Attached files
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EX-21.1 - EX-21.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g21538exv21w1.htm |
EX-31.1 - EX-31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g21538exv31w1.htm |
EX-32.1 - EX-32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g21538exv32w1.htm |
EX-32.2 - EX-32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g21538exv32w2.htm |
EX-31.2 - EX-31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g21538exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2009 |
or
o | 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)
(Address of principal executive offices)
(772) 287-2414
(Registrants telephone number, including area code)
(Registrants 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 o 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 o 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 o
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 o No o
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
registrants 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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x | |||
(Do not check if a smaller reporting company) |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No x
The aggregate market value of the voting and non-voting shares of the Companys Common Stock held
by non-affiliates based on the last sale of the Common Stock on March 31, 2009, was approximately
$5,804,391.
The number of shares outstanding of the issuers Common Stock as of December 16, 2009, was
33,212,666.
LIBERATOR MEDICAL HOLDINGS, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
PART I |
||||||||
Item 1. | 1 | |||||||
Item 1A. | 5 | |||||||
Item 1B. | 8 | |||||||
Item 2. | 8 | |||||||
Item 3. | 8 | |||||||
Item 4. | 9 | |||||||
PART II |
||||||||
Item 5. | 10 | |||||||
Item 6. | 11 | |||||||
Item 7. | 12 | |||||||
Item 7A. | 20 | |||||||
Item 8. | 21 | |||||||
Item 9. | 21 | |||||||
Item 9A(T). | 21 | |||||||
Item 9B. | 22 | |||||||
PART III |
||||||||
Item 10. | 23 | |||||||
Item 11. | 24 | |||||||
Item 12. | 26 | |||||||
Item 13. | 29 | |||||||
Item 14. | 30 | |||||||
PART IV |
||||||||
Item 15. | 30 | |||||||
Signatures | 31 | |||||||
EX-21.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
FORWARD-LOOKING STATEMENTS
Some of the information contained in this Report may constitute forward-looking statements or
statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Annual Report, in future filings by the Company with the Securities and Exchange Commission,
in the Companys press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words or phrases will
likely result, are expected to, will continue, is anticipated, estimate, project, or
similar expressions are intended to identify forward-looking statements. The Company wishes to
caution readers not to place undue reliance on any such forward-looking statements, which speak as
of the date made, and to advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates, credit and other risks
of manufacturing, distributing or marketing activities, competitive and regulatory factors, and
those factors set out under Risk Factors, below, could affect the Companys financial
performance and could cause the Companys 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
Background of the Company
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.,
formerly known as Liberator Services Corporation, and Liberator Health and Wellness, Inc.
The Company was organized in December 1906 in Utah under the name Cardiff Mining & Milling Company.
During the 1960s, the Company changed its name to Cardiff Industries, Inc., and sold its mining
operations. During the next decade the Company focused its operations on the television and radio
industry. In 1980 the Companys name was changed to Cardiff Communications, Inc. The Company
changed its domicile to Nevada on July 12, 2000. Upon the completion of the Companys business
combination with Liberator Medical described in the next paragraph, the Company changed its name to
Liberator Medical Holdings, Inc. The Company had no business operations in the ten years preceding
its acquisition of Liberator Medical in June 2007.
On June 22, 2007, we completed the acquisition of Liberator Medical, a durable medical equipment
company located in Stuart, Florida. The acquisition was consummated pursuant to a merger agreement
entered into on June 18, 2007, whereby we agreed to merge our newly-created, wholly-owned
subsidiary, Cardiff Merger, Inc., a Florida corporation, with and into Liberator Medical, with
Liberator Medical being the surviving entity as our wholly-owned subsidiary. As a condition of the
merger, we issued approximately 25,447,956 shares of our common stock to the stockholders of
Liberator Medical. We also agreed to issue to the then current holders of Liberator Medical options
and warrants exercisable to purchase shares of the Companys common stock on terms and conditions
equivalent to the existing terms and conditions of the respective Liberator Medical options and
warrants. Also, we appointed Liberator Medicals President and Chief Executive Officer, Mark A.
Libratore, to our board of directors and appointed him our President and Chief Executive Officer.
For additional information concerning the combination of our Company with Liberator Medical, see
the Companys Current Report on Form 8-K filed on June 29, 2007, with the Securities and Exchange
Commission.
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Table of Contents
Background of Liberator Medical Supply, Inc.
Liberator Medical was incorporated in the State of Florida in July 1999. It is a provider of
direct-to-consumer durable medical supplies, primarily to seniors. The majority of Liberator
Medicals revenue is derived from four product lines, diabetes, urological, ostomy, and mastectomy.
Liberator Medical provides a simple and reliable way
for its patients to obtain supplies. Its employees communicate directly with its patients and their
physicians regarding patients prescriptions and supply requirements on a regular basis and bills
Medicare and third-party insurers on behalf of its patients. Liberator Medical markets its products
directly to consumers, primarily through targeted media, direct-response television advertising and
direct-response print advertising to patients throughout the United States. Its 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. Liberator Medicals
operating platforms enable it 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.
Market
National healthcare spending will nearly double to $2.8 trillion by 2011, up from $1.42 trillion in
2001, according to the Centers for Medicare and Medicaid Services (CMS). As the baby boomer
population ages, the already flourishing medical supply industry will experience a 20-year
explosion in growth. Between 1990 and 1999, while the U.S. population grew 9 percent and inflation
26 percent, total annual healthcare spending increased 74 percent. Currently, more than 90 million
Americans live with chronic diseases, including Alzheimers disease, arthritis, cancer,
cardiovascular disease, chronic obstructive lung disease, and diabetes.
We are a quasi-medical distributor providing home health care services. According to HME News, the
home health care market is a highly fragmented industry of over 100,000 companies, with about 50
companies having annual sales in excess of $10 million.
According to the U.S. Department of Health and Human Services, Medicare and Medicaid have combined
annual payments of $775 billion.
The Company targets Medicare-eligible seniors with chronic illness. First Research estimates the
number of Americans over 65 will double from 34 million to 62 million between 2000 and 2025. The
research firm Rand estimates the number of Americans with two or more chronic conditions will
increase from 60 to 81 million between the years 2000 and 2020. Current out-of-pocket spending for
Americans age 65 and over with two chronic conditions is approximately $750 per year. The number of
Medicare beneficiaries is expected to nearly double to 77 million by 2030 from 40 million in 2000,
according to the Centers for Medicare and Medicaid Services. According to the 2009 BCC Research
report, the urological market size is approximately $4.4 billion and expected to increase to $13.2
billion in 2014. Below is an analysis of the Companys addressable market for targeted disease
segments as well as a description of each opportunity.
Target Market | Diagnosed | Undiagnosed | Current Market Size | ||||
Urological |
N/A | N/A | $4.4 billion* | ||||
Diabetes |
18 million | 6 million | $116 billion ** | ||||
Mastectomy |
3.2 million | N/A | $1.1 billion *** | ||||
Ostomy |
600,000 | N/A | $1.2 billion *** | ||||
Total |
>21.8 million | >6 million | $122.7 billion | ||||
* | BCC Research, 2009 | |
** | Center for Disease Control 2007 | |
*** | Center for Disease Control 2005 |
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Mail Order Medical Supplies
The Companys primary business is mail order medical supplies currently consisting of four primary
product lines; urological, diabetes, mastectomy, and ostomy. We attract new patients to our mail
order business through three sources. We communicate directly with potential patients through
targeted television, Internet, and print advertising. We have been able to commit substantial
amounts of cash to advertising since the closing of convertible debt offerings in May 2008 and
October 2008. We plan to continue our growth in our mail order business through an
ongoing program of direct-response television advertising. Our advertising campaign has resulted in
a significant increase in patient enrollment and has been the primary driver behind the growth in
sales. Sales from our mail order segment represented 99%, 94% and 80% of total net revenues for the
fiscal years ended September 30, 2009, 2008 and 2007.
Retail Sales
Sales for the retail store for fiscal year 2009 have decreased to less than 1% of our total sales
with no earnings contribution. The cost of operating a retail outlet along with the high cost of
maintaining a large inventory did not justify keeping the store open. Effective September 30,
2009, we closed the retail store.
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 income with a high return on
advertising dollars.
Our growth will depend upon the success of our advertising campaigns. Management believes that it
has perfected a method of capturing initial and recurring sales through use of local, regional and
national ad placement. Advertisements and placement drive customer leads. Sales reps handle inbound
calls to establish initial contact, qualify the consumer, identify the need and close the sale.
Aggressive contact management efforts, outbound mailings and outbound phone calls by sales reps on
active leads and established customers results in re-orders, cross selling opportunities and higher
conversion rates than traditional mail order businesses.
With an average customer life of four 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 over 200 manufacturers, including all of the largest U.S.
suppliers. In addition, the Company has been able to negotiate significant discounts, indicating
manufacturer confidence in our ability to obtain higher volumes.
Competitive Analysis
Diabetes
In diabetes products, Liberty Medical, a subsidiary of Medco (MHS NYSE), a company started by Mark
Libratore, is the industry leader. Liberty is well known for its TV ads featuring actor Wilford
Brimely. In addition to its organic growth, Liberty has been purchasing many small and medium size
competitors in primarily asset-only purchases. CCS Medical Holdings, Inc. may be the second largest
competitor.
Mastectomy
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 telemarketing approach provides the level of
privacy many customers need and want. 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.
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Ostomy
Currently there are three major national companies in ostomy; Edgepark, Liberty and United Ostomy.
Although there are many small companies as well, we have shown significant growth, primarily due to
the Company accepting Medicare in instances where other companies have refused assignment. We also
provide personal service, which we believe promotes customer loyalty.
Urological
Over the last two years, the Company has entered into the urological field and has demonstrated
significant growth in sales of urological catheters, condom catheters, indwelling catheters, urine
collection devices and various related accessories. As the population continues to age, this
category is expected to grow considerably. Competition consists primarily of specialty drug stores, 180 Medical, Inc., Byrams Healthcare, Edgepark, United Ostomy, and many small independent dealers and stores.
Litigation
We are not presently subject to any material pending legal proceedings and, to the best of our
knowledge, no such action against the Company is contemplated or threatened.
Technology Systems
Because customer service and billing Medicare are a major focus of its business, the Company has
completed and installed one of the industrys most popular, fully HIPPA compliant, and
user-friendly billing systems. In addition to electronic-billing to all four Medicare Regional Part
B regional centers, it also generates billing to over 5,000 insurance companies, nationwide.
Medicare reimbursement and code requirements are kept current and posting of accounts receivable is
done automatically from information downloaded from Medicare. Liberator Medical has written
customized software integrated with the Enterprise version of Goldmine to handle contact
management, generate customized forms and mailings, and facilitate rapid intake of new customers
following a carefully conceived intake protocol which captures and preserves essential customer
data.
For communications, we utilize a pair of Mitel 3300s in a cluster, which are capable of handling
hundreds of phones and are easily operated in a Web-based user interface. This system has the
capacity to interface with our contact management systems, provide pop-up screens, and provide
various other vital information that management uses.
Our systems operate on multiple HP Proliant servers with redundant power supplies and up to 4 TB of
storage capacity. We use various Microsoft operating systems (Windows 2003, Windows 2008 and Win XP
Professional) and various third-party licensed Microsoft Windows-friendly applications including
Fastrack for customer ordering and electronic order submissions, Goldmine for pre-customer sales
lead and customer CRM, Medforce Scan for digital document imaging, SQL Server 2005 and 2008 for
database management and Process Shipper (unified shipping program) for shipment processing and
tracking.
We subcontract the hosting and maintenance of the www.liberatormedical.com web site. Credit
card information is processed using industry-standard secure 128-bit SSL (secure-sockets-layer) web
sessions and credit card information is never stored in the associated Liberator SQL backend
database to reduce liability risks.
Intellectual Property
As of the date of this Report, we have one registered trademark/servicemark, Liberator, and our
stylized logo.
Employees
As of September 30, 2009, we had 139 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 Companys control, could negatively
affect the Companys revenues, profitability or cash flows in the future. These factors include:
Risks Relating to Our Business
| Our future operating results remain difficult to predict. We continue to face many risks and uncertainties which could affect our operating results, including, without limitation, those described below. |
| Although we had net income of $2,222,000 in fiscal year 2009, we have incurred significant net losses in every other year since our inception, including net losses of $1,309,000 for fiscal year 2008, $1,968,000 for the nine months ended September 30, 2007, $2,295,000 for fiscal year 2006, and $1,097,000 for fiscal year 2005. As of September 30, 2009, we had an accumulated deficit of $8,272,000. |
| The Company has aggressive marketing plans that require the Company to spend substantial sums. The Company may need additional capital to continue our business plan. In addition, the Company may not accurately predict the amount of capital it requires to operate its existing and future business, which requirement may exceed the Companys estimates. The failure by the Company to secure any additional financing which it may require may adversely affect its ability to grow. |
| We could experience significantly reduced profits if Medicare changes, delays or denies reimbursement or directs Medicare consumers to other companies through the process of competitive bidding, governmental contracts or any kind of nationwide managed care or governmental program. |
| 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 profit margin. Similarly, any increase in the cost of such products would reduce our overall profit margin 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. These agencies conduct audits and periodic investigations of most companies billing Medicare. Negative findings or results of audits are subject to appeals and judicial review and are often overturned at various levels. There is always the possibility that the Company could be the subject of any audit or investigation as it performs a substantial amount of Medicare billing each year. The Company is regularly audited by all four regional Medicare carriers and has on some occasions had to reimburse claims previously paid. This type of reimbursement is common to all Medicare participants. 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, returns, patients having similar equipment, patient not seen by physician recently enough, and lack of adequate medical necessity. Although the Company has set aside reserves for these repayments, demands for repayment could exceed Company reserves and the Company could be unable to pay them, which would adversely affect the Company. |
| We believe that we are able to control our level of expansion as well as the costs associated with the rapid growth which the Company presently plans. However, we cannot be sure that our existing staffing levels will be sufficient if we expand as rapidly as we currently believe. Further, (i) any expansion will create significant demands on our administrative, operational and financial personnel and other resources; (ii) additional expansion in 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 substantial expansion. |
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| Our ability to operate at a profit is highly dependent on recurring orders from customers, as to which there is no assurance. We generally incur losses and negative cash flow with respect to the first order from a new customer for chronic care products and respiratory 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. |
| We could lose customers and revenues to new or existing competitors who have greater financial or operating resources. |
| Competition from other sellers of products sold by us is intense and expected to increase. Many of our competitors and potential competitors are large companies with well-known names and substantial resources. These companies may develop products and services that are more effective or less expensive than any that we are developing or selling. They may also promote and market these products more successfully than we promote and market our products. |
| 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: |
changes in reimbursement guidelines and amounts; | ||
changes in regulations affecting the healthcare industry; | ||
changes in the mix or cost of our products; | ||
the timing of customer orders; | ||
the timing and cost of our advertising campaigns; and | ||
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, if we embark on any type of acquisition, involve a number of risks that might adversely affect our financial and operational resources, including: |
diversion of the attention of senior management from important business matters; | ||
amortization of substantial intangible assets; | ||
difficulty in retaining key personnel of an acquired business; | ||
failure to assimilate operations of an acquired business; | ||
failure to retain the customers of an acquired business; | ||
possible operating losses and expenses of an acquired business; | ||
exposure to legal claims for activities of an acquired business prior to acquisition; and | ||
incurrence of debt and related interest expense. |
| The success of the Company will largely be dependent on Mark Libratore, the Companys founder and our President and Chief Executive Officer, who is responsible for the day-to-day management of the business. Loss of Mr. Libratores 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. Libratores life, with the Company as the beneficiary of $3,000,000 and his wife, Cynthia Libratore, the beneficiary of $1,000,000. |
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| Our indebtedness aggregated approximately $11.0 million as of September 30, 2009. As a result, we are subject to the risks associated with significant indebtedness, including: |
| we must dedicate a portion of our cash flows from operations to pay debt service costs and, as a result, we have less funds available for operations and other purposes; | |
| it may be more difficult and expensive to obtain additional funds through financings, if available at all; | |
| we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; and | |
| if we default under any of our outstanding notes and/or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments. |
| As of November 30, 2009, Mark Libratore, our President and Chief Executive Officer, held approximately 47.5% of our outstanding common stock, excluding options to purchase up to 4,111,009 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: |
| the election of directors; | |
| the adoption of stock option plans; | |
| the amendment of charter documents; or | |
| the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets. |
Risks Relating to Ownership of Our Common Stock
| Even though we expect our common stock to continue to be quoted on the OTC Bulletin Board, we cannot predict the changes in the trading market for our common stock, including changes in liquidity. Because only a small percentage of our outstanding shares are freely traded in the public market, the price of our shares could be volatile and liquidation of an investors holdings may be difficult. Thus, holders of our common stock may be required to retain their shares for a long period of time. |
| We anticipate that we will retain any future earnings and other cash resources for future operation and development of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not. |
| Future sales or the potential for sale of a substantial number of shares of our common stock could cause our market value to decline and could impair our ability to raise capital through subsequent equity offerings. Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our common stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. |
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| Our bylaws contain provisions which could make it more difficult for a third party to acquire us without the consent of our board of directors. Our bylaws impose restrictions on the persons who may call special shareholder meetings. Furthermore, the Nevada Revised Statutes contain an affiliated transaction provision that prohibits a publicly-held Nevada corporation from engaging in a broad range of business combinations or other extraordinary corporate transactions with an interested stockholder unless, among others, (i) the transaction is approved by a majority of disinterested directors before the person becomes an interested shareholder or (ii) the transaction is approved by the holders of a majority of the corporations voting shares other than those owned by the interested shareholder. An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 10% of the corporations outstanding voting shares. This provision may have the effect of delaying or preventing a change of control of our company even if this change of control would benefit our shareholders. |
| Public trading of our common stock on the OTCBB is subject to certain provisions, commonly referred to as the penny stock rules, promulgated under the Securities Exchange Act of 1934. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading in our stock will be subject to additional sales practice requirements on broker-dealers. These require a broker dealer to: |
| make a special suitability determination for purchasers of penny stocks; | |
| receive the purchasers written consent to the transaction prior to the purchase; and | |
| deliver to a prospective purchaser of a penny stock, prior to the first transaction, a risk disclosure document relating to the penny stock market. |
Consequently, penny stock rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock. Also, many prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares. |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2009, Liberator Medical rents 38,000 square feet of space at its headquarters
in Stuart, Florida, at a monthly base rental of $31,300. Our lease expires on July 31, 2012. Of
that space, approximately 21,000 square feet house our call center and administrative offices and
approximately 17,000 square feet is used for our warehouse and shipping functions.
Liberator Medical also rents an additional 7,000 square feet of space in Stuart, of which 4,000
square feet is used for its retail sales facility and the balance for storage. The lease for this
facility expired in January 2009. We have been renting on a month-to-month basis since February
2009. We plan to vacate these premises in December 2009.
Liberator Medical has made arrangements for several of the nations largest medical distributors to
drop ship thousands of different kinds of products anywhere in the US for modest handling charges,
which reduces the space necessary for storage.
In October 2009, we signed a lease for an additional 24,000 square feet in Stuart, FL due to our
growth. This new facility will house our call center and certain administrative functions. We
expect to be occupying the new facility by the end of January 2010.
We believe that our existing facilities, including the new October 2009 lease, 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, the Company and/or its subsidiaries are a party to business disputes arising in
the normal course of its business operations. The Companys management believes that none of these
actions, standing alone, or in the aggregate, is currently material to the Companys results of
operations or financial condition.
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Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Annual Meeting of Stockholders held on September 4, 2009, the following proposals
were adopted by the vote specified below:
For | Against | Abstain | ||||||||||
Election of Director Mark Libratore |
21,479,273 | -0- | 25,250 | |||||||||
Approval of 2009 Employee Stock Purchase Plan |
19,578,448 | 106,252 | 412,656 | |||||||||
Approval of Amendment to the Employee 2007 Stock Plan |
19,578,348 | 106,300 | 52,708 | |||||||||
Ratification of Berenfeld, Spritzer, Shechter & Sheer, LLP |
21,434,273 | 30,100 | 40,150 |
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Companys common stock is quoted on the Over-the-Counter Bulletin Board, or OTCBB, under the
symbol LBMH.OB. Our common stock was traded on the OTC Pink Sheets under the symbol LBMH.PK
(previously CDFO) from February 14, 2008, until March 6, 2009. On February 14, 2008, we were not
eligible for trading on the OTCBB because we had not timely filed three periodic reports over a
two-year period and our common stock began to trade on the Pink Sheets. Our common stock traded on
the OTCBB, under the symbol LBMH.OB from September 4, 2007 until February 13, 2008. The Company
has been unable to obtain any historical information with respect to trading in its common stock or
market makers prior to July 12, 2007. The numbers below reflect our high and low bid information
for the period which began July 12, 2007, and ended September 30, 2009.
Stock Price | ||||||||
High | Low | |||||||
Quarter Ended: |
||||||||
September 30, 2007
|
$ | 2.75 | $ | 1.10 | ||||
December 31, 2007
|
$ | 1.80 | $ | .75 | ||||
March 31, 2008
|
$ | 1.35 | $ | .41 | ||||
June 30, 2008
|
$ | 1.00 | $ | .55 | ||||
September 30, 2008
|
$ | 1.05 | $ | .48 | ||||
December 31, 2008
|
$ | .80 | $ | .37 | ||||
March 31, 2009
|
$ | .64 | $ | .31 | ||||
June 30, 2009
|
$ | .70 | $ | .33 | ||||
September 30, 2009
|
$ | 1.49 | $ | .49 |
Such quotations reflect inter-dealer prices, without retail markup, markdown or commission. Such
quotes are not necessarily representative of actual transactions or of the value of the Companys
securities, and are, in all likelihood, not based upon any recognized criteria of securities
valuation as used in the investment banking community.
The Company understands that several member firms of the NASD are currently acting as market makers
for the Companys common stock. However, the trading volume for the Companys common stock is still
relatively limited. There is no assurance that an active trading market will continue to provide
adequate liquidity for the Companys existing shareholders or for persons who may acquire the
Companys common stock through the exercise of stock options.
As of November 30, 2009, the Company had approximately 1,354 shareholders of record of the
Companys common stock. However, a significant number of shares of the Companys common stock are
held in street name by brokers on behalf of shareholders and are therefore held by many
beneficial owners.
As of September 30, 2009, there were 32,462,311 shares of the Companys common stock issued and
32,376,311 shares outstanding. Of those shares, 22,468,110 shares were restricted securities of
the Company within the meaning of Rule 144(a)(3) promulgated under the Securities Act of 1933, as
amended.
On November 15, 2007, the SEC adopted changes to Rule 144 which took effect on February 15, 2008.
Rule 144, as amended, provides that a person who is not affiliated with us holding restricted
securities for six months may sell such shares without restriction. A person who is affiliated with
us and who has held restricted securities for six months will be able to sell such shares in
brokerage transactions, subject to limitations, including limitations on sales based on the number
of our shares outstanding, our trading volume, and certain other conditions. Such sales could have
a depressive effect on the price of our common stock in the open market.
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The Company has not declared any cash dividends on its Common Stock in the last thirty years and
its Board of Directors has no present intention of declaring any dividends. For the foreseeable
future, the Company intends to retain all earnings, if any, for use in the development and
expansion of its business.
The Companys shares are subject to Section 15(g) of the Securities Exchange Act of 1934 and Rule
15g-9, commonly referred to as the penny stock rule.
The rule defines penny stock to be any equity security that has a market price less than $5.00 per
share, subject to certain exceptions. The rule provides that any equity security is considered to
be a penny stock unless that security is; registered and traded on a national securities exchange
meeting specified criteria set by the SEC; authorized for quotation from the OTCBB; issued by a
registered investment company; excluded from the definition on the basis of price at least $5.00
per share or the issuers net tangible assets. The Companys shares are deemed to be penny stock,
trading in the shares will be subject to additional sales practice requirements on broker-dealers
who sell penny stocks to persons other than established customers and accredited investors.
Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 together with their spouse, and certain institutional
investors.
For transactions covered by these rules, broker-dealers must make a special suitability
determination for the purchase of such security and must have received the purchasers written
consent to the transaction prior to the purchase. Additionally, for the transaction involving a
penny stock, other rules apply. Consequently, these rules may restrict the ability of
broker-dealers to trade or maintain a market in our common stock and may affect the ability of
shareholders to sell their shares.
Stock Repurchase Program
Under a stock repurchase program approved by our Board of Directors in December 2008, we are
authorized to repurchase up to $500,000 of our Common Stock through December 2009. The
authorization enables the Company to purchase shares through open market transactions at
managements discretion. We intend to retain any common shares which we repurchase as treasury
shares or use them in connection with our employee stock option program.
Our shares repurchased for the three months ended September 30, 2009 were as follows:
Total Number of | Approximate Dollar | |||||||||||||||
Total | Shares Purchased as | Value of Shares that | ||||||||||||||
Number of | Average | Part of Publicly | May Yet Be | |||||||||||||
Shares | Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Purchased | per Share | Programs(2) | Plans or Programs(2) | |||||||||||||
July 131, 2009(1) |
| $ | | |||||||||||||
August 131, 2009(1) |
| $ | | |||||||||||||
September 130, 2009(1) |
| $ | | |||||||||||||
Total |
| $ | | 85,600 | $ | 459,422 | ||||||||||
(1) | In December 2008, we opened a separate money market account with an investment bank pursuant to which we transferred $50,000 into the account, of which $0 was used to purchase 0 shares during the three months ended September 30, 2009. | |
(2) | As of September 30, 2009, 85,600 cumulative shares have been purchased under our stock repurchase program for $40,578, and an approximate dollar value of shares in the amount of $459,422 may be purchased under the program through December 2009. |
Item 6. Selected Financial Data
Not required for smaller reporting companies.
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Item 7. Managements 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. Managements Discussion and
Analysis of Financial Condition and Results of Operation 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., licensed in the State of Florida and a federally approved Medicare
Participating Provider, is a direct-to-consumer, provider of Medicare Part B Benefits focused on
supplying medical supplies in a retail environment, and via the Internet in the United States. We
distribute a full range of medical products which address the healthcare needs of our customers.
We market our products directly to consumers primarily through targeted media and direct-response
television advertising. Our customer service representatives are specifically trained to
communicate with Medicare-eligible beneficiaries. Our operating platforms enable us to collect and
process required documents from physicians and customers, bill and collect amounts due from
Medicare and/or other government agencies and/or third party payors and/or customers.
We completed the acquisition of our operating company, Liberator Medical, on June 22, 2007. The
acquisition was accounted for as a reverse merger in which, for accounting purposes, Liberator
Medical was treated as the acquiring company. The acquisition was deemed a recapitalization of our
Company, which was, prior to the acquisition of Liberator Medical, an inactive public shell.
Accordingly, the financial statements presented, and the discussion which follows, represent the
historical financial statements and operating history of Liberator Medical.
Results of Operations
On August 20, 2007, the Company changed its fiscal year end from December 31 to September 30.
Accordingly, the fiscal year ended September 30, 2007, is for a period of nine months compared to
the fiscal years ended September 30, 2009 and 2008, which are each for a period of twelve months.
The following table summarizes the results of operations for the fiscal years ended September 30,
2009 and 2008, and the nine months ended September 30, 2007, including percentage of sales (dollars
in thousands):
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Sales |
$ | 25,818 | 100.0 | $ | 9,550 | 100.0 | $ | 2,250 | 100.0 | |||||||||||||||
Cost of Sales |
9,050 | 35.1 | 3,439 | 36.0 | 951 | 42.3 | ||||||||||||||||||
Gross Profit |
16,768 | 64.9 | 6,111 | 64.0 | 1,299 | 57.7 | ||||||||||||||||||
Operating Expenses |
13,479 | 52.2 | 6,912 | 72.4 | 3,155 | 140.2 | ||||||||||||||||||
Income (Loss) from Operations |
3,289 | 12.7 | (801 | ) | (8.4 | ) | (1,856 | ) | (82.5 | ) | ||||||||||||||
Other Income (Expense) |
(1,035 | ) | (4.0 | ) | (508 | ) | (5.3 | ) | (112 | ) | (5.0 | ) | ||||||||||||
Income (Loss) Before Income Taxes |
2,254 | 8.7 | (1,309 | ) | (13.7 | ) | (1,968 | ) | (87.5 | ) | ||||||||||||||
Income Taxes |
32 | 0.1 | | | | | ||||||||||||||||||
Net Income (Loss) |
2,222 | 8.6 | $ | (1,309 | ) | (13.7 | ) | $ | (1,968 | ) | (87.5 | ) | ||||||||||||
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Revenues
Sales for fiscal year 2009 increased by $16,268,000, or 170.3%, to $25,818,000, compared with
fiscal year 2008. The increase in sales occurred in the mail order segment of our business. The
increase was due to a substantial direct-response advertising campaign to obtain new mail order
customers. Our direct-response advertising costs for fiscal year 2009 increased $2,624,000, or
167.5%, to $4,191,000, compared with fiscal year 2008. The sales from
our retail segment decreased slightly for fiscal year 2009 compared to fiscal year 2008. The sales
from our Internet segment of our business remained substantially the same for fiscal year 2009
compared to fiscal year 2008.
Sales for fiscal year 2008 increased by $7,300,000 to $9,550,000, compared with fiscal year 2007.
On an annualized basis, sales increased by 218.3% for fiscal year 2008 compared to fiscal year
2007. The increase in sales occurred in the mail order segment of our business. This increase was a
result of a substantial advertising campaign to obtain new mail-order customers. Our
direct-response advertising costs for fiscal year 2008 increased $1,343,000, or 449.5%, to
$1,567,000, compared with fiscal year 2007. The retail and Internet segments of our business
remained substantially the same for fiscal year 2008 compared to fiscal year 2007, on an annualized
basis.
Gross Profit
Gross profit for fiscal year 2009 increased by $10,657,000, or 174.4%, to $16,768,000, compared
with fiscal year 2008. The increase was attributed to our increased sales volume for fiscal year
2009 compared to fiscal year 2008. As a percentage of sales, gross profit improved by 0.9% to
64.9% of sales for fiscal year 2009 compared to 64.0% of sales for fiscal year 2008. The increase
in profit margins is primarily the result of vendor price reductions and/or discounts due to our
increased sales volumes.
Gross profit for fiscal year 2008 increased by $4,812,000 to $6,111,000, compared with fiscal year
2007. On an annualized basis, gross profit increased by 252.8% for fiscal year 2008 compared to
fiscal year 2007. The increase was attributed to our increased sales volume for fiscal year 2008
compared to fiscal year 2007. As a percentage of sales, gross profit improved by 6.3% to 64.0% of
sales for fiscal year 2008 compared to 57.7% of sales for fiscal year 2007. The increase in profit
margins is primarily the result of vendor price reductions and/or discounts due to our increased
sales volumes.
Operating Expenses
The following table provides a breakdown of our operating expenses for the fiscal years ended
September 30, 2009 and 2008, and the nine months ended September 30, 2007, including percentage of
sales (dollars in thousands):
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Payroll, taxes and benefits |
$ | 5,406 | 20.9 | $ | 2,685 | 28.1 | $ | 1,365 | 60.7 | |||||||||||||||
Advertising |
2,042 | 7.9 | 470 | 4.9 | 134 | 6.0 | ||||||||||||||||||
Bad debts |
2,488 | 9.6 | 1,042 | 10.9 | 348 | 15.5 | ||||||||||||||||||
Depreciation |
306 | 1.2 | 213 | 2.2 | 138 | 6.1 | ||||||||||||||||||
General and administration |
3,237 | 12.5 | 2,502 | 26.2 | 1,170 | 52.0 | ||||||||||||||||||
Total Operating Expenses |
$ | 13,479 | 52.2 | $ | 6,912 | 72.4 | $ | 3,155 | 140.2 |
Payroll, taxes and benefits increased by $2,721,000, or 101.3%, to $5,406,000 for fiscal year 2009
compared to fiscal year 2008. Payroll, taxes and benefits increased by $1,320,000 to $2,685,000
for fiscal year 2008 compared to fiscal year 2007, an annualized increase of 47.5%. The increases
for both years are attributed to an increase in the number of employees and wage increases during
fiscal years 2009 and 2008 to support our increased sales volume. As of September 30, 2009, we had
139 active employees compared to 76 at September 30, 2008 and 52 at September 30, 2007.
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Advertising expenses increased by $1,572,000, or 334.5%, to $2,042,000 for fiscal year 2009
compared to fiscal year 2008. Advertising expenses increased by $336,000 to $470,000 for fiscal
year 2008 compared to fiscal year 2007, an annualized increase of 163.1%. The majority of our
advertising expenses are associated with the amortization of, previously capitalized,
direct-response advertising costs. The rest of our advertising expenses are 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, 2009 and 2008, and
the nine months ended September 30, 2007 (dollars in thousands):
2009 | 2008 | 2007 | ||||||||||
Advertising Expenses: |
||||||||||||
Amortization of direct-response costs |
$ | 1,866 | $ | 450 | $ | 113 | ||||||
Other advertising expenses |
176 | 20 | 21 | |||||||||
Total Advertising Expenses |
$ | 2,042 | $ | 470 | $ | 134 |
Our direct-response advertising efforts have been the driving force behind our increased sales over
the last two years. Utilizing the proceeds from $3.5 million of debt financing in May 2008, we
were able to increase our direct-response advertising investment from $224,000 for fiscal year 2007
to $1,567,000 during fiscal year 2008. Utilizing the proceeds from $2.5 million debt financing in
October 2008 and cash generated from operations during fiscal year 2009, we increased our
direct-response advertising investment to $4,191,000 for fiscal year 2009. As of September 30,
2009, we have $3,755,000 of deferred advertising costs that will be expensed over the next four
fiscal years to coincide with the expected future revenues generated as a result of our
direct-response advertising efforts.
Bad debt expenses increased by $1,446,000, or 138.8%, to $2,488,000 for fiscal year 2009 compared
to fiscal year 2008. Bad debt expenses increased by $694,000 to $1,042,000 for fiscal year 2008
compared to fiscal year 2007, an annualized increase of 124.6%. The increases in bad debt expenses
are due primarily to our increased sales levels. As a percentage of sales, bad debt expenses have
decreased from 15.5% for fiscal year 2007 to 10.9% for fiscal year 2008 to 9.6% for fiscal year
2009 as a result of additional staff and training in our collection process, which involves the
submission of claims to multiple layers of payers, such as Medicare, Medicaid, private insurance
companies, and our patients.
Depreciation expense increased by $93,000, or 43.7%, to $306,000 for fiscal year 2009 compared to
fiscal year 2008. Depreciation expense increased by $75,000 to $213,000 for fiscal year 2008
compared to fiscal year 2007, an annualized rate of 15.8%. The increases in depreciation expense
are due to purchases of property, plant, and equipment of $532,000 and $301,000 during fiscal years
2009 and 2008, respectively, in order to support the growth of our business.
General and administrative expenses increased by $735,000, or 29.4%, to $3,237,000 for fiscal year
2009 compared to fiscal year 2008. General and administration expenses increased by $1,332,000 to
$2,502,000 for fiscal year 2008 compared to fiscal year 2007, an annualized rate of 60.4%. The
increases are due to the additional costs, such as professional fees, rent, telephone expenses,
insurance, and other administrative type expenses, required to support our sales growth over the
last two years. As a percentage of sales, general and administrative expenses have decreased from
52.0% for fiscal year 2007 to 26.2% for fiscal year 2008 to 12.5% for fiscal year 2009.
Income (Loss) from Operations
Income from operations for fiscal year 2009 increased by $4,090,000 to $3,289,000, compared with a
loss from operations of $801,000 for fiscal year 2008. As a percentage of sales, operating income
improved by 21.1% to 12.7% of sales for fiscal year 2009 compared to a negative 8.4% of sales for
fiscal year 2008. The increase in operating income and margins for fiscal year 2009 is attributed
to our increased sales volumes at much lower levels of incremental operating expenses, as a
percentage of sales.
Loss from operations for fiscal year 2008 decreased by $1,055,000 to $801,000, compared with a loss
from operations of $1,856,000 for fiscal year 2007. As a percentage of sales, the operating loss
improved by 74.1% to a negative 8.4% of sales for fiscal year 2008 compared to a negative 82.5% of
sales for fiscal year 2007. The reduction in operating loss and improvement in operating margins
for fiscal year 2008 is attributed to our increased sales volumes at much lower levels of
incremental operating expenses, as a percentage of sales.
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Table of Contents
Other Income (Expense)
The following table shows a breakdown of other income (expense) for the fiscal years ended
September 30, 2009 and 2008, and the nine months ended September 30, 2007 (dollars in thousands):
2009 | 2008 | 2007 | ||||||||||
Other Income (Expense): |
||||||||||||
Interest Expense |
$ | (1,054 | ) | $ | (520 | ) | $ | (217 | ) | |||
Forgiveness of debt |
| | 108 | |||||||||
Loss on sale of assets |
| | (3 | ) | ||||||||
Interest income |
19 | 12 | | |||||||||
Total Other Income (Expense) |
$ | (1,035 | ) | $ | (508 | ) | $ | (112 | ) |
Other income (expense) is predominantly interest expense associated with our convertible debt and
shareholder loans. Interest expense increased by $534,000 to $1,054,000 for fiscal year 2009
compared to fiscal year 2008 as a result of interest expense for convertible debt issued during
fiscal year 2008 and during the first quarter of fiscal year 2009. Interest expense increased by
$303,000 to $520,000 for fiscal year 2008 compared to fiscal year 2007 as a result of interest
expense for convertible debt issued during fiscal year 2008.
Liquidity and Capital Resources
The following table summarizes the cash flows for the fiscal years ended September 30, 2009 and
2008, and the nine months ended September 30, 2007 (dollars in thousands):
2009 | 2008 | 2007 | ||||||||||
Cash Flows: |
||||||||||||
Net cash provided by (used in) operating activities |
$ | 1,712 | $ | (2,870 | ) | $ | (1,130 | ) | ||||
Net cash used in investing activities |
(941 | ) | (222 | ) | (18 | ) | ||||||
Net cash provided by financing activities |
1,854 | 4,088 | 1,201 | |||||||||
Net increase in cash |
2,625 | 996 | 53 | |||||||||
Cash at beginning of period |
1,173 | 177 | 124 | |||||||||
Cash at end of period |
$ | 3,798 | $ | 1,173 | $ | 177 | ||||||
Historically, the Companys principal use of cash has been to fund ongoing operations, which were
financed through both placements of equity and debt securities. During fiscal year 2009, we were
able to generate $1,712,000 of positive cash flows as a result of our operations. However, we
still may be required to raise cash through both sales and placements of equity and/or debt
securities in order to finance future growth of our operations.
The Company had cash of $3,798,000 at September 30, 2009, compared to cash of $1,173,000 at
September 30, 2008, an increase of $2,625,000. This increase in cash in 2009 is primarily due to
net proceeds of $2,177,000 from a long-term convertible debt offering in October 2008 and
$1,712,000 generated from our operating activities during fiscal year 2009, partially offset by
cash used to purchase a $500,000 certificate of deposit as security for a new credit line, $441,000
for purchases of property and equipment, and payments of $316,000 on our debt and capital lease
obligations.
The Company had cash of $1,173,000 at September 30, 2008, compared to cash of $177,000 at September
30, 2007, an increase of $996,000. This increase in cash in 2008 is primarily due to net proceeds
of $3,496,000 from convertible debt offerings and $686,000 from the sale of our common stock during
fiscal year 2008, partially offset by $2,870,000 used in operating activities during fiscal year
2008, $222,000 for purchases of property and equipment, and payments of $94,000 on our debt and
capital lease obligations.
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Operating Activities
During fiscal year 2009, cash provided by operating activities was $1,712,000, which was the result
of net income of $2,222,000 plus non-cash charges of $5,878,000 less changes in operating assets
and liabilities of $6,388,000. The non-cash charges consist primarily of $2,488,000 for bad debt
expense, $1,866,000 for amortization of deferred
advertising costs, $701,000 for non-cash interest expense related to convertible notes payable,
$420,000 for equity based compensation associated with common stock issued for professional
services and employee stock options, and depreciation of $306,000. The changes in operating assets
and liabilities during fiscal year 2009 primarily consist of an increase of $4,191,000 for deferred
advertising costs related to our direct-response advertising efforts and an increase of accounts
receivable of $3,933,000 as a result of our increased sales, partially offset by an increase in
accounts payable of $1,189,000 due to increased purchases and improved vendor payment terms for our
higher volume items, a decrease in deferred loan costs of $446,000 related to our convertible debt
offerings, and an increase in accrued expenses of $433,000 primarily related to accrued payroll as
a result of our higher employee headcount and executive compensation.
During fiscal year 2008, cash used in operating activities was $2,870,000, which was the result of
a net loss of $1,309,000 less non-cash charges of $2,689,000 plus changes in operating assets and
liabilities of $4,250,000. The non-cash charges consist primarily of $1,042,000 for bad debt
expense, $739,000 for equity based compensation associated with common stock issued for
professional services and employee stock options, $450,000 for amortization of deferred advertising
costs, $233,000 for non-cash interest expense related to convertible notes payable, and
depreciation of $213,000. The changes in operating assets and liabilities during fiscal year 2008
primarily consist of an increase in accounts receivable of $2,963,000 as a result of our increased
sales, an increase in $1,567,000 for deferred advertising costs related to our direct-response
advertising efforts, and an increase in inventory levels of $487,000 as a result of increased sales
volumes, partially offset by an increase in accounts payable of $501,000 due to increased
purchases, an increase in accrued expenses of $157,000 primarily related to accrued payroll as a
result of our higher employee headcount, and an decrease in deferred loan costs of $128,000 related
to our convertible debt offerings.
During the nine months ended September 30, 2007, cash used in operating activities was $1,130,000,
which was the result of a net loss of $1,968,000 less non-cash charges of $916,000 plus changes in
operating assets and liabilities of $78,000. The non-cash charges consist primarily of $348,000
for bad debt expense, $264,000 for equity based compensation associated with common stock issued
for professional services and employee stock options, $113,000 for amortization of deferred
advertising costs, and depreciation of $138,000. The changes in operating assets and liabilities
during fiscal year 2007 primarily consist of an increase of $224,000 for deferred advertising costs
related to our direct-response advertising efforts and a decrease in accounts payable of $97,000,
partially offset by a decrease in accounts receivable of $213,000.
Investing Activities
During fiscal year 2009, we purchased $532,000 of capital equipment, primarily as a result of our
growth during the fiscal year. $441,000 of the capital equipment was paid for with cash, and
$91,000 was purchased through capital leases. The property and equipment consisted of leasehold
improvements, computer equipment and software, warehouse equipment, and office furniture. In
addition, we purchased a $500,000 certificate of deposit as security for a $500,000 credit line
discussed below in Note 8 of the consolidated financial statements. The certificate matures in
September 2010 and bears interest at a rate of 1.242% per annum.
During fiscal year 2008, we purchased $301,000 of capital equipment, primarily as a result of our
growth during the fiscal year. $222,000 of the capital equipment was paid for with cash, and
$79,000 was purchased through capital leases. The property and equipment consisted of leasehold
improvements, computer equipment and software, warehouse equipment, and office furniture.
During fiscal year 2007, we purchased $43,000 of capital equipment. $18,000 of the capital
equipment was paid for with cash, and $$25,000 was purchased through capital leases. The property
and equipment consisted of computer equipment, telecom equipment, and office furniture.
Financing Activities
During fiscal year 2009, cash provided by financing activities was $1,854,000, primarily the result
of a $2,500,000 convertible debt offering in October 2008, less $326,000 for debt issuance costs
related to the convertible note, and less $316,000 for payments of debt and capital lease
obligations.
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During fiscal year 2008, cash provided by financing activities was $4,088,000, primarily the result
of a $3,500,000 convertible debt offering in May 2008, gross proceeds of $598,000 from short-term
convertible notes issued during 2008, gross proceeds of $762,000 from the sale of our common stock,
less debt issuance costs of $$577,000 related to the convertible notes, less broker commissions of
$101,000 related to the common stock sales, and less $94,000 for payments of debt and capital lease
obligations.
During fiscal year 2007, cash provided by financing activities was $1,201,000, primarily the result
of proceeds from debt financing of $877,000, gross proceeds of $641,000 from the sale of our common
stock, less broker commissions of $180,000, and less $137,000 for payments of debt and capital
lease obligations.
Outlook
The Company has experienced tremendous growth over the past two years and, as a result, five
consecutive profitable quarters while generating positive operating cash flows during fiscal year
2009. We believe we have built an infrastructure and business model that are capable of generating
a substantially higher sales volume at reduced levels of incremental cost. In an effort to
continue our growth, we plan on accelerating our advertising efforts over the next twelve months to
attract new customers and expand our operations to service our new and existing customers. The
outlook for demand for our products and services is favorable, as there should be an increase in
newly-diagnosed patients requiring the medical supplies that we provide. We expect our revenues to
increase significantly over the next twelve months due to our advertising and marketing programs.
The Company does not anticipate any major changes in Medicare reimbursement in 2010, nor in any
other reimbursement programs available from other third-party payors. We applied for and were
approved as a participating provider for Medicare. A participating provider is required to accept
assignment for all Medicare allowable charges.
Due to our emphasis to accelerate our sales growth through our direct-response advertising efforts,
we may be required to raise additional cash through the sale of our securities, whether on a debt
or equity basis. As of September 30, 2009, we had 2.9 million of outstanding warrants at an average
exercise price of $1.00 that expire during fiscal year 2010. We have already received telephone
inquiries from several of the warrant holders over the last few months and expect a majority of
these warrant holders to exercise these in-the-money warrants before expiration. There can be no
assurance, of course, as to the amount or timing of the proceeds we may receive from the sale of
our securities. However, we believe that existing cash and cash equivalents, together with cash
generated from the collection of accounts receivable, the sale of products, and the proceeds of the
sale of our securities will be sufficient to meet our cash requirements during the next twelve
months.
Our current assets of $11,549,000 exceed our current liabilities of $8,353,000 by $3,196,000.
Our plan for the next twelve months includes the following:
| Accelerate our advertising and marketing efforts; | ||
| Increase our customer base; | ||
| Continue to service our current customer base and increase the retention rate; | ||
| Continue to invest in the expansion of our infrastructure; and | ||
| Increase our accounts receivable collection efforts. |
In order to implement our current business model, we have completed the following:
| Identified and presented to many large funding sources, soliciting terms for long-term capital in the form of debt, equity or a combination of both; | ||
| Retained an investor relations firm to further enhance our exposure and opportunities for long-term capital requirements; | ||
| Identified products and related target customers through extensive market research; |
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| Established efficient and cost effective methods to reach qualified customers; | ||
| Established an infrastructure of management and knowledgeable staff to support substantial growth in sales with a minimal amount of additional staff members, maximizing our revenue per employee; | ||
| Leased an additional 24,000 square foot facility to house our expanding workforce and support our continued growth. We are currently in the process of completing the build out of this facility to house our call center and other administrative functions. We expect to be in the new facility by the end of January 2010; | ||
| Created a HIPPA compliant IT infrastructure and staff to accommodate additional growth in sales; | ||
| Established a marketing plan that can be monitored for effectiveness and is flexible enough to adjust to changing market conditions; and | ||
| Tested our advertising methods and established methods of testing additional advertising methods to meet with changing market conditions. |
We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider,
primarily focused on supplying medical supplies to the chronically ill patients.
Contractual Obligations
A summary of our contractual obligations for convertible debt obligations, capital lease
obligations, minimum lease payments under non-cancelable operating leases, and minimum purchase
commitments as of September 30, 2009 is presented in the following table (dollars in thousands):
Payments due by period | ||||||||||||||||||||||||
Totals | FY 2010 | FY 2011 | FY 2012 | FY 2013 | FY 2014 | |||||||||||||||||||
Convertible debt obligations (1) |
$ | 6,901 | $ | 4,360 | $ | 2,541 | $ | | $ | | $ | | ||||||||||||
Capital lease obligations |
176 | 100 | 63 | 13 | | | ||||||||||||||||||
Operating leases |
1,566 | 470 | 492 | 439 | 94 | 71 | ||||||||||||||||||
Purchase commitment (2) |
532 | 102 | 120 | 120 | 120 | 70 | ||||||||||||||||||
Total contractual obligations |
$ | 9,175 | $ | 5,032 | $ | 3,216 | $ | 572 | $ | 214 | 141 | |||||||||||||
(1) | The convertible debt obligations that are due in fiscal year 2010 include $601,000 of convertible notes that are convertible into shares of our common stock at a conversion price of $0.50 per share and $3,500,000 of convertible notes that are convertible into shares of our common stock at a conversion price of $0.80 per share. Based on the current price of our common stock, we anticipate that the majority of this debt will be converted into shares of common stock at some point during fiscal year 2010. If for some reason the notes are not converted, we believe we have significant financial resources to meet our debt obligations. | |
(2) | The purchase commitment includes a long distance service agreement that requires us to purchase a minimum of $6,000 per month of long distance service through December 2009. Effective January 2010, our commitment level will increase to a minimum level of $10,000 per month, partially offset by rebates for the first five months of service. The long distance service agreement expires in April 2014. |
Off-Balance Sheet Arrangements
As of September 30, 2009, we had no material off-balance sheet arrangements.
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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 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.
Accounts Receivable
Our accounts receivable are generally due from Medicare, Medicaid, private insurance companies, and
our patients. 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
copayment amounts, in a consistent manner for all classes of payers.
The Company carries its trade accounts receivable at cost less an allowance for doubtful accounts.
Management closely monitors outstanding accounts receivable and charges the allowance account for
any balances that are determined to be uncollectible. On a quarterly basis, the Company evaluates
its accounts receivable and establishes an allowance for doubtful accounts based on its history of
past write-offs and collections and current credit conditions.
We analyze our outstanding accounts receivable in 30 day aging buckets and have established reserve
requirements based on the aging of the receivable. Receivables that are greater than 24 months and
determined to be uncollectible are typically written off as soon as administratively possible after
that determination is made. Currently, we reserve 90% of the receivable amount for any receivable
greater than 120 days.
Deferred Advertising
In accordance with Accounting Standards Codification (ASC) Topic 340-20, Capitalized 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. Managements
judgments include determining the period over which such net cash flows are estimated to be
realized.
Currently, the amortization rate is such that 53% of the initial cost is amortized over twelve
months on a straight-line basis. In the second, third and fourth years, 25%, 14% and the final 8%
of costs, respectively, are also amortized over twelve months on a straight-line basis. A business
change, including a change in reimbursement rates, that reduces expected net cash flows or that
shortens the period over which such net cash flows are estimated to be realized could result in
accelerated charges against our earnings.
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Stock-Based Compensation Expense
Effective September 14, 2007, the Company adopted the provisions of ASC Topic 718, Compensation
Stock Compensation, which requires the Company to recognize expense related to the fair value of
stock-based compensation awards. The Company elected the modified prospective transition method as
permitted by Topic 718, under which stock-based compensation is based on the grant date fair value
estimated in accordance with the
provisions of Topic 718. We estimate 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 and a risk-free interest rate over the expected term of the
stock-based award.
Since the Companys common stock has only been trading publicly since July 2007 with relatively
light volume, we do not have sufficient company specific information regarding the volatility of
our share price on which to base an estimate of expected volatility. As a result, we use the
historical volatilities of similar entities within our industry as the expected volatility of our
share price.
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 tem 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 due
to the limited period of time that our equity shares have been publicly traded, 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.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) and FSP FIN 48-1, which amended
certain provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with Accounting Standards Codification Topic 740
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the
Companys tax positions are more likely than not of being sustained upon audit based on the
technical merits of the tax position. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, and
disclosure. In connection with our adoption of FIN 48, we analyzed the filing positions in all of
the federal and state jurisdictions where we are required to file income tax returns, as well as
all open tax years in these jurisdictions. There was no impact on our consolidated financial
statements upon the adoption of FIN 48 on January 1, 2007. The Company did not have any
unrecognized tax benefits and there was no effect on the financial condition or results of
operations as a result of implementing FIN 48 or FSP FIN 48-1. In accordance with FIN 48, the
Company adopted the policy of recognizing penalties in selling, general, and administrative
expenses and interest, if any, related to unrecognized tax positions as income tax expense.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
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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:
Report of Independent Registered Public Accounting Firm |
F-1 | |||
Consolidated Balance Sheets as of September 30, 2009 and 2008 |
F-2 | |||
Consolidated Statements of Operations for the years ended September 30, 2009 and 2008 and the nine months ended September 30, 2007 |
F-3 | |||
Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended September 30, 2009 and 2008 and the nine months ended September 30, 2007 |
F-4 | |||
Consolidated Statements of Cash Flows for the years ended September 30, 2009 and 2008 and the nine months ended September 30, 2007 |
F-5 | |||
Notes to the Consolidated Financial Statements |
F-6 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We have had no disagreements with our independent registered accounting firms on accounting and
financial disclosure.
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has carried out an evaluation under the supervision and with the participation of its
management, including its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and procedures. The evaluation
examined the Companys disclosure controls and procedures as of September 30, 2009, the end of the
period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended. Based on that evaluation, such officers have concluded that, as of September 30, 2009,
the Companys disclosure controls and procedures were effective to ensure that information required
to be disclosed by the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
period specified in the rules and forms of the Securities and Exchange Commission, and include
controls and procedures designed to ensure that information required to be disclosed by the Company
in such reports is accumulated and communicated to management, including the Companys Chief
Executive Officer and the Companys Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Managements 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 the Securities Exchange Act of 1934 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 of America.
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
assurance, not absolute, assurance with respect to the 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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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, 2009, as required by the Securities Exchange Act Rule 13a-15(c). In making our
assessment, we have utilized the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control Integrated Framework. We concluded that based on our
evaluation, our internal control over financial reporting was effective as of September 30, 2009.
This annual report does not include an audit or attestation report of our registered public
accounting firm regarding our internal control over financial reporting. Our managements report
was not subject to audit or attestation by our registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only managements report in this annual
report.
Changes in Internal Controls
Except as set forth in the following paragraph, during the fiscal year 2009 there were no changes
in the Companys internal controls over financial reporting that have materially affected or are
reasonably likely to materially affect such internal controls over financial reporting.
During fiscal year 2009, the Company hired a controller with SEC reporting and U.S. GAAP knowledge,
a degreed staff accountant to assist with the monthly closing and reporting processes, and an
experienced payroll administrator to support the growth of our business. During fiscal year 2009,
the Company strengthened the financial closing process and implemented additional control
procedures to ensure appropriate cut-off and review procedures to coincide with the increased
levels of sales and costs associated with the growth of our business.
Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. The Companys management,
including its Chief Executive Officer and its Chief Financial Officer, do not expect that the
Companys disclosure controls will prevent or detect all errors and all fraud. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with associated policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Item 9B. Other Information
None
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
As of September 30, 2009, the Executive Officers and Directors of the Company were:
Name | Age | Position(s) with the Company | ||
Mark Libratore | 58 | President, Chief Executive Officer, Director |
||
Robert Davis | 63 | Chief Financial Officer |
||
John Leger | 54 | Chief Operating Officer |
The business experience of each of the persons listed above during the past five years is as
follows:
Mark Libratore - In 1990, Mr. Libratore founded Liberty Medical Supply, Inc., which has become the
nations largest direct-to-consumer diabetic supplier. Mr. Libratore sold this business to
PolyMedica Corporation (PLMD) 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 became an officer and director of the Company in 2007.
Robert Davis - Robert Davis, has a Masters degree in Accounting from the University of Houston, and
holds a CPA certificate from the State of Texas. Bob 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 - John 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. John 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.
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.
As of September 30, 2009, the Companys sole director acts as the Audit Committee. As the sole
director of the Company, he has determined that the cost of having a financial expert on its Board
of Directors would place an undue economic burden, given the size of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers
and directors and persons who own more than 10% of a registered class of our equity securities to
file with the Securities and Exchange Commission initial statements of beneficial ownership,
reports of changes in ownership and annual reports concerning their ownership of the our common
stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors
and greater than 10% shareholders are required by the Securities and Exchange Commission
regulations to furnish our company with copies of all Section 16(a) reports they file. Based solely
on our review of the copies of such reports received by us, and on written representations by our
officers and directors regarding their compliance with the applicable reporting requirements under
Section 16(a) of the Exchange
Act, we believe that, with respect to the year ended September 30, 2009, our officers and
directors, and all of the persons known to us to own more than 10% of our common stock, filed all
required reports on a timely basis.
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Code of Ethics
The Company adopted a formal code of ethics on January 14, 2008. A copy of the Companys code of
ethics is posted on our website, www.liberatormedical.com, in the investor relations
section.
Board Committees and Designated Directors.
As of September 30, 2009, the board of directors was composed of one individual, who acted as the
Audit Committee. We did not have any other committees. Subsequently, in October 2009 and December
2009, we added two independent directors to our Board of Directors. It is intended that the board
of directors will increase in number as the Companys business continues to grow, and that in the
future the Board, as members are added, will establish an Audit Committee with additional members,
of which one of the members will be an audit committee financial expert, as such term is defined
in the rules of the Securities and Exchange Commission.
Item 11. Executive Compensation
Compensation Discussion and Analysis
The individuals who served as our chief executive officer, our chief financial officer, and our
chief operating officer during the fiscal year ended September 30, 2009, are referred to in this
Form 10-K as the Named Executive Officers. We did not have a Compensation Committee because there
is only one director, our Chief Executive Officer and President, as of September 30, 2009.
Compensation for the Named Executive Officers was determined by our President as the sole Director.
We plan to expand the Board in fiscal year 2010 and, if feasible, to establish a Compensation
Committee comprised of independent directors.
Compensation Philosophy and Objectives
Our compensation program for the Named Executive Officers is intended to attract, retain, motivate
and appropriately reward talented executives who can contribute significantly to our financial
growth and success, and thereby build value for our stockholders over the long term. The program
has the following specific goals:
| To offer a total compensation package to the Named Executive Officers that is competitive in the marketplace for executive talent. | ||
| To motivate the Named Executive Officers to achieve our business objectives by providing incentive compensation awards that take into account our overall performance and that measure performance against those business objectives. | ||
| To provide equity-based, long-term compensation arrangements that creates meaningful incentives for the Named Executive Officers to maximize our near and long-term future performance that aligns their interests with our shareholders and encourage the Named Executive Officers to remain with the Company. |
To achieve these objectives, the Board is developing certain processes for setting Named Executive
Officer compensation and is constructing an overall compensation program that consists of a number
of elements, as described below.
Employment and Consulting Agreements
We have entered into employment contracts with the three Named Executive Officers. There are no
consulting agreements with any of our Named Executive Officers.
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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, 2009 and 2008, and the nine month
period ended September 30, 2007.
Name and principal | Bonus | Option | All Other | |||||||||||||||||||||
position | Year | Salary($) | ($) | Awards($) | Compensation($) | Total($) | ||||||||||||||||||
Mark A. Libratore |
2009 | $ | 230,000 | $ | 88,070 | $ | 2,810 | $ | 43,090 | $ | 363,970 | |||||||||||||
President and Chief |
2008 | $ | 130,013 | $ | 24,713 | $ | 12,894 | $ | 40,078 | $ | 207,698 | |||||||||||||
Executive Officer |
2007 | $ | 95,000 | $ | -0- | $ | -0- | $ | 17,907 | $ | 112,907 | |||||||||||||
Robert Davis |
2009 | $ | 166,920 | $ | 56,870 | $ | 9,680 | $ | 5,650 | $ | 239,120 | |||||||||||||
Chief Financial Officer |
2008 | $ | 92,497 | $ | 19,951 | $ | 15,892 | $ | 2,458 | $ | 130,798 | |||||||||||||
2007 | $ | 65,769 | $ | -0- | $ | -0- | $ | 2,458 | $ | 68,227 | ||||||||||||||
John Leger |
2009 | $ | 151,920 | $ | 55,850 | $ | 6,470 | $ | 6,040 | $ | 220,280 | |||||||||||||
Chief Operating Officer |
2008 | $ | 125,017 | $ | 17,332 | $ | 9,536 | $ | 2,458 | $ | 154,343 | |||||||||||||
2007 | $ | 91,346 | $ | -0- | $ | -0- | $ | 2,458 | $ | 93,804 |
All Other Compensation Table
The All Other Compensation in the Summary Compensation Table expenses paid on behalf of the Named
Executive Officers was for health insurance, life insurance, transportation and certain other
personal expenses.
Outstanding Equity Awards at 2009 Fiscal Year End
On September 14, 2007, the Company issued options to the Named Executive Officers and others under
the Companys 2007 Stock Plan. On January 2, 2008, the Company rescinded all outstanding options
effective as of their date of issuance because they did not conform to the 2007 Stock Plan.
Accordingly, there were no outstanding equity awards at 2007 fiscal year end. On January 2, 2008,
the Company issued new options under, and in conformity with, the Companys 2007 Stock Plan to the
Named Executive Officers and others in the same amounts, and under the same terms, as the rescinded
options. On February 16, 2008, the Company rescinded all outstanding options effective as of their
date of issuance. Also on February 16, 2008, the Company issued new options under, and in
conformity with, the Companys Stock Plan to certain employees, not including the Named Executive
Officers, in the same amounts, and under the same terms, as the rescinded options. On April 14,
2008, the Company issued new options under and in conformity with, the Companys Stock Plan to the
Named Executive Officers and one other employee, in the same amounts, and under the same terms, as
the rescinded options. On October 30, 2008, the company issued new options under the 2007 Stock
Plan to two of the Named Executive Officers and other employees. On August 18, 2009, the Company
issued additional options under the 2007 Stock Plan to the Named Executive Officers and other
employees. The Companys outstanding equity awards to the Named Executive Officers at September 30,
2009, are set forth in the following table:
OUTSTANDING EQUITY AWARDS AT YEAR END
Number of | Number of | |||||||||||||||||||||
Securities | Securities | Market | ||||||||||||||||||||
Underlying | Underlying | Number of | Value of | |||||||||||||||||||
Unexercised | Unexercised | Option | Option | Shares | Shares | |||||||||||||||||
Options (#) | Options (#) | Exercise | Expiration | That Have | That Have | |||||||||||||||||
Exercisable | Unexercisable | Price ($) | Date | Not Vested (#) | Not Vested ($) | |||||||||||||||||
Mark Libratore |
100,000 | | $ | 0.825 | April 14, 2013 | | $ | | ||||||||||||||
| 90,000 | $ | 1.10 | August 18, 2014 | 90,000 | $ | 130,500 | |||||||||||||||
Robert Davis |
100,000 | | $ | 0.75 | April 14, 2013 | | $ | | ||||||||||||||
| 100,000 | $ | 0.60 | October 30, 2013 | 100,000 | $ | 145,000 | |||||||||||||||
| 100,000 | $ | 1.00 | August 18, 2014 | 100,000 | $ | 145,000 | |||||||||||||||
John Leger |
60,000 | | $ | 0.75 | April 14, 2013 | | $ | | ||||||||||||||
| 60,000 | $ | 0.60 | October 30, 2013 | 60,000 | $ | 87,000 | |||||||||||||||
| 80,000 | $ | 1.00 | August 18, 2014 | 80,000 | $ | 116,000 |
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Potential Payments Upon Termination
Employment and Consulting Agreements
We have employment agreements with the Named Executive Officers and one additional employee. These
employment agreements provide for potential payments upon termination.
Director Compensation
As of September 30, 2009, the Company had one director, Mark A. Libratore, who does not receive any compensation as a
director.
How Compensation is Determined
The Company does not have a Compensation Committee. The Board of Directors determines the
compensation of the Companys Named Executive Officers. All other compensation is determined by the
Named Executive Officers on the basis of the value of an employee or a contracted service to the
Company. In addition, compensation by other companies of like size for comparable services and
other factors specific to each determination of compensation are taken into consideration. The
Companys compensation policy for its Named Executive Officers and managers is determined by the
financial results of the Company. Base salaries are supplemented by cash performance bonuses
determined by the Board of Directors in January of each year based on the prior year financial
results. The Board also recognizes that those Named Executive Officers and managers may also be
shareholders of the Company and accordingly who share in dividends paid by the Company from its
earnings.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plans
2007 Stock Plan
Our 2007 Stock Plan (the 2007 Plan) was adopted by our board of directors and was approved by our
stockholders at our annual stockholder meeting on September 10, 2008. Stock options, stock
appreciation rights, or SARs, stock awards and cash awards may be granted under the 2007 Plan. Each
is referred to as an award in the 2007 Plan. Options granted under the 2007 plan may be either
incentive stock options, as defined under Section 422 of the Internal Revenue Code of 1986, as
amended, or non-statutory stock options. The number of shares of common stock to be reserved and
available for awards under the 2007 Stock Plan (subject to certain adjustments as provided therein)
is 1,000,000.
On September 4, 2009, our stockholders approved an amendment to the 2007 Stock Plan that increases
the number of shares reserved and available for awards to 2,000,000.
The 2007 Plan is administered by the board of directors acting as a whole or by a delegated officer
or officers in certain instances. Awards under the 2007 plan may be granted to our employees,
directors and consultants. Incentive stock options may be granted only to our employees. The
administrator, in his discretion, approves awards granted under the 2007 Plan. Generally, if an
awardees service to us terminates other than by reason of death, disability, and retirement or for
cause, vested options and SARs will remain exercisable for a period of thirty days.
The plan terminates on September 13, 2017. In the event of a termination of service of a
participant or death of a participant, the award grant may provide for exercise within a reduced
period. Unless otherwise determined by the administrator, awards granted under the 2007 Plan are
not transferable other than by will, domestic relations order, or the laws of descent or
distribution may be exercised during the awardees lifetime only by the awardees.
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The administrator determines the exercise price of options at the time the options are granted. The
exercise price of an incentive stock option may not be less than 100% of the fair market value of
our Common Stock on the date of grant. The term of an option may not be more than ten years from
the date of grant. No option may be exercised after the expiration of its term. Any incentive stock
option granted to a ten percent stockholder may not have a term of more than five years. The
administrator may grant SARs alone, in addition to, or in tandem with, any other awards under the
plan. An SAR entitles the participant to receive the amount by which the fair market value of a
specified number of shares on the exercise date exceeds an exercise price established by the
administrator. The excess amount will be payable on ordinary shares, in cash or in a combination
thereof, as determined by the administrator. The terms and conditions of an SAR will be contained
in an award agreement. The grant of an SAR may be made contingent upon the achievement of objective
performance conditions.
The administrator may grant stock awards such as bonus stock, restricted stock or restricted stock
units. Generally, such awards will contain vesting features such that awards will either not be
delivered, or may be repurchased by us at cost, if the vesting requirements are not met. The
administrator will determine the vesting and shared delivery terms.
The following table presents details of Liberators equity compensation plan as of September 30,
2009:
Weighted- | ||||||||||||
Stock Options | Average Exercise | Shares Available | ||||||||||
Outstanding | Price per Share | To Grant | ||||||||||
2007 Employee Stock Incentive Plan |
1,580,000 | $ | 0.81 | 420,000 |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding ownership of shares of our common stock, as of
November 30, 2009:
| 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. |
27
Table of Contents
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 32,930,885 shares outstanding on November 30, 2009 plus 8,712,084
shares deemed outstanding pursuant to Rule 13d-3, for a total of 41,642,969 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: |
||||||||
Shaihesh C. Zaveri (1) |
2,085,342 | (2) | 5.01 | % | ||||
and Mayuri S. Zaveri 6559 N. Country Club Rd. Mattoon, IL 61938 |
||||||||
Millennium Partners, L.P.(3) |
3,260,158 | (4) | 7.83 | % | ||||
c/o Millennium Management LLC 666 Fifth Avenue, 8th Floor New York, NY 10103 |
||||||||
Directors and Executive Officers: |
||||||||
Mark A. Libratore |
19,663,867 | (5) | 47.22 | % | ||||
President and Chief Executive Officer and Director 2979 SE Gran Park Way Stuart, FL 34997 |
||||||||
Robert Davis, Chief Financial Officer |
301,000 | (6) | * | |||||
2979 SE Gran Park Way Stuart, FL 34997 |
||||||||
John Leger, Vice President, Operations |
175,000 | (7) | * | |||||
2979 SE Gran Park Way Stuart, FL 34997 |
||||||||
All directors and executive officers as a group (3 persons) |
20,139,867 | (8) | 48.36 | % |
* | Less than one percent (1%). | |
(1) | Information with respect to the reporting person is derived from a Schedule 13G/A filed with the SEC on behalf of the reporting person on February 13, 2008. | |
(2) | Includes 375,000 of our common stock issuable upon exercise of a warrant at an exercise price of $1.00 per share. | |
(3) | Millennium Management LLC, a Delaware limited liability company (Millennium Management), is the managing partner of Millennium Partners, L.P., a Cayman Islands exempted limited partnership (Millennium Partners), and the manager of Millenco LLC, a Delaware limited liability company (Millenco), and consequently may be deemed to have voting control and investment discretion over securities owned by Millennium Partners or Millenco. Israel A. Englander is the managing member of Millennium Management and as a result, Mr. Englander may be deemed to be the beneficial owner of any shares deemed to be beneficially owned by Millennium Management. The foregoing should not be construed in and of itself as an admission by Millennium Management or Mr. Englander as to beneficial ownership of the shares owned by Millennium Partners or Millenco. The foregoing information is derived from the reporting person and a Schedule 13D filed with the SEC on behalf of the reporting person on June 2, 2008. |
28
Table of Contents
(4) | Represents an aggregate of (i) 730,000 shares of our common stock held by Millenco, (ii) 4,375,000 shares of our common stock issuable upon conversion of an outstanding senior convertible note held by Millennium Partners in the original principal amount of $3,500,000, at an initial conversion price of $0.80 per share, subject to adjustment, which matures on May 22, 2010, (iii) 3,333,334 shares of our common stock issuable upon conversion of an outstanding senior convertible note held by Millennium Partners in the original principal amount of $2,500,000, at an initial conversion price of $0.75 per share, subject to adjustment, which matures on October 17, 2010, (iv) 4,375,000 shares of our common stock issuable upon exercise of a warrant held by Millennium Partners at an initial exercise price of $1.00 per share, subject to adjustment, which has a term of five years, and (v) 1,166,667 shares of our common stock issuable upon exercise of a warrant held by Millennium Partners at an initial exercise price of $1.25 per share, subject to adjustment, which has a term of three years; provided, however, that the number of shares of our common stock into which such senior convertible notes and warrants is limited pursuant to the terms of the senior convertible notes and the warrants to that number of shares of our common stock which would result in Millennium Partners (together with its affiliates) having aggregate beneficial ownership of not more than 9.99% of our total issued and outstanding common stock. Thus, as of November 30, 2009, Millennium Partners may be deemed to beneficially own 3,260,158 shares of our common stock, which represents approximately 9.99% of the outstanding shares of the issued and outstanding shares of our common stock as of such date and 7.83% of the outstanding beneficially owned shares as defined by Rule 13d-3 under the Securities Exchange Act of 1934. | |
(5) | Includes 4,021,009 shares underlying options exercisable by Mr. Libratore within 60 days of November 30, 2009. Does not include 90,000 shares underlying options that are not exercisable within 60 days of November 30, 2009. | |
(6) | Includes 125,000 shares underlying options exercisable, and 6,000 shares underlying warrants exercisable by Mr. Davis within 60 days of November 30, 2009. Does not include 175,000 shares underlying options that are not exercisable within 60 days of November 30, 2009. | |
(7) | Includes 75,000 shares underlying options exercisable by Mr. Leger within 60 days of November 30, 2009. Does not include 125,000 shares underlying options that are not exercisable within 60 days of November 30, 2009. | |
(8) | See Footnote Nos. (5) through (7) |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Mark Libratore, the President and Chief Executive Officer of both the Company and Liberator
Medical, has loans outstanding to Liberator Medical in the amount of $1,515,000 at September 30,
2009. These notes bear interest at an annual rate of eight percent (8%) or eleven percent (11%)
and, pursuant to the Companys acquisition of Liberator Medical, have been assumed by the Company.
The Companys obligations to Mr. Libratore are payable on demand and are not collateralized.
However, the notes are subordinated to the senior, unsecured, convertible notes payables discussed
below in Note 6. In July 2009, the senior note holders authorized repayment of $250,000 of the
outstanding stockholder loan. As of September 30, 2009, $150,000 of the authorized $250,000 had
been paid to Mr. Libratore. Subsequently, in October 2009, a $100,000 payment was made to Mr.
Libratore to against the outstanding stockholder loan.
29
Table of Contents
Item 14. Principal Accounting Fees and Services
The following table sets forth fees billed or estimated to be billed to the Company by the
Companys independent auditors for the years ended September 30, 2009 and 2008 for (i) services
rendered for the audit of the Companys annual financial statements and the review of the Companys
quarterly financial statements; (ii) services rendered that are reasonably related to the
performance of the audit or review of the Companys 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:
Fiscal Year ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Audit fees |
$ | 105,675 | $ | 110,800 | ||||
Audit related fees |
1,225 | 3,000 | ||||||
Tax fees |
21,525 | 28,075 | ||||||
All other fees |
| 264 | ||||||
Total fees |
$ | 128,425 | $ | 142,139 | ||||
The engagement of Berenfeld, Spritzer, Shechter & Sheer, Certified Public Accountants, as the
Companys independent registered public accounting firm for the Fiscal year ended September 30,
2009, was ratified and approved by the Board of Directors of the Company on September 4, 2009.
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:
Number | Description | |||
21.1 | Subsidiaries (1) |
|||
31.1 | Section 302 Certificate of Chief Executive Officer (1) |
|||
31.2 | Section 302 Certificate of Chief Financial Officer (1) |
|||
32.1 | Section 906 Certificate of Chief Executive Officer (1) |
|||
32.2 | Section 906 Certificate of Chief Financial Officer (1) |
(1) | Filed herewith. |
30
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant
has duly caused this Annual Report and any subsequent amendments thereto to be signed on its behalf
by the undersigned, thereunto duly authorized.
LIBERATOR MEDICAL HOLDINGS, INC. |
||||
Dated: December 17, 2009 | By: | /s/ Mark A. Libratore | ||
Mark A. Libratore, President, | ||||
Chief Executive Officer and Director | ||||
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by
the following persons in their respective capacities with the Registrant and on the dates
indicated.
Signatures | Titles | Date | ||
/s/ Mark A. Libratore
|
President, Chief Executive Officer and Director | December 17, 2009 | ||
/s/ Robert J. Davis
|
Chief Financial Officer | December 17, 2009 |
31
INDEX TO FINANCIAL STATEMENTS
F-1 | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 |
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Liberator Medical Holdings, Inc. and Subsidiaries
Liberator Medical Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Liberator Medical Holdings, Inc.
and Subsidiaries (the Company), as of September 30, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders equity, and cash flows for the years ended
September 30, 2009 and 2008 and the nine month period ended September 30, 2007. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements 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 audit to obtain a
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Liberator Medical Holdings, Inc. and Subsidiaries as
of September 30, 2009 and 2008, and the results of its operations and its cash flows for each of
the years in the two year period ended September 30, 2009 and the nine month period ended September
30, 2007 in conformity with accounting principles generally accepted in the United States of
America.
Berenfeld Spritzer Shechter & Sheer LLP
Certified Public Accountants
Fort Lauderdale, Florida
December 17, 2009
Certified Public Accountants
Fort Lauderdale, Florida
December 17, 2009
F-1
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2009 and 2008
(In thousands, except share and per share amounts)
Consolidated Balance Sheets
As of September 30, 2009 and 2008
(In thousands, except share and per share amounts)
2009 | 2008 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 3,798 | $ | 1,173 | ||||
Restricted cash |
500 | | ||||||
Accounts receivable, net of allowance for doubtful accounts of $2,327 and
$1,056, respectively |
3,850 | 2,405 | ||||||
Prepaid expenses |
59 | 321 | ||||||
Inventory, net of allowance for obsolete inventory of $110 and $50, respectively |
902 | 786 | ||||||
Deferred advertising, current portion |
2,016 | 770 | ||||||
Debt issuance costs, current portion |
347 | 316 | ||||||
Other |
77 | 2 | ||||||
Total Current Assets |
11,549 | 5,773 | ||||||
Property and Equipment |
||||||||
Property and Equipment, net of accumulated depreciation of $1,021 and $715,
respectively |
1,041 | 816 | ||||||
Other Assets |
||||||||
Deferred advertising, net of current portion |
1,739 | 660 | ||||||
Debt issuance costs, net of current portion |
7 | 177 | ||||||
Deposits |
123 | 100 | ||||||
Total Other Assets |
1,869 | 937 | ||||||
Total Assets |
$ | 14,459 | $ | 7,526 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 2,089 | $ | 900 | ||||
Accrued liabilities |
716 | 290 | ||||||
Stockholder loan |
1,515 | 1,665 | ||||||
Convertible notes payable, net of unamortized discount of $292 and $57,
respectively |
3,893 | 772 | ||||||
Capital lease obligations, current portion |
80 | 51 | ||||||
Deferred rent liability, current portion |
60 | 48 | ||||||
Total Current Liabilities |
8,353 | 3,726 | ||||||
Long-Term Liabilities |
||||||||
Convertible notes payable, net of unamortized discount of $90 and $749,
respectively |
2,447 | 2,789 | ||||||
Capital lease obligations, net of current portion |
70 | 82 | ||||||
Deferred rent liability, net of current portion |
165 | 214 | ||||||
Total Long-Term Liabilities |
2,682 | 3,085 | ||||||
Total Liabilities |
11,035 | 6,811 | ||||||
Stockholders Equity |
||||||||
Common stock, $.001 par value, 200,000,000 shares authorized, 32,462,311 and
32,050,366 shares issued at September 30, 2009 and 2008, respectively |
32 | 32 | ||||||
Additional paid-in capital |
11,705 | 11,177 | ||||||
Accumulated deficit |
(8,272 | ) | (10,494 | ) | ||||
3,465 | 715 | |||||||
Less: Treasury stock, at cost (85,600 shares) |
(41 | ) | | |||||
Total Stockholders Equity |
3,424 | 715 | ||||||
Total Liabilities and Stockholders Equity |
$ | 14,459 | $ | 7,526 | ||||
See accompanying notes to consolidated financial statements
F-2
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands, except per share amounts)
Consolidated Statements of Operations
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands, except per share amounts)
2009 | 2008 | 2007 | ||||||||||
Sales |
$ | 25,818 | $ | 9,550 | $ | 2,250 | ||||||
Cost of Sales |
9,050 | 3,439 | 951 | |||||||||
Gross Profit |
16,768 | 6,111 | 1,299 | |||||||||
Operating Expenses |
||||||||||||
Payroll, taxes and benefits |
5,406 | 2,685 | 1,365 | |||||||||
Advertising |
2,042 | 470 | 134 | |||||||||
Bad debts |
2,488 | 1,042 | 348 | |||||||||
Depreciation |
306 | 213 | 138 | |||||||||
General and administrative |
3,237 | 2,502 | 1,170 | |||||||||
Total Operating Expenses |
13,479 | 6,912 | 3,155 | |||||||||
Income (Loss) from Operations |
3,289 | (801 | ) | (1,856 | ) | |||||||
Other Income (Expense) |
||||||||||||
Forgiveness of debt |
| | 108 | |||||||||
Loss on sale of assets |
| | (3 | ) | ||||||||
Interest Expense |
(1,054 | ) | (520 | ) | (217 | ) | ||||||
Interest Income |
19 | 12 | | |||||||||
Total Other Income (Expense) |
(1,035 | ) | (508 | ) | (112 | ) | ||||||
Income (Loss) before Income Taxes |
2,254 | (1,309 | ) | (1,968 | ) | |||||||
Provision for Income Taxes |
32 | | | |||||||||
Net Income (Loss) |
$ | 2,222 | $ | (1,309 | ) | $ | (1,968 | ) | ||||
Basic earnings (loss) per share: |
||||||||||||
Weighted average shares outstanding |
32,128 | 31,768 | 27,265 | |||||||||
Earnings (loss) per share |
$ | 0.07 | $ | (0.04 | ) | $ | (0.07 | ) | ||||
Diluted earnings (loss) per share: |
||||||||||||
Weighted average shares outstanding |
43,620 | 31,768 | 27,265 | |||||||||
Earnings (loss) per share |
$ | 0.06 | $ | (0.04 | ) | $ | (0.07 | ) |
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity (Deficit)
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands, except share amounts)
Consolidated Statements of Changes in Stockholders Equity (Deficit)
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands, except share amounts)
Total | ||||||||||||||||||||||||
Common | Common | Paid in | Accumulated | Treasury | Stockholders | |||||||||||||||||||
Shares | Stock | Capital | Deficit | Stock | Equity (Deficit) | |||||||||||||||||||
Balance at December 31, 2006 |
21,724,084 | $ | 22 | $ | 4,989 | $ | (6,980 | ) | $ | | $ | (1,969 | ) | |||||||||||
Sale of common stock, prior to merger |
1,234,375 | 1 | 451 | 452 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
2,489,497 | 2 | 1,885 | 1,887 | ||||||||||||||||||||
Stockholders equity of Cardiff Communications,
Inc. at merger |
2,963,179 | 3 | 155 | (246 | ) | (88 | ) | |||||||||||||||||
Prior years retained earnings for Liberator Health
and Education Services, Inc. |
9 | 9 | ||||||||||||||||||||||
Debt conversion at offering |
75,000 | | 43 | 43 | ||||||||||||||||||||
Common stock issued for cash, net of costs |
720,629 | 1 | 565 | 566 | ||||||||||||||||||||
Common issued for services |
1,257,250 | 1 | 1,005 | 1,006 | ||||||||||||||||||||
Net loss |
(1,968 | ) | (1,968 | ) | ||||||||||||||||||||
Balance at September 30, 2007 |
30,464,014 | $ | 30 | $ | 9,093 | $ | (9,185 | ) | $ | | $ | (62 | ) | |||||||||||
Common stock issued for cash, net of costs |
1,236,352 | 1 | 660 | 661 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
50,000 | | 25 | 25 | ||||||||||||||||||||
Options issued to employees |
40 | 40 | ||||||||||||||||||||||
Warrants issued with convertible debt |
792 | 792 | ||||||||||||||||||||||
Intrinsic value of conversion rights issued with
convertible debt |
303 | 303 | ||||||||||||||||||||||
Warrants issued for services |
24 | 24 | ||||||||||||||||||||||
Common stock issued for services |
300,000 | 1 | 240 | 241 | ||||||||||||||||||||
Net loss |
(1,309 | ) | (1,309 | ) | ||||||||||||||||||||
Balance at September 30, 2008 |
32,050,366 | $ | 32 | $ | 11,177 | $ | (10,494 | ) | $ | | $ | 715 | ||||||||||||
Options issued to employees |
105 | 105 | ||||||||||||||||||||||
Warrants issued with convertible debt |
106 | 106 | ||||||||||||||||||||||
Intrinsic value of conversion rights issued with
convertible debt |
86 | 86 | ||||||||||||||||||||||
Common stock issued for interest on convertible debt |
171,945 | | 105 | 105 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
170,000 | | 85 | 85 | ||||||||||||||||||||
Common stock issued for services |
60,000 | | 31 | 31 | ||||||||||||||||||||
Common stock issued for exercise of warrants |
10,000 | | 10 | 10 | ||||||||||||||||||||
Purchase common treasury stock |
(85,600 | ) | (41 | ) | (41 | ) | ||||||||||||||||||
Net income |
2,222 | 2,222 | ||||||||||||||||||||||
Balance at September 30, 2009 |
32,376,711 | $ | 32 | $ | 11,705 | $ | (8,272 | ) | $ | (41 | ) | $ | 3,424 | |||||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands)
Consolidated Statements of Cash Flows
For the years ended September 30, 2009 and 2008 and for the nine months ended September 30, 2007
(In thousands)
2009 | 2008 | 2007 | ||||||||||
Cash flow from operating activities |
||||||||||||
Net Income (Loss) |
$ | 2,222 | $ | (1,309 | ) | $ | (1,968 | ) | ||||
Adjustments to reconcile net income (loss) to net cash
provide by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
2,172 | 663 | 251 | |||||||||
Equity based compensation |
420 | 739 | 264 | |||||||||
Bad debt expense |
2,488 | 1,042 | 348 | |||||||||
Non-cash interest related to convertible notes payable |
701 | 233 | | |||||||||
Amortization of non-cash debt issuance costs |
37 | 12 | | |||||||||
Inventory reserve |
60 | | 50 | |||||||||
Loss on disposal of assets |
| | 3 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(3,933 | ) | (2,963 | ) | 213 | |||||||
Prepaid expenses and other current assets |
(119 | ) | 23 | (64 | ) | |||||||
Inventory |
(176 | ) | (487 | ) | 9 | |||||||
Accounts payable |
1,189 | 501 | (97 | ) | ||||||||
Accrued expenses |
433 | 157 | 75 | |||||||||
Deferred rent |
(37 | ) | (42 | ) | 10 | |||||||
Deferred advertising |
(4,191 | ) | (1,567 | ) | (224 | ) | ||||||
Debt issuance costs |
446 | 128 | | |||||||||
Net Cash Flows Provided by (Used in) Operating
Activities |
1,712 | (2,870 | ) | (1,130 | ) | |||||||
Cash flows from investing activities |
||||||||||||
Purchase of property and equipment |
(441 | ) | (222 | ) | (18 | ) | ||||||
Purchase of certificates of deposit |
(500 | ) | | | ||||||||
Net Cash Flows Used in Investing Activities |
(941 | ) | (222 | ) | (18 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Proceeds from sale of stock |
| 762 | 641 | |||||||||
Broker commissions |
| (101 | ) | (180 | ) | |||||||
Proceeds from the exercise of warrants |
10 | | | |||||||||
Proceeds from convertible notes payable and long-term debt |
2,500 | 4,098 | 877 | |||||||||
Debt issuance costs |
(326 | ) | (577 | ) | | |||||||
Proceeds from employee stock purchase plan |
27 | | | |||||||||
Purchase of treasury stock |
(41 | ) | | | ||||||||
Payments of long-term debt and capital lease obligations |
(316 | ) | (94 | ) | (137 | ) | ||||||
Net Cash Flows Provided by Financing Activities |
1,854 | 4,088 | 1,201 | |||||||||
Net increase in cash |
2,625 | 996 | 53 | |||||||||
Cash at beginning of period |
1,173 | 177 | 124 | |||||||||
Cash at end of period |
$ | 3,798 | $ | 1,173 | $ | 177 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 319 | $ | 215 | $ | 194 | ||||||
Cash paid for income taxes |
21 | | | |||||||||
Supplemental schedule of non-cash investing and financing
activities: |
||||||||||||
Capital expenditures funded by capital lease borrowings |
$ | 91 | $ | 79 | $ | 25 | ||||||
Common stock issued for interest expense |
105 | | | |||||||||
Common stock issued for conversion of debt |
85 | | 1,930 |
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Consolidated Financial Statements
September 30, 2009
Notes To The Consolidated Financial Statements
September 30, 2009
Note 1 Nature of the Business
Corporate History
Liberator Medical Holdings, Inc., (We or the Company) was organized in December 1906 in the
State of Utah under the name Cardiff Mining & Milling Company. During the 1960s the Company
changed its name to Cardiff Industries, Inc. and sold its mining operations. During the next decade
the Company focused its operations on the television and radio industry. Consequently in 1980, the
Companys name was changed to Cardiff Communications, Inc. The Company changed its domicile to the
state of Nevada which was effective in 1999 and filed with the Secretary of State of Nevada in
2001. In June 2007 the Companys name was changed to Liberator Medical Holdings, Inc. The Company
has had no operations during the 10 years to June, 2007. On June 22, 2007, we completed the
acquisition of Liberator Medical Supply, Inc., a Florida corporation, located in Stuart, Florida
(LMS). The acquisition was consummated pursuant to an agreement entered into as of June 18, 2007,
whereby we agreed to merge our newly-created, wholly-owned subsidiary, Cardiff Merger, Inc., a
Florida corporation, with and into LMS, with LMS being the surviving entity as our wholly-owned
subsidiary. Under the terms of the merger agreement, we issued 25,447,956 restricted shares of our
common stock to the stockholders of LMS. We also agreed to issue to the then current holders of LMS
options and warrants exercisable to purchase restricted shares of the Companys common stock on
terms and conditions equivalent to the existing terms and conditions of the respective LMS options
and/or warrants. Also, we added LMSs President and Chief Executive Officer, Mark A. Libratore, to
our Board of Directors and appointed him our President and Chief Executive Officer. As a condition
of the merger agreement, the Companys former President, Rubin Rodriguez, returned 9,990,000 shares
to the Company for cancellation and, at closing of the acquisition, the Company issued 2,713,680
shares in exchange for debt. These 2,713,680 shares were issued without restrictive legend,
pursuant to Rule 144(K). Accordingly, upon completion of the acquisition the Company had 28,411,135
shares of common stock issued and outstanding.
Liberator Medical Supply, Inc. (LMS) was incorporated in the State of Florida in July 1999. LMS
is a provider of direct-to-consumer durable medical supplies primarily to seniors. On December 7,
2004, LMS changed its tax status from a Subchapter S corporation, where its profits, losses and
other tax items flow through to the stockholders, to a C corporation. About seventy-five percent of
LMSs revenue is derived from four product lines: Diabetes, Urological, Ostomy, and Mastectomy. LMS
provides a simple and reliable way for patients to obtain their supplies. LMSs employees
communicate directly with patients and their physicians regarding patients prescriptions and
supply requirements on a regular basis and LMS bills Medicare and third-party insurers on behalf of
the patients. LMS markets its products directly to consumers primarily through targeted media,
direct-response television advertising and direct-response print advertising to patients throughout
the United States. LMSs 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 LMSs operating platforms enable it 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.
The acquisition of LMS and its wholly owned subsidiary, Liberator Services Corporation (LSC), was
accounted for as a reverse acquisition. Although Liberator Medical Holdings, Inc., through its
wholly-owned subsidiary, Cardiff Merger, Inc. was the company that made the acquisition, LMS and
LSC were treated as the surviving company for accounting purposes. As a result, the accompanying
financial statements reflect the consolidated results of operations and cash flows of LMS and LSC
prior to June 22, 2007, and the financial position, results of operations, and cash flows of
Liberator Medical Holdings, Inc., LMS and LSC, from and after June 22, 2007.
The acquisition of LMS resulted in a change of control of Liberator Medical Holdings, Inc. As a
result of the reverse acquisition accounting treatment, LMS is deemed to be the acquiring company
for accounting purposes. Effective on the acquisition date of June 22, 2007, the Companys
consolidated balance sheet included the assets and liabilities of LMS and LSC and its consolidated
equity accounts were recapitalized to reflect the combined equity of Liberator Medical Holdings,
LMS and LSC.
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On August 20, 2007, the Company changed its fiscal year end from December 31 to September 30. The
change in fiscal year results from the reverse acquisition of LMS and LSC.
On July 15, 2008, the Company changed the name of LSC to Liberator Health and Education Services,
Inc. (LHE).
On April 13, 2009, the Company formed Liberator Health and Wellness, Inc., a wholly-owned
subsidiary of Liberator Medical Holdings, Inc. The new organization will focus primarily on
opportunities to expand our sales of medical supplies over the Internet.
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., and Liberator Health and Wellness,
Inc., its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include money market accounts and any highly
liquid debt instruments purchased with a maturity of three months or less.
Restricted Cash
The Company purchased a $500,000 certificate of deposit in September 2009, which is pledged as
security for the credit line facility described below in Note 8. This certificate matures in
September 2010 and bears interest at a rate of 1.242% per annum.
Accounts Receivable
The Company carries its trade accounts receivable at cost less an allowance for doubtful accounts.
Management closely monitors outstanding accounts receivable and charges the allowance account for
any balances that are determined to be uncollectible. On a periodic basis, the Company evaluates
its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary,
based on its history of past write-offs and collections and current credit conditions. As of
September 30, 2009 and 2008, the allowance for doubtful accounts was $2,327,000 and $1,056,000,
respectively.
The bad debts written off against the allowance for doubtful accounts for the years ended September
30, 2009 and 2008, and the nine months ended September 30, 2007 was $1,216,000, $290,000, and
$344,000, respectively.
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 obsolete inventory are recorded
for inventory considered to be in excess or obsolete.
Deferred Advertising Costs
In accordance with Accounting Standards Codification (ASC) Topic 340-20, Capitalized 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
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period by comparing the carrying amounts
of such assets to the probable remaining future net cash flows expected to result directly from
such advertising. Managements judgments include determining the period over which such net cash
flows are estimated to be realized. As of September 30, 2009 and 2008, respectively, $3,755,000 and
$1,430,000 of advertising costs were recorded as deferred advertising on the consolidated balance
sheets. For the years ended September 30, 2009 and 2008, and the nine months ended September 30
2007, $1,866,000, $449,000 and $113,000, respectively, of deferred advertising costs were amortized
and charged to expense.
Debt Issuance Costs
Costs associated with obtaining and closing loans 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 $345,000 and $633,000 were deferred during the years ended September 30,
2009 and 2008, respectively. Debt issuance costs amortized for the years ended September 30, 2009
and 2008 were $484,000 and $140,000, respectively. There were no deferred debt issuance costs
during the nine month period ended September 30, 2007.
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.
Revenue Recognition
The Company recognizes income from the sale of its medical products under two policies. First, the
sale of medical supplies or equipment from its retail store is recognized when the sale takes place
(Point of Sale). Generally, no Medicare or third party (private insurance) assignment is accepted
by the Company on these sales. Second, revenue is recognized under an assignment, which is the
amount Medicare or a private provider will allow the Company for a particular medical supply or
service. The Company will not record a sale of an assignment amount until all of the proper
documentation such as prescriptions, Certificate of Medical Need, etc., are received from the
patient or attended physician. When all documentation is received, the assignment amount is
credited to sales and an accounts receivable account due from the provider. Assignment sales are
usually recorded within five days of the order.
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, 2009 and 2008 and the nine month
period ended September 30, 2007 amounted to $912,000, $315,000, and $87,000, respectively. These
amounts are included in cost of sales on the accompanying consolidated statements of operations.
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.
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Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) and FSP FIN 48-1, which amended
certain provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with Accounting Standards Codification Topic 740
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the
Companys tax positions are more likely than not of being sustained upon audit based on the
technical merits of the tax position. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, and
disclosure. In connection with our adoption of FIN 48, we analyzed the filing positions in all of
the federal and state jurisdictions where we are required to file income tax returns, as well as
all open tax years in these jurisdictions. There was no impact on our consolidated financial
statements upon the adoption of FIN 48 on January 1, 2007. The Company did not have any
unrecognized tax benefits and there was no effect on the financial condition or results of
operations as a result of implementing FIN 48 or FSP FIN 48-1. In accordance with FIN 48, the
Company adopted the policy of recognizing penalties in selling, general, and administrative
expenses and interest, if any, related to unrecognized tax positions as income tax expense.
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 generally accepted accounting principles.
Actual results could differ from these estimates.
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.
Leases
In accordance with ASC Topic 840, 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. If the lease has an increasing rate over time
and/or is an operating lease, all leasehold incentives, rent holidays, or other incentives will be
considered in determining if a deferred rent liability is required. Leasehold incentives are
capitalized and depreciated over the initial term of the lease.
Recent Accounting Pronouncements
In September 2009, Accounting Standards Codification (ASC) became the source of authoritative
U.S. GAAP recognized by the Financial Accounting Standards Board (FASB) for nongovernmental
entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive
releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for
registrants. The discussion below includes the applicable ASC reference.
ASC Topic 815-10 Derivatives and Hedging (formerly SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities) was adopted by the Company effective January 2, 2009. The
guidance under Topic 815-10 changes the manner of presentation and related disclosures of the fair
values of derivative instruments and their gains and losses. The Company does not currently hold
derivative instruments and was not impacted by the adoption of this pronouncement.
The Company adopted ASC Topic 825-10 Financial Instruments (formerly, FASB Staff Position No. SFAS
107-1 and APB No. 28-1, Disclosures about the Fair Value of Financial Instruments), which requires
quarterly disclosure
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of information about the fair value of financial instruments within the scope of Topic 825-10. The
Company adopted this pronouncement effective April 1, 2009 with no material impact on its
consolidated financial statements.
In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures
(formerly FASB Staff Position No. SFAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly). The standard provides additional guidance for estimating fair value in accordance
with Topic 820-10-65 when the volume and level of activity for the asset or liability have
significantly decreased and includes guidance on identifying circumstances that indicate if a
transaction is not orderly. The Company adopted this pronouncement effective April 1, 2009 with no
material impact on its consolidated financial statements.
The Company adopted, ASC Topic 855-10 Subsequent Events (formerly SFAS 165, Subsequent Events)
effective April 1, 2009. This pronouncement changes the general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued.
In July 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 168 codified all previously issued accounting pronouncements, eliminating the
prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized
by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 Generally
Accepted Accounting Principles, is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of this pronouncement did not have a material
effect on the consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Measuring
Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an
active market for the identical liability is not available, an entity must measure fair value using
one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with
no material impact on its consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which
revises the existing multiple-element revenue arrangements guidance and changes the determination
of when the individual deliverables included in a multiple-element revenue arrangement may be
treated as separate units of accounting, modifies the manner in which the transaction consideration
is allocated across the separately identified deliverables and expands the disclosures required for
multiple-element revenue arrangements. The pronouncement is effective for financial statements
issued after December 31, 2010. The Company does not expect the pronouncement to have a material
effect on its consolidated financial statements.
NOTE 3 Property and Equipment
A summary of property and equipment at September 30, 2009 and 2008 is as follows (in thousands):
Estimated | September 30, | September 30, | ||||||||||
Life | 2009 | 2008 | ||||||||||
Leased equipment |
5 years | $ | 582 | $ | 491 | |||||||
Transportation equipment |
3 years | 95 | 95 | |||||||||
Warehouse equipment |
5 years | 56 | 7 | |||||||||
Office furniture |
5 years | 150 | 79 | |||||||||
Computer equipment |
3 years | 87 | 39 | |||||||||
Telephone equipment |
5 years | 33 | 31 | |||||||||
Rental equipment |
7 years | 18 | 18 | |||||||||
Web Site |
3 years | 6 | 6 | |||||||||
Server Software |
3 years | 130 | 93 | |||||||||
Training guides |
3 years | 3 | 3 | |||||||||
Leasehold improvements |
5 years | 889 | 648 | |||||||||
Signage |
3 years | 13 | 13 | |||||||||
Fixed assets under construction |
| 8 | ||||||||||
Total property and equipment |
2,062 | 1,531 | ||||||||||
Less: accumulated depreciation |
(1,021 | ) | (715 | ) | ||||||||
Property and equipment, net |
$ | 1,041 | $ | 816 | ||||||||
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The amounts charged to operations for depreciation and amortization for the years ended September
30, 2009 and 2008 and the nine month period ended September 30, 2007 were $306,000, $213,000, and
$138,000, respectively.
NOTE 4 Deposits
Deposits at September 30, 2009 and 2008 consist of the following (in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Deposits on leased equipment |
$ | 9 | $ | 11 | ||||
Building rent deposits |
67 | 61 | ||||||
Utility deposits |
9 | 6 | ||||||
Deposits on software development |
25 | 13 | ||||||
Deposits for building expansion |
3 | | ||||||
Deposits for professional fees |
10 | | ||||||
Deposit on catalog printing |
| 9 | ||||||
Total deposits |
$ | 123 | $ | 100 | ||||
NOTE 5 Stockholder Loan
The stockholder loan at September 30, 2009 and 2008 in the amounts of $1,515,000 and $1,665,000,
respectively, consist of various 8% and 11% notes payable to the President and principal
stockholder of the Company, Mark Libratore. The notes payable are non-collateralized and due on
demand. However, the notes are subordinated to the senior, unsecured, convertible notes payables
discussed below in Note 6. In July 2009, the senior note holders authorized repayment of $250,000
of the outstanding stockholder loan. As of September 30, 2009, $150,000 of the authorized $250,000
had been paid to Mr. Libratore. Interest expense related to the stockholder loan for the years
ended September 30, 2009 and 2008 and the nine months ended September 30, 2007 were $150,000,
$153,000, and $115,000, respectively.
NOTE 6 Convertible Notes Payable
April 2008 Convertible Notes
On April 11, 2008, the Company closed a private placement consisting of convertible notes and
warrants for $804,000, of which $598,000 was cash proceeds and $206,000 was prior year debt
exchanged for the convertible notes. The notes are convertible into shares of our common stock at
an initial conversion price of $0.50 per share, subject to adjustment, and mature one year after
issuance. The notes are senior unsecured obligations of our Company and accrue interest at an
annual rate of twelve percent (12%) per annum, payable at maturity. The warrants have a term of
five years and are exercisable from the date of their issuance until their expiration at a price of
$1.00 per share. In addition, we issued a warrant to the placement agent exercisable for up to
51,000 shares of our common stock on terms substantially similar to the warrant issued in
connection with the note described above.
As of September 30, 2009, $110,000 of the notes has been converted into 220,000 shares of the
Companys common stock and $93,000 of the notes has been redeemed for cash. The maturity dates for
the remaining $601,000 of notes were extended for one year from the original date of maturity. The
maturity dates and amounts for the outstanding notes as of September 30, 2009 are as follows (in
thousands):
Amount Due | ||||
February 2010 |
$ | 263 | ||
March 2010 |
50 | |||
April 2010 |
288 | |||
Total April 2008 Convertible Notes Due |
$ | 601 | ||
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Interest expense related to the April 2008 convertible notes was $83,000 and $50,000 for the years
ended September 30, 2009 and 2008, respectively.
May 2008 Convertible Note
On May 22, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $3,500,000. The note is convertible into shares of our common stock
at an initial conversion price of $0.80 per share, subject to adjustment, and matures on May 22,
2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3% per
annum, paid semi-annually on each November 15 and May 15. The note is unconditionally guaranteed by
Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of
the note will be reduced if, among other things, we issue shares of common stock or securities
exercisable, exchangeable or convertible for or into shares of common stock (common stock
equivalents) at a price per share less than both the conversion price then in effect and $0.75,
subject to certain exclusions. The warrants have a term of 5 years and are exercisable for up to
4,375,000 shares of our common stock at an exercise price of $1.00 per share, subject to
adjustment. The exercise price of the warrants will be reduced if, among other things, we issue
shares of our common stock or common stock equivalents at a price per share less than both the
exercise price then in effect and the closing sale price of our common stock for any of the 10
consecutive trading days immediately preceding such issuance, subject to certain exclusions. In
addition, we issued a warrant to the placement agent exercisable for up to 350,000 shares of our
common stock on terms substantially similar to the warrant issued in connection with the note
described above.
Interest expense related to the May 2008 convertible notes was $105,000 and $38,000 for the years
ended September 30, 2009 and 2008, respectively.
October 2008 Convertible Note
On October 17, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $2,500,000. The note is convertible into shares of our common stock
at an initial conversion price of $0.75 per share, subject to adjustment, and matures on October
17, 2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3%
per annum, paid semi-annually on each October 15 and April 15. The note is unconditionally
guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The
conversion price of the note will be reduced if, among other things, we issue shares of common
stock or securities exercisable, exchangeable or convertible for or into shares of common stock
(common stock equivalents) at a price per share less than both the conversion price then in
effect and $0.75, subject to certain exclusions. The warrants have a term of 3 years and are
exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share,
subject to adjustment. The exercise price of the warrants will be reduced if, among other things,
we issue shares of our common stock or common stock equivalents at a price per share less than both
the exercise price then in effect and the closing sale price of our common stock for any of the 10
consecutive trading days immediately preceding such issuance, subject to certain exclusions. In
addition, we issued a warrant to the placement agent exercisable for up to 266,667 shares of our
common stock on terms substantially similar to the warrants issued in connection with the note
described above.
Interest expense related to the October 2008 convertible note was $72,000 for the year ended
September 30, 2009.
In May 2009, the Company entered into Waiver Agreements with the note holder of the May 2008 and
October 2008 convertible notes discussed above. As part of the Waiver Agreements, the note holder
agreed to accept 171,945 shares of the Companys common stock, with a fair market value of
$105,000, in lieu of the Companys obligation to pay cash in the amount of $86,000 for interest
payments that were due April 15, 2009 and May 15, 2009 under the original terms of the notes. As a
result of this transaction, the Company incurred an additional $19,000 of interest expense that
would not have been incurred if the Company had paid the interest due in cash. The rights and
obligations of the note holder and the Company with respect to any future interest payments and the
other terms of the notes are in all other respects unchanged.
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Short-term convertible notes payable consist of the following as of September 30, 2009 (in
thousands):
April08 Notes | May08 Note | Totals | ||||||||||
Notes Payable, face amount |
$ | 601 | $ | 3,500 | $ | 4,101 | ||||||
Discounts on Notes: |
||||||||||||
Valuation of Warrants |
(126 | ) | (610 | ) | (736 | ) | ||||||
Intrinsic Value of Conversion Rights |
| (303 | ) | (303 | ) | |||||||
Accumulated Amortization |
126 | 621 | 747 | |||||||||
Total Discounts |
| (292 | ) | (292 | ) | |||||||
Accrued Interest |
40 | 44 | 84 | |||||||||
Convertible Notes Payable, net |
$ | 641 | $ | 3,252 | $ | 3,893 | ||||||
Short-term Convertible notes payable consist of the following at September 30, 2008 (in thousands):
April08 Notes | ||||
Notes Payable, face amount |
$ | 779 | ||
Discounts on Notes: |
||||
Valuation of Warrants |
(126 | ) | ||
Accumulated Amortization |
69 | |||
Total Discounts |
(57 | ) | ||
Accrued Interest |
50 | |||
Convertible Notes Payable, net |
$ | 772 | ||
Long-term Convertible notes payable consist of the following at September 30, 2009 (in thousands):
Oct08 Note | ||||
Notes Payable, face amount |
$ | 2,500 | ||
Discounts on Notes: |
||||
Valuation of Warrants |
(86 | ) | ||
Intrinsic Value of Conversion Rights |
(86 | ) | ||
Accumulated Amortization |
82 | |||
Total Discounts |
(90 | ) | ||
Accrued Interest |
37 | |||
Convertible Notes Payable, net |
$ | 2,447 | ||
Long-term Convertible notes payable consist of the following at September 30, 2008 (in thousands):
May08 Note | ||||
Notes Payable, face amount |
$ | 3,500 | ||
Discounts on Notes: |
||||
Valuation of Warrants |
(610 | ) | ||
Intrinsic Value of Conversion Rights |
(303 | ) | ||
Accumulated Amortization |
164 | |||
Total Discounts |
(749 | ) | ||
Accrued Interest |
38 | |||
Convertible Notes Payable, net |
$ | 2,789 | ||
NOTE 7 Capital Lease Obligations
Capital lease obligations include eleven capitalized leases with interest rates ranging from 8.4%
to 28.4%. The combined monthly payments of principal and interest are $9,000. The amount of
equipment and furniture capitalized under the capital leases was $289,000. Accumulated
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depreciation
recorded for the equipment and furniture under
capital leases as of September 30, 2009 is $132,000. The payment terms of the capital leases expire
between August 2010 and May 2012.
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, 2009 (in thousands):
Amount | ||||
Year ending September 30: |
||||
2010 |
$ | 100 | ||
2011 |
63 | |||
2012 |
13 | |||
Total minimum lease payments |
176 | |||
Less: Interest on capitalized lease obligations |
(26 | ) | ||
Present value of capitalized lease obligations |
150 | |||
Less: Current portion |
(80 | ) | ||
Capitalized lease obligations, net of current portion |
$ | 70 | ||
Interest expense on capitalized leases was $28,000 and $27,000 for years ended September 30, 2009
and 2008, respectively, and $21,000 for the nine months ended September 30, 2007.
NOTE 8 Credit Line Facility
On September 4, 2009, the Company entered into a one-year Business Loan Agreement, Promissory Note
and Assignment of Deposit (collectively, the Credit Line Facility) with a lender. Pursuant to
the Credit Line Facility, the lender has agreed to advance the Company a maximum of Five Hundred
Thousand Dollars ($500,000) secured by the Companys $500,000 certificate of deposit held by the
lender. Interest is payable on any advance under the Credit Line Facility at a rate of 1.000
percentage point under the corporate loan base rate index published by the Wall Street Journal,
with a minimum interest rate of 4.750% per annum.
As of September 30, 2009, the Company had no outstanding balance under the Credit Line Facility.
NOTE 9 Stockholders Equity
Warrants
The Company issued warrants to the stockholders of LMS to purchase 2,818,092 shares of the
Companys common stock in conjunction with the merger discussed above in Note 1. The
weighted-average exercise price for these warrants is $0.98 per share. As of September 30, 2009,
200,000 of these warrants have expired and 10,000 of these warrants have been exercised. The
expiration dates of the remaining warrants are as follows:
Shares | Expiration Date | |
7,188
|
April 2010 | |
31,250 | May 2010 | |
2,194,654 | June 2010 | |
337,500 | July 2010 | |
12,500 | August 2010 | |
25,000 | November 2010 |
From July 2007 to January 2008, in connection with sales of the Companys common stock, the Company
issued warrants to purchase an additional 686,667 shares of the Companys common stock at a
weighted-average exercise price of $1.40 per share. As of September 30, 2009, none of these
warrants have been exercised. These warrants will expire as follows:
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Shares | Expiration Date | |
25,000 | July 2010 | |
234,375 | August 2010 | |
75,625 | September 2010 | |
169,167 | October 2010 | |
145,000 | November 2010 | |
31,250 | December 2010 | |
6,250 | January 2011 |
In November 2007, the Company issued warrants to purchase 125,000 shares of the Companys common
stock at an exercise price of $2.00 per share as compensation for consulting services. These
warrants are still outstanding as of September 30, 2009 and expire in November 2012. The fair value
of these warrants of $24,000 was determined using the Black-Scholes option pricing model with the
assumptions listed below:
Risk-free interest rate: |
4.11 | % | ||
Expected term: |
5 years | |||
Expected dividend yield: |
0.00 | |||
Expected volatility: |
27.97 | % |
In connection with the April 2008 Convertible Notes discussed above in Note 6, the Company issued
warrants to purchase 829,000 shares of the Companys common stock at an exercise price of $1.00 per
share to the note holders and 51,000 shares of the Companys common stock at an exercise price of
$1.00 per share to the placement agent. As of September 30, 2009, none of these warrants have been
exercised. These warrants will expire as follows:
Shares | Expiration Date | |
263,000
|
February 2013 | |
100,000 | March 2013 | |
517,000 | April 2013 |
The fair value of these warrants of $126,000 and $7,000, respectively, was determined using the
Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate: |
Range of 2.39% to 2.93% | |||
Expected term: |
5 years | |||
Expected dividend yield: |
0.00 | |||
Expected volatility: |
27.97 | % |
In connection with the convertible note payable issued in May 2008 and discussed above in Note 6,
the Company issued warrants to purchase 4,375,000 shares of the Companys common stock at an
exercise price of $1.00 per share to the note holder and 350,000 shares of the Companys common
stock at an exercise price of $1.00 per share to the placement agent. These warrants are still
outstanding as of September 30, 2009 and expire in May 2013. The fair value of these warrants of
$610,000 and $49,000, respectively, was determined using the Black-Scholes option pricing model
with the assumptions listed below:
Risk-free interest rate: |
3.24 | % | ||
Expected term: |
5 years | |||
Expected dividend yield: |
0.00 | |||
Expected volatility: |
27.97 | % |
In connection with the convertible notes payable issued in October 2008 and discussed above in Note
6, the Company issued warrants to purchase 1,166,667 shares of the Companys common stock at an
exercise price of $1.25 per share to the note holders and 266,667 shares of the Companys common
stock at an exercise price of $1.25 per share to the placement agent. These warrants are still
outstanding as of September 30, 2009, and expire in October 2011. The fair value of these warrants
of $86,000 and $20,000, respectively, was determined using the Black-Scholes option pricing model
with the assumptions listed below:
Risk-free interest rate: |
1.90 | % | ||
Expected term: |
3 years | |||
Expected dividend yield: |
0.00 | % | ||
Expected volatility: |
35.19 | % |
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Table of Contents
A summary of warrants issued, exercised and expired during the year ended September 30, 2009, is as
follows:
# of Shares | ||||
Balance at September 30, 2008 |
9,234,759 | |||
Issued |
1,433,334 | |||
Exercised |
(10,000 | ) | ||
Expired |
(200,000 | ) | ||
Balance at September 30, 2009 |
10,458,093 | |||
Options
Prior to the merger discussed above in Note 1, LMS was primarily funded from operating revenues and
from loans made by the Companys founder, principal shareholder and President, Mark Libratore, in
the amount of $3,254,000. Of that amount, Mr. Libratore converted $1,589,000 into paid-in capital
of LMS. In connection with Mr. Libratores conversion of $1,589,000 of debt to equity and under the
terms of the Private Placement and Merger Agreement, Mr. Libratore received and exercised 620,000
options in March 2007 and beginning on June 1, 2007, 356,455 options monthly until a total number
of 4,541,009 options are received. The exercise price of the options is $0.0001. As of September
30, 2009, a total of 3,921,009 were outstanding. All previous agreements between the Company and
Mr. Libratore relating to the conversion of debt to equity were rescinded. There can be no
assurance that the terms of such loans, including the terms of conversion of loans into Common
Stock and the options granted by Mr. Libratore on conversion, are those that could have been
obtained in a transaction among unrelated parties. The Company has agreed to honor the agreement
and issue options in the same amount and manner as LMS had agreed to.
Employee Stock Options
On September 14, 2007 the Board of Directors adopted the Companys 2007 Stock Plan with an
aggregate of 1,000,000 shares of the Companys unissued common stock. The Plan was approved by the
shareholders at the Companys 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 Companys board of directors or the
committee overseeing the 2007 Stock Plan.
On February 6, 2008, the Board of Directors of the Company approved a grant of 230,000 stock
options to employees with an exercise price of $0.75 per share. This was the initial grant made by
the board of directors of the 2007 Stock Plan.
On April 15, 2008, the Board of Directors of the Company approved a grant of 160,000 stock options
to employees with an exercise price of $0.75 per share and 100,000 stock options to an employee
with an exercise price of $0.825 per share. This grant was made to employees not granted stock
options on February 6, 2008.
On October 30, 2008, the Board of Directors of the Company approved a grant of 480,000 stock
options under the 2007 Stock Plan to employees with an exercise price of $0.60 per share. The
options vest 25% on October 1, 2009, 25% on April 1, 2010, 25% on October 1, 2010, and 25% on April
1, 2011.
On July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock
Plan to increase the number shares authorized under the plan from 1,000,000 to 2,000,000 shares.
The amendment was approved at the Companys annual shareholders meeting on September 4, 2009.
On August 18, 2009, the Board of Directors of the Company approved a grant of 530,000 stock options
to employees with an exercise price of $1.00 per share and 90,000 stock options to an employee with
an exercise price
F-16
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of $1.10 per share. The options vest 25% on January 1, 2010, 25% on July 1, 2010, 25% on January 1,
2011, and 25% on July 1, 2011.
A summary of the employee stock options outstanding under the plan as of September 30, 2009, and
activity for the year then ended is as follows:
Weighted | ||||||||||||
Avg. | Aggregate | |||||||||||
Exercise | Intrinsic | |||||||||||
2007 Plan Employee Stock Options: | Shares | Price | Value | |||||||||
Options outstanding, beginning of year |
490,000 | $ | 0.77 | |||||||||
Granted |
1,100,000 | 0.83 | ||||||||||
Exercised |
| | ||||||||||
Expired or forfeited |
(10,000 | ) | 0.75 | |||||||||
Options outstanding, end of year |
1,580,000 | $ | 0.81 | $ | 611,500 | |||||||
Options exercisable, end of year |
480,000 | $ | 0.77 | $ | 208,500 | |||||||
On September 14, 2007 the Company adopted the provisions of ASC Topic 718, Compensation Stock
Compensation, which requires the Company to recognize expense related to the fair value of
stock-based compensation awards. The Company elected the modified prospective transition method as
permitted by Topic 718, under which stock-based compensation for the years ended September 30, 2009
and 2008 is based on grant date fair value estimated in accordance with the provisions of Topic 718
and compensation expense for all stock-based compensation awards granted subsequent to January 1,
2006, as well as the unvested portion of previously granted awards that remained outstanding as of
January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of
Topic 718.
The fair values of share-based payments are estimated on the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the years ended September
30, 2009 and 2008:
2009 | 2008 | |||||||
Risk-free interest rate: |
1.68 | % | 2.77 | % | ||||
Expected term: |
3 years | 3 years | ||||||
Expected dividend yield: |
0 | % | 0 | % | ||||
Expected volatility: |
57.32 | % | 27.97 | % |
For the years ended September 30, 2009 and 2008 and the nine months ended September 30, 2007,
respectively, the Company recorded $86,000, $40,000, and $0 of stock-based compensation expense
which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits.
As of September 30, 2009, there is $334,000 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 1.75 years.
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (the ESPP) became effective June 10, 2009, the effective
date of the registration statement filed on Form S-8 with the SEC. The ESPP provides a means by
which employees of the Company are given an opportunity to purchase common stock of the Company
through payroll deductions. The maximum number of shares to be offered under the ESPP is 500,000
shares of the Companys common stock, subject to changes authorized by the Board of Directors of
the Company. Shares are offered through consecutive offering periods with durations of
approximately six (6) months, commencing on the first trading day on or after June 1st
and November 30th of each year and terminating on the last trading day before the
commencement of the next offering period. The ESPP is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code. The ESPP allows
employees to designate up to 15% of their cash compensation to purchase shares of the Companys
common stock at 85% of the lesser of the fair market value at the beginning of the offering period
or the exercise date, which is the last trading day of the offering period. Employees who own
stock possessing 5% or more of the total combined voting power or value of all classes of the
Companys common stock are not eligible to participate in the ESPP.
F-17
Table of Contents
The first offering period of the ESPP commenced on June 10, 2009 and will end on November 30, 2009.
As of September 30, 2009 no shares of the Companys common stock have been purchased through the
ESPP. As of September 30, 2009, the Company has received $27,000 through payroll deductions under
the ESPP.
The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares
expected to be issued under the ESPP at the grant date, the beginning date of the offering period,
and recognizes compensation expense ratably over the offering period. As of September 30, 2009,
the Company has recognized $19,000 of compensation expense related to the first offering period.
Sale of Common Stock
On July 12, 2007, the Board of Directors of the Company authorized a private offering at a price of
$0.80 per share of 2,500,000 restricted shares of common stock, $0.001 par value, of the Company
and 1,250,000 warrants for the purchase of restricted shares of common stock, $0.001 par value, of
the Company. The subscriber will receive, in payment of the subscription price of the shares, the
number of shares subscribed and one warrant for each two (2) shares subscribed. The warrants are
exercisable from the date of their issuance for a period ended three (3) years thereafter at a
price of $1.60 per share. As of September 30, 2009, the Company had sold 1,785,981 shares of common
stock. Proceeds for year ended September 30, 2008 was $787,000 and for the nine month period ended
September 30, 2007 was $641,000.
NOTE 10 Basic and Diluted Earnings (Loss) 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 indicated (in thousands, except per share
amounts):
2009 | 2008 | 2007 | ||||||||||
Numerator: |
||||||||||||
Net income (loss) basic |
$ | 2,222 | $ | (1,309 | ) | $ | (1,968 | ) | ||||
Effect of dilutive securities: |
||||||||||||
Convertible debt |
196 | | | |||||||||
Net income (loss) diluted |
$ | 2,418 | $ | (1,309 | ) | $ | (1,968 | ) | ||||
Denominator: |
||||||||||||
Weighted average shares outstanding basic |
32,128 | 31,768 | 27,265 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
3,939 | | | |||||||||
Convertible debt |
7,553 | | | |||||||||
Weighted average shares outstanding diluted |
43,620 | 31,768 | 27,265 | |||||||||
Earnings per share basic |
$ | 0.07 | $ | (0.04 | ) | $ | (0.07 | ) | ||||
Earnings per share diluted |
$ | 0.06 | $ | (0.04 | ) | $ | (0.07 | ) |
The following tables summarize the number of weighted shares outstanding for each of the periods
presented, but not included in the calculation of diluted income (loss) per share because the
impact would have been anti-dilutive and/or the conversion price of the securities was greater than
the average market price of our common stock for the fiscal years indicated (in thousands):
2009 | 2008 | 2007 | ||||||||||
Stock options |
1,580 | 4,411 | 3,921 | |||||||||
Warrants |
10,458 | 9,235 | 3,084 | |||||||||
Convertible Debt |
1,203 | 5,933 | | |||||||||
Totals |
13,241 | 19,579 | 7,005 | |||||||||
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Table of Contents
NOTE 11 Income Taxes
The Company had a net income tax provision for the fiscal year ended September 30, 2009 of
approximately $32,000. Although the Company had net operating losses carryforwards which
completely offset its regular taxable income, the Company incurred alternative minimum tax on its
net alternative minimum taxable income. For the year ended September 30, 2009, the Company had
$4.9 million of federal net operating losses carryforwards and $4.7 million of Florida net
operating losses which expire in 2028 and which are fully reserved. In addition, the Company does
not have any net operating loss carrybacks. As a result, the Company was unable to recognize an
income tax benefit for the fiscal year ended September 30, 2009.
Actual income tax expense (benefit) differs from the amount calculated using the Federal statutory
tax rate of 35% for the fiscal year ended September 30, 2009 as follows (dollars in thousands):
Amount | Rates | |||||||
Computed expected federal income tax (benefit) |
$ | 789 | 35.0 | % | ||||
State tax (benefit), net of federal provision (benefit) |
108 | 4.8 | % | |||||
True-up of prior year differences |
121 | 5.3 | % | |||||
Change in valuation allowance |
(1,060 | ) | (47.0 | %) | ||||
Nondeductible expenses |
74 | 3.3 | % | |||||
Total income tax expense (benefit) |
$ | 32 | 1.4 | % | ||||
Significant components of the Companys deferred tax assets (liabilities) are as follows (dollars
in thousands):
September 30, | ||||
2009 | ||||
Deferred tax assets current: |
||||
Allowance for bad debts |
$ | 898 | ||
Inventory reserve |
42 | |||
Deferred expenses |
7 | |||
Accrued expenses |
55 | |||
Deferred tax assets current |
1,002 | |||
Less: Valuation allowance |
(1,002 | ) | ||
Net deferred tax assets current |
| |||
Deferred tax assets non-current: |
||||
Net operating loss carryforwards |
1,874 | |||
Amortization of value of warrants |
320 | |||
Minimum tax credit carryforward |
32 | |||
Deferred tax assets non-current |
2,226 | |||
Less: Valuation allowance |
(771 | ) | ||
Net deferred tax assets non-current |
1,455 | |||
Deferred tax liability non-current: |
||||
Deferred advertising |
1,449 | |||
Property, plant and equipment |
6 | |||
Deferred tax liability non-current |
1,455 | |||
Net deferred tax liability non-current |
| |||
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Table of Contents
In assessing the ability to realize a portion of the deferred tax assets, management considers
whether it is more than 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 valuation allowance of deferred tax assets as
of September 30, 2009 was $1.8 million. The decrease in the valuation allowance was approximately
$1.1 million for the year ended September 30, 2009, primarily due to the utilization of prior year
carryforward losses.
NOTE 12 Related Party Transactions
In addition to the stockholder loan discussed above in Note 5, three stockholders loaned LMS
$45,000 during 2007, which was repaid by LMS during 2007.
NOTE 13 Commitments
The Company leases property and telephone equipment under operating leases that expire at various
times through June 2014. Future minimal rental commitments under non-cancelable operating leases
with terms in excess of one year as of September 30, 2009 are as follows (in thousands):
Amount | ||||
Year ending September 30: |
||||
2010 |
$ | 470 | ||
2011 |
492 | |||
2012 |
439 | |||
2013 |
94 | |||
2014 |
71 | |||
$ | 1,566 | |||
Rent expense for the years ended September 30, 2009 and 2008 and nine month period ended September
30, 2007 was $496,000, $403,000, and $292,000, respectively.
NOTE 14 401(K) Plan
The Company instituted a 401(K) Plan in early 2007. The Company at its sole discretion may
contribute to each participants account a percentage of the participants effective deferral. The
matching contribution, if any, will be determined at the end of the Plan year. There is no current
intent to do so at this time.
Employees with one year of service can elect to defer a minimum of 1% and the greater of a maximum
of 90% of their annual wages or the maximum dollar amount allowed by law into the plan. The vesting
schedule for the employees matching portion is based upon a graded vesting schedule.
NOTE 15 Concentration of Credit Risk
From time to time, the Company has cash and/or certificate of deposits 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 or
certificates of deposit. Cash and certificates of deposit exceeding federally insured limits
amounted to $2,796,000 as of September 30, 2009.
NOTE 16 Subsequent Events
The Company has evaluated subsequent events through the time it filed its annual report on Form
10-K on December 17, 2009.
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Table of Contents
On October 13, 2009, the Company entered into a three year operating lease for an additional 24,000
square feet of office space. In addition, the Company entered into a five year operating lease for
telephone equipment for the new location. As a result of the new operating leases, the future
minimal rental commitments under non-cancelable operating leases with terms in excess of one year
increase as follows (in thousands):
Amount | ||||
Year ending September 30: |
||||
2010 |
$ | 77 | ||
2011 |
155 | |||
2012 |
155 | |||
2013 |
52 | |||
2014 |
52 | |||
2015 |
9 | |||
$ | 500 | |||
On October 29, 2009, Joseph D. Farish, Jr. was appointed to the Board of Directors of the Company.
As compensation for his services as a director, Mr. Farish will receive an annual fee of $10,000,
payable quarterly, and an option, vesting over two years, to purchase 50,000 shares of common stock
at $2.35 per share.
On November 2, 2009, the Company entered into a revised Credit Line Facility with the same lender
discussed above in Note 8. Under the revised loan agreement, the lender has agreed to advance the
Company a maximum of One Million Dollars ($1,000,000) secured by the Companys existing $500,000
certificate of deposit held by the lender plus an additional $550,000 certificate of deposit to be
held by the lender. The revised Credit Line Facility expires on September 8, 2010. All other
terms of the September 4, 2009 Credit Line Facility remain unchanged.
On December 3, 2009, Robert Cuillo was appointed to the Board of Directors of the Company. As
compensation for his services as a director, Mr. Cuillo will receive an annual fee of $10,000,
payable quarterly, and an option, vesting over two years, to purchase 50,000 shares of common stock
at $2.18 per share.
F-21