2014, to be paid on January 9, 2015.

The Company’s Board of Directors will evaluate on a quarterly basis the amount and timing of future dividends based on the Company’s operating results, financial condition, capital requirements and general business conditions. The amount and timing of any future dividends may vary, and the payment of any dividend does not assure that the Company will be able to pay dividends in the future, or that, if able, our Board will consistently declare dividends.

Stock Buyback Program

Under a stock buyback program approved by our Board of Directors in June 2013, we were authorized to purchase up to 1,000,000 shares of our Common Stock through June 2014. The authorization enabled the Company to purchase shares through open market transactions at management’s discretion. We intend to retain any common shares purchased as treasury shares or use them in connection with our employee stock option program.

During the twelve months ended September 30, 2013, 264,649 shares had been repurchased under our stock buyback program for proceeds of $429,779. There were no additional shares repurchased during the twelve months ended September 30, 2014.

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Item 6. Selected Financial Data

Smaller reporting companies are not required to provide the information required by this item.

Our public float was greater than $75 million as of March 31, 2014, the last business day of our second quarter of fiscal year 2014 and accordingly we became an accelerated filer at the end of fiscal 2014. In accordance with Item 10(f)(2)(i) of Regulation S-K, we will transition from the scaled disclosure requirements available to smaller reporting companies to the disclosure requirements applicable to accelerated filers beginning with our quarterly report on Form 10-Q for our first quarter of fiscal year 2015.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors, including, but not limited to, those described in the subsection titled “Risk Factors,” located in Part I, Item 1A, of this Form 10-K.

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.

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The following table shows our revenue streams, inclusive of new and recurring orders, for the twelve months ended September 30, 2014 and 2013, from customer leads based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

New and recurring revenues generated from		For the twelve months ended September 30,
customer leads received during:		2014			2013
Pre-FY 2010		$	20,942		$	23,297
FY 2010			10,327			11,511
FY 2011			11,102			12,536
FY 2012			11,578			13,532
FY 2013			10,371			8,515
FY 2014			9,355			n/a
Total Revenues *			73,675			69,391
Other Sales and Adjustments			894			(280)
Net Sales		$	74,569		$	69,111

* 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 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 fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		2014					2013
		Amount			%		Amount			%
Net Sales		$	74,569		100.0		$	69,111		100.0
Cost of Sales			27,808		37.3			25,689		37.2
Gross Profit			46,761		62.7			43,422		62.8
Operating Expenses			34,052		45.7			31,663		45.8
Income from Operations			12,709		17.0			11,759		17.0
Other Expense			(50)		(0.0)			(83)		(0.1)
Income Before Income Taxes			12,659		17.0			11,676		16.9
Provision for Income Taxes			4,857		6.5			4,598		6.7
Net Income		$	7,802		10.5		$	7,078		10.2

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Revenues

Net sales for fiscal year 2014 increased by $5,458,000, or 7.9%, to $74,569,000, compared with sales of $69,111,000 for fiscal year 2013. The increase in 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.

The following table summarizes the number of customers serviced and revenues generated from our new customers and our recurring customer base for fiscal years 2014 and 2013 (dollars in thousands):

		2014					2013
		# of Customers		Net Sales			# of Customers		Net Sales
New Customers Acquired*		12,540		$	12,496		12,752		$	12,264
Recurring Customer Base		30,866			61,179		30,283			57,127
Total Revenues, net of contractual allowances		43,406		$	73,675		43,035		$	69,391
Other Sales and Adjustments					894					(280)
Net Sales				$	74,569				$	69,111

* For fiscal year 2014, $9,355 of the net sales for new customers acquired was generated from leads received during fiscal year 2014. For fiscal year 2013, $8,515 of the net sales for new customers acquired was generated from leads received during fiscal year 2013. The remaining net sales generated from new customers acquired were generated from leads received during prior fiscal years.

The average annual order value of our recurring customer base increased to $1,982 per customer during fiscal year 2014 compared with $1,886 per customer during fiscal year 2013. The increase in the average annual order value per recurring customer for fiscal year 2014 was primarily attributed to a decrease in the number of diabetic patients and urology patients using Foley catheters, both of which have lower average annual order values than our other product lines.

We obtain the majority of our new customers from leads generated by direct responses to our advertising. The number of new customers acquired through our advertising is dependent on internal and external factors, including, but not limited to, the timing of our advertising spend, the length of time from the receipt of the customer leads, the level of responses to our advertising efforts, our ability to convert leads to customers, and the market environment.

During fiscal year 2014, we increased our direct response advertising expenditures by $5,043,000 to $14,043,000, compared with $9,000,000 for fiscal year 2013. Due to the timing and focus of our advertising spend during fiscal year 2014, we acquired 212 fewer new customers than we acquired during fiscal year 2013. However, by targeting urology patients using supplies with higher reimbursement rates and ostomy patients utilizing accessory products, our net sales generated from new customers acquired during fiscal year 2014 exceeded the net sales generated by our new customers acquired during fiscal year 2013 by $232,000. We believe that although we acquired fewer customers in fiscal year 2014 compared to fiscal year 2013, we have evidence that the results of our direct-response advertising efforts are similar to our historical patterns.

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During fiscal year 2014, we increased our advertising expenditures to build our customer lead base. The following table shows the number of new customer leads generated from direct responses to our advertising and business acquisitions over the last two fiscal years:

Year		Customer Acquisition Investment ($000's)			Number of New Customer Leads
FY2014(1)		$	14,213		55,529
FY2013(2)			9,343		51,037

⁽¹⁾

Includes $170,000 for an acquisition of a small urological division completed in January 2014.

⁽²⁾

Includes $343,000 for an acquisition of a small ostomy supply business completed in July 2013.

The majority of the new customers acquired place their initial order with us within three to six months following our advertising expenditures. However, we generate new customers directly from our advertising spend beyond six months, primarily due to delays in reconnecting with the prospective customers after the initial contact and obtaining the proper documentation from the customers and/or their physicians.

The following table shows the timing of the new customers acquired based on the fiscal year the customer leads were initially received:

		Number of New Customers Acquired(1)
Customer Leads Received		FY2014		FY2013
FY2014		9,933		−
FY2013		1,320		9,473
FY2012		583		2,251
Pre-FY2012		704		1,028
Total New Customers		12,540		12,752

⁽¹⁾

The number of new customers acquired in a particular fiscal year is derived from leads received during the current fiscal year and from leads received in preceding years. During fiscal year 2014, we acquired 12,540 new customers, of which 9,933 were generated from leads received during the same fiscal year and 2,607 of the new customers were generated from leads received in prior years.

We expect to continue to acquire new customers over the next fifteen to eighteen months from our increased customer lead base. Similar to our past direct-response advertising efforts, when we increased our advertising spend, our costs to acquire new customers increased. We believe that the incremental costs associated with acquiring new customers through our increased advertising expenditures will be more than offset by the recurring revenues generated from the new customers acquired as a result of our advertising efforts.

Gross Profit

Gross profit for fiscal year 2014 increased by $3,339,000, or 7.7%, to $46,761,000, compared with gross profit of $43,422,000 for fiscal year 2013. The increase was attributed to our increased sales volume for fiscal year 2014 compared with fiscal year 2013.

As a percentage of net sales, gross profit decreased by 0.1% to 62.7% for fiscal year 2014 compared with gross profit of 62.8% for fiscal year 2013. The decrease in gross profit as a percentage of sales was due to an increase in our product mix towards ostomy supplies, which have lower gross margins than our other product lines. This decrease in profit margins was partially offset by vendor rebates earned during fiscal year 2014 based on achieving certain product volume tiers and a reduction in product costs from one of our suppliers beginning in November 2013.

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Operating Expenses

The following table provides a breakdown of our operating expenses for the fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		2014					2013
		Amount			%		Amount			%
Operating Expenses:
Payroll, taxes and benefits		$	14,788		19.8		$	14,311		20.7
Advertising			9,902		13.3			8,908		12.9
Bad debts			3,279		4.4			3,069		4.4
Depreciation and amortization			663		0.9			683		1.0
General and administrative			5,420		7.3			4,692		6.8
Total Operating Expenses		$	34,052		45.7		$	31,663		45.8

Payroll, taxes and benefits increased by $477,000, or 3.3%, to $14,788,000 for fiscal year 2014 compared with fiscal year 2013. As of September 30, 2014, we had 319 active employees, compared with 297 at September 30, 2013. The increase of 22 employees was required to support our increased sales volumes.

As a result of process and system enhancements implemented over the last year and continued growth of our recurring revenue as a percentage of our total revenue, our payroll expenses as a percentage of net sales decreased by 0.9% for fiscal year 2014 compared with fiscal year 2013.

Advertising expenses increased by $994,000, or 11.2%, to $9,902,000 for fiscal year 2014 compared with fiscal year 2013. 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 fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		2014			2013
Advertising Expenses:
Amortization of direct-response costs		$	9,811		$	8,721
Other advertising expenses			91			187
Total Advertising Expenses		$	9,902		$	8,908

As a result of our increase in advertising expenditures, our advertising expense, as a percentage of sales, increased by 0.4% for fiscal year 2014 compared with fiscal year 2013. Similar to our past direct response advertising efforts, when we increased our advertising spend during fiscal year 2014, our costs to acquire new customers increased compared with fiscal year 2013.

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 five to six years based on probable future net revenues updated at each reporting period.

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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 fiscal year ended September 30, 2014 and 2013. For presentation purposes, the quarterly advertising cost pools have been aggregated into fiscal years (dollars in thousands):

Actual Advertising			Grouped by		Amortization Expense for the twelve months ended September 30,						Deferred Advertising Balance @
Spend			Fiscal Year			2014			2013		9/30/2014
$	1,567		FY2008		$	−		$	30		$	−
	4,191		FY2009			136			228			47
	10,808		FY2010			933			1,326			909
	15,245		FY2011			2,016			2,570			3,406
	13,113		FY2012			2,271			2,952			5,601
	9,000		FY2013			1,942			1,615			5,443
	14,043		FY2014			2,513			−			11,530
	Total Amortization Expense				$	9,811		$	8,721		$	26,936

Bad debt expense increased by $210,000, or 6.8%, to $3,279,000 for fiscal year 2014 compared with fiscal year 2013. The increase in bad debt expense was due to an increase in net sales of $5,458,000. As a percentage of sales, bad debt expense remained flat at 4.4% for fiscal year 2014 compared with fiscal year 2013. The number of days outstanding of gross accounts receivables, excluding reserves, decreased by 2.8 days to 61.3 days as of September 30, 2014, compared with 64.1 days as of September 30, 2013.

Depreciation and amortization expenses decreased by $20,000, or 2.9%, to $663,000 for fiscal year 2014 compared with fiscal year 2013. The decrease in depreciation and amortization expenses was primarily related to computer equipment and software purchases that were fully depreciated as of the end of September 2013, which reduced our depreciation expense by $65,000 in 2014. This decrease was partially offset by a $34,000 increase in amortization expense related to intangible assets and an $11,000 increase in depreciation expense related to purchases of property and equipment during fiscal year 2014.

Purchases of property and equipment totaled $756,000 and $390,000 during fiscal years 2014 and 2013, respectively.

General and administrative expenses increased by $728,000, or 15.5%, to $5,420,000 for fiscal year 2014 compared with fiscal year 2013. The increase was due to increases in accounting fees, consulting fees, legal fees, director fees, and dues and subscriptions. These increases were directly attributable to costs associated with compliance with the attestation requirements of the Sarbanes Oxley Act, which required our registered public accounting firm to audit our internal controls over financial reporting for the first time, costs to support our sales growth, and costs associated with the listing of our common stock on the NYSE MKT during fiscal year 2014. These increases were partially offset by decreases in software support.

As a percentage of net sales, general and administrative expenses increased from 6.8% for fiscal year 2013 to 7.3% for fiscal year 2014.

Income from Operations

Income from operations for fiscal year 2014 increased by $950,000, or 8.1%, to $12,709,000, compared with fiscal year 2013. The increase in operating income was primarily attributed to increased gross profits driven by our increased sales volumes, as well as reductions in payroll costs as a percentage of net sales.

Other Expense

Other expense for fiscal years 2014 and 2013 was interest expense related to the outstanding balance on our credit line facility.

Interest expense decreased by $33,000 for fiscal year 2014 compared with fiscal year 2013 due to a reduction of $1.0 million in borrowings under our credit line facility during the fourth quarter of fiscal year 2013.

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Income Taxes

The following table provides a breakdown of our income tax expenses for fiscal years 2014 and 2013 (dollars in thousands):

		Fiscal year ended September 30,
		2014			2013
Current income tax expense:
Federal		$	2,801		$	1,005
State			524			271
		$	3,325		$	1,276
Deferred income tax expense:
Federal		$	1,304		$	2,879
State			228			443
		$	1,532		$	3,322
Total income tax expense		$	4,857		$	4,598

The following table provides a breakdown of our income tax liabilities by current and deferred as of September 30, 2014 and 2013 (dollars in thousands):

		As of September 30,
		2014			2013
Current income tax liabilities		$	178		$	1,195
Less: Current income tax prepaid			(7)			−
Net current income tax liabilities		$	171		$	1,195
Deferred income tax liabilities:
Deferred tax liability		$	10,031		$	8,561
Less: Deferred tax assets, current portion			(2,005)			(2,067)
Net deferred tax liabilities:		$	8,026		$	6,494

The provision for income taxes was $4,857,000 for fiscal year 2014. The effective tax rate was approximately 38% of the income before income taxes of $12,659,000, 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 $4,598,000 for fiscal year 2013. The effective tax rate was approximately 39% of the income before income taxes of $11,676,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

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Liquidity and Capital Resources

The following table summarizes the cash flows for the fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		2014			2013
Cash Flows:
Net cash provided by operating activities		$	5,528		$	13,633
Net cash used in investing activities			(360)			(686)
Net cash used in financing activities			(5,360)			(3,820)
Net increase (decrease) in cash			(192)			9,127
Cash at beginning of period			12,453			3,326
Cash at end of period		$	12,261		$	12,453

The Company had cash of $12,261,000 at September 30, 2014, compared with $12,453,000 at September 30, 2013, a decrease of $192,000. The decrease in cash during fiscal year 2014 was due to $5,528,000 of cash provided by operating activities, partially offset by $360,000 of cash used in investing activities and $5,360,000 of cash used in financing activities.

Operating Activities

Cash provided by operating activities was $5,528,000 for fiscal year 2014, which represents a decrease of $8,105,000 compared with cash provided by operating activities of $13,633,000 for fiscal year 2013. The decrease in operating cash flows for fiscal year 2014 was the result of an increase in direct-response advertising spend of $5,043,000 and an increase in payments for income taxes of $3,999,000, partially offset by an increase in net income of $724,000 and an increase of $213,000 in changes in other operating assets and liabilities and non-cash expenses.

Currently, Regions C and D of Medicare are conducting pre-payment audits for catheter claims submitted by all suppliers. Additionally, the Company has been notified by Region C that up to fifty percent of its claims for straight-tip catheters will be subjected to pre-payment review. The results of these audits have not generated a significant number of denials and/or adjustments, and based on our historical experience 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 September 30, 2014, we had approximately $456,000 of Medicare claims delayed due to pre-payment audits by all Medicare regions.

In addition to the Medicare pre-payment audits for catheter claims, Medicare is experiencing a delay in Administrative Law Judge ("ALJ") Hearings for Medicare appeals, which has increased the amount of Medicare claims we have pending for the ALJ appeals process. As of September 30, 2014, we had approximately $437,000 of Medicare claims delayed due to the delay in the Medicare ALJ appeals process.

Investing Activities

During fiscal year 2014, we purchased $194,000 of property and equipment for cash, primarily computer software and computer equipment. In January 2014, the Company acquired certain assets of a urology division, including the urology customer records, websites, and inventory, of a durable medical equipment business for a cash purchase price of $170,000. The acquisition was immaterial to the Company's consolidated financial position and results of operations.

During fiscal year 2013, we purchased $367,000 of property and equipment for cash, primarily office furniture, computer equipment, and leasehold improvements related to the build-out of a new 6,400 square-foot facility, which was completed in January 2013. In July 2013, we acquired the stock of a small ostomy supply business for $319,000, net of $24,000 of cash included as part of the acquisition. The acquisition was immaterial to our consolidated financial position and results of operations.

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Financing Activities

During fiscal year 2014, cash used in financing activities was $5,360,000, which included cash dividends paid of $6,314,000, payments of $99,000 toward capital lease obligations, and payments of $21,000 for costs associated with the renewal of our credit line facility, partially offset by $1,074,000 of proceeds from the exercise of stock options and warrants.

During fiscal year 2013, cash used in financing activities was $3,820,000, which included cash dividends paid of $2,616,000, repayment of $1,000,000 towards our credit line facility, repurchases of our common stock of $430,000, payments of $71,000 toward capital lease obligations, and payments of $21,000 for costs associated with the renewal of our credit line facility, partially offset by $270,000 of proceeds from the exercise of stock options and warrants and $48,000 of proceeds from our employee stock purchase plan.

Outlook

We increased our sales by $5.5 million, or 7.9%, to $74.6 million for fiscal year 2014 compared with sales of $69.1 million for fiscal year 2013. Our operating income increased by $1.0 million, or 8.1%, to $12.7 million for fiscal year 2014 compared with operating income of $11.8 million for fiscal year 2013. Our operating margins remained consistent at 17.0% for fiscal years 2014 and 2013. In addition, we generated cash from operating activities of $5.5 million for fiscal year 2014.

We will continue to manage the levels of our direct response advertising spend to maximize profitability and cash flows for fiscal year 2015. We believe that there is significant opportunity to expand the audience we are reaching through our advertising efforts and improve the efficiency of our advertising expenditures. We continue to explore potential acquisition targets during fiscal year 2015 that allow us to acquire new customers at competitive rates and are accretive to our earnings. We are also evaluating potential new products that fit our operating model and offer attractive margins. Based on investments we have made in our employees, infrastructure, and technology, we will continue to experience efficiencies that we believe should increase our operating margins during fiscal year 2015.

As of September 30, 2014, we had $12.3 million of cash and $5.4 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from the collection of accounts receivable and the sale of products will be sufficient to meet our cash requirements during the next twelve months.

At September 30, 2014, our current assets of $25,535,000 exceeded our current liabilities of $9,910,000 by $15,625,000.

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 September 30, 2014, we had no off-balance sheet arrangements.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

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Accounts Receivable

Our accounts receivable are generally due from Medicare, Medicaid, private insurance companies, and our patients. Accounts receivable are reported net of allowances for contractual adjustments and uncollectible accounts. The collection process is time consuming, complex and typically involves the submission of claims to multiple layers of payers whose payment of claims may be contingent upon the payment of another payer. As a result, our collection efforts may be active for up to 18 to 24 months from the initial billing date. In accordance with regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and co-payment amounts, in a manner consistent for all classes of payers.

The Company has established an allowance to account for contractual adjustments that result from differences between the payment amount received and the expected realizable amount. These adjustments are recorded as a reduction of both gross revenues and accounts receivable. Our current billing system does not provide reports on contractual adjustments by date of service. Accordingly, we are unable to directly compare the aggregate estimated allowance for contractual adjustments to the actual contractual adjustments recorded. However, we do analyze the aggregate allowance for contractual adjustments as a percentage of net sales compared to the last twelve months’ actual contractual adjustments as a percentage of net sales to determine that our estimated allowance for contractual adjustments is a reasonable basis for recording our periodic allowance for contractual adjustments.

Allowances for uncollectible accounts (or bad debts) are recorded as an operating expense and consist of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payer’s inability or refusal to pay. In establishing the appropriate allowance for uncollectible accounts, management makes assumptions with respect to future collectability. We base our estimates of accounts receivable collectability on our historical collection and write-off experience, our credit policies, and aging of our accounts receivable. Changes in judgment regarding these factors will cause the level of accounts receivable allowances to be adjusted.

The typical collection process begins with the electronic submission of a claim to Medicare, Medicaid, or other primary insurance carriers, for which a response (and payment) is obtained within 15 to 30 days. Any claim denials are generally acted upon timely following the response and, where applicable, corrected claims are submitted. A response (and co- payment) for amounts billed to secondary payers, including Medicaid, private third-party insurance carriers, and patients, generally occurs within 30 to 60 days of submission of the claim. On a continual basis, the outstanding accounts receivable balances are reviewed by collection personnel, including contacting the insurance company and/or patient in an attempt to determine why payment has not been remitted and obtain payment from the respective responsible party. When applicable, corrected claims are submitted to the insurance carrier. Patient statements are generated and sent out monthly. Outbound calls are continually made to patients with outstanding balances in an attempt to obtain payment. Uncollectible account balances for all payer classes are written off after remaining unpaid for a period of 24 months. Balances that are determined to be uncollectible prior to the passage of 24 months from the last billing date are written off at the time of such determination.

We perform eligibility and insurance verification on patients prior to the shipment of products and submission of a claim. As a result, we do not have amounts that are pending approval from third-party payers outside of the typical review process for submitted claims.

The Company performs analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. However, because of continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have a material impact on the Company’s future results of operations and cash flows. For the fiscal year ended September 30, 2014, a hypothetical change of 1% in the allowances for contractual adjustments as a percentage of gross sales would have resulted in a change in our revenue and net income of approximately $0.8 million.

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The following table sets forth our accounts receivable balances outstanding by aging category for each major payer source as of September 30, 2014 (in thousands):

The following table sets forth our accounts receivable balances outstanding by aging category for each major payer source as of September 30, 2013 (in thousands):

Deferred Advertising

We capitalize and amortize direct-response advertising and related costs when we can demonstrate, among other things, which patients have directly responded to our advertisements. We assess the realizability of the amounts of direct-response advertising costs reported as assets at the end of each reporting period by comparing the carrying amounts of such assets to the probable remaining future benefits expected to result directly from such advertising. Management’s judgments include determining the period over which such net cash flows are estimated to be realized.

We receive responses to our direct-response advertising efforts in the form of leads, of which a certain number are qualified as new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our process of billing the customer’s insurance carrier directly and collecting any customer co-payments, if applicable. The majority of the new customers qualified from our direct-response advertisements place their initial order within three to six months from the time we receive their initial response from our direct-response advertising.

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In order to capitalize our direct-response advertising costs, we must demonstrate that the results of our direct-response advertising will be similar to the effects of responses to past direct-response advertising activities that resulted in future benefits. We monitor the initial success rate of our advertisements as a cost per lead and track the overall cost per acquired customer for each of our quarterly cost pools. For fiscal years 2014 and 2013, our direct-response advertising results demonstrated a continuation of similar patterns. Our advertising efforts in fiscal years 2014 and 2013 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. During fiscal year 2014, we increased our advertising spend compared with fiscal year 2013. Consistent with our past direct-response advertising efforts, when we increased our advertising spend; our costs to acquire new customers increased proportionally to our increased advertising spend.

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 five to six years based on probable future net revenues updated at each reporting period.

Stock-Based Compensation Expense

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award.

The expected volatility is based on the historical volatility of the Company's common stock share price using a historical term equal to the expected term of the stock-based award.

The expected dividend yield is calculated based on the annualized cash dividend declared by the Company's Board of Directors for the current quarter corresponding to the grant date of the stock-based award.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a remaining term equal to the expected term of the stock-based award.

In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to utilize a simplified method, based on the average of the vesting term and contractual term of the award, in determining the expected term of stock-based awards. Since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term, we utilize the simplified method to calculate the expected term of stock-based awards.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company files consolidated federal and state income tax returns.

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Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 8. Financial Statements

The following is an index to the Financial Statements of the Company being filed here-with commencing at page F-1 below:

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of September 30, 2014 and 2013		F-3
Consolidated Statements of Operations for the fiscal years ended September 30, 2014 and 2013		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2014 and 2013		F-5
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2014 and 2013		F-6
Notes to the Consolidated Financial Statements		F-7

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We have had no disagreements with our independent registered accounting firm on accounting and financial disclosure.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2014. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of September 30, 2014, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation, our internal control over financial reporting was effective as of September 30, 2014.

The Company’s independent registered public accounting firm, Crowe Horwath LLP, audited our internal control over financial reporting as of September 30, 2014, as stated in their report in the section entitled “Report of Independent Registered Public Accounting Firm” included elsewhere in this Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting that occurred during the fourth quarter ended September 30, 2014, or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

As of September 30, 2014, the Executive Officers and Directors of the Company were:

Name		Age		Position(s) with the Company
Mark Libratore		63		President, Chief Executive Officer, Director
Robert Davis		68		Chief Financial Officer
John Leger		59		Chief Operating Officer
Jeannette Corbett(1)(2)(3)		64		Director
Tyler Wick(1)(2)(3)		43		Director

⁽¹⁾

Member of the Governance and Nominating Committee.

⁽²⁾

Member of the Audit Committee.

⁽³⁾

Member of the Compensation Committee.

Mark Libratore - In 1990, Mr. Libratore founded Liberty Medical Supply, Inc., which has become the nation’s largest direct-to-consumer diabetic supplier. Mr. Libratore sold this business to PolyMedica Corporation in August 1996 and remained President of Liberty Medical and Senior Vice President of PolyMedica until February 1999. Mr. Libratore founded Liberator Medical Supply, Inc., in 1999, and has served as its President and Chief Executive Officer since inception. Liberator Medical Supply, Inc., was acquired by the Company on June 22, 2007, at which time he became President and Chief Executive Officer of the Company.

Robert Davis – Mr. Davis, has a Masters degree in Accounting from the University of Houston, and holds a CPA certificate from the State of Texas. Mr. Davis has held numerous financial executive-level positions as Comptroller and Vice President of Finance for companies such as controller for a Manufacturer of Jet Engine parts, TurboCombustor Corp., Data Development Inc., and Caribbean Computer Corp., and served as CFO and Manager of Financial Planning for Liberty Medical Supply, Inc. from 1995 to 1999. He has been the Chief Financial Officer of Liberator Medical Supply, Inc., since its organization, and of the Company since 2007.

John Leger – Mr. Leger joined Liberator Medical Supply, Inc. in April 2006, and has been the Chief Operating Officer of the Company since 2007. John was the Senior VP of Operations at Liberty Medical Supply from December 1991 through January 2004. He was responsible for diabetic call center operations, customer services, repeat customer sales, document acquisition and management, claims processing to Medicare, mail services, shipping, receiving, and purchasing. Mr. Leger worked closely with Mark Libratore in building the mail order diabetes business to $100M in annualized sales, and stayed on with the company through its growth to over 650,000 active customers. Due to an agreement not to compete with Liberty during a severance agreement period, John made his expertise available as an independent consultant until he joined Closer Healthcare, Inc. as a VP of Operations in 2005. Closer is a mail order provider of diabetes testing supplies and primarily serviced customers in national clinical trials as well as the managed care sector. He spent a year with Closer prior to joining Liberator Medical.

Jeannette Corbett - Mrs. Corbett, a Certified Public Accountant, is President Emeritus, Board Member, Chairman of the Grants Committee and Member of the Finance Committee of the Quantum Foundation, West Palm Beach, Florida. Previously, she served as CFO of the Medical Services Division and Vice President of Finance of Phymatrix Corporation (PHMX), West Palm Beach, Florida. Prior to her position at Phymatrix, Mrs. Corbett was President of McGill, Roselli, Ayala & Hoppmann, a West Palm Beach-based accounting firm. She has also served as an adjunct instructor of taxation of Palm Beach State College in Lake Worth, Florida. Mrs. Corbett has a bachelor's of science degree in business administration from the University of Florida, graduating Summa Cum Laude. Mrs. Corbett was Chairman of the Board of JFK Medical Center in Atlantis, Florida, from 1991-1994 and was Chair of the Hospital's Finance Committee from 1989-1991. Ms. Corbett became a member of our Board of Directors in February 2010. She was elected to the Board primarily because of her expertise in accounting and finance.

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Tyler Wick – Mr. Wick is a principal with Abry Partners, Boston, Massachusetts, a private equity firm which he joined in December 2011. Prior to that time, he was a principal with Ticonderoga Capital, a Boston, Massachusetts, private equity firm. His private equity experience also includes serving as an Associate at Dillon Read Venture Capital. He was an Associate in the healthcare practice of the investment-banking group of Advest, Inc., where he focused on private placements and mergers and acquisitions for middle market healthcare services companies. Prior to Advest, he was a consultant with the Mentor Group, an international legal consulting firm. Mr. Wick is a member of the Board of Directors of AFS Technologies, ALN Medical Management, Brainshark, Octagon Research, Outside the Classroom and Softrax and is an Observer to the Boards of nuBridges and Construction Software Technologies. He is also a member of the Executive Committee of NERASBIC and serves on the Board of Directors for the Boston Chapter of the Association for Corporate Growth. Mr. Wick received a B.A. degree cum laude from Amherst College. Mr. Wick became a member of our Board of Directors in October 2010. He was elected to the Board primarily because of his background in investment banking and private equity.

Each director of the Company serves until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies. Each officer serves until the first meeting of the Board of Directors following the next annual meeting of the shareholders and until his or her successor is duly elected and qualifies. There are no family relationships among any of our executive officers or directors.

On October 20, 2014 the Board of Directors appointed two new members. The appointments increase the number of directors from three to five. The new directors are as follows:

Ruben Jose King-Shaw, Jr. - is a Managing Partner and Chief Investment Officer at Mansa Capital, LLC, a healthcare private equity investment firm based in Boston, Massachusetts. Mansa Capital specializes in early growth stage companies in the healthcare service and healthcare information technology sectors. Ruben sits on the Board of Directors of many of the firm's portfolio investments. He remains active in public service and was appointed to the Obama Administration's Medicare's Program Advisory and Oversight Commission, which was charged with reforming how the Medicare program procures specific products and services using value-based strategies and establishing foundations for President Obama's healthcare reform programs. Ruben has been a member of the Cornell University Board of Trustees since 2011 and has been a Trustee of the University of Massachusetts since 2005. He has extensive experience in healthcare policy, economics and finance, and served as Chief Operating Officer and Deputy Administrator of the Centers for Medicare and Medicaid Services from 2001 through 2003. Prior to his service in the federal government, in 1998 Ruben was appointed by Governor Jeb Bush as Secretary of the Florida Agency for Healthcare Administration, which is responsible for Florida's Medicaid programs, health quality assurance, facility licensure and managed care regulation activities.

Philip Sprinkle - is a partner in the Atlanta office and chairs the health law practice group of the Balch and Bingham LLP, law firm. Having been in private practice since 1981, Phil is licensed in Georgia, Virginia and Florida and is one of the few certified health lawyers in the State of Florida. He is a frequent lecturer and writer on health care and corporate matters, including taxable and tax-exempt financing, medical staff matters, and academic medicine. His speaking engagements have included nationally recognized entities such as the American Bar Association, the American Health Lawyers Association, the Georgetown Corporate Counsel Institute, and numerous state organizations such as Health Care Financial Management chapters in Virginia and Florida and the Health Lawyers Division of the Virginia State Bar. Phil is an adjunct professor of law at the University of Miami, where he teaches healthcare finance and regulation. He graduated with honors from the University of Virginia College of Arts & Sciences in 1978 and the University of Virginia School of Law in 1981.

The following persons are not executive officers of the Company but make significant contributions to the Company’s business:

Paul Levett joined Liberator in 2005 as its Chief Marketing Officer. From 1990 to 1996 Mr. Levett served as President of Lowe Direct, a direct marketing and advertising agency in New York City, New York. In 1996, Mr. Levett founded Lieber, Levett, Koenig, Farese and Babcock, a New York advertising agency. He was retired from 2000 until he joined Liberator in 2005.

George Narr joined Liberator in April 2010 as its Chief Information Officer. From 1996 to 2006 Mr. Narr served as Chief Information Officer of Liberty Medical Supply, Inc. From 2006 to 2008 Mr. Narr was a private consultant in the medical supply industry. From 2008 to 2010 Mr. Narr was the Chief Information Officer at Simplex Healthcare in Franklin, Tennessee.

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Compliance With Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended September 30, 2014 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2014, as well as any written representation from a reporting person that no Form 5 is required, we are aware of no officer, director or 10% or greater shareholder that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during the fiscal year ended September 30, 2014.

Director Committees

Our Board of Directors has an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee. The Board of Directors has also determined that Jeannette Corbett is an audit committee financial expert, as that term is defined in Item 407 of Regulation S-K. The Board has determined that Ms. Corbett is independent under the independence standards for audit committee members pursuant to applicable SEC regulations and NYSE MKT listing standards.

Compensation Committee Interlocks and Insider Participation

The members of the Company’s Compensation Committee are non-employee directors. The Compensation Committee, with the advice of an outside consulting firm, will determine compensation for our executive officers and managers by multiple factors, including individual performance, compensation of persons in similar capacities in other companies having a size and business comparable to the Company, performance, and our financial results. Base salaries are supplemented by cash performance bonuses determined by our Compensation Committee in October of each year based on the prior year financial results.

Code of Ethics

We adopted a Code of Conduct and Ethics that applies to all officers, directors and employees of our Company on January 14, 2008, as amended on August 10, 2010. Any person may, without charge, request a copy of our Code of Ethics by writing to our Chief Financial Officer at 2979 SE Gran Park Way, Stuart, Florida 34997.

Item 11. Executive Compensation

Employment Agreements

We have entered employment agreements with Mark A. Libratore, our President and Chief Executive Officer; Robert Davis, our Chief Financial Officer; and John Leger, our Chief Operating Officer. The employment agreements are renewed annually in accordance with their terms or until either we or the executive officer notifies the other party at least 90 days prior to the end of the term that such party does not wish to further extend the term. Each employment agreement provides for a minimum annual salary of $400,000, $275,000 and $200,000, in the case of Messrs. Libratore, Davis and Leger, respectively, which salary is reviewed annually by our board of directors (or committee thereof) and adjusted upward, at the sole discretion of our board of directors (or committee thereof). Pursuant to the agreements, each of Messrs. Libratore, Davis and Leger is eligible to receive additional cash incentive compensation pursuant to our annual bonus plan then in effect, and the target annual bonus for each of Messrs. Libratore, Davis and Leger is up to 15%, 10% and 10%, respectively, of such executive officer’s annual base salary, with the actual bonus to be based upon such individual and/or Company performance criteria established for each fiscal year by our board of directors in consultation with the executive officer. Each executive officer is eligible to participate in distributions from the quarterly executive bonus plan configured by our President and Chief Financial Officer.

Each executive officer is entitled to participate in our stock purchase plan and to be considered by our board of directors (or compensation committee of our board of directors, if any) for grants or awards of stock, stock options or warrants under any of our stock incentive or similar plans in effect from time to time. During the term, each executive officer shall be eligible to participate in such health and other group insurance and other employee benefit plans and programs in effect from time to time on the same basis as other senior executives. In addition, during the term of his agreement, Mr. Libratore shall be entitled to a minimum monthly automobile allowance of $800, plus gas expense.

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The employment agreements provide that each executive officer is entitled to severance benefits. If the executive officer’s employment is terminated during the term by us other than for Cause or Disability (each as defined below), or by the executive officer for Good Reason (as defined herein), the executive officer will be entitled to receive (i) his pro-rata bonus for the fiscal year of termination, (ii) payment of an amount equal to the sum of 1/12 of his annual base salary and 1/12 of the target annual bonus each month for 18 months, 12 months and six months, in the case of Messrs. Libratore, Davis and Leger, respectively, following termination, and (iii) continuation of medical benefits on the same terms as active senior executives for 18 months, 12 months and six months, in the case of Messrs. Libratore, Davis and Leger, respectively, following termination. In addition, all of the executive officer’s unvested options outstanding at the time of such termination will become fully vested. If the executive officer’s employment with us is terminated due to the executive officer’s death or Disability, the executive officer (or his estate, if applicable) will be entitled to receive (i) the pro-rata bonus and (ii) option vesting. Receipt of the severance payments, continued medical coverage and option vesting shall be conditioned on the executive officer’s continued compliance with the non-disclosure, non-competition and non-solicitation obligations under the employment agreement. For purposes of the employment agreements, the following terms have the following meanings:

“Cause” means termination upon (i) the willful and continued failure by executive officer to substantially perform his duties or the oral or written instructions of our President, Chief Executive Officer and/or Board of Directors (other than any such failure resulting from executive officer’s incapacity due to physical or mental illness) after an oral or written demand for substantial performance is delivered to the executive officer by our President, Chief Executive Officer, and/or Board of Directors, which demands specifically identifies the manner in which the President, Chief Executive Officer, and/or the Board of Directors believes that executive officer has not substantially performed his duties or complied with an instruction from our President, Chief Executive Officer, and/or Board of Directors; (ii) the willful engaging by executive officer in conduct that is demonstrably and materially injurious to us; (iii) the failure to observe material policies generally applicable to our officers or employees; (iv) the failure to cooperate with any internal investigation of our Company or any of our affiliates; (v) commission of any act of fraud, theft or financial dishonesty with respect us or any of our affiliates or indictment or conviction of any felony; or (vi) material violation of the provisions of the employment agreement.

“Disability” means the executive officer is entitled to receive long-term disability benefits under our long-term disability plan in which the executive officer participates, or, if there is no such plan, the executive officer’s inability, due to physical or mental ill health, to perform the essential functions of the executive officer’s job, with or without a reasonable accommodation, for 180 days during any 365 day period irrespective of whether such days are consecutive.

“Good Reason” means (i) a material and adverse change in the executive officer’s duties or responsibilities; (ii) a reduction in the executive officer’s base salary or target annual bonus; (iii) a relocation of the executive officer’s principal place of employment by more than 50 miles; or (iv) breach by us of any material provision of the employment agreement; provided, that the executive officer must give notice of termination for Good Reason within 60 days of the occurrence of the first event giving rise to Good Reason.

During the term of the employment agreements and for a period of 18 months thereafter, subject to applicable law, the executives will be subject to restrictions on competition with us and restrictions on the solicitation of our customers and employees. For all periods during and after the term, the executives will be subject to nondisclosure and confidentiality restrictions relating to our confidential information and trade secrets.

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SUMMARY COMPENSATION TABLE

The following table provides summary information regarding compensation earned by the named executive officers during the fiscal years ended September 30, 2014 and 2013.

⁽¹⁾

All Other Compensation includes expenses paid on behalf of the named executive officers for health insurance, life insurance, transportation and certain other personal expenses.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The Company’s outstanding equity awards to the named executive officers at September 30, 2014 are set forth in the following table:

		Number of
		Securities
		Underlying
		Unexercised		Option			Option
		Options (#)		Exercise			Expiration
Name		Exercisable		Price			Date
Mark A. Libratore		75,000		$	1.32		December 27, 2015
Robert J. Davis		55,000		$	1.20		December 27, 2015
		45,000		$	0.97		February 14, 2018
John Leger		20,000		$	1.20		December 27, 2015
		45,000		$	0.97		February 14, 2018

The Company’s 2007 Stock Plan (the “Stock Plan”) provides that the Board of Directors may grant to those individuals who are eligible under the terms of the Stock Plan nonqualified stock options, incentive stock options, restricted stock, stock appreciation rights, performance awards, performance units and other incentives payable in shares of the Company’s common stock as the Board of Directors may determine. Such grants may be made to officers, employees or members of the Board of Directors of the Company and its subsidiaries as well as the Company’s consultants, agents, advisors and independent contractors in exchange for bona fide services rendered. The number of shares of common stock to be reserved and available for awards under the Stock Plan (subject to certain adjustments as provided therein) is 2,105,000.

The purpose of the Stock Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company by providing them the opportunity to acquire a proprietary interest in the Company and to link their interests and efforts to the long-term interests of the Company’s shareholders. See “Description of the Stock Plan,” below.

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Equity Compensation Plan Information

The following table presents details of the Company’s equity compensation plan as of September 30, 2014:

Plan Category		Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)			(b)		(c)
2007 Employee Stock Incentive Plan		752,916		$	1.39		131,526

Description of the Stock Plan

The Stock Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company. The maximum number of shares of common stock available for issuance under the Stock Plan is 2,105,000.

The Stock Plan permits awards of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentives payable in cash or in shares of common stock. The Stock Plan provides that the exercise price of any option will not be less than the fair market value of the common stock on the date of grant or, for a 10% shareholder, 110% of fair market value.

Eligibility

An award under the Stock Plan can be made to any employee, officer or director of the Company or a subsidiary, as selected by the Committee. Subject to certain limitations, an award under the plan can also be made to any consultant, agent, advisor or independent contractor to the Company or a related company, as selected by the Committee. As of September 30, 2014, there were approximately 319 employees, including officers, and 2 directors eligible to participate in the Stock Plan.

Shares Covered by the Stock Plan

The Stock Plan permits the granting of awards covering an aggregate of 2,105,000 shares of Company common stock. The shares of Company common stock may be either authorized but unissued shares or treasury shares.

Any shares that are reserved for options or performance shares that lapse, expire, terminate or are cancelled, or if shares of Company common stock are issued under the plan and are thereafter reacquired by the Company, the shares subject to such awards and the reacquired shares may be available for subsequent awards under the Stock Plan.

Stock Options and Rights

Options granted under the Stock Plan may be either non-qualified stock options or incentive stock options qualifying for special tax treatment under Section 422 of the Internal Revenue Code. The exercise price of any stock option may not be less than the fair market value of the shares of common stock on the date of grant and 110% of fair market value for 10% shareholders. The exercise price is payable in cash, shares of common stock previously owned by the optionee or a combination of cash and shares of common stock previously owned by the optionee, or by a recourse or non-recourse note executed by the nominee (subject to Sarbanes-Oxley prohibitions on officer loans). Both non-qualified stock options and incentive stock options will generally expire on the tenth anniversary of the date of grant, unless otherwise specified.

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Stock appreciation rights may be granted in tandem with stock options or alone as freestanding stock appreciation rights. The grant price of a tandem stock appreciation right shall be equal to the exercise price of the related option, and the grant price of a freestanding stock appreciation right shall be the fair market value of the common stock on the grant date. The exercise of a stock appreciation right will entitle the holder to receive payment equal to the product of (i) the excess of the fair market value of the common stock on the date of exercise over the grant price and (ii) the number of shares with respect to which the stock appreciation right is exercised. At the discretion of the Compensation Committee, payment upon an exercise of a stock appreciation right may be in cash, common stock or some combination thereof.

Restricted Stock and Stock Units

Under the Stock Plan, the Committee may grant shares of restricted stock and stock units on terms and conditions, including performance criteria, repurchase and forfeiture, as determined by the Committee. Upon satisfaction of the terms and conditions of the award, shares of restricted stock become transferable, and the stock units become payable in cash, shares of common stock, or a combination of both, in the discretion of the Committee.

Amendment and Termination of the Stock Plan

The Board or the Committee may, at any time, amend, suspend or terminate the Stock Plan or any portion of the plan, provided that to the extent required by law or a stock exchange rule, shareholder approval is required for any amendment to the plan. By its terms, the Stock Plan terminates ten years after its effective date.

Recent Grants

In the fiscal year which ended September 30, 2014, the Company granted 150,000 options to its directors, executive officers and employees who were directors, executive officers and employees in the 2014 fiscal year.

DIRECTOR COMPENSATION

Directors other than Mr. Libratore receive (i) an annual fee of $20,000 (plus an additional $8,000 if Audit Committee chairman, and $5,000 if chairman of another Board committee); (ii) a per Board meeting fee of $1,000 and $500 for each committee meeting and (iii) a one-time issuance of options for the purchase of 50,000 common shares of the Company, exercisable at the market price at the date of grant and vesting over a two-year period (iv) a one-time award of 12,987 common shares of the Company. Director’s fees payments for the first quarter of fiscal year 2014 were paid in the form of options for the purchase of common shares. Mr. Libratore is not compensated as a director of the Company.

The following table sets forth each Director’s compensation for the year ended September 30, 2014:

Name		Fees Earned or Paid in Cash			Option Awards			Total
Mark A. Libratore(1)			−			−			−
Jeannette Corbett		$	36,500		$	61,890		$	98,390
Tyler Wick		$	40,300		$	61,890		$	102,190

⁽¹⁾

Mr. Libratore is not compensated for his services as a director.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information regarding ownership of shares of our common stock, as of November 30, 2014:

·

by each person known by us to be the beneficial owner of 5% or more of our common stock;

·

by each of our directors and executive officers; and

·

by all of our directors and executive officers as a group.

Except as otherwise indicated, each person and each group shown in the table has sole voting and investment power with respect to the shares of common stock indicated. For purposes of the table below, in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed to be the beneficial owner, of any shares of our common stock over which he or she has or shares, directly or indirectly, voting or investment power or of which he or she has the right to acquire beneficial ownership at any time within 60 days. As used in this prospectus, “voting power” is the power to vote or direct the voting of shares and “investment power” includes the power to dispose or direct the disposition of shares. Common stock beneficially owned and percentage ownership was based on 53,166,209 shares outstanding on November 30, 2014, plus 897,082 shares deemed outstanding pursuant to Rule 13d-3, for a total of 54,063,291 shares outstanding. Unless otherwise indicated, the address of each beneficial owner is c/o Liberator Medical Holdings, Inc., 2979 SE Gran Park Way, Stuart, Florida 34997.

Name and Address		Number of Shares		Percent
5% Beneficial Owners:
Millennium Partners, L.P.(1)		6,230,000		11.52%
c/o Millennium Management LLC
666 Fifth Avenue, 8th Floor
New York, NY 10103
Directors and Executive Officers:
Mark A. Libratore		19,785,867		36.60%
President and Chief Executive Officer and Director
Robert Davis		815,000		1.51%
Chief Financial Officer
John Leger, Vice President, Operations		280,165		*
Tyler Wick		182,987		*
Jeannette Corbett		127,987		*
All directors and executive officers as a group (5 persons)		21,192,006		39.20%

*

Less than one percent (1%).

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⁽¹⁾

Millennium Management LLC, a Delaware limited liability company (“Millennium Management”), is the general partner of Millennium Partners, L.P., a Cayman Islands exempted limited partnership (“Millennium Partners”), and may be deemed to have shared voting control and investment discretion over securities owned by Millennium Partners. Millennium Management is also the general partner of the 100% shareholder of ICS Opportunities, Ltd., and may be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Millennium International Management, L.P., a Delaware limited liability partnership, is the investment manager of ICS Opportunities, Ltd., and may be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Millennium International Management GP LLC, a Delaware limited liability company, is the general partner of Millennium International Management, and may also be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Israel A. Englander is the managing partner of Millennium Management and Millennium International Management GP LLC, and consequently may also be deemed to have shared voting control and investment discretion over securities owned by Millennium Partners or ICS Opportunities, as the case may be. The foregoing information is derived from the reporting persons as set forth in a Schedule 13D Amendment filed with the SEC on behalf of the reporting persons on October 16, 2013, and a Form 4 filed on July 1, 2014.

⁽²⁾

Represents as of November 30, 2014, an aggregate 6,230,000 shares owned beneficially by Millennium Partners, L.P., 6,230,000 shares owned beneficially by Millennium Management LLC and Israel Englander (See footnote (1), above), and 0 shares owned beneficially by Millennium International Management GP LLC, Millennium International Management LP, and ICS Opportunities, Ltd.

⁽³⁾

Includes 75,000 shares underlying options exercisable by Mr. Libratore within 60 days of November 30, 2014.

⁽⁴⁾

Includes 100,000 shares underlying options exercisable by Mr. Davis within 60 days of November 30, 2014.

⁽⁵⁾

Includes 65,000 shares underlying options exercisable by Mr. Leger within 60 days of November 30, 2014.

⁽⁶⁾

Includes 61,250 shares underlying options exercisable by Mr. Wick within 60 days of November 30, 2014.

⁽⁷⁾

Includes 50,000 shares underlying options exercisable by Ms. Corbett within 60 days of November 30, 2014.

⁽⁸⁾

See Footnote Nos. (3) through (7)

Item 13. Certain Relationships and Related Transactions, and Director Independence

All transactions between the Company and related parties are reviewed and approved by our Audit Committee, which is made up entirely of independent directors. We collect information about related party transactions from our officers and directors through annual questionnaires distributed to officers and directors. Each director and officer agrees to abide by our Code of Conduct and Ethics, which provides that officers and directors should avoid conflicts of interest and that any transaction or situation that could involve a conflict of interest between the Company and the officer or director must be reported to the Audit Committee of the Board and is subject to approval by the Audit Committee if and when appropriate. The Code of Conduct and Ethics identifies a non-exclusive list of situations that may present a conflict of interest, including significant dealings with a competitor, customer or supplier, similar dealings by an immediate family member, personal investments in entities that do business with the Company, and gifts and gratuities that influence a person’s business decisions, as well as other transactions between an individual and the Company. The Audit Committee’s charter provides that the Audit Committee will review, investigate and monitor matters pertaining to the integrity or independence of the Board, including related party transactions. The Audit Committee reviews and makes determinations about related party transactions or other conflicts of interest as they arise. Policies requiring review and approval of any transaction or arrangement with a director or executive officer that may present a conflict of interest are set forth in the Code of Conduct and Ethics.

There have not been, since October 1, 2013, nor are the currently proposed, any transactions with related person required to be reported pursuant to Item 404(a) of Regulations S-K.

Item 14. Principal Accountant Fees and Services

Crowe Horwath LLP has served as the Company’s independent registered public accounting firm for the fiscal years ended September 30, 2014 and 2013.

34

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Independent Auditor Fees

The following table sets forth fees billed, or expected to be billed, to the Company by the Company’s independent auditors for the years ended September 30, 2014 and 2013, for (i) services rendered for the audit of the Company’s annual financial statements and the review of the Company’s quarterly financial statements; (ii) services rendered that are reasonably related to the performance of the audit or review of the Company’s financial statements that are not reported as Audit Fees; (iii) services rendered in connection with tax preparation, compliance, advice and assistance; and (iv) all other services:

		Crowe Horwath, LLP
		2014			2013
Audit fees		$	172,397		$	124,900
Audit related fees			−			4,500
Total Fees		$	172,397		$	129,400

Audit Committee

The audit and non-audit related fees of the Company’s independent auditors are subject to an engagement letter between the Company and the independent auditors. Each engagement letter is reviewed and approved by the Company’s Audit Committee.

PART IV.

Item 15. Exhibits and Financial Statement Schedules

The following exhibits designated with a footnote reference are incorporated herein by reference to a prior registration statement or a periodic report filed by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act:

⁽¹⁾

Filed herewith.

35

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LIBERATOR MEDICAL HOLDINGS, INC.

By: /s/ Mark A. Libratore

Mark A. Libratore

President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.

Signature		Title		Date
/s/ Mark A. Libratore
Mark A. Libratore		President, Chief Executive Officer and Director (principal executive officer)		December 15, 2014
/s/ Robert J. Davis
Robert J. Davis		Chief Financial Officer (principal financial and accounting officer)		December 15, 2014
/s/ Jeannette Corbett
Jeannette Corbett		Director		December 15, 2014
/s/ Tyler Wick
Tyler Wick		Director		December 15, 2014

36

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INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of September 30, 2014 and 2013		F-3
Consolidated Statements of Operations for the fiscal years ended September 30, 2014 and 2013		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2014 and 2013		F-5
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2014 and 2013		F-6
Notes to the Consolidated Financial Statements		F-7

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Liberator Medical Holdings, Inc. and Subsidiaries

Stuart, Florida

We have audited the accompanying consolidated balance sheets of Liberator Medical Holdings, Inc. and Subsidiaries (“Liberator”) as of September 30, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. We also have audited Liberator’s internal control over financial reporting as of September 30, 2014 based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Liberator’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Liberator as of September 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Liberator maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ Crowe Horwath LLP

Crowe Horwath LLP

Fort Lauderdale, Florida

December 15, 2014

F-2

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Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

As of September 30, 2014 and 2013

(In thousands, except dollar per share amounts)

		2014			2013
Assets
Current Assets:
Cash		$	12,261		$	12,453
Accounts receivable, net of allowances of $4,569 and $4,502, respectively			8,866			7,836
Inventory, net of allowance for obsolete inventory of $181 and $308, respectively			1,954			2,187
Deferred tax assets			2,005			2,067
Prepaid and other current assets			449			219
Total Current Assets			25,535			24,762
Property and equipment, net of accumulated depreciation of $4,016 and $3,492, respectively			1,260			1,044
Deferred advertising, net			26,936			22,705
Intangible assets, net of accumulated amortization of $281 and $169, respectively			420			414
Other assets			178			174
Total Assets		$	54,329		$	49,099
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	6,085		$	4,915
Accrued liabilities			1,758			1,354
Dividends payable			1,728			1,569
Income tax payable			178			1,195
Other current liabilities			161			111
Total Current Liabilities			9,910			9,144
Deferred tax liabilities			10,031			8,561
Credit line facility			1,500			1,500
Other long-term liabilities			453			63
Total Liabilities			21,894			19,268
Commitments and contingencies (see Note 9)
Stockholders’ Equity:
Common stock, $.001 par value, 200,000 shares authorized, 53,520 and 52,637 shares issued, respectively; 53,166 and 52,283 shares outstanding at September 30, 2014 and 2013, respectively			54			53
Additional paid-in capital			36,385			35,111
Accumulated deficit			(3,524)			(4,853)
Treasury stock, at cost; 354 shares at September 30, 2014 and 2013			(480)			(480)
Total Stockholders’ Equity			32,435			29,831
Total Liabilities and Stockholders’ Equity		$	54,329		$	49,099

See accompanying notes to consolidated financial statements

F-3

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Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

For the fiscal years ended September 30, 2014 and 2013

(In thousands, except dollar per share amounts)

		2014			2013
Net Sales		$	74,569		$	69,111
Cost of Sales			27,808			25,689
Gross Profit			46,761			43,422
Operating Expenses:
Payroll, taxes and benefits			14,788			14,311
Advertising			9,902			8,908
Bad debts			3,279			3,069
Depreciation and amortization			663			683
General and administrative			5,420			4,692
Total Operating Expenses			34,052			31,663
Income from Operations			12,709			11,759
Other Expense
Interest expense			(50)			(83)
Total Other Expense			(50)			(83)
Income before Income Taxes			12,659			11,676
Provision for Income Taxes			4,857			4,598
Net Income		$	7,802		$	7,078
Basic earnings per share:
Weighted average shares outstanding			52,704			50,115
Earnings per share		$	0.15		$	0.14
Diluted earnings per share:
Weighted average shares outstanding			53,679			52,375
Earnings per share		$	0.15		$	0.14
Dividends declared per common share *		$	0.12		$	0.08

* Four and three quarterly dividends were declared during fiscal years 2014 and 2013, respectively

See accompanying notes to consolidated financial statements

F-4

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Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the fiscal years ended September 30, 2014 and 2013

(In thousands)

						Additional						Total
		Common		Common		Paid in		Accumulated		Treasury		Stockholders’
		Shares		Stock		Capital		Deficit		Stock		Equity
Balance at October 1, 2012		48,143	$	48	$	34,707	$	(7,746)	$	(50)	$	26,959
Options issued to employees and directors		−		−		76		−		−		76
Common stock issued for exercise of options and warrants		4,294		5		265		−		−		270
Common stock issued for employee stock purchase plan		111		−		63		−		−		63
Purchase of treasury stock		(265)		−		−		−		(430)		(430)
Net income		−		−		−		7,078		−		7,078
Cash dividends declared, $0.08 per share		−		−		−		(4,185)		−		(4,185)
Balance at September 30, 2013		52,283	$	53	$	35,111	$	(4,853)	$	(480)	$	29,831
Options issued to employees and directors		−		−		89		−		−		89
Common stock issued to directors		26		−		112		−		−		112
Common stock issued for exercise of options and warrants		857		1		895		−		−		896
Income tax benefit related to exercise of stock options		−		−		178		−		−		178
Net income		−		−		−		7,802		−		7,802
Cash dividends declared, $0.1225 per share		−		−		−		(6,473)		−		(6,473)
Balance at September 30, 2014		53,166	$	54	$	36,385	$	(3,524)	$	(480)	$	32,435

See accompanying notes to consolidated financial statements

F-5

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Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the fiscal years ended September 30, 2014 and 2013

(In thousands)

		2,014			2,013
Cash flow from operating activities:
Net income		$	7,802		$	7,078
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			10,473			9,404
Stock-based compensation			201			76
Provision for doubtful accounts and contractual adjustments			3,506			3,407
Deferred income taxes			1,532			3,321
Reserve for inventory obsolescence			14			126
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			(4,535)			(787)
Deferred advertising			(14,043)			(9,000)
Inventory			255			368
Other assets			(205)			40
Income taxes prepaid and payable			(1,024)			1,104
Accounts payable			1,171			(1,724)
Accrued liabilities			405			235
Other liabilities			(24)			(15)
Net Cash Flows Provided by Operating Activities			5,528			13,633
Cash flows from investing activities
Purchase of property and equipment and other			(194)			(367)
Proceeds from sale of property and equipment			4			−
Acquisition of business, net of cash acquired			(170)			(319)
Net Cash Flows Used in Investing Activities			(360)			(686)
Cash flows from financing activities
Repayments to credit line facility			−			(1,000)
Costs associated with credit line facility			(21)			(21)
Proceeds from employee stock purchase plan			−			48
Proceeds from exercise of options and warrants			896			270
Income tax benefit related to exercise of stock options			178			−
Cash dividends paid			(6,314)			(2,616)
Purchase of treasury stock			−			(430)
Payments of capital lease obligations			(99)			(71)
Net Cash Flows Used in Financing Activities			(5,360)			(3,820)
Net (decrease) increase in cash			(192)			9,127
Cash at beginning of period			12,453			3,326
Cash at end of period		$	12,261		$	12,453
Supplemental disclosure of cash flow information:
Cash paid for interest		$	51		$	84
Cash paid for income taxes		$	4,170		$	171
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures funded by capital lease borrowings or term notes		$	562		$	23
Cash dividends declared, but not yet paid		$	1,728		$	1,569

See accompanying notes to consolidated financial statements

F-6

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Liberator Medical Holdings, Inc. and Subsidiaries

Notes To The Consolidated Financial Statements

September 30, 2014

Note 1 — Description of Business

Liberator Medical Holdings, Inc. and Subsidiaries (the “Company”) distribute direct-to-consumer durable medical supplies to customers in all fifty states within the United States. The Company’s revenue is primarily derived from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions to Medicare-eligible seniors with chronic conditions. We provide a simple, reliable way for patients to purchase medical supplies on a recurring basis. Our employees communicate directly with the patients and their physicians regarding the patients’ prescriptions and supply requirements. The Company bills Medicare and third-party insurers on behalf of its patients. The Company markets its products directly to consumers, primarily through targeted media, direct-response television, Internet, and print advertising throughout the United States. Our patient service representatives are specifically trained to communicate with patients, in particular seniors, helping them to follow their doctors’ orders and manage their chronic diseases. The Company’s operating platforms enable it to efficiently collect the required documentation from physicians and patients in order to bill and collect amounts due from Medicare, other third party payers and directly from patients.

Note 2 — Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. A summary of the more significant policies is set forth below:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education Services, Inc., Liberator Health and Wellness, Inc., Practica Medical Manufacturing, Inc. and Tri-County Medical & Ostomy Supplies, Inc., its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements in order to maintain consistency and comparability between the periods presented. The following reclassification was made to the Consolidated Statement of Cash Flows for the twelve months ended September 30, 2013, to be consistent with the Consolidated Statement of Cash Flows for the twelve months ended September 30, 2014, presented:

·

In the Cash flow from operating activities section, within the changes in operating assets and liabilities section, $1,104,000 was reclassified from accrued liabilities to income taxes prepaid and payable.

The reclassification had no impact on previously reported net cash flows from operating activities, total assets, stockholders’ equity, or net income.

Segment Reporting

The Company operates and tracks its results as one reportable segment, Mail Order Supplies, based on the aggregation of three operating segments. Over 99% of the Company’s net sales are generated through Mail Order Supplies operating segment. The Company operates a retail store in Tennessee and a small specialty catheter manufacturer based in Florida, which sell the same types of medical supplies as our Mail Order Supplies segment, but sales are less than 1% of the Company’s total net sales for these two operating segments. The Company’s President and Chief Executive Officer has been identified as the Chief Operating Decision Maker.

F-7

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The following table summarizes the Company’s revenues by product line as a percentage of net sales for the fiscal years ending September 30, 2014 and 2013:

		2014		2013
Product Lines:
Urological supplies		75.9%		77.3%
Ostomy supplies		19.5%		16.5%
Mastectomy fashions		4.5%		5.2%
Diabetic supplies		0.1%		1.0%

Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Such estimates include, but are not limited to, (i) the net realizable value of accounts receivable; (ii) the reserve for excess and obsolete inventory; (iii) the expected period and amounts of future benefits to be realized directly from deferred direct advertising costs; (iv) the fair values of stock compensation expense; (v) the valuation of intangible assets; and (vi) valuation allowances for deferred income tax assets. Actual results could differ from management’s estimates.

Fair Value of Financial Instruments

Financial instruments include cash, receivables, payables and debt obligations. Due to the short-term nature of the financial instruments, the carrying value is representative of their fair value. The carrying value of the Credit Line Facility approximates fair value as interest rates are indexed to the Daily LIBOR Rate.

Accounts Receivable

Accounts receivable are reported net of allowances for contractual adjustments and uncollectible accounts. Contractual adjustments are recorded against revenues. Contractual adjustments result from differences between the payment amount received and the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payer’s inability or refusal to pay.

The Company performs analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have a material impact on the Company’s results of operations and cash flows. The Company does not accrue interest on its accounts receivable.

F-8

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The following is a reconciliation of the beginning and ending allowances for accounts receivable for the fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		Beginning Balance at October 1st			Charged against Revenues or to Bad Debt Expense			Actual Deductions against Allowance			Ending Balance at September 30th
Fiscal year ended September 30, 2013:
Allowance for contractual adjustments		$	769		$	338		$	−		$	1,107
Allowance for uncollectible accounts			4,275			3,069			(3,949)			3,395
Total allowances for accounts receivable		$	5,044		$	3,407		$	(3,949)		$	4,502
Fiscal year ended September 30, 2014:
Allowance for contractual adjustments		$	1,107		$	228		$	−		$	1,335
Allowance for uncollectible accounts			3,395			3,279			(3,440)			3,234
Total allowances for accounts receivable		$	4,502		$	3,507		$	(3,440)		$	4,569

Inventories

Inventories are comprised of finished goods and are stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. Allowances for excess and obsolete inventory are recorded for inventory considered to be in excess or obsolete.

Deferred Advertising Costs

We capitalize and amortize direct-response advertising and related costs when we can demonstrate among other things that patients have directly responded to our advertisements. We assess the realizability of the amounts of direct-response advertising costs reported as assets at the end of each reporting period by comparing the carrying amounts of such assets to the probable remaining future net cash flows expected to result directly from such advertising. Management’s judgments include determining the period over which such net cash flows are estimated to be realized.

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 five to six years based on probable future net revenues updated at each reporting period.

A summary of deferred advertising costs for the fiscal years ending September 30, 2014 and 2013, is as follows (in thousands):

		2014			2013
Deferred Advertising Costs:
Beginning Balance, 10/1		$	22,705		$	22,426
Plus: Direct-response advertising spend			14,043			9,000
Less: Amortization of deferred advertising costs			(9,812)			(8,721)
Ending Balance, 9/30		$	26,936		$	22,705

F-9

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A business change, including a change in reimbursement rates, that reduces or increases expected net cash flows or that shortens or lengthens the period over which such net cash flows are estimated to be realized could result in accelerated or reduced charges against our earnings.

Debt Issuance Costs

Costs associated with obtaining, closing, and modifying loans and/or debt instruments such as, but not limited to placement agent fees, attorney fees and state documentary fees are capitalized and expensed over the term of the loan.

Debt issuance costs of $21,000 and $21,000 were capitalized during the years ended September 30, 2014 and 2013, respectively. Debt issuance costs amortized for the years ended September 30, 2014 and 2013, were $21,000 and $23,000, respectively.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful life of the respective assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or useful life. Maintenance, repairs, and minor improvements are charged to expense as incurred; major renewals and betterments that extend the useful life of the associated asset are capitalized. When items of property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in results of operations for the period.

Intangible Assets

Intangible assets with definite lives are amortized over their estimated useful lives. We currently amortize acquired intangible assets with definite lives over a period of between five and eight years.

Long –lived Assets

Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. We did not record any impairments of long-lived assets during fiscal years 2014 and 2013.

Treasury Stock

Treasury stock is accounted for using the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

Revenue Recognition

We recognize revenue related to product sales upon delivery to customers, provided that we have received and verified any written documentation required to bill Medicare, other government agencies, third-party payers, and patients. For product shipments for which we have not yet received the required written documentation, revenue recognition is delayed until the period in which those documents are collected and verified. We record revenue at the amounts expected to be collected from government agencies, other third-party payers, and from patients directly. We record, if necessary, contractual adjustments equal to the difference between the reimbursement amounts defined in the fee schedule and the revenue recorded per the billing system. These adjustments are recorded as a reduction of both gross revenues and accounts receivable. We analyze various factors in determining revenue recognition, including a review of specific transactions, current Medicare regulations and reimbursement rates, historical experience and the credit-worthiness of patients.

Revenue related to Medicare reimbursements is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined prices for reimbursable supplies, and we bill the remaining balance to either third-party payers or directly to patients.

Shipping and Handling Costs

Shipping and handling costs are not charged to the patients in compliance with Medicare policy. Shipping and handling costs for the years ended September 30, 2014 and 2013, were $2,301,000 and $2,163,000, respectively. These amounts are included in cost of sales on the accompanying consolidated statements of operations.

F-10

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Stock-Based Compensation

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award.

The expected volatility is based on the historical volatility of the Company's common stock share price using a historical term equal to the expected term of the stock-based award.

The expected dividend yield is calculated based on the annualized cash dividend declared by the Company's Board of Directors for the current quarter corresponding to the grant date of the stock-based award.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a remaining term equal to the expected term of the stock-based award.

In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to utilize a simplified method, based on the average of the vesting term and contractual term of the award, in determining the expected term of stock-based awards. Since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term, we utilize the simplified method to calculate the expected term of stock-based awards.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company files consolidated federal and state income tax returns.

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

Leases

The Company performs a review of newly acquired leases to determine whether a lease should be treated as a capital or operating lease. Capital lease assets are capitalized and depreciated over the term of the initial lease. A liability equal to the present value of the aggregated lease payments is recorded utilizing the stated lease interest rate. If an interest rate is not stated, the Company will determine an estimated cost of capital and utilize that rate to calculate the present value. For operating leases, the Company records rent expense and amortization of leasehold improvements on a straight-line basis over the initial term of the lease. All leasehold incentives, rent holidays, and/or other incentives are factored into the calculation of the deferred rent liability in order to record rent expense on a straight-line basis over the initial term of the lease. Leasehold incentives are capitalized and depreciated over the initial term of the lease.

Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated using the treasury stock method and reflect the potential dilution that could occur if stock options or warrants were exercised and were not anti-dilutive.

F-11

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance to clarify the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a comprehensive framework for revenue recognition that supersedes current general revenue guidance and most industry-specific guidance. In addition, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its financial statements.

Note 3 — Property And Equipment

A summary of property and equipment at September 30, 2014 and 2013, is as follows (dollars in thousands):

		Estimated Life		2014			2013
Leased equipment		3 — 5 years		$	1,222		$	807
Transportation equipment		5 — 10 years			81			55
Warehouse equipment		5 — 10 years			257			132
Office furniture		5 — 10 years			630			613
Computer equipment		3 — 5 years			675			599
Telephone equipment		5 years			104			101
Website		5 years			150			114
Server software		3 years			380			343
Leasehold improvements		Shorter of life of asset or lease			1,754			1,749
Signage		5 — 10 years			23			23
Total property and equipment					5,276			4,536
Less: accumulated depreciation					(4,016)			(3,492)
Property and equipment, net				$	1,260		$	1,044

The amounts charged to operating expenses for depreciation of property and equipment for the years ended September 30, 2014 and 2013 were $551,000 and $604,000, respectively.

F-12

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Note 4 — Intangible Assets

A summary of intangible assets at September 30, 2014 and 2013, is as follows (in thousands):

		2014			2013
Acquired customer lists		$	620		$	502
Less: accumulated amortization			(268)			(166)
Net acquired customer lists			352			336
Acquired trade name			81			81
Less: accumulated amortization			(13)			(3)
Net acquired trade name			68			78
Total intangible assets			701			583
Less: accumulated amortization			(281)			(169)
Net intangible assets		$	420		$	414

Amortization expense associated with intangible assets for fiscal years 2014 and 2013 was $112,000 and $78,000, respectively. The remaining amortization period for acquired customer lists and trade names is 7.25 and 6.75 years respectively. It is anticipated that there will be no residual value at the end of the amortization period for the intangible assets. Estimated amortization expense for intangible assets as of September 30, 2014, for the next five fiscal years is as follows (in thousands):

	Amount
Fiscal years ending September 30:
2015	$	116
2016		91
2017		50
2018		44
2019		41
	$	342

NOTE 5 — Credit Line Facility

PNC 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. 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.

On February 27, 2014, the PNC Credit Line Facility was amended as follows:

·

The expiration date for the PNC Credit Line Facility was extended from February 11, 2015, to March 31, 2016.

·

The interest rate on the outstanding balance was reduced from LIBOR plus 2.75% to LIBOR plus 2.50%.

·

The EBITDA (earnings before interest, taxes, depreciation and amortization) definition was revised to subtract the actual cash outlay for deferred advertising as stated on the Consolidated Statement of Cash Flows.

·

The value of an acquisition requiring PNC's prior written consent was increased to $1,500,000.

F-13

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The PNC Credit Line Facility requires the Company to comply with certain covenants, including financial covenants which are defined in the credit agreement. On July 29, 2014, the financial covenants were modified to reset the minimum Fixed Coverage Charge ratio to be tested for the period ended March 31, 2015 (as defined below) and to add minimum EBITDA and Liquidity covenants required for the fiscal quarters beginning June 30, 2014. As of September 30, 2014, the Company was in compliance with the following amended financial covenants:

·

The Company will maintain as of the end of each fiscal quarter, on a rolling four quarters basis, a ratio of Senior Funded Debt to EBITDA of less than 2.0 to 1; and

·

The Company will maintain, on a rolling four quarters basis, a Fixed Coverage Charge ratio of at least (i) 1.00 to 1.00 for the fiscal quarter ending March 31, 2015, and (ii) 1.10 to 1.00 for the fiscal quarter ending June 30, 2015, and each fiscal quarter thereafter.

·

The Company will maintain, on a rolling four quarters basis, a minimum EBITDA of at least $7,000,000 for the fiscal quarters ending June 30, 2014, September 30, 2014, and December 31, 2014.

·

The Company will maintain at all times a minimum Liquidity of at least $7,500,000 to be tested for the fiscal quarters ending June 30, 2014, September 30, 2014, and December 31, 2014.

As of September 30, 2014, the availability under the PNC Credit Line Facility was $5,363,000 with an outstanding balance of $1,500,000. The interest rate for the outstanding balance as of September 30, 2014, was 2.65%. For fiscal years ended September 30, 2014 and 2013, the Company incurred $42,000 and $75,000, respectively, in interest expense related to the PNC Credit Line Facility.

NOTE 6 — Stockholders’ Equity

Warrants

In connection with the sale of common stock on March 9, 2010, for gross proceeds of $7 million, the Company issued warrants to purchase 233,333 shares of the Company’s common stock at an exercise price of $2.50 per share to the placement agent. During the fiscal year ended September 30, 2014, 29,167 of these warrants were exercised and 204,166 remain outstanding and expire in October 2015. The grant-date fair value of these warrants of $228,961 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	2.34%
Expected term:	5 years
Expected dividend yield:	0.00%
Expected volatility:	63.66%

A summary of warrants issued, exercised and expired during the fiscal years ended September 30, 2014 and 2013, is as follows:

Warrants:		Shares		Weighted Avg. Exercise Price
Balance at October 1, 2012		5,532,333		$	1.09
Issued		−			−
Exercised		(16,000)			1.00
Expired		(5,283,000)			1.02
Balance at September 30, 2013		233,333		$	2.50
Issued		−			−
Exercised		(29,167)			2.50
Expired		−			−
Balance at September 30, 2014		204,166		$	2.50

F-14

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Options

In April 2013, Mr. Libratore, the Company’s founder, principal shareholder and President, exercised options, which were granted under the terms of the reverse merger in June 2007, for 3,921,009 shares of the Company’s common stock at an exercise price of $0.0001.

Employee and Director Stock Options

On September 14, 2007, the Board of Directors adopted the Company’s 2007 Stock Plan with an aggregate of 1,000,000 shares of the Company’s unissued common stock. The Plan was approved by the shareholders at the Company’s annual meeting in September 2008. The 1,000,000 shares authorized under the 2007 Stock Plan are reserved for issuance to officers, directors, employees, prospective employees and consultants as incentive stock options, non-qualified stock options, restricted stock awards, other equity awards and performance based stock incentives. The option price, number of shares and grant date are determined at the discretion of the Company’s board of directors or the committee overseeing the 2007 Stock Plan.

On July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number of shares authorized under the plan from 1,000,000 to 2,000,000 shares. The amendment was approved at the Company’s annual meeting on September 4, 2009.

On September 12, 2011, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number of shares authorized under the plan from 2,000,000 to 2,105,000 shares. This amendment was approved at the Company’s annual meeting on October 20, 2011.

As of September 30, 2014, there has been 2,580,974 shares issued, 607,500 shares expired or forfeited and 1,194,584 shares exercised under the 2007 Stock Plan. As of September 30, 2014, there were 752,916 shares outstanding and 131,526 shares available for grant under the 2007 Stock Plan.

There were 150,000 and 370,000 options granted during the fiscal years 2014 and 2013, respectively. The weighted-average grant date fair values of options granted during the fiscal years 2014 and 2013 were $0.50 and $0.29, respectively. There were 827,584 and 367,000 options exercised during fiscal years 2014 and 2013, respectively. The total intrinsic value of options exercised during fiscal year 2014 and 2013 was approximately $2,210,000 and $309,000, respectively.

The fair values of stock-based awards granted during the fiscal year ended September 30, 2014, were calculated with the following weighted-average assumptions:

		2014		2013
Risk-free interest rate:		0.68%		0.40%
Expected term:		3.0 years		2.9 years
Expected dividend yield:		5.60%		0.00%
Expected volatility:		48.34%		46.87%

For the fiscal years ended September 30, 2014 and 2013, the Company recorded $200,000 and $58,000, 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 September 30, 2014, there was $31,000 in total unrecognized compensation expense related to non-vested employee stock options granted under the 2007 Stock Plan, which is expected to be recognized over 1.0 year.

F-15

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Stock option activity for the fiscal years ended September 30, 2014 and 2013 is summarized as follows:

2007 Stock Plan:		Shares		Weighted Average Exercise Price			Weighted Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at October 1, 2012		2,035,000		$	0.97		1.74		$	92,150
Granted		370,000			0.93
Exercised		(367,000)			0.72
Expired or forfeited		(587,500)			0.83
Options outstanding at September 30, 2013		1,450,500		$	1.07		1.98		$	1,401,445
Granted		150,000			2.15
Exercised		(827,584)			0.99
Expired or forfeited		(20,000)			0.60
Options outstanding at September 30, 2014		752,916		$	1.39		2.25		$	1,326,974
Options exercisable at September 30, 2014		637,916		$	1.30		1.97		$	1,178,974
Options vested or expected to vest at September 30, 2014		752,916		$	1.39		2.25		$	1,326,974

Director Stock Grants

In January 2014, the two independent members of the Company's Board of Directors were issued an aggregate of 25,974 restricted common shares as compensation. For the twelve months ended September 30, 2014, the Company recorded $112,000 of stock-based compensation expense associated with these stock grants

NOTE 7 — 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 fiscal years ended September 30, 2014 and 2013 (in thousands, except per share amounts):

		2014			2013
Numerator:
Net income — basic and diluted		$	7,802		$	7,078
Denominator:
Weighted average shares outstanding — basic			52,704			50,115
Effect of dilutive securities:
Stock options and warrants			975			2,260
Weighted average shares outstanding — diluted			53,679			52,375
Earnings per share — basic		$	0.15		$	0.14
Earnings per share — diluted		$	0.15		$	0.14

F-16

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The following table summarizes the number of shares outstanding for each of the periods presented, but not included in the calculation of diluted earnings per share because the impact would have been anti-dilutive for the fiscal years indicated (in thousands):

		2014		2013
Stock options		−		735
Warrants		−		233
Totals		−		968

NOTE 8 — Income Taxes

Income tax expense is as follows (in thousands):

		Fiscal year ended September 30,
		2014			2013
Current income tax expense:
Federal		$	2,801		$	1,005
State			524			271
		$	3,325		$	1,276
Deferred income tax expense:
Federal		$	1,304		$	2,879
State			228			443
		$	1,532		$	3,322
Total income tax expense		$	4,857		$	4,598

F-17

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Income tax expense differs from the amounts that would result from applying the federal statutory rate of 35% to the Company’s income before taxes as follows (in thousands):

		Fiscal year ended September 30,
		2014			2013
Computed “expected” income tax expense		$	4,431		$	4,087
State income taxes, net of federal benefit			490			459
True-up of prior year differences			(28)			−
Other			(84)			−
Other nondeductible expenses, net			48			52
Total income tax expense		$	4,857		$	4,598

Temporary differences that give rise to the components of deferred tax assets and liabilities are as follows (in thousands):

		As of September 30,
		2014			2013
Deferred tax assets — current:
Allowance for bad debts		$	1,762		$	1,746
Capitalization of costs to inventory			24			30
Inventory reserve			70			132
Deferred expenses			67			97
Accrued expenses			82			62
Deferred tax assets — current			2,005			2,067
Less: Valuation allowance			−			−
Net deferred tax assets — current		$	2,005		$	2,067
Deferred tax assets — non-current:
Net operating loss carry-forwards		$	50		$	55
Transaction costs			−			4
Property and equipment			315			145
Deferred tax assets — non-current			365			204
Less: Valuation allowance			(5)			(7)
Net deferred tax assets — non-current		$	360		$	197
Deferred tax liability — non-current:
Deferred advertising		$	(10,391)			(8,758)
Deferred tax liability — non-current		$	(10,391)		$	(8,758)
Net deferred tax liability		$	(8,026)		$	(6,494)

As of September 30, 2014, the Company had net operating losses of approximately $128,000 for federal income tax purposes that can be carried forward for up to twenty years and deducted against future federal taxable income. The Company also had net operating losses of approximately $135,000 for Tennessee income tax purposes that can be carried forward for up to fifteen years and deducted against future Tennessee taxable income. The net operating loss carry-forwards expire in various years through 2031. All of the total federal and Tennessee net operating losses are subject to limitations under the provisions of Internal Revenue Code section 382 due to an ownership change.

F-18

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Management did not believe it was more likely than not that the Company would be able to realize the full benefit of the deferred tax asset from the Tennessee net operating loss carry-forwards. As of September 30, 2014, management determined a valuation allowance against the net deferred tax assets of $5,700. As of September 30, 2013, management determined a valuation allowance against the net deferred tax assets of $6,700. In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment.

The Company and its subsidiaries file a consolidated federal and Florida income tax return. Two of the Company’s subsidiaries will file additional separate state income tax returns. These returns remain subject to examination by taxing authorities for all years after September 30, 2010.

For fiscal years 2014 and 2013, the Company recorded as part of its income tax expense an unrecognized tax benefit for certain state taxes of $35,000 and $46,000, respectively, and interest and/or penalties related to the unrecognized tax benefit of $4,000 and $8,000, respectively. The Company also recorded a gross decrease in its tax positions from prior years of $15,000. The Company had $170,000 and $146,000 of total unrecognized tax benefits, including accrued interest and penalties that are included in accrued liabilities in the accompanying balance sheet as of September 30, 2014 and 2013, respectively. The state statutes and regulations and their applicability to specific situations vary by state.

The following is a reconciliation of the beginning and ending liabilities for unrecognized tax benefits for the fiscal years ended September 30, 2014 and 2013 (dollars in thousands):

		2014			2013
Balance at October 1		$	124		$	78
Gross decreases – tax positions in prior period			15			−
Gross increases – tax positions in current period			35			46
Balance at September 30		$	144		$	124
Accrued interest and penalties			26			22
Total liability for unrecognized tax benefits		$	170		$	146

We do not believe it is reasonably possible that unrecognized tax benefits will significantly change within the next twelve months. We also do not believe that the recognition of any of the unrecognized tax benefits would affect the Company’s effective tax rate.

NOTE 9 — Commitments and Contingencies

Capital Lease and Notes Payable Obligations

The Company leases certain computer equipment, software, office furniture, and warehouse equipment under capital leases and notes payable. The cost of these leased assets were $788,000 and $244,000 as of September 30, 2014 and 2013, respectively. The net book values of these assets were $621,000 and $133,000 as of September 30, 2014 and 2013, respectively. The payment terms of the capital leases expire between March 2015 and August 2019.

F-19

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The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2014 (in thousands):

		Amount
Fiscal year ending September 30:
2015		$	185
2016			128
2017			127
2018			127
2019			112
Total minimum lease payments			679
Less: Interest on capitalized lease obligations			(74)
Present value of capitalized lease obligations			605
Less: Current portion			(178)
Capitalized lease obligations, net of current portion		$	427

The present values of the capital lease and notes payable obligations are included in other current liabilities and other long-term liabilities on the Company’s Consolidated Balance Sheet as of September 30, 2014. Interest expense on capitalized leases was $7,000 and $9,000 for the fiscal years ended September 30, 2014 and 2013, respectively.

Operating Leases

The Company leases various office and warehouse facilities, software, and equipment under non-cancelable operating leases that expire at various times through April 2016. Future minimal rental and lease commitments under non-cancelable operating leases with terms in excess of one year as of September 30, 2014, are as follows (in thousands):

		Amount
Fiscal year ending September 30:
2015		$	686
2016			637
2017			598
2018			434
2019			370
Total minimum lease payments		$	2,724

Rent, software, and equipment lease expense for the years ended September 30, 2014 and 2013, was $1,225,000 and $1,337,000, respectively.

Purchase Commitments

In January 2010 the Company entered into a long distance telephone service agreement that requires the Company to purchase a minimum of $10,000 per month, excluding additional vendor rebates. The January 2010 service agreement expires in April of 2015. The Company purchased $147,000 and $146,000 of long distance service under the agreement for the fiscal years ended September 30, 2014 and 2013, respectively.

F-20

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Litigation

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

NOTE 10 — Concentration of Credit Risk

The Company has cash in financial institutions in excess of federally insured limits. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances. Cash exceeding federally insured limits amounted to $12,260,000 and $11,345,000 as of September 30, 2014 and 2013, respectively.

The Company generally does not require collateral or other security in extending credit to its customers; however, the Company routinely accepts assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans, or policies covering its customers. Accounts receivable due from government sources under Medicare, Medicaid, and other federally funded programs was approximately 59% and 50% of total gross receivables as of September 30, 2014 and 2013, respectively.

A significant portion of the Company’s revenues are generated from the sale of urological products. As a result, changes in the external environment, including regulatory changes, could be beneficial or detrimental depending on market conditions. The impact of these changes cannot be determined at this time.

NOTE 11 — Subsequent Events

On October 31, 2014, the Company announced the appointment of two new members to its Board of Directors, expanding the number of board members from three to five.

On November 21, 2014, the Board of Directors approved a cash dividend of $0.0325 per common share to its shareholders. The dividend will be paid on January 9, 2015, to all shareholders of record as of the close of business on December 26, 2014.

F-21