UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2012

 or

 

¨

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		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

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 ¨

 

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 þ   No ¨

 

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 ¨		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company þ
				(Do not check if a smaller reporting company)

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨   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 February 7, 2013
Common Stock, $.001		48,176,749

 

 

TABLE OF CONTENTS

 

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
SIGNATURES		18
EX-31.1
EX-31.2
EX-32.1
EX-32.2

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of December 31, 2012 (unaudited) and September 30, 2012
(In thousands, except dollar per share amounts)

 

		December 31,				September 30,
		2012				2012
Assets
Current Assets:
Cash		$	4,431			$	3,326
Accounts receivable, net of allowances of $5,022 and $5,044, respectively			9,200				10,365
Inventory, net of allowance for obsolete inventory of $362 and $310, respectively			2,426				2,627
Deferred taxes, current portion			2,310				2,254
Prepaid and other current assets			346				287
Total Current Assets			18,713				18,859
Property and equipment, net of accumulated depreciation of $3,035 and $2,888, respectively			1,411				1,250
Deferred advertising			23,032				22,426
Intangible assets, net of accumulated amortization of $107 and $91, respectively			223				239
Other assets			87				88
Total Assets		$	43,466			$	42,862
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	4,525			$	6,537
Accrued liabilities			1,608				1,221
Other current liabilities			96				92
Total Current Liabilities			6,229				7,850
Deferred tax liability			6,283				5,421
Credit line facility			2,500				2,500
Other long-term liabilities			114				132
Total Liabilities			15,126				15,903
Stockholders’ Equity:
Common stock, $.001 par value, 200,000 shares authorized, 48,266 and 48,232 shares issued, respectively; 48,177 and 48,143 shares outstanding at December 31, 2012, and September 30, 2012, respectively			48				48
Additional paid-in capital			34,736				34,707
Accumulated deficit			(6,394	)			(7,746	)
Treasury stock, at cost; 89 shares at December 31, 2012, and September 30, 2012			(50	)			(50	)
Total Stockholders’ Equity			28,340				26,959
Total Liabilities and Stockholders’ Equity		$	43,466			$	42,862

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2012 and 2011
(Unaudited)
(in thousands, except per share amounts)

 

		Three Months Ended December 31,
		2012				2011
Sales		$	17,551			$	14,796
Cost of Sales			6,573				6,003
Gross Profit			10,978				8,793
Operating Expenses
Payroll, taxes and benefits			3,843				3,464
Advertising			2,203				1,968
Bad debts			1,278				1,130
Depreciation and amortization			164				199
General and administrative			1,232				1,253
Total Operating Expenses			8,720				8,014
Income from Operations			2,258				779
Other Expense
Interest expense			(21	)			(12	)
Total Other Expense			(21	)			(12	)
Income before Income Taxes			2,237				767
Provision for Income Taxes			885				313
Net Income		$	1,352			$	454
Basic earnings per share:
Weighted average shares outstanding			48,147				48,057
Earnings per share		$	0.03			$	0.01
Diluted earnings per share:
Weighted average shares outstanding			52,143				52,321
Earnings per share		$	0.03			$	0.01

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the three months ended December 31, 2012
(Unaudited)
(in thousands)

 

										Additional												Total
		Common Stock								Paid in				Accumulated				Treasury				Stockholders’
		Shares				Amount				Capital				Deficit				Stock				Equity
Balance at October 1, 2012			48,143			$	48			$	34,707			$	(7,746	)		$	(50	)		$	26,959
Options issued to employees and directors			—				—				10				—				—				10
Common stock issued for employee stock purchase plan			34				—				19				—				—				19
Net income			—				—				—				1,352				—				1,352
Balance at December 31, 2012			48,177			$	48			$	34,736			$	(6,394	)		$	(50	)		$	28,340

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2012 and 2011
(Unaudited)
(in thousands)

 

		Three Months Ended
		December 31,
		2012				2011
Cash flow from operating activities:
Net Income		$	1,352			$	454
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			2,310				2,123
Equity based compensation			10				38
Provision for doubtful accounts and contractual adjustments			1,335				1,163
Deferred income taxes			805				307
Reserve for inventory obsolescence			53				6
Changes in operating assets and liabilities:
Accounts receivable			(169	)			(2,449	)
Deferred advertising			(2,753	)			(2,700	)
Inventory			148				119
Other assets			(57	)			(175	)
Accounts payable			(2,013	)			(945	)
Accrued liabilities			393				142
Other liabilities			3				(27	)
Net Cash Flow Provided by (Used in) Operating Activities			1,417				(1,944	)
Cash flow from investing activities:
Purchase of property and equipment			(308	)			(40	)
Net Cash Flow Used in Investing Activities			(308	)			(40	)
Cash flow from financing activities:
Proceeds from employee stock purchase plan			13				20
Proceeds from credit line facility			—				1,000
Payments of debt and capital lease obligations			(17	)			(7	)
Net Cash Flow Provided by (Used in) Financing Activities			(4	)			1,013
Net increase (decrease) in cash			1,105				(971	)
Cash at beginning of period			3,326				3,016
Cash at end of period		$	4,431			$	2,045
Supplemental disclosure of cash flow information:
Cash paid for interest		$	21			$	12
Cash paid for income taxes		$	5			$	—
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures funded by capital lease borrowing		$	—			$	18

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 Liberator Medical Holdings, Inc. and Subsidiaries

 

Notes To The Unaudited Condensed Consolidated Financial Statements

December 31, 2012

 

Note 1 — Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the “Company”) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, that was filed with the SEC on December 20, 2012. The results of operations for the three months ended December 31, 2012, are not necessarily indicative of the results to be expected for the full year.

 

The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and Wellness, Inc., and Practica Medical Manufacturing, Inc., its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

 

Note 2 — Summary of Significant Accounting Policies

 

The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012. There were no material changes to our significant accounting policies during the interim period ended December 31, 2012.

 

Recent Accounting Pronouncements

 

In July 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that requires health care entities to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. The guidance affects health care entities that recognize significant amounts of patient service revenue at the time services are rendered even though the entities do not assess a patient’s ability to pay. All other entities would continue to present the provision for bad debts (including bad debts associated with patient service revenue) as an operating expense. Additional disclosures relating to a company’s sources of patient revenue and its allowance for doubtful accounts related to patient accounts receivable are also required. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. The adoption of this guidance on October 1, 2012, did not have a material impact on our financial position, results of operations or cash flows.

 

 Note 3 — Credit Line Facility

 

On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the “PNC Credit Line Facility”) with PNC Bank, National Association ("PNC"). Pursuant to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal property, including inventory and accounts receivable. Interest is payable on any advance at LIBOR plus 2.75%. Advances under the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Company’s accounts receivable and inventory that can constitute the permitted borrowing base. The PNC Credit Line Facility originally expired in February 2013; however, in January 2012 the expiration was extended to February 2014, with all other terms and conditions remaining the same.

 

The PNC Credit Line Facility requires the Company to comply with certain financial covenants which are defined in the credit agreement. As of December 31, 2012, these financial covenants included:

 

·

The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a ratio of Senior Funded Debt to EBITDA of less than 2.0 to 1; and

 

·

The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a Fixed Charge Coverage Ratio of at least 1.25 to 1.

 

 

As of December 31, 2012, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility. As of December 31, 2012, the availability under the PNC Credit Line Facility was $4,682,000 with an outstanding balance of $2,500,000. The outstanding balance has been classified as non-current since the due date under the credit line facility is February 2014, and a borrowing base in excess of amounts outstanding as of December 31, 2012, will be maintained as a result of expected collateral levels. The interest rate as of December 31, 2012, for the outstanding balance was 2.96%. For the three months ended December 31, 2012 and 2011, the Company incurred $19,000 and $12,000, respectively, in interest expense related to the PNC Credit Line Facility.

  

Note 4 — Stockholders’ Equity

 

Warrants

 

A summary of warrants issued, exercised and expired during the three months ended December 31, 2012, is as follows:

 

						Weighted
						Avg.
						Exercise
Warrants:		Shares				Price
Balance at October 1, 2012			5,532,333			$	1.09
Issued			—				—
Exercised			—				—
Expired			(125,000	)			2.00
Balance at December 31, 2012			5,407,333			$	1.05

 

Options

 

In connection with conversion of $1,589,000 of debt to equity and under the terms of the reverse merger in June 2007, Mr. Libratore, the 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 December 31, 2012, a total of 3,921,009 options were outstanding.

 

Employee & Director Stock Options

 

The weighted-average grant date fair value of options granted during the three months ended December 31, 2012, was $0.29. There were no options granted during the three months ended December 31, 2011. There were no options exercised during the three months ended December 31, 2012 and 2011. The fair values of stock-based awards granted during the three months ended December 31, 2012, were calculated with the following weighted-average assumptions:

 

		2012
Risk-free interest rate:			0.34	%
Expected term:			3.12 years
Expected dividend yield:			0.00	%
Expected volatility:			50.58	%

 

For the three months ended December 31, 2012 and 2011, the Company recorded $5,000 and $30,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of December 31, 2012, there was $25,000 in total unrecognized compensation expense related to non-vested employee and director stock options granted under the 2007 Stock Plan, which is expected to be recognized over 1.75 years.

 

Stock option activity for the three months ended December 31, 2012, is summarized as follows:

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
2007 Stock Plan:		Shares				Price				Life (Years)				Value
Options outstanding at October 1, 2012			2,035,000			$	0.97				1.74			$	92,150
Granted			100,000				.83
Expired or forfeited			(80,000	)			1.20
Options outstanding at December 31, 2012			2,055,000			$	0.95				1.59			$	44,550
Options exercisable at December 31, 2012			1,955,000			$	0.96				1.43			$	44,550
Options vested or expected to vest at December 31, 2012			2,055,000			$	0.95				1.59			$	44,550

 

 

2009 Employee Stock Purchase Plan

 

The Employee Stock Purchase Plan (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 1 and November 30 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 December 31, 2012, 404,680 shares of the Company’s common stock have been purchased through the ESPP, using $312,000 of proceeds received from employee payroll deductions. For the three months ended December 31, 2012 and 2011, the Company received $13,000 and $20,000, respectively, through payroll deductions under the ESPP.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares expected to be issued under the ESPP at the grant date, the beginning date of the offering period, and recognizes compensation expense ratably over the offering period. If an employee elects to increase their payroll withholdings during the offering period, the increase is treated as a modification to the original option granted under the ESPP. As a result of the modification, the incremental fair value, if any, associated with the modified award is recognized as compensation expense at the date of the modification. Compensation expense is recognized only for shares that vest under the ESPP. For the three months ended December 31, 2012 and 2011, the Company recognized $5,000 and $8,000, respectively, of compensation expense related to the ESPP.

 

Note 5 — Basic and Diluted Earnings per Common Share

 

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three months ended December 31, 2012 and 2011 (in thousands, except per share amounts):

 

		For the three months
		ended December 31,
		2012				2011
Numerator:
Net income — basic & diluted		$	1,352			$	454
Denominator:
Weighted average shares outstanding — basic			48,147				48,057
Effect of dilutive securities:
Stock options and warrants			3,996				4,264
Weighted average shares outstanding — diluted			52,143				52,321
Earnings per share — basic		$	0.03			$	0.01
Earnings per share — diluted		$	0.03			$	0.01

 

 

The following table summarizes the number of weighted shares outstanding for each of the periods presented, but not included in the calculation of diluted income per share because the impact would have been anti-dilutive for the three months ended December 31, 2012 and 2011 (in thousands):

 

		For the three months
		ended December 31,
		2012				2011
Stock options			1,650				680
Warrants			5,407				358
Totals			7,057				1,038

 

Note 6 — Income Taxes

 

The provision for income taxes was $885,000 for the three months ended December 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $2,237,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

 

The provision for income taxes was $313,000 for the three months ended December 31, 2011. The effective tax rate was approximately 41% of the income before income taxes of $767,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

 

 

 

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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. When used in this Quarterly Report, in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date made. Various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of distributing or marketing activities, competitive and regulatory factors, and additional factors set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, under the caption “Risk Factors,” could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated by any forward-looking statements.

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company included in our Annual Report on Forms 10-K for the year ended September 30, 2012, and management’s discussion and analysis contained therein. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

Business Overview

 

Liberator Medical Supply, Inc. (“Liberator Medical”), a wholly-owned subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies to Medicare-eligible seniors. Accredited by The Joint Commission, our Company’s unique combination of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase medical supplies needed on a regular, ongoing, recurring basis, with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet; repeat orders are confirmed with the customer and shipped when needed.

 

We market our products directly to consumers through our direct response advertising efforts. We target consumers with chronic conditions requiring a continuous supply of medical products that we can provide at attractive gross margins. Our advertising efforts do not represent an effort to target new markets or sell new products, but are a continuation of our efforts to acquire new customers in the markets we currently serve. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers.

 

We receive initial contact from prospective customers in the form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place their initial order with us within three to six months from the time we receive initial contact from the customer. Since our inception, we have demonstrated our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that can last for periods of greater than ten years.

 

The following table shows our revenue streams, including new and recurring orders, for the three months ended December 31, 2012 and 2011, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

 

New and recurring revenues generated from customer leads received during:		For the three months ended December 31,
		2012				2011
Pre-FY 2008		$	598			$	748
FY 2008			2,355				2,395
FY 2009			3,279				3,474
FY 2010			3,086				3,278
FY 2011			3,365				4,113
FY 2012			3,898				890
FY 2013			1,010				n/a
Total Revenues *			17,591				14,898
Other Sales and Adjustments			(40	)			(102	)
Net Sales		$	17,551			$	14,796
* Revenues include orders from new and recurring customers, net of contractual allowances. Revenue from new customers will impact comparisons between the periods for fiscal year 2013 and the corresponding periods from fiscal year 2012, especially revenue from new customers acquired during the latter portion of the fiscal years.

 

 

We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We are able to adjust our advertising spend relatively quickly to respond to changing market conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase, we continue to focus on improving operational efficiencies to increase profitability.

 

Results of Operations

 

The following table summarizes the results of operations for the three months ended December 31, 2012 and 2011, including percentage of sales (dollars in thousands):

 

		2012								2011
		Amount				%				Amount				%
Sales		$	17,551				100.0			$	14,796				100.0
Cost of Sales			6,573				37.5				6,003				40.6
Gross Profit			10,978				62.5				8,793				59.4
Operating Expenses			8,720				49.7				8,014				54.2
Income from Operations			2,258				12.8				779				5.3
Other Expense			(21	)			(0.1	)			(12	)			(0.1	)
Income before Income Taxes			2,237				12.7				767				5.2
Provision for Income Taxes			885				5.0				313				2.1
Net Income		$	1,352				7.7			$	454				3.1

 

Revenues

 

Sales for the three months ended December 31, 2012, increased by $2,755,000, or 18.6%, to $17,551,000, compared with sales of $14,796,000 for the three months ended December 31, 2011. The increase in sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base. Our direct-response advertising expenditures for the three months ended December 31, 2012, were $2,753,000 compared with $2,700,000 for the three months ended December 31, 2011. We acquired 3,908 and 3,608 new customers during the three months ended December 31, 2012 and 2011, respectively.

 

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three months ended December 31, 2012 and 2011 (dollars in thousands):

 

		2012				2011
New Customers *		$	1,984			$	1,757
Recurring Customer Base			15,607				13,141
Total Revenues, net of contractual allowances		$	17,591			$	14,898
Other Sales and Adjustments			(40	)			(102	)
Net Sales		$	17,551			$	14,796
* We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For the three months ended December 31, 2012, $1,010 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2012. For the three months ended December 31, 2011, $890 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2011. The remaining net sales from new customers acquired were generated from leads received during prior periods.

 

Gross Profit

 

Gross profit for the three months ended December 31, 2012, increased by $2,185,000, or 24.8%, to $10,978,000, compared with gross profit of $8,793,000 for the three months ended December 31, 2011. The increase was attributed to our increased sales volume for the three months ended December 31, 2012, compared with the three months ended December 31, 2011.

 

 

As a percentage of sales, gross profit increased by 3.1% for the three months ended December 31, 2012, compared with the three months ended December 31, 2011. 75% of the increase was due to favorable product / vendor mix within the urological and ostomy product lines. 25% of the increase was due to a reduction in the number of overnight and two-day deliveries to our customers, which decreased our shipping costs for the quarter.

 

Operating Expenses

 

The following table provides a breakdown of our operating expenses for the three months ended December 31, 2012 and 2011, including percentage of sales (dollars in thousands):

 

		2012								2011
		Amount				%				Amount				%
Operating Expenses:
Payroll, taxes, and benefits		$	3,843				21.9			$	3,464				23.4
Advertising			2,203				12.6				1,968				13.3
Bad debts			1,278				7.3				1,130				7.6
Depreciation and amortization			164				0.9				199				1.3
General and administrative			1,232				7.0				1,253				8.5
Total Operating Expenses		$	8,720				49.7			$	8,014				54.2

 

Payroll, taxes and benefits increased by $379,000, or 10.9%, to $3,843,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011. The increase was attributed to an increase in staffing to manage the continuous growth of our recurring business. As of December 31, 2012, we had 348 active employees, compared with 309 at December 31, 2011.

  

Advertising expenses increased by $235,000, or 11.9%, to $2,203,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011.

 

The majority of our advertising expenses is associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expenses is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expenses for the three months ended December 31, 2012 and 2011 (dollars in thousands):

 

		2012				2011
Advertising Expenses:
Amortization of direct response costs		$	2,147			$	1,924
Other advertising expenses			56				44
Total Advertising Expenses		$	2,203			$	1,968

 

Direct response advertising costs are accumulated into quarterly cost pools and amortized separately. The amortization is the amount computed using the ratio that current period revenues for each direct-response advertising cost pool bear to the total of current and estimated future benefits for that direct response advertising cost pool. We have persuasive evidence that demonstrates future benefits are realized from our direct response advertising efforts beyond four years. Since the reliability of accounting estimates decreases as the length of the period for which such estimates are made increases, we estimate future benefits for each advertising cost pool for a period of no longer than four years at each reporting period, which creates a “rolling” type amortization period. Once a particular cost pool has been amortized to a level where the difference between amortizing the cost pool over a “rolling” four-year period and amortizing the cost pool on a “straight-line” basis over a period shorter than four years is de minimis, we amortize the costs over a fixed time period based on current and expected future revenues. As a result of this policy, our direct response advertising costs are amortized over a period of approximately six years based on probable future net revenues updated at each reporting period.

 

The table below shows our historical direct response advertising spend and a breakdown of the amortization expense associated with the respective accumulated advertising cost pools for the three months ended December 31, 2012 and 2011. For presentation purposes, the quarterly advertising cost pools prior to fiscal year 2012 have been aggregated into fiscal years (dollars in thousands):

 

Actual Advertising				Grouped by Fiscal or Interim		Amortization Expense for the three months ended December 31,								Deferred Advertising Balance @
Spend				Period		2012				2011				12/31/2012
$	1,567			FY2008		$	10			$	24			$	22
	4,191			FY2009			66				126				345
	10,808			FY2010			343				511				2,826
	15,245			FY2011			668				1,029				7,324
	2,700			FY2012-Q1			147				234				1,765
	2,858			FY2012-Q2			170				—				2,042
	3,546			FY2012-Q3			236				—				2,749
	4,009			FY2012-Q4			314				—				3,399
	2,753			FY2013-Q1			193				—				2,560
	Total Amortization Expense					$	2,147			$	1,924			$	23,032

 

 

 

Bad debt expenses increased by $148,000, or 13.1%, to $1,278,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011. The increases in bad debt expenses are due primarily to our increased sales levels.

 

Depreciation and amortization expenses decreased by $35,000, or 17.6%, to $164,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011. The decrease in depreciation expense is primarily related to leasehold improvements that were fully depreciated as of the end of July 2012, which reduced our depreciation expense by $51,000 per quarter. This decrease was partially offset by depreciation expense related to purchases of property and equipment over the last year.

 

Purchases of property and equipment totaled $308,000 and $40,000 during the three months ended December 31, 2012 and 2011, respectively.

 

General and administrative expenses decreased by $21,000, or 1.7%, to $1,232,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011. The decrease was due to reductions in answering service, selling, travel, and equipment lease expenses. These decreases were partially offset by increases in software, website, and computer related expenses. As a percentage of sales, general and administrative expenses decreased by 1.5% for the three months ended December 31, 2012, as compared with the three months ended December 31, 2011.

 

Income from Operations

 

Income from operations for the three months ended December 31, 2012, increased by $1,479,000, or 189.9%, to $2,258,000, compared with the three months ended December 31, 2011. The increase in operating income is primarily attributed to increased gross profits driven by our increased sales volumes as well as a reduction as a percentage of sales in payroll, advertising, bad debt, and general and administrative expenses.

 

Other Expenses

 

The following table shows a breakdown of other expense for the three months ended December 31, 2012 and 2011 (dollars in thousands):

 

		2012				2011
Other Expenses:
Interest Expense		$	(21	)		$	(12	)
Total Other Expenses		$	(21	)		$	(12	)

 

Other expenses for the three months ended December 31, 2012 and 2011, were interest expense related to our outstanding balance on our credit line facility.

 

Interest expense increased by $9,000 for the three months ended December 31, 2012, compared with the three months ended December 31, 2011, due to an increase of $1 million in borrowings under our credit line facility during the three months ended December 31, 2011.

 

 Income Taxes

 

The provision for income taxes was $885,000 for the three months ended December 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $2,237,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

 

The provision for income taxes was $313,000 for the three months ended December 31, 2011. The effective tax rate was approximately 41% of the income before income taxes of $767,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

 

 

 Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended December 31, 2012 and 2011 (dollars in thousands): 

 

		2012				2011
Cash Flows:
Net cash provided by (used in) operating activities		$	1,417			$	(1,944	)
Net cash used in investing activities			(308	)			(40	)
Net cash provided by (used in) financing activities			(4	)			1,013
Net increase (decrease) in cash			1,105				(971	)
Cash at beginning of period			3,326				3,016
Cash at end of period		$	4,431			$	2,045

 

The Company had cash of $4,431,000 at December 31, 2012, compared with cash of $3,326,000 at September 30, 2012, an increase of $1,105,000. The increase in cash for the three months ended December 31, 2012, is primarily due to $1,417,000 of cash provided by our operating activities for the three months ended December 31, 2012, partially offset by $308,000 of net cash used in investing activities.

 

Operating Activities

 

Cash provided by operating activities was $1,417,000 for the three months ended December 31, 2012, which represents an improvement of $3,361,000 compared with cash used in operating activities of $1,944,000 for the three months ended December 31, 2011. The improvement in operating cash flows for the three months ended December 31, 2012, was primarily driven by additional net income of $898,000, an increase in non-cash charges of $876,000, and an improvement in the changes in operating assets and liabilities of $1,587,000 compared with the three months ended December 31, 2011. The improvement in the changes in operating assets and liabilities for the three months ended December 31, 2012, was primarily driven by an improvement of $2,280,000 in the change in accounts receivable, partially offset by a decrease of $817,000 in the change in accounts payable and accrued liabilities compared with the three months ended December 31, 2011.

 

The number of days of net accounts receivable outstanding decreased by 9.3 days to 47.2 days as of December 31, 2012, compared with 56.5 days as of September 30, 2012. The improvement was due to increased collections of accounts receivable, primarily from Medicare, during the three months ended December 31, 2012.

 

During the second half of fiscal year 2012, we experienced a significant increase in the number of Medicare pre-payment audits for claims that were submitted to one of the four Medicare regions. The results of these audits have not generated a significant number of denials and/or adjustments, and we expect to receive payment for most of these claims from Medicare. As a result, we have experienced a delay of up to 45 to 90 days in receiving payments for these Medicare claims. During the three months ended December 31, 2012, we saw a slight decrease in the number of pre-payment Medicare audits. As of December 31, 2012, we had approximately $450,000 of Medicare claims delayed due to pre-payment audits.

 

Investing Activities

 

During the three months ended December 31, 2012 and 2011, we purchased $308,000 and $40,000, respectively, of property and equipment to support our continued growth. The majority of the $308,000 of purchases, including leasehold improvements and computer equipment, during the three months ended December 31, 2012, was related to the build-out of a new 6,400 square-foot facility, which was completed in January 2013.

 

Financing Activities

 

During the three months ended December 31, 2012, cash used in financing activities was $4,000, which included $13,000 of proceeds from our employee stock purchase plan, offset by payments of $17,000 towards capital lease obligations.

 

During the three months ended December 31, 2011, cash provided by financing activities was $1,013,000, which included proceeds of $1,000,000 from the credit line facility and $20,000 of proceeds from our employee stock purchase plan, which was partially offset by capital lease payments of $7,000.

  

Outlook

 

We have increased sales from $14.8 million for the interim period ended December 31, 2011, to $17.6 million for the interim period ended December 31, 2012, and operating margins from 5.3% to 12.9% for the same periods. In addition, we have generated cash from operating activities of $2.8 million over the last twelve months, from January 2012 to December 2012.

 

 

 

We will continue to manage the levels of our direct response advertising spend to maximize profitability and cash flows for fiscal year 2013, which may result in slower top-line sales growth. Based on investments we have made in our employees, infrastructure, and technology, we expect to increase our operating margins and cash flows for fiscal year 2013 compared with fiscal year 2012.

 

As of December 31, 2012, we had $4.4 million of cash and $4.7 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from the collection of accounts receivable and the sale of products, will be sufficient to meet our cash requirements during the next twelve months.

 

At December 31, 2012, our current assets of $18,713,000 exceeded our current liabilities of $6,229,000 by $12,484,000.

 

We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider, primarily focused on supplying medical supplies to chronically ill patients.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2012, 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 Annual Report on Form 10-K for the year ended September 30, 2012, for a 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 Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (“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 December 31, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2012.

 

Change in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

 

/s/ LIBERATOR MEDICAL HOLDINGS, INC.

Registrant

 

/s/ Mark A. Libratore		President		February 12, 2013
Mark A. Libratore
/s/ Robert J. Davis		Chief Financial Officer		February 12, 2013
Robert J. Davis