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LBMH > SEC Filings for LBMH > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for LIBERATOR MEDICAL HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LIBERATOR MEDICAL HOLDINGS, INC.


15-May-2013

Quarterly Report


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 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, insurance groups, 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 and six months ended March 31, 2013 and 2012, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

                                     For the three months          For the six months
     New and recurring revenues         ended March 31,              ended March 31,
     generated from customer
     leads received during:           2013            2012          2013          2012

     Pre-FY2008                    $       511      $    598     $    1,109     $  1,346
     FY 2008                             2,223         2,339          4,578        4,734
     FY 2009                             3,095         3,288          6,374        6,762
     FY 2010                             2,905         3,044          5,991        6,322
     FY 2011                             3,116         3,528          6,481        7,641
     FY 2012                             3,259         1,692          7,157        2,582
     FY 2013                             1,725           n/a          2,735          n/a

     Total Revenues *              $    16,834      $ 14,489     $   34,425     $ 29,387
     Other Sales and Adjustments          (100 )         181           (140 )         79

     Net Sales                     $    16,734      $ 14,670     $   34,285     $ 29,466

* 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 and six
months ended March 31, 2013 and 2012, including percentage of sales (dollars in
thousands):



                                   For the three months ended March 31,                  For the six months ended March 31,
                                       2013                       2012                      2013                      2012
                               Amount            %         Amount         %          Amount          %         Amount         %
Sales                        $   16,734         100.0     $ 14,670       100.0     $   34,285       100.0     $ 29,466       100.0
Cost of Sales                     6,000          35.9        5,687        38.8         12,574        36.7       11,690        39.7
Gross Profit                     10,734          64.1        8,983        61.2         21,711        63.3       17,776        60.3
Operating Expenses                8,376          50.0        7,845        53.5         17,095        49.9       15,859        53.8
Income from Operations            2,358          14.1        1,138         7.7          4,616        13.4        1,917         6.5
Other Expense                       (21 )        (0.1 )        (20 )      (0.1 )          (42 )       (.1 )        (32 )       (.1 )
Income before Income Taxes        2,337          14.0        1,118         7.6          4,574        13.3        1,885         6.4
Provision for Income Taxes          917           5.5          448         3.0          1,802         5.2          761         2.6
Net Income                   $    1,420           8.5     $    670         4.6     $    2,772         8.1     $  1,124         3.8

Revenues

Sales for the three months ended March 31, 2013, increased by $2,064,000, or 14.1%, to $16,734,000, compared with sales of $14,670,000 for the three months ended March 31, 2012. Sales for the six months ended March 31, 2013, increased by $4,819,000, or 16.4%, to $34,285,000, compared with sales of $29,466,000 for the six months ended March 31, 2012. 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 March 31, 2013, were $2,187,000 compared with $2,858,000 for the three months ended March 31, 2012. We acquired 2,916 and 2,971 new customers during the three months ended March 31, 2013 and 2012, respectively.

Our direct-response advertising expenditures for the six months ended March 31, 2013, were $4,940,000 compared with $5,558,000 for the six months ended March 31, 2012. We acquired 6,824 and 6,579 new customers during the six months ended March 31, 2013 and 2012, respectively.

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, 2013 and 2012 (dollars in thousands):

                                         For the three months             For the six months
                                            ended March 31,                ended March 31,

Revenues generated by:                   2013             2012           2013            2012

New Customers *                       $     2,524      $    2,407     $     4,508     $    4,164
Recurring Customer Base                    14,310          12,082          29,917         25,223

Total Revenues, net of contractual
adjustments                           $    16,834      $   14,489     $    34,425     $   29,387
Other Sales and Adjustments                  (100 )           181            (140 )           79

Net Sales                             $    16,734      $   14,670     $    34,285     $   29,466

* 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 six months ended March 31, 2013, $2,735 of the net sales for new customers acquired was generated from leads received during the six months ended March 31, 2013. For the six months ended March 31, 2012, $2,582 of the net sales for new customers acquired was generated from leads received during the six months ended March 31, 2012. 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 March 31, 2013, increased by $1,751,000, or 19.5%, to $10,734,000, compared with gross profit of $8,983,000 for the three months ended March 31, 2012. For the six months ended March 31, 2013, gross profit increased by $3,935,000, or 22.1%, to $21,711,000, compared with gross profit of $17,776,000. The increase was attributed to our increased sales volume for the three and six months ended March 31, 2013, compared with the three and six months ended March 31, 2012.

As a percentage of sales, gross profit increased by 2.9% and 3.0%, respectively, for the three and six months ended March 31, 2013, compared with the three and six months ended March 31, 2012. Approximately 70% of the increase was due to favorable product and vendor mix within the urological and ostomy product lines, and 30% of the increase was due to decreased shipping costs as a result of a reduction in the number of overnight and two-day deliveries to our customers.

Operating Expenses

The following table provides a breakdown of our operating expenses for the three and six months ended March 31, 2013 and 2012, including percentage of sales (dollars in thousands):

                               For the three months ended March 31,                  For the six months ended March 31,
                                    2013                       2012                     2013                      2012
                           Amount             %         Amount        %          Amount           %         Amount        %
Operating Expenses:
Payroll, taxes, &
benefits                 $    3,666            21.9     $ 3,577       24.4     $    7,509         21.9     $  7,041       23.9
Advertising                   2,269            13.6       1,972       13.5          4,471         13.0        3,940       13.3
Bad debts                     1,167             7.0         843        5.7          2,445          7.1        1,973        6.7
Depreciation and
amortization                    174             1.0         210        1.4            338          1.0          409        1.4
General and
administrative                1,100             6.6       1,243        8.5          2,332          6.8        2,496        8.5

Total Operating
Expenses                 $    8,376            50.1     $ 7,845       53.5     $   17,095         49.8     $ 15,859       53.8

Payroll, taxes and benefits increased by $89,000, or 2.5%, to $3,666,000 for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Payroll, taxes and benefits increased by $468,000, or 6.70%, to $7,509,000 for the six months ended March 31, 2013, compared with the six months ended March 31, 2012. The increase was due to an increase in the number of employees to support our increased sales volume. As of March 31, 2013, we had 318 active employees, compared with 299 at March 31, 2012.

Advertising expenses increased by $297,000, or 15.1%, to $2,269,000 for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. For the six months ended March 31, 2013, advertising expenses increased by $531,000, or 13.5%, to $4,471,000, compared with the six months ended March 31, 2012.

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 and six months ended March 31, 2013 and 2012 (dollars in thousands):

                                          For the three months          For the six months
                                             Ended March 31,              Ended March 31,
                                           2013            2012          2013          2012

Advertising Expenses:
Amortization of direct-response costs   $     2,223       $ 1,929     $    4,370      $ 3,853
Other advertising expenses                       46            43            101           87
Total Advertising Expenses              $     2,269       $ 1,972     $    4,471      $ 3,940

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 six months ended March 31, 2013 and 2012. For presentation purposes, the quarterly advertising cost pools prior to fiscal year 2012 have been aggregated into fiscal years (dollars in thousands):

                                            Amortization Expense for           Deferred
      Actual            Grouped by            the six months ended            Advertising
    Advertising      Fiscal or Interim              March 31,                  Balance @
       Spend              Period             2013               2012           3/31/2013
   $       1,567          FY2008         $         19       $         43     $          13
           4,191          FY2009                  126                235               286
          10,808          FY2010                  682                972             2,487
          15,245          FY2011                1,321              1,926             6,671
           2,700         FY2012-Q1                288                447             1,624
           2,858         FY2012-Q2                328                230             1,883
           3,546         FY2012-Q3                447                  -             2,538
           4,009         FY2012-Q4                583                  -             3,130
           2,753         FY2013-Q1                417                  -             2,336
           2,187         FY2013-Q2                159                  -             2,028

Total Amortization Expense $ 4,370 $ 3,853 $ 22,996

Bad debt expenses increased by $324,000, or 38.4%, to $1,167,000 for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. For the six months ended March 31, 2013, bad debt expenses increased by $472,000, or 23.9%, compared with the six months ended March 31, 2012. The increases in bad debt expenses are due primarily to our increased sales levels.

Depreciation and amortization expenses decreased by $36,000, or 17.1%, to $174,000 for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. For the six months ended March 31, 2013, depreciation expense decreased by $71,000, or 17.4%. The decrease in depreciation expense was 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 $347,000 and $119,000 during the six months ended March 31, 2013 and 2012, respectively.

General and administrative expenses decreased by $143,000, or 11.5%, to $1,100,000 for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. For the six months ended March 31, 2013, general and administrative expenses decreased by $164,000, or 6.6%, compared with the six months ended March 31, 2012. The decrease is due to reductions in professional fees and answering service expenses, partially offset by an increase in software support costs.

Income from Operations

Income from operations for the three months ended March 31, 2013, increased by $1,220,000, or 107.2%, to $2,358,000, compared with the three months ended March 31, 2012. For the six months ended March 31, 2013, income from operations increased by $2,699,000, or 140.8%, to $4,616,000, compared with the six months ended March 31, 2012. 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, and general and administrative expenses, partially offset by an increase in bad debts expense.

Other Expense



The following table shows a breakdown of other income (expense) for the three
and six months ended March 31, 2013 and 2012 (dollars in thousands):



                                For the three months           For the six months
                                   ended March 31,               ended March 31,
                                2013            2012          2013            2012
        Other Expense
        Interest Expense      $     (21 )     $     (20 )   $     (42 )     $     (32 )
        Total Other Expense   $     (21 )     $     (20 )   $     (42 )     $     (32 )

Other expenses for the three and six months ended March 31, 2013 and 2012 were interest expense related to our outstanding balance on our credit line facility.

For the six months ended March 31, 2013, interest expense increased by $10,000, compared with the six months ended March 31, 2012, due to an increase of $1 million in borrowings under our credit line facility during the first quarter of fiscal year 2012.

Income Taxes

The provision for income taxes was $1,802,000 for the six months ended March 31, 2013. The effective tax rate was approximately 39% of the income before income taxes of $4,574,000, 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 $761,000 for the six months ended March 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $1,885,000, 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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