UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 (Mark One)

  X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015

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

 

 

 

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  X   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  X   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	X  .
Non-accelerated filer	. (Do not check if a smaller reporting company)	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  X   

 

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 May 4, 2015
Common Stock, $.001		53,429,958

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TABLE OF CONTENTS

 

		Page
PART I — FINANCIAL INFORMATION		3
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	18
Item 4.	Controls and Procedures	19
PART II — OTHER INFORMATION		19
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
SIGNATURES		20

2

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PART I — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2015 (unaudited) and September 30, 2014

(In thousands, except dollar per share amounts)

 

		March 31,				September 30,
		2015				2014
Assets
Current Assets:
Cash		$	9,747			$	12,261
Accounts receivable, net of allowances of $4,913 and $4,569, respectively			10,690				8,866
Inventory, net of allowance for obsolete inventory of $199 and $181, respectively			2,434				1,954
Deferred tax assets			2,022				2,005
Prepaid and other current assets			949				449
Total Current Assets			25,842				25,535
Property and equipment, net of accumulated depreciation of $4,215 and $4,016, respectively			1,147				1,260
Deferred advertising, net			29,823				26,936
Intangible assets, net of accumulated amortization of $339 and $281, respectively			362				420
Other assets			159				178
Total Assets		$	57,333			$	54,329
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	6,677			$	6,085
Accrued liabilities			1,964				1,758
Dividends payable			1,736				1,728
Other current liabilities			325				339
Total Current Liabilities			10,702				9,910
Deferred tax liabilities			10,966				10,031
Credit line facility			1,500				1,500
Other long-term liabilities			453				453
Total Liabilities			23,621				21,894
Commitments and contingencies (see Note 7)
Stockholders’ Equity:
Common stock, $0.001 par value, 200,000 shares authorized, 53,784 and 53,520 shares issued, respectively; 53,430 and 53,166 shares outstanding at March 31, 2015, and September 30, 2014, respectively			54				54
Additional paid-in capital			37,009				36,385
Accumulated deficit			(2,871)				(3,524)
Treasury stock, at cost; 354 shares at March 31, 2015,  and September 30, 2014			(480)				(480)
Total Stockholders’ Equity			33,712				32,435
Total Liabilities and Stockholders’ Equity		$	57,333			$	54,329

 

See accompanying notes to unaudited condensed consolidated financial statements. 

3

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the three and six months ended March 31, 2015 and 2014

(Unaudited)

(In thousands, except per share amounts)

 

	Three Months Ended March 31,								Six Months Ended March 31,
	2015				2014				2015				2014
Net Sales	$	19,674			$	17,619			$	39,890			$	36,256
Cost of Sales		7,466				6,611				15,051				13,493
Gross Profit		12,208				11,008				24,839				22,763
Operating Expenses:
Payroll, taxes and benefits		3,858				3,681				7,620				7,338
Advertising		2,775				2,371				5,390				4,697
Bad debts		1,082				818				2,025				1,642
Depreciation and amortization		138				168				257				339
General and administrative		1,620				1,373				2,828				2,650
Total Operating Expenses		9,473				8,411				18,120				16,666
Income from Operations		2,735				2,597				6,719				6,097
Other Expenses		(17)				(13)				(29)				(26)
Income before Income Taxes		2,718				2,584				6,690				6,071
Provision for Income Taxes		1,023				971				2,574				2,338
Net Income	$	1,695			$	1,613			$	4,116			$	3,733
Basic earnings per share:
Weighted average shares outstanding		53,252				52,578				53,209				52,467
Earnings per share	$	0.03			$	0.03			$	0.08			$	0.07
Diluted earnings per share:
Weighted average shares outstanding		53,714				53,602				53,645				53,450
Earnings per share	$	0.03			$	0.03			$	0.08			$	0.07
Dividends declared per common share	$	0.03			$	0.03			$	0.07			$	0.06

 

See accompanying notes to unaudited condensed consolidated financial statements.

4

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended March 31, 2015

(Unaudited)

(In thousands except per share amounts)

										Additional																						Total
	Common Stock									Paid in												Accumulated					Treasury					Stockholders’
	Shares				Amount					Capital												Deficit					Stock					Equity
Balance at October 1, 2014		53,166			$	54				$			36,385									$	(3,524)				$	(480)				$	32,435
Stock based compensation expense		—				—							16										—					—					16
Common stock issued for exercise of stock options and warrants		264				—							590										—					—					590
Income tax benefit related to exercise of stock options		—				—							18										—					—					18
Net income		—				—							—										4,116					—					4,116
Cash dividends declared, $0.065 per share		—				—							—										(3,463)					—					(3,463)
Balance at March 31, 2015		53,430			$	54				$			37,009									$	(2,871)				$	(480)				$	33,712

See accompanying notes to unaudited condensed consolidated financial statements.

5

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Liberator Medical Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the six months ended March 31, 2015 and 2014

(Unaudited)

(in thousands)

		Six Months Ended
		March 31,
		2015				2014
Cash flow from operating activities:
Net Income		$	4,116			$	3,733
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			5,602				5,003
Stock based compensation			16				164
Provision for doubtful accounts and contractual adjustments			1,923				1,804
Deferred income taxes			918				713
Reserve for inventory obsolescence			18				19
Changes in operating assets and liabilities:
Accounts receivable			(3,748)				(3,114)
Deferred advertising			(8,231)				(7,030)
Inventory			(497)				(142)
Other assets			(211)				(284)
Income taxes prepaid and payable			(255)				(1,958)
Accounts payable			592				824
Accrued liabilities			206				109
Other liabilities			10				(15)
Net Cash Flow Provided by (Used in) Operating Activities			459				(174)
Cash flow from investing activities:
Purchase of property and equipment			(60)				(75)
Proceeds from sale of property and equipment			—				4
Acquisition of business			—				(134)
Net Cash Flow Used in Investing Activities			(60)				(205)
Cash flow from financing activities:
Proceeds from exercise of stock options and warrants			590				531
Cash dividends paid			(3,456)				(3,141)
Costs associated with credit line facility			—				(21)
Income tax benefit related to exercise of stock options			18				171
Payments of capital lease obligations			(65)				(41)
Net Cash Flow Used in Financing Activities			(2,913)				(2,501)
Net decrease in cash			(2,514)				(2,880)
Cash at beginning of period			12,261				12,453
Cash at end of period		$	9,747			$	9,573
Supplemental disclosure of cash flow information:
Cash paid for interest		$	29			$	27
Cash paid for income taxes		$	1,893			$	3,411
Supplemental schedule of non-cash financing activities:
Cash expenditures funded by capital lease borrowings		$	26			$	—
Cash dividends declared, but not yet paid		$	1,736			$	1,584

 

See accompanying notes to unaudited condensed consolidated financial statements

6

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Liberator Medical Holdings, Inc. and Subsidiaries

Notes To The Condensed Consolidated Financial Statements

March 31, 2015

 

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 consolidated 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, 2014, that was filed with the SEC on December 15, 2014. The results of operations for the six months ended March 31, 2015, 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., Practica Medical Manufacturing, Inc., and Tri-County Medical & Ostomy Supplies, Inc., its wholly-owned subsidiaries.

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, 2014. There were no material changes to our significant accounting policies during the interim period ended March 31, 2015.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance to clarify the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a comprehensive framework for revenue recognition that supersedes current general revenue guidance and most industry-specific guidance. In addition, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its consolidated financial statements.

In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs.  The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this standards update.  The new guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. The adoption of this guidance is not expected to have a material impact on our financial position, overall results of operations or cash flows.  

7

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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. On May 7, 2015 the PNC Credit Line Facility was extended to September 30, 2016. 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 Facility includes the following provisions.

·

The interest rate on the outstanding balance is LIBOR plus 2.50%.

·

The EBITDA (earnings before interest, taxes, depreciation and amortization) is defined as EBITDA minus the actual cash outlay for deferred advertising as stated on the Consolidated Statement of Cash Flows.

 

·

The value of an acquisition requiring PNC's prior written consent is $1,500,000.

The PNC Credit Line Facility requires the Company to comply with certain covenants, including financial covenants which are defined in the credit agreement.  On May 7, 2015, the financial covenants were modified to reset the testing period for the Fixed Coverage Charge ratio to the period ended June 30, 2015 (as defined below). The Company was in compliance with all the amended financial covenants including the following:

·

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, on a rolling four quarters basis, a Fixed Coverage Charge ratio of at least (i) 1.00 to 1.00 commencing with the fiscal quarter ending June 30, 2015.

·

The Company will maintain at all times a minimum Liquidity of at least $7,500,000 to be tested at the end of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2015.

As of March 31, 2015, availability under the PNC Credit Line Facility was $6,164,000 with an outstanding balance of $1,500,000.  The interest rate for the outstanding balance as of March 31, 2015, was 2.68%. For the six months ended March 31, 2015 and 2014, the Company incurred $20,000 and $22,000, respectively, in interest expense related to the outstanding balances pursuant to the PNC Credit Line Facility.

Note 4 — Stockholders' Equity

Warrants

 

A summary of warrants issued, exercised, and expired during the six months ended March 31, 2015, is as follows:

 

						Weighted
						Avg.
						Exercise
Warrants:		Shares				Price
Balance at October 1, 2014			204,166			$	2.50
Issued			—				—
Exercised			(183,749)				(2.50)
Expired			(20,417)				(2.50)
Balance at March 31, 2015			—			$	—

 

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Employee and Director Stock Options

 

The Company granted 0 and 150,000 options during the six months ended March 31, 2015 and 2014, respectively.  The weighted-average grant date fair value of options granted during the six months ended March 31, 2014, was $0.50 per share.  There were 80,000 options exercised during the six months ended March 31, 2015, and 475,084 exercised during the six months ended March 31, 2014. The total intrinsic value of options exercised during the six months ended March 31, 2015 and 2014, was approximately $161,000 and $1,385,000, respectfully.

The fair values of stock-based awards granted during the six months ended March 31, 2014, were calculated with the following weighted-average assumptions:

		2014
Risk-free interest rate:			0.68%
Expected term:			2.99 years
Expected dividend yield:			5.60%
Expected volatility:			48.34%

For the six months ended March 31, 2015 and 2014, the Company recorded $16,000 and $52,000, 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 March 31, 2015, there was $16,000 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 0.5 years.

Stock option activity for the six months ended March 31, 2015, 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, 2014			752,916			$	1.39				2.25			$	1,326,974
Granted			—				—
Exercised			(80,000)				1.64
Expired or forfeited			—				—
Options outstanding at March 31, 2015			672,916			$	1.36				1.94			$	1,441,494
Options exercisable at March 31, 2015			612,916			$	1.28				1.78			$	1,360,494
Options vested or expected to vest at March 31, 2015			672,916			$	1.36				1.94			$	1,441,494

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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 and six months ended March 31, 2015 and 2014 (in thousands, except per share amounts):

 

		For the three months								For the six months
		ended March 31,								ended March 31,
		2015				2014				2015				2014
Numerator:
Net income — basic		$	1,695			$	1,613			$	4,116			$	3,733
Denominator:
Weighted average shares outstanding — basic			53,252				52,578				53,209				52,467
Effect of dilutive securities:
Stock options and warrants			462				1,024				436				983
Weighted average shares outstanding — diluted			53,714				53,602				53,645				53,450
Earnings per share — basic		$	0.03			$	0.03			$	0.08			$	0.07
Earnings per share — diluted		$	0.03			$	0.03			$	0.08			$	0.07

 

Note 6 — Income Taxes

The provision for income taxes was $2,574,000 for the six months ended March 31, 2015. The effective tax rate was approximately 38% of the income before income taxes of $6,690,000, 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 $2,338,000 for the six months ended March 31, 2014. The effective tax rate was approximately 39% of the income before income taxes of $6,071,000, 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.

Note 7 — Commitments and Contingencies

Litigation

The Company has received subpoenas from the United States Department of Justice and has been named, among others, in a civil qui tam complaint alleging, inter alia, violations of the federal False Claims Act, 31 U.S.C. §3729. United States ex rel. Herman, et al. v. Coloplast A/S, et al., Docket No. 11-cv-12131-RWZ (D. Mass). To date, the Lawsuit has not been served on the Defendants. On February 4, 2015, the Plaintiffs and the United States, with the affirmative support of the State of California and all Defendants, filed a Joint Motion for an Extension of Time seeking to extend the time to serve the complaint in the Lawsuit until May 19, 2015. At the present time, the Company is fully cooperating with the government’s investigation, and the Company’s Board of Directors has conducted its own internal investigation.  The ultimate outcome of this matter cannot presently be determined and therefore the Company is unable to estimate a range of loss, if any, at this time. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the accompanying consolidated financial statements.

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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, 2014, 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 Form 10-K for the year ended September 30, 2014, 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 by our patients on a recurring basis, generally on a continual basis for a lifetime, 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 who require 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.

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The following table shows our revenue streams, including new and recurring orders, for the three and six months ended March 31, 2015 and 2014, 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 March 31,							For the six months ended March 31,
		2015				2014			2015				2014
Pre-FY 2010		$	4,817			$	5,182		$	9,951			$	10,772
FY 2010			2,403				2,507			4,943				5,227
FY 2011			2,631				2,623			5,381				5,682
FY 2012			2,661				2,755			5,496				5,896
FY 2013			2,175				2,529			4,525				5,535
FY 2014			2,945				1,832			6,590				2,714
FY 2015			1,811				n/a			2,738				n/a
Total Revenues *		$	19,443			$	17,428		$	39,624			$	35,826
Other Sales and Adjustments			231				191			266				430
Net Sales		$	19,674			$	17,619		$	39,890			$	36,256
* 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 2015 and the corresponding periods from fiscal year 2014, 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 and six months ended March 31, 2015 and 2014, including percentage of net sales (dollars in thousands):

 

		For the three months ended March 31,																For the six months ended March 31,
		2015								2014								2015								2014
		Amount				%				Amount				%				Amount				%				Amount				%
Net Sales		$	19,674				100.0			$	17,619				100.0			$	39,890				100.0			$	36,256				100.0
Cost of Sales			7,466				37.9				6,611				37.5				15,051				37.7				13,493				37.2
Gross Profit			12,208				62.1				11,008				62.5				24,839				62.3				22,763				62.8
Operating Expenses			9,473				48.2				8,411				47.7				18,120				45.5				16,666				46.0
Income from Operations			2,735				13.9				2,597				14.8				6,719				16.8				6,097				16.8
Other Expenses			(17)				(0.1)				(13)				(0.1)				(29)				(0.0)				(26)				(0.1)
Income before Income Taxes			2,718				13.8				2,584				14.7				6,690				16.8				6,071				16.7
Provision for Income Taxes			1,023				5.2				971				5.5				2,574				6.5				2,338				6.4
Net Income		$	1,695				8.6			$	1,613				9.2			$	4,116				10.3			$	3,733				10.3

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Revenues

 

Net sales for the three months ended March 31, 2015, increased by $2,055,000, or 11.7%, to $19,674,000, compared with net sales of $17,619,000 for the three months ended March 31, 2014. Net sales for the six months ended March 31, 2015, increased by $3,634,000, or 10.0%, to $39,890,000, compared with net sales of $36,256,000 for the six months ended March 31, 2014. The increase in net 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. As of January 1, 2015 we received an increase in reimbursement for Medicare claims of 1.5% which contributed approximately $215,000 in revenue growth.

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three and six months ended March 31, 2015 and 2014 (dollars in thousands):

Revenues generated by:		For the three months ended March 31,							For the six months ended March 31,
		2015				2014			2015				2014
New Customers (1)		$	2,480			$	2,379		$	4,188			$	4,049
Recurring Customer Base			16,963				15,049			35,436				31,777
Total Revenues, net of contractual adjustments		$	19,443			$	17,428		$	39,624			$	35,826
Other Sales and Adjustments			231				191			266				430
Net Sales		$	19,674			$	17,619		$	39,890			$	36,256
(1) 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 March 31, 2015, $1,811 of the net sales for new customers acquired was generated from leads received during the three months ended March 31, 2015. For the three months ended March 31, 2014, $1,832 of the net sales for new customers acquired was generated from leads received during the three months ended March 31, 2014. The remaining net sales from new customers acquired were generated from leads received during prior periods.

We obtain the majority of our new customers from leads generated by direct responses to our advertising. The number of new customers acquired through our advertising is dependent on internal and external factors, including, but not limited to, the timing of our advertising spend, the length of time from the receipt of the customer leads, the level of responses to our advertising efforts, our ability to convert leads to customers, and the market environment.  

Our direct-response advertising expenditures for the three months ended March 31, 2015, were $4,227,000 compared with $4,112,000 for the three months ended March 31, 2014. We acquired 2,890 and 3,231 new customers during the three months ended March 31, 2015 and 2014, respectively.

Our direct-response advertising expenditures for the six months ended March 31, 2015, were $8,231,000 compared with $7,030,000 for the three months ended March 31, 2014. We acquired 5,758 and 6,060 new customers during the six months ended March 31, 2015 and 2014, respectively.

We expect to continue to acquire new customers over the next fifteen to eighteen months from our increased advertising expenditures. Similar to our past direct-response advertising efforts, when we increased our advertising spend, our costs to acquire new customers increased. We believe that the incremental costs associated with acquiring new customers through our increased advertising expenditures will be more than offset by the recurring revenues generated from the new customers acquired as a result of our advertising efforts.

The majority of new customers acquired place their initial order with us within three to six months following our advertising expenditures. However, we generate new customers directly from our advertising spend beyond six months, primarily due to delays in reconnecting with the prospective customers after the initial contact and obtaining the proper documentation from the customers and/or their physicians.

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The following table shows the timing of the new customers acquired based on the quarter the customer leads were initially received:

Customer Leads Received		Number of New Customers Acquired ¹
		FY2015-Q2		FY2015-Q1		FY2014-Q4		FY2014-Q3		FY2014-Q2		FY2014-Q1
FY2015-Q2		1,952
FY2015-Q1		460		1,715
FY2014-Q4		85		640		1,873
FY2014-Q3		40		110		625		1,837
FY2014-Q2		42		66		167		830		2,077
FY2014-Q1		40		48		73		137		626		1,688
Pre-FY2014		271		289		410		528		528		1,141
Total New Customers		2,890		2,868		3,148		3,332		3,231		2,829
(1) The number of new customers acquired in a particular quarter is derived from leads received in the current quarter and from leads received in preceding quarters. During the second quarter of fiscal year 2015, we acquired 2,890 new customers, of which 1,952 new customers were from leads received in the same quarter and 938 new customers were from leads received in prior quarters.

Gross Profit

 

Gross profit for the three months ended March 31, 2015, increased by $1,200,000, or 10.9%, to $12,208,000, compared with gross profit of $11,008,000 for the three months ended March 31, 2014. For the six months ended March 31, 2015, gross profit increased by $2,076,000, or 9.1%, to $24,840,000, compared with gross profit of $22,763,000. The increase was attributed to our increased sales volume for the three and six months ended March 31, 2015, compared with the three and six months ended March 31, 2014.

 

As a percentage of sales, gross profit decreased by 0.4% and 0.5%, respectively, for the three and six months ended March 31, 2015, compared with the three and six months ended March 31, 2014.  The decrease in gross profit as a percentage of sales was primarily attributable to an increase in our product mix towards ostomy supplies, which have a lower profit contribution, and the expiration of one of our vendor rebate programs. 

Operating Expenses

 

The following table provides a breakdown of our operating expenses for the three and six months ended March 31, 2015 and 2014, including percentage of net sales (dollars in thousands):

		For the three months ended March 31,																For the six months ended March 31,
		2015								2014								2015								2014
		Amount				%				Amount				%				Amount				%				Amount				%
Operating Expenses:
Payroll, taxes, and benefits		$	3,858				19.6			$	3,681				20.9			$	7,620				19.1			$	7,338				20.2
Advertising			2,775				14.1				2,371				13.5				5,390				13.5				4,697				13.0
Bad debts			1,082				5.5				818				4.6				2,025				5.1				1,642				4.5
Depreciation and amortization			138				0.8				168				1.0				257				0.7				339				0.9
General and administrative			1,620				8.2				1,373				7.8				2,828				7.1				2,650				7.3
Total Operating Expenses		$	9,473				48.2			$	8,411				47.7			$	18,120				45.5			$	16,666				46.0

Payroll, taxes and benefits

Increased by $177,000, or 4.8%, to $3,858,000 for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Payroll, taxes and benefits increased by $282,000, or 3.8%, to $7,620,000 for the six months ended March 31, 2015, compared with the six months ended March 31, 2014. The increase for the three and six months ended March 31, 2015, was due to fluctuations in number of employees to support our increased sales volume.   As of March 31, 2015, we had 338 active employees, compared with 320 at March 31, 2014.  As a percentage of sales, payroll decreased 1.3% and 1.1% for the three and six months ended March 31, 2015 respectively.

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Advertising expenses

Increased by $404,000, or 17%, to $2,775,000 for the three months ended March 31, 2015, compared with the three months ended March 31, 2014.  For the six months ended March 31, 2015, advertising expenses increased by $693,000, or 14.8%, to $5,390,000, compared with the six months ended March 31, 2014.

The majority of our advertising expense is associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expense 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 expense for the three and six months ended March 31, 2015 and 2014 (dollars in thousands):

 

		For the three months Ended March 31,								For the six months Ended March 31,
		2015				2014				2015				2014
Advertising Expense:
Amortization of direct-response costs		$	2,747			$	2,353			$	5,345			$	4,664
Other advertising expenses			28				18				45				33
Total Advertising Expense		$	2,775			$	2,371			$	5,390			$	4,697

As a result of our increase in advertising expenditures, our advertising expense, as a percentage of sales, increased by 0.6% and 0.5% for the three and six months ended March 31, 2015, respectively, compared with the three and six months ended March 31, 2014. Similar to our past direct response advertising efforts, when we increased our advertising spend during the three and six months ended March 31, 2015, our costs to acquire new customers increased compared with the three and six months ended March 31, 2014.

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.

Bad debt expenses

Increased by $264,000, or 32.2%, to $1,082,000 for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. For the six months ended March 31, 2015, bad debt expenses increased by $383,000, or 23.3%, compared with the six months ended March 31, 2014.  The increase in bad debt expense was due to the increase in sales and an increase in the reserve requirements for bad debts.

 

Depreciation and amortization expenses

Decreased by $30,000, or 17.9%, to $138,000 for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. For the six months ended March 31, 2015, depreciation and amortization expense decreased by $82,000, or 24.1%, to $257,000 compared with the six months ended March 31, 2014. The reduction was primarily due to leasehold improvements being fully depreciated as of September 30, 2014. 

Purchases of property and equipment totaled $86,000 and $75,000 during the six months ended March 31, 2015 and 2014, respectively.

 

General and administrative expenses

Increased by $247,000, or 18%, to $1,620,000 for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. For the six months ended March 31, 2015, general and administrative expenses increased by $178,000, or 6.7%, compared with the six months ended March 31, 2014. The increases are primarily attributed to increases of $392,000 and $393,000, respectively, for professional fees, partially offset by reductions of $145,000 and $215,000, respectively, for other administrative expenses during the three and six months ended March 31, 2015.

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Income from Operations

 

Income from operations for the three months ended March 31, 2015, increased by $138,000, or 5.3%, to $2,735,000, compared with the three months ended March 31, 2014. For the six months ended March 31, 2015, income from operations increased by $622,000, or 10.2%, to $6,719,000, compared with the six months ended March 31, 2014. 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, partially offset by an increase in general and administrative expenses.

 

Other Expenses

Other expenses for the three and six months ended March 31, 2015 and 2014, consisted of interest expense associated with the outstanding $1.5 million balance on our credit line facility. Interest expense increased by $4,000 to $17,000 for the three months ended March 31, 2015, compared with $13,000 for the three months ended March 31, 2014. Interest expense increased by $3,000 to $29,000 for the six months ended March 31, 2015, compared with $26,000 for the six months ended March 31, 2014.

Income Taxes

The following table provides a breakdown of our income tax expenses for the three and six months ended March 31, 2015 and 2014 (dollars in thousands):

		For the three months								For the six months
		ended March 31,								ended March 31,
			2015				2014			2015				2014
Current income tax expense:
Federal		$	407			$	111			$	1,388,			$	1,373
State			88				27				268				251
Total current income tax expenses			495				138				1,656				1,624
Deferred income tax expense:
Federal			451				712				783				608
State			77				121				135				106
Total deferred income tax expense			528				833				918				714
Provision for income taxes		$	1,023			$	971			$	2,574			$	2,338

The provision for income taxes was $2,574,000 for the six months ended March 31, 2015.  The effective tax rate was approximately 38% of the income before income taxes of $6,690,000, 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 $2,338,000 for the six months ended March 31, 2014. The effective tax rate was approximately 39% of the income before income taxes of $6,071,000, 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.

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Liquidity and Capital Resources

The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended March 31, 2015 and 2014 (dollars in thousands): 

		For the Six Months Ended
		March 31,
		2015				2014
Cash Flows:
Net cash provided by (used in) operating activities		$	459			$	(174)
Net cash used in investing activities			(60)				(205)
Net cash used in financing activities			(2,913)				(2,501)
Net decrease in cash			(2,514)				(2,880)
Cash at beginning of period			12,261				12,453
Cash at end of period		$	9,747			$	9,573

The Company had cash of $9,747,000 at March 31, 2015, compared with cash of $12,261,000 at September 30, 2014, a decrease of $2,514,000. The decrease in cash for the six months ended March 31, 2015, was primarily due to $2,913,000 of cash used in financing activities and $60,000 of cash used in investing activities, partially offset by $459,000 of cash provided by operating activities.

Operating Activities

 

Cash provided in operating activities was $459,000 for the six months ended March 31, 2015, which represents an increase of $633,000 compared with cash used in operating activities of $174,000 for the six months ended March 31, 2014. The increase in operating cash flows for the six months ended March 31, 2015, was the result of a decrease in cash paid for income taxes of $1,518,000, increases in non-cash expenses of $774,000, and an increase in net income of $383,000, partially offset by an increase in deferred advertising expenditures of $1,201,000, a decrease of cash provided by accounts receivables of $634,000, and a decrease in cash provided by other operating assets and liabilities of $207,000.    

Currently Region C and D of Medicare are conducting pre-payment audits for catheter claims submitted by all suppliers. Region C is also conducting pre-payment audits on up to fifty percent of the company’s claims for straight tip catheters. The pre-payment review audits have caused a delay in the collection of accounts receivables due to the time required to collect medical documentation and to respond to each audited claim and, in some cases, appeals for adverse decisions. The result of these audits have not generated a significant number of denials and/or adjustments, and based on our historical experience we expect to receive payment for most of these claims from Medicare. As of March 31, 2015, we had approximately $354,000 in claims delayed due to pre-payment audits by all Medicare Regions.

In addition to the Medicare pre-payment audits for catheter claims, Medicare is experiencing a delay in Administrative Law Judge ("ALJ") Hearings for Medicare appeals, which has increased the amount of Medicare claims we have pending for the ALJ appeals process. As of March 31, 2015, we had approximately $358,000 of Medicare claims delayed due to the delay in the Medicare ALJ appeals process.

Due to the increase in Medicare pre-payment audits and the delay in the Medicare ALJ appeals process, the number of days of gross accounts receivable outstanding increased by 10.1 days to 71.4 days as of March 31, 2015, compared with 61.3 days outstanding as of September 30, 2014.

Investing Activities

 

During the six months ended March 31, 2015 and 2014, we purchased $60,000 and $75,000, respectively, of property and equipment for cash. The purchases during the six months ended March 31, 2015 and 2014, were for computer equipment, website enhancements, and other software to support our continued growth.

During the six months ended March 31, 2014, we acquired certain assets of a urology division, including the urology customer records, websites, and inventory, of a durable medical equipment business for a cash purchase price of $170,000, of which $134,000 was paid during the six months ended March 31, 2014. The acquisition was immaterial to the Company's consolidated financial position and results of operations.

 

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Financing Activities

 

During the six months ended March 31, 2015, cash used in financing activities was $2,913,000, which included cash dividends paid of $3,456,000, payments of $65,000 for capital lease obligations, partially offset by $590,000 of proceeds received from the exercise of stock options and warrants, and $18,000 of income tax benefits related to the exercise of certain non-qualified stock options.

During the six months ended March 31, 2014, cash used in financing activities was $2,501,000, which included cash dividends paid of $3,141,000, payments of $41,000 for capital lease obligations, and payments of $21,000 for costs associated with the extension of our PNC Credit Line Facility, partially offset by $531,000 of proceeds received from the exercise of stock options and warrants, and $171,000 of income tax benefits related to the exercise of certain non-qualified stock options.

 

As of March 31, 2015, we had $9.7 million in cash and $6.2 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 operations, will be sufficient to meet our cash requirements during the next twelve months.

At March 31, 2015, our current assets of $25,842,000 exceeded our current liabilities of $10,702,000 by $15,140,000.

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 March 31, 2015, 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, 2014, 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

 

As of March 31, 2015, we had an outstanding balance of $1.5 million under a credit line facility that matures September 30, 2016, which accrues interest at a variable rate of LIBOR plus 2.50 percent per annum. As of March 31, 2015, the short term LIBOR rate used as the base for calculating the interest rate for our credit line facility was approximately 0.18 percent. As such, changes in the LIBOR rates would impact our interest expense. Based upon the balance outstanding under our credit facility as of March 31, 2015, for every 100 basis point increase in the short term LIBOR rates, we would incur approximately $15,000 of additional annual interest expense.

We maintain our cash balances at high quality financial institutions. The balances in our accounts may periodically exceed amounts insured by the Federal Deposit Insurance Corporation, which insures deposits of up to $250,000 as of March 31, 2015. We do not believe we are exposed to any significant credit risk and have not experienced any losses.

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 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 March 31, 2015. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2015, 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

 

The legal proceedings described in Note 7 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Item 1: Legal Proceedings" by reference.

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, 2014. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

 

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

 

During the six months ended March 31, 2015, the Company issued 263,749 shares of common stock upon the exercise of outstanding options and warrants for gross proceeds of $590,373. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

None.

 

Item 6. Exhibits

Exhibit Number	Description
31.1	Section 302 Certificate of Chief Executive Officer
31.2	Section 302 Certificate of Chief Financial Officer
32.1	Section 906 Certificate of Chief Executive Officer
32.2	Section 906 Certificate of Chief Financial Officer

 

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SIGNATURES

 

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

 

LIBERATOR MEDICAL HOLDINGS, INC.

Registrant

 

/s/ Mark A. Libratore		President		May 11, 2015
Mark A. Libratore
/s/ Robert J. Davis		Chief Financial Officer		May 11, 2015
Robert J. Davis

 

 

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