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LBMH > SEC Filings for LBMH > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for LIBERATOR MEDICAL HOLDINGS, INC.

Form 10-Q for LIBERATOR MEDICAL HOLDINGS, INC.


9-Aug-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 nine months ended June 30, 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 nine months
      New and recurring revenues         ended June 30,              ended June 30,
      generated from customer
      leads received during:           2013            2012        2013           2012

      Pre-FY 2008                   $       541      $    635   $     1,650     $  1,981
      FY 2008                             2,136         2,246         6,714        6,980
      FY 2009                             3,000         3,219         9,374        9,981
      FY 2010                             2,799         3,046         8,790        9,368
      FY 2011                             3,122         3,368         9,603       11,009
      FY 2012                             3,230         2,622        10,387        5,204
      FY 2013                             2,485           n/a         5,220          n/a

      Total Revenues *              $    17,313      $ 15,136   $    51,738     $ 44,523
      Other Sales and Adjustments           178         (175)            38         (96)

      Net Sales                     $    17,491      $ 14,961   $    51,776     $ 44,427

* 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 nine
months ended June 30, 2013 and 2012, including percentage of sales (dollars in
thousands):



                       For the three months ended June 30,            For the nine months ended June 30,
                            2013                   2012                   2013                   2012
                     Amount         %        Amount        %       Amount         %        Amount        %
Sales             $    17,491      100.0  $    14,961    100.0  $    51,776      100.0  $    44,427    100.0
Cost of Sales           6,598       37.7        5,836     39.0       19,172       37.0       17,526     39.4
Gross Profit           10,893       62.3        9,125     6.01       32,604       63.0       26,901     60.6
Operating
Expenses                7,537       43.1        7,958     53.2       24,632       47.6       23,817     53.6
Income from
Operations              3,356       19.2        1,167      7.8        7,972       15.4        3,084      7.0
Other Expense            (20)      (0.1)         (21)    (0.1)         (62)      (0.1)         (53)    (0.1)
Income before
Income Taxes            3,336       19.1        1,146      7.7        7,910       15.3        3,031      6.9
Provision for
Income Taxes            1,322        7.6          470      3.1        3,124        6.0        1,231      2.8
Net Income        $     2,014       11.5  $       676      4.5  $     4,786        9.2  $     1,800      4.1


Revenues

Sales for the three months ended June 30, 2013, increased by $2,530,000, or 16.9%, to $17,491,000, compared with sales of $14,961,000 for the three months ended June 30, 2012. Sales for the nine months ended June 30, 2013, increased by $7,349,000, or 16.5%, to $51,776,000, compared with sales of $44,427,000 for the nine months ended June 30, 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 June 30, 2013, were $2,036,000 compared with $3,546,000 for the three months ended June 30, 2012. We acquired 2,903 and 3,315 new customers during the three months ended June 30, 2013 and 2012, respectively.

Our direct-response advertising expenditures for the nine months ended June 30, 2013, were $6,975,000 compared with $9,104,000 for the nine months ended June 30, 2012. We acquired 9,727 and 9,894 new customers during the nine months ended June 30, 2013 and 2012, respectively.

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three and nine months ended June 30, 2013 and 2012 (dollars in thousands):

                                             For the three months      For the nine months
                                                ended June 30,           ended June 30,

  Revenues generated by:                      2013           2012       2013         2012

  New Customers *                          $    3,466      $  3,341   $  7,974     $  7,505
  Recurring Customer Base                      13,846        11,795     43,764       37,018

  Total Revenues, net of contractual
  adjustments                              $   17,312      $ 15,136   $ 51,738     $ 44,523
  Other Sales and Adjustments                     179         (175)         38         (96)

  Net Sales                                $   17,491      $ 14,961   $ 51,776     $ 44,427

* 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 nine months ended June 30, 2013, $5,220 of the net sales for new customers acquired was generated from leads received during the nine months ended June 30, 2013. For the nine months ended June 30, 2012, $5,204 of the net sales for new customers acquired was generated from leads received during the nine months ended June 30, 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 June 30, 2013, increased by $1,768,000, or 19.4%, to $10,893,000, compared with gross profit of $9,125,000 for the three months ended June 30, 2012. For the nine months ended June 30, 2013, gross profit increased by $5,703,000, or 21.2%, to $32,604,000, compared with gross profit of $26,901,000. The increase was attributed to our increased sales volume for the three and nine months ended June 30, 2013, compared with the three and nine months ended June 30, 2012.

As a percentage of sales, gross profit increased by 1.3% and 2.4%, respectively, for the three and nine months ended June 30, 2013, compared with the three and nine months ended June 30, 2012. Approximately three-fourths of the increase was due to favorable product and vendor mix within the urological and ostomy product lines, and one-fourth 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 and decreased shipping rates due to higher sales volumes.


Operating Expenses


The following table provides a breakdown of our operating expenses for the three
and nine months ended June 30, 2013 and 2012, including percentage of sales
(dollars in thousands):


                               For the three months ended June 30,                  For the nine months ended June 30,
                                  2013                        2012                     2013                      2012
                         Amount             %           Amount        %         Amount           %         Amount        %
Operating Expenses:
Payroll, taxes, &
benefits               $    3,570            20.4      $  3,526       23.5    $   11,079         21.4     $ 10,567       23.8
Advertising                 2,146            12.3         1,956       13.1         6,617         12.8        5,896       13.2
Bad debts                     541             3.1         1,028        6.9         2,986          5.8        3,001        6.8
Depreciation and
amortization                  171             1.0           206        1.4           509          1.0          615        1.4
General and
administrative              1,109             6.3         1,242        8.3         3,441          6.6        3,738        8.4

Total Operating
Expenses               $    7,537            43.1      $  7,958       53.2    $   24,632         47.6     $ 23,817       53.6

Payroll, taxes and benefits increased by $44,000, or 1.3%, to $3,570,000 for the three months ended June 30, 2013, compared with the three months ended June 30, 2012. Payroll, taxes and benefits increased by $512,000, or 4.9%, to $11,079,000 for the nine months ended June 30, 2013, compared with the nine months ended June 30, 2012. As of June 30, 2013, we had 297 active employees, compared with 313 at June 30, 2012. Even though the number of employees decreased by 16 employees from June 30, 2012, to June 30, 2013, the average number of employees
(322) during the nine months ended June 30, 2013, was higher compared with the average number of employees (307) during the nine months ended June 30, 2012, to support our increased sales volumes.

As a result of process and system enhancements implemented over the last year and continued growth of our recurring revenue as a percentage of our total revenue, our payroll expenses as a percentage of sales decreased by 3.1% for the three months ended June 30, 2013, and 2.4% for the nine months ended June 30, 2013, compared with the respective periods ended June 30, 2012.

Advertising expenses increased by $190,000, or 9.7%, to $2,146,000 for the three months ended June 30, 2013, compared with the three months ended June 30, 2012. For the nine months ended June 30, 2013, advertising expenses increased by $721,000, or 12.2%, to $5,896,000, compared with the nine months ended June 30, 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 nine months ended June 30, 2013 and 2012 (dollars in thousands):

                                           For the three months        For the nine months
                                              Ended June 30,              Ended June 30,
                                            2013            2012        2013           2012
 Advertising Expenses:
 Amortization of direct-response costs   $     2,117       $ 1,918   $    6,487       $ 5,770
 Other advertising expenses                       29            38          130           126
 Total Advertising Expenses              $     2,146       $ 1,956   $    6,617       $ 5,896

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 nine months ended June 30, 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):

      Actual          Grouped by         Amortization Expense for the         Deferred
    Advertising    Fiscal or Interim      nine months ended June 30,        Advertising
       Spend            Period            2013                 2012           Balance @
                                                                             6/30/2013
    $      1,567        FY2008          $      25            $       57      $          5
           4,191        FY2009                179                   315               232
          10,808        FY2010              1,010                 1,350             2,159
          15,245        FY2011              1,935                 2,689             6,058
           2,700       FY2012-Q1              411                   622             1,502
           2,858       FY2012-Q2              467                   453             1,745
           3,546       FY2012-Q3              628                   284             2,357
           4,009       FY2012-Q4              802                     -             2,911
           2,753       FY2013-Q1              580                     -             2,173
           2,187       FY2013-Q2              318                     -             1,869
           2,036       FY2013-Q3              132                     -             1,904

Total Amortization Expense $ 6,487 $ 5,770 $ 22,915

Bad debt expenses decreased by $487,000, or 47.4%, to $541,000 for the three months ended June 30, 2013, compared with the three months ended June 30, 2012. For the nine months ended June 30, 2013, bad debt expenses decreased by $15,000, or 0.5%, compared with the nine months ended June 30, 2012. The decreases in bad debt expenses were due to improvements in our billing and collection processes implemented over the last year and an increase in the number of employees in our accounts receivable department, which resulted in increased collections of accounts receivable as a percentage of sales for the period.

Depreciation and amortization expenses decreased by $35,000, or 17.0%, to $171,000 for the three months ended June 30, 2013, compared with the three months ended June 30, 2012. For the nine months ended June 30, 2013, depreciation expense decreased by $106,000, or 17.2%. 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 $361,000 and $232,000 during the nine months ended June 30, 2013 and 2012, respectively.

General and administrative expenses decreased by $133,000, or 10.7%, to $1,109,000 for the three months ended June 30, 2013, compared with the three months ended June 30, 2012. For the nine months ended June 30, 2013, general and administrative expenses decreased by $297,000, or 8.0%, compared with the nine months ended June 30, 2012. The decrease is due to reductions in professional fees, answering service expenses, and selling expenses, partially offset by an increase in software support costs.

Income from Operations

Income from operations for the three months ended June 30, 2013, increased by $2,189,000, or 187.6%, to $3,356,000, compared with the three months ended June 30, 2012. For the nine months ended June 30, 2013, income from operations increased by $4,888,000, or 158.5%, to $7,972,000, compared with the nine months ended June 30, 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, general and administrative expenses, and bad debt expense.

Other Expense

Other expenses for the three and nine months ended June 30, 2013 and 2012, were interest expense related to our outstanding balance on our credit line facility.

For the nine months ended June 30, 2013, interest expense increased by $9,000 compared with the nine months ended June 30, 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 following table provides a breakdown of our income tax expenses for the
three and nine months ended June 30, 2013 and 2012 (dollars in thousands):



                                         For the three months        For the nine months
                                            ended June 30,              ended June 30,
                                           2013            2012       2013           2012
   Current income tax expense:
   Federal                             $        533       $    -   $      772       $     3
   State                                        111            6          198            20

   Total current income tax expense    $        644       $    6   $      970       $    23

   Deferred income tax expense:
   Federal                             $        587       $  398   $    1,871       $ 1,035
   State                                         91           66          283           173
   Total deferred income tax expense   $        678       $  464   $    2,154       $ 1,208

   Provision for Income Taxes          $      1,322       $  470   $    3,124       $ 1,231

As of September 30, 2012, the Company had net operating losses of approximately $8.0 million for federal income tax purposes and $7.3 million for Florida income tax purposes that can be carried forward for up to twenty years and deducted against future taxable income. Based on our financial results through June 30, 2013, we anticipate our taxable income for fiscal year 2013 to exceed our net operating loss carry-forwards. As a result, our income tax expense for the three and nine months ended June 30, 2013, included a larger proportion of current income tax expense versus deferred income expense compared with the respective periods ended June 30, 2012.

The following table provides a breakdown of our income tax liabilities by current and deferred as of June 30, 2013, and September 30, 2012 (dollars in thousands):

                                                   June 30,       September 30,
                                                     2013             2012

      Current income tax liabilities               $     951     $            92

      Deferred income tax liabilities:
      Deferred tax liability                       $   7,685     $         5,421
      Less: Deferred tax assets, current portion     (2,365)             (2,254)
      Net deferred tax liabilities:                $   5,320     $         3,167

Liquidity and Capital Resources



The following table summarizes our cash flows from operating, investing, and
financing activities for the nine months ended June 30, 2013 and 2012 (dollars
in thousands):


                                                    For the Nine Months Ended
                                                            June 30,
                                                  2013                   2012
  Cash Flows:
  Net cash provided by (used in) operating
  activities                                    $      8,561          $      (1,358)
  Net cash used in investing activities                (361)                   (112)
  Net cash provided by (used in) financing
  activities                                           (916)                   1,013
  Net increase (decrease) in cash                      7,284                   (457)
  Cash at beginning of period                          3,326                   3,016
  Cash at end of period                         $     10,610          $        2,559


The Company had cash of $10,610,000 at June 30, 2013, compared with cash of $3,326,000 at September 30, 2012, an increase of $7,284,000. The increase in cash for the nine months ended June 30, 2013, is primarily due to $8,561,000 of cash generated by our operating activities for the nine months ended June 30, 2013, partially offset by $916,000 of net cash used in financing activities and $361,000 of net cash used in investing activities.

Operating Activities

Cash provided by operating activities was $8,561,000 for the nine months ended June 30, 2013, which represents an improvement of $9,919,000 compared with cash used in operating activities of $1,358,000 for the nine months ended June 30, 2012. The improvement in operating cash flows for the nine months ended June 30, 2013, was the result of a decrease in changes in operating assets and liabilities of $5,196,000, additional net income of $2,986,000 and an increase in non-cash charges of $1,737,000 compared with the nine months ended June 30, 2012. The decrease in the changes in operating assets and liabilities for the nine months ended June 30, 2013, compared with the nine months ended June 30, 2012, was the result of a decrease of $3,990,000 in the change in accounts receivable, a decrease in direct-response advertising of $2,129,000, partially offset by a decrease of $1,354,000 in the change in accounts payable and accrued liabilities.

The number of days of net accounts receivable outstanding decreased by 13.4 days to 43.1 days as of June 30, 2013, compared with 56.5 days as of September 30, 2012. The reduction in the number of days of net accounts receivable outstanding was due to improvements in our accounts receivable collection efforts, which included enhancements to our billing and collection processes and an increase in . . .

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