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LBMH > SEC Filings for LBMH > Form 10-K on 23-Dec-2013All Recent SEC Filings

Show all filings for LIBERATOR MEDICAL HOLDINGS, INC.

Form 10-K for LIBERATOR MEDICAL HOLDINGS, INC.


23-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors, including, but not limited to, those described in the subsection titled "Risk Factors," located in Part I, Item 1A, of this Form 10-K.

Company 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.


The following table shows our revenue streams, including new and recurring orders, for the twelve months ended September 30, 2013 and 2012, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

                                                      For the twelve months
      New and recurring revenues                       ended September 30,
      generated from customer
      leads received during:                        2013                 2012

      Pre-FY 2009                                $   10,992            $   11,920
      FY 2009                                        12,305                13,320
      FY 2010                                        11,511                12,446
      FY 2011                                        12,536                14,314
      FY 2012                                        13,532                 9,092
      FY 2013                                         8,515                   n/a

      Total Revenues *                               69,391                61,092
      Other Sales and Adjustments                      (280 )                (149 )

      Net Sales                                  $   69,111            $   60,943

* 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 fiscal years ended September 30, 2013 and 2012 (dollars in thousands):

                                               2013                     2012

                                        Amount          %        Amount         %

          Net Sales                    $ 69,111       100.0     $ 60,943       100.0
          Cost of Sales                  25,689        37.2       23,924        39.3

          Gross Profit                   43,422        62.8       37,019        60.7
          Operating Expenses             31,663        45.8       32,712        53.7

          Income from Operations         11,759        17.0        4,307         7.0
          Other Expense                     (83 )      (0.1 )        (75 )      (0.1

          Income Before Income Taxes     11,676        16.9        4,232         6.9
          Provision for Income Taxes      4,598         6.7        1,731         2.8

          Net Income                   $  7,078        10.2     $  2,501         4.1


Revenues

Sales for fiscal year 2013 increased by $8,168,000, or 13.4%, to $69,111,000, compared with sales of $60,943,000 for fiscal year 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 fiscal year 2013 were $9,000,000, compared to $13,113,000 for fiscal year 2012. In July 2013, we acquired a small ostomy supply business for $343,000, which also contributed to the number of new customers acquired in fiscal year 2013.

The following table summarizes the number of customers serviced and revenues generated from our new customers and our recurring customer base for fiscal years 2013 and 2012 (dollars in thousands):

                                                 2013                       2012

                                           # of         Net           # of         Net
                                         Customers     Sales        Customers     Sales

  New Customers Acquired*                 12,752     $ 12,264        14,245     $ 12,244
  Recurring Customer Base                 30,283       57,127        27,537       48,848

  Total Revenues, net of contractual      43,035     $ 69,391        41,782     $ 61,092
  allowances
  Other Sales and Adjustments                           (280)                      (149)

  Net Sales                                          $ 69,111                   $ 60,943

* 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 fiscal year 2013, $8,515 of the net sales for new customers acquired was generated from leads received during fiscal year 2013. For fiscal year 2012, $9,092 of the net sales for new customers acquired was generated from leads received during fiscal year 2012. The remaining net sales generated from new customers acquired were generated from leads received during prior fiscal years.

Due to our reduced levels of advertising spend during fiscal year 2013, we acquired 1,541 fewer customers than we acquired during fiscal year 2012. However, by targeting urology patients using supplies with higher reimbursement rates and ostomy patients utilizing accessory products, our net sales generated from new customers acquired during fiscal year 2013 exceeded the net sales generated by our new customers acquired during fiscal year 2012 by $20,000, increasing our returns on our advertising spend.

The average annual order value of our recurring customer base increased to $1,886 per customer during fiscal year 2013 compared with $1,774 per customer during fiscal year 2012. The increase in the average annual order value per recurring customer for fiscal year 2013 was primarily attributed to a decrease in the number of diabetic patients and urology patients using foley catheters, both of which have lower average annual order values than our other product lines.

Gross Profit

Gross profit for fiscal year 2013 increased by $6,403,000, or 17.3%, to $43,422,000, compared with gross profit of $37,019,000 for fiscal year 2012. The increase was attributed to our increased sales volume for fiscal year 2013 compared with fiscal year 2012.

As a percentage of net sales, gross profit increased by 2.1% to 62.8% for fiscal year 2013 compared with gross profit of 60.7% for fiscal year 2012. The increase in gross profit as a percentage of sales was attributed to cost savings of approximately $1.2 million, or 1.7% of net sales, in shipping costs during fiscal year 2013.


Operating Expenses


The following table provides a breakdown of our operating expenses for the
fiscal years ended September 30, 2013 and 2012 (dollars in thousands):


                                               2013                2012

                                           Amount     %        Amount     %

            Operating Expenses:
            Payroll, taxes and benefits   $ 14,311   20.7     $ 14,136   23.2
            Advertising                      8,908   12.9        8,099   13.3
            Bad debts                        3,069    4.4        4,664    7.7
            Depreciation and amortization      683    1.0          794    1.3
            General and administrative       4,692    6.8        5,019    8.2

            Total Operating Expenses      $ 31,663   45.8     $ 32,712   53.7

Payroll, taxes and benefits increased by $175,000, or 1.2%, to $14,311,000 for fiscal year 2013 compared with fiscal year 2012. As of September 30, 2013, we had 297 active employees, compared with 326 at September 30, 2012. Even though the number of employees decreased by 29 employees from September 30, 2012, to September 30, 2013, the average number of employees (317) during fiscal year 2013 was higher compared with the average number of employees (310) during fiscal year 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 net sales decreased by 2.5% for fiscal year 2013 compared with fiscal year 2012.

Advertising expenses increased by $809,000, or 10.0%, to $8,908,000 for fiscal year 2013 compared with fiscal year 2012. The majority of our advertising expenses are 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 fiscal years ended September 30, 2013 and 2012 (dollars in thousands):

                                                       2013      2012

              Advertising Expenses:
              Amortization of direct-response costs   $ 8,721   $ 7,878
              Other advertising expenses                  187       221

              Total Advertising Expenses              $ 8,908   $ 8,099

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.

Similar to our past direct response advertising efforts, when we decreased our advertising spend during fiscal year 2013, our costs to acquire new customers decreased compared with fiscal year 2012.


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 fiscal year ended September 30, 2013 and 2012. For presentation purposes, the quarterly advertising cost pools have been aggregated into fiscal years (dollars in thousands):

    Actual          Grouped by       Amortization Expense for the twelve        Deferred
  Advertising    Fiscal or Interim        months ended September 30,          Advertising
     Spend            Period            2013                     2012           Balance @
                                                                               9/30/2013
  $   1,567           FY2008           $    30                 $     70        $     -
      4,191           FY2009                228                     394             184
      10,808          FY2010               1,326                   1,717           1,843
      15,245          FY2011               2,570                   3,407           5,422
      13,113          FY2012               2,952                   2,290           7,871
      9,000           FY2013               1,615                     -             7,385

Total Amortization Expense $ 8,721 $ 7,878 $ 22,705

Bad debt expense decreased by $1,595,000, or 34.2%, to $3,069,000 for fiscal year 2013 compared with fiscal year 2012. The decrease in bad debt expense was due to increased accounts receivable collection efforts during fiscal year 2013. During the last quarter of fiscal year 2012, we implemented improvements to our billing and collections processes, including system enhancements, and increased the number of employees in our accounts receivable department. As a result of these efforts, our collections of receivables, as a percentage of sales, increased and the number of days outstanding of gross accounts receivables, excluding reserves, decreased by 19.9 days to 64.1 days as of September 30, 2013, compared with 84.0 days as of September 30, 2012, which reduced our bad debt reserve requirements for fiscal year 2013 compared with fiscal year 2012.

Depreciation and amortization expenses decreased by $111,000, or 14.0%, to $683,000 for fiscal year 2013 compared with fiscal year 2012. The decrease in depreciation and amortization expenses was primarily related to leasehold improvements that were fully depreciated as of the end of July 2012, which reduced our depreciation 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 $390,000 and $353,000 during fiscal years 2013 and 2012, respectively.

General and administrative expenses decreased by $327,000, or 6.5%, to $4,692,000 for fiscal year 2013 compared with fiscal year 2012. The decrease was due to a reduction in costs incurred for answering services, selling expenses, postage, temporary labor, and professional fees. These decreases were partially offset by increases in software support and rent expense, and other administrative type expenses to support the growth of our business.

As a percentage of net sales, general and administrative expenses decreased from 8.2% for fiscal year 2012 to 6.8% for fiscal year 2013.

Income from Operations

Income from operations for fiscal year 2013 increased by $7,452,000, or 173.0%, to $11,759,000, compared with fiscal year 2012. The increase in operating income was primarily attributed to increased gross profits driven by our increased sales volumes and lower shipping costs, as well as a reduction as a percentage of net sales of our operating expenses as discussed above.

Other Expense

Other expense for fiscal years 2013 and 2012 was interest expense related to the outstanding balance on our credit line facility.

Interest expense increased by $8,000 for fiscal year 2013 compared with fiscal year 2012 due to an increase of $1.0 million in borrowings under our credit line facility during the first quarter of fiscal year 2012. At the end of the fourth quarter of fiscal year 2013, we repaid $1.0 million in borrowings to the credit line facility.


Income Taxes


The following table provides a breakdown of our income tax expenses for fiscal
years 2013 and 2012 (dollars in thousands):


                                           Fiscal year ended September 30,

                                            2013                     2012

       Current income tax expense:
       Federal                        $          1,005         $              3
       State                                       271                       31

                                      $          1,276         $             34

       Deferred income tax expense:
       Federal                        $          2,879         $          1,454
       State                                       443                      243

                                      $          3,322         $          1,697

       Total income tax expense       $          4,598         $          1,731

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. Our taxable income for fiscal year 2013 exceeded our net operating loss carry-forwards. As a result, our income tax expense for fiscal year 2013 included a larger proportion of current income tax expense versus deferred income expense compared with fiscal year 2012. For fiscal year 2013, our federal and state income tax liabilities were reduced by approximately $3.1 million through the utilization of substantially all of our net operating loss carry-forwards.

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

                                                        As of September 30,
                                                         2013          2012

         Current income tax liabilities                $   1,195     $      92

         Deferred income tax liabilities:
         Deferred tax liability                        $   8,561     $   5,421
         Less: Deferred tax assets, current portion      (2,067)       (2,254)

         Net deferred tax liabilities:                 $   6,494     $   3,167

The provision for income taxes was $4,598,000 for fiscal year 2013. The effective tax rate was approximately 39% of the income before income taxes of $11,676,000, 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 $1,731,000 for fiscal year 2012. The effective tax rate was approximately 41% of the income before income taxes of $4,232,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company's expenses that are not deductible for tax purposes.


Liquidity and Capital Resources

The following table summarizes the cash flows for the fiscal years ended September 30, 2013 and 2012 (dollars in thousands):

                                                             2013        2012

      Cash Flows:
      Net cash provided by (used in) operating activities $ 13,633     $  (546 )
      Net cash used in investing activities                   (686 )      (151 )
      Net cash provided by (used in) financing activities   (3,820 )     1,007

      Net increase in cash                                   9,127         310
      Cash at beginning of period                            3,326       3,016

      Cash at end of period                               $ 12,453     $ 3,326

The Company had cash of $12,453,000 at September 30, 2013, compared with $3,326,000 at September 30, 2012, an increase of $9,127,000. The increase in cash during fiscal year 2013 was due to $13,633,000 of cash provided by operating activities, partially offset by $686,000 cash used in investing activities and $3,820,000 of cash used in financing activities.

Operating Activities

Cash provided by operating activities was $13,633,000 for fiscal year 2013, which represents an improvement of $14,179,000 compared with cash used in operating activities of $546,000 for fiscal year 2012. The improvement in operating cash flows for fiscal year 2013 was the result of; a decrease of $6,506,000 in the change in accounts receivable due to our improved collection efforts; an increase in net income of $4,577,000 due to an increase in profitability; a reduction in direct response advertising spend of $4,113,000; an increase in non-cash charges of $890,000; partially offset by a decrease in the change accounts payables of $2,030,000.

The number of days outstanding of gross accounts receivables, excluding reserves, decreased by 19.9 days to 64.1 days as of September 30, 2013, compared with 84.0 days as of September 30, 2012. The reduction in the number of days of gross 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 the number of employees in our accounts receivable department.

During the second half of fiscal year 2012, we experienced a significant increase in the number of Medicare pre-payment audits for claims that were submitted to one of the four Medicare regions. The results of these audits have not generated a significant number of denials and/or adjustments, and we expect to receive payment for most of these claims from Medicare. As a result, we have experienced a delay of up to 45 to 90 days in receiving payments for these Medicare claims. As of September 30, 2013, we had approximately $625,000 of Medicare claims delayed due to pre-payment audits.

In late September 2013, a second Medicare region began conducting pre-payment audits on our Medicare claims. We process about 1.5 times more claims for the second Medicare region than we do for the first Medicare region and expect approximately $1.0 million of additional Medicare claims to be delayed from this second region during the first quarter of fiscal year 2014. Similar to our results from the first Medicare region, we do not expect to generate a significant number of denials and/or adjustments from these audits and expect to receive payment for most of these claims from Medicare, consistent with our previous levels of collections from Medicare, but on a delayed basis.

Investing Activities

During fiscal year 2013, we purchased $367,000 of property and equipment for cash, primarily office furniture, computer equipment, and leasehold improvements related to the build-out of a new 6,400 square-foot facility, which was completed in January 2013.

In July 2013, we acquired the stock of a small ostomy supply business for $319,000, net of $24,000 cash included as part of the acquisition. The acquisition was immaterial to our consolidated financial position and results of operations.

During fiscal year 2012, we purchased $151,000 of property and equipment for cash, primarily computer equipment and software, to support our continued growth.


Financing Activities

During fiscal year 2013, cash used in financing activities was $3,820,000, which included cash dividends paid of $2,616,000, repayment of $1,000,000 towards our credit line facility, repurchases of our common stock of $430,000, payments of $71,000 toward capital lease obligations, and payments of $21,000 for costs associated with the renewal of our credit line facility, partially offset by $270,000 of proceeds from the exercise of stock options and warrants and $48,000 of proceeds from our employee stock purchase plan.

During fiscal year 2012, cash provided by financing activities was $1,007,000, primarily as a result of $1,000,000 in proceeds from the credit line facility and $67,000 of proceeds from our employee stock purchase plan, partially offset by payments of $39,000 for capital lease obligations and $21,000 for costs associated with the renewal of our credit line facility.

Outlook

We increased our sales by $8.2 million, or 13.4%, to $69.1 million for fiscal year 2013 compared with sales of $60.9 million for fiscal year 2012. Our operating income increased by $7.5 million, or 173%, to $11.8 million for fiscal year 2013 compared with operating income of $4.3 million for fiscal year 2012. Our operating margins improved from 7.1% for fiscal year 2012 to 17.0% for fiscal year 2013. In addition, we generated cash from operating activities of $13.6 million for fiscal year 2013.

We will continue to manage the levels of our direct response advertising spend to maximize profitability and cash flows for fiscal year 2014, which may result in slower top-line sales growth. We continue to explore potential acquisition targets during fiscal year 2014 that allow us to acquire new customers at . . .

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