UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 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) (Zip Code)

(772) 287-2414

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X . No      .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X . No      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Yes      . No      .

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

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

APPLICABLE TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of February 3, 2015
Common Stock, $.001		53,166,209

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TABLE OF CONTENTS

			Page
PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements		3
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		17
Item 4.	Controls and Procedures		17
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		18
Item 1A.	Risk Factors		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.	Defaults Upon Senior Securities		18
Item 4.	Mine Safety Disclosures		18
Item 5.	Other Information		18
Item 6.	Exhibits		18
SIGNATURES			19

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of December 31, 2014 (unaudited) and September 30, 2014

(In thousands, except dollar per share amounts)

		December 31, 2014			September 30, 2014
Assets
Current Assets:
Cash		$	11,954		$	12,261
Accounts receivable, net of allowances of $4,617 and $4,569, respectively			9,606			8,866
Inventory, net of allowance for obsolete inventory of $181			2,078			1,954
Deferred tax assets			2,033			2,005
Prepaid and other current assets			716			449
Total Current Assets			26,387			25,535
Property and equipment, net of accumulated depreciation of $4,106 and $4,016, respectively			1,210			1,260
Deferred advertising, net			28,342			26,936
Intangible assets, net of accumulated amortization of $310 and $281, respectively			391			420
Other assets			164			178
Total Assets		$	56,494		$	54,329
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	6,187		$	6,085
Accrued liabilities			1,554			1,758
Dividends payable			1,728			1,728
Income tax payable			1,322			178
Other current liabilities			150			161
Total Current Liabilities			10,941			9,910
Deferred tax liabilities			10,449			10,031
Credit line facility			1,500			1,500
Other long-term liabilities			468			453
Total Liabilities			23,358			21,894
Commitments and contingencies (see Note 7)
Stockholders’ Equity:
Common stock, $0.001 par value, 200,000 shares authorized, 53,520 shares issued and 53,166 shares outstanding at December 31, 2014, and September 30, 2014			54			54
Additional paid-in capital			36,393			36,385
Accumulated deficit			(2,831)			(3,524)
Treasury stock, at cost; 354 shares at December 31, 2014, and September 30, 2014			(480)			(480)
Total Stockholders’ Equity			33,136			32,435
Total Liabilities and Stockholders’ Equity		$	56,494		$	54,329

See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the three months ended December 31, 2014 and 2013

(Unaudited)

(in thousands, except per share amounts)

		Three Months Ended December 31,
		2014			2013
Net Sales		$	20,216		$	18,637
Cost of Sales			7,585			6,882
Gross Profit			12,631			11,755
Operating Expenses:
Payroll, taxes and benefits			3,762			3,657
Advertising			2,615			2,326
Bad debts			943			824
Depreciation and amortization			119			171
General and administrative			1,208			1,277
Total Operating Expenses			8,647			8,255
Income from Operations			3,984			3,500
Other Expenses			(12)			(13)
Income before Income Taxes			3,972			3,487
Provision for Income Taxes			1,551			1,367
Net Income		$	2,421		$	2,120
Basic earnings per share:
Weighted average shares outstanding			53,166			52,358
Earnings per share		$	0.05		$	0.04
Diluted earnings per share:
Weighted average shares outstanding			53,695			53,228
Earnings per share		$	0.05		$	0.04
Dividends declared per common share		$	0.03		$	0.03

See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the three months ended December 31, 2014

(Unaudited)

(in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the three months ended December 31, 2014 and 2013

(Unaudited)

(in thousands)

		Three Months Ended December 31,
		2014			2013
Cash flow from operating activities:
Net Income		$	2,421		$	2,120
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,717			2,482
Equity based compensation			8			32
Provision for doubtful accounts and contractual adjustments			927			1,027
Deferred income taxes			390			(120)
Reserve for inventory obsolescence			−			13
Changes in operating assets and liabilities:
Accounts receivable			(1,667)			(2,779)
Deferred advertising			(4,004)			(2,918)
Inventory			(124)			(307)
Other assets			(260)			(402)
Income taxes prepaid and payable			1,150			486
Accounts payable			101			1,466
Accrued liabilities			(204)			215
Other liabilities			5			(8)
Net Cash Flow Provided by Operating Activities			1,460			1,307
Cash flow from investing activities:
Purchase of property and equipment			(13)			(51)
Proceeds from sale of property and equipment			−			4
Net Cash Flow Used in Investing Activities			(13)			(47)
Cash flow from financing activities:
Proceeds from exercise of employee stock options			−			72
Cash dividends paid			(1,728)			(1,569)
Payments of capital lease obligations			(26)			(21)
Net Cash Flow Used in Financing Activities			(1,754)			(1,518)
Net decrease in cash			(307)			(258)
Cash at beginning of period			12,261			12,453
Cash at end of period		$	11,954		$	12,195
Supplemental disclosure of cash flow information:
Cash paid for interest		$	12		$	15
Cash paid for income taxes		$	10		$	1,000
Supplemental schedule of non-cash financing activities:
Capital expenditures funded by capital lease borrowings or term notes		$	26		$	−
Cash dividends declared, but not yet paid		$	1,728		$	1,572

See accompanying notes to unaudited condensed consolidated financial statements.

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Liberator Medical Holdings, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

December 31, 2014

Note 1 — Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the “Company”) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014, that was filed with the SEC on December 15, 2014. The results of operations for the three months ended December 31, 2014, are not necessarily indicative of the results to be expected for the full year.

The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and Wellness, Inc., Practica Medical Manufacturing, Inc., and Tri-County Medical & Ostomy Supplies, Inc., its wholly-owned subsidiaries.

Note 2 — Summary of Significant Accounting Policies

The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014. There were no material changes to our significant accounting policies during the interim period ended December 31, 2014.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying condensed consolidated financial statements in order to maintain consistency and comparability between the periods presented. The following reclassification was made to the Condensed Consolidated Statement of Cash Flows for the three months ended December 31, 2013, to be consistent with the Condensed Consolidated Statement of Cash Flows for the three months ended December 31, 2014, presented:

·

In the cash flow from operating activities section, within the changes in operating assets and liabilities section, $486,000 was reclassified from accounts payable 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.

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 consolidated financial statements.

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Note 3 — Credit Line Facility

On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the “PNC Credit Line Facility”) with PNC Bank, National Association ("PNC"). Pursuant to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal property, including inventory and accounts receivable. 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.

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 December 31, 2014, the Company was in compliance with all financial covenants including the following:

·

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 December 31, 2014, the availability under the PNC Credit Line Facility was $5,671,000 with an outstanding balance of $1,500,000. The interest rate for the outstanding balance as of December 31, 2014, was 2.67%. For the three months ended December 31, 2014 and 2013, the Company incurred $10,000 and $11,000, respectively, in interest expense related to the PNC Credit Line Facility.

Note 4 — Stockholders’ Equity

Employee and Director Stock Options

The Company granted 0 and 150,000 options during the three months ended December 31, 2014 and 2013, respectively. The weighted-average grant date fair values of the options granted during the three months ended December 31, 2013, were $0.50. There were no options exercised during the three months ended December 31, 2014, and 120,000 exercised during the three months ended December 31, 2013. The total intrinsic value of options exercised during the three months ended December 31, 2013, was approximately $203,000.

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

		2013
Risk-free interest rate:		0.68%
Expected term:		2.99 years
Expected dividend yield:		5.60%
Expected volatility:		48.34%

For the three months ended December 31, 2014 and 2013, the Company recorded $8,000 and $32,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of December 31, 2014, there was $24,000 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 0.75 years.

Stock option activity for the three months ended December 31, 2014, is summarized as follows:

2007 Stock Plan:		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at October 1, 2014		752,916		$	1.39		2.25		$	1,326,974
Granted		−			−		−			−
Exercised		−			−		−			−
Expired or forfeited		−			−		−			−
Options outstanding at December 31, 2014		752,916		$	1.39		2.00		$	1,138,745
Options exercisable at December 31, 2014		692,916		$	1.32		1.85		$	1,093,745
Options vested or expected to vest at December 31, 2014		752,916		$	1.39		2.00		$	1,138,745

Note 5 — Basic and Diluted Earnings per Common Share

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three months ended December 31, 2014 and 2013 (in thousands, except per share amounts):

		For the three months ended
		December 31,
		2014			2013
Numerator:
Net income — basic and diluted		$	2,421		$	2,120
Denominator:
Weighted average shares outstanding — basic			53,166			52,358
Effect of dilutive securities:
Stock options and warrants			529			870
Weighted average shares outstanding — diluted			53,695			53,228
Earnings per share — basic		$	0.05		$	0.04
Earnings per share — diluted		$	0.05		$	0.04

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Note 6 — Income Taxes

The provision for income taxes was $1,551,000 for the three months ended December 31, 2014. The effective tax rate was approximately 39% of income before income taxes of $3,972,000, 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 $1,367,000 for the three months ended December 31, 2013. The effective tax rate was approximately 39% of income before income taxes of $3,487,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

Note 7 — Commitments and Contingencies

Litigation

The Company has received subpoenas from the United States Department of Justice and has been named, among others, in a civil qui tam complaint alleging inter alia violations of the federal False Claims Act, 31 U.S.C. §3729. United States ex rel. Herman, et al. v. Coloplast A/S, et al., Docket No. 11-cv-12131-RWZ. To date, the Lawsuit has not been served on the Defendants. On February 4, 2015, the Plaintiffs and the United States, with the affirmative support of the State of California and all Defendants, filed a Joint Motion for an Extension of Time seeking to extend the time to serve the complaint in the Lawsuit until May 19, 2015. At the present time, the Company is fully cooperating with the government’s criminal and civil investigations, and the Company’s Board of Directors also is conducting its own internal investigation. The ultimate outcome of this matter cannot presently be determined and therefore the Company is unable to estimate a range of loss, if any, at this time. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the accompanying consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. When used in this Quarterly Report, in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date made. Various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of distributing or marketing activities, competitive and regulatory factors, and additional factors set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014, under the caption “Risk Factors,” could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated by any forward-looking statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company included in our Annual Report on Forms 10-K for the year ended September 30, 2014, and management’s discussion and analysis contained therein. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Company Overview

Liberator Medical Supply, Inc. (“Liberator Medical”), a wholly-owned subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies to Medicare-eligible seniors. Accredited by The Joint Commission, our Company’s unique combination of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase medical supplies needed by our patients on a recurring basis, generally on a continual basis for a lifetime, with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet; repeat orders are confirmed with the customer and shipped when needed.

We market our products directly to consumers through our direct response advertising efforts. We target consumers with chronic conditions who require a continuous supply of medical products that we can provide at attractive gross margins. Our advertising efforts do not represent an effort to target new markets or sell new products, but are a continuation of our efforts to acquire new customers in the markets we currently serve. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers.

We receive initial contact from prospective customers in the form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place their initial order with us within three to six months from the time we receive initial contact from the customer. Since our inception, we have demonstrated our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that can last for periods of greater than ten years.

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The following table shows our revenue streams, including new and recurring orders, for the three months ended December 31, 2014 and 2013, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

		For the three months ended
New and recurring revenues generated		December 31,
from customer leads received during:		2014			2013
Pre-FY 2010		$	5,134		$	5,590
FY 2010			2,540			2,720
FY 2011			2,750			3,059
FY 2012			2,835			3,141
FY 2013			2,350			3,006
FY 2014			3,645			882
FY 2015			927			n/a
Total Revenues *			20,181			18,398
Other Sales and Adjustments			35			239
Net Sales		$	20,216		$	18,637
* 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 2015 and the corresponding periods from fiscal year 2014, especially revenue from new customers.

We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We are able to adjust our advertising spend relatively quickly to respond to changing market conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase, we continue to focus on improving operational efficiencies to increase profitability.

Results of Operations

The following table summarizes the results of operations for the three months ended December 31, 2014 and 2013 (dollars in thousands):

		2014					2013
		Amount			%		Amount			%
Net Sales		$	20,216		100.0		$	18,637		100.0
Cost of Sales			7,585		37.5			6,882		36.9
Gross Profit			12,631		62.5			11,755		63.1
Operating Expenses			8,647		42.8			8,255		44.3
Income from Operations			3,984		19.7			3,500		18.8
Other Expenses			(12)		(0.1)			(13)		(0.1)
Income before Income Taxes			3,972		19.6			3,487		18.7
Provision for Income Taxes			1,551		7.6			1,367		7.3
Net Income		$	2,421		12.0		$	2,120		11.4

Revenues

Net sales for the three months ended December 31, 2014, increased by $1,579,000, or 8.5%, to $20,216,000, compared with net sales of $18,637,000 for the three months ended December 31, 2013. The increase in net sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base.

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The following table summarizes the revenues generated from our new customers and our recurring customer base for the three months ended December 31, 2014 and 2013 (dollars in thousands):

		2014			2013
New Customers *		$	1,708		$	1,670
Recurring Customer Base			18,473			16,728
Total Revenues, net of contractual allowances			20,181			18,398
Other Sales and Adjustments			35			239
Net Sales		$	20,216		$	18,637
* We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For the three months ended December 31, 2014, $927 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2014. For the three months ended December 31, 2013, $882 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2013. The remaining net sales from new customers acquired were generated from leads received during prior periods.

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.

Our direct-response advertising expenditures for the three months ended December 31, 2014, were $4,004,000 compared with $2,918,000 for the three months ended December 31, 2013. We acquired 2,868 and 2,829 new customers during the three months ended December 31, 2014 and 2013, respectively. We expect to continue to acquire new customers over the next fifteen to eighteen months from our increased advertising expenditures. Similar to our past direct-response advertising efforts, when we increased our advertising spend and targeted customers with urologic supply needs, 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.

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 quarter the customer leads were initially received:

Customer Leads		Number of New Customers Acquired (1)
Received		FY2015-Q1		FY2014-Q4		FY2014-Q3		FY2014-Q2		FY2014-Q1
FY2015-Q1		1,715		−		−		−		−
FY2014-Q4		640		1,873		−		−		−
FY2014-Q3		110		625		1,837		−		−
FY2014-Q2		66		167		830		2,077		−
FY2014-Q1		48		73		137		626		1,688
Pre-FY2014		289		410		528		528		1,141
Total New Customers		2,868		3,148		3,332		3,231		2,829

⁽¹⁾

The number of new customers acquired in a particular quarter is derived from leads received in the current quarter and from leads received in preceding quarters. During the first quarter of fiscal year 2015, we acquired 2,868 new customers, of which 1,715 new customers were from leads received in the same quarter and 1,153 new customers were from leads received in prior quarters.

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Gross Profit

Gross profit for the three months ended December 31, 2014, increased by $876,000, or 7.5%, to $12,631,000, compared with gross profit of $11,755,000 for the three months ended December 31, 2013. The increase was attributed to our increased sales volume for the three months ended December 31, 2014, compared with the three months ended December 31, 2013.

As a percentage of sales, gross profit decreased by 0.6% to 62.5% for the three months ended December 31, 2014, compared with gross profit of 63.1% for the three months ended December 31, 2013. The decrease in gross profit as a percentage of sales was primarily attributed to the product mix of sales and additional freight for increased sales volume in the period ending December 31, 2014.

Operating Expenses

The following table provides a breakdown of our operating expenses for the three months ended December 31, 2014 and 2013, (dollars in thousands):

		2014					2013
		Amount			%		Amount			%
Operating Expenses:
Payroll, taxes and benefits		$	3,762		18.6		$	3,657		19.6
Advertising			2,615		12.9			2,326		12.5
Bad debts			943		4.7			824		4.4
Depreciation and amortization			119		0.6			171		0.9
General and administrative			1,208		6.0			1,277		6.9
Total Operating Expenses		$	8,647		42.8		$	8,255		44.3

Payroll, taxes and benefits increased by $105,000, or 2.9%, to $3,762,000 for the three months ended December 31, 2014, compared with the three months ended December 31, 2013. As of December 31, 2014, we had 327 active employees, compared with 317 at December 31, 2013. The increase in the number of employees was a result of sales volume. As a percentage of net sales, payroll decreased from 19.6% during the three months ended December 31, 2013, to 18.6% during the three months ended December 31, 2014.

Advertising expenses increased by $289,000, or 12.4%, to $2,615,000 for the three months ended December 31, 2014, compared with the three months ended December 31, 2013.

The majority of our advertising expenses is associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expenses is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expenses for the three months ended December 31, 2014 and 2013 (dollars in thousands):

		2014			2013
Advertising Expenses:
Amortization of direct-response costs		$	2,598		$	2,311
Other advertising expenses			17			15
Total Advertising Expenses		$	2,615		$	2,326

As a result of our increase in advertising expenditures, our advertising expense, as a percentage of sales, increased by 0.4% for the three months ended December 31, 2014, compared with the three months ended December 31, 2013. Similar to our past direct response advertising efforts, when we increased our advertising spend during the three months ended December 31, 2014, our costs to acquire new customers increased compared with the three months ended December 31, 2013.

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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.

Bad debt expense increased by $119,000, or 14.4%, to $943,000 for the three months ended December 31, 2014, compared with the three months ended December 31, 2013. The increase in bad debt expense was primarily attributed to the increase in net sales for the three months ending December 31, 2014.

Depreciation and amortization expenses decreased by $52,000, or 30.4%, to $119,000 for the three months ended December 31, 2014, compared with the three months ended December 31, 2013. The reduction was primarily due to leasehold improvements being fully depreciated as of September 30, 2014.

Purchases of property and equipment totaled $39,000 and $51,000 during the three months ended December 31, 2014 and 2013, respectively.

General and administrative expenses decreased by $69,000, or 5.4%, to $1,208,000 for the three months ended December 31, 2014, compared with the three months ended December 31, 2013. The decrease was primarily due to a reduction in equipment lease payments for telephone equipment during the three months ended December 31, 2014, and initial fees paid for NYSE registration during the three months ended December 31, 2013.

Income from Operations

Income from operations for the three months ended December 31, 2014, increased by $484,000, or 13.8%, to $3,984,000, compared with the three months ended December 31, 2013. The increase in operating income is 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 and decreased general and administration expenses.

Other Expenses

Other expenses for the three months ended December 31, 2014 and 2013, consisted of interest expense associated with the outstanding $1.5 million balance on our credit line facility. Interest expense decreased by $1,000 to $12,000 for the three months ended December 31, 2014, compared with $13,000 for the three months ended December 31, 2013.

Income Taxes

The following table provides a breakdown of our income tax expenses for the three months ended December 31, 2014 and 2013 (dollars in thousands):

		For the three months ended
		December 31,
		2014			2013
Current income tax expense:
Federal		$	981		$	1,262
State			180			224
Total current income tax expense		$	1,161		$	1,486
Deferred income tax expense (income):
Federal		$	332		$	(104)
State			58			(15)
Total deferred income tax expense (income)		$	390		$	(119)
Provision for Income Taxes		$	1,551		$	1,367

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The provision for income taxes was $1,551,000 for the three months ended December 31, 2014. The effective tax rate was approximately 39% of the income before income taxes of $3,972,000, 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 $1,367,000 for the three months ended December 31, 2013. The effective tax rate was approximately 39.2% of the income before income taxes of $3,487,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

Liquidity and Capital Resources

The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended December 31, 2014 and 2013 (dollars in thousands):

		2014			2013
Cash Flows:
Net cash provided by operating activities		$	1,460		$	1,307
Net cash used in investing activities			(13)			(47)
Net cash used in financing activities			(1,754)			(1,518)
Net decrease in cash			(307)			(258)
Cash at beginning of period			12,261			12,453
Cash at end of period		$	11,954		$	12,195

The Company had cash of $11,954,000 at December 31, 2014, compared with cash of $12,261,000 at September 30, 2014, a decrease of $307,000. The decrease in cash for the three months ended December 31, 2014, was due to $1,754,000 of cash used in financing activities and $13,000 of net cash used in investing activities, partially offset by $1,460,000 of cash provided by operating activities.

Operating Activities

Cash provided by operating activities was $1,460,000 for the three months ended December 31, 2014, which represents an increase of $153,000 compared with cash provided by operating activities of $1,307,000 for the three months ended December 31, 2013. The increase in operating cash flows for the three months ended December 31, 2014, was the result of a decrease in cash paid for income taxes of $990,000, increases in non-cash operating expenses of $608,000, and an increase in net income of $301,000, offset by an increase in advertising expenditures of $1,086,000 and a decrease in cash provided by other operating assets and liabilities of $660,000

Currently Region C and D of Medicare are conducting pre-payment audits for catheter claims submitted by all suppliers. Region C is also conducting pre-payment audits on up to fifty percent of the company’s claims for straight tip catheters. The result 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. As of December 31, 2014, we had approximately $648,000 in 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 December 31, 2014, we had approximately $355,000 of Medicare claims delayed due to the Medicare ALJ appeals process.

Due to the increase in Medicare pre-payment audits during the three months ended December 31, 2014, the number of days of gross accounts receivable outstanding increased by 2.1 days to 63.3 days as of December 31, 2014, compared with 61.3 days as of September 30, 2014.

Investing Activities

During the three months ended December 31, 2014 and 2013, we purchased $13,000 and $51,000, respectively, of property and equipment to support our continued growth. The $13,000 of purchases during the three months ended December 31, 2014, was for computer equipment, and software. The $51,000 of purchases during the three months ended December 31, 2013, was for computer equipment, website enhancements, and other software.

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Financing Activities

During the three months ended December 31, 2014, cash used in financing activities was $1,754,000, which included cash dividends paid of $1,728,000 and payments of $26,000 for capital lease obligations.

During the three months ended December 31, 2013, cash used in financing activities was $1,518,000, which included cash dividends paid of $1,569,000 and payments of $21,000 for capital lease obligations, partially offset by $72,000 of proceeds received from the exercise of employee options.

As of December 31, 2014, we had $12.0 million of cash and $5.7 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from operations, will be sufficient to meet our cash requirements during the next twelve months.

At December 31, 2014, our current assets of $26,387,000 exceeded our current liabilities of $10,941,000 by $15,446,000.

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

Off-Balance Sheet Arrangements

As of December 31, 2014, we had no off-balance sheet arrangements.

Critical Accounting Policies

See “Summary of Significant Accounting Policies” in the Notes to the unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended September 30, 2014, for a discussion of significant accounting policies, recent accounting pronouncements, and their effect, if any, on the Company.

Effect of Inflation

We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2014, we had an outstanding balance of $1.5 million under a credit line facility that matures March 2016, which accrues interest at a variable rate of LIBOR plus 2.50 percent per annum. As of December 31, 2014, the short term LIBOR rate used as the base for calculating the interest rate for our credit line facility was approximately 0.17 percent. As such, changes in the LIBOR rates would impact our interest expense. Based upon the balance outstanding under our credit facility as of December 31, 2014, for every 100 basis point increase in the short term LIBOR rates, we would incur approximately $15,000 of additional annual interest expense.

We maintain our cash balances at high quality financial institutions. The balances in our accounts may periodically exceed amounts insured by the Federal Deposit Insurance Corporation, which insures deposits of up to $250,000 as of December 31, 2014. We do not believe we are exposed to any significant credit risk and have not experienced any losses.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

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We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2014. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The legal proceedings described in Note 7 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Item 1: Legal Proceedings" by reference

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit 31.1 — Section 302 Certificate of Chief Executive Officer

Exhibit 31.2 — Section 302 Certificate of Chief Financial Officer

Exhibit 32.1 — Section 906 Certificate of Chief Executive Officer

Exhibit 32.2 — Section 906 Certificate of Chief Financial Officer

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

LIBERATOR MEDICAL HOLDINGS, INC.

Registrant

/s/ Mark A. Libratore

President

February 9, 2015

Mark A. Libratore

/s/ Robert J. Davis

Chief Financial Officer

February 9, 2015

Robert J. Davis

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