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LBMH > SEC Filings for LBMH > Form 10-Q on 12-Feb-2014All Recent SEC Filings

Show all filings for LIBERATOR MEDICAL HOLDINGS, INC.

Form 10-Q for LIBERATOR MEDICAL HOLDINGS, INC.


12-Feb-2014

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, 2013, 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, 2013, 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.

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 three months ended December 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
       New and recurring revenues generated            ended December 31,
       from customer leads received during:           2013             2012

       Pre-FY 2009                                $      2,678     $      2,953
       FY 2009                                           2,912            3,279
       FY 2010                                           2,720            3,086
       FY 2011                                           3,059            3,365
       FY 2012                                           3,141            3,398
       FY 2013                                           3,006            1,010
       FY 2014                                             882              n/a
       Total Revenues *                                 18,398           17,591
       Other Sales and Adjustments                         239             (40)
       Net Sales                                  $     18,637     $     17,551

* 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 2014 and the corresponding periods from fiscal year 2013, especially revenue from new customers

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

Results of Operations



The following table summarizes the results of operations for the three months
ended December 31, 2013 and 2012 (dollars in thousands):


                                                2013               2012
                                           Amount      %      Amount      #
             Net Sales                    $ 18,637   100.0   $ 17,551   100.0
             Cost of Sales                   6,882    36.9      6,573    37.5
             Gross Profit                   11,755    63.1     10,978    62.5
             Operating Expenses              8,255    44.3      8,720    49.7
             Income from Operations          3,500    18.8      2,258    12.8
             Other Expenses                   (13)   (0.1)       (21)   (0.1)
             Income before Income Taxes      3,487    18.7      2,237    12.7
             Provision for Income Taxes      1,367     7.3        885     5.0
             Net Income                   $  2,120    11.4   $  1,352     7.7

Revenues

Net sales for the three months ended December 31, 2013, increased by $1,086,000, or 6.2%, to $18,637,000, compared with net sales of $17,551,000 for the three months ended December 31, 2012. 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.

Our direct-response advertising expenditures for the three months ended December 31, 2013, were $2,918,000 compared with $2,753,000 for the three months ended December 31, 2012. We acquired 3,008 and 3,908 new customers during the three months ended December 31, 2013 and 2012, respectively.

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three months ended December 31, 2013 and 2012 (dollars in thousands):


                                                    2013             2012
        New Customers *                         $      1,670     $      1,984
        Recurring Customer Base                       16,728           15,607
        Total Revenues, net of contractual
        allowances                                    18,398           17,591
        Other Sales and Adjustments                      239             (40)
        Net Sales                               $     18,637     $     17,551

*We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For the three months ended December 31, 2013, $882 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2013. For the three months ended December 31, 2012, $1,010 of the net sales for new customers acquired was generated from leads received during the three months ended December 31, 2012. The remaining net sales from new customers acquired were generated from leads received during prior periods.

The number of new customers acquired and the amount of revenue generated by new customers during a particular quarter is impacted by the amount of advertising spend in the current quarter and in the previous quarters. Our direct-response advertising spend for the two quarters immediately preceding the three months ended December 31, 2013, averaged $2.0 million per quarter. For the two quarters immediately preceding the three months ended December 31, 2012, our direct-response advertising spend averaged $3.5 million per quarter, which contributed to the higher number of new customers and revenues generated by new customers during the three months ended December 31, 2012.

Gross Profit

Gross profit for the three months ended December 31, 2013, increased by $777,000, or 7.1%, to $11,755,000, compared with gross profit of $10,978,000 for the three months ended December 31, 2012. The increase was attributed to our increased sales volume for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

As a percentage of sales, gross profit increased by 0.6% to 63.1% for the three months ended December 31, 2013, compared with gross profit of 62.5% for the three months ended December 31, 2012. The increase in gross profit as a percentage of sales was primarily attributed to a reduction in product costs from one of our vendors pursuant to a three-year agreement, effective November 1, 2013.

Operating Expenses


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


                                                  2013             2012
                                             Amount     %     Amount     %
             Operating Expenses:
             Payroll, taxes and benefits     $ 3,657   19.6   $ 3,843   21.9
             Advertising                       2,326   12.5     2,203   12.6
             Bad debts                           824    4.4     1,278    7.3
             Depreciation and amortization       171    0.9       164    0.9
             General and administrative        1,277    6.9     1,232    7.0
             Total Operating Expenses        $ 8,255   44.3   $ 8,720   49.7

Payroll, taxes and benefits decreased by $186,000, or 4.8%, to $3,657,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The decrease was due to a reduction in the number of employees as a result of process and system enhancements implemented during fiscal year 2013. As of December 31, 2013, we had 317 active employees, compared with 348 at December 31, 2012.

Advertising expenses increased by $123,000, or 5.6%, to $2,326,000 for the three months ended December 31, 2013, compared with the three months ended December 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 months ended December 31, 2013 and 2012 (dollars in thousands):

                                                       2013      2012
              Advertising Expenses:
              Amortization of direct-response costs   $ 2,311   $ 2,147
              Other advertising expenses                   15        56
              Total Advertising Expenses              $ 2,326   $ 2,203

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

The table below shows our historical direct response advertising spend and a breakdown of the amortization expense associated with the respective accumulated advertising cost pools for the three months ended December 31, 2013 and 2012. For presentation purposes, the quarterly advertising cost pools prior to fiscal year 2013 have been aggregated into fiscal years (dollars in thousands):

                                         Amortization Expense for the      Deferred
         Actual          Grouped by           three months ended          Advertising
      Advertising        Fiscal or               December 31,              Balance @
         Spend         Interim Period       2013              2012        12/31/2013
     $        1,567        FY2008       $          -      $         10   $           -
              4,191        FY2009                 43                66             141
             10,808        FY2010                283               343           1,560
             15,245        FY2011                589               668           4,833
             13,113        FY2012                621               867           7,250
              2,753      FY2013-Q1               144               193           1,874
              2,187      FY2013-Q2               126                 -           1,611
              2,036      FY2013-Q3               125                 -           1,622
              2,024      FY2013-Q4               162                 -           1,720
              2,918      FY2014-Q1               218                 -           2,700

Total Amortization Expense $ 2,311 $ 2,147 $ 23,311

Bad debt expense decreased by $454,000, or 35.5%, to $824,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The decrease in bad debt expense was due to increased accounts receivable collection efforts. During the last quarter of fiscal year 2012, we implemented improvements to our billing and collection processes, including system enhancements, and increased the number of employees in our accounts receivable department. As a result of these efforts, the number of days outstanding of gross accounts receivables, excluding reserves, decreased by 3.7 days to 69.2 days as of December 31, 2013, compared with 72.9 days as of December 31, 2012, which reduced our bad debt reserve requirements for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

Depreciation and amortization expenses increased by $7,000, or 4.3%, to $171,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012.

Purchases of property and equipment totaled $51,000 and $308,000 during the three months ended December 31, 2013 and 2012, respectively.

General and administrative expenses increased by $45,000, or 3.7%, to $1,277,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012. The increase was primarily due to fees associated with the listing our common stock on the NYSE MKT and an increase in professional fees. These increases were partially offset by reductions in software support costs.


Income from Operations

Income from operations for the three months ended December 31, 2013, increased by $1,242,000, or 55.0%, to $3,500,000, compared with the three months ended December 31, 2012. The increase in operating income is primarily attributed to increased gross profits driven by our increased sales volumes and decreased operating expenses discussed above.

Other Expenses



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


                                                 2013     2012
                       Other Expenses:
                       Interest Expense         $ (12)   $ (21)
                       Loss on sale of assets      (1)        -
                       Total Other Expenses     $ (13)   $ (21)

Interest expense decreased by $9,000 for the three months ended December 31, 2013, compared with the three months ended December 31, 2012, due to a reduction of $1.0 million in borrowings under our credit line facility. The outstanding borrowings under our credit line facility were $1.5 million during the three months ended December 31, 2013, compared with outstanding borrowings of $2.5 million under our credit line facility during the three months ended December 31, 2012.

Income Taxes



The following table provides a breakdown of our income tax expenses for the
three months ended December 31, 2013 and 2012 (dollars in thousands):


                                                       For the three months
                                                        ended December 31,
                                                        2013           2012
       Current income tax expense:
       Federal                                      $       1,262    $      46
       State                                                  224           34
       Total current income tax expense             $       1,486    $      80
       Deferred income tax expense (income):
       Federal                                      $       (104)    $     702
       State                                                 (15)          103
       Total deferred income tax expense (income)   $       (119)    $     805
       Provision for Income Taxes                   $       1,367    $     885

Our taxable income for fiscal year 2013 exceeded our net operating loss carry-forwards from fiscal year 2012, and substantially all of our net operating loss carry-forwards were utilized to reduce our federal and state income tax liabilities for fiscal year 2013. As a result, our income tax expense for the three months ended December 31, 2013, consisted of a larger proportion of current income tax expense versus deferred income expense (income) compared with the three months ended December 31, 2012.

The following table provides a breakdown of our income tax liabilities by current and deferred as of December 31, 2013, and September 30, 2013 (dollars in thousands):


                                            As of December     As of September
                                                312013            30, 2012

       Current income tax liabilities       $        1,681     $         1,195

       Deferred income tax liabilities:
       Deferred tax liability               $        8,487     $         8,561
       Less: Deferred tax assets,
       current portion                             (2,112)             (2,067)
       Net deferred tax liabilities:        $        6,375     $         6,494

The provision for income taxes was $1,367,000 for the three months ended December 31, 2013. The effective tax rate was approximately 39.2% of the income before income taxes of $3,487,000, 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 $885,000 for the three months ended December 31, 2012. The effective tax rate was approximately 40% of the income before income taxes of $2,237,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company's expenses that are not deductible for tax purposes.

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