Attached files
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EX-31.1 - LIBERATOR MEDICAL HOLDINGS, INC. | v218338_ex31-1.htm |
EX-32.1 - LIBERATOR MEDICAL HOLDINGS, INC. | v218338_ex32-1.htm |
EX-31.2 - LIBERATOR MEDICAL HOLDINGS, INC. | v218338_ex31-2.htm |
EX-32.2 - LIBERATOR MEDICAL HOLDINGS, INC. | v218338_ex32-2.htm |
UNITED STATES
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 June 30, 2010
or
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission file number: 000-05663
LIBERATOR MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA
|
87-0267292
|
|
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (Zip Code)
(772) 287-2414
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 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
(Do not check if a smaller reporting company) |
Smaller reporting company þ
|
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 issuer’s classes of common stock, as of the latest practicable date.
Class
|
Outstanding as of August 12, 2010
|
|
Common Stock, $.001
|
44,568,208
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Page
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Explanatory Note
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3
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||
PART I — FINANCIAL INFORMATION
|
4
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||
Item 1.
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Condensed Consolidated Financial Statements
|
4
|
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Balance Sheets as of June 30, 2010 (unaudited) and September 30, 2009
|
4
|
||
Statements of Operations for the three and nine months ended June 30, 2010 and 2009 (unaudited)
|
5
|
||
Statement of Changes in Stockholders’ Equity for the nine months ended June 30, 2010 (unaudited)
|
6
|
||
Statements of Cash Flows for the nine months ended June 30, 2010 and 2009 (unaudited)
|
7
|
||
Notes to Unaudited Condensed Consolidated Financial Statements
|
8
|
||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
24
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
29
|
|
Item 4T.
|
Controls and Procedures
|
30
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|
PART II — OTHER INFORMATION
|
32
|
||
Item 1.
|
Legal Proceedings
|
32
|
|
Item 1A.
|
Risk Factors
|
32
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Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
32
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Item 3.
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Defaults Upon Senior Securities
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32
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Item 4.
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<Removed and Reserved>
|
||
Item 5.
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Other Information
|
32
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Item 6.
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Exhibits
|
32
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SIGNATURES
|
33
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EX-31.1
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EX-31.2
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EX-32.1
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EX-32.2
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2
Liberator Medical Holdings, Inc. (the “Company”) is filing this amendment to its Quarterly Report on Form 10-Q for the interim period ended June 30, 2010, which was originally filed with the Securities and Exchange Commission (“SEC”) on August 16, 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 and nine months ended June 30, 2010, to properly account for the following:
|
·
|
The Company’s 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 have been made in order to maintain consistency and comparability with our subsequent presentations in fiscal year 2010 on Form 10-K.
|
The revisions relate to non-operating and non-cash items for the interim period ended June 30, 2010, and do not impact reported revenues, operating income, or the Company’s 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 and nine months ended June 30, 2010.
This Form 10-Q/A amends the following items in the Company’s Original Filing:
|
·
|
Part I – Item 1 – Condensed Consolidated Financial Statements
|
|
·
|
Part I – Item 2 – Management’s 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 Company’s subsequent filings to the Original Filing with the SEC.
3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Liberator Medical Holdings, Inc. and Subsidiaries
(in thousands, except per share amounts)
Restated
June 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Current Assets:
|
||||||||
Cash
|
$
|
6,889
|
$
|
3,798
|
||||
Restricted cash
|
1,060
|
500
|
||||||
Accounts receivable, net of allowances of $3,622 and $2,327, respectively
|
6,511
|
3,850
|
||||||
Inventory, net of allowance for obsolete inventory of $227 and $110, respectively
|
2,037
|
902
|
||||||
Deferred taxes, current portion
|
1,244
|
—
|
||||||
Other current assets
|
662
|
483
|
||||||
Total Current Assets
|
18,403
|
9,533
|
||||||
Property and equipment, net of accumulated depreciation of $1,384 and $1,021, respectively
|
1,912
|
1,041
|
||||||
Deferred advertising
|
8,522
|
3,755
|
||||||
Intangible assets, net of accumulated amortization of $3
|
204
|
—
|
||||||
Other noncurrent assets
|
226
|
130
|
||||||
Total Assets
|
$
|
29,267
|
$
|
14,459
|
||||
Liabilities and Stockholders’ Equity
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable
|
$
|
5,606
|
$
|
2,089
|
||||
Accrued liabilities
|
798
|
716
|
||||||
Stockholder loans
|
865
|
1,515
|
||||||
Convertible notes payable, net of unamortized discount of $137 and $292, respectively
|
2,382
|
3,893
|
||||||
Derivative liabilities
|
2,467
|
—
|
||||||
Other current liabilities
|
136
|
140
|
||||||
Total Current Liabilities
|
12,254
|
8,353
|
||||||
Convertible notes payable, net of unamortized discount of $0 and $90, respectively
|
—
|
2,447
|
||||||
Deferred tax liability
|
676
|
—
|
||||||
Other noncurrent liabilities
|
176
|
235
|
||||||
Total Liabilities
|
13,106
|
11,035
|
||||||
Stockholders’ Equity:
|
||||||||
Common stock, $.001 par value, 200,000 shares authorized; 44,637 and 32,462 shares issued, respectively; 44,547 and 32,377 shares outstanding at June 30, 2010, and September 30, 2009, respectively
|
45
|
32
|
||||||
Additional paid-in capital
|
28,763
|
11,705
|
||||||
Accumulated deficit
|
(12,597
|
)
|
(8,272
|
)
|
||||
16,211
|
3,465
|
|||||||
Less: Treasury stock, at cost; 89 and 85 shares at June 30, 2010, and September 30, 2009, respectively
|
(50
|
)
|
(41
|
)
|
||||
Total Stockholders’ Equity
|
16,161
|
3,424
|
||||||
Total Liabilities and Stockholders’ Equity
|
$
|
29,267
|
$
|
14,459
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Liberator Medical Holdings, Inc. and Subsidiaries
For the three and nine months ended June 30, 2010 and 2009
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
Restated
2010
|
2009
|
Restated
2010
|
2009
|
|||||||||||||
Sales
|
$
|
10,619
|
$
|
6,950
|
$
|
29,428
|
$
|
18,119
|
||||||||
Cost of Sales
|
3,677
|
2,506
|
10,312
|
6,425
|
||||||||||||
Gross Profit
|
6,942
|
4,444
|
19,116
|
11,694
|
||||||||||||
Operating Expenses
|
||||||||||||||||
Payroll, taxes and benefits
|
2,569
|
1,518
|
7,357
|
3,857
|
||||||||||||
Advertising
|
1,336
|
616
|
3,255
|
1,373
|
||||||||||||
Bad debts
|
1,020
|
373
|
2,603
|
1,861
|
||||||||||||
Depreciation and amortization
|
179
|
80
|
449
|
214
|
||||||||||||
General and administrative
|
896
|
785
|
2,991
|
2,445
|
||||||||||||
Total Operating Expenses
|
6,000
|
3,372
|
16,655
|
9,750
|
||||||||||||
Income from Operations
|
942
|
1,072
|
2,461
|
1,944
|
||||||||||||
Other Income (Expense)
|
||||||||||||||||
Interest Expense
|
(289
|
)
|
(267
|
)
|
(1,105
|
)
|
(812
|
)
|
||||||||
Change in fair value of derivative liabilities
|
3,697
|
—
|
(1,460
|
)
|
—
|
|||||||||||
Loss on disposal of assets
|
—
|
—
|
(2
|
)
|
—
|
|||||||||||
Interest Income
|
8
|
3
|
16
|
17
|
||||||||||||
Total Other Income (Expense)
|
3,416
|
(264
|
)
|
(2,551
|
)
|
(795
|
)
|
|||||||||
Income (Loss) before Income Taxes
|
4,358
|
808
|
(90
|
)
|
1,149
|
|||||||||||
Provision for (benefit from) Income Taxes
|
413
|
14
|
(599
|
)
|
14
|
|||||||||||
Net Income
|
$
|
3,945
|
$
|
794
|
$
|
509
|
$
|
1,135
|
||||||||
Basic earnings per share:
|
||||||||||||||||
Weighted average shares outstanding
|
41,569
|
32,133
|
36,438
|
32,068
|
||||||||||||
Earnings per share
|
$
|
0.09
|
$
|
0.02
|
$
|
0.01
|
$
|
0.04
|
||||||||
Diluted earnings per share:
|
||||||||||||||||
Weighted average shares outstanding
|
54,797
|
37,334
|
44,809
|
35,990
|
||||||||||||
Earnings per share
|
$
|
0.07
|
$
|
0.02
|
$
|
0.01
|
$
|
0.03
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
Liberator Medical Holdings, Inc. and Subsidiaries
For the nine months ended June 30, 2010 as Restated
(Unaudited)
(in thousands)
Total
|
||||||||||||||||||||||||
Common
|
Common
|
Paid in
|
Accumulated
|
Treasury
|
Stockholders’
|
|||||||||||||||||||
Shares
|
Stock
|
Capital
|
Deficit
|
Stock
|
Equity
|
|||||||||||||||||||
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
|
280 | 280 | ||||||||||||||||||||||
Common stock issued for interest on convertible debt
|
19 | — | 45 | 45 | ||||||||||||||||||||
Common stock issued upon conversion of debt
|
5,578 | 6 | 8,908 | 8,914 | ||||||||||||||||||||
Common stock issued for exercise of warrants
|
1,749 | 2 | 1,554 | 1,556 | ||||||||||||||||||||
Common stock issued for employee stock purchase plan
|
162 | — | 73 | 73 | ||||||||||||||||||||
Common stock issued for cash, net of issuance costs
|
4,666 | 5 | 6,588 | 6,593 | ||||||||||||||||||||
Purchase common treasury stock
|
(4 | ) | (9 | ) | (9 | ) | ||||||||||||||||||
Net income
|
509 | 509 | ||||||||||||||||||||||
Balance at June 30, 2010
|
44,547 | $ | 45 | $ | 28,763 | $ | (12,597 | ) | $ | (50 | ) | $ | 16,161 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
Liberator Medical Holdings, Inc. and Subsidiaries
For the nine months ended June 30, 2010 and 2009
(Unaudited)
(in thousands)
Restated
2010
|
2009
|
|||||||
Cash flow from operating activities:
|
||||||||
Net Income
|
$
|
509
|
$
|
1,135
|
||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
Depreciation and amortization
|
3,670
|
1,458
|
||||||
Change in fair value of derivative liabilities
|
1,460
|
|||||||
Equity based compensation
|
303
|
365
|
||||||
Provision for doubtful accounts and sales returns and adjustments
|
2,759
|
1,861
|
||||||
Non-cash interest related to convertible notes payable
|
886
|
565
|
||||||
Deferred income taxes
|
(566
|
)
|
—
|
|||||
Amortization of non-cash debt issuance costs
|
23
|
29
|
||||||
Loss on disposal of assets
|
2
|
—
|
||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(5,420
|
)
|
(2,950
|
)
|
||||
Deferred advertising
|
(7,988
|
)
|
(2,907
|
)
|
||||
Inventory
|
(1,135
|
)
|
(449
|
)
|
||||
Other assets
|
(320
|
)
|
294
|
|||||
Accounts payable
|
3,516
|
1,220
|
||||||
Accrued expenses
|
(51
|
)
|
112
|
|||||
Deferred rent
|
(3
|
)
|
(34
|
)
|
||||
Net Cash Flow Provided by (Used in) Operating Activities
|
(2,355
|
)
|
699
|
|||||
Cash flow from investing activities:
|
||||||||
Purchase of property and equipment and other
|
(1,531
|
)
|
(369
|
)
|
||||
Proceeds from the sale of assets
|
5
|
—
|
||||||
Purchase of certificates of deposit
|
(559
|
)
|
—
|
|||||
Net Cash Flow Used in Investing Activities
|
(2,085
|
)
|
(369
|
)
|
||||
Cash flow from financing activities:
|
||||||||
Proceeds from the sale of common stock
|
7,000
|
—
|
||||||
Costs associated with the sale of common stock
|
(407
|
)
|
—
|
|||||
Proceeds from issuance of convertible notes
|
—
|
2,500
|
||||||
Costs associated with issuance of convertible notes
|
—
|
(326
|
)
|
|||||
Proceeds from the exercise of warrants
|
1,556
|
—
|
||||||
Proceeds from employee stock purchase plan
|
102
|
—
|
||||||
Purchase of treasury stock
|
(9
|
)
|
(41
|
)
|
||||
Payments of debt and capital lease obligations
|
(711
|
)
|
(148
|
)
|
||||
Net Cash Flow Provided by Financing Activities
|
7,531
|
1,985
|
||||||
Net increase in cash
|
3,091
|
2,315
|
||||||
Cash at beginning of period
|
3,798
|
1,173
|
||||||
Cash at end of period
|
$
|
6,889
|
$
|
3,488
|
||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid for interest
|
$
|
323
|
$
|
290
|
||||
Cash paid for income taxes
|
$
|
20
|
$
|
21
|
||||
Supplemental schedule of non-cash investing and financing activities:
|
||||||||
Capital expenditures funded by capital lease borrowings
|
$
|
—
|
$
|
91
|
||||
Common stock issued for interest expense
|
$
|
45
|
$
|
105
|
||||
Common stock issued for conversion of debt
|
$
|
8,914
|
$
|
85
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
Liberator Medical Holdings, Inc. and Subsidiaries
June 30, 2010
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 Company’s 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 and nine months ended June 30, 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. Practica Medical Manufacturing, Inc. was formed in April 2010 as a wholly-owned subsidiary of the Company, carrying on similar business activity as the other 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 Company’s 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 Company’s Condensed Consolidated Statement of Operations.
8
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.
Recently Adopted Accounting Pronouncements
On October 1, 2009, we adopted 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 instrument's 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).
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures,” which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim periods beginning after December 15, 2010. The Company adopted these amendments in January 2010. The Company has outstanding convertible debt instruments that have embedded conversion features that are classified as derivative liabilities. The fair values of the derivative liabilities are disclosed in Note 4 - Fair Value Measurements.
In June 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which changes various aspects of accounting for and disclosures of interests in variable interest entities. ASU 2009-17 is effective for interim and annual periods beginning after November 15, 2009. The Company adopted these amendments in January 2010 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on accounting for transfers of financial assets. This guidance was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of this statement did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In July 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010 with certain other additional disclosures that will be effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.
In April 2010, the FASB issued ASU 2010-13, “Compensation — Stock Compensation (Topic 718) — Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and are not expected to have a significant impact on the Company’s consolidated financial statements.
9
In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 will be effective on July 1, 2010 and are not expected to have a significant impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements (A Consensus of the FASB Emerging Issues Task Force)”. ASU 2009-14 requires tangible products that contain software and non-software elements that work together to deliver the products essential functionality to be evaluated under the accounting standard regarding multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. The Company does not expect that this standard update will have a significant impact on its consolidated financial statements.
In September 2009, the FASB issued certain amendments as codified in ASC Topic 605-25, “Revenue Recognition; Multiple-Element Arrangements.” These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company will adopt the provisions of these amendments in its fiscal year 2011 and does not expect that these amendments to have a significant impact on its consolidated financial statements.
Note 3 – Restatement of Previously Issued Financial Statements (Restated)
On December 9, 2010, the Company concluded that the Company’s previously issued unaudited financial statements as of and for the interim period ended June 30, 2010, 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 and nine months ended June 30, 2010, 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 Company’s 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 Company’s 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 Company’s 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 $545,000 in tax benefits during the nine months ended June 30, 2010.
|
10
In addition, certain reclassifications related to the accounting for deferred advertising costs has been made in order to maintain consistency and comparability with our subsequent presentations in fiscal year 2010 on Form 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 June 30, 2010. 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 following tables provide a summary of the amounts restated as of and for the three and nine months ended June 30, 2010 (dollars in thousands, except per share amounts):
Balance Sheet Data:
|
As
Previously
Reported
|
Reclassifications
|
Cumulative
Effect
Adjustment
as of
10/1/2009
|
Current
Period
Effect
|
As
Restated
|
|||||||||||||||
Deferred advertising, current portion
|
4,595 | (4,595 | ) | — | — | — | ||||||||||||||
Deferred taxes, current portion
|
413 | — | — | 831 | 1,244 | |||||||||||||||
Total Current Assets
|
22,167 | (4,595 | ) | — | 831 | 18,403 | ||||||||||||||
Deferred advertising
|
3,927 | 4,595 | — | — | 8,522 | |||||||||||||||
Total Assets
|
28,436 | — | — | 831 | 29,267 | |||||||||||||||
Notes Payable, net
|
$ | 2,493 | — | $ | (596 | ) | $ | 485 | $ | 2,382 | ||||||||||
Derivative liabilities
|
— | — | 5,820 | (3,353 | ) | 2,467 | ||||||||||||||
Total Current Liabilities
|
9,898 | — | 5,224 | (2,868 | ) | 12,254 | ||||||||||||||
Deferred tax liability
|
457 | — | — | 219 | 676 | |||||||||||||||
Total Liabilities
|
10,531 | — | 5,224 | (2,649 | ) | 13,106 | ||||||||||||||
Additional Paid in Capital
|
24,274 | — | (390 | ) | 4,879 | 28,763 | ||||||||||||||
Accumulated Deficit
|
(6,364 | ) | — | (4,834 | ) | (1,399 | ) | (12,597 | ) | |||||||||||
Total Equity
|
$ | 17,905 | — | $ | (5,224 | ) | $ | 3,480 | $ | 16,161 |
For the three months ended
June 30, 2010
|
For the nine months ended
June 30, 2010
|
|||||||||||||||||||||||
Statement of Operations Data:
|
As
Previously
Reported
|
Current
Period Effect
|
As
Restated
|
As
Previously
Reported
|
Current Period
Effect
|
As
Restated
|
||||||||||||||||||
Other Income (Expense):
|
||||||||||||||||||||||||
Interest Expense
|
(150 | ) | (139 | ) | (289 | ) | (621 | ) | (484 | ) | (1,105 | ) | ||||||||||||
Change in fair value of derivative liabilities
|
— | 3,697 | 3,697 | — | (1,460 | ) | (1,460 | ) | ||||||||||||||||
Total Other Income (Expense)
|
(142 | ) | 3,558 | 3,416 | (607 | ) | (1,944 | ) | (2,551 | ) | ||||||||||||||
Provision for (Benefit from) Income Taxes
|
2 | 411 | 413 | (54 | ) | (545 | ) | (599 | ) | |||||||||||||||
Net Income
|
$ | 798 | $ | 3,147 | $ | 3,945 | $ | 1,908 | $ | (1,399 | ) | $ | 509 | |||||||||||
Basic Earnings per Share
|
$ | 0.02 | $ | 0.07 | $ | 0.09 | $ | 0.05 | $ | (0.04 | ) | $ | 0.01 | |||||||||||
Diluted Earnings per Share
|
$ | 0.02 | $ | 0.05 | $ | 0.07 | $ | 0.04 | $ | (0.03 | ) | $ | 0.01 |
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 Company’s 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:
11
|
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 management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.
|
The summary of fair values of financial instruments as of June 30, 2010 (dollars in thousands):
June 30, 2010
|
|||||||||||||
Instrument
|
Fair Value
|
Carrying Value
|
Level
|
Valuation Methodology
|
|||||||||
Derivative liabilities (See Note 10 below)
|
$ | 2,467 | $ | 2,467 | 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 nine months ended June 30, 2010 (dollars in thousands):
2010
|
||||
Beginning balance: Derivative liabilities
|
$
|
—
|
||
Adoption of change in accounting principle
|
5,820
|
|||
Total loss on change in derivative liabilities
|
1,460
|
|||
Purchases, sales, issuances and settlements, net
|
(4,813
|
)
|
||
Ending balance: Derivative liabilities
|
$
|
2,467
|
Note 5 — Property and Equipment
A summary of property and equipment at June 30, 2010, and September 30, 2009, is as follows (in thousands):
Estimated
|
June 30,
|
September 30,
|
|||||||
Life
|
2010
|
2009
|
|||||||
Leased equipment
|
5 years
|
$
|
582
|
$
|
582
|
||||
Transportation equipment
|
3 years
|
72
|
95
|
||||||
Warehouse equipment
|
5 years
|
98
|
56
|
||||||
Office furniture
|
5 years
|
473
|
150
|
||||||
Computer equipment
|
3 years
|
231
|
87
|
||||||
Telephone equipment
|
5 years
|
77
|
33
|
||||||
Rental equipment
|
7 years
|
18
|
18
|
||||||
Web Site
|
3 years
|
6
|
6
|
||||||
Software
|
3 years
|
222
|
130
|
||||||
Training guides
|
3 years
|
3
|
3
|
||||||
Leasehold improvements
|
5 years
|
1,494
|
889
|
||||||
Signage
|
3 years
|
21
|
13
|
||||||
Total property and equipment
|
3,296
|
2,062
|
|||||||
Less: accumulated depreciation
|
(1,384
|
)
|
(1,021
|
)
|
|||||
Property and equipment, net
|
$
|
1,912
|
$
|
1,041
|
12
The amounts charged to operations for depreciation for the nine months ended June 30, 2010 and 2009, were $446,000 and $214,000, respectively.
Note 6 — Acquired Intangible Assets
A summary of acquired intangible assets at June 30, 2010, is as follows (in thousands):
Gross Carrying
|
Accumulated
|
|||||||
Amount
|
Amortization
|
|||||||
Amortized intangible assets
|
||||||||
Patented technology
|
$
|
207
|
(3
|
)
|
Amortization expense associated with intangible assets for the nine months ended June 30, 2010, was $3,000. The remaining net intangible assets of $204,000 are expected to be amortized over the next 13.3 years. Estimated amortization expense for intangible assets as of June 30, 2010, for the next five fiscal years is as follows (in thousands):
Amount
|
||||
Year ending September 30:
|
||||
2010
|
$
|
4
|
||
2011
|
15
|
|||
2012
|
15
|
|||
2013
|
15
|
|||
2014
|
15
|
|||
$
|
64
|
Note 7 — Stockholder Loan
The stockholder loans at June 30, 2010, and September 30, 2009, in the amounts of $865,000 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 nine months ended June 30, 2010, $650,000 of principal was repaid to Mr. Libratore. As of June 30, 2010, the senior note holders have authorized the remaining balance of the stockholder loan to be repaid to Mr. Libratore in increments of $300,000 per quarter until the stockholder loan is paid in full. Interest expense related to the stockholder loan for the nine months ended June 30, 2010 and 2009 was $81,000, and $115,000, 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 agreed to advance the Company a maximum of $500,000 secured by the Company’s $500,000 certificate of deposit held by the lender. Interest is payable on any advance under the Credit Line Facility at a rate of 1.000 percentage point under the corporate loan base rate index published by the Wall Street Journal, with a minimum interest rate of 4.750% per annum.
On November 2, 2009, the Company entered into a revised Credit Line Facility with the same lender discussed above. Under the revised loan agreement, the lender agreed to advance the Company a maximum of $1,000,000 secured by the Company’s 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 June 30, 2010, the Company had an outstanding balance of $0 under the Credit Line Facility. Interest expense related to the credit line for the nine months ended June 30, 2010, was $18,000.
Note 9 — Convertible Notes Payable (Restated)
April 2008 Convertible Notes
13
On April 11, 2008, the Company closed a private placement consisting of convertible notes and warrants for $804,000, of which $598,000 were cash proceeds and $206,000 were prior year debt exchanged for the convertible notes. The notes are convertible into shares of our common stock at an initial conversion price of $0.50 per share, subject to adjustment, and mature one year after issuance. The notes are senior unsecured obligations of our Company and accrue interest at an annual rate of twelve percent (12%) per annum, payable at maturity. The warrants have a term of five years and are exercisable from the date of their issuance until their expiration at a price of $1.00 per share. In addition, we issued a warrant to the placement agent exercisable for up to 51,000 shares of our common stock on terms substantially similar to the warrant issued in connection with the note described above.
As of June 30, 2010, $711,000 of the notes has been converted into 1,422,000 shares of the Company’s common stock and $93,000 of the notes has been redeemed for cash.
Interest expense related to the April 2008 convertible notes was $22,000 and $65,000 for the nine months ended June 30, 2010 and 2009, respectively.
May 2008 Convertible Note
On May 22, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $3,500,000. The note 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 would 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 had concluded that the adjustment feature for the conversion price of the note was not indexed to the Company’s 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 Company’s 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.
On May 11, 2010, the $3,500,000 note was converted into 4,375,000 shares of the Company’s common stock at a conversion price of $0.80 per share.
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 $201,000 was recorded as non-cash interest expense for the nine months ended June 30, 2010.
Interest expense related to the May 2008 convertible note was $558,000 and $437,000 for the nine months ended June 30, 2010 and 2009, respectively.
October 2008 Convertible Note
On October 17, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $2,500,000. The note is convertible into shares of our common stock at an initial conversion price of $0.75 per share, subject to adjustment, and matures on October 17, 2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3% per annum, paid semi-annually on each October 15 and April 15. The note is unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of the note will be reduced if, among other things, we issue shares of common stock or securities exercisable, exchangeable or convertible for or into shares of common stock (“common stock equivalents”) at a price per share less than both the conversion price then in effect and $0.75, subject to certain exclusions. The Company has concluded that the adjustment feature for the conversion price of the note is not indexed to the Company’s 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 Company’s 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
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 $283,000 was recorded as non-cash interest expense for the nine months ended June 30, 2010.
Interest expense related to the October 2008 convertible note was $411,000 and $117,000 for the nine months ended June 30, 2010 and 2009, respectively.
In October 2009, the Company entered into a Waiver Agreement with the 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 Company’s common stock, with a fair market value of $45,000, in lieu of the Company’s 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 June 30, 2010 (in thousands):
Oct ’08 Note
|
||||
Notes Payable, face amount
|
$ | 2,500 | ||
Discounts on Notes:
|
||||
Initial valuation of Warrants
|
(86 | ) | ||
Initial valuation of Embedded Derivative
|
(841 | ) | ||
Accumulated Amortization
|
790 | |||
Total Discounts
|
(137 | ) | ||
Accrued Interest
|
19 | |||
Convertible Notes Payable, net
|
$ | 2,382 |
Short-term convertible notes payable consist of the following as of September 30, 2009 (in thousands):
April ’08 Notes
|
May ’08 Note
|
Totals
|
||||||||||
Notes Payable, face amount
|
$ | 601 | $ | 3,500 | $ | 4,101 | ||||||
Discounts on Notes:
|
||||||||||||
Initial valuation of Warrants
|
(126 | ) | (610 | ) | (736 | ) | ||||||
Initial valuation of Beneficial Conversion Option
|
— | (303 | ) | (303 | ) | |||||||
Accumulated Amortization
|
126 | 621 | 747 | |||||||||
Total Discounts
|
— | (292 | ) | (292 | ) | |||||||
Accrued Interest
|
40 | 44 | 84 | |||||||||
Convertible Notes Payable, net
|
$ | 641 | $ | 3,252 | $ | 3,893 |
Long-term Convertible notes payable consist of the following at September 30, 2009 (in thousands):
Oct ’08 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 |
15
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 Company’s 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 Company’s Condensed Consolidated Statement of Operations.
The following is a summary of the cumulative effect adjustment recorded to the Company’s Consolidated Balance Sheet on October 1, 2009 (in thousands):
Balance
September 30, 2009
|
Cumulative
Effect of
Adjustment
|
Balance
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 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 | ||||
Company’s stock price per share
|
$ | 0.73 | $ | 0.75 |
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:
16
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 | ||||
Company’s stock price per share
|
$ | 1.45 | $ | 1.45 |
The cumulative effect of these adjustments was recorded as an decrease to total stockholders’ equity of $5,224,000 as of October 1, 2009.
On May 11, 2010, the May 2008 Note for $3,500,000 was converted into 4,375,000 shares of the Company’s common stock at a conversion price of $0.80 per share. The fair value of the Embedded Derivative for the May 2008 Note as of the conversion date was $4,813,000, which was the intrinsic value of the conversion, based on the Company’s stock price as of the conversion date. The increase in fair value of $1,556,000 for the Embedded Derivative from October 1, 2009, to the conversion date of May 11, 2010, was recorded as a non-cash charge to Other Expenses for the nine months ended June 30, 2010.
As of June 30, 2010, the fair value of the Embedded Derivative for the October 2008 Note was $2,467,000. The decrease in fair value of $865,000 from October 1, 2009, was recorded as non-cash benefit to Other Income for the nine months ended June 30, 2010. The fair value as of June 30, 2010 was calculated using a simulation model with the following assumptions:
October 2008 Note
|
||||
Risk-free interest rate:
|
0.18 | % | ||
Expected term:
|
0.30 Years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
47.66 | % | ||
Probability of triggering reset provision:
|
0.01 | % | ||
Existing conversion price per share
|
$ | 0.75 | ||
Company’s stock price per share
|
$ | 1.49 |
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 June 30, 2010, is $194,000. 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 June 30, 2010 (in thousands):
Amount
|
||||
Year ending September 30:
|
||||
2010
|
$ | 25 | ||
2011
|
62 | |||
2012
|
13 | |||
Total minimum lease payments
|
100 | |||
Less: Interest on capitalized lease obligations
|
(10 | ) | ||
Present value of capitalized lease obligations
|
90 | |||
Less: Current portion
|
(68 | ) | ||
Capitalized lease obligations, net of current portion
|
$ | 22 |
Interest expense on capitalized leases was $16,000 and $22,000 for nine months ended June 30, 2010 and 2009, respectively.
Note 12 — Stockholders’ Equity
17
Sale of Common Stock
On March 9, 2010, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company issued and sold to a single institutional investor (the “Investor”) an aggregate of 4,666,667 shares of the Company’s common stock, par value $.001 per share, in a private placement at a price of $1.50 per share, resulting in aggregate gross proceeds to the Company of $7.0 million. Pursuant to the terms of the Purchase Agreement, the Company has provided the Investor certain demand registration rights covering the resale of all of the shares issued in the private placement, as well as piggy-back registration rights in certain circumstances. The securities were issued in reliance upon the exemptions from registration under the Securities Act of 1933, as amended, provided by Regulation D and Section 4(2). The securities were issued directly by the Company and did not involve a public offering or general solicitation. The Investor in the private placement is an “Accredited Investor,” as that term is defined in Rule 501 of Regulation D.
At closing of the Purchase Agreement, Mark A. Libratore, the Company’s President, Chairman and Chief Executive Officer, entered into a Stockholders Agreement with the Investor. Pursuant to the Stockholders Agreement, Mr. Libratore agreed to vote his shares of common stock of the Company in favor of the election of a director to be designated by the Investor.
On February 5, 2010, the Company entered into an Investment Banking Agreement (the “Investment Banking Agreement”) with Littlebanc Advisors LLC, securities through Wilmington Capital Securities, LLC (the “Placement Agent”), pursuant to which the Company engaged the Placement Agent to act as its agent. As compensation for the Placement Agent’s services, the Placement Agent received an aggregate of $350,000 in commissions and a five-year warrant to purchase 233,333 shares of the Company’s common stock at an exercise price of $2.50 per share.
Warrants
The Company issued warrants to the stockholders of Liberator Medical Supply, Inc., to purchase 2,818,092 shares of the Company’s common stock in conjunction with the reverse merger in 2007. As of June 30, 2010, 1,026,000 of these warrants have expired and 1,422,875 of these warrants have been exercised. The weighted-average exercise price for the remaining 368,750 warrants as of June 30, 2010, is $0.87 per share. The expiration dates of the outstanding warrants are as follows:
Shares
|
Expiration Date
|
||
331,250 |
July 2010
|
||
12,500 |
August 2010
|
||
25,000 |
November 2010
|
From July 2007 to January 2008, in connection with sales of the Company’s common stock, the Company issued warrants to purchase an additional 686,667 shares of the Company’s common stock at a weighted-average exercise price of $1.40 per share. As of June 30, 2010, 113,250 of these warrants have been exercised. The weighted-average exercise price for the remaining 573,417 warrants as of June 30, 2010, is $1.47 per share. The expiration dates of the outstanding warrants are as follows:
Shares
|
Expiration Date
|
||
6,250 |
July 2010
|
||
139,875 |
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 Company’s common stock at an exercise price of $2.00 per share as compensation for consulting services. These warrants are still outstanding as of June 30, 2010, and expire in November 2012. The fair value of these warrants of $24,000 was determined using the Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate:
|
4.11 | % | ||
Expected term:
|
5 years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
27.97 | % |
18
In connection with the April 2008 Convertible Notes discussed above in Note 9, the Company issued warrants to purchase 829,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holders and 51,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the placement agent. As of June 30, 2010, 30,000 of these warrants have been exercised. The remaining 850,000 warrants will expire as follows:
Shares
|
Expiration Date
|
||
263,000 |
February 2013
|
||
100,000 |
March 2013
|
||
487,000 |
April 2013
|
The fair value of these warrants of $126,000 and $7,000, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate:
|
Range of 2.39% to 2.93%
|
|||
Expected term:
|
5 years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
27.97 | % |
In connection with the convertible note payable issued in May 2008 and discussed above in Note 9, the Company issued warrants to purchase 4,375,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holder and 350,000 shares of the Company’s 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 Company’s common stock. The 4,375,000 warrants held by the note holder are still outstanding as of June 30, 2010, and expire in May 2013.
The fair value of these warrants of $610,000 and $49,000, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate:
|
3.24 | % | ||
Expected term:
|
5 years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
27.97 | % |
In connection with the long-term convertible notes payable issued in October 2008 and discussed above in Note 9, the Company issued warrants to purchase 1,166,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the note holders and 266,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the placement agent. These warrants are still outstanding as of June 30, 2010, and expire in October 2011. The fair value of these warrants of $86,264 and $19,717, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate:
|
1.90 | % | ||
Expected term:
|
3 years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
35.19 | % |
In connection with the sale of common stock on March 9, 2010, for gross proceeds of $7 million and discussed above, the Company issued warrants to purchase 233,333 shares of the Company’s common stock at an exercise price of $2.50 per share to the placement agent. These warrants are still outstanding as of June 30, 2010, and expire in October 2015. The fair value of these warrants of $228,961 was determined using the Black-Scholes option pricing model with the assumptions listed below:
Risk-free interest rate:
|
2.34 | % | ||
Expected term:
|
5 years
|
|||
Expected dividend yield:
|
0.00 | % | ||
Expected volatility:
|
63.66 | % |
19
A summary of warrants issued, exercised and expired during the nine months ended June 30, 2010, is as follows:
Weighted
|
||||||||
Avg.
|
||||||||
Exercise
|
||||||||
Warrants:
|
Shares
|
Price
|
||||||
Balance at September 30, 2009
|
10,458,093 | $ | 1.07 | |||||
Issued
|
233,333 | 2.50 | ||||||
Exercised
|
(1,906,125 | ) | 1.00 | |||||
Expired
|
(826,467 | ) | 1.00 | |||||
Balance at June 30, 2010
|
7,958,834 | $ | 1.13 |
Options
In connection with conversion of $1,589,000 of debt to equity and under the terms of the reverse merger in 2007, Mr. Libratore, the Company’s founder, principal shareholder and President, received options to purchase 4,541,009 shares of the Company’s common stock at an exercise price of $0.0001. As of June 30, 2010, a total of 3,921,009 options were outstanding.
Employee and Director Stock Options
On September 14, 2007, the Board of Directors adopted the Company’s 2007 Stock Plan with an aggregate of 1,000,000 shares of the Company’s unissued common stock. The Plan was approved by the shareholders at the Company’s 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 Company’s board of directors or the committee overseeing the 2007 Stock Plan.
On July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number of shares authorized under the plan from 1,000,000 to 2,000,000 shares. The amendment was approved at the Company’s annual 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 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.
On February 26, 2010, Jeannette Corbett was appointed to the Board of Directors of the Company. As part of the compensation for her services as a director, Ms. Corbett was granted an option, vesting over two years, to purchase 50,000 shares of common stock at $1.90 per share.
20
On June 4, 2010, Morgan Duke was appointed to the Board of Directors of the Company. Mr. Duke’s appointment was made pursuant to the Purchase Agreement entered into by the Company on March 9, 2010, in association with the sale of common stock, discussed above, to a single institutional investor. As part of the compensation for Mr. Duke’s services as a director, the institutional investor was granted an option, vesting over two years, to purchase 50,000 shares of common stock at $1.55 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 nine months ended June 30, 2010 and 2009:
2010
|
2009
|
|||||||
Risk-free interest rate:
|
1.32 | % | 1.82 | % | ||||
Expected term:
|
3 years
|
3 years
|
||||||
Expected dividend yield:
|
0.00 | % | 0.00 | % | ||||
Expected volatility:
|
68.59 | % | 36.05 | % |
For the nine months ended June 30, 2010 and 2009, the Company recorded $188,000 and $58,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits. As of June 30, 2010, there is $331,000 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.
A summary of the stock options outstanding under the 2007 Stock Plan as of June 30, 2010, and activity for the nine 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
|
200,000 | 2.00 | ||||||||||
Exercised
|
— | — | ||||||||||
Expired or forfeited
|
— | — | ||||||||||
Options outstanding at June 30, 2010
|
1,780,000 | $ | 0.95 | $ | 1,069,700 | |||||||
Options exercisable at June 30, 2010
|
900,000 | $ | 0.81 | $ | 635,000 |
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 Company’s 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 Company’s 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 Company’s common stock are not eligible to participate in the ESPP.
As of June 30, 2010, 161,781 shares of the Company’s common stock have been purchased through the ESPP, using $73,000 of proceeds received from employee payroll deductions. For the nine months ended June 30, 2010, the Company received $102,000 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 nine months ended June 30, 2010, the Company recognized $92,000 of compensation expense related to the ESPP.
21
Note 13 — Basic and Diluted Earnings 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 and nine months ended June 30, 2010 and 2009 (in thousands, except per share amounts):
For the three months
|
For the nine months
|
|||||||||||||||
ended June 30,
|
ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net income — basic
|
$ | 3,945 | $ | 794 | $ | 509 | $ | 1,135 | ||||||||
Effect of dilutive securities:
|
||||||||||||||||
Convertible debt
|
31 | 19 | — | — | ||||||||||||
Net income — diluted
|
$ | 3,976 | $ | 813 | $ | 509 | $ | 1,135 | ||||||||
Denominator:
|
||||||||||||||||
Weighted average shares outstanding — basic
|
41,569 | 32,133 | 36,438 | 32,068 | ||||||||||||
Effect of dilutive securities:
|
||||||||||||||||
Stock options and warrants
|
7,765 | 3,922 | 8,371 | 3,922 | ||||||||||||
Convertible debt
|
5,463 | 1,279 | — | — | ||||||||||||
Weighted average shares outstanding — diluted
|
54,797 | 37,334 | 44,809 | 35,990 | ||||||||||||
Earnings per share — basic
|
$ | 0.09 | $ | 0.02 | $ | 0.01 | $ | 0.04 | ||||||||
Earnings per share — diluted
|
$ | 0.07 | $ | 0.02 | $ | 0.01 | $ | 0.03 |
The following tables summarize the number of weighted shares outstanding for each of the periods presented, but not included in the calculation of diluted income per share because the impact would have been anti-dilutive for the three and/or the nine months ended June 30, 2010 and 2009 (in thousands):
For the three months
|
For the nine months
|
|||||||||||||||
ended June 30,
|
ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock options
|
200 | 960 | 200 | 960 | ||||||||||||
Warrants
|
358 | 10,468 | 233 | 10,468 | ||||||||||||
Convertible debt
|
— | 7,708 | 3,333 | 8,911 | ||||||||||||
Totals
|
558 | 19,136 | 3,766 | 20,339 |
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 nine months ended June 30, 2010, of $599,000. The Company recognized $1,437,000 in tax benefits due to a change in the valuation allowance as of June 30, 2010. The Company recorded a current federal income tax benefit of $32,000 to adjust for prior year income tax return. In addition, the Company incurred deferred tax expense of $870,000 for the nine months ended June 30, 2010.
22
The Company’s effective tax rate was approximately 666% and 1% for the nine months ended June 30, 2010 and 2009, respectively, which differ from the federal statutory rate of 35% due to the effect of state income taxes, the reduction in valuation allowance, and certain of the Company’s expenses that are not deductible for income tax purposes, primarily consisting of $1,460,000 of expense for the change in fair value of the derivative liabilities. The effective tax rate for the nine months ended June 30, 2009 reflects the utilization of net operating losses from previous years that were fully reserved by a valuation allowance at the time of utilization and an estimated alternative minimum tax liability of $14,000.
Note 15 — Commitments
The Company leases property and telephone equipment under operating leases that expire at various times through November 2014. Future minimal rental commitments under non-cancelable operating leases with terms in excess of one year as of June 30, 2010, are as follows (in thousands):
Amount
|
||||
Year ending September 30:
|
||||
2010
|
$ | 150 | ||
2011
|
676 | |||
2012
|
621 | |||
2013
|
271 | |||
2014
|
204 | |||
$ | 1,922 |
Rent expense for the nine months ended June 30, 2010 and 2009, was $463,000 and $365,000, respectively.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements 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 in Part II, Item 1A,”Risk Factors.” 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 Report on Form 10-K for the year ended September 30, 2009, filed with the Securities and Exchange Commission and management’s 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.
Executive Summary
Our emphasis continues to be on top line sales growth while controlling our costs in order to sustain profitable growth. For the third quarter of fiscal year 2010, our sales increased by 53%, to $10.6 million, compared with the third quarter of fiscal year 2009. For the nine months ended June 30, 2010, our sales increased by 62%, to $29.4 million, compared with the nine months ended June 30, 2009.
We have been able to significantly grow our sales over the last three years through the downturn in the U.S. economy. 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 nine months, creating a more competitive environment within this medium. Although customer acquisition costs remain at acceptable levels, during the third quarter of fiscal year 2010 we increased our spending significantly in alternative media channels and plan to continue those efforts.
Over the last nine months, 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. While our sales have increased during the last nine months, we have been able to decrease our general and administrative costs as a percentage of sales.
We believe we are well positioned to continue to grow our sales and improve profitability over the long term.
24
Results of Operations
The following table summarizes the results of operations for the three and nine months ended June 30, 2010 and 2009, including percentage of sales (dollars in thousands):
For the three months
ended June 30,
|
For the nine months
ended June 30,
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||
As
Restated
Amount
|
%
|
Amount
|
%
|
As
Restated
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||
Sales
|
$ | 10,619 | 100.0 | $ | 6,950 | 100.0 | $ | 29,428 | 100.0 | $ | 18,119 | 100.0 | ||||||||||||||||||||
Cost of Sales
|
3,677 | 34.6 | 2,506 | 36.1 | 10,312 | 35.0 | 6,425 | 35.5 | ||||||||||||||||||||||||
Gross Profit
|
6,942 | 65.4 | 4,444 | 63.9 | 19,116 | 65.0 | 11,694 | 64.5 | ||||||||||||||||||||||||
Operating Expenses
|
6,000 | 56.5 | 3,372 | 48.5 | 16,655 | 56.6 | 9,750 | 53.8 | ||||||||||||||||||||||||
Income from Operations
|
942 | 8.9 | 1,072 | 15.4 | 2,461 | 8.4 | 1,944 | 10.7 | ||||||||||||||||||||||||
Other Income (Expense)
|
3,416 | 32.2 | (264 | ) | (3.8 | ) | (2,551 | ) | (8.7 | ) | (795 | ) | (4.4 | ) | ||||||||||||||||||
Income (loss) before Income Taxes
|
4,358 | 41.1 | 808 | 11.6 | (90 | ) | (0.3 | ) | 1,149 | 6.3 | ||||||||||||||||||||||
Income Tax Expense (Benefit)
|
413 | 3.9 | 14 | 0.2 | (599 | ) | (2.0 | ) | 14 | 0.1 | ||||||||||||||||||||||
Net Income
|
$ | 3,945 | 37.2 | $ | 794 | 11.4 | $ | 509 | 1.7 | $ | 1,135 | 6.3 |
Revenues:
Sales for the three months ended June 30, 2010, increased by $3,669,000, or 52.8%, to $10,619,000, compared with sales of $6,950,000 for the three months ended June 30, 2009. The increase was due to our direct response advertising campaign to obtain new mail order customers. Sales for the nine months ended June 30, 2010, increased by $11,309,000, or 62.4%, to $29,428,000, compared with sales of $18,119,000 for the nine months ended June 30, 2009, as a result of the direct response advertising campaign.
Gross Profit:
Gross profit for the three months ended June 30, 2010, increased by $2,498,000, or 56.2%, to $6,942,000, compared with gross profit of $4,444,000 for the three months ended June 30, 2009. Gross profit for the nine months ended June 30, 2010, increased by $7,422,000, or 63.5%, to $19,116,000, compared to $11,694,000 for the nine months ended June 30, 2009. The increase was attributed to our increased sales volume for the three and nine months ended June 30, 2010, compared to the three and nine months ended June 30, 2009. As a percentage of sales, the increases in gross profit for the three and nine months ended June 30, 2010 are primarily attributed to product mix and, to a lesser extent, a reduction in freight costs compared to the three and nine months ended June 30, 2009.
Operating Expenses:
The following table provides a breakdown of our operating expenses for the three and nine months ended June 30, 2010 and 2009, including percentage of sales (dollars in thousands):
For the three months ended June 30,
|
For the nine months ended June 30,
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||
As Restated
Amount
|
%
|
Amount
|
%
|
As Restated
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||
Operating Expenses:
|
||||||||||||||||||||||||||||||||
Payroll, taxes, & benefits
|
$ | 2,569 | 24.2 | $ | 1,518 | 21.8 | $ | 7,357 | 25.0 | $ | 3,857 | 21.3 | ||||||||||||||||||||
Advertising
|
1,336 | 12.6 | 616 | 8.9 | 3,255 | 11.1 | 1,373 | 7.6 | ||||||||||||||||||||||||
Bad debts
|
1,020 | 9.6 | 373 | 5.4 | 2,603 | 8.8 | 1,861 | 10.3 | ||||||||||||||||||||||||
Depreciation and amortization
|
179 | 1.7 | 80 | 1.2 | 449 | 1.5 | 214 | 1.2 | ||||||||||||||||||||||||
General and administration
|
896 | 8.4 | 785 | 11.3 | 2,991 | 10.2 | 2,445 | 13.5 | ||||||||||||||||||||||||
Total Operating Expenses
|
$ | 6,000 | 56.5 | $ | 3,372 | 48.5 | $ | 16,655 | 56.6 | $ | 9,750 | 53.8 |
Operating expenses for the three months ended June 30, 2010, were $6,000,000, or 56.5% of sales, compared with $3,372,000, or 48.5% of sales for the three months ended June 30, 2009. Operating expenses for the nine months ended June 30, 2010, were $16,655,000, or 56.6% of sales, compared with $9,750,000, or 53.8% of sales, for the nine months ended June 30, 2009. The increases in operating expenses are primarily attributed to increased spending levels for additional employees, advertising costs, rent, depreciation and other administration costs to support our current and future sales growth.
25
Other Income (Expense):
The following table shows a breakdown of other income (expense) for the three and the nine months ended June 30, 2010 and 2009 (dollars in thousands):
For the three months
ended June 30, 2010
|
For the nine months
ended June 30, 2010
|
|||||||||||||||
As Restated
2010
|
2009
|
As Restated
2010
|
2009
|
|||||||||||||
Other Income (Expense):
|
||||||||||||||||
Interest Expense
|
$ | (289 | ) | $ | (267 | ) | $ | (1,105 | ) | $ | (812 | ) | ||||
Change in fair value of derivative liabilities
|
3,697 | — | (1,460 | ) | — | |||||||||||
Loss on disposal of assets
|
— | — | (2 | ) | — | |||||||||||
Interest income
|
8 | 3 | 16 | 17 | ||||||||||||
Total Other Income (Expense)
|
$ | 3,416 | $ | (264 | ) | $ | (2,551 | ) | $ | (795 | ) |
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 nine months ended June 30, 2010 and 2009, respectively, totaled $2,300,000 and $460,000.
Interest expense increased by $293,000 to $1,105,000 for the nine months ended June 30, 2010, compared to the nine months ended June 30, 2009. As a result of accounting guidance that became effective for us on October 1, 2009, we are required to bifurcate and separately account for embedded anti-dilution provisions contained in certain convertible notes issued in May and October 2008 as derivative liabilities. Accordingly, on October 1, 2009, we recorded a cumulative effect adjustment that increased the value of the discounts on our convertible debt issued in May and October 2008, which resulted in an additional $484,000 of non-cash interest expense for the nine months ended March 31, 2010.
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):
Closing
Market
Price of
Common
Stock
|
Change in
Fair Value of
Derivative
Liabilities
Income /
(Expense)
|
|||||||
Interim period ending:
|
||||||||
September 30, 2009, Q4 2009
|
$ | 1.45 | $ | n/a | ||||
December 31, 2009, Q1 2010
|
2.18 | (5,098 | ) | |||||
March 31, 2010, Q2 2010
|
2.20 | (59 | ) | |||||
June 30, 2010, Q3 2010
|
1.49 | 3,697 | ||||||
Total Change in FV of Derivative Liabilities
|
$ | (1,460 | ) |
Income Taxes:
The benefit from income taxes was $599,000 for the nine months ended June 30, 2010. The effective tax rate was approximately 666% of the loss before income taxes of $90,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes, a $1,437,000 decrease to the valuation allowance for deferred tax assets that management has determined will, more likely than not, be utilized, and certain of the Company’s expenses that are not deductible for income tax purposes, primarily consisting of $1,460,000 of expense for the change in fair value of derivative liabilities.
26
The provision for income taxes was $14,000 for the nine months ended June 30, 2009. The effective tax rate was 1% of the income before income taxes of $1,149,000, which reflects the utilization of net operating losses from previous years that were fully reserved by a valuation allowance at the time of utilization, partially offset by an estimated alternative minimum tax liability of $14,000.
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing, and financing activities for the nine months ended June 30, 2010 and 2009 (dollars in thousands):
For the nine months ended
|
||||||||
June 30,
|
||||||||
As Restated
2010
|
2009
|
|||||||
Cash Flows:
|
||||||||
Net cash (used in) provided by operating activities
|
$ | (2,355 | ) | $ | 699 | |||
Net cash used in investing activities
|
(2,085 | ) | (369 | ) | ||||
Net cash provided by financing activities
|
7,531 | 1,985 | ||||||
Net increase in cash
|
3,091 | 2,315 | ||||||
Cash at beginning of period
|
3,798 | 1,173 | ||||||
Cash at end of period
|
$ | 6,889 | $ | 3,488 |
The Company had cash of $6,889,000 at June 30, 2010, compared to cash of $3,798,000 at September 30, 2009, an increase of $3,091,000. The increase in cash for the nine months ended June 30, 2010, is primarily attributed to the sale of common stock to a single institutional investor in March 2010 for gross proceeds of $7 million and proceeds from the exercise of warrants, partially offset by our direct response advertising costs, the build out of our new 24,000 square foot facility, payments on our outstanding shareholder loan, and an increase in the level of operating assets over operating liabilities, primarily accounts receivable.
As of June 30, 2010, our current assets of $18,403,000 exceeded our current liabilities of $12,254,000 by $6,149,000.
The current liabilities as of June 30, 2010, consist of an outstanding convertible note payable with a face amount of $2.5 million, which is convertible into shares of our common stock at a conversion price that is less than the current market price of our common stock. In addition, as of June 30, 2010, we had outstanding warrants to purchase 942,000 shares of our common stock at an average exercise price of $1.24 that expire during the next twelve months. Based on the exercise history over the last three quarters of fiscal year 2010, we expect a good portion of the warrant holders to exercise the “in-the-money” warrants before expiration.
There can be no assurance, of course, as to the amount or timing of the conversion of the remaining note payable and/or the proceeds from the exercise of the outstanding warrants. However, we believe that our 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.
Operating Activities
Net cash used in operating activities increased to $2,355,000 during the nine months ended June 30, 2010, compared to net cash provided by operating activities of $699,000 during the nine months ended June 30, 2009. The increase is primarily the result of increased levels of direct response advertising costs, accounts receivable and inventory, partially offset by increases in non-cash related expenses and accounts payable.
Investing Activities
During the nine months ended June 30, 2010, we purchased $1,324,000 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; see Note 8 of our unaudited condensed consolidated financial statements. The certificate matures in September 2010 and bears interest at a rate of 1.242% per year.
27
Financing Activities
During the nine months ended June 30, 2010, cash provided by financing activities was $7,531,000, which included net proceeds of $6,593,000 from the sale of common stock to a single institutional investor, $1,556,000 of proceeds from the exercise of warrants, and $102,000 of proceeds from our employee stock purchase plan, partially offset by payments of $711,000 to pay down a portion of our outstanding debt and capital lease obligations.
During the nine months ended June 30, 2009, cash provided by financing activities was $1,985,000, which was the result of a $2,500,000 convertible debt offering in October 2008, partially offset by $326,000 of debt issuance costs associated with the debt offering and payments of $148,000 to pay down a portion of our outstanding debt and capital lease obligations.
Outlook
The Company has experienced substantial growth over the past three years. We have built an infrastructure and implemented a business model that is capable of generating a substantially higher sales volume at reduced levels of incremental costs. In an effort to continue our growth, we have continued to invest in direct response advertising efforts to attract new customers, and we have expanded our infrastructure and work force to service our new and existing customers. The outlook for demand for our products 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 due to our advertising and marketing programs and the retention of our existing customer base. 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 workforce; and
|
|
•
|
Increase our accounts receivable collection efforts.
|
In order to implement our current business model, we have completed the following:
|
•
|
Completed the private placement of shares of our common stock to a single institutional investor for gross proceeds of $7.0 million;
|
|
•
|
Identified products and related target customers through extensive market research;
|
|
•
|
Expanded our advertising and marketing efforts on the Internet to reach qualified customers in an efficient and cost-effective manner;
|
|
•
|
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;
|
|
•
|
Appointed three independent members and an investor to our Board of Directors;
|
|
•
|
Created a HIPPA compliant IT infrastructure and staff to accommodate additional growth in sales;
|
28
|
•
|
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 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
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 June 30, 2010, 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)
|
$ | 2,578 | $ | 37 | $ | 2,541 | $ | — | $ | — | $ | — | ||||||||||||
Operating leases
|
1,922 | 150 | 676 | 621 | 271 | 204 | ||||||||||||||||||
Capital lease obligations
|
100 | 25 | 62 | 13 | — | — | ||||||||||||||||||
Purchase commitment (2)
|
460 | 30 | 120 | 120 | 120 | 70 | ||||||||||||||||||
Total contractual obligations
|
$ | 5,060 | $ | 242 | $ | 3,399 | $ | 754 | $ | 391 | 274 |
(1)
|
The convertible debt obligation that is due in fiscal year 2011 is a $2,500,000 note payable that is convertible into shares of our common stock at a conversion price of $0.75 per share.
|
(2)
|
The purchase commitment consists of a long distance service agreement that requires us to purchase a minimum of $10,000 per month of long distance service through April 2014.
|
Off-Balance Sheet Arrangements
As of June 30, 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 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. Quantitative and Qualitative 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
29
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 Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
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 June 30, 2010. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses identified in the Company's 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 Company's 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 Company's internal control over financial reporting as of June 30, 2010. Based on that assessment, management identified the following material weaknesses:
|
·
|
Assess and Identify the Impact of Recently Issued Accounting Pronouncements: The Company’s procedures to assess and identify the impact of Recently Issued Accounting Pronouncements were not sufficient, as evidenced by the Company’s failure to timely identify the impact of ASC 815-40-15, “Derivatives and Hedging — Contracts in Entity’s 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 periods ending December 31, 2009, March 31, 2010, and June 30, 2010.
|
|
·
|
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 Company’s 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.
|
30
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 nine months ended June 30, 2010, there were no changes in the Company’s 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 Company’s Audit Committee, and intends to implement improvements during fiscal year 2011 as follows:
|
·
|
Subscribe to an outside service that provides the Company’s 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 Controller’s and Chief Financial Officer’s review and assessment of the timing and impacts, if any, that the new accounting pronouncements will have on the Company’s 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.
|
31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
Item 1A. Risk Factors
The Company’s business, results of operations and financial condition are subject to various risks. Please refer to the “Risks Factors” section in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, for a discussion of risks to which our business, results of operations and financial condition are subject. There have been no material changes to the risk factors disclosed in our Annual Report for the fiscal year ended September 30, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended June 30, 2010, the Company issued 1,749,000 shares of common stock upon the exercise of outstanding warrants for gross proceeds of $1,556,000 and 1,203,000 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 4. <Removed and Reserved>
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
32
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
|
April 13, 2011
|
||
Mark A. Libratore
|
||||
/s/ Robert J. Davis
|
Chief Financial Officer
|
April 13, 2011
|
||
Robert J. Davis
|
33