Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g26196exv31w2.htm |
EX-32.1 - EX-32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g26196exv32w1.htm |
EX-31.1 - EX-31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | g26196exv31w1.htm |
EX-32.2 - EX-32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | g26196exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(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, 2010 |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
Commission file number: 000-05663
LIBERATOR MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA (State or other jurisdiction of incorporation or organization) |
87-0267292 (I.R.S. Employer Identification No.) |
2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (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 16, 2011 | |
Common Stock, $.001 | 47,995,600 |
TABLE OF CONTENTS
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of December 31, 2010 (unaudited) and September 30, 2010
(In thousands, except dollar per share amounts)
Condensed Consolidated Balance Sheets
As of December 31, 2010 (unaudited) and September 30, 2010
(In thousands, except dollar per share amounts)
December | September | |||||||
31, 2010 | 30, 2010 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash |
$ | 7,430 | $ | 7,428 | ||||
Accounts receivable, net of allowance of $3,748 and $3,312, respectively |
6,408 | 6,744 | ||||||
Inventory, net of allowance for obsolete inventory of $110 and $110, respectively |
2,471 | 1,985 | ||||||
Deferred taxes, current portion |
1,462 | 1,696 | ||||||
Prepaid and other current assets |
436 | 355 | ||||||
Total Current Assets |
18,207 | 18,208 | ||||||
Property and equipment, net of accumulated depreciation of $1,648 and $1,527,
respectively |
1,769 | 1,862 | ||||||
Deferred advertising |
12,048 | 10,006 | ||||||
Other assets |
197 | 139 | ||||||
Total Assets |
$ | 32,221 | $ | 30,215 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 5,630 | $ | 3,826 | ||||
Accrued liabilities |
839 | 1,077 | ||||||
Derivative liabilities |
| 1,698 | ||||||
Stockholder loans |
| 565 | ||||||
Convertible notes payable, net of unamortized discount of $21 |
| 2,516 | ||||||
Other current liabilities |
142 | 146 | ||||||
Total Current Liabilities |
6,611 | 9,828 | ||||||
Deferred tax liability |
1,963 | 1,826 | ||||||
Other long-term liabilities |
109 | 145 | ||||||
Total Liabilities |
8,683 | 11,799 | ||||||
Stockholders Equity: |
||||||||
Common stock, $.001 par value, 200,000 shares authorized, 48,085 and 44,707 shares
issued, respectively; 47,996 and 44,617 shares outstanding at December 31, 2010, and
September 30, 2010, respectively |
48 | 45 | ||||||
Additional paid-in capital |
34,204 | 28,927 | ||||||
Accumulated deficit |
(10,664 | ) | (10,506 | ) | ||||
Treasury stock, at cost; 89 shares at December 31, 2010, and September 30, 2010 |
(50 | ) | (50 | ) | ||||
Total Stockholders Equity |
23,538 | 18,416 | ||||||
Total Liabilities and Stockholders Equity |
$ | 32,221 | $ | 30,215 | ||||
See
accompanying notes to consolidated financial statements.
3
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2010 and 2009
(Unaudited)
(in thousands, except per share amounts)
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2010 and 2009
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Sales |
$ | 12,204 | $ | 9,158 | ||||
Cost of Sales |
4,336 | 3,248 | ||||||
Gross Profit |
7,868 | 5,910 | ||||||
Operating Expenses |
||||||||
Payroll, taxes and benefits |
2,841 | 2,169 | ||||||
Advertising |
1,901 | 806 | ||||||
Bad debts |
892 | 655 | ||||||
Depreciation |
166 | 95 | ||||||
General and administrative |
925 | 1,025 | ||||||
Total Operating Expenses |
6,725 | 4,750 | ||||||
Income from Operations |
1,143 | 1,160 | ||||||
Other Income (Expense) |
||||||||
Interest expense |
(31 | ) | (416 | ) | ||||
Change in fair value of derivative liabilities |
(902 | ) | (5,098 | ) | ||||
Interest income |
2 | 3 | ||||||
Gain on sale of assets |
2 | -- | ||||||
Total Other Income (Expense) |
(929 | ) | (5,511 | ) | ||||
Income (Loss) before Income Taxes |
214 | (4,351 | ) | |||||
Provision for (Benefit from) Income Taxes |
372 | (1,006 | ) | |||||
Net Loss |
$ | (158 | ) | $ | (3,345 | ) | ||
Basic and Diluted earnings (loss) per share: |
||||||||
Weighted average shares outstanding |
47,419 | 32,848 | ||||||
Earnings (loss) per share |
$ | (0.00 | ) | $ | (0.10 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders Equity
For the three months ended December 31, 2010
(Unaudited)
(in thousands)
Condensed Consolidated Statement of Changes in Stockholders Equity
For the three months ended December 31, 2010
(Unaudited)
(in thousands)
Total | ||||||||||||||||||||||||
Common | Common | Paid in | Accumulated | Treasury | Stockholders | |||||||||||||||||||
Shares | Stock | Capital | Deficit | Stock | Equity | |||||||||||||||||||
Balance at October 1, 2010 |
44,617 | $ | 45 | $ | 28,927 | $ | (10,506 | ) | $ | (50 | ) | $ | 18,416 | |||||||||||
Options issued to employees and directors |
128 | 128 | ||||||||||||||||||||||
Common stock issued upon conversion of debt |
3,333 | 3 | 5,097 | 5,100 | ||||||||||||||||||||
Common stock issued for employee stock purchase plan |
46 | | 52 | 52 | ||||||||||||||||||||
Net loss |
(158 | ) | (158 | ) | ||||||||||||||||||||
Balance at December 31, 2010 |
47,996 | $ | 48 | $ | 34,204 | $ | (10,664 | ) | $ | (50 | ) | $ | 23,538 | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2010 and 2009
(Unaudited)
(in thousands)
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2010 and 2009
(Unaudited)
(in thousands)
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cash flow from operating activities: |
||||||||
Net Loss |
$ | (158 | ) | $ | (3,345 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
2,011 | 905 | ||||||
Change in fair value of derivative liabilities |
902 | 5,098 | ||||||
Equity based compensation |
128 | 133 | ||||||
Provision for doubtful accounts and sales returns and adjustments |
980 | 763 | ||||||
Non-cash interest related to convertible notes payable |
21 | 353 | ||||||
Deferred income taxes |
371 | (1,009 | ) | |||||
Amortization of non-cash debt issuance costs |
| 9 | ||||||
Gain on sale of assets |
(2 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(643 | ) | (1,576 | ) | ||||
Deferred advertising |
(3,887 | ) | (2,037 | ) | ||||
Inventory |
(486 | ) | (31 | ) | ||||
Other assets |
(140 | ) | (150 | ) | ||||
Accounts payable |
1,804 | 744 | ||||||
Accrued expenses |
(283 | ) | (179 | ) | ||||
Other liabilities |
(21 | ) | (2 | ) | ||||
Net Cash Flow Provided by (Used in) Operating Activities |
597 | (324 | ) | |||||
Cash flow from investing activities: |
||||||||
Purchase of property and equipment |
(75 | ) | (780 | ) | ||||
Proceeds from the sale of assets |
3 | | ||||||
Purchase of certificates of deposit |
| (553 | ) | |||||
Net Cash Flow Used in Investing Activities |
(72 | ) | (1,333 | ) | ||||
Cash flow from financing activities: |
||||||||
Proceeds from the exercise of warrants |
| 163 | ||||||
Proceeds from employee stock purchase plan |
59 | 56 | ||||||
Proceeds from credit line facility |
| 750 | ||||||
Purchase of treasury stock |
| (9 | ) | |||||
Payments of debt and capital lease obligations |
(582 | ) | (220 | ) | ||||
Net Cash Flow Provided by (Used in) Financing Activities |
(523 | ) | 740 | |||||
Net increase (decrease) in cash |
2 | (917 | ) | |||||
Cash at beginning of period |
7,428 | 3,798 | ||||||
Cash at end of period |
$ | 7,430 | $ | 2,881 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 47 | $ | 105 | ||||
Cash paid for income taxes |
$ | | $ | 12 | ||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Common stock issued for interest expense |
$ | | $ | 45 | ||||
Common stock issued for conversion of debt |
$ | 5,100 | $ | 150 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
Table of Contents
Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Unaudited Condensed Consolidated Financial Statements
December 31, 2009
Note 1 Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Liberator Medical
Holdings, Inc. (the Company) and the notes thereto have been prepared in accordance with
instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. However, in the opinion of the Company, such
information includes all adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the financial position and results of operations for the
interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes thereto that are
included in the Companys Annual Report on Forms 10-K and 10-K/A for the year ended September 30,
2010 that were filed with the SEC on January 13, 2011, and January 28,2011, respectively. The
results of operations for the three months ended December 31, 2010 are not necessarily indicative
of the results to be expected for the full year.
The unaudited condensed consolidated financial statements include the accounts of the Company,
Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and
Wellness, Inc., and Practica Medical Manufacturing, Inc., its wholly-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
Note 2 Summary of Significant Accounting Policies
The significant accounting policies followed by the Company for interim reporting are consistent
with those included in the Companys Annual Report on Form 10-K for the year ended September 30,
2010.
Recent Accounting Pronouncements
In January 2010, the FASB issued new guidance for fair value measurements and disclosures which
requires a reporting entity to disclose separately the amounts of significant transfers in and out
of Level 1 and 2 fair value measurements and describe the reasons for the transfers. The guidance
also requires a reporting entity to present separately information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010, except for
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The guidance adopted on
January 1, 2010 did not have a material impact on the Companys financial statements. Adoption of
the remaining guidance is not expected to have a material impact on the Companys financial
statements.
Note 3 Stockholder Loans
The stockholder loans at September 30, 2010 in the amounts of $565,000 consist of various 8% and
11% notes payable to the President and principal stockholder of the Company, Mark Libratore. The
notes payable were non-collateralized and due on demand. However, the notes were subordinated to
the senior, unsecured, convertible notes payable discussed below in Note 5. During the three months
ended December 31, 2010, $565,000 of principal was repaid to Mr. Libratore. Interest expense
related to the stockholder loans for the three months ended December 31, 2010 and 2009 were $4,000,
and $31,000, respectively.
Note 4 Credit Line Facility
On September 4, 2009, the Company entered into a one-year Business Loan Agreement, Promissory Note
and Assignment of Deposit (collectively, the Credit Line Facility) with a lender. Pursuant to the
Credit Line Facility, the lender agreed to advance the Company a maximum of $500,000 secured by the
Companys $500,000 certificate
of deposit held by the lender. Interest is payable on any advance under the Credit Line Facility at
a rate of 1.000 percentage point under the corporate loan base rate index published by the Wall
Street Journal, with a minimum interest rate of 4.750% per annum.
7
Table of Contents
On November 2, 2009, the Company entered into a revised Credit Line Facility with the same lender
discussed above. Under the revised loan agreement, the lender agreed to advance the Company a
maximum of $1,000,000 secured by the existing $500,000 certificate of deposit held by the lender
plus an additional $550,000 certificate of deposit to be held by the lender. The revised Credit
Line Facility expired on September 8, 2010. All other terms of the September 4, 2009 Credit Line
Facility remained unchanged.
In November and December 2009, the Company borrowed $750,000 from the credit line facility. In June
2010, the Company repaid the $750,000 balance under the credit line facility.
In September 2010, the Company elected not to renew the credit line facility.
Interest expense related to the credit line facility for the three months ended December 31, 2010
and 2009, was $0 and $2,000, respectively.
Note 5 Convertible Notes Payable
April 2008 Convertible Notes
On April 11, 2008, the Company closed a private placement consisting of convertible notes and
warrants for $804,000, of which $598,000 were cash proceeds and $206,000 were prior year debt
exchanged for the convertible notes. The notes were convertible into shares of our common stock at
an initial conversion price of $0.50 per share, subject to adjustment, and matured one year after
issuance. The notes were senior unsecured obligations of our Company and accrued 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, 2010, $711,000 of the notes has been converted into 1,422,000 shares of the
Companys common stock and $93,000 of the notes has been redeemed for cash.
Interest expense related to the April 2008 convertible notes was $0 and $16,000 for the three
months ended December 31, 2010 and 2009, respectively.
May 2008 Convertible Note
On May 22, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $3,500,000. The note was convertible into shares of our common stock
at an initial conversion price of $0.80 per share, subject to adjustment, and matured on May 22,
2010. The note was a senior unsecured obligation of ours and accrued interest at the rate of 3% per
annum, paid semi-annually on each November 15 and May 15. The note was unconditionally guaranteed
by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price
of the note could have been reduced if, among other things, we issued shares of common stock or
securities exercisable, exchangeable or convertible for or into shares of common stock at a price
per share less than both the conversion price then in effect and $0.75, subject to certain
exclusions. The Company concluded that the adjustment feature for the conversion price of the note
was not indexed to the Companys own stock and, therefore, was an embedded derivative financial
liability that required 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.
8
Table of Contents
In May 2009, the Company entered into a Waiver Agreement with the note holder of the May 2008
convertible notes discussed above. As part of the Waiver Agreement, the note holder agreed to
accept 104,137 shares of the Companys common stock, with a fair market value of $68,000, in lieu
of the Companys obligation to pay cash in the amount of $52,000 for interest payment that was due
May 15, 2009 under the original terms of the notes. As a result of this transaction, the Company
incurred an additional $16,000 of interest expense that would not have been incurred if the Company
had paid the interest due in cash. The rights and obligations of the note holder and the Company
with respect to any future interest payments and the other terms of the note were in all other
respects unchanged.
On May 11, 2010, the $3,500,000 note was converted into 4,375,000 shares of the Companys common
stock at a conversion price of $0.80 per share.
Interest expense related to the May 2008 convertible note was $0 and $219,000 for the three months
ended December 31, 2010 and 2009, respectively.
October 2008 Convertible Note
On October 17, 2008, the Company closed a private placement consisting of a convertible note and a
warrant for gross proceeds of $2,500,000. The note was convertible into shares of our common stock
at an initial conversion price of $0.75 per share, subject to adjustment, and matured on October
17, 2010. The note was a senior unsecured obligation of ours and accrued interest at the rate of 3%
per annum, paid semi-annually on each October 15 and April 15. The note was unconditionally
guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The
conversion price of the note could have been reduced if, among other things, we issued 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 concluded that the adjustment feature
for the conversion price of the note was not indexed to the Companys own stock and, therefore, was
an embedded derivative financial liability that required 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.
In May 2009, the Company entered into Waiver Agreement with the note holder of the October 2008
convertible note discussed above. As part of the Waiver Agreement, the note holder agreed to accept
67,808 shares of the Companys common stock, with a fair market value of $37,000, in lieu of the
Companys obligation to pay cash in the amount of $34,000 for interest payments that were due April
15, 2009 under the original terms of the note. As a result of this transaction, the Company
incurred an additional $3,000 of interest expense that would not have been incurred if the Company
had paid the interest due in cash. The rights and obligations of the note holder and the Company
with respect to any future interest payments and the other terms of the notes were 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
were in all other respects unchanged.
9
Table of Contents
On October 15, 2010, the $2,500,000 note was converted into 3,333,333 shares of the Companys
common stock at a conversion price of $0.75 per share.
Interest expense related to the October 2008 convertible note was $24,000 and $142,000 for the
three months ended December 31, 2010 and 2009, respectively.
Short-term convertible notes payable consist of the following as of September 30, 2010 (in
thousands):
Oct08 Note | ||||
Notes Payable, face amount |
$ | 2,500 | ||
Discounts on Notes: |
||||
Initial valuation of Warrants |
(86 | ) | ||
Initial valuation of Bifurcated Embedded Derivative |
(841 | ) | ||
Accumulated Amortization |
906 | |||
Total Discounts |
(21 | ) | ||
Accrued Interest |
37 | |||
Convertible Notes Payable, net |
$ | 2,516 | ||
NOTE 6 Derivative Liabilities
The May 2008 and October 2008 convertible notes, discussed above in Note 5, contained embedded
adjustment features whereby the conversion price could have been adjusted if the Company had issued
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. The embedded adjustment features were not indexed to the Companys own stock and, therefore,
were embedded derivative financial liabilities (the Embedded Derivatives) that required
bifurcation and separate accounting. Accordingly, the Company recorded a cumulative effect
adjustment to the opening balance of retained earnings on October 1, 2009. Subsequently, the
Company adjusted the Embedded Derivatives to fair value at each interim period and recognized the
changes in fair value as a charge or a benefit to earnings included in the Other Income (Expense)
section of the Companys Consolidated Statement of Operations.
The 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 |
As of December 31, 2009, the fair values of the Embedded Derivatives for the May 2008 and October
2008 Notes 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 Monte Carlo 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 |
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Table of Contents
On May 11, 2010, the May 2008 Note for $3,500,000 was converted into 4,375,000 shares of the
Companys common stock at a conversion price of $0.80 per share. The fair value of the Embedded
Derivative for the May 2008 Note as of the conversion date was $4,813,000 and was transferred from
derivative liabilities to additional paid-in capital.
As of September 30, 2010, the fair value of the Embedded Derivative for the October 2008 Note was
$1,698,000. The fair value as of September 30, 2010 was calculated using a Monte Carlo simulation
model with the following assumptions:
October 2008 Note | ||||
Risk-free interest rate:
|
0.14 | % | ||
Expected term:
|
17 days | |||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
49.30 | % | ||
Probability of triggering reset provision:
|
0.01 | % | ||
Existing conversion price per share
|
$ | 0.75 | ||
Companys stock price per share
|
$ | 1.26 |
On October 15, 2010, the $2.5 million convertible note was converted into shares of our common
stock at a conversion price of $0.75 per share. The fair value of the embedded derivative on
October 15, 2010, was $2,600,000, which was the intrinsic value of the conversion, based on the
Companys stock price as of the conversion date. As a result of the increase in fair value of the
embedded derivative from September 30, 2010, to the date of conversion on October 15, 2010,
$902,000 was recorded as an additional non-cash charge to earnings for the three months ended
December 31, 2010. As a result of the conversion, $2,600,000 was transferred into additional paid
in capital.
Note 7 Stockholders Equity
Warrants
A summary of warrants issued, exercised and expired during the three months ended December 31,
2010, is as follows:
Weighted | ||||||||
Avg. | ||||||||
Exercise | ||||||||
Warrants: | Shares | Price | ||||||
Balance at September 30, 2010 |
7,393,334 | $ | 1.14 | |||||
Issued |
| | ||||||
Exercised |
| | ||||||
Expired |
(370,417 | ) | 1.59 | |||||
Balance at December 31, 2010 |
7,022,917 | $ | 1.12 | |||||
Employee & Director Stock Options
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.
11
Table of Contents
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.
On October 21, 2010, Tyler Wick was appointed to the Board of Directors of the Company. As part of
the compensation for his services as a director, Mr. Wick was granted an option, vesting over two
years, to purchase 50,000 shares of common stock at $1.50 per share.
On December 29, 2010, the Board of Directors of the Company approved a grant of 450,000 stock
options under the 2007 Stock Plan to employees with an exercise price of $1.20 per share for
375,000 shares of the grant and an exercise price of $1.32 per share for 75,000 shares of the
grant. The options vest 25% on January 1, 2011, 25% on July 1, 2011, 25% on January 1, 2012, and
25% on July 1, 2012.
The weighted-average grant date fair value of options granted during the three months ended
December 31, 2010 and 2009, was $0.40 and $1.03, respectively. There were no options exercised
during the three months ended December 31, 2010 and 2009. The fair values of stock-based awards
granted during the three months ended December 31, 2010 and 2009, were calculated with the
following weighted-average assumptions:
2010 | 2009 | |||||||
Risk-free interest rate: |
1.05 | % | 1.38 | % | ||||
Expected term: |
3 years | 3 years | ||||||
Expected dividend yield: |
0.00 | % | 0.00 | % | ||||
Expected volatility: |
48.91 | % | 66.35 | % |
For the three months ended December 31, 2010 and 2009 the Company recorded $118,000 and $55,000,
respectively, of stock-based compensation expense, which has been classified as Operating expenses,
sub-classification of Payroll, taxes and benefits, for the employees and General and administrative
for the directors. As of December 31, 2010, there is $343,000 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 1.8 years.
Stock option activity for the three months ended December 31, 2010 is summarized as follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
2007 Stock Plan: | Shares | Price | Life (Years) | Value | ||||||||||||
Options outstanding at September 30, 2010 |
1,655,000 | $ | 0.92 | 3.07 | $ | 671,850 | ||||||||||
Granted |
500,000 | 1.25 | ||||||||||||||
Expired or forfeited |
| | ||||||||||||||
Options outstanding at December 31, 2010 |
2,155,000 | $ | 1.00 | 3.51 | $ | 698,100 | ||||||||||
Options exercisable at December 31, 2010 |
1,143,750 | $ | 0.84 | 2.84 | $ | 524,813 | ||||||||||
Options vested or expected to vest at December 31, 2010 |
2,155,000 | $ | 1.00 | 3.51 | $ | 698,100 |
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.
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As of December 31, 2010, 237,840 shares of the Companys common stock have been purchased through
the ESPP, using $168,000 of proceeds received from employee payroll deductions. For the three
months ended December 31, 2010 and 2009, the Company received $59,000 and $56,000, respectively,
through payroll deductions under the ESPP.
The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares
expected to be issued under the ESPP at the grant date, the beginning date of the offering period,
and recognizes compensation expense ratably over the offering period. If an employee elects to
increase their payroll withholdings during the offering period, the increase is treated as a
modification to the original option granted under the ESPP. As a result 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, 2010 and 2009, the Company recognized
$9,000 and $70,000, respectively, of compensation expense related to the ESPP.
Note 8 Income Taxes
The Company had a net income tax provision for the quarter ended December 31, 2010, of $372,000.
Although the Company had net operating loss carry-forwards which completely offsets regular taxable
income, the Company incurred alternative minimum tax on its net alternative minimum taxable income
of $1,000. In addition, the Company incurred deferred tax expense of $371,000.
The Companys effective tax rate was approximately 174% and 23% for the three months ended
December 31, 2010 and 2009, respectively, which differ from the federal statutory rate of 35% due
to the effect of state income taxes and certain of the Companys expenses that are not deductible
for tax purposes, primarily consisting of expense related to 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 which management has
determined will, more likely than not, be utilized.
Note 9 Subsequent Event
On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the Line
of Credit Agreement) with PNC Bank, National Association (the Lender). Pursuant to the Line of
Credit Agreement, the Lender will provide a maximum of Eight Million Five Hundred Thousand Dollars
($8,500,000) of revolving credit secured by the Companys personal property, including inventory
and accounts receivable Interest is payable on any advance at LIBOR plus 2.75%. Advances under the
Line of Credit Agreement are subject to a Borrowing Base Rider, which establishes a maximum
percentage amount of the Companys accounts receivable and inventory that can constitute the
permitted borrowing base. The Line of Credit Agreement expires in February 2013.
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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 within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide
current expectations of future events based on certain assumptions and include any statement that
does not directly relate to any historical or current fact. When used in this quarterly report, in
future filings by the Company with the Securities and Exchange Commission, in the Companys press
releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases will likely result, are
expected to, will continue, is anticipated, estimate, project, or similar expressions are
intended to identify forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak as of the date made, and
to advise readers that various factors, including regional and national economic conditions,
substantial changes in levels of market interest rates, credit and other risks of manufacturing,
distributing or marketing activities, competitive and regulatory factors, and those factors set
forth in the Companys Annual Report on Form 10-K for the year ended September 30, 2010, under the
caption Risk Factors, could affect the Companys financial performance and could cause the
Companys actual results for future periods to differ materially from those anticipated by any
forward-looking statements.
The following discussion should be read in conjunction with our unaudited consolidated financial
statements and notes thereto included in this Form 10-Q and the audited financial statements of the
Company, included in our Annual Report on Forms 10-K and 10-K/A for the year ended September 30,
2010, filed with the Securities and Exchange Commission and managements discussion and analysis
contained therein. The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
Overview
We are a leading national direct-to-consumer provider of quality medical supplies to
Medicare-eligible seniors. Liberator Medical Supply, Inc. (LMS), a wholly-owned subsidiary of the
Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits. An
Exemplary Provider accredited by The Compliance Team, our Companys unique combination of
marketing, industry expertise and customer service has demonstrated success over a broad spectrum
of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase
medical supplies needed on a regular, ongoing, repeat-order basis, with the convenience of direct
billing to Medicare and private insurance. Liberators revenue primarily comes from supplying
products to meet the rapidly growing requirements of general medical supplies, primarily diabetes
supplies, catheters, ostomy supplies and mastectomy fashions. Customers may purchase by phone,
mail, or Internet, with repeat orders confirmed with the customer and shipped when needed.
We market our products directly to consumers primarily through targeted media and direct response
television advertising. Our customer service representatives are specifically trained to
communicate with Medicare-eligible beneficiaries. Our operating platforms enable us to collect and
process required documents from physicians and customers, bill and collect amounts due from
Medicare and/or other government agencies and/or third party payers and/or customers.
Results of Operations
The following table summarizes the results of operations for the three months ended December 31,
2010 and 2009, including percentage of sales (dollars in thousands):
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales |
$ | 12,204 | 100.0 | $ | 9,158 | 100.0 | ||||||||||
Cost of Sales |
4,336 | 35.5 | 3,248 | 35.5 | ||||||||||||
Gross Profit |
7,868 | 64.5 | 5,910 | 64.5 | ||||||||||||
Operating Expenses |
6,725 | 55.1 | 4,750 | 51.9 | ||||||||||||
Income from Operations |
1,143 | 9.4 | 1,160 | 12.7 | ||||||||||||
Other Income (Expense) |
(929 | ) | (7.6 | ) | (5,511 | ) | (60.2 | ) | ||||||||
Income (Loss) Before Income Taxes |
214 | 1.8 | (4,351 | ) | (47.5 | ) | ||||||||||
Provision for (benefit from) Income Taxes |
372 | 3.1 | (1,006 | ) | (11.0 | ) | ||||||||||
Net Loss |
$ | (158 | ) | (1.3 | ) | $ | (3,345 | ) | (36.5 | ) | ||||||
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Revenues:
Sales for the three months ended December 31, 2010, increased by $3,046,000, or 33.3%, to
$12,204,000, compared with sales of $9,158,000 for the three months ended December 31, 2009. The
increase in sales was primarily due to our continued emphasis on our direct response advertising
campaign to obtain new customers and our dedication to customer service to retain our recurring
customer base. Our direct-response advertising expenditures for the three months ended December 31,
2010, were $3,887,000 compared to $2,037,000 for the three months ended December 31, 2009.
Gross Profit:
Gross profit for the three months ended December 31, 2010, increased by $1,958,000, or 33.1%, to
$7,868,000, compared with gross profit of $5,910,000 for the three months ended December 31, 2009.
The increase was attributed to our increased sales volume for the three months ended December 31,
2010, compared to the three months ended December 31, 2009.
Operating Expenses:
The following table provides a breakdown of our operating expenses for the three months ended
December 31, 2010 and 2009, including percentage of sales (dollars in thousands):
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Operating Expenses: |
||||||||||||||||
Payroll, taxes and benefits |
$ | 2,841 | 23.3 | $ | 2,169 | 23.7 | ||||||||||
Advertising |
1,901 | 15.6 | 806 | 8.8 | ||||||||||||
Bad debts |
892 | 7.3 | 655 | 7.2 | ||||||||||||
Depreciation |
166 | 1.4 | 95 | 1.0 | ||||||||||||
General and administration |
925 | 7.6 | 1,025 | 11.2 | ||||||||||||
Total Operating Expenses |
$ | 6,725 | 55.1 | $ | 4,750 | 51.9 | ||||||||||
Payroll, taxes and benefits increased by $672,000, or 31.0%, to $2,841,000 for the three months
ended December 31, 2010, compared to the three months ended December 31, 2009. The increase is
primarily attributed to an increase in the number of employees to support our increased sales
volume. We have chosen to invest in recruiting, hiring, and training additional staff ahead of our
advertising schedule, which helps us achieve compliance on many fronts and maintain the quality of
our customer service. As of December 31, 2010, we had 223 active employees compared to 187 at
December 31, 2009.
Advertising expenses increased by $1,095,000, or 135.9%, to $1,901,000 for the three months ended
December 31, 2010, compared to the three months ended December 31, 2009. The majority of our
advertising expenses are associated with the amortization of previously capitalized direct response
advertising costs. The rest of our advertising expenses are for costs that do not qualify as direct
response advertising and are expensed as incurred. The following table shows a breakdown of our
advertising expenses for the three months ended December 31, 2010, and 2009 (dollars in thousands):
2010 | 2009 | |||||||
Advertising Expenses: |
||||||||
Amortization of direct-response costs |
$ | 1,845 | $ | 809 | ||||
Other advertising expenses |
56 | (3 | ) | |||||
Total Advertising Expenses |
$ | 1,901 | $ | 806 |
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As of December 31, 2010, we have $12,048,000 of deferred advertising costs that will be expensed
over a period between four and six years based on probable future net revenues updated at each
reporting period and expected to result directly from such advertising.
Bad debt expenses increased by $237,000, or 36.2%, to $892,000 for the three months ended December
31, 2010, compared to the three months ended December 31, 2009. The increases in bad debt expenses
are due primarily to our increased sales levels.
Depreciation expense increased by $71,000, or 74.7%, to $166,000 for the three months ended
December 31, 2010, compared to the three months ended December 31, 2009. The increase in
depreciation expense is primarily attributed to the build out of an additional 24,000 square foot
facility during the first six months of fiscal year 2010 to house our expanding workforce and
provide the capacity necessary to support our future sales growth. Purchases of property and
equipment totaled $75,000 and $780,000 during the three months ended December 31, 2010 and 2009,
respectively.
General and administrative expenses decreased by $100,000, or 9.8%, to $925,000 for the three
months ended December 31, 2010 compared to the three months ended December 31, 2009. The decreases
are due to the reduction of amortization costs associated with debt issuance costs, professional
fees, and office expense; partially offset by increases in software costs, equipment lease
payments, and compensation for the board of directors. As a percentage of sales, general and
administrative expenses have decreased from 11.2% for the three months ended December 31, 2009, to
7.6% for the three months ended December 31, 2010.
Income from Operations:
Income from operations for the three months ended December 31, 2010, decreased by $17,000 to
$1,143,000, compared to the three months ended December 31, 2009. The decrease in operating income
is attributed to our increased investments in payroll, facilities, and advertising costs, partially
offset by a reduction in general and administrative costs.
Other Income (Expense):
The following table shows a breakdown of other income (expense) for the three months ended December
31, 2010 and 2009 (dollars in thousands):
2010 | 2009 | |||||||
Other Income (Expense): |
||||||||
Interest Expense |
$ | (31 | ) | $ | (416 | ) | ||
Change in fair value of derivative liabilities |
(902 | ) | (5,098 | ) | ||||
Gain on sale of assets |
2 | | ||||||
Interest income |
2 | 3 | ||||||
Total Other Income (Expense) |
$ | (929 | ) | $ | (5,511 | ) |
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, 2010 and 2009,
respectively, totaled $923,000 and $5,406,000.
Interest expense decreased by $384,000 to $31,000 for the three months ended December 31, 2010,
compared to the three months ended December 31, 2009. The decrease in interest expense was due to
reduced levels of debt during the three months ended December 31, 2010, as a result of the
conversion of $6,452,000 of notes into shares of our common stock and $1,315,000 of principal
payments towards shareholder loans since December 31, 2009.
16
Table of Contents
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 and the three months ended December 31,
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 FY 2009 |
$ | 1.45 | $ | n/a | ||||
December 31, 2009, Q1 FY 2010 |
2.18 | (5,098 | ) | |||||
March 31, 2010, Q2 FY 2010 |
2.20 | (59 | ) | |||||
June 30, 2010, Q3 FY 2010 |
1.49 | 3,698 | ||||||
September 30, 2010, Q4 FY 2010 |
1.26 | 768 | ||||||
October 15, 2010, Q1 FY 2011 (Conversion Date of $2.5 million note) |
1.53 | (902 | ) | |||||
Total change in fair value of derivative liabilities |
$ | (1,593 | ) | |||||
As a result of the increase in fair value of the embedded derivatives from October 1, 2009 to
December 31, 2009, $5,098,000 was recorded as a non-cash charge to earnings for the three months
ended December 31, 2009.
On May 11, 2010, the $3.5 million convertible note issued in May 2008 was converted into shares of
our common stock at a conversion price of $0.80 per share. As of September 30, 2010, derivatives
liabilities had a remaining balance of $1,698,000, which is related to the embedded derivative
contained in the $2.5 million convertible note due October 17, 2010.
On October 15, 2010, the $2.5 million convertible note was converted into shares of our common
stock at a conversion price of $0.75 per share. The fair value of the embedded derivative on
October 15, 2010, was $2,600,000. As a result of the increase in fair value of the embedded
derivative from September 30, 2010, to the date of conversion on October 15, 2010, $902,000 was
recorded as an additional non-cash charge to earnings for the three months ended December 31, 2010.
As a result of the conversion, $5.1 million, which is the balance of the derivative liabilities
plus the face value of the convertible note, was transferred into additional paid in capital,
eliminating any additional exposure to changes in fair value of the derivative liabilities
associated with the convertible debt issued in May and October 2008 since the notes have been
converted into shares of our common stock.
Income Taxes:
The provision for income taxes was $372,000 for the three months ended December 31, 2010. The
effective tax rate was approximately 174% of the income before income taxes of $214,000, which
differs from the federal statutory rate of 35% due to the effect of state income taxes and certain
of the Companys expenses that are not deductible for tax purposes, primarily consisting of
$902,000 of expense related to the change in fair value of derivative liabilities recorded for the
three months ended December 31, 2010.
The benefit for income taxes was $1,006,000 for the three months ended December 31, 2009. The
effective tax rate was approximately 23% of the loss before income taxes of $4,351,000, which
differs from the federal statutory rate of 35% due to the effect of state income taxes, a
$1,438,000 decrease to the valuation allowance for deferred tax assets that management has
determined will, more likely than not, be utilized, 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.
17
Table of Contents
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing, and financing activities
for the three months ended December 31, 2010 and 2009 (dollars in thousands):
For the Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cash Flows: |
||||||||
Net cash provided by (used in) operating activities |
$ | 597 | $ | (324 | ) | |||
Net cash used in investing activities |
(72 | ) | (1,333 | ) | ||||
Net cash provided by (used in) financing activities |
(523 | ) | 740 | |||||
Net increase (decrease) in cash |
2 | (917 | ) | |||||
Cash at beginning of period |
7,428 | 3,798 | ||||||
Cash at end of period |
$ | 7,430 | $ | 2,881 | ||||
The Company had cash of $7,430,000 at December 31, 2010, compared to cash of $7,428,000 at
September 30, 2010, an increase of $2,000. The increase in cash for the three months ended December
31, 2010, is primarily due to $597,000 of cash generated from operating activities and $59,000 of
proceeds from the employee stock purchase plan, partially offset by payments of $582,000 on our
debt obligations and $75,000 for purchases of property and equipment.
Operating Activities
During the three months ended December 31, 2010, cash provided by operations was $597,000, which
was the result of a net loss of $158,000 plus non-cash charges of $4,411,000 less changes in
operating assets and liabilities of $3,656,000. The non-cash charges consist primarily of
$1,845,000 for amortization of deferred advertising costs, $902,000 for the change in fair value of
derivative liabilities, $892,000 for bad debt expense, $371,000 for deferred income taxes, $166,000
for depreciation, $128,000 for equity based compensation associated with employee and director
stock options, and $87,000 for increase in reserve for returns and adjustments. The changes in
operating assets and liabilities for the three months ended December 31, 2010 consist of $3,887,000
of deferred advertising expenditures related to our direct response advertising efforts, increases
for accounts receivable of $643,000 and inventory of $486,000 as a result of our increased sales,
and a decrease of $283,000 for accrued expenses primarily related to the payment of management
incentives in October 2010, partially offset by an increase in accounts payable of $1,804,000 due
to increased purchases and improved vendor payment terms for our higher volume items.
During the three months ended December 31, 2009, cash used in operations was $324,000, which was
the result of a net loss of $3,345,000 plus non-cash charges of $6,252,000 less changes in
operating assets and liabilities of $3,231,000. The non-cash charges consist primarily of
$5,098,000 for the change in fair value of derivative liabilities, $809,000 for amortization of
deferred advertising costs, $655,000 for bad debt expense, $353,000 for non-cash interest expense
related to convertible notes payable, $133,000 for equity based compensation associated with
employee and director stock options, $107,000 for increase in the reserve for returns and
adjustments, and $95,000 for depreciation; less, $1,009,000 for deferred income taxes. The changes
in operating assets and liabilities for the three months ended December 31, 2009, consist of
$2,037,000 of deferred advertising expenditures related to our direct response advertising efforts,
increases for accounts receivable of $1,576,000 and inventory of $31,000 as a result of our
increased sales, and a decrease of $179,000 for accrued expenses primarily related to the payment
of management incentives in October 2009, partially offset by an increase in accounts payable of
$744,000 due to increased purchases.
Investing Activities
During the three months ended December 31, 2010, we purchased $75,000 of property and equipment to
support our continued growth.
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, into which we moved 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 4 of the unaudited condensed consolidated financial statements.
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Table of Contents
Financing Activities
During the three months ended December 31, 2010, cash used in financing activities was $523,000,
which included payments of $582,000 towards our debt obligations, partially offset by $59,000 of
proceeds from our employee stock purchase plan.
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.
Outlook
The Company has experienced substantial growth over the past three fiscal years despite the
downturn in the U.S. economy. We have increased sales for eleven consecutive quarters. Our growth
has been driven by our direct response marketing campaign, primarily through television ads at
remnant (discounted) rates. Based on information from our media buying agents, we believe that
demand for television time slots within the direct response advertising market has increased over
the last fiscal year, creating a more competitive environment within this medium. Although customer
acquisition costs remain at acceptable levels, during fiscal year 2010 and the first three months
of fiscal year 2011, we increased our spending in alternative media channels and plan to continue
those efforts during the remainder of fiscal year 2011. In addition, we have invested heavily in
our infrastructure by adding both personnel and facilities, so that we continue to remain capable
of supporting a much higher sales volume. We currently have approximately 50% of each of our
facilities available for future growth. We have chosen to build our infrastructure ahead of our
advertising spend, which helps us achieve compliance on many fronts and maintain the quality of our
customer service. Our cost structure continues to remain flexible enough to adapt to changing
market conditions. We can pulse our advertising spend and the expansion of our workforce relatively
quickly based on the results of our marketing programs. We believe we are well positioned to
continue to grow our sales and improve profitability over the long term.
We plan to continue our advertising efforts over the next twelve months to attract new customers
and expand our operations to service our new and existing customers. The outlook for demand for our
products and services is favorable, as there should be an increase in newly-diagnosed patients
requiring the medical supplies that we provide. We expect our revenues to continue to grow over the
next three quarters of fiscal year 2011 due to our advertising and marketing programs. The Company
does not anticipate any major changes affecting the Company in Medicare reimbursement in 2011, nor
in any other reimbursement programs available from other third-party payers.
Due to our emphasis on sales growth through our direct-response advertising efforts, we may be
required to raise additional cash, preferably through debt facilities versus the sale of additional
equity, in order to maintain our current growth rates. As of December 31, 2010, we had $7.4 million
of cash available to fund our operations. We believe that existing cash and cash equivalents,
together with cash generated from the collection of accounts receivable, and the sale of products
will be sufficient to meet our cash requirements during the next twelve months.
At December 31, 2010, our current assets of $18,207,000 exceeded our current liabilities of
$6,611,000 by $11,596,000.
Our plan for the next twelve months includes the following:
| Continue our advertising and marketing efforts; | ||
| Increase our customer base; | ||
| Continue to service our current customer base and increase the retention rate; |
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| Continue to invest in the expansion of our infrastructure; and | ||
| Increase our accounts receivable collection efforts. |
In order to implement our current business model, we have completed the following:
| Identified and presented to many large funding sources, soliciting terms for long-term capital in the form of debt, equity or a combination of both; | ||
| Expanded our Board of Directors to include five directors, four of whom are non-employee directors, and formed an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee; | ||
| Identified products and related target customers through extensive market research; | ||
| Established efficient and cost-effective methods to reach qualified customers; | ||
| Established an infrastructure of management and knowledgeable staff to support substantial growth in sales with a minimal amount of additional staff members, maximizing our revenue per employee; | ||
| Leased an additional 24,000 square foot facility to house our expanding workforce and support our continued growth. We completed the build out of this facility to house our call center and other administrative functions and moved into the new facility in January, 2010. | ||
| Created a HIPAA compliant IT infrastructure and staff to accommodate additional growth in sales; | ||
| Established a marketing plan that can be monitored for effectiveness and is flexible enough to adapt to changing market conditions; and | ||
| Established methods of testing our current and new advertising methods to meet changing market conditions. |
We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider,
primarily focused on supplying medical supplies to chronically ill patients.
Off-Balance Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet arrangements.
Critical Accounting Policies
See Summary of Significant Accounting Policies in the Notes to the unaudited condensed
consolidated financial statements and our current Annual Report on Form 10-K/A for the year ended
September 30, 2010, 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.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted under the 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, 2010. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were not effective due to material weaknesses
identified in the Companys internal control over financial reporting described below.
Managements Report on Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the Companys annual or interim financial statements will not be prevented or detected on a timely
basis.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, we have evaluated the effectiveness of our internal control over financial reporting as of
December 31, 2010, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment,
we have utilized the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control Integrated Framework. We concluded that based on our
evaluation, our internal control over financial reporting was not effective as of December 31, 2010
due to material weaknesses identified as follows:
| Assess and Identify the Impact of Recently Issued Accounting Pronouncements: The Companys procedures to assess and identify the impact of Recently Issued Accounting Pronouncements were not sufficient, as evidenced by the Companys failure to timely identify the impact of ASC 815-40-15, Derivatives and Hedging Contracts in Entitys Own Equity (Scope and Scope Exceptions), which became effective for the Company on October 1, 2009. The Company did not become aware of the new guidance until June 2010, and the impacts of the accounting guidance were not properly identified by the Company until December 2010. As a result, the Company determined that the previously issued interim financial statements for fiscal year 2010 should no longer be relied upon, 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. |
| 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. |
Change in Internal Control over Financial Reporting
During the three months ended December 31, 2010, the Company remediated the following material
weaknesses previously disclosed in the Companys Annual Report for fiscal year 2010 filed with the
SEC on Form 10-K:
| 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 |
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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. | |||
Remediation: The Company engaged an independent third party valuation expert to calculate the fair values of the embedded derivative liabilities and correctly accounted for the embedded derivatives contained in certain convertible notes payable. The Company has restated 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. | |||
| Accounting for Deferred Direct-Response Advertising Costs: Management has identified a material weakness related to the classification and measurement of our capitalized direct-response advertising costs due to the following: |
| The Company had not previously defined what constituted a separate stand-alone cost pool as defined by ASC 340-20-35-1. |
| The amortization of capitalized direct-response advertising costs was not calculated by taking the ratio of current period revenues over the total period revenues associated with each cost pool as required by ASC 340-20-35-3. |
| Prior to September 30, 2010, the Company had reflected both a current and long term portion of the assets on the consolidated balance sheet. In accordance with an SEC interpretation (SPCH.T.1995.22.Glynn), the SEC would object to the classification of any unamortized cost of advertising as a current asset. This resulted in the Company reclassifying the fiscal year 2009 comparative balance to conform to the current fiscal year classification. |
Remediation: During the first quarter of fiscal year 2011 and before we filed our Annual Report for fiscal year 2010 with the SEC on Form 10-k, management completed the above analysis as required, including defining separate stand-alone cost pools. In addition, management determined that no restatements of prior period financial statements were required as a result of the above analysis. |
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 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 | ||
| 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/A
for the fiscal year ended September 30, 2010. 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
During the three months ended December 31, 2010, the Company issued 3,333,333 shares of common
stock upon the conversion of convertible notes payable. The securities were issued in reliance upon
the exemptions from registration provided by Regulation D, Rule 506, and Section 4(2) of the
Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.1 Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 Section 906 Certificate of Chief Financial Officer
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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