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EX-31.1 - EX-31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv31w1.htm |
EX-21.1 - EX-21.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv21w1.htm |
EX-32.1 - EX-32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv32w1.htm |
EX-31.2 - EX-31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv31w2.htm |
EX-32.2 - EX-32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv32w2.htm |
EX-23.1 - EX-23.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g25783exv23w1.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, 2010
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 (State or other jurisdiction of incorporation or organization) |
87-0267292 (I.R.S. Employer Identification No.) |
2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices)
(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 þ
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 þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No 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. þ
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 þ | |||
(Do not check if a smaller reporting company) |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
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, 2010, was approximately
$40,432,453.
The number of shares outstanding of the issuers Common Stock as of January 11, 2011, was
47,995,600.
LIBERATOR MEDICAL HOLDINGS, INC.
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FORWARD-LOOKING STATEMENTS
Some of the information contained in this Report constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide
current expectations of future events based on certain assumptions and include any statement that
does not directly relate to any historical or current fact. When used in this 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, Liberator Health and Wellness, Inc., and Practica
Medical Manufacturing, 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 issued 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.
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
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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, print, and
Internet advertising, throughout the United States. Its customer service representatives are
specifically trained to communicate with patients, in particular seniors, helping them to follow
their doctors orders and manage their chronic diseases. 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 is expected to nearly double to $4.6 trillion by 2019, up from $2.3
trillion in 2008, according to the Centers for Medicare and Medicaid Services (CMS). As the baby
boomer population ages, the already flourishing medical supply industry is poised to experience a
20-year explosion in growth.
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 almost 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.
According to the 2010 BCC Research report, the diabetes market size is approximately $38 billion
and expected to increase to $51.2 billion in 2015. 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
|
Not Available | Not Available | $4.4 billion* | |||
Diabetes
|
>18 million | >6 million | $38 billion ** | |||
Mastectomy
|
>3.2 million | Not Available | $1.1 billion *** | |||
Ostomy
|
> 600,000 | Not Available | $1.2 billion *** | |||
Total
|
>21.8 million | >6 million | $44.7 billion | |||
* | BCC Research, 2009 | |
** | BCC Research, 2010 | |
*** | Center for Disease Control 2005 |
Sales and Marketing
The Company focuses on making the buying process easy and convenient. Customers can purchase by
phone, mail, or over the Internet. This produces an annuity-like revenue stream with a high return
on advertising dollars.
Our growth will depend upon the success of our advertising campaigns. Management believes that
it has developed a method of capturing initial and recurring sales through use of local, regional
and
national ad placement.
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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
Urological
Over the last three 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.
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 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.
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.
Litigation
From time to time, we are party to certain legal proceedings that arise in the ordinary course and
are incidental to our business. There are currently no such pending proceedings to which we are a
party that our management believes will have a material adverse effect on the Companys
consolidated financial position or results of operations. However, future events or circumstances,
currently unknown to management, will determine whether the resolution of pending or threatened
litigation or claims will ultimately have a material effect on our consolidated financial position,
liquidity or results of operations in any future reporting periods.
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Technology Systems
Excellent customer service and timely and accurate billing to Medicare are central to our success.
As a result, the Company utilizes one of the health care
industrys most popular, fully HIPAA 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 systems, 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 to operate the business effectively.
Our computer 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.
Employees
As of September 30, 2010, we had 214 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.
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
| The Company has aggressive marketing plans that require the Company to spend substantial sums of its cash. The Company may need additional capital to continue its business plan. In addition, the Company may not accurately predict the amount of capital necessary to fund its existing and future operations, which requirement may exceed the Companys estimates. The inability to secure additional financing may adversely affect the Companys 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. |
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| Sales of a significant portion of our products depend on the continued availability of reimbursement of our customers by government and private insurance plans. Any reduction in Medicare reimbursement currently available for our products would reduce our revenues. Without a corresponding reduction in the cost of such products, the result would be a reduction in our overall gross profit. Similarly, any increase in the cost of such products would reduce our overall gross profit unless there was a corresponding increase in Medicare reimbursement. Our profits could also be affected by the imposition of more stringent regulatory requirements for Medicare reimbursement. The regulations that govern Medicare reimbursement are complex and our compliance with these regulations may be reviewed by federal agencies, including the Department of Health and Human Services, the Department of Justice, and the Food and Drug Administration (FDA). These agencies conduct audits 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. | |
| A significant portion of the Companys revenues are generated from the sale of urological products. As a result, changes in the external environment, including regulatory changes, could be detrimental depending on market conditions. | |
| We believe that we are able to control our level of expansion as well as the costs associated with 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. | |
| 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, 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 our competitors is intense and expected to increase. Many of our competitors and potential competitors are large companies with well-known brand names and substantial resources. These companies may develop products and services that are more effective or cost efficient. They may also promote and market these products more successfully than we promote and market our products. |
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| Many of the products that we sell are regulated by the FDA and other regulatory agencies. If any of these agencies mandate a suspension of production or sales of our products or mandate a recall, we may lose sales and incur expenses until we are in compliance with the regulations or change to another acceptable supplier. | |
| Our future results may vary significantly depending on a number of factors, including: |
| 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 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; | ||
| 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. | |
| As of December 31, 2010, Mark Libratore, our President and Chief Executive Officer, held approximately 32.6% 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. |
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| 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. | |
| 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. |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2010, Liberator Medical rents 39,740 square feet of space at its headquarters
in Stuart, Florida, at a monthly base rental of $34,122. Our lease expires on July 31, 2012. Of
that space, approximately 21,140 square feet house our administrative offices and approximately
18,600 square feet is used for our warehouse, shipping, and storage functions.
In addition, Liberator Medical rents an additional 24,000 square feet of space in Stuart, Florida
at a monthly base rental of $8,500. This facility houses our call center and certain administrative
functions.
We believe that our existing facilities are suitable as office, shipping and warehouse space, and
are adequate to meet our current needs. We also believe that our insurance coverage adequately
covers our current interest in our leased space. We do not own any real property for use in our
operations or otherwise.
Item 3. Legal Proceedings
From time to time, we are party to certain legal proceedings that arise in the ordinary course and
are incidental to our business. There are currently no such pending proceedings to which we are a
party that our management believes will have a material adverse effect on the Companys
consolidated financial position or results of operations. However, future events or circumstances,
currently unknown to management, will determine whether the resolution of pending or threatened
litigation or claims will ultimately have a material effect on our consolidated financial position,
liquidity or results of operations in any future reporting periods.
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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. The following table reflects the range of the high and low sales prices per share
of the Companys common stock for each quarterly period within fiscal years 2010 and 2009:
Stock Price | ||||||||
High | Low | |||||||
Quarter Ended: |
||||||||
December 31, 2008 |
$ | .80 | $ | .37 | ||||
March 31, 2009 |
$ | .64 | $ | .31 | ||||
June 30, 2009 |
$ | .70 | $ | .33 | ||||
September 30, 2009 |
$ | 1.49 | $ | .49 | ||||
December 31, 2009 |
$ | 2.47 | $ | 1.40 | ||||
March 31, 2010 |
$ | 2.44 | $ | 1.74 | ||||
June 30, 2010 |
$ | 2.25 | $ | 1.41 | ||||
September 30, 2010 |
$ | 1.68 | $ | 1.15 |
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 in the future.
As of November 30, 2010, the Company had approximately 1,385 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, 2010, there were 44,706,566 shares of the Companys common stock issued and
44,616,966 shares outstanding. Of those shares, 30,888,601 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 our Company who holds
restricted securities for six months may sell such shares without restriction, provided, for a
period ending twelve months after the securities acquisition date, we are current in our SEC
filings. A person who is affiliated with our Company 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, current
public information, and certain other conditions. Such sales could have a depressive effect on the
price of our common stock in the open market.
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.
Stock Repurchase Program
Under a stock repurchase program approved by our Board of Directors in December 2008, we were
authorized to repurchase up to $500,000 of our Common Stock through December 2009. The
authorization enabled the Company
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to purchase shares through open market transactions at managements discretion. At the expiration
of the stock repurchase program in December 2009, the Company had purchased 89,600 shares at a cost
of $49,634. As of September 30, 2010, no additional shares have been authorized to be repurchased.
Item 6. Selected Financial Data
Not required for smaller reporting companies.
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
We are a leading national direct-to-consumer provider of quality medical supplies to
Medicare-eligible seniors. Liberator Medical Supply, Inc. (LMS), a wholly-owned subsidiary of the
Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits. An
Exemplary Provider accredited by The Compliance Team, our Companys unique combination of
marketing, industry expertise and customer service has demonstrated success over a broad spectrum
of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase
medical supplies needed on a regular, ongoing, repeat-order basis, with the convenience of direct
billing to Medicare and private insurance. Liberators revenue primarily comes from supplying
products to meet the rapidly growing requirements of general medical supplies, primarily diabetes
supplies, catheters, ostomy supplies and mastectomy fashions. Customers may purchase by phone, mail
or internet, with repeat orders confirmed with the customer and shipped when needed.
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 payers and/or customers.
Results of Operations
The following table summarizes the results of operations for the fiscal years ended September 30,
2010 and 2009 (dollars in thousands):
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales |
$ | 40,919 | 100.0 | $ | 25,818 | 100.0 | ||||||||||
Cost of Sales |
14,349 | 35.1 | 9,050 | 35.1 | ||||||||||||
Gross Profit |
26,570 | 64.9 | 16,768 | 64.9 | ||||||||||||
Operating Expenses |
21,945 | 53.6 | 13,479 | 52.2 | ||||||||||||
Income from Operations |
4,625 | 11.3 | 3,289 | 12.7 | ||||||||||||
Other Income (Expense) |
(1,927 | ) | (4.7 | ) | (1,035 | ) | (4.0 | ) | ||||||||
Income Before Income Taxes |
2,698 | 6.6 | 2,254 | 8.7 | ||||||||||||
Income Tax Expense |
98 | 0.2 | 32 | 0.1 | ||||||||||||
Net Income |
$ | 2,600 | 6.4 | $ | 2,222 | 8.6 | ||||||||||
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Revenues
Sales for fiscal year 2010 increased by $15,101,000, or 58.5%, to $40,919,000, compared with fiscal
year 2009. The increase in sales was primarily due to our continued emphasis on our direct response
advertising campaign to obtain new customers and our dedication to customer service to retain our
recurring customer base. Our direct response advertising expenditures for fiscal year 2010
increased by $6,617,000, or 157.9%, to $10,808,000, compared with fiscal year 2009.
Gross Profit
Gross profit for fiscal year 2010 increased by $9,802,000, or 58.5%, to $26,570,000, compared with
fiscal year 2009. The increase was attributed to our increased sales volume for fiscal year 2010
compared to fiscal year 2009. As a percentage of net sales, gross profit for fiscal year 2010
remained consistent with results from fiscal year 2009. During fiscal year 2010, we did not
experience significant changes in our costs for supplies from our vendors.
Operating Expenses
The following table provides a breakdown of our operating expenses for the fiscal years ended
September 30, 2010 and 2009 (dollars in thousands):
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Operating Expenses: |
||||||||||||||||
Payroll, taxes and benefits |
$ | 9,973 | 24.4 | $ | 5,406 | 20.9 | ||||||||||
Advertising |
4,629 | 11.3 | 2,042 | 7.9 | ||||||||||||
Bad debts |
2,653 | 6.5 | 2,488 | 9.6 | ||||||||||||
Depreciation |
593 | 1.4 | 306 | 1.2 | ||||||||||||
General and administration |
4,097 | 10.0 | 3,237 | 12.5 | ||||||||||||
Total Operating Expenses |
$ | 21,945 | 53.6 | $ | 13,479 | 52.2 |
Payroll, taxes and benefits increased by $4,567,000, or 84.5%, to $9,973,000 for fiscal year 2010
compared to fiscal year 2009. The increase is primarily attributed to an increase in the number of
employees during fiscal years 2010 to support our increased sales volume. We have chosen to invest
in recruiting, hiring, and training additional staff ahead of our advertising schedule, which helps
us achieve compliance on many fronts and maintain the quality of our customer service. During
fiscal year 2010, we added seventy-five employees. Of these additional employees, we added several
key management positions to focus on new product opportunities, increased sales within our existing
product lines, additional distribution channels within the insurance industry, and improved
productivity within our operations, lead management, and accounting groups. As of September 30,
2010, we had 214 active employees compared to 139 at September 30, 2009.
Advertising expenses increased by $2,587,000, or 126.7%, to $4,629,000 for fiscal year 2010
compared to fiscal year 2009. 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, 2010 and 2009 (dollars in thousands):
2010 | 2009 | |||||||
Advertising Expenses: |
||||||||
Amortization of direct-response costs |
$ | 4,557 | $ | 1,866 | ||||
Other advertising expenses |
72 | 176 | ||||||
Total Advertising Expenses |
$ | 4,629 | $ | 2,042 |
As of September 30, 2010, we have $10,006,000 of deferred advertising costs that will be expensed
over a period between four and six years based on probable future net revenues updated at each
reporting period and expected to result directly from such advertising.
Bad debt expenses increased by $165,000, or 6.6%, to $2,653,000 for fiscal year 2010 compared to
fiscal year 2009. The increases in bad debt expenses are due primarily to our increased sales
levels. As a percentage of sales, bad debt
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expenses have decreased from 9.6% for fiscal year 2009 to 6.5% for fiscal year 2010 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 $287,000, or 93.8%, to $593,000 for fiscal year 2010 compared to
fiscal year 2009. The increase in depreciation expense is primarily attributed to the build out of
an additional 24,000 square foot facility during fiscal year 2010 to house our expanding workforce
and provide the capacity necessary to support our future sales growth. Purchases of property and
equipment totaled $1,421,000 and $441,000 during fiscal years 2010 and 2009, respectively.
General and administrative expenses increased by $860,000, or 26.6%, to $4,097,000 for fiscal year
2010 compared to fiscal year 2009. The increases are due to the additional costs, such as rent,
telephone, insurance, compensation for the board of directors, utilities, and other administrative
type expenses, required to support the growth of our business. As a percentage of sales, general
and administrative expenses have decreased from 12.5% for fiscal year 2009 to 10.0% for fiscal year
2010.
Income from Operations
Income from operations for fiscal year 2010 increased by $1,336,000 to $4,625,000, compared to
fiscal year 2009. The increase in operating income is attributed to our increased sales volumes. As
a percentage of sales, operating income decreased by 1.4% to 11.3% of sales for fiscal year 2010
compared fiscal year 2009. The decrease in operating margins is primarily attributed to our
increased investment in payroll and advertising costs, partially offset by improvements in bad debt
and general and administrative costs, as a percentage of sales.
Other Income (Expense)
The following table shows a breakdown of other income (expense) for the fiscal years ended
September 30, 2010 and 2009 (dollars in thousands):
2010 | 2009 | |||||||
Other Income (Expense): |
||||||||
Interest Expense |
$ | (1,256 | ) | $ | (1,054 | ) | ||
Change in fair value of derivative liabilities |
(691 | ) | | |||||
Loss on sale of assets |
(2 | ) | | |||||
Interest income |
22 | 19 | ||||||
Total Other Income (Expense) |
$ | (1,927 | ) | $ | (1,035 | ) |
Other income (expense) is predominantly non-cash charges associated with the amortization of
discounts on our convertible debt, recorded as interest expense, and non-cash charges associated
with the change in fair value of derivative liabilities embedded within our convertible debt.
Non-cash charges to other income (expense) for fiscal years 2010 and 2009, respectively, totaled
$1,693,000 and $701,000.
Interest expense increased by $202,000 to $1,256,000 for fiscal year 2010 compared to fiscal year
2009. As a result of accounting guidance that became effective for us on October 1, 2009, we are
required to bifurcate and separately account for embedded anti-dilution provisions contained in
certain convertible notes issued in May and October 2008 as derivative liabilities. Accordingly, on
October 1, 2009, we recorded a cumulative effect adjustment that increased the value of the
discounts on our convertible debt issued in May and October 2008, which resulted in an additional
$579,000 of non-cash interest expense during fiscal year 2010. This increase in interest expense
was partially offset by a reduction in interest expense due to reduced levels of debt during fiscal
year 2010 as a result of the conversion of $4,100,000 of notes into shares of our common stock and
$950,000 of principal payments towards shareholder loans.
In addition to the cumulative effect adjustment recorded on October 1, 2009, we are required to
adjust the embedded derivative liabilities to fair value at each balance sheet date, or interim
period, and recognize the changes in fair value as a non-cash charge or benefit to earnings. The
changes in fair value of the derivative liabilities at each interim period are very sensitive to
changes in the market price for our common stock. When the market price of our
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common stock increases, the fair value of the embedded derivatives increases, resulting in
additional non-cash charges to our earnings. Conversely, when the market price for our common stock
declines, the fair value of the embedded derivatives decreases, resulting in non-cash benefits to
our earnings. The following table illustrates the changes in the market price of our common stock
and the changes in fair value of the derivative liabilities recorded in fiscal year 2010 (dollars
in thousands, except per share amounts):
Change in | ||||||||
Closing | Fair Value of | |||||||
Market | Derivative | |||||||
Price of | Liabilities | |||||||
Common | Income / | |||||||
Stock | (Expense) | |||||||
Interim period ending: |
||||||||
September 30, 2009, Q4 2009 |
$ | 1.45 | $ | n/a | ||||
December 31, 2009, Q1 2010 |
2.18 | (5,099 | ) | |||||
March 31, 2010, Q2 2010 |
2.20 | (59 | ) | |||||
June 30, 2010, Q3 2010 |
1.49 | 3,698 | ||||||
September 30, 2010, Q4 2010 |
1.26 | 769 | ||||||
Total Change in FV of Derivative Liabilities |
$ | (691 | ) | |||||
On May 11, 2010, the $3.5 million convertible note issued in May 2008 was converted into
shares of our common stock at a conversion price of $0.80 per share. As a result of the conversion,
$4,812,500 was transferred from derivative liabilities into additional paid in capital. As of
September 30, 2010, derivatives liabilities had a remaining balance of $1,698,000, which is related
to the embedded derivative contained in the $2.5 million convertible note due October 17, 2010.
On October 15, 2010, the $2.5 million convertible note was converted into shares of our common
stock at a conversion price of $0.75 per share. The fair value of the embedded derivative on
October 15, 2010, was $2,600,000. As a result of the increase in fair value of the embedded
derivative from September 30, 2010, to the date of conversion on October 15, 2010, $902,000 will be
recorded as an additional non-cash charge to earnings for the first quarter of fiscal year 2011. As
a result of the conversion, the balance of the derivative liabilities will be transferred into
additional paid in capital, eliminating any additional exposure to changes in fair value of the
derivative liabilities associated with the convertible debt since the financial instruments
containing the embedded derivatives have been converted into shares of our common stock.
Liquidity and Capital Resources
The following table summarizes the cash flows for the fiscal years ended September 30, 2010 and
2009 (dollars in thousands):
2010 | 2009 | |||||||
Cash Flows: |
||||||||
Net cash provided by (used in) operating activities |
$ | (2,336 | ) | $ | 1,712 | |||
Net cash used in investing activities |
(1,307 | ) | (941 | ) | ||||
Net cash provided by financing activities |
7,273 | 1,854 | ||||||
Net increase in cash |
3,630 | 2,625 | ||||||
Cash at beginning of period |
3,798 | 1,173 | ||||||
Cash at end of period |
$ | 7,428 | $ | 3,798 | ||||
The Company had cash of $7,428,000 at September 30, 2010, compared to $3,798,000 at September
30, 2009, an increase of $3,630,000. This increase in cash during fiscal year 2010 is primarily due
to net proceeds of $6,593,000 from the sale of common stock in March 2010, proceeds of $1,592,000
from the exercise of warrants during fiscal year 2010, and net proceeds of $500,000 from the sale
of certificates of deposit, partially offset by $2,336,000 of cash used for operations, $1,812,000
for purchases of property and equipment and other investing activities, and payments of $1,031,000
on our debt obligations.
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Operating Activities
During fiscal year 2010, cash used in operating activities was $2,336,000, which was the result of
net income of $2,600,000 plus non-cash charges of $10,486,000 less changes in operating assets and
liabilities of $15,422,000. The non-cash charges consist primarily of $4,557,000 for amortization
of deferred advertising costs, $2,653,000 for bad debt expense, $691,000 for the change in fair
value of derivative liabilities, $593,000 for depreciation, $443,000 for increase in reserve for
returns and adjustments, $1,003,000 for non-cash interest expense related to convertible notes
payable, $388,000 for equity based compensation associated with employee and director stock
options, and $130,000 for deferred income taxes. The changes in operating assets and liabilities
during fiscal year 2010 primarily consist of an increase of $10,808,000 for deferred advertising
expenditures related to our direct response advertising efforts and increases for accounts
receivable of $5,988,000 and inventory of $692,000 as a result of our increased sales, partially
offset by an increase in accounts payable of $1,736,000 due to increased purchases and improved
vendor payment terms for our higher volume items, a decrease in deferred loan costs of $321,000
related to our convertible debt offerings, and an increase in accrued expenses of $266,000
primarily related to accrued payroll as a result of our higher employee headcounts.
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 expenditures 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.
Investing Activities
During fiscal year 2010, we purchased $1,812,000 of property and equipment and other investing
activities, primarily as a result of the build out of an additional 24,000 square foot facility to
house our expanding workforce and provide the capacity necessary to support our future sales
growth. In addition, we purchased $562,000 of certificates of deposit as security for a $1,000,000
credit line discussed below in Note 6 of the consolidated financial statements. In September 2010,
we received $1,062,000 from the sale of certificates of deposit held as security for the credit
line when the credit line facility was not renewed.
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 6 of the consolidated financial statements.
Financing Activities
During fiscal year 2010, cash provided by financing activities was $7,273,000, primarily as a
result of the sale of common stock for net proceeds of $6,593,000 and the exercise of warrants for
$1,592,000, partially offset by payments of $1,031,000 for debt and capital lease obligations.
During fiscal year 2009, cash provided by financing activities was $1,854,000, primarily as a
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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Outlook
The Company has experienced tremendous growth over the past three fiscal years despite the downturn
in the U.S. economy. We have increased sales for ten consecutive quarters. Our growth has been
driven by our direct response marketing campaign, primarily through television ads at remnant
(discounted) rates. Based on information from our media buying agents, we believe that demand for
television time slots within the direct response advertising market has increased over the last
fiscal year, creating a more competitive environment within this medium. Although customer
acquisition costs remain at acceptable levels, during fiscal year 2010 we increased our spending in
alternative media channels and plan to continue those efforts into fiscal year 2011. In addition,
we have invested heavily in our infrastructure by adding both personnel and facilities during
fiscal year 2010, so that we continue to remain capable of supporting a much higher sales volume.
We currently have approximately 50% of each of our facilities available for future growth. We have
chosen to build our infrastructure ahead of our advertising spend, which helps us achieve
compliance on many fronts and maintain the quality of our customer service. Our cost structure
continues to remain flexible enough to adapt to changing market conditions. We can pulse our
advertising spend and the expansion of our workforce relatively quickly based on the results of our
marketing programs. We believe we are well positioned to continue to grow our sales and improve
profitability over the long term.
We plan to continue 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, affecting the Company, in Medicare reimbursement in 2011, nor in any
other reimbursement programs available from other third-party payers.
Due to our emphasis on sales growth through our direct-response advertising efforts, we may be
required to raise additional cash, preferably through debt facilities versus the sale of additional
equity, in order to maintain our current growth rates. As of September 30, 2010, we had $7.4
million of cash available to fund our operations. We believe that existing cash and cash
equivalents, together with cash generated from the collection of accounts receivable, and the sale
of products will be sufficient to meet our cash requirements during the next twelve months.
Our current assets of $18,208,000 exceed our current liabilities of $9,828,000 by $8,380,000.
Our plan for the next twelve months includes the following:
| Continue our advertising and marketing efforts; | ||
| Increase our customer base; | ||
| Continue to service our current customer base and increase the 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; | ||
| Expanded our Board of Directors to include five directors, four of whom are non-employee directors, and formed an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee; | ||
| Identified products and related target customers through extensive market research; | ||
| 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; |
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| Leased an additional 24,000 square foot facility to house our expanding workforce and support our continued growth. We completed the build out of this facility to house our call center and other administrative functions and moved into the new facility in January, 2010. | ||
| Created a HIPAA 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 adapt to changing market conditions; and | ||
| Established methods of testing our current and new advertising methods to meet 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 chronically ill patients.
Off-Balance Sheet Arrangements
As of September 30, 2010, we had no material off-balance sheet arrangements.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (GAAP). The preparation of these consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that
we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the estimate is made, and
if different estimates that reasonably could have been used, or changes in the accounting estimate
that are reasonably likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical accounting policies reflect the more significant estimates
and assumptions used in the preparation of the consolidated financial statements.
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 manner consistent for all classes of payers.
Accounts receivable are reported net of allowances for sales returns and adjustments and
uncollectible accounts. Sales returns and adjustments are recorded against revenues. Sales
adjustments result from differences between the payment amount received and the expected realizable
amount. Bad debt is recorded as an operating expense and consists of billed charges that are
ultimately deemed uncollectible due to the customers or third-party payers inability or refusal
to pay.
The Company performs analyses to evaluate the net realizable value of accounts receivable.
Specifically, the Company considers historical realization data, accounts receivable aging trends,
other operating trends and relevant
business conditions. Because of continuing changes in the health care industry and third-party
reimbursement, it is
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possible that the Companys estimates could change, which could have a
material impact on the Companys results of operations and cash flows.
Deferred Advertising
We capitalize and amortize direct-response advertising and related costs when we can demonstrate,
among other things, which patients have directly responded to our advertisements. We assess the
realizability of the amounts of direct-response advertising costs reported as assets at the end of
each reporting period by comparing the carrying amounts of such assets to the probable remaining
future benefits expected to result directly from such advertising. Managements judgments include
determining the period over which such net cash flows are estimated to be realized.
Direct-response advertising costs are accumulated into quarterly cost pools and amortized
separately. The amortization is the amount computed using the ratio that current period revenues
for each direct-response advertising cost pool bear to the total of current and estimated future
benefits for that direct-response advertising cost pool. At each reporting period, the Company
estimates future benefits for each cost pool for a period of no longer than four years. We have
persuasive evidence that demonstrates future benefits are realized from our direct-response
advertising efforts beyond four years. However, the reliability of accounting estimates decreases
as the length of the period for which such estimates are made increases. As a result,
direct-response advertising costs are amortized over a period between four and six years based on
probable future net revenues updated at each reporting period.
Stock-Based Compensation Expense
The Company estimates the fair values of share-based payments on the date of grant using a
Black-Scholes option pricing model, which requires assumptions for the expected volatility of the
share price of our common stock, the expected dividend yield, and a risk-free interest rate over
the expected term of the stock-based award.
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 expected dividend yield is 0% as the Company has not paid any dividends on its common stock and
does not anticipate it will pay any dividends in the foreseeable future.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the
grant date with a remaining term equal to the expected term of the stock-based award.
In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to
utilize a simplified method, based on the average of the vesting term and contractual term of the
award, in determining the expected term of stock-based awards. Since we do not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate the expected term 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.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency
risks. However, we have entered into certain other financial instruments and contracts, such as
embedded conversion features on convertible debt instruments that are not afforded equity
classification. These instruments are required to be carried as freestanding derivative
instruments, at fair value, in our consolidated financial statements.
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Derivative financial instruments consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variables (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement. Derivative financial
instruments may be free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value and recorded as
liabilities or, in rare instances, assets. The changes in fair values at each reporting period, or
interim period, are recorded as a charge or a benefit to earnings included in the Other Income
(Expense) section of the Companys Consolidated Statement of Operations.
We estimate fair values of derivative financial instruments using various techniques that are
considered to be consistent with the objective measurement of fair values. In selecting the
appropriate technique, we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. Estimating fair values of derivative
financial instruments requires the development of significant and subjective estimates that may,
and are likely to, change over the duration of the instrument with related changes in internal and
external market factors. In addition, option-based techniques are highly volatile and sensitive to
changes in the trading market price of our common stock. Since derivative financial instruments are
initially and subsequently carried at fair values, our income or loss will reflect the volatility
in changes to these estimates and assumptions.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance on deferred tax assets is established when management
considers it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The Company files consolidated federal and state income tax returns.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax
benefits are recorded as incurred as a component of income tax expense.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8. Financial Statements
The following is an index to the Financial Statements of the Company being filed here-with
commencing at page F-1:
Reports of Independent Registered Public Accounting Firms
|
F-1 | |
Consolidated Balance Sheets as of September 30, 2010 and 2009
|
F-3 | |
Consolidated Statements of Operations for the fiscal years ended
September 30, 2010 and 2009
|
F-4 | |
Consolidated Statements of Changes in Stockholders Equity for the
fiscal years ended September 30, 2010 and 2009
|
F-5 | |
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2010 and 2009
|
F-6 | |
Notes to the Consolidated Financial Statements
|
F-7 |
19
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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. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Principal Financial Officer, to allow timely
decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
September 30, 2010. Based upon that evaluation, our Chief Executive Officer and Principal Financial
Officer concluded that our disclosure controls and procedures were not effective due to material
weaknesses identified in the Companys internal control over financial reporting described below.
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 Securities Exchange Act Rule 13a-15(f). Our internal controls
are designed to provide reasonable assurance as to the reliability of our financial statements for
external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting has inherent limitations and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only
reasonable, not absolute, assurance with respect to financial statement preparation and
presentation. Further, because of changes in conditions, the effectiveness of internal control over
financial reporting may vary over time.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the
Companys annual or interim financial statements will not be prevented or detected on a timely
basis.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, we have evaluated the effectiveness of our internal control over financial reporting as of
September 30, 2010, as required by 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 not effective as of September 30,
2010 due to material weaknesses identified as follows:
| Assess and Identify the Impact of Recently Issued Accounting Pronouncements: The Companys procedures to assess and identify the impact of Recently Issued Accounting Pronouncements were not sufficient, as evidenced by the Companys failure to timely identify the impact of ASC 815-40-15, Derivatives and Hedging Contracts in Entitys Own Equity (Scope and Scope Exceptions),which became effective for the Company on October 1, 2009. The Company did not become aware of the new guidance until June 2010, and the impacts of the accounting guidance were not properly identified by the Company until December 2010. As a result, the Company determined that the previously issued interim financial statements for fiscal year 2010 should no longer be relied upon and plans to file restated interim financial statements for the interim periods. |
20
Table of Contents
| Accounting for Derivative Financial Instruments: Management has identified a material weakness related to accounting for embedded derivatives included in certain convertible notes payable that were outstanding when ASC 815-40-15 became effective for the Company on October 1, 2009. When the Company first assessed the impacts of ASC 815-40-15, management erred in its conclusion that certain embedded derivatives met the scope exceptions of ASC 815-40-15 and did not require adjustments to its accounting. The Company lacked a technical review process which might have enabled the Company to identify the error and prevent a misstatement of the Companys interim financial statements. | ||
| Accounting for Deferred Direct-Response Advertising Costs: Management has identified a material weakness related to the classification and measurement of our capitalized direct-response advertising costs due to the following: |
| The Company had not previously defined what constituted a separate stand-alone cost pool as defined by ASC 340-20-35-1. | ||
| The amortization of capitalized direct-response advertising costs was not calculated by taking the ratio of current period revenues over the total period revenues associated with each cost pool as required by ASC 340-20-35-3. | ||
| Prior to September 30, 2010, the Company had reflected both a current and long term portion of the assets on the consolidated balance sheet. In accordance with an SEC interpretation (SPCH.T.1995.22.Glynn), the SEC would object to the classification of any unamortized cost of advertising as a current asset. This resulted in the Company reclassifying the fiscal year 2009 comparative balance to conform to the current fiscal year classification. |
In the fourth quarter of fiscal year 2010, management completed the above analysis as required, including defining a separate stand-alone cost pool. In addition, management determined that no restatements of prior period financial statements were required as a result of the above analysis. | |||
| Documentation of Accounting Review and Approval Process: In connection with the audit of our consolidated financial statements for the fiscal year ended September 30, 2010, our independent registered accounting firm reported to our Board of Directors that they observed inadequate documented review and approval of certain aspects of the accounting process including the documented review of accounting reconciliations and journal entries that they considered to be a material weakness in internal control. After a review of our current review and approval of certain aspects of the accounting process, management concluded that the inadequate documented review and approval process represented a material weakness. |
The Company is neither an accelerated filer nor a large accelerated filer, as defined in Rule 12b-2
under the Exchange Act, and is not otherwise including in this Annual Report an attestation report
of the Companys registered public accounting firm regarding internal control over financial
reporting. Managements report was not required to be attested by the Companys registered public
accounting firm pursuant to Item 308(b) of Regulation S-K.
Changes in Internal Controls
During fiscal year 2010 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.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
In order to remediate the material weaknesses in internal control over financial reporting, the
Company is in the process of finalizing a remediation plan, under the direction of the Companys
Audit Committee, and intends to implement improvements during the first half of fiscal year 2011 as
follows:
| Subscribe to an outside service that provides the Companys Chief Financial Officer and Controller with timely guidance on Recently Issued Accounting Pronouncements. In addition, the Company intends to |
21
Table of Contents
supplement its current interim and annual financial reporting processes with documentation of the Controllers and Chief Financial Officers review and assessment of the timing and impacts, if any, that the new accounting pronouncements will have on the Companys financial statements; and | |||
| Engage outside experts, as needed, to provide counsel and guidance on non-routine technical accounting issues that can be associated with future financial instruments. The Company has determined that it is not economically feasible for the Company to maintain the required expertise internally due to the limited number of complex transactions that the Company may undertake and the current size of the Company. As the Company continues to grow, management will continually re-assess its staffing levels, particularly within the accounting and finance areas, required to maintain effective internal controls over financial reporting. | ||
| Document all significant accounting policies and ensure that the accounting policies are in accordance with accounting principles generally accepted in the United States and that internal controls are designed effectively to ensure that the financial information is properly reported. Management will engage independent accounting specialists to ensure that there is an independent verification of the accounting positions taken. | ||
| In connection with the reported inadequate documented review and approval of certain aspects of the accounting process, management has plans to review the current review and approval processes and implement changes to ensure that all accounting reconciliations and journal entries are reviewed and approved on a timely basis and that this review is documented by a member of management separate from the preparer. |
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
22
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the sections and subsections
entitled Management, Executive Compensation, Code of Ethics, Audit Committee, Audit
Committee Financial Experts and Section 16(a) Beneficial Ownership Reporting Compliance
contained in our Proxy Statement for the 2011 Annual Meeting of Stockholders to be filed with the
SEC pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the section entitled
Executive Compensation and Transactions contained in our Proxy Statement for the 2011 Annual
Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the section entitled
Security Ownership of Certain Beneficial Owners and Management contained in Part II, Item 5,
Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities and in our Proxy Statement for the 2011 Annual Meeting of Stockholders to be
filed with the SEC pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the section entitled Certain
Relationships and Related Transactions contained in our Proxy Statement for the 2011 Annual
Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the section entitled
Principal Accountant Fees and Services contained in our Proxy Statement for the 2011 Annual
Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A.
23
Table of Contents
PART IV.
Item 15. Exhibits and Financial Statement Schedules
The following exhibits designated with a footnote reference are incorporated herein by reference to
a prior registration statement or a periodic report filed by the Registrant pursuant to Section 13
or 15(d) of the Exchange Act:
Number | Description | |
21.1
|
Subsidiaries (1) | |
23.1
|
Consent of Crowe Horwath LLP. (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. |
24
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LIBERATOR MEDICAL HOLDINGS, INC. |
||||
By: | /s/ Mark A. Libratore | |||
Mark A. Libratore | ||||
President, Chief Executive Officer and Director | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on
behalf of the registrant and in the capacities and on the dates indicated have signed this report
below.
Signature | Title | Date | ||
/s/ Mark A. Libratore
|
President,
Chief Executive
Officer and
Director (principal executive officer) |
January 13, 2011 | ||
/s/ Robert J. Davis
|
Chief
Financial Officer
(principal financial and accounting officer) |
January 13, 2011 | ||
/s/ Jeannette Corbett
|
Director | January 13, 2011 | ||
/s/ Robert Cuillo
|
Director | January 13, 2011 | ||
/s/ Morgan Duke
|
Director | January 13, 2011 | ||
/s/ Tyler Wick
|
Director | January 13, 2011 |
25
Table of Contents
INDEX TO FINANCIAL STATEMENTS
F-1 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
26
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Liberator Medical Holdings, Inc.
Liberator Medical Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Liberator Medical Holdings, Inc. as
of September 30, 2010, and the related consolidated statement of operations, changes in
stockholders equity, and cash flows for the year ended September 30, 2010. 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 audit. The consolidated
financial statements of Liberator Medical Holdings, Inc. as of and for the year ended September 30,
2009 were audited by other auditors who have ceased operations, and who expressed an unqualified
opinion on those financial statements in their report dated December 17, 2009.
We conducted our audit 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
reasonable assurance about whether the 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 audit 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of September 30, 2010, and the results of its
operations and its cash flows for the year ended September 30, 2010 in conformity with U.S.
generally accepted accounting principles.
/s/ Crowe Horwath LLP
Fort Lauderdale, Florida
January 13, 2011
Fort Lauderdale, Florida
January 13, 2011
F-1
Table of Contents
Provided below is a copy of the accountants report
issued by Berenfeld Spritzer Shechter & Sheer LLP (Berenfeld), our former independent public
accountants, in connection with the filing of our Annual Report of Form 10-K for the year ended
September 30, 2009. This audit report has not been reissued by Berenfeld in connection with the
filing of this Annual Report on Form 10-K for the year ended September 30, 2010. We are unable to
obtain a reissued accountants report from Berenfeld, and we will be unable to obtain future
accountants reports from Berenfeld, because Berenfeld has discontinued its auditing practice and
ceased operations. This means that we will also be unable to obtain consents to incorporate any
financial statements audited by Berenfeld into registration statements that we may file or amend in
the future. Accordingly, investors may not be able to bring an action against Berenfeld pursuant to
the Securities Act of 1933 or the Securities Exchange Act of 1934 with respect to any such
registration statements or with respect to this Annual Report and,
therefore, any recovery from Berenfeld may be limited. The ability of investors to recover from Berenfeld may also be
limited as a result of Berenfelds financial condition.
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-2
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2010 and 2009
(In thousands, except dollar per share amounts)
Consolidated Balance Sheets
As of September 30, 2010 and 2009
(In thousands, except dollar per share amounts)
2010 | 2009 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash |
$ | 7,428 | $ | 3,798 | ||||
Restricted cash |
| 500 | ||||||
Accounts receivable, net of allowance of $3,312 and $2,327, respectively |
6,744 | 3,850 | ||||||
Inventory, net of allowance for obsolete inventory of $110 and $110, respectively |
1,985 | 902 | ||||||
Deferred taxes, current portion |
1,696 | | ||||||
Prepaid and other current assets |
355 | 483 | ||||||
Total Current Assets |
18,208 | 9,533 | ||||||
Property and equipment, net of accumulated depreciation of $1,527 and $1,021, respectively |
1,862 | 1,041 | ||||||
Deferred advertising |
10,006 | 3,755 | ||||||
Other assets |
139 | 130 | ||||||
Total Assets |
$ | 30,215 | $ | 14,459 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 3,826 | $ | 2,089 | ||||
Accrued liabilities |
1,077 | 716 | ||||||
Derivative liabilities |
1,698 | | ||||||
Stockholder loan |
565 | 1,515 | ||||||
Convertible notes payable, net of unamortized discount of $21 and $292, respectively |
2,516 | 3,893 | ||||||
Other current liabilities |
146 | 140 | ||||||
Total Current Liabilities |
9,828 | 8,353 | ||||||
Convertible notes payable, net of unamortized discount of $0 and $90, respectively |
| 2,447 | ||||||
Deferred tax liability |
1,826 | | ||||||
Other long-term liabilities |
145 | 235 | ||||||
Total Liabilities |
11,799 | 11,035 | ||||||
Commitments and contingencies (see Note 11) |
||||||||
Stockholders Equity: |
||||||||
Common stock, $.001 par value, 200,000 shares authorized, 44,707 and 32,462 shares
issued, respectively; 44,617 and 32,377 shares outstanding at September 30, 2010 and
2009, respectively |
45 | 32 | ||||||
Additional paid-in capital |
28,927 | 11,705 | ||||||
Accumulated deficit |
(10,506 | ) | (8,272 | ) | ||||
Treasury stock, at cost; 89 and 85 shares at September 30, 2010 and 2009, respectively |
(50 | ) | (41 | ) | ||||
Total Stockholders Equity |
18,416 | 3,424 | ||||||
Total Liabilities and Stockholders Equity |
$ | 30,215 | $ | 14,459 | ||||
See accompanying notes to consolidated financial statements
F-3
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For the fiscal years ended September 30, 2010 and 2009
(In thousands, except dollar per share amounts)
Consolidated Statements of Operations
For the fiscal years ended September 30, 2010 and 2009
(In thousands, except dollar per share amounts)
2010 | 2009 | |||||||
Net Sales |
$ | 40,919 | $ | 25,818 | ||||
Cost of Sales |
14,349 | 9,050 | ||||||
Gross Profit |
26,570 | 16,768 | ||||||
Operating Expenses |
||||||||
Payroll, taxes and benefits |
9,973 | 5,406 | ||||||
Advertising |
4,629 | 2,042 | ||||||
Bad debts |
2,653 | 2,488 | ||||||
Depreciation |
593 | 306 | ||||||
General and administrative |
4,097 | 3,237 | ||||||
Total Operating Expenses |
21,945 | 13,479 | ||||||
Income from Operations |
4,625 | 3,289 | ||||||
Other Income (Expense) |
||||||||
Loss on sale of assets |
(2 | ) | | |||||
Interest expense |
(1,256 | ) | (1,054 | ) | ||||
Interest income |
22 | 19 | ||||||
Change in fair value of derivative liabilities |
(691 | ) | ||||||
Total Other Income (Expense) |
(1,927 | ) | (1,035 | ) | ||||
Income before Income Taxes |
2,698 | 2,254 | ||||||
Provision for Income Taxes |
98 | 32 | ||||||
Net Income |
$ | 2,600 | $ | 2,222 | ||||
Basic earnings per share: |
||||||||
Weighted average shares outstanding |
38,493 | 32,128 | ||||||
Earnings per share |
$ | 0.07 | $ | 0.07 | ||||
Diluted earnings per share: |
||||||||
Weighted average shares outstanding |
52,595 | 43,620 | ||||||
Earnings per share |
$ | 0.05 | $ | 0.06 |
See accompanying notes to consolidated financial statements
F-4
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
For the fiscal years ended September 30, 2010 and 2009
(In thousands)
Consolidated Statements of Changes in Stockholders Equity
For the fiscal years ended September 30, 2010 and 2009
(In thousands)
Total | ||||||||||||||||||||||||
Common | Common | Paid in | Accumulated | Treasury | Stockholders | |||||||||||||||||||
Shares | Stock | Capital | Deficit | Stock | Equity | |||||||||||||||||||
Balance at September 30, 2008 |
32,050 | $ | 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 |
172 | | 105 | 105 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
170 | | 85 | 85 | ||||||||||||||||||||
Common stock issued for services |
60 | | 31 | 31 | ||||||||||||||||||||
Common stock issued for exercise of warrants |
10 | | 10 | 10 | ||||||||||||||||||||
Purchase common treasury stock |
(85 | ) | (41 | ) | (41 | ) | ||||||||||||||||||
Net income |
2,222 | 2,222 | ||||||||||||||||||||||
Balance at September 30, 2009 |
32,377 | $ | 32 | $ | 11,705 | $ | (8,272 | ) | $ | (41 | ) | $ | 3,424 | |||||||||||
Cumulative effect of change in accounting (see Note 6) |
(390 | ) | (4,834 | ) | (5,224 | ) | ||||||||||||||||||
Options issued to employees and directors |
365 | 365 | ||||||||||||||||||||||
Common stock issued for interest on convertible debt |
19 | | 45 | 45 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
5,578 | 6 | 8,907 | 8,913 | ||||||||||||||||||||
Common stock issued for employee stock purchase plan |
192 | | 117 | 117 | ||||||||||||||||||||
Common stock issued for exercise of warrants |
1,788 | 2 | 1,591 | 1,593 | ||||||||||||||||||||
Common stock issued for cash |
4,667 | 5 | 6,588 | 6,593 | ||||||||||||||||||||
Purchase of common treasury stock |
(4 | ) | (9 | ) | (9 | ) | ||||||||||||||||||
Deferred tax liability related to discounts on convertible notes
payable |
(1 | ) | (1 | ) | ||||||||||||||||||||
Net income |
2,600 | 2,600 | ||||||||||||||||||||||
Balance at September 30, 2010 |
44,617 | $ | 45 | $ | 28,927 | $ | (10,506 | ) | $ | (50 | ) | $ | 18,416 | |||||||||||
See accompanying notes to consolidated financial statements
F-5
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2010 and 2009
(In thousands)
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2010 and 2009
(In thousands)
2010 | 2009 | |||||||
Cash flow from operating activities: |
||||||||
Net Income |
$ | 2,600 | $ | 2,222 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
5,150 | 2,172 | ||||||
Equity based compensation |
388 | 420 | ||||||
Provision for doubtful accounts and sales returns and adjustments |
3,096 | 2,488 | ||||||
Non-cash interest related to convertible notes payable |
1,003 | 701 | ||||||
Change in fair value of derivative liabilities |
691 | | ||||||
Deferred income taxes |
130 | | ||||||
Amortization of non-cash debt issuance costs |
26 | 37 | ||||||
Reserve for inventory obsolescence |
| 60 | ||||||
Loss on disposal of assets |
2 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(5,988 | ) | (3,933 | ) | ||||
Deferred advertising |
(10,808 | ) | (4,191 | ) | ||||
Inventory |
(692 | ) | (176 | ) | ||||
Prepaid expenses and other current assets |
(235 | ) | (97 | ) | ||||
Other assets |
305 | 424 | ||||||
Accounts payable |
1,736 | 1,189 | ||||||
Accrued expenses |
266 | 433 | ||||||
Other liabilities |
(6 | ) | (37 | ) | ||||
Net Cash Flows Provided by (Used in) Operating Activities |
(2,336 | ) | 1,712 | |||||
Cash flows from investing activities |
||||||||
Purchase of property and equipment and other |
(1,812 | ) | (441 | ) | ||||
Proceeds from the sale of assets |
5 | | ||||||
Purchase of certificates of deposit |
(562 | ) | (500 | ) | ||||
Proceeds from the sale of certificates of deposit |
1,062 | | ||||||
Net Cash Flows Used in Investing Activities |
(1,307 | ) | (941 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from the sale of common stock |
7,000 | | ||||||
Costs associated with the sale of common stock |
(407 | ) | | |||||
Proceeds from the exercise of warrants |
1,592 | 10 | ||||||
Proceeds from issuance of convertible notes |
| 2,500 | ||||||
Costs associated with the issuance of convertible notes |
| (326 | ) | |||||
Proceeds from employee stock purchase plan |
128 | 27 | ||||||
Purchase of treasury stock |
(9 | ) | (41 | ) | ||||
Payments of debt and capital lease obligations |
(1,031 | ) | (316 | ) | ||||
Net Cash Flows Provided by Financing Activities |
7,273 | 1,854 | ||||||
Net increase in cash |
3,630 | 2,625 | ||||||
Cash at beginning of period |
3,798 | 1,173 | ||||||
Cash at end of period |
$ | 7,428 | $ | 3,798 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 337 | $ | 319 | ||||
Cash paid for income taxes |
13 | 21 | ||||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Capital expenditures funded by capital lease borrowings |
$ | | $ | 91 | ||||
Common stock issued for interest expense |
45 | 105 | ||||||
Common stock issued for conversion of debt |
8,913 | 85 |
See accompanying notes to consolidated financial statements
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Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Consolidated Financial Statements
September 30, 2010
Notes To The Consolidated Financial Statements
September 30, 2010
Note 1 Description of Business
Liberator Medical Holdings, Inc. and subsidiaries (the Company) distributes direct-to-consumer
durable medical supplies to customers in all fifty states within the United States. The Companys
revenue is primarily derived from four product lines; urological, diabetic, ostomy, and mastectomy
supplies. We provide a simple and reliable way for patients to obtain supplies. Our employees
communicate directly with the patients and their physicians regarding patients prescriptions and
supply requirements on a regular basis. The Company bills Medicare and third-party insurers on
behalf of its patients. The Company markets its products directly to consumers, primarily through
targeted media, direct-response television, Internet, and print advertising to patients throughout
the United States. Our patient service representatives are specifically trained to communicate with
patients, in particular seniors, helping them to follow their doctors orders and manage their
chronic diseases. The Companys 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.
Note 2 Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform with accounting principles generally
accepted in the United States of America. A summary of the more significant policies is set forth
below:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, Liberator Medical
Supply, Inc., Liberator Health and Education Services, Inc., Liberator Health and Wellness, Inc.,
and Practica Medical Manufacturing, Inc., its wholly owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with U.S. generally accepted accounting principles.
Such estimates include (i) the amounts for accounts receivable allowances for returns and
contractual adjustments and doubtful accounts; (ii) the expected period and amounts of future
benefits to be realized directly from deferred direct advertising costs; (iii) the fair values of
derivative financial instruments and stock compensation expense; and (iv) valuation allowances for
deferred income tax assets. Actual results could differ from managements 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. The following reclassifications were made to the fiscal year 2009 financial
statements to be consistent with the fiscal year 2010 financial statements presented:
| On the Consolidated Balance Sheet as of September 30, 2009, $2,016,000 of Deferred Advertising was reclassified from Current Assets to Non-current Assets in order to be consistent with accounting guidance issued for deferred advertising costs being amortized over a period longer than twelve months; and | ||
| On the Consolidated Statement of Cash Flows for the fiscal year ended September 30, 2009, $22,000 of Deposits was reclassified within the Changes in Operating Assets and Liabilities section from Prepaid Expenses and Other Current Assets to Other Assets. In addition, $446,000 of Debt Issuance Costs was reclassified to Other Assets within the Changes in Operating Assets section. |
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These reclassifications had no impact on previously reported total assets, stockholders
equity, cash flows, or net income.
Cash and 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 and a $550,000
certificate of deposit in October 2009, which were pledged as security for the credit line facility
described below in Note 7. In September 2010, the Company elected not to renew the credit line
facility and when the certificates of deposit matured, the balance of the certificates of deposit,
including accrued interest, were transferred into a non-restricted cash account.
Accounts Receivable
Accounts receivable are reported net of allowances for sales returns and contractual adjustments
and uncollectible accounts. Sales returns and contractual adjustments are recorded against
revenues. Contractual adjustments result from differences between the payment amount received and
the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed
charges that are ultimately deemed uncollectible due to the customers or third-party payers
inability or refusal to pay.
The Company performs analyses to evaluate the net realizable value of accounts receivable.
Specifically, the Company considers historical realization data, accounts receivable aging trends,
other operating trends and relevant business conditions. Because of continuing changes in the
health care industry and third-party reimbursement, it is possible that the Companys estimates
could change, which could have a material impact on the Companys results of operations and cash
flows. The Company does not accrue interest on its accounts receivable.
The bad debts written off against the allowance for uncollectible accounts for the years ended
September 30, 2010 and 2009 were $2,110,000 and $1,216,000, 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 excess and obsolete inventory
are recorded for inventory considered to be in excess or obsolete.
Deferred Advertising Costs
We capitalize and amortize direct-response advertising and related costs when we can demonstrate
among other things that patients have directly responded to our advertisements. We assess the
realizability of the amounts of direct-response advertising costs reported as assets at the end of
each reporting period by comparing the carrying amounts of such assets to the probable remaining
future net cash flows expected to result directly from such advertising. Managements judgments
include determining the period over which such net cash flows are estimated to be realized.
Direct-response advertising costs are accumulated into quarterly cost pools and amortized
separately. The amortization is the amount computed using the ratio that current period revenues
for each direct-response advertising cost pool bear to the total of current and estimated future
benefits for that direct-response advertising cost pool. At each reporting period, the Company
estimates future benefits for each cost pool for a period of no longer than four years. We have
persuasive evidence that demonstrates future benefits are realized from our direct-response
advertising efforts beyond four years. However, the reliability of accounting estimates decreases
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as the length of the period for which such estimates are made increases. As a result,
direct-response advertising
costs are amortized over a period between four and six years based on probable future net revenues
updated at each reporting period.
A summary of deferred advertising costs for the fiscal years ending September 30, 2010 and 2009 is
as follows (in thousands):
2010 | 2009 | |||||||
Deferred Advertising Costs: |
||||||||
Beginning Balance, 10/1 |
$ | 3,755 | $ | 1,430 | ||||
Plus: Direct-response advertising spend |
10,808 | 4,191 | ||||||
Less: Amortization of deferred
advertising costs |
(4,557 | ) | (1,866 | ) | ||||
Ending Balance, 9/30 |
$ | 10,006 | $ | 3,755 | ||||
A business change, including a change in reimbursement rates, that reduces or increases expected
net cash flows or that shortens or lengthens the period over which such net cash flows are
estimated to be realized could result in accelerated or reduced charges against our earnings.
Debt Issuance Costs
Costs associated with obtaining and closing loans and/or debt instruments such as, but not limited
to placement agent fees, attorney fees and state documentary fees are capitalized and expensed over
the term of the loan. Debt issuance costs of $0 and $345,000 were deferred during the years ended
September 30, 2010 and 2009, respectively. Debt issuance costs amortized for the years ended
September 30, 2010 and 2009 were $347,000 and $484,000, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization.
Property and equipment is depreciated using the straight-line method over the estimated useful life
of the respective assets, which range from 3 to 10 years. Leasehold improvements are amortized
using the straight-line method over the shorter of the related lease term or useful life.
Maintenance, repairs, and minor improvements are charged to expense as incurred; major renewals and
betterments that extend the useful life of the associated asset are capitalized. When items of
property and equipment are sold or retired, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in results of operations for the period.
Treasury Stock
Treasury stock is accounted for using the cost method whereby the entire cost of the acquired stock
is recorded as treasury stock.
Revenue Recognition
We recognize revenue related to product sales upon delivery to customers, provided that we have
received and verified any written documentation required to bill Medicare, other government
agencies, third-party payers, and patients. For product shipments for which we have not yet
received the required written documentation, revenue recognition is delayed until the period in
which those documents are collected and verified. We record revenue at the amounts expected to be
collected from government agencies, other third-party payers, and from patients directly. We
record, if necessary, contractual adjustments equal to the difference between the reimbursement
amounts defined in the fee schedule and the revenue recorded per the billing system. These
adjustments are recorded as a reduction of both gross revenues and accounts receivable. We analyze
various factors in determining revenue recognition, including a review of specific transactions,
current Medicare regulations and reimbursement rates, historical experience and the
credit-worthiness of patients.
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Revenue related to Medicare reimbursements is calculated based on government-determined
reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays are subject
to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined prices for
reimbursable supplies, and we bill the remaining balance to either third-party payers or directly
to patients.
Shipping and Handling Costs
Shipping and handling costs are not charged to the patients in compliance with Medicare policy.
Shipping and handling costs for the years ended September 30, 2010 and 2009, were $1,410,000 and
$912,000, respectively. These amounts are included in cost of sales on the accompanying
consolidated statements of operations.
Stock-Based Compensation
The Company estimates the fair values of share-based payments on the date of grant using a
Black-Scholes option pricing model, which requires assumptions for the expected volatility of the
share price of our common stock, the expected dividend yield, and a risk-free interest rate over
the expected term of the stock-based award.
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 expected dividend yield is 0% as the Company has not paid any dividends on its common stock and
does not anticipate it will pay any dividends in the foreseeable future.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the
grant date with a remaining term equal to the expected term of the stock-based award.
In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to
utilize a simplified method, based on the average of the vesting term and contractual term of the
award, in determining the expected term of stock-based awards. Since we do not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate the expected term 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.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency
risks. However, we have entered into certain other financial instruments and contracts with
embedded conversion features on convertible debt instruments that must be separated from the host
instrument and are not afforded equity classification. These instruments are required to be carried
as derivative liabilities, at fair value, in our consolidated financial statements.
Derivative financial instruments consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variables (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement. Derivative financial
instruments may be free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value and recorded as
assets or liabilities. The changes in fair values at each reporting period, or interim period, are
recorded as a charge or a benefit to earnings included in the Other Income (Expense) section of the
Companys Consolidated Statement of Operations.
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We estimate fair values of derivative financial instruments using various techniques that are
considered to be consistent with the objective measurement of fair values. In selecting the
appropriate technique, we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. Estimating fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors. In addition, option-based
techniques are highly volatile and sensitive to changes in the trading market price of our common
stock. Since derivative financial instruments are initially and subsequently carried at fair
values, our income or loss will reflect the volatility in changes to these estimates and
assumptions.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Inputs
refer broadly to the assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk. Inputs may be observable or unobservable. Observable
inputs are based on market data obtained from sources independent of the Company. Unobservable
inputs reflect the Companys own assumptions based on the best information available in the
circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into
three broad levels. The three levels of the fair value hierarchy are defined as follows:
Level 1
|
| Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date. | ||
Level 2
|
| Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, as of the reporting date. | ||
Level 3
|
| Unobservable inputs for the asset or liability that reflect managements own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date. |
The summary of fair values of financial instruments as of September 30, 2010 (dollars in
thousands):
September 30, 2010 | ||||||||||||||||
Instrument | Fair Value | Carrying Value | Level | Valuation Methodology | ||||||||||||
Derivative liabilities (See Note 6) |
$ | 1,698 | $ | 1,698 | 3 | Monte Carlo Simulation model |
The Company engaged an independent third party valuation expert to calculate the fair values of the
embedded derivative liabilities. Please refer to Note 6 for disclosure of assumptions used to
calculate the fair value of the derivative liabilities.
The following represents a reconciliation of the changes in fair value of financial instruments
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
fiscal year ended September 30, 2010 (dollars in thousands):
2010 | ||||
Beginning balance: Derivative liabilities |
$ | | ||
Adoption of change in accounting principle |
5,820 | |||
Total (gains) losses |
691 | |||
Purchases, sales, issuances and settlements, net |
(4,813 | ) | ||
Ending balance: Derivative liabilities |
$ | 1,698 | ||
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Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. A valuation allowance on
deferred tax assets is established when management considers it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company files consolidated
federal and state income tax returns.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax
benefits are recorded as incurred as a component of income tax expense.
Leases
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. The Company records rent expense and
amortization of leasehold improvements on a straight-line basis over the initial term of the lease.
All leasehold incentives, rent holidays, and/or other incentives are factored into the calculation
of the deferred rent liability in order to record rent expense on a straight-line basis over the
initial term of the lease. Leasehold incentives are capitalized and depreciated over the initial
term of the lease.
Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if stock options, warrants, or convertible debt
instruments were exercised or converted into common stock and were not anti-dilutive
Recently Adopted Accounting Pronouncements
On October 1, 2009, we adopted Accounting Standards Codification (ASC) 815-40-15, Derivatives
and Hedging Contracts in Entitys Own Equity (Scope and Scope Exceptions) (ASC 815-40-15),
which requires that we apply a two-step approach in evaluating whether an equity-linked financial
instrument (or embedded feature) is indexed to our own stock, including evaluating the instruments
contingent exercise and settlement provisions. Upon adoption of ASC 815-40-15 on October 1, 2009,
we reclassified $5,820,000 from stockholders equity to derivative liabilities. Additionally, the
fair value of the derivative liabilities are adjusted to fair market value at the end of each
reporting period (See Note 6 below).
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures, which amends the disclosure
requirements related to recurring and nonrecurring fair value measurements. The guidance requires
disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value
measurement hierarchy, including the reasons and the timing of the transfers and information on
purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets
and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is
effective for annual and interim reporting periods beginning after December 15, 2009, except for
Level 3 reconciliation disclosures which are effective for annual and interim periods beginning
after December 15, 2010. The Company adopted these amendments in January 2010 and the adoption did
not have a material impact on the disclosures in the Companys consolidated financial statements.
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NOTE 3 Property and Equipment
A summary of property and equipment at September 30, 2010 and 2009 is as follows (in thousands):
Estimated | September 30, | September 30, | ||||||||||
Life | 2010 | 2009 | ||||||||||
Leased equipment |
3 5 years | $ | 582 | $ | 582 | |||||||
Transportation equipment |
5 10 years | 95 | 95 | |||||||||
Warehouse equipment |
5 10 years | 84 | 56 | |||||||||
Office furniture |
5 10 years | 484 | 150 | |||||||||
Computer equipment |
3 5 years | 277 | 87 | |||||||||
Telephone equipment |
5 years | 77 | 33 | |||||||||
Rental equipment |
10 years | 18 | 18 | |||||||||
Web Site |
5 years | 6 | 6 | |||||||||
Server Software |
3 years | 233 | 130 | |||||||||
Training guides |
5 years | 3 | 3 | |||||||||
Leasehold improvements |
Shorter of life of asset or lease | 1,509 | 889 | |||||||||
Signage |
5 10 years | 21 | 13 | |||||||||
Total property and equipment |
3,389 | 2,062 | ||||||||||
Less: accumulated depreciation |
(1,527 | ) | (1,021 | ) | ||||||||
Property and equipment, net |
$ | 1,862 | $ | 1,041 | ||||||||
The amounts charged to operations for depreciation and amortization for the years ended
September 30, 2010 and 2009 were $593,000 and $306,000, respectively.
NOTE 4 Stockholder Loans
The stockholder loans at September 30, 2010 and 2009, in the amounts of $565,000 and $1,515,000,
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 payable
discussed below in Note 5. During the fiscal year ended September 30, 2010, $950,000 of principal
was repaid to Mr. Libratore. As of September 30, 2010, the senior note holders have authorized the
remaining balance of the stockholder loans are to be repaid to Mr. Libratore in increments of
$300,000 per quarter until the stockholder loan is paid in full. Interest expense related to the
stockholder loan for the fiscal years ended September 30, 2010 and 2009 were $93,000, and $150,000,
respectively.
NOTE 5 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 were cash proceeds and $206,000 were 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, 2010, $711,000 of the notes has been converted into 1,422,000 shares of the
Companys common stock and $93,000 of the notes has been redeemed for cash.
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Interest expense related to the April 2008 convertible notes was $22,000 and $83,000 for the fiscal
years ended September 30, 2010 and 2009, 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 matured 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 at a price per share
less than both the conversion price then in effect and $0.75, subject to certain exclusions. The
Company has concluded that the adjustment feature for the conversion price of the note is not
indexed to the Companys own stock and, therefore, is an embedded derivative financial liability
that requires bifurcation and separate accounting. 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.
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. The Company has concluded
that the adjustment feature for the exercise price of the warrants is indexed to the Companys own
stock, and, accordingly, has classified the warrants as equity instruments. 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.
In May 2009, the Company entered into a Waiver Agreement with the note holder of the May 2008
convertible notes discussed above. As part of the Waiver Agreement, the note holder agreed to
accept 104,137 shares of the Companys common stock, with a fair market value of $68,000, in lieu
of the Companys obligation to pay cash in the amount of $52,000 for interest payment that was due
May 15, 2009 under the original terms of the notes. As a result of this transaction, the Company
incurred an additional $16,000 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 note are in all other
respects unchanged.
On May 11, 2010, the $3,500,000 note was converted into 4,375,000 shares of the Companys common
stock at a conversion price of $0.80 per share.
Interest expense related to the May 2008 convertible note was $64,000 and $121,000 for the fiscal
years ended September 30, 2010 and 2009, 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 Company has concluded that the adjustment
feature for the conversion price of the note is not indexed to the Companys own stock and,
therefore, is an embedded derivative financial liability that requires bifurcation and separate
accounting. 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. 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
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10 consecutive trading days immediately preceding such issuance, subject to certain
exclusions. The Company has concluded that the adjustment feature for the exercise price of the
warrants is indexed to the Companys own stock, and, accordingly, has classified the warrants as
equity instruments. 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.
In May 2009, the Company entered into Waiver Agreement with the note holder of the October 2008
convertible note discussed above. As part of the Waiver Agreement, the note holder agreed to accept
67,808 shares of the Companys common stock, with a fair market value of $37,000, in lieu of the
Companys obligation to pay cash in the amount of $34,000 for interest payments that were due April
15, 2009 under the original terms of the note. As a result of this transaction, the Company
incurred an additional $3,000 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.
In October 2009, the Company entered into a Waiver Agreement with the note holder of the October
2008 convertible note discussed above. As part of the Waiver Agreement, the note holder agreed to
accept 18,101 shares of the Companys common stock, with a fair market value of $45,000, in lieu of
the Companys obligation to pay cash in the amount of $38,000 for an interest payments that was due
October 15, 2009, under the original terms of the note. As a result of this transaction, the
Company incurred an additional $7,000 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 note are in all
other respects unchanged.
Interest expense related to the October 2008 convertible note was $82,000 and $75,000 for the
fiscal years ended September 30, 2010 and 2009, respectively.
Short-term convertible notes payable consist of the following as of September 30, 2010 (in
thousands):
Oct08 Note | ||||
Notes Payable, face amount |
$ | 2,500 | ||
Discounts on Notes: |
||||
Initial valuation of Warrants |
(86 | ) | ||
Initial valuation of Bifurcated Embedded Derivative |
(841 | ) | ||
Accumulated Amortization |
906 | |||
Total Discounts |
(21 | ) | ||
Accrued Interest |
37 | |||
Convertible Notes Payable, net |
$ | 2,516 | ||
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: |
||||||||||||
Initial valuation of Warrants |
(126 | ) | (610 | ) | (736 | ) | ||||||
Initial valuation of Beneficial Conversion Option |
| (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 | ||||||
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Table of Contents
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: |
||||
Initial valuation of Warrants |
(86 | ) | ||
Initial valuation of Beneficial Conversion Option |
(86 | ) | ||
Accumulated Amortization |
82 | |||
Total Discounts |
(90 | ) | ||
Accrued Interest |
37 | |||
Convertible Notes Payable, net |
$ | 2,447 | ||
NOTE 6 Derivative Liabilities
The May 2008 and October 2008 convertible notes, discussed above in Note 5, contain embedded
adjustment features whereby the conversion price will be adjusted if the Company issues additional
shares of common stock or securities exercisable, exchangeable, or convertible into shares of
common stock at a price per share less than both the conversion price then in effect and $0.75.
Based on ASC 815-40-15, discussed above in Note 2, that became effective for the Company on October
1, 2009, the embedded adjustment features are not indexed to the Companys own stock and,
therefore, are embedded derivative financial liabilities (the Embedded Derivatives) that require
bifurcation and separate accounting. Accordingly, the Company recorded a cumulative effect
adjustment to the opening balance of retained earnings on October 1, 2009. The cumulative effect
adjustment is the difference between the amounts recognized in the balance sheet for the conversion
options of the notes payable before initial application of ASC 815-40-15 and the fair values of the
Embedded Derivatives at initial application of ASC 815-40-15 on October 1, 2009. Subsequently, the
Company adjusted the Embedded Derivatives to fair value at each interim period and recognized the
changes in fair value as a charge or a benefit to earnings included in the Other Income (Expense)
section of the Companys Consolidated Statement of Operations.
The following is a summary of the cumulative effect adjustment recorded to the Companys
Consolidated Balance Sheet on October 1, 2009 (in thousands):
Balance | Cumulative | |||||||||||
September | Effect of | Balance | ||||||||||
30, 2009 | Adjustment | October 1, 2009 | ||||||||||
Derivative liabilities |
$ | | $ | 5,820 | $ | 5,820 | ||||||
Convertible Notes Payable, net |
6,340 | (596 | ) | 5,744 | ||||||||
Additional paid-in capital |
11,705 | (390 | ) | 11,315 | ||||||||
Accumulated deficit |
(8,272 | ) | (4,834 | ) | (13,106 | ) |
When the convertible notes were originally issued in May 2008 and October 2008, beneficial
conversion features of $390,000 were recorded to additional paid-in capital. As a result of
reclassifying the embedded conversion features from equity to liabilities, the cumulative effect of
the adjustment was a reduction of additional paid-in capital of $390,000.
The fair values of the Embedded Derivatives at the issuance dates (May 2008 and October 2008) of
the convertible notes were $1,771,000. The increase in the convertible note discounts of $1,381,000
less the accretion of an additional $785,000 in discounts to the convertible notes resulting from
the bifurcation of the Embedded Derivatives was booked as a reduction of $596,000 to the
Convertible Notes Payable as of October 1, 2009. The fair values at the issuance dates were
calculated using a Monte Carlo simulation model with the following assumptions:
May 2008 Note | October 2008 Note | |||||||
Risk-free interest rate: |
2.56 | % | 1.64 | % | ||||
Expected term: |
2 years | 2 years | ||||||
Expected dividend yield: |
0.00 | % | 0.00 | % | ||||
Expected volatility: |
45.29 | % | 50.87 | % | ||||
Probability of triggering reset provision: |
64.17 | % | 61.62 | % | ||||
Existing conversion price per share |
$ | 0.80 | $ | 0.75 | ||||
Companys stock price per share |
$ | 0.73 | $ | 0.75 |
F-16
Table of Contents
The fair values of the Embedded Derivatives at the transition date, October 1, 2009, were
$5,820,000, which was booked as a Derivative Liability on October 1, 2009. The fair values as of
October 1, 2009, were calculated using a Monte Carlo simulation model with the following
assumptions:
May 2008 Note | October 2008 Note | |||||||
Risk-free interest rate: |
0.40 | % | 0.40 | % | ||||
Expected term: |
0.64 years | 1.05 years | ||||||
Expected dividend yield: |
0.00 | % | 0.00 | % | ||||
Expected volatility: |
56.03 | % | 56.03 | % | ||||
Probability of triggering reset provision: |
22.42 | % | 19.18 | % | ||||
Existing conversion price per share |
$ | 0.80 | $ | 0.75 | ||||
Companys stock price per share |
$ | 1.45 | $ | 1.45 |
The cumulative effect of these adjustments was recorded as an increase to Accumulated Deficit of
$4,834,000 as of October 1, 2009.
On May 11, 2010, the May 2008 Note for $3,500,000 was converted into 4,375,000 shares of the
Companys common stock at a conversion price of $0.80 per share. The fair value of the Embedded
Derivative for the May 2008 Note as of the conversion date was $4,813,000, which was the intrinsic
value of the conversion, based on the Companys stock price as of the conversion date. The increase
in fair value of $1,556,000 for the Embedded Derivative from October 1, 2009, to the conversion
date of May 11, 2010, was recorded as a non-cash charge to Other Expenses for fiscal year 2010.
As of September 30, 2010, the fair value of the Embedded Derivative for the October 2008 Note was
$1,698,000. The decrease in fair value of $865,000 from October 1, 2009, was recorded as non-cash
benefit to Other Income for fiscal year 2010. The fair value as of September 30, 2010 was
calculated using a Monte Carlo simulation model with the following assumptions:
October 2008 Note | ||||
Risk-free interest rate: |
0.14 | % | ||
Expected term: |
17 days | |||
Expected dividend yield: |
0.00 | % | ||
Expected volatility: |
49.30 | % | ||
Probability of triggering reset provision: |
0.01 | % | ||
Existing conversion price per share |
$ | 0.75 | ||
Companys stock price per share |
$ | 1.26 |
NOTE 7 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 agreed to advance the Company a maximum of $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.
On November 2, 2009, the Company entered into a revised Credit Line Facility with the same lender
discussed above. Under the revised loan agreement, the lender agreed to advance the Company a
maximum of $1,000,000 secured by the 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 expired on September 8, 2010. All other terms of the September 4, 2009 Credit Line
Facility remained unchanged.
In November and December 2009, the Company borrowed $750,000 from the credit line facility. In June
2010, the Company repaid the $750,000 balance under the credit line facility.
F-17
Table of Contents
In September 2010, the Company elected not to renew the credit line facility.
Interest expense related to the credit line facility for the fiscal years ended September 30, 2010
and 2009, was $18,000 and $0, respectively.
NOTE 8 Stockholders Equity
Sale of Common Stock
On March 9, 2010, the Company entered into a Securities Purchase Agreement (the Purchase
Agreement) pursuant to which the Company issued and sold to a single institutional investor (the
Investor) an aggregate of 4,666,667 shares of the Companys common stock, par value $.001 per
share, in a private placement at a price of $1.50 per share, resulting in aggregate gross proceeds
to the Company of $7.0 million. Pursuant to the terms of the Purchase Agreement, the Company has
provided the Investor certain demand registration rights covering the resale of all of the shares
issued in the private placement, as well as piggy-back registration rights in certain
circumstances. The securities were issued in reliance upon the exemptions from registration under
the Securities Act of 1933, as amended, provided by Regulation D and Section 4(2). The securities
were issued directly by the Company and did not involve a public offering or general solicitation.
The Investor in the private placement is an Accredited Investor, as that term is defined in Rule
501 of Regulation D.
At closing of the Purchase Agreement, Mark A. Libratore, the Companys President, Chairman and
Chief Executive Officer, entered into a Stockholders Agreement with the Investor. Pursuant to the
Stockholders Agreement, Mr. Libratore agreed to vote his shares of common stock of the Company in
favor of the election of a director to be designated by the Investor.
On February 5, 2010, the Company entered into an Investment Banking Agreement (the Investment
Banking Agreement) with Littlebanc Advisors LLC, securities through Wilmington Capital Securities,
LLC (the Placement Agent), pursuant to which the Company engaged the Placement Agent to act as
its agent. As compensation for the Placement Agents services, the Placement Agent received an
aggregate of $350,000 in commissions and a five-year warrant to purchase 233,333 shares of the
Companys common stock at an exercise price of $2.50 per share.
Warrants
The Company issued warrants to the stockholders of Liberator Medical Supply, Inc., to purchase
2,818,092 shares of the Companys common stock in conjunction with the reverse merger in June 2007.
As of September 30, 2010, 1,355,217 of these warrants have expired and 1,437,875 of these warrants
have been exercised. The weighted-average exercise price for the remaining 25,000 warrants as of
September 30, 2010, is $1.50 per share. The expiration dates of the outstanding warrants are as
follows:
Shares | Expiration Date | |
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, 2010, 197,500 of these
warrants have expired and 137,500 of these warrants have been exercised. The weighted-average
exercise price for the remaining 351,667 warrants as of September 30, 2010, is $1.60 per share. The
expiration dates of the outstanding warrants are as follows:
Shares | Expiration Date | |
169,167
|
October 2010 | |
145,000
|
November 2010 | |
31,250
|
December 2010 | |
6,250
|
January 2011 |
F-18
Table of Contents
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, 2010, 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 5, 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, 2010, 30,000 of these warrants have
been exercised. The remaining 850,000 warrants will expire as follows:
Shares | Expiration Date | |
263,000
|
February 2013 | |
100,000
|
March 2013 | |
487,000
|
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 5,
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. In October 2009, the
placement agent exercised 350,000 warrants via a cashless exercise, in which the Company issued
192,873 shares of the Companys common stock. The 4,375,000 warrants held by the note holder are
still outstanding as of September 30, 2010, 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 long-term convertible notes payable issued in October 2008 and discussed
above in Note 5, 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 holder 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, 2010, and expire in October 2011. The fair value
of these warrants of $86,264 and $19,717, 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 | % |
F-19
Table of Contents
In connection with the sale of common stock on March 9, 2010, for gross proceeds of $7 million
and discussed above, the Company issued warrants to purchase 233,333 shares of the Companys common
stock at an exercise price of $2.50 per share to the placement agent. These warrants are still
outstanding as of September 30, 2010, and expire in October 2015. The fair value of these warrants
of $228,961 was determined using the Black-Scholes option pricing model with the assumptions listed
below:
Risk-free interest rate: |
2.34 | % | ||
Expected term: |
5 years | |||
Expected dividend yield: |
0.00 | % | ||
Expected volatility: |
63.66 | % |
A summary of warrants issued, exercised and expired during the fiscal years ended September 30,
2010 and 2009, is as follows:
Weighted | ||||||||
Avg. | ||||||||
Exercise | ||||||||
Warrants: | Shares | Price | ||||||
Balance at September 30, 2008 |
9,234,759 | $ | 1.04 | |||||
Issued |
1,433,334 | 1.25 | ||||||
Exercised |
(10,000 | ) | 1.00 | |||||
Expired |
(200,000 | ) | 1.00 | |||||
Balance at September 30, 2009 |
10,458,093 | $ | 1.07 | |||||
Issued |
233,333 | 2.50 | ||||||
Exercised |
(1,945,375 | ) | 1.00 | |||||
Expired |
(1,352,717 | ) | 1.00 | |||||
Balance at September 30, 2010 |
7,393,334 | $ | 1.14 | |||||
Options
In connection with conversion of $1,589,000 of debt to equity and under the terms of the reverse
merger in June 2007, Mr. Libratore, the Companys founder, principal shareholder and President,
received options to purchase 4,541,009 shares of the Companys common stock at an exercise price of
$0.0001. As of September 30, 2010, a total of 3,921,009 options were outstanding.
Employee and Director 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 July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock
Plan to increase the number of shares authorized under the plan from 1,000,000 to 2,000,000 shares.
The amendment was approved at the Companys annual meeting on September 4, 2009. As of September
30, 2010, there are 1,655,000 shares outstanding and 345,000 shares available for grant under the
2007 Stock Plan.
The weighted-average grant date fair value of options granted during the fiscal years 2010 and 2009
was $0.93 and $0.35, respectively. There were no options exercised during the fiscal years 2010
and 2009. The fair values of stock-based awards granted during the fiscal years ended September 30,
2010 and 2009, were calculated with the following weighted-average assumptions:
F-20
Table of Contents
2010 | 2009 | |||||||||
Risk-free interest rate: |
1.32 | % | 1.68 | % | ||||||
Expected term: |
3 years | 3 years | ||||||||
Expected dividend yield: |
0.00 | % | 0.00 | % | ||||||
Expected volatility: |
68.59 | % | 57.32 | % |
For the fiscal years ended September 30, 2010 and 2009, the Company recorded $260,000 and $86,000,
respectively, of stock-based compensation expense, which has been classified as Operating expenses,
sub-classification of Payroll, taxes and benefits, for the employees and General and administrative
for the directors. As of September 30, 2010, there is $259,000 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 1.7 years.
Stock option activity for the fiscal years ended September 30, 2010 and 2009 is summarized as
follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
2007 Stock Plan: | Shares | Price | Life (Years) | Value | ||||||||||||
Options outstanding at September 30, 2008 |
490,000 | $ | 0.77 | 2.45 | $ | 242,400 | ||||||||||
Granted, 2009 |
1,100,000 | 0.83 | ||||||||||||||
Expired or forfeited, 2009 |
(10,000 | ) | 0.75 | |||||||||||||
Options outstanding at September 30, 2009 |
1,580,000 | $ | 0.81 | 3.21 | $ | 706,300 | ||||||||||
Granted, 2010 |
200,000 | 2.00 | ||||||||||||||
Expired or forfeited, 2010 |
(125,000 | ) | 1.30 | |||||||||||||
Options outstanding at September 30, 2010 |
1,655,000 | $ | 0.92 | 3.32 | $ | 656,800 | ||||||||||
Options exercisable at September 30, 2010 |
1,017,500 | $ | 0.84 | 3.06 | $ | 447,050 | ||||||||||
Options vested or expected to vest at
September 30, 2010 |
1,655,000 | $ | 0.92 | 3.32 | $ | 656,800 |
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.
As of September 30, 2010, 192,539 shares of the Companys common stock have been purchased through
the ESPP, using $117,000 of proceeds received from employee payroll deductions. For the fiscal
years ended September 30, 2010 and 2009, the Company received $128,000 and $27,000, respectively,
through payroll deductions under the ESPP.
The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares
expected to be issued under the ESPP at the grant date, the beginning date of the offering period,
and recognizes compensation expense ratably over the offering period. If an employee elects to
increase their payroll withholdings during the offering period, the increase is treated as a
modification to the original option granted under the ESPP. As a result
F-21
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of the modification, the incremental fair value, if any, associated with the modified award is
recognized as compensation expense at the date of the modification. Compensation expense is
recognized only for shares that vest under the ESPP. For the fiscal years ended September 30, 2010
and 2009, the Company recognized $105,000 and $19,000 of compensation expense related to the ESPP.
NOTE 9 Basic and Diluted Earnings per Common Share
The following is a reconciliation of the numerator and denominator used in the computation of basic
and diluted earnings per share for the fiscal years ended September 30, 2010 and 2009 (in
thousands, except per share amounts):
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income basic |
$ | 2,600 | $ | 2,222 | ||||
Effect of dilutive securities: |
||||||||
Convertible debt |
146 | 196 | ||||||
Net income diluted |
$ | 2,746 | $ | 2,418 | ||||
Denominator: |
||||||||
Weighted average shares outstanding basic |
38,493 | 32,128 | ||||||
Effect of dilutive securities: |
||||||||
Stock options and warrants |
8,060 | 3,939 | ||||||
Convertible debt |
6,042 | 7,553 | ||||||
Weighted average shares outstanding diluted |
52,595 | 43,620 | ||||||
Earnings per share basic |
$ | 0.07 | $ | 0.07 | ||||
Earnings per share diluted |
$ | 0.05 | $ | 0.06 |
The following tables summarize the number of shares outstanding for each of the periods presented,
but not included in the calculation of diluted income per share because the impact would have been
anti-dilutive for the fiscal years indicated (in thousands):
2010 | 2009 | |||||||
Stock options |
100 | 1,580 | ||||||
Warrants |
358 | 10,458 | ||||||
Convertible Debt |
| 1,203 | ||||||
Totals |
458 | 13,241 | ||||||
NOTE 10 Income Taxes
Income tax expense (benefit) is as follows (in thousands):
Fiscal year ended September 30, | ||||||||
2010 | 2009 | |||||||
Current income tax expense (benefit): |
||||||||
Federal |
$ | (32 | ) | $ | 32 | |||
State |
| | ||||||
(32 | ) | 32 | ||||||
Deferred income tax expense: |
||||||||
Federal |
1,358 | | ||||||
State |
208 | | ||||||
1,566 | 32 | |||||||
Change in valuation allowance (benefit): |
||||||||
Federal |
(1,247 | ) | | |||||
State |
(189 | ) | | |||||
(1,436 | ) | | ||||||
Total income tax expense |
$ | 98 | $ | 32 | ||||
F-22
Table of Contents
Income tax expense (benefit) differs from the amounts that would result from applying the
federal statutory rate of 35% to the Companys income before taxes as follows (in thousands):
Fiscal year ended September 30, | ||||||||
2010 | 2009 | |||||||
Computed expected income tax expense (benefit) |
$ | 944 | $ | 789 | ||||
State income taxes, net of federal benefit |
135 | 108 | ||||||
True-up of prior year differences |
(34 | ) | 121 | |||||
Change in valuation allowance |
(1,436 | ) | (1,060 | ) | ||||
Non-deductible amortization of notes payable |
335 | | ||||||
Other nondeductible expenses |
154 | 74 | ||||||
Total income tax expense (benefit) |
$ | 98 | $ | 32 | ||||
Temporary differences that give rise to the components of deferred tax assets and liabilities are
as follows (in thousands):
September 30, | ||||||||
2010 | 2009 | |||||||
Deferred tax assets current: |
||||||||
Allowance for bad debts |
$ | 1,278 | $ | 898 | ||||
Capitalization of costs to inventory |
10 | | ||||||
Inventory reserve |
42 | 42 | ||||||
Derivative mark-to-market adjustment |
267 | | ||||||
Deferred expenses |
55 | 7 | ||||||
Accrued expenses |
44 | 55 | ||||||
Deferred tax assets current |
1,696 | 1,002 | ||||||
Less: Valuation allowance |
| (1,002 | ) | |||||
Net deferred tax assets current |
$ | 1,696 | $ | | ||||
Deferred tax assets non-current |
||||||||
Net operating loss carry-forwards |
$ | 2,094 | $ | 1,874 | ||||
Charitable contribution carry-forwards |
2 | | ||||||
Amortization of value of warrants |
| 320 | ||||||
Minimum tax credit carry-forward |
| 32 | ||||||
Deferred tax assets non-current |
2,096 | 2,226 | ||||||
Less: Valuation allowance |
(17 | ) | (771 | ) | ||||
Net deferred tax assets non-current |
$ | 2,079 | $ | 1,455 | ||||
Deferred tax liability non-current: |
||||||||
Deferred advertising |
3,860 | 1,449 | ||||||
Property and equipment |
45 | 6 | ||||||
Deferred tax liability non-current |
$ | 3,905 | $ | 1,455 | ||||
Net deferred tax asset (liability) |
$ | (130 | ) | $ | | |||
Deferred tax liability for discounts on notes |
(1 | ) | | |||||
Total deferred tax liabilities |
$ | (131 | ) | $ | | |||
F-23
Table of Contents
As of September 30, 2010, the Company had net operating losses of approximately $5.5 million
for federal income tax purposes and $5.0 million for Florida income tax purposes that can be
carried forward for up to twenty years and deducted against future taxable income. The net
operating loss carry-forwards expire in various years through 2030. Of the total federal and
Florida net operating losses, $46,000 are subject to limitations under the provisions of the
Internal Revenue Code section 382 due to a prior year ownership change.
As of September 30, 2010, management determined a valuation allowance against the net deferred tax
assets of $17,000. In assessing the ability to realize a portion of the deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making the assessment.
As of September 30, 2010, the Company does not have any material unrecognized tax benefits and
accordingly has not recorded any interest or penalties related to unrecognized tax benefits. We do
not believe it is reasonably possible that unrecognized tax benefits will significantly change
within the next twelve months. The Company and its subsidiaries file a consolidated federal income
tax return and Florida income tax return. These returns remain subject to examination by taxing
authorities for all years after December 31, 2006.
NOTE 11 Commitments and Contingencies
Capital Lease Obligations
The Company leases certain computer equipment and office furniture under capital leases. The net
book value of these assets was $77,000 and $158,000 as of September 30, 2010, and 2009,
respectively. The payment terms of the capital leases expire between October 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, 2010 (in thousands):
Amount | ||||
Fiscal year ending September 30: |
||||
2011 |
$ | 63 | ||
2012 |
13 | |||
Total minimum lease payments |
76 | |||
Less: Interest on capitalized lease obligations |
(6 | ) | ||
Present value of capitalized lease obligations |
70 | |||
Less: Current portion |
(57 | ) | ||
Capitalized lease obligations, net of current portion |
$ | 13 | ||
Interest expense on capitalized leases was $19,000 and $29,000 for years ended September 30,
2010 and 2009, respectively.
Operating Leases
The Company leases various office and warehouse facilities and equipment under non-cancelable
operating leases that expire at various times through February 2015. Future minimal rental and
lease commitments under non-cancelable operating leases with terms in excess of one year as of
September 30, 2010 are as follows (in thousands):
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Amount | ||||
Fiscal year ending September 30: |
||||
2011 |
$ | 828 | ||
2012 |
765 | |||
2013 |
387 | |||
2014 |
332 | |||
2015 |
25 | |||
Total minimum lease payments |
$ | 2,337 | ||
Rent and equipment lease expense for the years ended September 30, 2010 and 2009 was $844,000
and $571,000, respectively.
Purchase Commitments
In May 2009, the Company entered into a long distance telephone service agreement that requires the
company to purchase a minimum of $6,000 per month, excluding vendor rebates, of long distance
service through December 2009. Effective January 2010, the agreement was revised to $10,000 per
month, excluding additional vendor rebates. The long distance service agreement expires in April
2014. The Company purchased $208,000 and $48,000 of long distance service under the agreement for
the fiscal years ended September 30, 2010 and 2009, respectively.
Litigation
From time to time, we are party to certain legal proceedings that arise in the ordinary course and
are incidental to our business. There are currently no such pending proceedings to which we are a
party that our management believes will have a material adverse effect on the Companys
consolidated financial position or results of operations. However, future events or circumstances,
currently unknown to management, will determine whether the resolution of pending or threatened
litigation or claims will ultimately have a material effect on our consolidated financial position,
liquidity or results of operations in any future reporting periods.
NOTE 12 401(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 13 Concentration of Credit Risk
From time to time, the Company has cash in financial institutions in excess of federally insured
limits. However, the Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on its cash balances. Cash exceeding federally insured
limits amounted to $3,186,000 as of September 30, 2010.
The Company generally does not require collateral or other security in extending credit to its
customers; however, the Company routinely accepts assignment of (or is otherwise entitled to
receive) benefits receivable under the health insurance programs, plans, or policies covering its
customers. Accounts receivable due from government sources under Medicare, Medicaid, and other
federally funded programs was approximately 60% and 58% of total gross receivables as of September
30, 2010 and 2009, respectively.
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Product Concentration: A significant portion of the Companys revenues are generated from the sale
of urological products. As a result, changes in the external environment, including regulatory
changes, could be beneficial or detrimental depending on market conditions. The impact of these
changes cannot be determined at this time.
NOTE 14 Subsequent Events
On October 14, 2010, the Company received a notice of conversion from the holder for the entire
$2,500,000 principal amount of the Senior Convertible Note due October 17, 2010, together with a
notice of increase delivered pursuant to the note provision limiting the holders conversion right
to that number of common shares which, together with any other common shares beneficially owned by
the holder, would exceed 9.99% of the number of shares of common stock outstanding immediately
after giving effect to such conversion (the Maximum Percentage). Concurrently with the receipt of
the holders notice of conversion and increase in the Maximum Percentage, the Company agreed to
waive the note provision that any increase or decrease in the Maximum Percentage is effective
commencing on the 61st day after the notice is delivered to the Company, so that the
holders increase in the Maximum Percentage was effective immediately upon its receipt by the
Company.
On October 15, 2010, the Company issued 3,333,333 shares of the Companys common stock upon
conversion of the $2,500,000 convertible note due October 17, 2010 at a conversion price of $0.75
per share. The shares were issued on reliance from the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended. As a result of the note conversion, the
Companys current liabilities were reduced by $2,500,000 for the face value of the convertible note
and $2,600,000 for the fair value of the embedded derivative as of the conversion date. In
addition, $902,000 was recorded as a non-cash charge to Other Expenses due to the increase in fair
value of the embedded derivative from September 30, 2010, to the conversion date of the note on
October 15, 2010.
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