See accompanying notes to unaudited condensed consolidated financial statements.
5
Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30, 2015 and 2014
(Unaudited)
(In thousands)
| | | | | | | | |
|
| Nine Months Ended
|
|
|
| June 30,
|
|
|
| 2015
|
|
| 2014
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net Income
|
| $
| 5,785
| | | $
| 5,716
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
| | | | | | |
|
Depreciation and amortization
|
| | 8,567
| | | | 7,702
|
|
Stock based compensation
|
| | 24
| | | | 184
|
|
Provision for doubtful accounts and contractual adjustments
|
| | 3,033
| | | | 2,685
|
|
Deferred income taxes
|
| | 1,070
| | | | 843
|
|
Reserve for inventory obsolescence
|
| | 32
| | | | 31
|
|
Changes in operating assets and liabilities:
|
| | | | | | |
|
Accounts receivable
|
| | (4,249)
| | | | (3,848)
|
|
Deferred advertising
|
| | (11,713)
| | | | (10,213)
|
|
Inventory
|
| | (1,360)
| | | | 107
|
|
Other assets
|
| | (130)
| | | | (692)
|
|
Income taxes prepaid and payable
|
| | 261
| | | | (968)
|
|
Accounts payable
|
| | (617)
| | | | 165
|
|
Accrued liabilities
|
| | 865
| | | | 376
|
|
Other liabilities
|
| | 15
| | | | (22)
|
|
Net Cash Flow Provided by Operating Activities
|
| | 1,583
| | | | 2,066
|
|
|
| | | | | | |
|
Cash flow from investing activities:
|
| | | | | | |
|
Purchase of property and equipment
|
| | (90)
| | | | (153)
|
|
Proceeds from sale of property and equipment
|
| |
| | | | 4
|
|
Acquisition of business
|
| |
| | | | (161)
|
|
Net Cash Flow Used in Investing Activities
|
| | (90)
| | | | (310)
|
|
|
| | | | | | |
|
Cash flow from financing activities:
|
| | | | | | |
|
Proceeds from exercise of stock options and warrants
|
| | 620
| | | | 694
|
|
Cash dividends paid
|
| | (5,192)
| | | | (4,725)
|
|
Costs associated with credit line facility
|
| |
| | | | (21)
|
|
Income tax benefit related to exercise of stock options
|
| | 18
| | | | 171
|
|
Payments of capital lease obligations
|
| | (105)
| | | | (64)
|
|
Net Cash Flow Used in Financing Activities
|
| | (4,659)
| | | | (3,945)
|
|
|
| | | | | | |
|
Net decrease in cash
|
| | (3,166)
| | | | (2,189)
|
|
|
| | | | | | |
|
Cash at beginning of period
|
| | 12,261
| | | | 12,453
|
|
Cash at end of period
|
| $
| 9,095
| | | $
| 10,264
|
|
|
| | | | | | |
|
Supplemental disclosure of cash flow information:
|
| | | | | | |
|
Cash paid for interest
|
| $
| 46
| | | $
| 39
|
|
Cash paid for income taxes
|
| $
| 1,897
| | | $
| 3,412
|
|
|
| | | | | | |
|
Supplemental schedule of non-cash financing activities:
|
| | | | | | |
|
Capital expenditures funded by capital lease borrowings
|
| $
| 26
| | | $
| 123
|
|
Cash dividends declared, but not yet paid
|
| $
| 1,737
| | | $
| 1,589
|
|
See accompanying notes to unaudited condensed consolidated financial statements
6
Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Condensed Consolidated Financial Statements June 30, 2015
Note 1 Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the Company) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Companys Annual Report on Form 10-K for the year ended September 30, 2014, that was filed with the SEC on December 15, 2014. The results of operations for the nine months ended June 30, 2015, are not necessarily indicative of the results to be expected for the full year.
The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and Wellness, Inc., Practica Medical Manufacturing, Inc., and Tri-County Medical & Ostomy Supplies, Inc., its wholly-owned subsidiaries.
Note 2 Summary of Significant Accounting Policies
The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Companys Annual Report on Form 10-K for the year ended September 30, 2014. With the exception of the following significant accounting policy, there were no material changes to our significant accounting policies during the interim period ended June 30, 2015.
Legal and Other Contingencies
In the normal course of business, the Company is subject to certain legal proceedings, as well as demands, claims and threatened litigation. The Company accrues an estimated loss for any claim, litigation, investigation or proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability that a loss has been incurred and whether the loss can be reasonably estimated. Actual expenses could differ from these estimates. The Company expenses its legal costs associated with these legal proceedings, demands, claims, and threatened litigation, as incurred.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance to clarify the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a comprehensive framework for revenue recognition that supersedes current general revenue guidance and most industry-specific guidance. In addition, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. In July 2015, the FASB decided to delay the effective date of ASU No. 2014-09, Revenue from Contracts with Customers. With the one-year deferral, the guidance is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Additionally, early adoption is now permitted. However, entities reporting under U.S. GAAP are not permitted to adopt the standard earlier than the original effective date of December 15, 2016. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its consolidated financial statements.
7
In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this standards update. The new guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. The adoption of this guidance is not expected to have a material impact on our financial position, overall results of operations or cash flows.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory. The amendments in this update simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance is effective for fiscal and interim periods beginning on or after December 15, 2016. Early adoption is permitted. The new guidance must be applied prospectively after the date of adoption. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its consolidated financial statements.
Note 3 Credit Line Facility
On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the PNC Credit Line Facility) with PNC Bank, National Association ("PNC"). Pursuant to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Companys personal property, including inventory and accounts receivable. On May 7, 2015, the PNC Credit Line Facility was extended to September 30, 2016. Advances under the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Companys accounts receivable and inventory that can constitute the permitted borrowing base. The PNC Credit Facility includes the following provisions.
·
The interest rate on the outstanding balance is LIBOR plus 2.50%.
·
The EBITDA (earnings before interest, taxes, depreciation and amortization) is defined as EBITDA minus the actual cash outlay for deferred advertising as stated on the Consolidated Statement of Cash Flows.
·
The value of an acquisition requiring PNC's prior written consent is $1,500,000.
The PNC Credit Line Facility requires the Company to comply with certain covenants, including financial covenants which are defined in the credit agreement. On May 7, 2015, the financial covenants were amended to include the following:
·
The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a ratio of Senior Funded Debt to EBITDA of less than 2.0 to 1.0; and
·
The Company will maintain, on a rolling four quarters basis, a Fixed Coverage Charge ratio of at least 1.00 to 1.00, commencing with the fiscal quarter ended June 30, 2015.
·
The Company will maintain at all times a minimum Liquidity of at least $7,500,000 to be tested at the end of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2015.
As of June 30, 2015, the Company was in default of the Fixed Coverage Charge ratio covenant. In August 2015, PNC granted a waiver of the Fixed Coverage Charge ratio for the quarter ended June 30, 2015. Beginning with the fiscal quarter ending September 30, 2015, the Company must maintain a Fixed Coverage Charge ratio of at least 1.00 to 1.00. Without a modification to the calculation of the Fixed Coverage Charge ratio, the Company does not expect to be in compliance with the covenant in the quarter ending September 30, 2015. Consequently, the Company has classified the outstanding balance of $1,500,000 under the PNC Credit Line Facility as a current liability as of June 30, 2015.
Availability under the PNC Credit Line Facility was $5,803,000 as of June 30, 2015. The interest rate for the outstanding balance as of June 30, 2015, was 2.69%. For the nine months ended June 30, 2015 and 2014, the Company incurred $30,000 and $32,000, respectively, in interest expense related to the outstanding balances pursuant to the PNC Credit Line Facility.
8
Note 4 Stockholders Equity
Warrants
A summary of warrants issued, exercised, and expired during the nine months ended June 30, 2015, is as follows:
| | | | | | | |
|
|
|
|
| Weighted
|
|
|
|
|
| Avg.
|
|
|
|
|
| Exercise
|
Warrants:
|
| Shares
|
|
| Price
|
Balance at October 1, 2014
|
|
| 204,166
|
|
| $
| 2.50
|
Issued
|
|
|
|
|
|
|
|
Exercised
|
|
| (183,749)
|
|
|
| (2.50)
|
Expired
|
|
| (20,417)
|
|
|
|
|
Balance at June 30, 2015
|
|
|
|
|
| $
|
|
|
|
|
|
|
|
|
|
Employee and Director Stock Options
The Company granted 0 and 150,000 options during the nine months ended June 30, 2015 and 2014, respectively. The weighted-average grant date fair value of options granted during the nine months ended June 30, 2014, was $0.50 per share. There were 105,000 and 625,084 options exercised during the nine months ended June 30, 2015 and 2014, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2015 and 2014, was approximately $195,000 and $1,826,000 respectively.
The fair values of stock-based awards granted during the nine months ended June 30, 2014, were calculated with the following weighted-average assumptions:
| | |
|
| 2014
|
Risk-free interest rate:
|
| 0.68%
|
Expected term:
|
| 2.99 years
|
Expected dividend yield:
|
| 5.60%
|
Expected volatility:
|
| 48.34%
|
For the nine months ended June 30, 2015 and 2014, the Company recorded $24,000 and $72,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of June 30, 2015, there is $8,000 in total unrecognized compensation expense related to non-vested employee options and director stock options granted, which is expected to be recognized over 0.25 years.
Stock option activity for the nine months ended June 30, 2015, is summarized as follows:
| | | | | | | | | | | | | |
|
|
|
|
| Weighted
|
|
| Average
|
|
|
|
|
|
|
|
|
| Average
|
|
| Remaining
|
|
| Aggregate
|
|
|
|
|
| Exercise
|
|
| Contractual
|
|
| Intrinsic
|
2007 Stock Plan:
|
| Shares
|
|
| Price
|
|
| Life (Years)
|
|
| Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at October 1, 2014
|
| 752,916
|
|
| $
| 1.39
|
|
| 2.25
|
|
| $
| 1,326,974
|
Granted
|
|
|
|
|
|
|
|
| |
|
|
| |
Exercised
|
| (105,000)
|
|
|
| 1.53
|
|
| |
|
|
| |
Expired or forfeited
|
|
|
|
|
|
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
Options outstanding at June 30, 2015
|
| 647,916
|
|
| $
| 1.36
|
|
| 1.74
|
|
| $
| 587,058
|
|
| |
|
|
| |
|
| |
|
|
| |
Options exercisable at June 30, 2015
|
| 617,916
|
|
| $
| 1.33
|
|
| 1.66
|
|
| $
| 583,458
|
Options vested or expected to vest at June 30, 2015
|
| 647,916
|
|
| $
| 1.36
|
|
| 1.74
|
|
| $
| 587,058
|
9
Note 5 Basic and Diluted Earnings per Common Share
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three and nine months ended June 30, 2015 and 2014 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
|
| For the three months
|
|
| For the nine months
|
|
| ended June 30,
|
|
| ended June 30,
|
|
| 2015
|
|
| 2014
|
|
| 2015
|
|
| 2014
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic and diluted
|
| $
| 1,669
|
|
| $
| 1,983
|
|
| $
| 5,785
|
|
| $
| 5,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
| 53,430
|
|
|
| 52,823
|
|
|
| 53,284
|
|
|
| 52,585
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
| 350
|
|
|
| 796
|
|
|
| 405
|
|
|
| 928
|
Weighted average shares outstanding diluted
|
|
| 53,780
|
|
|
| 53,619
|
|
|
| 53,689
|
|
|
| 53,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
| $
| 0.03
|
|
| $
| 0.04
|
|
| $
| 0.11
|
|
| $
| 0.11
|
Earnings per share diluted
|
| $
| 0.03
|
|
| $
| 0.04
|
|
| $
| 0.11
|
|
| $
| 0.11
|
Note 6 Income Taxes
The provision for income taxes was $3,245,000 for the nine months ended June 30, 2015. The effective tax rate was approximately 36% of the income before income taxes of $9,030,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Companys expenses that are not deductible for tax purposes.
The provision for income taxes was $3,459,000 for the nine months ended June 30, 2014. The effective tax rate was approximately 38% of the income before income taxes of $9,175,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Companys expenses that are not deductible for tax purposes.
Note 7 Commitments and Contingencies
Litigation
The Company received subpoenas from the United States Department of Justice and is a defendant, among other defendants, in a civil qui tam litigation alleging, inter alia, violations of the federal False Claims Act, 31 U.S.C. §3729. United States ex rel. Herman, et al. v. Coloplast A/S, et al., Docket No. 11-cv-12131-RWZ (D. Mass). A second amended complaint in the litigation was filed on June 1, 2015. The civil plaintiffs and the government, with the concurrence of all of the other parties to the litigation, have filed successive motions to stay the litigation, the most recent of which was entered by the District Court on July 21, 2015; this order stays the litigation until September 21, 2015. The Company has, and continues to, fully cooperate with the governments investigation. The Company has recently reached an agreement in principle to settle and resolve all claims asserted in the litigation, which settlement is subject to final approvals, as well as negotiation and execution of settlement documents. Based upon the agreement in principle, the Company has accrued the expected expenses for the settlement, and a reasonable estimate of these expenses is $600,000, which amount includes the amount payable to the government, as well as the Companys share of the relators counsel fees and expenses. If the agreement in principle is not consummated, the additional expenses, if any, to the Company cannot be reasonably estimated at this time given that the litigation has not proceeded beyond its preliminary stages it is currently stayed; the $600,000 accrual may not be sufficient.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements 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 Companys 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 Companys Annual Report on Form 10-K for the year ended September 30, 2014, under the caption Risk Factors, could affect the Companys financial performance and could cause the Companys actual results for future periods to differ materially from those anticipated by any forward-looking statements.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company included in our Annual Report on Form 10-K for the year ended September 30, 2014, and managements 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 Companys 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. Liberators 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 customers 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.
11
The following table shows our revenue streams, including new and recurring orders, for the three and nine months ended June 30, 2015 and 2014, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):
| | | | | | | | | | | | | | |
New and recurring revenues
generated from customer
leads received during:
|
| For the three months
ended June 30,
|
| For the nine months
ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2015
|
|
| 2014
|
| 2015
|
|
| 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-FY 2010
|
| $
| 4,846
|
|
| $
| 5,055
|
| $
| 14,797
|
|
| $
| 15,827
|
FY 2010
|
|
| 2,410
|
|
|
| 2,546
|
|
| 7,353
|
|
|
| 7,773
|
FY 2011
|
|
| 2,591
|
|
|
| 2,672
|
|
| 7,972
|
|
|
| 8,354
|
FY 2012
|
|
| 2,670
|
|
|
| 2,787
|
|
| 8,166
|
|
|
| 8,683
|
FY 2013
|
|
| 2,160
|
|
|
| 2,441
|
|
| 6,685
|
|
|
| 7,976
|
FY 2014
|
|
| 2,937
|
|
|
| 2,886
|
|
| 9,527
|
|
|
| 5,600
|
FY 2015
|
|
| 2,858
|
|
|
| n/a
|
|
| 5,596
|
|
|
| n/a
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |
Total Revenues *
|
| $
| 20,472
|
|
| $
| 18,387
|
| $
| 60,096
|
|
| $
| 54,213
|
Other Sales and adjustments
|
|
| (96)
|
|
|
| 191
|
|
| 170
|
|
|
| 621
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |
Net Sales
|
| $
| 20,376
|
|
| $
| 18,578
|
| $
| 60,266
|
|
| $
| 54,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Revenues include orders from new and recurring customers, net of contractual allowances. Revenue from new customers will impact comparisons between the periods for fiscal year 2015 and the corresponding periods from fiscal year 2014, especially revenue from new customers acquired during the latter portion of the fiscal years.
|
We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We are able to adjust our advertising spend relatively quickly to respond to changing market conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase, we continue to focus on improving operational efficiencies to increase profitability.
Results of Operations
The following table summarizes the results of operations for the three and nine months ended June 30, 2015 and 2014, including percentage of sales (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the three months ended June 30,
|
|
| For the nine months ended June 30,
|
|
| 2015
|
|
| 2014
|
|
| 2015
|
|
| 2014
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
Net Sales
|
| $
| 20,376
|
|
|
| 100.0
|
|
| $
| 18,578
|
|
|
| 100.0
|
|
| $
| 60,266
|
|
|
| 100.0
|
|
| $
| 54,834
|
|
|
| 100.0
|
Cost of Sales
|
|
| 7,916
|
|
|
| 38.8
|
|
|
| 6,827
|
|
|
| 36.7
|
|
|
| 22,967
|
|
|
| 38.1
|
|
|
| 20,320
|
|
|
| 37.1
|
Gross Profit
|
|
| 12,460
|
|
|
| 61.2
|
|
|
| 11,751
|
|
|
| 63.3
|
|
|
| 37,299
|
|
|
| 61.9
|
|
|
| 34,514
|
|
|
| 62.9
|
Operating Expenses
|
|
| 10,103
|
|
|
| 49.6
|
|
|
| 8,635
|
|
|
| 46.5
|
|
|
| 28,223
|
|
|
| 46.8
|
|
|
| 25,301
|
|
|
| 46.1
|
Income from Operations
|
|
| 2,357
|
|
|
| 11.6
|
|
|
| 3,116
|
|
|
| 16.8
|
|
|
| 9,076
|
|
|
| 15.1
|
|
|
| 9,213
|
|
|
| 16.8
|
Other Expenses
|
|
| (17)
|
|
|
| (0.1)
|
|
|
| (12)
|
|
|
| (0.1)
|
|
|
| (46)
|
|
|
| (0.1)
|
|
|
| (38)
|
|
|
| (0.1)
|
Income before Income Taxes
|
|
| 2,340
|
|
|
| 11.5
|
|
|
| 3,104
|
|
|
| 16.7
|
|
|
| 9,030
|
|
|
| 15.0
|
|
|
| 9,175
|
|
|
| 16.7
|
Provision for Income Taxes
|
|
| 671
|
|
|
| 3.3
|
|
|
| 1,121
|
|
|
| 6.0
|
|
|
| 3245
|
|
|
| 5.4
|
|
|
| 3,459
|
|
|
| 6.3
|
Net Income
|
| $
| 1,669
|
|
|
| 8.2
|
|
| $
| 1,983
|
|
|
| 10.7
|
|
| $
| 5,785
|
|
|
| 9.6
|
|
| $
| 5,716
|
|
|
| 10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
Revenues
Net sales for the three months ended June 30, 2015, increased by $1,798,000, or 9.7%, to $20,376,000, compared with net sales of $18,578,000 for the three months ended June 30, 2014. Net sales for the nine months ended June 30, 2015, increased by $5,432,000, or 9.9%, to $60,266,000, compared with net sales of $54,834,000 for the nine months ended June 30, 2014. The increase in net sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base. Effective January 1, 2015, we received an increase in reimbursement for Medicare claims of 1.5%, which contributed approximately $230,000 and $445,000 in revenue growth for the three and nine months ended June 30, 2015, respectively.
12
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, 2015 and 2014 (dollars in thousands):
| | | | | | | | | | | | | | | |
Revenues generated by:
|
| For the three months
ended June 30,
|
| For the nine months
ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2015
|
|
| 2014
|
| 2015
|
|
| 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Customers (1)
|
| $
| 3,636
| | | $
| 3,734
| | $
| 7,824
| | | $
| 7,783
|
Recurring Customer Base
|
| | 16,836
| | | | 14,653
| | | 52,272
| | | | 46,430
|
Total Revenues, net of contractual adjustments
|
| $
| 20,472
| | | $
| 18,387
| | $
| 60,096
| | | $
| 54,213
|
Other Sales and Adjustments
|
| | (96)
| | | | 191
| | | 170
| | | | 621
|
Net Sales
|
| $
| 20,376
| | | $
| 18,578
| | $
| 60,266
| | | $
| 54,834
|
| | | | | | | | | | | | | | | |
(1) We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For the three months ended June 30, 2015, $2,858 of the net sales for new customers acquired was generated from leads received during the three months ended June 30, 2015. For the three months ended June 30, 2014, $2,886 of the net sales for new customers acquired was generated from leads received during the three months ended June 30, 2014. The remaining net sales from new customers acquired were generated from leads received during prior periods.
|
We obtain the majority of our new customers from leads generated by direct responses to our advertising. The number of new customers acquired through our advertising is dependent on internal and external factors, including, but not limited to, the timing of our advertising spend, the length of time from the receipt of the customer leads, the level of responses to our advertising efforts, our ability to convert leads to customers, and the market environment.
Our direct-response advertising expenditures for the three months ended June 30, 2015, were $3,482,000 compared with $3,183,000 for the three months ended June 30, 2014. We acquired 3,276 and 3,332 new customers during the three months ended June 30, 2015 and 2014, respectively.
Our direct-response advertising expenditures for the nine months ended June 30, 2015, were $11,713,000 compared with $10,213,000 for the nine months ended June 30, 2014. We acquired 9,034 and 9,392 new customers during the nine months ended June 30, 2015 and 2014, respectively.
We expect to continue to acquire new customers over the next fifteen to eighteen months from our increased advertising expenditures. Similar to our past direct-response advertising efforts, when we increased our advertising spend, our costs to acquire new customers increased. We believe that the incremental costs associated with acquiring new customers through our increased advertising expenditures will be more than offset by the recurring revenues generated from the new customers acquired as a result of our advertising efforts.
The majority of new customers acquired place their initial order with us within three to six months following our advertising expenditures. However, we generate new customers directly from our advertising spend beyond six months, primarily due to delays in reconnecting with the prospective customers after the initial contact and obtaining the proper documentation from the customers and/or their physicians.
13
The following table shows the timing of the new customers acquired based on the quarter the customer leads were initially received:
| | | | | | | | | | | | | | | |
Customer
Leads
Received
|
| Number of New Customers Acquired (1)
|
| FY2015-Q3
| | FY2015-Q2
| | FY2015-Q1
| | FY2014-Q4
| | FY2014-Q3
| | FY2014-Q2
| | FY2014-Q1
|
FY2015-Q3
|
| 1,879
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2015-Q2
|
| 847
|
| 1,952
|
|
|
|
|
|
|
|
|
|
|
FY2015-Q1
|
| 85
|
| 460
|
| 1,715
|
|
|
|
|
|
|
|
|
FY2014-Q4
|
| 54
|
| 85
|
| 640
|
| 1,873
|
|
|
|
|
|
|
FY2014-Q3
|
| 53
|
| 40
|
| 110
|
| 625
|
| 1,837
|
|
|
|
|
FY2014-Q2
|
| 50
|
| 42
|
| 66
|
| 167
|
| 830
|
| 2,077
|
|
|
FY2014-Q1
|
| 28
|
| 40
|
| 48
|
| 73
|
| 137
|
| 626
|
| 1,688
|
Pre-FY2014
|
| 280
|
| 271
|
| 289
|
| 410
|
| 528
|
| 528
|
| 1,141
|
Total New Customers
|
| 3,276
|
| 2,890
|
| 2,868
|
| 3,148
|
| 3,332
|
| 3,231
|
| 2,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The number of new customers acquired in a particular quarter are derived from leads received in the current quarter and from leads received in preceding quarters. During the third quarter of fiscal year 2015, we acquired 3,276 new customers, of which 1,879 new customers were from leads received in the same quarter and 1,397 new customers were from leads received in prior quarters.
|
Gross Profit
Gross profit for the three months ended June 30, 2015, increased by $709,000, or 6.0%, to $12,460,000, compared with gross profit of $11,751,000 for the three months ended June 30, 2014. For the nine months ended June 30, 2015, gross profit increased by $2,785,000, or 8.1%, to $37,299,000, compared with gross profit of $34,514,000. The increase was attributed to our increased sales volume for the three and nine months ended June 30, 2015, compared with the three and nine months ended June 30, 2014.
As a percentage of sales, gross profit decreased by 2.1% and 1.0%, respectively, for the three and nine months ended June 30, 2015, compared with the three and nine months ended June 30, 2014. The decrease in gross profit as a percentage of sales was primarily attributable to an increase in our product mix towards ostomy supplies, which have a lower profit contribution, and an increase in costs from one of our primary vendors.
Operating Expenses
The following table provides a breakdown of our operating expenses for the three and nine months ended June 30, 2015 and 2014, including percentage of sales (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the three months ended June 30,
|
|
| For the nine months ended June 30,
|
|
| 2015
|
|
| 2014
|
|
| 2015
|
|
| 2014
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
|
| Amount
|
|
| %
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll, taxes, and benefits
|
| $
| 3,872
|
|
|
| 19.0
|
|
| $
| 3,650
|
|
|
| 19.6
|
|
| $
| 11,492
|
|
|
| 19.1
|
|
| $
| 10,988
|
|
|
| 20.0
|
Advertising
|
|
| 2,860
|
|
|
| 14.0
|
|
|
| 2,553
|
|
|
| 13.7
|
|
|
| 8,250
|
|
|
| 13.7
|
|
|
| 7,250
|
|
|
| 13.2
|
Bad debts
|
|
| 1,126
|
|
|
| 5.5
|
|
|
| 845
|
|
|
| 4.6
|
|
|
| 3,151
|
|
|
| 5.2
|
|
|
| 2,487
|
|
|
| 4.5
|
Depreciation and amortization
|
|
| 137
|
|
|
| 0.7
|
|
|
| 166
|
|
|
| 0.9
|
|
|
| 394
|
|
|
| 0.7
|
|
|
| 505
|
|
|
| 0.9
|
General and administrative
|
|
| 1,508
|
|
|
| 7.4
|
|
|
| 1,421
|
|
|
| 7.7
|
|
|
| 4,336
|
|
|
| 7.2
|
|
|
| 4,071
|
|
|
| 7.4
|
Litigation Settlement (Note 7)
| | | 600
| | | | 2.9
| | | | 0
| | | | 0.0
| | | | 600
| | | | 1.0
| | | | 0
| | | | 0.0
|
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
Total Operating Expenses
|
| $
| 10,103
|
|
|
| 49.6
|
|
| $
| 8,635
|
|
|
| 46.5
|
|
| $
| 28,223
|
|
|
| 46.8
|
|
| $
| 25,301
|
|
|
| 46.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll, taxes and benefits increased by $222,000, or 6.1%, to $3,872,000 for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. Payroll, taxes and benefits increased by $504,000, or 4.6%, to $11,492,000 for the nine months ended June 30, 2015, compared with the nine months ended June 30, 2014. The increase for the three and nine months ended June 30, 2015, was due to fluctuations in number of employees to support our increased sales volume. As of June 30, 2015, we had 338 active employees, compared with 330 at June 30, 2014. As a percentage of sales, payroll decreased 0.6% and 0.9% for the three and nine months ended June 30, 2015 respectively.
14
Advertising expenses increased by $307,000, or 12.0%, to $2,860,000 for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. For the nine months ended June 30, 2015, advertising expenses increased by $1,000,000, or 13.8%, to $8,250,000, compared with the nine months ended June 30, 2014.
The majority of our advertising expense is associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expense is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expense for the three and nine months ended June 30, 2015 and 2014 (dollars in thousands):
| | | | | | | | | | | | | | | | |
|
| For the three months
Ended June 30,
|
|
| For the nine months
Ended June 30,
|
|
|
| 2015
|
|
| 2014
|
|
| 2015
|
|
| 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of direct-response costs
|
| $
| 2,828
|
|
| $
| 2,533
|
|
| $
| 8,173
|
|
| $
| 7,197
|
|
Other advertising expenses
|
|
| 32
|
|
|
| 20
|
|
|
| 77
|
|
|
| 53
|
|
Total Advertising Expense
|
| $
| 2,860
|
|
| $
| 2,553
|
|
| $
| 8,250
|
|
| $
| 7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of our increase in advertising expenditures, our advertising expense, as a percentage of sales, increased by 0.3% and 0.5% for the three and nine months ended June 30, 2015, respectively, compared with the three and nine months ended June 30, 2014. Similar to our past direct response advertising efforts, when we increased our advertising spend during the three and nine months ended June 30, 2015, our costs to acquire new customers increased compared with the three and nine months ended June 30, 2014.
Direct response advertising costs are accumulated into quarterly cost pools and amortized separately. The amortization is the amount computed using the ratio that current period revenues for each direct-response advertising cost pool bear to the total of current and estimated future benefits for that direct response advertising cost pool. We have persuasive evidence that demonstrates future benefits are realized from our direct response advertising efforts beyond four years. Since the reliability of accounting estimates decreases as the length of the period for which such estimates are made increases, we estimate future benefits for each advertising cost pool for a period of no longer than four years at each reporting period, which creates a rolling type amortization period. Once a particular cost pool has been amortized to a level where the difference between amortizing the cost pool over a rolling four-year period and amortizing the cost pool on a straight-line basis over a period shorter than four years is de minimis, we amortize the costs over a fixed time period based on current and expected future revenues. As a result of this policy, our direct response advertising costs are amortized over a period of approximately six years based on probable future net revenues updated at each reporting period.
Bad debt expenses increased by $281,000, or 33.3%, to $1,126,000 for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. For the nine months ended June 30, 2015, bad debt expenses increased by $663,000, or 26.7%, compared with the nine months ended June 30, 2014. The increase in bad debt expense was due to the increase in sales and an increase in the reserve requirements for uncollectible accounts receivables.
Depreciation and amortization expenses decreased by $29,000, or 17.5%, to $137,000 for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. For the nine months ended June 30, 2015, depreciation and amortization expense decreased by $111,000, or 22%, to $394,000 compared with the nine months ended June 30, 2014.
Purchases of property and equipment totaled $116,000 and $276,000 during the nine months ended June 30, 2015 and 2014, respectively.
General and administrative expenses increased by $87,000, or 6.1%, to $1,508,000 for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. For the nine months ended June 30, 2015, general and administrative expenses increased by $265,000, or 6.5% to $4,336,000, compared with the nine months ended June 30, 2014. The increases in general and administrative expenses for the three and nine months ended June 30, 2015, are attributed to increases of $263,000 and $682,000, respectively, in legal costs, primarily associated with the civil qui tam complaint discussed above in Note 7. These increases are partially offset by reductions of $177,000 and $418,000 for other administrative expenses during the three and nine months ended June 30, 2015, respectively.
Litigation settlement expenses for the three and nine months ended June 30, 2015, include a $600,000 accrual associated with the agreement in principal to settle the civil qui tam litigation described in Note 7 above.
15
Income from Operations
Income from operations for the three months ended June 30, 2015, decreased by $759,000, or 24.4%, to $2,357,000, compared with the three months ended June 30, 2014. The decrease in operating income is primarily attributed to increases in legal and settlement costs, advertising expense, and bad debt expense, partially offset by increased gross profits driven by our increased sales volumes and a reduction as a percentage of sales in payroll costs and other general and administration expenses.
For the nine months ended June 30, 2015, income from operations decreased by $137,000, or 1.5%, to $9,076,000, compared with the nine months ended June 30, 2014. The decrease in operating income is primarily attributed to the increase in legal and settlement costs, advertising expense, and bad debt expense, partially offset by increased gross profits driven by our increased sales volumes and a reduction as a percentage of sales in payroll costs and general and administration expenses.
Other Expenses
Other expenses for the three and nine months ended June 30, 2015 and 2014, included interest expense associated with the outstanding $1.5 million balance on our credit line facility. Interest expense increased by $5,000 to $17,000 for the three months ended June 30, 2015, compared with $12,000 for the three months ended June 30, 2014. Interest expense increased by $8,000 to $46,000 for the nine months ended June 30, 2015, compared with $38,000 for the nine months ended June 30, 2014.
Income Taxes
The following table provides a breakdown of our income tax expenses for the three and nine months ended June 30, 2015 and 2014 (dollars in thousands):
| | | | | | | | | | | | | | | |
|
| For the three months
|
|
| For the nine months
|
|
| ended June 30,
|
|
| ended June 30,
|
|
| 2015
|
|
| 2014
|
|
| 2015
|
|
| 2014
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
| $
| 426
|
|
| $
| 837
|
|
| $
| 1,815
|
|
| $
| 2,210
|
State
|
|
| 93
|
|
|
| 155
|
|
|
| 361
|
|
|
| 406
|
Total current income tax expenses
|
|
| 519
|
|
|
| 992
|
|
|
| 2,175
|
|
|
| 2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
| 140
|
|
|
| 107
|
|
|
| 924
|
|
|
| 715
|
State
|
|
| 12
|
|
|
| 22
|
|
|
| 146
|
|
|
| 128
|
Total deferred income tax expense
|
|
| 152
|
|
|
| 129
|
|
|
| 1,070
|
|
|
| 843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
| $
| 671
|
|
| $
| 1,121
|
|
| $
| 3,245
|
|
| $
| 3,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes was $3,245,000 for the nine months ended June 30, 2015. The effective tax rate was approximately 36% of the income before income taxes of $9,030,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Companys expenses that are not deductible for tax purposes.
The provision for income taxes was $3,459,000 for the nine months ended June 30, 2014. The effective tax rate was approximately 38% of the income before income taxes of $9,175,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Companys expenses that are not deductible for tax purposes.
16
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing, and financing activities for the nine months ended June 30, 2015 and 2014 (dollars in thousands):
| | | | | | | |
|
| For the Nine Months Ended
|
|
| June 30,
|
|
| 2015
|
|
| 2014
|
Cash Flows:
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
| $
| 1,583
|
|
| $
| 2,066
|
Net cash used in investing activities
|
|
| (90)
|
|
|
| (310)
|
Net cash used in financing activities
|
|
| (4,659)
|
|
|
| (3,945)
|
Net decrease in cash
|
|
| (3,166)
|
|
|
| (2,189)
|
Cash at beginning of period
|
|
| 12,261
|
|
|
| 12,453
|
Cash at end of period
|
| $
| 9,095
|
|
| $
| 10,264
|
|
|
|
|
|
|
|
|
The Company had cash of $9,095,000 at June 30, 2015, compared with cash of $12,261,000 at September 30, 2014, a decrease of $3,166,000. The decrease in cash for the nine months ended June 30, 2015, was due to $4,659,000 of cash used in financing activities and $90,000 of cash used in investing activities, partially offset by $1,583,000 of cash provided by operating activities.
Operating Activities
Cash provided by operating activities was $1,583,000 for the nine months ended June 30, 2015, which represents a decrease of $483,000 compared with cash provided by operating activities of $2,066,000 for the nine months ended June 30, 2014. The decrease in operating cash flows for the nine months ended June 30, 2015, compared with the operating cash flows for the nine months ended June 30, 2014, was the result of an increase in direct-response advertising expenditures of $1,500,000, an increase of cash used for inventory of $1,467,000, and an increase in cash used by other operating assets and liabilities of $381,000, partially offset by a decrease in income taxes paid of $1,515,000, an increase in non-cash expenses of $1,281,000, an increase in net income of $69,000.
Currently Region C and D of Medicare are conducting pre-payment audits for catheter claims submitted by all suppliers. The pre-payment review audits have caused a delay in the collection of accounts receivables due to the time required to collect medical documentation and to respond to each audited claim and, in some cases, appeals for adverse decisions. The result of these audits have not generated a significant number of denials and/or adjustments, and based on our historical experience we expect to receive payment for most of these claims from Medicare. As of June 30, 2015, we had approximately $450,000 in claims delayed due to pre-payment audits by all Medicare Regions.
In addition to the Medicare pre-payment audits for catheter claims, Medicare is experiencing a delay in Administrative Law Judge ("ALJ") Hearings for Medicare appeals, which has increased the amount of Medicare claims we have pending for the ALJ appeals process. As of June 30, 2015, we had approximately $500,000 of Medicare claims delayed due to the delay in the Medicare ALJ appeals process.
Due to the increase in Medicare pre-payment audits and the delay in the Medicare ALJ appeals process, the number of days outstanding of gross accounts receivable, excluding reserves, increased by 6.8 days to 68.0 as of June 30, 2015, compared with 61.3 days outstanding as of September 30, 2014.
Investing Activities
During the nine months ended June 30, 2015 and 2014, we purchased $90,000 and $153,000, respectively, of property and equipment for cash to support our continued growth. In addition, we leased $26,000 and $123,000 of property and equipment during the nine months ended June 30, 2015 and 2014, respectively. The $116,000 of purchases during the nine months ended June 30, 2015, was for computer equipment, warehouse equipment and software. The $276,000 of purchases during the nine months ended June 30, 2014, was for computer equipment, website enhancements, and other software.
During the nine months ended June 30, 2014, we acquired certain assets of a urology division, including the urology customer records, websites, and inventory, of a durable medical equipment business for a cash purchase price of $170,000, of which $161,000 was paid during the nine months ended June 30, 2014. The acquisition was immaterial to the Company's consolidated financial position and results of operations.
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Financing Activities
During the nine months ended June 30, 2015, cash used in financing activities was $4,659,000, which included cash dividends paid of $5,192,000, and payments of $105,000 for capital lease obligations, which was partially offset by $620,000 of proceeds received from the exercise of stock options and warrants, and $18,000 of income tax benefits related to the exercise of certain non-qualified stock options.
During the nine months ended June 30, 2014, cash used in financing activities was $3,945,000, which included cash dividends paid of $4,725,000, payments of $64,000 for capital lease obligations, and payments of $21,000 for costs associated with the extension of our credit line facility, partially offset by $694,000 of proceeds received from the exercise of stock options and warrants, and $171,000 of income tax benefits related to the exercise of certain non-qualified stock options.
Outlook
As of June 30, 2015, we had $9.1 million of cash and $5.8 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from operations, will be sufficient to meet our cash requirements during the next twelve months.
At June 30, 2015, our current assets of $25,248,000 exceeded our current liabilities of $11,862,000 by $13,386,000.
We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider, primarily focused on supplying medical supplies to chronically ill patients
Off-Balance Sheet Arrangements
As of June 30, 2015, we had no off-balance sheet arrangements.
Critical Accounting Policies
Please see our Annual Report on Form 10-K for the year ended September 30, 2014, for a discussion of significant accounting policies, recent accounting pronouncements, and their effect, if any, on the Company. With the exception of the following significant accounting policy, there were no material changes to our significant accounting policies during the interim period ended June 30, 2015.
Legal and Other Contingencies
In the normal course of business, the Company is subject to certain legal proceedings, as well as demands, claims and threatened litigation. The Company accrues an estimated loss for any claim, litigation, investigation or proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability that a loss has been incurred and whether the loss can be reasonably estimated. Actual expenses could differ from these estimates. The Company expenses its legal costs associated with these legal proceedings, demands, claims, and threatened litigation, as incurred.
Effect of Inflation
We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 2015, we had an outstanding balance of $1.5 million under a credit line facility that matures September 30, 2016, which accrues interest at a variable rate of LIBOR plus 2.50 percent per annum. As of June 30, 2015, the short term LIBOR rate used as the base for calculating the interest rate for our credit line facility was approximately 0.19 percent. As such, changes in the LIBOR rates would impact our interest expense. Based upon the balance outstanding under our credit facility as of June 30, 2015, for every 100 basis point increase in the short term LIBOR rates, we would incur approximately $15,000 of additional annual interest expense.
We maintain our cash balances at high quality financial institutions. The balances in our accounts may periodically exceed amounts insured by the Federal Deposit Insurance Corporation, which insures deposits of up to $250,000 as of June 30, 2015. We do not believe we are exposed to any significant credit risk and have not experienced any losses.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2015. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The legal proceedings described in Note 7 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Item 1: Legal Proceedings" by reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. Please refer to the Risks Factors section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended June 30, 2015, the Company issued 288,749 shares of common stock upon the exercise of outstanding options and warrants for gross proceeds of $620,373. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.1 Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 Section 906 Certificate of Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
/s/ LIBERATOR MEDICAL HOLDINGS, INC.
Registrant
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/s/ Mark A. Libratore
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| President
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| August 10, 2015
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Mark A. Libratore
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|
/s/ Robert J. Davis
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| Chief Financial Officer
|
| August 10, 2015
|
Robert J. Davis
|
|
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