Attached files
file | filename |
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EX-32.1 - EX-32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g26197exv32w1.htm |
EX-31.2 - EX-31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g26197exv31w2.htm |
EX-32.2 - EX-32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g26197exv32w2.htm |
EX-31.1 - EX-31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g26197exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2009 |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
Commission file number: 000-05663
LIBERATOR MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA (State or other jurisdiction of incorporation or organization) |
87-0267292 (I.R.S. Employer Identification No.) |
2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(772) 287-2414
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes 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 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
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding as of February 10, 2010 | |
Common Stock, $.001 | 33,933,666 |
TABLE OF CONTENTS
Page | ||||||||
Explanatory Note | 3 | |||||||
PART I FINANCIAL INFORMATION | 4 | |||||||
Item 1. | 4 | |||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
Item 2. | 23 | |||||||
Item 3. | 28 | |||||||
Item 4T. | 28 | |||||||
PART II OTHER INFORMATION | 30 | |||||||
Item 1. | 30 | |||||||
Item 1A. | 30 | |||||||
Item 2. | 30 | |||||||
Item 3. | 30 | |||||||
Item 4. | 30 | |||||||
Item 5. | 30 | |||||||
SIGNATURES | 31 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
Explanatory Note Restatement of Previously Issued Financial Statements
Liberator Medical Holdings, Inc. (the Company) is filing this amendment to its Quarterly Report
on Form 10-Q for the interim period ended December 31, 2009, which was originally filed with the
Securities and Exchange Commission (SEC) on February 11, 2010 (the Original Filing), to include
restated financial statements as described in Note 3 to the condensed consolidated financial
statements. The Company has restated its previously issued condensed consolidated financial
statements as of and for the three months ended December 31, 2009, to properly account for the
following:
| The Companys adoption of accounting principles related to embedded conversion features included in certain convertible notes payable issued in May and October 2008 that became effective for the Company on October 1, 2009. | ||
| The effect of a change in a valuation allowance that resulted from a change in judgment about the realizability of the related deferred tax asset in future years. | ||
| In addition, certain reclassifications related to the accounting for deferred advertising costs and deferred income taxes have been made in order to maintain consistency and comparability with our subsequent presentations in fiscal year 2010 on Forms 10-Q and 10-K. |
The revisions relate to non-operating and non-cash items for the interim period ended December 31,
2009, and do not impact reported revenues, operating income, or the Companys cash position. Please
refer to Note 3 of the condensed consolidated financial statements below for a detailed analysis of
the effects of the restatements on our condensed consolidated financial statements for the three
months ended December 31, 2009.
This Form 10-Q/A amends the following items in the Companys Original Filing:
| Part I Item 1 Condensed Consolidated Financial Statements | ||
| Part I Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations | ||
| Part I Item 4T Controls and Procedures | ||
| Part II Item 6 Exhibits |
For the convenience of the reader, this Form 10-Q/A sets forth the Quarterly Report on Form 10-Q in
its entirety. Other than as described above, none of the other disclosures in the Original Filing
have been amended or updated. Among other things, forward-looking statements made in the Original
Filing have not been revised to reflect events that occurred or facts that became known to the
Company after the filing of the Original Filing, and such forward-looking statements should be read
in their historical context. Accordingly, this Form 10-Q/A should be read in conjunction with the
Companys filings subsequent to the Original Filing with the SEC.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
As Restated | ||||||||
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 2,881 | $ | 3,798 | ||||
Restricted cash |
1,053 | 500 | ||||||
Accounts receivable, net of allowances of $2,717 and $2,327, respectively |
4,664 | 3,850 | ||||||
Inventory, net of allowance for obsolete inventory of $110 and $110, respectively |
933 | 902 | ||||||
Deferred taxes, current portion |
1,073 | | ||||||
Debt issuance costs, current portion |
242 | 347 | ||||||
Other current assets |
246 | 136 | ||||||
Total Current Assets |
11,092 | 9,533 | ||||||
Property and equipment, net of accumulated depreciation of $1,116 and $1,021,
respectively |
1,726 | 1,041 | ||||||
Deferred advertising |
4,983 | 3,755 | ||||||
Debt issuance costs, net of current portion |
| 7 | ||||||
Deposits |
258 | 123 | ||||||
Total Assets |
$ | 18,059 | $ | 14,459 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 2,834 | $ | 2,089 | ||||
Accrued liabilities |
560 | 716 | ||||||
Credit line facility |
750 | | ||||||
Stockholder loans |
1,315 | 1,515 | ||||||
Convertible notes payable, net of unamortized discount of $670 and $292,
respectively |
5,863 | 3,893 | ||||||
Derivative liabilities |
10,918 | | ||||||
Capital lease obligations, current portion |
77 | 80 | ||||||
Deferred rent liability, current portion |
38 | 60 | ||||||
Total Current Liabilities |
22,355 | 8,353 | ||||||
Convertible notes payable, net of unamortized discount of $0 and $90, respectively |
| 2,447 | ||||||
Capital lease obligations, net of current portion |
53 | 70 | ||||||
Deferred rent liability, net of current portion |
185 | 165 | ||||||
Deferred tax liability |
64 | | ||||||
Total Liabilities |
22,657 | 11,035 | ||||||
Stockholders Equity (Deficit) |
||||||||
Common stock, $.001 par value, 200,000 shares authorized; 33,298 and 32,462 shares
issued, respectively; 33,209 and 32,377 shares outstanding at December 31, 2009 and
September 30, 2009, respectively |
33 | 32 | ||||||
Additional paid-in capital |
11,870 | 11,705 | ||||||
Accumulated deficit |
(16,451 | ) | (8,272 | ) | ||||
(4,548 | ) | 3,465 | ||||||
Less: Treasury stock, at cost; 89 and 85 shares at December 31, 2009 and September
30, 2009, respectively |
(50 | ) | (41 | ) | ||||
Total Stockholders Equity (Deficit) |
(4,598 | ) | 3,424 | |||||
Total Liabilities and Stockholders Equity (Deficit) |
$ | 18,059 | $ | 14,459 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2009 and 2008
(Unaudited)
(in thousands, except per share amounts)
As Restated | ||||||||
2009 | 2008 | |||||||
Sales |
$ | 9,158 | $ | 5,342 | ||||
Cost of Sales |
3,248 | 1,841 | ||||||
Gross Profit |
5,910 | 3,501 | ||||||
Operating Expenses |
||||||||
Payroll, taxes and benefits |
2,169 | 1,065 | ||||||
Advertising |
806 | 298 | ||||||
Bad debts |
655 | 679 | ||||||
Depreciation |
95 | 66 | ||||||
General and administrative |
1,025 | 882 | ||||||
Total Operating Expenses |
4,750 | 2,990 | ||||||
Income from Operations |
1,160 | 511 | ||||||
Other Income (Expense) |
||||||||
Interest expense |
(416 | ) | (273 | ) | ||||
Change in fair value of derivative liabilities |
(5,098 | ) | | |||||
Interest income |
3 | 8 | ||||||
Total Other Income (Expense) |
(5,511 | ) | (265 | ) | ||||
Income (Loss) before Income Taxes |
(4,351 | ) | 246 | |||||
Benefit from Income Taxes |
(1,006 | ) | | |||||
Net Income (Loss) |
$ | (3,345 | ) | $ | 246 | |||
Basic earnings (loss) per share: |
||||||||
Weighted average shares outstanding |
32,848 | 32,049 | ||||||
Earnings (Loss) per share |
$ | (0.10 | ) | $ | 0.01 | |||
Diluted earnings (loss) per share: |
||||||||
Weighted average shares outstanding |
32,848 | 35,970 | ||||||
Earnings (Loss) per share |
$ | (0.10 | ) | $ | 0.01 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders Equity (Deficit)
For the three months ended December 31, 2009 As Restated
(Unaudited)
(in thousands)
(Unaudited)
(in thousands)
Total | ||||||||||||||||||||||||
Common | Common | Paid in | Accumulated | Treasury | Stockholders | |||||||||||||||||||
Shares | Stock | Capital | Deficit | Stock | Equity (Deficit) | |||||||||||||||||||
Balance at September 30, 2009 |
32,377 | $ | 32 | $ | 11,705 | $ | (8,272 | ) | $ | (41 | ) | $ | 3,424 | |||||||||||
Cumulative effect of change in accounting principle |
(390 | ) | (4,834 | ) | (5,224 | ) | ||||||||||||||||||
Options issued to employees |
125 | 125 | ||||||||||||||||||||||
Common stock issued for interest on convertible debt |
19 | | 45 | 45 | ||||||||||||||||||||
Common stock issued upon conversion of debt |
300 | | 150 | 150 | ||||||||||||||||||||
Common stock issued for exercise of warrants |
355 | 1 | 162 | 163 | ||||||||||||||||||||
Common stock issued for employee stock purchase plan |
162 | | 73 | 73 | ||||||||||||||||||||
Purchase common treasury stock |
(4 | ) | (9 | ) | (9 | ) | ||||||||||||||||||
Net loss |
(3,345 | ) | (3,345 | ) | ||||||||||||||||||||
Balance at December 31, 2009 |
33,209 | $ | 33 | $ | 11,870 | $ | (16,451 | ) | $ | (50 | ) | $ | (4,598 | ) | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2009 and 2008
(Unaudited)
(in thousands)
(Unaudited)
(in thousands)
Restated | ||||||||
2009 | 2008 | |||||||
Cash flow from operating activities: |
||||||||
Net Income (Loss) |
$ | (3,345 | ) | $ | 246 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
905 | 357 | ||||||
Change in fair value of derivative liabilities |
5,098 | | ||||||
Equity based compensation |
133 | 136 | ||||||
Provision for doubtful accounts and sales returns and adjustments |
763 | 679 | ||||||
Non-cash interest related to convertible notes payable |
353 | 162 | ||||||
Deferred income taxes |
(1,009 | ) | | |||||
Amortization of non-cash debt issuance costs |
9 | 10 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,576 | ) | (1,190 | ) | ||||
Deferred advertising |
(2,037 | ) | (680 | ) | ||||
Inventory |
(31 | ) | (275 | ) | ||||
Other assets |
(150 | ) | 80 | |||||
Accounts payable |
744 | 928 | ||||||
Accrued expenses |
(179 | ) | 6 | |||||
Deferred rent |
(2 | ) | (12 | ) | ||||
Net Cash Flow Provided by (Used in) Operating Activities |
(324 | ) | 447 | |||||
Cash flow from investing activities: |
||||||||
Purchase of property and equipment |
(780 | ) | (29 | ) | ||||
Purchase of certificates of deposit |
(553 | ) | | |||||
Net Cash Flow Used in Investing Activities |
(1,333 | ) | (29 | ) | ||||
Cash flow from financing activities: |
||||||||
Proceeds from issuance of convertible notes |
| 2,500 | ||||||
Costs associated with issuance of convertible notes |
| (310 | ) | |||||
Proceeds from the exercise of warrants |
163 | | ||||||
Proceeds from employee stock purchase plan |
56 | | ||||||
Proceeds from credit line facility |
750 | | ||||||
Purchase of treasury stock |
(9 | ) | (3 | ) | ||||
Payments of debt and capital lease obligations |
(220 | ) | (16 | ) | ||||
Net Cash Flow Provided by Financing Activities |
740 | 2,171 | ||||||
Net increase (decrease) in cash |
(917 | ) | 2,589 | |||||
Cash at beginning of period |
3,798 | 1,173 | ||||||
Cash at end of period |
$ | 2,881 | $ | 3,762 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 105 | $ | 93 | ||||
Cash paid for income taxes |
$ | 12 | $ | | ||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Capital expenditures funded by capital lease borrowings |
$ | | $ | 17 | ||||
Common stock issued for interest expense |
$ | 45 | $ | | ||||
Common stock issued for conversion of debt |
$ | 150 | $ | |
See accompanying notes to unaudited condensed consolidated financial statements.
7
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Unaudited Condensed Consolidated Financial Statements
December 31, 2009
Notes To The Unaudited Condensed Consolidated Financial Statements
December 31, 2009
Note 1 Basis of Presentation (Restated)
The accompanying unaudited condensed consolidated financial statements of Liberator Medical
Holdings, Inc. (the Company) and the notes thereto have been prepared in accordance with
instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. However, in the opinion of the Company, such
information includes all adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the financial position and results of operations for the
interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes thereto that are
included in the Companys Annual Report on Form 10-K for the year ended September 30, 2009 that was
filed with the SEC on December 17, 2009. The results of operations for the three months ended
December 31, 2009 are not necessarily indicative of the results to be expected for the full year.
The unaudited condensed consolidated financial statements include the accounts of the Company,
Liberator Medical Supply, Inc., Liberator Health and Education, Inc., and Liberator Health and
Wellness, Inc., its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Certain reclassifications of amounts previously reported have been made to the accompanying
condensed consolidated financial statements in order to maintain consistency and comparability
between the periods presented. The following reclassification was made to the 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. |
Note 2 Summary of Significant Accounting Policies (Restated)
The significant accounting policies followed by the Company for interim reporting are consistent
with those included in the Companys Annual Report on Form 10-K for the year ended September 30,
2009, except for the accounting policy related to Derivative Financial Instruments discussed below.
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 condensed 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 Condensed Consolidated Statement of Operations.
8
Table of Contents
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.
Recent Accounting Pronouncements
In September 2009, Accounting Standards Codification (ASC) became the source of authoritative
U.S. Generally Accepted Accounting Principles (GAAP) recognized by the Financial Accounting
Standards Board (FASB) for nongovernmental entities, except for certain FASB Statements not yet
incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are
also sources of authoritative U.S. GAAP for registrants. The discussion below includes the
applicable ASC reference.
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 Notes 4 and 10 below).
The Company adopted ASC Topic 825-10 Financial Instruments, which requires quarterly disclosure of
information about the fair value of financial instruments within the scope of Topic 825-10. The
Company adopted this pronouncement effective April 1, 2009 with no material impact on its condensed
consolidated financial statements. The carrying value of financial instruments including cash, receivables, accounts payable, accrued
expenses and debt, approximates their fair value at December 31, 2009 and September 30, 2009 due to
the relatively short-term nature of these instruments. The carrying value of long-term debt
approximates its fair value as it bears variable interest rate which reflects the current market
yield level for comparable loans.
In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures. The
standard provides additional guidance for estimating fair value in accordance with Topic 820-10-65
when the volume and level of activity for the asset or liability have significantly decreased and
includes guidance on identifying circumstances that indicate if a transaction is not orderly. The
Company adopted this pronouncement effective April 1, 2009 with no material impact on its condensed
consolidated financial statements.
The Company adopted, ASC Topic 855-10 Subsequent Events effective April 1, 2009. This pronouncement
changes the general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. The
Company has evaluated subsequent events through the time it filed its original interim report on
Form 10-Q on February 11, 2010.
In July 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 168 codified all previously issued accounting pronouncements, eliminating the
prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized
by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 Generally
Accepted Accounting Principles, is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of this pronouncement did not have a material
effect on the condensed consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Measuring
Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an
active market for the identical liability is not available, an entity must measure fair value using
one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with
no material impact on its condensed consolidated financial statements.
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In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which
revises the existing multiple-element revenue arrangements guidance and changes the determination
of when the individual
deliverables included in a multiple-element revenue arrangement may be treated as separate units of
accounting, modifies the manner in which the transaction consideration is allocated across the
separately identified deliverables and expands the disclosures required for multiple-element
revenue arrangements. The pronouncement is effective for financial statements issued after December
31, 2010. The Company does not expect the pronouncement to have a material effect on its condensed
consolidated financial statements.
Note 3 Restatement of Previously Issued Financial Statements (Restated)
On December 9, 2010, the Company concluded that the Companys previously issued unaudited financial
statements as of and for the interim period ended December 31, 2009, contained errors in the
application of certain generally accepted accounting principles. The Company has restated its
previously issued condensed consolidated financial statements as of and for the three months ended
December 31, 2009, to properly account for the following:
| Previously, the Company had concluded that embedded anti-dilution provisions included in certain convertible notes payable issued in May and October 2008 were indexed to the Companys own stock under accounting principles that became effective for the Company on October 1, 2009 and did not change the accounting treatment for the embedded conversion features when the guidance became effective for the Company on October 1, 2009. However, after re-evaluating the accounting principles issued and our accounting treatment for the embedded conversion features, the Company concluded that an error was made in the application of the accounting principles, that the embedded anti-dilution provisions are not indexed to the Companys own stock, and, therefore, they are embedded derivative financial liabilities (the Embedded Derivatives) that require bifurcation and separate accounting. Accordingly, the Company should have recorded a cumulative effect adjustment to the opening balance of paid in capital and accumulated deficit on October 1, 2009. In addition, the Company is required to adjust the Embedded Derivatives 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, recorded as a component of other income (expense) in the Companys condensed consolidated statement of operations. |
| Previously, the Company included a change in the valuation allowance as an adjustment to the estimated annual tax rate used in the calculation of interim period deferred taxes, which allocated the tax benefits proportionately throughout the four quarters of fiscal year 2010. Based on a re-evaluation of generally accepted accounting principles, the Company recorded the effect of the change in the valuation allowance as a discrete event, which resulted in an additional $1,072,000 in tax benefits during the interim period ending December 31, 2009. |
| In addition, certain reclassifications related to the accounting for deferred advertising costs and deferred income taxes have been made in order to maintain consistency and comparability with our subsequent presentations in fiscal year 2010 on Forms 10-Q and 10-K. The Company had reflected both a current and long term portion of the deferred advertising assets on the condensed consolidated balance sheet as of December 31, 2009. 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. As a result, the Company reclassified the amount previously recorded as current assets to non-current assets. The Company had reflected its deferred tax assets and deferred tax liabilities as a consolidated deferred tax liability amount on the condensed consolidated balance sheet as of December 31, 2009. The Company has reclassified the current portion of the deferred tax assets from the consolidated deferred tax liability and presented the amounts separately in accordance with generally accepted accounting principles. |
10
Table of Contents
The following tables provide a summary of the amounts restated as of and for the three months ended
December 31, 2009 (dollars in thousands, except per share amounts):
Cumulative | ||||||||||||||||
Effect | ||||||||||||||||
As | Adjustment | Current | ||||||||||||||
Previously | as of | Period | As | |||||||||||||
Balance Sheet Data: | Reported | 10/1/2009 | Effect | Restated | ||||||||||||
Deferred advertising, current portion |
2,678 | | (2,678 | ) | | |||||||||||
Deferred taxes, current portion |
| | 1,073 | 1,073 | ||||||||||||
Current Assets |
12,697 | | (1,605 | ) | 11,092 | |||||||||||
Deferred advertising |
2,305 | | 2,678 | 4,983 | ||||||||||||
Total Assets |
16,986 | | 1,073 | 18,059 | ||||||||||||
Notes payable, net |
$ | 6,286 | $ | (596 | ) | $ | 173 | $ | 5,863 | |||||||
Derivative liabilities |
| 5,820 | 5,098 | 10,918 | ||||||||||||
Current Liabilities |
11,860 | 5,224 | 5,271 | 22,355 | ||||||||||||
Deferred tax liability |
503 | | (439 | ) | 64 | |||||||||||
Total Liabilities |
12,601 | 5,224 | 4,832 | 22,657 | ||||||||||||
Additional Paid in Capital |
11,820 | (390 | ) | 440 | 11,870 | |||||||||||
Accumulated Deficit |
(7,418 | ) | (4,834 | ) | (5,268 | ) | (16,451 | ) | ||||||||
Total Equity (Deficit) |
$ | 4,385 | $ | (5,224 | ) | $ | (3,759 | ) | $ | (4,598 | ) | |||||
For the three months ended December 31, 2009 | ||||||||||||
As | Current | |||||||||||
Previously | Period | As | ||||||||||
Statement of Operations Data: | Reported | Effect | Restated | |||||||||
Other Income (Expense): |
||||||||||||
Interest Expense |
$ | (243 | ) | $ | (173 | ) | $ | (416 | ) | |||
Change in fair value of derivative liabilities |
| (5,098 | ) | (5,098 | ) | |||||||
Total Other Income (Expense) |
(240 | ) | (5,271 | ) | (5,511 | ) | ||||||
Provision for (Benefit from) Income Taxes |
66 | (1,072 | ) | (1,006 | ) | |||||||
Net Income (Loss) |
$ | 854 | $ | (4,199 | ) | $ | (3,345 | ) | ||||
Basic Earnings (Loss) per Share |
$ | 0.03 | $ | (0.13 | ) | (0.10 | ) | |||||
Diluted Earnings (Loss) per Share |
$ | 0.02 | $ | (0.12 | ) | (0.10 | ) |
Note 4 Fair Value Measurements (Restated)
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. |
11
Table of Contents
The summary of fair values of financial instruments as of December 31, 2009 (dollars in thousands):
December 31, 2009 | ||||||||||||||
Instrument | Fair Value | Carrying Value | Level | Valuation Methodology | ||||||||||
Derivative liabilities (See Note 10 below)
|
$ | 10,918 | $ | 10,918 | 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 10 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
three months ended December 31, 2009 (dollars in thousands):
FY 2010 | ||||
Beginning balance: Derivative liabilities |
$ | | ||
Adoption of change in accounting principle |
5,820 | |||
Total loss on change in derivative liabilities |
5,098 | |||
Purchases, sales, issuances and settlements, net |
| |||
Ending balance: Derivative liabilities |
$ | 10,918 | ||
Note 5 Property and Equipment
A summary of property and equipment at December 31, 2009 and September 30, 2009 is as follows (in
thousands):
Estimated | December 31, | September 30, | ||||||||||
Life | 2009 | 2009 | ||||||||||
Leased equipment |
5 years | $ | 582 | $ | 582 | |||||||
Transportation equipment |
3 years | 95 | 95 | |||||||||
Warehouse equipment |
5 years | 64 | 56 | |||||||||
Office furniture |
5 years | 339 | 150 | |||||||||
Computer equipment |
3 years | 150 | 87 | |||||||||
Telephone equipment |
5 years | 33 | 33 | |||||||||
Rental equipment |
7 years | 18 | 18 | |||||||||
Web site |
3 years | 6 | 6 | |||||||||
Server software |
3 years | 158 | 130 | |||||||||
Training guides |
3 years | 3 | 3 | |||||||||
Leasehold improvements |
5 years | 901 | 889 | |||||||||
Signage |
3 years | 13 | 13 | |||||||||
Fixed assets under construction |
480 | | ||||||||||
Total property and equipment |
2,842 | 2,062 | ||||||||||
Less: accumulated depreciation |
(1,116 | ) | (1,021 | ) | ||||||||
Property and equipment, net |
$ | 1,726 | $ | 1,04 | ||||||||
The amounts charged to operations for depreciation for the three months ended December 31, 2009 and
2008 were $95,000 and $66,000, respectively.
Note 6 Deposits
Deposits at December 31, 2009 and September 30, 2009 consist of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Deposits on leased equipment |
$ | 14 | $ | 9 | ||||
Building rent deposits |
64 | 67 | ||||||
Utility deposits |
9 | 9 | ||||||
Deposits on software consulting |
25 | 25 | ||||||
Deposits for building expansion |
66 | 3 | ||||||
Deposits for professional fees |
80 | 10 | ||||||
Total deposits |
$ | 258 | $ | 123 | ||||
12
Table of Contents
Note 7 Stockholder Loan
The stockholder loan at December 31, 2009 and September 30, 2009 in the amounts of $1,315,000 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 9. During the three months ended December 31, 2009, $200,000 was
paid to Mr. Libratore. As of December 31, 2009, an additional $150,000 has been authorized by the
senior note holders, but not paid to Mr. Libratore. Interest expense related to the stockholder
loan for the three months ended December 31, 2009 and 2008 were $31,000, and $38,000, respectively.
Note 8 Credit Line Facility
On September 4, 2009, the Company entered into a one-year Business Loan Agreement, Promissory Note
and Assignment of Deposit (collectively, the Credit Line Facility) with a lender. Pursuant to the
Credit Line Facility, the lender has agreed to advance the Company a maximum of Five Hundred
Thousand Dollars ($500,000) secured by the Companys $500,000 certificate of deposit held by the
lender. Interest is payable on any advance under the Credit Line Facility at a rate of 1.000
percentage point under the corporate loan base rate index published by the Wall Street Journal,
with a minimum interest rate of 4.750% per annum.
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 has agreed to advance the Company a
maximum of One Million Dollars ($1,000,000) secured by the Companys existing $500,000 certificate
of deposit held by the lender plus an additional $550,000 certificate of deposit to be held by the
lender. The revised Credit Line Facility expires on September 8, 2010. All other terms of the
September 4, 2009 Credit Line Facility remain unchanged.
As of December 31, 2009, the Company had an outstanding balance of $750,000 under the Credit Line Facility.
As of December 31, 2009, the Company had an outstanding balance of $750,000 under the Credit Line Facility.
Note 9 Convertible Notes Payable (Restated)
April 2008 Convertible Notes
On April 11, 2008, the Company closed a private placement consisting of convertible notes and
warrants for $804,000, of which $598,000 was cash proceeds and $206,000 was prior year debt
exchanged for the convertible notes. The notes are convertible into shares of our common stock at
an initial conversion price of $0.50 per share, subject to adjustment, and mature one year after
issuance. The notes are senior unsecured obligations of our Company and accrue interest at an
annual rate of twelve percent (12%) per annum, payable at maturity. The warrants have a term of
five years and are exercisable from the date of their issuance until their expiration at a price of
$1.00 per share. In addition, we issued a warrant to the placement agent exercisable for up to
51,000 shares of our common stock on terms substantially similar to the warrant issued in
connection with the note described above. As of December 31, 2009, $260,000 of the notes has been converted into 520,000 shares of the
Companys common stock and $93,000 of the notes has been redeemed for cash. During fiscal year
2009, the maturity dates for the remaining $451,000 of notes were extended for one year from the
original date of maturity. The maturity dates and amounts for the outstanding notes as of December
31, 2009 are as follows (in thousands):
Amount Due | ||||
February 2010 |
$ | 263 | ||
March 2010 |
50 | |||
April 2010 |
138 | |||
Total April 2008 Convertible Notes Due |
$ | 451 | ||
13
Table of Contents
Interest expense related to the April 2008 convertible notes was $16,000 and $23,000 for the three
months ended December 31, 2009 and 2008, respectively.
May 2008 Convertible Note
On May 22, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $3,500,000. The note is convertible into shares of our common stock
at an initial conversion price of $0.80 per share, subject to adjustment, and matures on May 22,
2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3% per
annum, paid semi-annually on each November 15 and May 15. The note is unconditionally guaranteed by
Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of
the note will be reduced if, among other things, we issue shares of common stock or securities
exercisable, exchangeable or convertible for or into shares of common stock (common stock
equivalents) at a price per share less than both the conversion price then in effect and $0.75,
subject to certain exclusions. The 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.
As a result of the cumulative effect adjustment recorded for the Embedded Derivatives, described
above in Note 3, the net discounts on the May 2008 note increased by $201,000. Due to the increased
discounts on the note, an additional $78,000 was recorded as non-cash interest expense.
Interest expense related to the May 2008 convertible note was $219,000 and $141,000 for the three
months ended December 31, 2009 and 2008, respectively.
October 2008 Convertible Note
On October 17, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $2,500,000. The note is convertible into shares of our common stock
at an initial conversion price of $0.75 per share, subject to adjustment, and matures on October
17, 2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3%
per annum, paid semi-annually on each October 15 and April 15. The note is unconditionally
guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The
conversion price of the note will be reduced if, among other things, we issue shares of common
stock or securities exercisable, exchangeable or convertible for or into shares of common stock
(common stock equivalents) at a price per share less than both the conversion price then in
effect and $0.75, subject to certain exclusions. The 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 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.
14
Table of Contents
As a result of the cumulative effect adjustment recorded for the Embedded Derivatives, described
above in Note 3, the net discounts on the October 2008 note increased by $395,000. Due to the
increased discounts on the note, an additional $95,000 was recorded as non-cash interest expense.
Interest expense related to the October 2008 convertible note was $142,000 and $33,000 for the
three months ended December 31, 2009 and 2008, respectively.
In May 2009, the Company entered into Waiver Agreements with the note holder of the May 2008 and
October 2008 convertible notes discussed above. As part of the Waiver Agreements, the note holder
agreed to accept 171,945 shares of the Companys common stock, with a fair market value of
$105,000, in lieu of the Companys obligation to pay cash in the amount of $86,000 for interest
payments that were due April 15, 2009 and May 15, 2009 under the original terms of the notes. As a
result of this transaction, the Company incurred an additional $19,000 of interest expense that
would not have been incurred if the Company had paid the interest due in cash. The rights and
obligations of the note holder and the Company with respect to any future interest payments and the
other terms of the notes are in all other respects unchanged.
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.
Short-term convertible notes payable consist of the following as of December 31, 2009 (in
thousands):
April08 | May08 | Oct08 | ||||||||||||||
Notes | Note | Note | Totals | |||||||||||||
Notes Payable, face amount |
$ | 452 | $ | 3,500 | $ | 2,500 | $ | 6,452 | ||||||||
Discounts on Notes: |
||||||||||||||||
Initial valuation of Warrants |
(126 | ) | (610 | ) | (86 | ) | (822 | ) | ||||||||
Initial valuation of Embedded Derivative |
| (930 | ) | (841 | ) | (1,771 | ) | |||||||||
Accumulated Amortization |
126 | 1,239 | 558 | 1,923 | ||||||||||||
Total Discounts |
| (301 | ) | (369 | ) | (670 | ) | |||||||||
Accrued Interest |
45 | 17 | 19 | 81 | ||||||||||||
Convertible Notes Payable, net |
$ | 497 | $ | 3,216 | $ | 2,150 | $ | 5,863 | ||||||||
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 Options |
| (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 | ||||||
15
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 10 Derivative Liabilities (Restated)
The May 2008 and October 2008 convertible notes, discussed above in Note 9, 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 accounting principles, 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 paid in capital and accumulated deficit 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 Condensed Consolidated Statement of Operations.
The following is a summary of the cumulative effect adjustment recorded to the Companys Condensed
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 |
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 total stockholders
deficit of $5,224,000 as of October 1, 2009.
As of December 31, 2009, the fair values of the Embedded Derivatives for the May 2008 and October
2008 Note were $10,918,000. The increase in fair value of $5,098,000 from October 1, 2009, was
recorded as non-cash charge to Other Expenses for the three months ended December 31, 2009. The
fair values as of December 31, 2009, were calculated using a simulation model with the following
assumptions:
May 2008 Note | October 2008 Note | |||||||
Risk-free interest rate:
|
0.47 | % | 0.47 | % | ||||
Expected term:
|
0.39 years | 0.79 years | ||||||
Expected dividend yield:
|
0.00 | % | 0.00 | % | ||||
Expected volatility:
|
51.99 | % | 51.99 | % | ||||
Probability of triggering reset provision:
|
2.91 | % | 2.11 | % | ||||
Existing conversion price per share
|
$ | 0.80 | $ | 0.75 | ||||
Companys stock price per share
|
$ | 2.18 | $ | 2.18 |
Note 11 Capital Lease Obligations
Capital lease obligations include eleven capitalized leases with interest rates ranging from 8.4%
to 28.4%. The combined monthly payments of principal and interest are $9,000. The amount of
equipment and furniture capitalized under the capital leases was $289,000. Accumulated depreciation
recorded for the equipment and furniture under capital leases as of December 31, 2009 is $152,000.
The payment terms of the capital leases expire between August 2010 and May 2012.
The following is a schedule by years of future minimum lease payments under capital leases together
with the present value of the net minimum lease payments as of December 31, 2009 (in thousands):
Amount | ||||
Year ending September 30: |
||||
2010 |
$ | 75 | ||
2011 |
62 | |||
2012 |
13 | |||
Total minimum lease payments |
150 | |||
Less: Interest on capitalized lease obligations |
(20 | ) | ||
Present value of capitalized lease obligations |
130 | |||
Less: Current portion |
(77 | ) | ||
Capitalized lease obligations, net of current portion |
$ | 53 | ||
17
Table of Contents
Interest expense on capitalized leases was $6,000 and $7,000 for three months ended December 31,
2009 and 2008, respectively.
Note 12 Stockholders Equity
Warrants
The Company issued warrants to the stockholders of LMS to purchase 2,818,092 shares of the
Companys common stock in conjunction with the merger in 2007. As of December 31, 2009, 200,000 of
these warrants have expired and 133,750 of these warrants have been exercised. The weighted-average
exercise price for the remaining 2,484,342 warrants as of December 31, 2009 is $0.98 per share. The
expiration dates of the outstanding warrants are as follows:
Shares | Expiration Date | |
7,188 | April 2010 | |
31,250 | May 2010 | |
2,070,904 | June 2010 | |
337,500 | July 2010 | |
12,500 | August 2010 | |
25,000 | November 2010 |
From July 2007 to January 2008, in connection with sales of the Companys common stock, the Company
issued warrants to purchase an additional 686,667 shares of the Companys common stock at a
weighted-average exercise price of $1.40 per share. The weighted-average exercise price for the
remaining 667,917 warrants as of December 31, 2009 is $1.41 per share. The expiration dates of the
outstanding warrants are as follows:
Shares | Expiration Date | |
6,250 | July 2010 | |
234,375 | August 2010 | |
75,625 | September 2010 | |
169,167 | October 2010 | |
145,000 | November 2010 | |
31,250 | December 2010 | |
6,250 | January 2011 |
In November 2007, the Company issued warrants to purchase 125,000 shares of the Companys common
stock at an exercise price of $2.00 per share as compensation for consulting services. These
warrants are still outstanding as of December 31, 2009 and expire in November 2012. The fair value
of these warrants of $24,000 was determined using the Black-Scholes option pricing model with the
assumptions listed below:
Risk-free interest rate: |
4.11 | % | ||
Expected term: |
5 | years | ||
Expected dividend yield: |
0.00 | % | ||
Expected volatility: |
27.97 | % |
In connection with the April 2008 Convertible Notes discussed above in Note 9, 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 December 31, 2009, 20,000 of these warrants have been
exercised. These remaining 860,000 warrants will expire as follows:
Shares | Expiration Date | |
263,000 | February 2013 | |
100,000 | March 2013 | |
497,000 | April 2013 |
18
Table of Contents
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 9,
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 December 31, 2009 and expire in May 2013.
The fair value of these warrants of $610,000 and $49,000, respectively, was determined using the
Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate: |
3.24 | % | ||
Expected term: |
5 | years | ||
Expected dividend yield: |
0.00 | % | ||
Expected volatility: |
27.97 | % |
In connection with the long-term convertible notes payable issued in October 2008 and discussed
above in Note 9, the Company issued warrants to purchase 1,166,667 shares of the Companys common
stock at an exercise price of $1.25 per share to the note holders and 266,667 shares of the
Companys common stock at an exercise price of $1.25 per share to the placement agent. These
warrants are still outstanding as of December 31, 2009, 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 | % |
A summary of warrants issued, exercised and expired during the three months ended December 31,
2009, is as follows:
Weighted | ||||||||
Avg. | ||||||||
Exercise | ||||||||
Warrants: | Shares | Price | ||||||
Balance at September 30, 2009 |
10,458,093 | $ | 1.07 | |||||
Issued |
| | ||||||
Exercised |
(512,500 | ) | 1.00 | |||||
Expired |
| | ||||||
Balance at December 31, 2009 |
9,945,593 | $ | 1.07 | |||||
Options
In connection with conversion of $1,589,000 of debt to equity and under the terms of the Private
Placement and Merger Agreement, Mr. Libratore, the Companys founder, principal shareholder and
President, received and exercised 620,000 options in March 2007 and beginning on June 1, 2007,
356,455 options monthly until a total number of 4,541,009 options are received. The exercise price
of the options is $0.0001. As of December 31, 2009, a total of 3,921,009 options were outstanding.
19
Table of Contents
Employee & 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 shares authorized under the plan from 1,000,000 to 2,000,000 shares.
The amendment was approved at the Companys annual shareholders meeting on September 4, 2009.
On September 14, 2007 the Company adopted the provisions of ASC Topic 718, Compensation Stock
Compensation, which requires the Company to recognize expense related to the fair value of
stock-based compensation awards. The Company elected the modified prospective transition method as
permitted by Topic 718, under which stock-based compensation for the years ended September 30, 2009
and 2008 is based on grant date fair value estimated in accordance with the provisions of Topic 718
and compensation expense for all stock-based compensation awards granted subsequent to January 1,
2006, as well as the unvested portion of previously granted awards that remained outstanding as of
January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of
Topic 718.
On October 30, 2008, the Board of Directors of the Company approved a grant of 480,000 stock
options under the 2007 Stock Plan to employees with an exercise price of $0.60 per share. The
options vest 25% on October 1, 2009, 25% on April 1, 2010, 25% on October 1, 2010, and 25% on April
1, 2011.
On October 29, 2009, Joseph D. Farish, Jr. was appointed to the Board of Directors of the Company.
As part of the compensation for his services as a director, Mr. Farish was granted an option,
vesting over two years, to purchase 50,000 shares of common stock at $2.35 per share.
On December 3, 2009, Robert Cuillo was appointed to the Board of Directors of the Company. As part
of the compensation for his services as a director, Mr. Cuillo was granted an option, vesting over
two years, to purchase 50,000 shares of common stock at $2.18 per share.
The fair values of share-based payments are estimated on the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the three months ended
December 31, 2009 and 2008:
2009 | 2008 | |||||||
Risk-free interest rate: |
1.38 | % | 1.82 | % | ||||
Expected term: |
3 | years | 3 | years | ||||
Expected dividend yield: |
0.00 | % | 0.00 | % | ||||
Expected volatility: |
66.35 | % | 36.05 | % |
For the three months ended December 31, 2009 and 2008 the Company recorded $55,000 and $44,000,
respectively, of stock-based compensation expense which has been classified as Operating expenses,
sub-classification of Payroll, taxes and benefits. As of December 31, 2009, there is $381,000 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 1.9 years.
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A summary of the stock options outstanding under the 2007 Stock Plan as of December 31, 2009, and
activity for the three months then ended is as follows:
Weighted | ||||||||||||
Avg. | Aggregate | |||||||||||
Exercise | Intrinsic | |||||||||||
2007 Stock Plan: | Shares | Price | Value | |||||||||
Options outstanding at September 30, 2009 |
1,580,000 | $ | 0.81 | |||||||||
Granted |
100,000 | 2.27 | ||||||||||
Exercised |
| | ||||||||||
Expired or forfeited |
| | ||||||||||
Options outstanding at December 31, 2009 |
1,680,000 | $ | 0.90 | $ | 2,144,100 | |||||||
Options exercisable at December 31, 2009 |
600,000 | $ | 0.73 | $ | 862,500 | |||||||
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.
The first offering period of the ESPP commenced on June 10, 2009 and ended on November 30, 2009.
The second offering period commenced on December 1, 2009 and will end on May 31, 2009. As of
December 31, 2009 161,781 shares of the Companys common stock have been purchased through the
ESPP. For the three months ended December 31, 2009, the Company received $56,000 through payroll
deductions under the ESPP.
The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares
expected to be issued under the ESPP at the grant date, the beginning date of the offering period,
and recognizes compensation expense ratably over the offering period. 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 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 three months ended December 31, 2009, the Company recognized $70,000
of compensation expense related to the ESPP.
Note 13 Basic and Diluted Earnings (Loss) per Common Share (Restated)
The following is a reconciliation of the numerator and denominator used in the computation of basic
and diluted earnings per share for the three months ended December 30, 2009 and 2008 (in thousands,
except per share amounts):
For the Quarters Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Numerator: |
||||||||
Net income (loss) basic |
$ | (3,345 | ) | $ | 246 | |||
Effect of dilutive securities: |
||||||||
Convertible debt |
| | ||||||
Net income (loss) diluted |
$ | (3,345 | ) | $ | 246 | |||
Denominator: |
||||||||
Weighted average shares outstanding basic |
32,848 | 32,049 | ||||||
Effect of dilutive securities: |
||||||||
Stock options |
| 3,921 | ||||||
Convertible debt |
| | ||||||
Weighted average shares outstanding diluted |
32,848 | 35,970 | ||||||
Earnings per share basic |
$ | (0.10 | ) | $ | 0.01 | |||
Earnings per share diluted |
$ | (0.10 | ) | $ | 0.01 |
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The following table summarizes the number of weighted shares outstanding for each of the periods
presented, but not included in the calculation of diluted income (loss) per share because the
impact would have been anti-dilutive for the three months ended December 31, 2009 and 2008 (in
thousands):
2009 | 2008 | |||||||
Stock options |
5,601 | 975 | ||||||
Warrants |
9,946 | 10,668 | ||||||
Convertible Debt |
8,611 | 8,650 | ||||||
Totals |
24,158 | 20,293 | ||||||
Note 14 Income Taxes (Restated)
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.
The Company had a net income tax benefit for the quarter ended December 31, 2009, of $1,006,000.
The Company recognized $1,438,000 in tax benefits due to a change in the valuation allowance as of
December 31, 2009. Although the Company had net operating loss carryforwards that completely
offsets regular taxable income, the Company incurred alternative minimum tax on its net alternative
minimum taxable income of $3,000. In addition, the Company incurred deferred tax expense of
$429,000.
The Companys effective tax rate was approximately 23% and 0% for the three months ended December
31, 2009 and 2008, respectively, which differs from the federal statutory rate of 35% due to the
effect of state income taxes, the reduction in valuation allowance, and certain of the Companys
expenses that are not deductible for income tax purposes, primarily consisting of $5,098,000 of
expense for the change in fair value of derivative liabilities. The effective tax rate for the
three months ended December 31, 2009, also reflects a $1,438,000 decrease to the valuation
allowance for deferred tax assets that management has determined will, more likely than not, be
utilized. The effective tax rate for the three months ended December 31, 2008, reflects the
utilization of net operating losses from previous years.
Note 15 Commitments
The Company leases property and telephone equipment under operating leases that expire at various
times through June 2014. Future minimal rental commitments under non-cancelable operating leases
with terms in excess of one year as of December 31, 2009 are as follows (in thousands):
Amount | ||||
Fiscal year ending September 30: |
||||
2010 |
$ | 432 | ||
2011 |
661 | |||
2012 |
608 | |||
2013 |
161 | |||
2014 |
121 | |||
$ | 1,983 | |||
Rent expense for the three months ended December 31, 2009 and 2008 was $164,000 and $120,000,
respectively.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements can also be identified by words such as
intends, anticipates, expects, believes, plans, predicts, and similar terms.
Forward-looking statements are not guarantees of future performance and our actual results may
differ significantly from the results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those set forth below under Certain
Risk Factors. The following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in this Form 10-Q and the audited
financial statements of the Company, included in our Report on Form 10-K for the year ended
September 30, 2009, filed with the Securities and Exchange Commission and managements discussion
and analysis contained therein. We assume no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
Overview
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 focused on providing medical
supplies in a retail environment, and via the Internet in the United States. LMS distributes a full
range of medical products which address the healthcare needs of our customers.
We market our products directly to consumers primarily through targeted media and direct response
television advertising. Our customer service representatives are specifically trained to
communicate with Medicare-eligible beneficiaries. Our operating platforms enable us to collect and
process required documents from physicians and customers, bill and collect amounts due from
Medicare and/or other government agencies and/or third party payors and/or customers.
Results of Operations
The following table summarizes the results of operations for the three months ended December 31,
2009 and 2008, including percentage of sales (dollars in thousands):
As Restated | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales |
$ | 9,158 | 100.0 | $ | 5,342 | 100.0 | ||||||||||
Cost of Sales |
3,248 | 35.5 | 1,841 | 34.5 | ||||||||||||
Gross Profit |
5,910 | 64.5 | 3,501 | 65.5 | ||||||||||||
Operating Expenses |
4,750 | 51.9 | 2,990 | 56.0 | ||||||||||||
Income from Operations |
1,160 | 12.7 | 511 | 9.6 | ||||||||||||
Other Income (Expense) |
(5,511 | ) | (60.2 | ) | (265 | ) | (5.0 | ) | ||||||||
Income (Loss) Before Income Taxes |
(4,351 | ) | (47.5 | ) | 246 | 4.6 | ||||||||||
Benefit from Income Taxes |
(1,006 | ) | (11.0 | ) | | | ||||||||||
Net Income (Loss) |
$ | (3,345 | ) | (36.5 | ) | $ | 246 | 4.6 | ||||||||
Revenues:
Sales for
the three months ended December 31, 2009, increased by $3,816,000, or 71.4%, to
$9,158,000, compared with sales of $5,342,000 for the three months ended December 31, 2008. The
increase was due to our direct-response advertising campaign to obtain new mail order customers.
Our direct-response advertising costs for the three months ended
December 31, 2009, were $2,037,000
compared to $713,000 for the three months ended December 31, 2008.
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Gross Profit:
Gross
profit for the three months ended December 31, 2009, increased by $2,409,000, or 68.8%, to
$5,910,000, compared with gross profit of $3,501,000 for the three months ended December 31, 2008.
The increase was attributed to our increased sales volume for the three months ended December 31,
2009 compared to the three months ended December 31, 2008. As a percentage of sales, gross profit
decreased by 1.0% to 64.5% of sales for the three months ended December 31, 2009, compared to 65.5% of sales for the three months ended
December 31, 2008. The 1.0% decrease in profit margins is primarily the result of product mix.
Operating Expenses:
The following table provides a breakdown of our operating expenses for the three months ended
December 31, 2009 and 2008, including percentage of sales (dollars in thousands):
As Restated | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Operating Expenses: |
||||||||||||||||
Payroll, taxes and benefits |
$ | 2,169 | 23.7 | $ | 1,065 | 20.0 | ||||||||||
Advertising |
806 | 8.8 | 298 | 5.6 | ||||||||||||
Bad debts |
655 | 7.2 | 679 | 12.7 | ||||||||||||
Depreciation |
95 | 1.0 | 66 | 1.2 | ||||||||||||
General and administration |
1,025 | 11.2 | 882 | 16.5 | ||||||||||||
Total Operating Expenses |
$ | 4,750 | 51.9 | $ | 2,990 | 56.0 | ||||||||||
Operating
expenses for the three months ended December 31, 2009, were $4,750,000, or 51.9% of
revenue, compared with $2,990,000, or 56.0% of revenue for the three months ended December 31,
2008. The increase in operating expenses is primarily attributed to increased spending levels for
additional employees, advertising costs, rent and other administration costs to support our sales
growth.
Income from Operations:
Income
from operations for the three months ended December 31, 2009, increased $649,000 to
$1,160,000, compared with $511,000 for the three months ended December 31, 2008. As a percentage of
sales, operating income improved by 3.1% to 12.7% of sales for the three months ended December 31,
2009, compared to 9.6% of sales for the three months ended December 31, 2008. The increase in
operating income and margins for the three months ended
December 31, 2009, is attributed to our
increased sales volumes at lower levels of incremental operating expenses, as a percentage of
sales.
Other Income (Expense):
The following table shows a breakdown of other income (expense) for the three months ended December
31, 2009 and 2008 (dollars in thousands):
As Restated | ||||||||
2009 | 2008 | |||||||
Other Income (Expense): |
||||||||
Interest Expense |
$ | (416 | ) | $ | (273 | ) | ||
Change in fair value of derivative liabilities |
(5,098 | ) | | |||||
Interest income |
3 | 8 | ||||||
Total Other Income (Expense) |
$ | (5,511 | ) | $ | (265 | ) |
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 the three months ended December 31, 2009 and 2008,
respectively, totaled $5,407,000 and $162,000.
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Interest
expense increased by $143,000 to $416,000 for the three months ended
December 31, 2009, compared to the three months ended December 31, 2008. 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 $173,000 of non-cash interest expense for the three
months ended December 31, 2009.
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 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 | (5,098 | ) |
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing, and financing activities
for the three months ended December 31, 2009 and 2008 (dollars in thousands):
For the Quarters Ended | ||||||||
December 31, | ||||||||
As Restated | ||||||||
2009 | 2008 | |||||||
Cash Flows: |
||||||||
Net cash provided by (used in) operating activities |
$ | (324 | ) | $ | 447 | |||
Net cash used in investing activities |
(1,333 | ) | (29 | ) | ||||
Net cash provided by financing activities |
740 | 2,171 | ||||||
Net increase (decrease) in cash |
(917 | ) | 2,589 | |||||
Cash at beginning of period |
3,798 | 1,173 | ||||||
Cash at end of period |
$ | 2,881 | $ | 3,762 | ||||
The Company had cash of $2,881,000 at December 31, 2009, compared to cash of $3,798,000 at
September 30, 2009, a decrease of $917,000. The decrease in cash for the three months ended
December 31, 2009, is primarily due to our accelerated direct-response advertising campaign and the
build out of our new 24,000 square foot facility during the quarter, partially offset by borrowings
from our credit line facility.
In order to maintain our accelerated sales growth through our direct-response advertising efforts,
we may be required to raise additional cash through the sale of our securities, whether on a debt
or equity basis. As of December 31, 2009, we had 2.8 million of outstanding warrants at an average
exercise price of $1.00 that expire during fiscal year 2010. We have already received telephone
inquiries from several of the warrant holders over the last few months and expect a majority of
these warrant holders to exercise these in-the-money warrants before expiration. There can be no
assurance, of course, as to the amount or timing of the proceeds we may receive from the sale of
our securities. However, we believe that existing cash and cash equivalents, together with cash
generated
from the collection of accounts receivable and the sale of products will be sufficient to meet our
cash requirements during the next twelve months, but at reduced levels of sales growth if we are
unable to raise additional capital.
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Table of Contents
Operating Activities
Net cash used in operating activities decreased to $324,000 during the three months ended December
31, 2009, as compared to net cash provided by operating activities of $447,000 during the three
months ended December 31, 2008. The decrease is primarily a result of our increased direct-response
advertising spend.
Investing Activities
During the three months ended December 31, 2009, we purchased $780,000 of property and equipment
primarily related to the build out of our new 24,000 square foot facility, which we moved into in
January 2010. In addition, we purchased a $550,000 certificate of deposit as additional security
for a $1,000,000 credit line facility discussed above in Note 6 of the unaudited condensed
consolidated financial statements. The certificate matures in September 2010 and bears interest at
a rate of 1.242%.
Financing Activities
During the three months ended December 31, 2009, cash provided by financing activities was
$740,000, which included borrowings of $750,000 from our credit line facility used to finance the
build out of our new facility discussed above, $163,000 of proceeds from the exercise of warrants,
and $56,000 of proceeds from our employee stock purchase plan, partially offset by payments of
$220,000 to pay down a portion of our outstanding debt and capital lease obligations.
During the three months ended December 31, 2008, cash provided by financing activities was
$2,171,000, which was the result of a $2,500,000 convertible debt offering in October 2008,
partially offset by $310,000 of debt issuance costs associated with the debt offering.
Outlook
The Company has experienced tremendous growth over the past two and a half years. We have built an
infrastructure and business model that are capable of generating a substantially higher sales volume
at reduced levels of incremental cost. In an effort to continue our growth, we have accelerated our
advertising efforts to attract new customers and expanded 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 continue to increase over the next nine months due to our advertising and
marketing programs. The Company does not anticipate any major changes in Medicare reimbursement in
2010, nor in any other reimbursement programs available from other third-party payers.
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. |
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In order to implement our current business model, we have completed the following:
| Identified and presented to many large funding sources, soliciting terms for long-term capital in the form of debt, equity or a combination of both; | ||
| Retained an investor relations firm to further enhance our exposure and opportunities for long-term capital requirements; | ||
| Identified products and related target customers through extensive market research; | ||
| 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; | ||
| Completed the build out of an additional 24,000 square foot facility to house our expanding workforce and support our continued growth; | ||
| Created a HIPPA compliant IT infrastructure and staff to accommodate additional growth in sales; | ||
| Established a marketing plan that can be monitored for effectiveness and is flexible enough to adjust to changing market conditions; and | ||
| Tested our advertising methods and established methods of testing additional advertising methods to meet with changing market conditions. |
We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider,
primarily focused on supplying medical supplies to the chronically ill patients
Contractual Obligations
A summary of our contractual obligations for convertible debt obligations, capital lease
obligations, minimum lease payments under non-cancelable operating leases, and minimum purchase
commitments as of December 31, 2009 is presented in the following table (dollars in thousands):
Payments due by period | ||||||||||||||||||||||||
Totals | FY 2010 | FY 2011 | FY 2012 | FY 2013 | FY 2014 | |||||||||||||||||||
Convertible debt obligations (1) |
$ | 6,642 | $ | 4,101 | $ | 2,541 | $ | | $ | | $ | | ||||||||||||
Operating leases |
1,983 | 432 | 661 | 608 | 161 | 121 | ||||||||||||||||||
Capital lease obligations |
150 | 75 | 62 | 13 | | | ||||||||||||||||||
Purchase commitment (2) |
514 | 84 | 120 | 120 | 120 | 70 | ||||||||||||||||||
Total contractual obligations |
$ | 9,289 | $ | 4,692 | $ | 3,384 | $ | 741 | $ | 281 | 191 | |||||||||||||
(1) | The convertible debt obligations that are due in fiscal year 2010 include $452,000 of convertible notes that are convertible into shares of our common stock at a conversion price of $0.50 per share and $3,500,000 of convertible notes that are convertible into shares of our common stock at a conversion price of $0.80 per share. Based on the current price of our common stock, we anticipate that the majority of this debt will be converted into shares of common stock at some point during fiscal year 2010. If for some reason the notes are not converted, we believe we have sufficient financial resources to meet our debt obligations. | |
(2) | The purchase commitment consists of a long distance service agreement that requires us to purchase a minimum of $10,000 per month, partially offset by rebates for the first five months of calendar year 2010, of long distance service through April 2014. |
Off-Balance Sheet Arrangements
As of December 31, 2009, we had no off-balance sheet arrangements.
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Critical Accounting Policies
See Summary of Significant Accounting Policies in the Notes to the unaudited condensed
consolidated financial statements and our current annual report on Form 10-K for the year ended
September 30, 2009, for discussion of significant accounting policies, recent accounting
pronouncements and their effect, if any, on the Company.
Effect of Inflation
We do not believe that inflation has had a material effect on our business, results of operations
or financial condition during the past two years.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
We have not entered into any hedging agreements or swap agreements. Our principal market risk is
the risk related to our customers and Medicare.
Item 4T. 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 Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December
31, 2009. 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.
Change in Internal Control over Financial Reporting
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.
As a result of the restatement of our financial statements for the interim periods ending December
31, 2009, March 31, 2010, and June 30, 2010, our Chief Executive Officer and Principal Financial
Officer re-assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2009. Based on that assessment, management identified the following material
weaknesses:
| 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, which resulted in the restatement of the interim financial statements for the interim period ending December 31, 2009. The Company plans to file restated interim financial statements for the interim periods ending March 31, 2010, and June 30, 2010. |
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| 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 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. |
During the three months ended December 31, 2009, there were no changes in the Companys internal
controls over financial reporting that have materially affected or are reasonably likely to
materially affect such internal controls over financial reporting.
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 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. |
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K
for the fiscal year ended September 30, 2009. Please refer to the Risks Factors section in our
Annual Report for a discussion of risks to which our business, financial condition, results of
operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under a stock repurchase program approved by our Board of Directors in December 2008, we are
authorized to repurchase up to $500,000 of our Common Stock through December 2009. The
authorization enables the Company to purchase shares through open market transactions at
managements discretion. We intend to retain any common shares which we repurchase as treasury
shares or use them in connection with our employee stock option program. Our shares repurchased for
the three months ended December 31, 2009 were as follows:
Total Number of | Approximate Dollar | |||||||||||||||
Total | Shares Purchased as | Value of Shares that | ||||||||||||||
Number of | Average | Part of Publicly | May Yet Be | |||||||||||||
Shares | Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Purchased | per Share | Programs(2) | Plans or Programs(2) | |||||||||||||
October 131, 2009(1) |
| $ | | |||||||||||||
November 130, 2009(1) |
4,000 | $ | 2.26 | |||||||||||||
December 131, 2009(1) |
| $ | | |||||||||||||
Total |
4,000 | $ | 2.26 | 89,600 | $ | 0 | ||||||||||
(1) | In December 2008, we opened a separate money market account with an investment bank pursuant to which we transferred $50,000 into the account, of which $9,055 was used to purchase 4,000 shares during the three months ended December 31, 2009. | |
(2) | As of December 31, 2009, 89,600 cumulative shares have been purchased under our stock repurchase program for $49,634. The stock repurchase program ended on December 31, 2009 and no additional shares have been authorized to be repurchased. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Other Information
None.
Item 5. Exhibits
Exhibit 31.1 Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 Section 906 Certificate of Chief Financial Officer
Exhibit 31.2 Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 Section 906 Certificate of Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, duly authorized.
/s/ LIBERATOR MEDICAL HOLDINGS, INC.
Registrant
/s/ Mark A. Libratore
|
President | February 22, 2011 | ||
/s/ Robert J. Davis
|
Chief Financial Officer | February 22, 2011 |
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