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LIBERATOR MEDICAL HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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." The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of manufacturing, distributing or marketing activities, competitive
and regulatory factors, and those factors set forth in the Company's Annual
Report on Form 10-K for the year ended September 30, 2011, 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, 2011, filed with
the Securities and Exchange Commission 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.
Overview
We are a leading national direct-to-consumer provider of quality medical
supplies to Medicare-eligible seniors. Liberator Medical Supply, Inc. ("LMS"), a
wholly-owned subsidiary of the Company, is a federally licensed,
direct-to-consumer, provider of Medicare Part B Benefits. An Exemplary Provider™
accredited by The Compliance Team, 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 on a regular, ongoing,
repeat-order basis, with the convenience of direct billing to Medicare and
private insurance. Liberator's revenue primarily comes from supplying products
to meet the rapidly growing requirements of general medical supplies, primarily
diabetes supplies, catheters, ostomy supplies and mastectomy fashions. Customers
may purchase by phone, mail, or Internet, with repeat orders confirmed with the
customer and shipped when needed.
We market our products directly to consumers primarily through targeted media
and direct response television advertising. Our customer service representatives
are specifically trained to communicate with Medicare-eligible beneficiaries.
Our operating platforms enable us to collect and process required documents from
physicians and customers, bill and collect amounts due from Medicare, other
government agencies, third party payors and/or customers.
Results of Operations
The following table summarizes the results of operations for the three months
ended December 31, 2011 and 2010, including percentage of sales (dollars in
thousands):
2011 2010
Amount % Amount %
Sales $ 14,796 100.0 $ 12,220 100.0
Cost of Sales 6,003 40.6 4,439 36.3
Gross Profit 8,793 59.4 7,781 63.7
Operating Expenses 8,014 54.2 6,725 55.0
Income from Operations 779 5.3 1,056 8.6
Other Income (Expense) (12 ) (0.1 ) (929 ) (7.6 )
Income Before Income Taxes 767 5.2 127 1.0
Provision for Income Taxes 313 2.1 329 2.7
Net Income (Loss) $ 454 3.1 $ (202 ) (1.7 )
13
Revenues:
Sales for the three months ended December 31, 2011, increased by $2,576,000, or
21.1%, to $14,796,000, compared with sales of $12,220,000 for the three months
ended December 31, 2010. The increase in sales was primarily due to our
continued emphasis on our direct response advertising campaign to obtain new
customers and our customer service to maximize the reorder rates for our
recurring customer base.
Our direct-response advertising expenditures for the three months ended December
31, 2011, were $2,700,000 compared with $3,887,000 for the three months ended
December 31, 2010. 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.
In addition to our direct response advertising efforts, on May 13, 2011, we
acquired the ostomy supply customers of SGV Medical Supplies (see Note 3 of the
condensed consolidated financial statements above). The customers from SGV
generated $396,000 of sales for the three month period ending December 31, 2011.
Gross Profit:
Gross profit for the three months ended December 31, 2011, increased by
$1,012,000, or 13.0%, to $8,793,000, compared with gross profit of $7,781,000
for the three months ended December 31, 2010. The increase was attributed to our
increased sales volume for the three months ended December 31, 2011, compared
with the three months ended December 31, 2010.
As a percentage of sales, gross profit decreased by 4.3% for the three months
ended December 31, 2011, compared with the three months ended December 31, 2010.
Two-thirds of the decrease in gross profit as a percentage of sales was
attributed to an increase in our ostomy supply sales, which have lower gross
margins than our other product lines as a percentage of our total sales, and the
remaining one-third of the decrease was due to an increase in shipping costs for
the three months ended December 31, 2011, compared with the three months ended
December 31, 2010.
Operating Expenses:
The following table provides a breakdown of our operating expenses for the three
months ended December 31, 2011 and 2010, including percentage of sales (dollars
in thousands):
2011 2010
Amount % Amount %
Operating Expenses:
Payroll, taxes and benefits $ 3,464 23.4 $ 2,841 23.2
Advertising 1,968 13.3 1,901 15.5
Bad debts 1,130 7.6 892 7.3
Depreciation and amortization 199 1.3 166 1.4
General and administration 1,253 8.5 925 7.6
Total Operating Expenses $ 8,014 54.2 $ 6,725 55.0
Payroll, taxes and benefits increased by $623,000, or 21.9%, to $3,464,000 for
the three months ended December 31, 2011, compared with the three months ended
December 31, 2010. The increase is primarily attributed to an increase in the
number of employees to support our increased sales volume. As of December 31,
2011, we had 309 active employees compared with 223 at December 31, 2010. Even
though we have increased our employee headcount over the last year, as a
percentage of sales our payroll costs have remained consistent at 23% of sales.
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Advertising expenses increased by $67,000, or 3.5%, to $1,968,000 for the three
months ended December 31, 2011, compared with the three months ended December
31, 2010. The majority of our advertising expenses are associated with the
amortization of previously capitalized direct response advertising costs. The
rest of our advertising expenses are 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,
2011 and 2010 (dollars in thousands):
2011 2010
Advertising Expenses:
Amortization of direct-response costs $ 1,924 $ 1,845
Other advertising expenses 44 56
Total Advertising Expenses $ 1,968 $ 1,901
As of December 31, 2010, we have $17,968,000 of deferred advertising costs that
will be expensed over a period between four and six years based on estimated
future revenues for each cost pool, updated at each reporting period and
expected to result directly from such advertising.
Consistent with our past direct-response advertising efforts, when we decreased
our advertising spend in the last two quarters of fiscal year 2011 and the first
quarter of fiscal year 2012, our costs to acquire new customers decreased. As a
result of our decreased costs to acquire new customers, our advertising expense,
as a percentage of sales, decreased by 2.2% for the three months ended December
31, 2011, compared with the three months ended December 31, 2010.
Bad debt expenses increased by $238,000, or 26.7%, to $1,130,000 for the three
months ended December 31, 2011 compared with the three months ended December 31,
2010. The increases in bad debt expenses are due primarily to our increased
sales levels.
Depreciation and amortization expense increased by $33,000, or 19.9%, to
$199,000 for the three months ended December 31, 2011, compared with the three
months ended December 31, 2010. The increase in depreciation expense is
primarily attributable to the purchase of additional computer equipment during
the first six months of fiscal year 2011 to support the additional staff added
as a result of our sales growth. Purchases of property and equipment totaled
$58,000 and $75,000 during the three months ended December 31, 2011 and 2010,
respectively.
General and administrative expenses increased by $328,000, or 35.5%, to
$1,253,000 for the three months ended December 31, 2011, compared with the three
months ended December 31, 2010. The increase is due to additional costs incurred
for software, answering service expenses, professional fees, and selling
expenses required to support the growth of our business.
Income from Operations:
Income from operations for the three months ended December 31, 2011, decreased
by $277,000 to $779,000, compared with the three months ended December 31, 2010.
The decrease in operating income was due to our reduced gross profit margins, a
result of our increased ostomy supply sales and increased shipping costs, and,
to a lesser extent, our increased investments in additional employees and
systems to support the growth of our business.
Other Income (Expense):
The following table shows a breakdown of other income (expense) for the three
months ended December 31, 2011 and 2010 (dollars in thousands):
2011 2010
Other Income (Expense):
Interest Expense $ (12 ) $ (31 )
Change in fair value of derivative liabilities - (902 )
Gain on sale of assets - 2
Interest income - 2
Total Other Income (Expense) $ (12 ) $ (929 )
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Other income (expense) for the three months ended December 31, 2011, was
primarily interest expense related to our outstanding balance on our credit line
facility.
Other income (expense) for the three months ended December 31, 2010, was
predominantly non-cash charges associated with the amortization of discounts on
convertible debt, recorded as interest expense, and non-cash charges associated
with the change in fair value of derivative liabilities embedded within
convertible debt that has been converted into common shares. Non-cash charges to
other income (expense) for the three months ended December 31, 2010, totaled
$923,000.
Interest expense decreased by $19,000 to $12,000 for the three months ended
December 31, 2011, as compared with $31,000 for the three months ended December
31, 2010. The decrease in interest expense is primarily due to non-cash interest
expense related to the convertible notes payables, which was converted during
the three months ended December 31, 2010.
We were required to adjust the embedded derivative liabilities to fair value at
each balance sheet date, or interim period, and recognize the changes in fair
value as a non-cash charge or benefit to earnings. As of September 30, 2010, the
fair value of the Embedded Derivative for the October 2008 Note was $1,698,000.
On October 15, 2010, the convertible note was converted into shares of our
common stock at a conversion price of $0.75 per share. The fair value of the
embedded derivative on October 15, 2010, was $2,600,000. As a result of the
increase in fair value of the embedded derivative from September 30, 2010, to
the date of conversion, $902,000 was recorded as an additional non-cash charge
to earnings for the three months ended December 31, 2010.
Income Taxes:
The provision for income taxes was $313,000 for the three months ended December
31, 2011. The effective tax rate was approximately 41% of the income before
income taxes of $767,000, 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 $329,000 for the three months ended December
31, 2010. The effective tax rate was approximately 260% of the income before
income taxes of $127,000, 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, primarily consisting of expense
relating to the change in fair value of the derivative liabilities.
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