UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2012

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-05663

LIBERATOR MEDICAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of
incorporation or organization) 87-0267292
(I.R.S. Employer
Identification No.)

2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices)

(772) 287-2414
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting and non-voting shares of the Company’s Common Stock held by non-affiliates based on the last sale of the Common Stock on March 30, 2012, was approximately $18,388,692.

The number of shares outstanding of the issuer’s Common Stock as of November 30, 2012, was 48,143,257.

LIBERATOR MEDICAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I
Item 1. Business	3
Item 1A. Risk Factors	6
Item 1B. Unresolved Staff Comments	8
Item 2. Properties	8
Item 3. Legal Proceedings	9
Item 4. Mine Safety Disclosures	9
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6. Selected Financial Data	11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	21
Item 8. Financial Statements and Supplementary Data	21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A. Controls and Procedures	22
Item 9B. Other Information	23
PART III
Item 10. Directors, Executive Officers and Corporate Governance	24
Item 11. Executive Compensation	26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30
Item 13. Certain Relationships and Related Transactions, and Director Independence	32
Item 14. Principal Accountant Fees and Services	33
PART IV
Item 15. Exhibits and Financial Statement Schedules	34
Signatures	35
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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FORWARD-LOOKING STATEMENTS

Some of the information contained in this Report constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include current expectations of future events based on certain assumptions and statements that do not directly relate to any historical or current fact. When used in this Annual 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, on the Company’s website, 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,” “plans,” “believes,” or similar expressions are intended to identify forward-looking statements. The Company’s forward-looking statements are based on management’s current expectation and assumption regarding the Company’s business and performance, the economy, and other future conditions and forecasts of future events, circumstances and results. As with any projection statement or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include 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 out under “Risk Factors,” below, 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 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.

PART I

Item 1. Business

Overview

Throughout this Report we use the terms “we,” “our Company,” and “us” to refer to Liberator Medical Holdings, Inc., and its wholly-owned consolidated subsidiaries, Liberator Medical Supply, Inc. (which is sometimes called “Liberator Medical”), Liberator Health and Education Services, Inc., Liberator Health and Wellness, Inc., and Practica Medical Manufacturing, Inc.

We are a leading national direct-to-consumer provider of quality medical supplies, primarily to Medicare-eligible seniors. Liberator Medical, a wholly-owned subsidiary of the Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits. 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 Medical is recognized for offering a simple, reliable way to purchase medical supplies needed on a recurring basis, with the convenience of direct billing to Medicare and private insurance. Our employees communicate directly with our patients and their physicians regarding patients’ prescriptions and supply requirements on a regular basis. We bill Medicare and third-party insurers on behalf of our patients. Liberator Medical markets products directly to consumers, primarily through targeted media, direct-response television, Internet, and print advertising throughout the United States. Customer service representatives are specifically trained to communicate with patients, in particular seniors, helping them to follow their doctors’ orders and manage their chronic diseases. Our operating platforms enable us to efficiently collect and process required documents from physicians and patients and bill and collect amounts due from Medicare, other third party payers and directly from patients.

Market

The U.S. domestic healthcare spending is expected to increase by approximately $2.1 trillion from $2.7 trillion in 2011 to $4.8 trillion in 2021, according to the Centers for Medicare and Medicaid Services (“CMS”).

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The Company targets Medicare-eligible seniors with chronic illness. As the baby boomer population ages, CMS estimates that the number of Americans over the age of 65 will increase from an estimated 42.1 million in 2012 to 55.9 million in 2021. According to research by the Robert Wood Johnson Foundation, over 90% of Americans over the age of 65 have at least one chronic condition, and over 70% of this population has multiple chronic conditions.

We are a quasi-medical distributor providing home health care services. According to HME News, the home health care market is a highly fragmented industry of over 100,000 companies, with about 60 companies having annual sales in excess of $10 million. The products that we distribute are classified as Durable Medical Equipment (“DME”). CMS estimates that the national expenditures within the DME market will increase by over $30 billion from $39.7 billion in 2011 to $70.7 billion in 2021. The number of DME companies with Medicare billings less than $300,000 has been declining, or consolidating, over the last few years according to HME News, primarily as a result of increased Medicare accreditation and bonding requirements implemented in 2009. We have been able to attract new customers, looking for new suppliers, as a result of consolidation within the DME market over the last few years.

Liberator’s revenue comes from supplying products to meet the rapidly growing requirements of general medical supplies, primarily urological catheters, ostomy supplies, mastectomy fashions, and diabetic supplies. Customers may purchase by phone, mail, or Internet, with repeat orders confirmed with the customer and shipped when needed.

Urological Catheters

The majority of our revenue is generated from urological catheters, primarily intermittent catheters. Our sales growth was accelerated in April 2008, when the Medicare reimbursement rate for intermittent catheters was increased from four catheters per month to two hundred catheters per month.

An aging population, an under-penetrated population base, and a rising incidence of various urological problems (i.e. neurogenic bladder), will drive continued growth in the U.S. urological catheter market, according to The Global Industry Analysts Inc. (the "GIA") report released in August 2011. The advent of advanced catheters aimed at minimizing invasiveness and lowering infection risk and other complications, as well as the adoption of favorable reimbursement policies, are also expected to fuel market growth in the U.S.

According to data released by CMS for Medicare claims paid in 2011, Liberator Medical is the leading supplier of urological intermittent catheters for Medicare patients, exceeding the second leading supplier by 59%.

Competition consists primarily from 180 Medical, Inc., MP Total Care Medical, Inc., UroMed, Inc., and many independent dealers and retail stores.

Ostomy Supplies

According to a GIA report released in October 2011, the ostomy supply market in the U.S. was approximately $380 million in 2009 and expected to grow 3.8% each year to over $500 million in 2017. The aging population in the U.S. and the rising incidence of diseases such as colorectal cancer, inflammatory bowel diseases, and bladder cancer, among others, has increased the demand for ostomy supplies. The United Ostomy Association estimates that over 500,000 Americans have some type of stoma due to a colostomy, ileostomy, and/or urostomy.

Many smaller DME companies have refused to accept assignment of insurance benefits for ostomy supplies due to low reimbursement rates from Medicare and other insurance providers. We have been able to leverage our increased ostomy supply volumes to negotiate lower prices from our vendors, which has enabled us to stay competitive and gain share in the ostomy supply market.

Competition exists primarily from three major national competitors for ostomy supplies: Edgepark Medical Supplies, Byram Healthcare, and Liberty Medical Supplies.

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Mastectomy Fashions

Liberator Medical has been accepting assignment of insurance benefits for mastectomy fashions for over ten years. We are the only medical supply company that combines a comprehensive product catalogue, which is available on-line and in hard copy, and direct billing to Medicare and other insurance providers.

According to data released by CMS for Medicare claims paid in 2011, Liberator Medical is the leading supplier of mastectomy fashions for Medicare patients by more than double the payments received by the second leading supplier. The overall market size has stabilized as the number of mastectomies performed each year has declined in recent years due to the advancement of breast-conserving surgeries and breast cancer treatments.

Competition in this area is limited mostly to small specialty shops. Most small boutiques require the customer to walk in and discuss this sensitive matter with a stranger. For many, this may be inconvenient or an unacceptable option. Instead, our approach provides the level of privacy many customers need and want. In addition, many small boutiques have chosen to exit the Medicare market due to increased regulation and bonding requirements, which provides us with additional opportunities to gain customers.

Diabetic Supplies

Diabetic supplies are a small portion of our total revenue. In 2008, we elected not to participate in the Medicare competitive bidding process that was implemented in certain U.S. metropolitan areas in 2009 due to the low reimbursement rates provided under the program for diabetic supplies. If customers have insurance other than Medicare, or have Medicare but reside in an area not covered by the competitive bid process, we will provide supplies for these customers and accept assignment of insurance.

Sales and Marketing

The Company focuses on making the buying process easy and convenient. Customers can purchase by phone, mail, or over the Internet. This produces an annuity-like revenue stream with a high return on advertising dollars. Our growth will depend upon the success of our advertising campaigns. Management believes that it has developed a method of capturing initial and recurring sales through use of local, regional and national ad placement.

With an average customer life of between four to six years, we believe our strategy should provide predictable, recurring income. Management is constantly evaluating and testing new products for direct marketing to various targeted customers. As these new and innovative products come to market, we anticipate being positioned to bring them to the public quickly with the right marketing, intake, processing, and third-party billing mechanisms.

Suppliers

The Company distributes products from over 200 manufacturers, including all of the largest U.S. suppliers. As the Company’s sales volumes have increased, we have been able to develop partnerships with the larger manufacturers, enabling the Company to obtain preferred pricing and maintain a readily available supply of products for our customers’ medical necessities.

Litigation

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Employees

As of September 30, 2012, we had 326 employees. None of our employees are members of any union or covered by collective bargaining agreements. We believe that the relations between our management and employees are good.

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Item 1A. Risk Factors

Current and potential shareholders should consider carefully the risk factors described below. Any of these factors, or others, many of which are beyond the Company’s control, could negatively affect the Company’s revenues, profitability or cash flows in the future. These factors include:

Risks Relating to Our Business

• The Company has aggressive marketing plans that require the Company to spend a substantial amount of its cash. The Company may need additional capital to continue its business plan. In addition, the Company may not accurately predict the amount of capital necessary to fund its existing and future operations, which requirement may exceed the Company’s estimates. The inability to secure additional financing may adversely affect the Company’s ability to grow.

• Sales of a significant portion of our products depend on the continued availability of reimbursement of our customers by government and private insurance plans. Any reduction in Medicare reimbursement currently available for our products would reduce our revenues. Without a corresponding reduction in the cost of such products, the result would be a reduction in our overall gross profit. Similarly, any increase in the cost of such products would reduce our overall gross profit unless there was a corresponding increase in Medicare reimbursement. Our profits could also be affected by the imposition of more stringent regulatory requirements for Medicare reimbursement. The regulations that govern Medicare reimbursement are complex and our compliance with these regulations may be reviewed by federal agencies, including the Department of Health and Human Services, the Department of Justice, and the Food and Drug Administration (“FDA”). These agencies conduct audits and periodic investigations of most companies billing Medicare. Negative findings or results of audits are subject to appeals and judicial review and are often overturned at various levels. There is always the possibility that the Company could be the subject of any audit or investigation as it performs a substantial amount of Medicare billing each year. Medicare audits or investigations could possibly lead to recoupment of monies paid to the Company, fines, off-sets on future payments and even loss of Medicare billing privileges. Since its inception, the Company has had no fines or penalties but the Company has been audited by all four regional Medicare carriers and from time-to-time been asked to repay amounts on claims previously paid for various reasons such as billing errors, lack of medical records in physician offices, insufficient patient diagnoses, patients having similar equipment, patients not seen by physician recently enough, and lack of adequate medical necessity, which is common to all Medicare providers. Although the Company has set aside reserves for contractual adjustments, demands for repayment could exceed Company reserves and the Company could be unable to pay them, which would adversely affect the Company.

• A significant portion of the Company’s revenues is generated from the sale of urological supplies. As a result, changes in the external environment, including regulatory changes, could be detrimental, depending on market conditions.

• We believe that we are able to control our level of expansion as well as the costs associated with our growth plans. However, (i) any expansion will create significant demands on our administrative, operational and financial personnel and other resources; (ii) additional expansion in existing or new markets could strain these resources and increase our need for capital; and (iii) our personnel, systems, procedures, controls and existing space may not be adequate to support substantial expansion.

• Our ability to operate at a profit is highly dependent on recurring orders from customers, as to which there is no assurance. We generally incur losses and negative cash flow with respect to the first order from a new customer for chronic care products, due primarily to the marketing and regulatory compliance costs associated with initial customer qualification. Accordingly, the profitability of these product lines depends, in large part, on recurring and sustained reorders. Reorder rates are inherently uncertain due to several factors, many of which are outside our control, including changing customer preferences, competitive price pressures, customer transition to extended care facilities, customer mortality and general economic conditions.

• We could be liable for harm caused by products that we sell. The sale of medical products entails the risk that users will make product liability claims. A product liability claim could be expensive. While management believes that our insurance provides adequate coverage, no assurance can be made that adequate coverage will exist for these claims.

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• We could lose customers and revenues to new or existing competitors who have greater financial or operating resources.

• Competition from our competitors is intense and expected to increase. Many of our competitors and potential competitors are large companies with well-known brand names and substantial resources. These companies may develop products and services that are more effective or cost efficient. They may also promote and market these products more successfully than we promote and market our products.

• Many of the products that we sell are regulated by the FDA and other regulatory agencies. If any of these agencies mandate a suspension of production or sales of our products or mandate a recall, we may lose sales and incur expenses until we are in compliance with the regulations or change to another acceptable supplier.

• Our future results may vary significantly depending on a number of factors, including:

— changes in reimbursement guidelines and amounts;

— changes in regulations affecting the healthcare industry;

— changes in the mix or cost of our products;

— the timing of customer orders;

— the timing, cost, and levels of our advertising spend; and

— the timing of the introduction or acceptance of new products and services offered by us or our competitors.

• We regularly review potential acquisitions of businesses and products. Acquisitions involve a number of risks that might adversely affect our financial and operational resources, including:

— diversion of the attention of senior management from important business matters;

— difficulty in retaining key personnel of an acquired business;

— failure to assimilate operations of an acquired business;

— failure to retain the customers of an acquired business;

— possible operating losses and expenses of an acquired business;

— exposure to legal claims for activities of an acquired business prior to acquisition; and

— incurrence of debt and related interest expense.

• The success of the Company will largely be dependent on Mark Libratore, the Company’s founder and our President and Chief Executive Officer, who is responsible for the day-to-day management of the business. Loss of Mr. Libratore’s services, either through retirement, incapacity or death, may have a material adverse effect on the Company. The Company has $4,000,000 of key man insurance on Mr. Libratore’s life, with the Company as the beneficiary of $3,000,000 and his wife the beneficiary of $1,000,000.

• As of November 30, 2012, Mark Libratore, our President and Chief Executive Officer, held 15,699,858 shares of common stock, or 32.6% of our outstanding common stock, excluding his options to purchase up to 4,186,009 shares of our common stock. As a result, Mr. Libratore has the ability to exercise substantial control over all corporate actions requiring shareholder approval, including the following actions:

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— the election of directors;

— the adoption of stock option plans;

— the amendment of charter documents; and

— the approval of certain mergers and other significant corporate transactions, including the sale of the Company.

Risks Relating to Ownership of Our Common Stock

• Even though we expect our common stock to continue to be quoted on the OTC Bulletin Board, we cannot predict the changes in the trading market for our common stock, including changes in liquidity. Because only a small percentage of our outstanding shares is freely traded in the public market, the price of our shares could be volatile and liquidation of an investor’s holdings may be difficult. Thus, holders of our common stock may be required to retain their shares for a longer period of time.

• We anticipate that we will retain any future earnings and other cash resources for future operation and development of our business. Any future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.

• Future sales or the potential for sale of a substantial number of shares of our common stock could cause our market value to decline and could impair our ability to raise capital through subsequent equity offerings. Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our common stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities.

• Our bylaws contain provisions which could make it more difficult for a third party to acquire us without the consent of our board of directors. Our bylaws impose restrictions on the persons who may call special shareholder meetings. Furthermore, the Nevada Revised Statutes contain an affiliated transaction provision that prohibits a publicly-held Nevada corporation from engaging in a broad range of business combinations or other extraordinary corporate transactions with an “interested stockholder” unless, among others, (i) the transaction is approved by a majority of disinterested directors before the person becomes an interested shareholder or (ii) the transaction is approved by the holders of a majority of the corporation’s voting shares other than those owned by the interested shareholder. An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 10% of the corporation’s outstanding voting shares. This provision may have the effect of delaying or preventing a change of control of our Company even if this change of control would benefit our shareholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company leases four facilities in Stuart, Florida. As of September 30, 2012, the Company operates from three of the four facilities. In July 2012, the Company entered into a lease for the fourth facility and expects to begin operations in this facility after renovations are completed in December 2012.

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The following table summarizes our leased properties as of September 30, 2012:

	Square Feet	Lease Expires	Current Use
1.	39,740	July 2014	Corporate headquarters, administrative offices, warehouse and shipping
2.	24,000	September 2014	Call center and administrative offices
3.	6,900	December 2013	Records storage
4.	6,400	July 2016	Administrative offices (Intended Use)

We believe that our existing facilities are suitable as office, shipping and warehouse space, and are adequate to meet our current needs. We also believe that our insurance coverage adequately covers our current interest in our leased space. We do not own any real property for use in our operations or otherwise.

Item 3. Legal Proceedings

From time-to-time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is quoted on the OTC Bulletin Board, or OTCBB, under the symbol “LBMH.OB.” The following table reflects the range of the high and low sales prices per share of the Company’s common stock for each quarterly period within fiscal years 2012 and 2011:

	Stock Price
	High		Low
Quarter Ended:
December 31, 2010	$	1.53	$	1.06
March 31, 2011	$	1.50	$	1.15
June 30, 2011	$	1.55	$	1.25
September 30, 2011	$	1.49	$	0.75
December 31, 2011	$	1.19	$	0.76
March 31, 2012	$	1.15	$	0.86
June 30, 2012	$	1.04	$	0.89
September 30, 2012	$	.97	$	.68

Such quotations reflect inter-dealer prices, without retail markup, markdown or commission. Such quotes are not necessarily representative of actual transactions or of the value of the Company’s securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.

The Company understands that several member firms of the NASD are currently acting as market makers for the Company’s common stock. However, the trading volume for the Company’s common stock is still relatively limited. There is no assurance that an active trading market will continue to provide adequate liquidity for the Company’s existing shareholders or for persons who may acquire the Company’s common stock in the future.

As of November 30, 2012, the Company had approximately 1,369 shareholders of record of the Company’s common stock. However, a significant number of shares of the Company’s common stock are held in “street name” by brokers on behalf of shareholders and are therefore held by many beneficial owners.

As of September 30, 2012, there were 48,232,857 shares of the Company’s common stock issued and 48,143,257 shares outstanding. Of those shares, 33,042,804 shares were “restricted” securities of the Company within the meaning of Rule 144(a)(3) promulgated under the Securities Act of 1933, as amended.

SEC Rule 144 provides that a person who is not affiliated with our Company who holds restricted securities for six months may sell such shares without restriction, provided that, for a period ending twelve months after the securities acquisition date we are current in our SEC filings. A person who is affiliated with our Company and who has held restricted securities for six months will be able to sell such shares in brokerage transactions subject to limitations, including limitations on sales based on the number of our shares outstanding, our trading volume, current public information, and certain other conditions. Such sales could have a depressive effect on the price of our common stock in the open market.

The Company has not declared any cash dividends on its common stock since inception. Any future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements.

Stock Repurchase Program

There were no shares of our common stock repurchased during the three months ended September 30, 2012.

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Item 6. Selected Financial Data

Not required for smaller reporting companies.

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

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

Company Overview

Liberator Medical Supply, Inc. (“Liberator Medical”), a wholly-owned subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies to Medicare-eligible seniors. Accredited by The Joint Commission, our Company’s unique combination of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase medical supplies needed on a regular, ongoing, recurring basis, with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet; repeat orders are confirmed with the customer and shipped when needed.

We market our products directly to consumers through our direct response advertising efforts. We target consumers with chronic conditions requiring a continuous supply of medical products that we can provide at attractive gross margins. Our advertising efforts do not represent an effort to target new markets or sell new products, but are a continuation of our efforts to acquire new customers in the markets we currently serve. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers.

We receive initial contact from prospective customers in the form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place their initial order with us within three to six months from the time we receive initial contact from the customer. Since our inception, we have demonstrated our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that can last for periods of greater than ten years.

The following table shows our revenue streams, including new and recurring orders, for the twelve months ended September 30, 2012 and 2011, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

New and recurring revenues generated from customer	For the twelve months ended September 30,
leads received during:	2012			2011
Pre-FY 2008	$	2,626		$	2,857
FY 2008		9,294			10,302
FY 2009		13,320			14,489
FY 2010		12,446			14,385
FY 2011		14,314			10,791
FY 2012		9,092			n/a
Total Revenues *		61,092			52,824
Other Sales and Adjustments		(149	)		(126	)
Net Sales	$	60,943		$	52,698

* 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 2012 and the corresponding periods from fiscal year 2011, especially revenue from new customers acquired during the latter portion of the fiscal years.

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

Results of Operations

The following table summarizes the results of operations for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

	2012						2011
	Amount			%			Amount			%
Net Sales	$	60,943			100.0		$	52,698			100.0
Cost of Sales		23,924			39.3			20,601			39.1
Gross Profit		37,019			60.7			32,097			60.9
Operating Expenses		32,712			53.7			29,500			56.0
Income from Operations		4,307			7.0			2,597			4.9
Other Income (Expense)		(75	)		(0.1	)		(937	)		(1.8	)
Income Before Income Taxes		4,232			6.9			1,660			3.1
Provision for Income Taxes		1,731			2.8			1,401			2.6
Net Income	$	2,501			4.1		$	259			0.5

Revenues:

Sales for fiscal year 2012 increased by $8,245,000, or 15.6%, to $60,943,000, compared with sales of $52,698,000 for fiscal year 2011. The increase in sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base. Our direct response advertising expenditures for fiscal year 2012 were $13,113,000, compared to $15,245,000 for fiscal year 2011. During fiscal year 2011, we acquired an ostomy supply business (see Note 10 - Acquisition of the attached consolidated financial statements) for $466,000, which also contributed to the number of new customers acquired in fiscal year 2011 and the recurring customer base for fiscal year 2012.

The following table summarizes the number of customers serviced and revenues generated from our new customers and our recurring customer base for fiscal years 2012 and 2011 (dollars in thousands):

	2012					2011
	# of Customers		Net Sales			# of Customers		Net Sales
New Customers Acquired*		14,245	$	12,244			15,797	$	13,343
Recurring Customer Base		27,537		48,848			20,519		39,481
Total Revenues, net of contractual allowances		41,782	$	61,092			36,316	$	52,824
Other Sales and Adjustments				(149	)				(126	)
Net Sales			$	60,943				$	52,698

* We receive initial contact from prospective customers in the form of leads. The majority of the new customers acquired place their initial order with us within three to six months from the time we receive the initial customer lead. For fiscal year 2012, $9,092 of the net sales for new customers acquired was generated from leads received during fiscal year 2012. For fiscal year 2011, $10,791 of the net sales for new customers acquired was generated from leads received during fiscal year 2011. The remaining net sales generated from new customers acquired were generated from leads received during prior fiscal years.

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Due to our reduced direct response advertising during fiscal year 2012 and the acquisition of the ostomy supply business during fiscal year 2011, we acquired 1,552 fewer new customers during fiscal year 2012 than in fiscal year 2011. However, we were able to reduce our customer acquisition costs and acquire 1,484 more new urology customers during fiscal year 2012 compared with fiscal year 2011. New urology customers accounted for 68.7% of the net sales by new customers acquired during fiscal year 2012 compared with 54.3% of the net sales by new customers acquired during fiscal year 2011.

The average annual order value of our recurring customer base decreased to $1,774 per customer during fiscal year 2012 compared with $1,924 per customer during fiscal year 2011. The decrease in average annual order value per recurring customer was primarily attributed to an increase in the recurring sales of our ostomy supply products, which have lower average annual order values compared with urology supplies. Ostomy supply customers accounted for 14.7% of the net sales from our recurring customer base during fiscal year 2012 compared with 8.4% of the net sales from our recurring customer base during fiscal year 2011, primarily attributed to a full-year's worth of sales from the ostomy supply business acquired in May 2011.

Gross Profit:

Gross profit for fiscal year 2012 increased by $4,922,000, or 15.3%, to $37,019,000, compared with gross profit of $32,097,000 for fiscal year 2011. The increase was attributed to our increased sales volume for fiscal year 2012 compared with fiscal year 2011.

As a percentage of sales, gross profit decreased by 0.2% for fiscal year 2012 compared with fiscal year 2011 primarily attributable to an increase in shipping costs, as a percentage of net sales, from 4.6% to 4.9%.

Operating Expenses:

The following table provides a breakdown of our operating expenses for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

	2012				2011
	Amount		%		Amount		%
Operating Expenses:
Payroll, taxes and benefits	$	14,136		23.2	$	12,174		23.1
Advertising		8,099		13.3		8,206		15.6
Bad debts		4,664		7.7		3,746		7.1
Depreciation		794		1.3		730		1.4
General and administration		5,019		8.2		4,644		8.8
Total Operating Expenses	$	32,712		53.7	$	29,500		56.0

Payroll, taxes and benefits increased by $1,962,000, or 16.1%, to $14,136,000 for fiscal year 2012 compared with fiscal year 2011. The increase was due to 19 additional employees added during fiscal year 2012 and a full year’s worth of payroll for 93 employees added during fiscal year 2011, of which 57 employees were hired during the last six months of fiscal year 2011. The continuous growth of our recurring business requires regular increases in staff. We have chosen to invest in recruiting, hiring, and training additional staff ahead of our advertising schedule, which helps us achieve compliance on many fronts and maintain the quality of our customer service. As of September 30, 2012, we had 326 employees compared with 307 at September 30, 2011.

Advertising expenses decreased by $107,000, or 1.3%, to $8,099,000 for fiscal year 2012 compared with fiscal year 2011. The majority of our advertising expenses are associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expenses is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expenses for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

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	2012		2011
Advertising Expenses:
Amortization of direct-response costs	$	7,878	$	8,060
Other advertising expenses		221		146
Total Advertising Expenses	$	8,099	$	8,206

As of September 30, 2012, we had $22,426,000 of deferred advertising costs that will be expensed over a period between four and six years based on probable future net revenues for each cost pool, updated at each reporting period and expected to result directly from such advertising.

Similar to our past direct response advertising efforts, when we decreased our advertising spend during fiscal year 2012, our costs to acquire new customers decreased compared with fiscal year 2011. As a result of our decreased advertising spend, our advertising expense decreased as a percentage of sales by 1.3% during fiscal year 2012 compared with fiscal year 2011.

Bad debt expense increased by $918,000, or 24.5%, to $4,664,000 for fiscal year 2012 compared with fiscal year 2011. The majority, approximately $586,000, of the increase in bad debt expense for fiscal year 2012 was related to our increased sales volume. As a percentage of sales, bad debt expense increased by approximately 0.6%, or $332,000, during fiscal year 2012 compared with fiscal year 2011 due to an increase in our reserve requirements for uncollectable accounts receivable. The increase in our reserve requirements was primarily attributed to a change in policy by Blue Cross and Blue Shield of Florida (“BCBSFL”).

In late 2011, BCBSFL, our largest private third-party payer, changed its policy in regard to processing durable medical equipment claims for patients enrolled in Blue Cross and Blue Shield (“BCBS”) plans outside of Florida. In years past, BCBSFL would process our medical supply claims for patients enrolled in BCBS plans outside of Florida. Effective January 2012, BCBSFL stopped accepting and paying for medical supply claims for our non-Florida BCBS patients, and we were required to submit claims directly to the patients’ BCBS plans outside of Florida. As a result of this change in BCBSFL policy, we experienced delays in our claims submission process and an increased number of denials due to confusion within the various BCBS organizations. As of September 30, 2012, we were in the process of resubmitting denied claims totaling $497,000 of accounts receivable over 120-days old due from the various BCBS plans. Even though we expect to collect a portion of these receivables, the aging of these BCBS claims warranted an increase in our reserve requirements for uncollectible accounts receivable.

Depreciation and amortization expenses increased by $64,000, or 8.8%, to $794,000 for fiscal year 2012 compared with fiscal year 2011. The increase in depreciation and amortization expenses was due to an increase of $40,000 in amortization expense of intangible assets acquired in May 2011 and an increase of $24,000 in depreciation expense for property and equipment. Purchases of property and equipment totaled $353,000 and $471,000 during fiscal years 2012 and 2011, respectively.

General and administrative expenses increased by $375,000, or 8.1%, to $5,019,000 for fiscal year 2012 compared with fiscal year 2011. The increase was due to additional costs incurred for postage, answering services, software, selling expenses, temporary labor, and other administrative type expenses required to support the growth of our business. These increases were partially offset by reductions in professional fees, director fees, printing and reproduction and office expenses. As a percentage of sales, general and administrative expenses have decreased from 8.8% for fiscal year 2011 to 8.2% for fiscal year 2012.

Income from Operations:

Income from operations for fiscal year 2012 increased by $1,710,000, or 65.9%, to $4,307,000, compared with fiscal year 2011. The increase in operating income was primarily attributed to increased gross profits driven by our increased sales volumes as well as a reduction as a percentage of sales in advertising and general and administrative expenses, partially offset by increases in payroll and bad debt expenses.

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Other Income (Expense):

The following table shows a breakdown of other income (expense) for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

	2012			2011
Other Income (Expense):
Interest Expense	$	(75	)	$	(42	)
Change in fair value of derivative liabilities		—			(902	)
Gain on sale of assets		—			2
Interest income		—			5
Total Other Income (Expense)	$	(75	)	$	(937	)

Other income (expense) for fiscal year 2012 was interest expense related to the outstanding balance on our credit line facility.

Other income (expense) for fiscal year 2011 was predominantly non-cash charges associated with the change in fair value of derivative liabilities embedded within our convertible debt. Non-cash charges to other income (expense) for fiscal year 2011 totaled $923,000.

Interest expense increased by $33,000 for fiscal year 2012 compared with fiscal year 2011 due to an increase in borrowings under our credit line facility.

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 liability included in the October 2008 Convertible 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 fiscal year 2011.

Income Taxes

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

The provision for income taxes was $1,401,000 for fiscal year 2011. The effective tax rate was approximately 84% of the income before income taxes of $1,660,000, 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 $902,000 of expense related to the change in fair value of derivative liabilities recorded for fiscal year 2011.

Liquidity and Capital Resources

The following table summarizes the cash flows for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

	2012			2011
Cash Flows:
Net cash used in operating activities	$	(546	)	$	(4,494	)
Net cash used in investing activities		(151	)		(832	)
Net cash provided by financing activities		1,007			914
Net increase (decrease) in cash		310			(4,412	)
Cash at beginning of period		3,016			7,428
Cash at end of period	$	3,326		$	3,016

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The Company had cash of $3,326,000 at September 30, 2012, compared with $3,016,000 at September 30, 2011, an increase of $310,000. This increase in cash during fiscal year 2012 was primarily due to $1,000,000 of borrowings from our credit line facility, partially offset by $546,000 in net cash used for operating activities and $151,000 for purchases of property and equipment.

Operating Activities

Cash used in operating activities was $546,000 for fiscal year 2012, which represents an improvement of $3,947,000 compared with cash used in operating activities of $4,493,000 during fiscal year 2011. The improvement in operating cash flows during fiscal year 2012 was primarily driven by additional net income of $2,242,000, and a reduction in direct response advertising spend of $2,132,000, partially offset by a decrease in changes in operating assets and liabilities of $449,000.

During fiscal year 2012, cash used in operating activities was $546,000, which was the result of net income of $2,501,000 plus non-cash charges of $15,444,000 less changes in operating assets and liabilities of $18,491,000. The non-cash charges consist primarily of $7,878,000 for amortization of deferred advertising costs, $4,664,000 for bad debt expense, $1,697,000 for deferred income tax, $794,000 for depreciation expense, $122,000 for equity based compensation associated with employee and director stock options, and $123,000 for an increase in the reserve for contractual adjustments. The changes in operating assets and liabilities during fiscal year 2012 primarily consist of $13,113,000 for deferred advertising expenditures related to our direct response advertising efforts and increases for accounts receivable of $7,293,000 as a result of our increased sales and an increase in the number of days outstanding of accounts receivables due to factors discussed below, which were partially offset by an increase in accounts payable of $1,529,000 due to increased purchases and an increase in the number days outstanding of accounts payable, and a decrease in inventory of $216,000.

Effective January 2012, BCBSFL stopped accepting medical supply claims for non-Florida BCBS patients, and we were required to submit our claims directly to the patients’ BCBS plans outside of Florida. As a result of this change in BCBSFL policy, we experienced delays in our claims submission process and an increased number of denials due to confusion within the various BCBS organizations. As of September 30, 2012, we were in the process of resubmitting denied claims totaling $497,000. Due to the change in BCBSFL policy, our aged accounts receivable over 120 days old due from the various BCBS plans increased by $348,000 as of September 30, 2012, compared with the aged accounts receivable over 120 days old due from the various BCBS plans as of September 30, 2011. We expect to collect a portion of these receivables, but the aging of these BCBS claims warranted an increase in our reserve requirements for uncollectible accounts receivable as of September 30, 2012, and had a negative impact on our operating cash flows for fiscal year 2012.

During the second half of fiscal year 2012, we experienced a significant increase in the number of Medicare pre-payment audits for claims that were submitted to one of the four Medicare regions. The results of these audits have not generated a significant number of denials and/or adjustments, and we expect to receive payment for most of these claims from Medicare. However, we have experienced a delay of up to 45 to 90 days in receiving payments for these Medicare claims. As of September 30, 2012, we had approximately $500,000 of Medicare claims delayed due to pre-payment audits, resulting in an increase of our accounts receivable and a decrease in our cash.

During fiscal year 2011, cash used in operating activities was $4,494,000, which was the result of net income of $259,000 plus non-cash charges of $15,421,000 less changes in operating assets and liabilities of $20,174,000. The non-cash charges consist primarily of $8,060,000 for amortization of deferred advertising costs, $3,746,000 for bad debt expense, $902,000 for the change in fair value of derivative liabilities, $730,000 for depreciation expense, $204,000 for increase in reserve contractual adjustments, $385,000 for equity based compensation associated with employee and director stock options, and $1,340,000 for deferred income taxes. The changes in operating assets and liabilities during fiscal year 2011 primarily consist of $15,245,000 for deferred advertising expenditures related to our direct response advertising efforts and increases for accounts receivable of $5,065,000 and inventory of $1,025,000 as a result of our increased sales, which were partially offset by an increase in accounts payable of $1,182,000 due to increased purchases.

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Investing Activities

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

During fiscal year 2011, we used $466,000 of cash for the acquisition of SGV Medical Supplies. In addition, we purchased $369,000 of property and equipment, primarily computer equipment and software, to support our continued growth.

Financing Activities

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

During fiscal year 2011, cash provided by financing activities was $914,000, primarily as a result of $1,500,000 in proceeds from the credit line facility and $86,000 of proceeds from our employee stock purchase plan, which was partially offset by payments of $621,000 for debt and capital lease obligations and $51,000 for costs associated with the PNC Credit Line Facility.

Outlook

During fiscal year 2012, our sales increased by $8.2 million, or 15.6%, and our income from operations increased by $1.7 million, or 65.9%, compared with fiscal year 2011. Our operating margins improved by 2.1% during fiscal year 2012, primarily due to decreased levels of advertising spend and the implementation of new software technology in several key areas of our business during the year.

We decreased our direct response advertising expenditures by $2.1 million during fiscal year 2012 compared with fiscal year 2011. The decrease in advertising spend was related to advertising spend targeted towards non-urological supply customers, which resulted in a decrease of $2.3 million of sales to new non-urological customers during fiscal year 2012 compared with fiscal year 2011. Our sales to new urological customers increased by $1.2 million during fiscal year 2012 compared with fiscal year 2011. Since sales to our urological customers have higher average order values at higher gross margins than sales for our other product lines, the average annual order value and the gross margins for our recurring customer base should increase during fiscal year 2013 compared with fiscal year 2012.

During fiscal year 2012, we completed the implementation of new software technology in several key areas of our business that increased our productivity, allowing us to increase our sales volume with minimal increases in payroll costs during the last half of fiscal year 2012. Over the last six months of fiscal year 2012, we increased our sales by $2.0 million with an increase in payroll costs of $55,000, improving our operating margins by 1.4 % compared with the first six months of fiscal year 2012. We will continue to invest in new technology and implement process improvements during fiscal year 2013 that we believe will improve overall productivity and contribute to increased profitability.

We expect to manage the levels of our direct response advertising spend to maximize profitability and cash flows for fiscal year 2013, which may result in slower top-line sales growth. Based on our results from fiscal year 2012, we expect to continue to increase our operating margins and cash flows for fiscal year 2013 by adjusting our advertising spend based on market conditions within the advertising channels that we target.

As of September 30, 2012, we had $3.3 million of cash and $5.3 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 the collection of accounts receivable and the sale of products will be sufficient to meet our cash requirements during the next twelve months.

At September 30, 2012, our current assets of $18,859,000 exceeded our current liabilities of $7,850,000 by $11,009,000.

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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 September 30, 2012, we had no off-balance sheet arrangements.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Accounts Receivable

Our accounts receivable are generally due from Medicare, Medicaid, private insurance companies, and our patients. Accounts receivable are reported net of allowances for contractual adjustments and uncollectible accounts. The collection process is time consuming, complex and typically involves the submission of claims to multiple layers of payers whose payment of claims may be contingent upon the payment of another payer. As a result, our collection efforts may be active for up to 18 to 24 months from the initial billing date. In accordance with regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and co-payment amounts, in a manner consistent for all classes of payers.

The Company has established an allowance to account for contractual adjustments that result from differences between the payment amount received and the expected realizable amount. These adjustments are recorded as a reduction of both gross revenues and accounts receivable. Our current billing system does not provide reports on contractual adjustments by date of service. Accordingly, we are unable to directly compare the aggregate estimated allowance for contractual adjustments to the actual contractual adjustments recorded. However, we do analyze the aggregate allowance for contractual adjustments as a percentage of net sales compared to the last twelve months’ actual contractual adjustments as a percentage of net sales to determine that our estimated allowance for contractual adjustments is a reasonable basis for recording our periodic allowance for contractual adjustments.

Allowances for uncollectible accounts (or bad debts) are recorded as an operating expense and consist of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payer’s inability or refusal to pay. In establishing the appropriate allowance for uncollectible accounts, management makes assumptions with respect to future collectability. We base our estimates of accounts receivable collectability on our historical collection and write-off experience, our credit policies, and aging of our accounts receivable. Changes in judgment regarding these factors will cause the level of accounts receivable allowances to be adjusted.

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The typical collection process begins with the electronic submission of a claim to Medicare, Medicaid, or other primary insurance carriers, for which a response (and payment) is obtained within 15 to 30 days. Any claim denials are generally acted upon timely following the response and, where applicable, corrected claims are submitted. A response (and co- payment) for amounts billed to secondary payers, including Medicaid, private third-party insurance carriers, and patients, generally occurs within 30 to 60 days of submission of the claim. On a continual basis, the outstanding accounts receivable balances are reviewed by collection personnel, including contacting the insurance company and/or patient in an attempt to determine why payment has not been remitted and obtain payment from the respective responsible party. When applicable, corrected claims are submitted to the insurance carrier. Patient statements are generated and sent out monthly. Outbound calls are continually made to patients with outstanding balances in an attempt to obtain payment. Uncollectible account balances for all payer classes are written off after remaining unpaid for a period of 24 months. Balances that are determined to be uncollectible prior to the passage of 24 months from the last billing date are written off at the time of such determination.

We perform eligibility and insurance verification on patients prior to the shipment of products and submission of a claim. As a result, we do not have amounts that are pending approval from third-party payers outside of the typical review process for submitted claims.

The Company performs analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. However, because of continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have a material impact on the Company’s future results of operations and cash flows. For the fiscal year ended September 30, 2012, a hypothetical change of 1% in the allowances for contractual adjustments as a percentage of gross sales would have resulted in a change in our revenue and net income of approximately $0.7 million.

The following table sets forth our accounts receivable balances outstanding by aging category for each major payer source as of September 30, 2012 (in thousands):

	Aging of Accounts Receivable as of September 30, 2012
	< 30		31 – 60		61 – 120		> 120
Type of Payer	Days		Days		Days		Days		Totals
Medicare and Medicaid	$	4,757	$	995	$	946	$	2,256	$	8,954
Private insurance companies		1,427		607		661		1,132		3,827
Patients		285		210		334		1,799		2,628
Total gross accounts receivable	$	6,469	$	1,812	$	1,941	$	5,187		15,409
Less: Allowances										(5,044	)
Accounts receivable, net									$	10,365

Deferred Advertising

We capitalize and amortize direct-response advertising and related costs when we can demonstrate, among other things, which patients have directly responded to our advertisements. We assess the realizability of the amounts of direct-response advertising costs reported as assets at the end of each reporting period by comparing the carrying amounts of such assets to the probable remaining future benefits expected to result directly from such advertising. Management’s judgments include determining the period over which such net cash flows are estimated to be realized.

We receive responses to our direct-response advertising efforts in the form of leads, of which a certain number are qualified as new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our process of billing the customer’s insurance carrier directly and collecting any customer co-payments, if applicable. The majority of the new customers qualified from our direct-response advertisements place their initial order within three to six months from the time we receive their initial response from our direct-response advertising.

19

In order to capitalize our direct-response advertising costs, we must demonstrate that the results of our direct-response advertising will be similar to the effects of responses to past direct-response advertising activities that resulted in future benefits. We monitor the initial success rate of our advertisements as a cost per lead and track the overall cost per acquired customer for each of our quarterly cost pools. For fiscal years 2012 and 2011, our direct-response advertising results demonstrated a continuation of similar patterns. Our advertising efforts in fiscal years 2012 and 2011 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. During fiscal year 2012, we decreased our advertising spend compared with fiscal year 2011. Consistent with our past direct-response advertising efforts, when we decreased our advertising spend; our costs to acquire new customers decreased proportionally to our decreased advertising spend. Conversely, when we increased our advertising spend during fiscal year 2011, our costs to acquire new customers increased proportionally to our increased advertising spend.

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.

Stock-Based Compensation Expense

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award.

Since the Company’s common stock has only been trading publicly since July 2007 with relatively light volume, we do not have sufficient company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the historical volatilities of similar entities within our industry as the expected volatility of our share price.

The expected dividend yield is 0%, as the Company has not paid any dividends on its common stock.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date, with a remaining term equal to the expected term of the stock-based award.

In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to utilize a simplified method, based on the average of the vesting term and contractual term of the award, in determining the expected term of stock-based awards. Since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time that our equity shares have been publicly traded, we utilize the simplified method to calculate the expected term of stock-based awards.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, we had entered into certain other financial instruments and contracts, such as embedded conversion features on convertible debt instruments that were not afforded equity classification. These instruments were required to be carried as freestanding derivative instruments, at fair value, in our consolidated financial statements.

20

Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The changes in fair values at each reporting period, or interim period, are recorded as a charge or a benefit to earnings included in the Other Income (Expense) section of the Company’s Consolidated Statement of Operations.

We estimated the fair values of derivative financial instruments using various techniques that were considered to be consistent with the objective measurement of fair values. In selecting the appropriate technique, we considered, among other factors, the nature of the instrument, the market risks that it embodied and the expected means of settlement. Estimating fair values of the derivative financial instruments required the development of significant and subjective estimates that may have changed over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Since the derivative financial instruments were initially and subsequently carried at fair values, our income or loss reflected the volatility in the changes to these estimates and assumptions.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company files consolidated federal and state income tax returns.

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 8. Financial Statements

The following is an index to the Financial Statements of the Company being filed here-with commencing at page F-1 below:

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of September 30, 2012 and 2011	F-2
Consolidated Statements of Operations for the fiscal years ended September 30, 2012 and 2011	F-3
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2012 and 2011	F-4
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2012 and 2011	F-5
Notes to the Consolidated Financial Statements	F-6

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We have had no disagreements with our independent registered accounting firm on accounting and financial disclosure.

Item 9A. 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 Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s 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 Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of September 30, 2012, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —Integrated Framework. We concluded that based on our evaluation, our internal control over financial reporting was effective as of September 30, 2012.

The Company is neither an accelerated filer nor a large accelerated filer, as defined in Rule 12b-2 under the Exchange Act, and is not otherwise including in this Annual Report an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to be attested by the Company’s registered public accounting firm pursuant to Item 308(b) of Regulation S-K.

Changes in Internal Controls

During fiscal year 2012 the Company remediated the following material weaknesses previously disclosed in the Company’s Annual Report for fiscal year 2011 filed with the SEC on Form 10-K:

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· Documentation of Accounting Review and Approval Process: In connection with the audit of our consolidated financial statements for the fiscal year ended September 30, 2010, our independent registered accounting firm reported to our Audit Committee that they observed inadequate documented review and approval of certain aspects of the accounting process, including the documented review of accounting reconciliations and journal entries, that they considered to be a material weakness in internal controls. Based on a review of certain aspects of our accounting process in place as of September 30, 2011, management concluded that the inadequate documented review and approval process represented a material weakness.

Remediation: During fiscal year 2012, the Company revised the review and approval process to ensure that all account reconciliations and journal entries were reviewed and approved on a timely basis with supporting documentation to support the review and approval processes. As part of the revised process, the Company hired an Assistant Controller in September 2011 to assist with the monthly accounting process and ensure that the Company’s accounting process includes documented review of accounting reconciliations and journal entries.

· Inventory Controls: Management had identified a material weakness as of September 30, 2011, related to the Company’s procedures to account for inventory. During the reconciliation of the annual physical inventory count at fiscal year-end, the Company determined that the journal entries to record the cost of goods sold each month contained errors as a result of unit of measure conversion issues with certain products that were sold in each month of fiscal year 2011. As a result, the Company restated the reports the Company filed on Form 10-Q with the SEC for the three interim periods for fiscal year 2011. For further detail of the restatements of previously issued financial statements, please refer to the Form 8-K filed with the SEC on December 7, 2011.

Remediation: The Company adjusted the cost of goods journal entries to eliminate the unit of measure issues identified at the end of fiscal year 2011. Starting in the second quarter of fiscal year 2012, the Company conducted physical inventory counts at the end of each interim or year-end reporting period. Until a new perpetual inventory system is implemented and the appropriate inventory controls are in place, the Company will continue to conduct quarterly physical inventory counts at each interim and year-end reporting period and perform additional analytical and cut-off procedures to mitigate any material weaknesses associated with the lack of a perpetual inventory system.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Chief Executive Officer and its Chief Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information

None

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

As of September 30, 2012, the Executive Officers and Directors of the Company were:

Name	Age	Position(s) with the Company
Mark Libratore	61	President, Chief Executive Officer, Director
Robert Davis	66	Chief Financial Officer
John Leger	57	Chief Operating Officer
Jeanette Corbett (1)(2)(3)	62	Director
Morgan Duke (1)(3)	37	Director
Tyler Wick (1)(2)(3)	41	Director

(1) Member of the Governance and Nominating Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

Mark Libratore - In 1990, Mr. Libratore founded Liberty Medical Supply, Inc., which has become the nation’s largest direct-to-consumer diabetic supplier.  Mr. Libratore sold this business to PolyMedica Corporation in August 1996 and remained President of Liberty Medical and Senior Vice President of PolyMedica until February 1999.  Mr. Libratore founded Liberator Medical Supply, Inc., in 1999, and has served as its President and Chief Executive Officer since inception.  Liberator Medical Supply, Inc., was acquired by the Company on June 22, 2007, at which time he became President and Chief Executive Officer of the Company.

Robert Davis – Mr. Davis, has a Masters degree in Accounting from the University of Houston, and holds a CPA certificate from the State of Texas. Mr. Davis has held numerous financial executive-level positions as Comptroller and Vice President of Finance for companies such as controller for a Manufacturer of Jet Engine parts, TurboCombustor Corp., Data Development Inc., and Caribbean Computer Corp., and served as CFO and Manager of Financial Planning for Liberty Medical Supply, Inc. from 1995 to 1999. He has been the Chief Financial Officer of Liberator Medical Supply, Inc., since its organization, and of the Company since 2007.

John Leger – Mr. Leger joined Liberator Medical Supply, Inc. in April 2006, and has been the Chief Operating Officer of the Company since 2007. John was the Senior VP of Operations at Liberty Medical Supply from December 1991 through January 2004. He was responsible for diabetic call center operations, customer services, repeat customer sales, document acquisition and management, claims processing to Medicare, mail services, shipping, receiving, and purchasing. Mr. Leger worked closely with Mark Libratore in building the mail order diabetes business to $100M in annualized sales, and stayed on with the company through its growth to over 650,000 active customers. Due to an agreement not to compete with Liberty during a severance agreement period, John made his expertise available as an independent consultant until he joined Closer Healthcare, Inc. as a VP of Operations in 2005. Closer is a mail order provider of diabetes testing supplies and primarily serviced customers in national clinical trials as well as the managed care sector. He spent a year with Closer prior to joining Liberator Medical.

Jeannette Corbett - Mrs. Corbett, a Certified Public Accountant, is President Emeritus and Acting Interim President of the Quantum Foundation, West Palm Beach, Florida.  Previously, she served as CFO of the Medical Services Division and Vice President of Finance of Phymatrix Corporation (PHMX), West Palm Beach, Florida. Prior to her position at Phymatrix, Mrs. Corbett was President of McGill, Roselli, Ayala & Hoppmann, a West Palm Beach-based accounting firm. She has also served as an adjunct instructor of taxation of Palm Beach State College in Lake Worth, Florida. Mrs. Corbett has a bachelor's of science degree in business administration from the University of Florida, graduating Summa Cum Laude. Mrs. Corbett was Chairman of the Board of JFK Medical Center in Atlantis, Florida, from 1991-1994 and was Chair of the Hospital's Finance Committee from 1989-1991.

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Morgan Duke – Mr. Duke is a Partner at Kinderhook Partners, an investment partnership which makes long-term investments in small public companies, including the Company.  Mr. Duke was previously a strategy consultant with the Monitor Group, where he advised senior management and directors of major public and private companies in North America and Europe across a range of industries, including healthcare, media, and telecommunications.  Mr. Duke received an M.B.A. from Harvard University and a B.A. from Johns Hopkins University.  Mr. Duke also studied music at the Peabody Conservatory.  Mr. Duke serves as the director designated by Kinderhook Partners pursuant to the Securities Purchase Agreement with the Company dated March 9, 2010.

Tyler Wick – Mr. Wick is a principal with Abry Partners, Boston, Massachusetts, a private equity firm which he joined in December 2011. Prior to that time, he was a principal with Ticonderoga Capital, a Boston, Massachusetts, private equity firm. His private equity experience also includes serving as an Associate at Dillon Read Venture Capital. He was an Associate in the healthcare practice of the investment-banking group of Advest, Inc., where he focused on private placements and mergers and acquisitions for middle market healthcare services companies. Prior to Advest, he was a consultant with the Mentor Group, an international legal consulting firm. Mr. Wick is a member of the Board of Directors of AFS Technologies, ALN Medical Management, Brainshark, Octagon Research, Outside the Classroom and Softrax and is an Observer to the Boards of nuBridges and Construction Software Technologies. He is also a member of the Executive Committee of NERASBIC and serves on the Board of Directors for the Boston Chapter of the Association for Corporate Growth. Mr. Wick received a B.A. degree cum laude from Amherst College.

Each director of the Company serves until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies. Each officer serves until the first meeting of the Board of Directors following the next annual meeting of the shareholders and until his or her successor is duly elected and qualifies. There are no family relationships among any of our executive officers or directors.

The following persons are not executive officers of the Company but make significant contributions to the Company’s business:

Paul Levett joined Liberator in 2005 as its Chief Marketing Officer.   From 1990 to 1996 Mr. Levett served as President of Lowe Direct, a direct marketing and advertising agency in New York City, New York.  In 1996, Mr. Levett founded Lieber, Levett, Koenig, Farese and Babcock, a New York advertising agency.  He was retired from 2000 until he joined Liberator in 2005.

George Narr joined Liberator in April 2010 as its Chief Information Officer.  From 1996 to 2006 Mr. Narr served as Chief Information Officer of Liberty Medical Supply, Inc.  From 2006 to 2008 Mr. Narr was a private consultant in the medical supply industry.  From 2008 to 2010 Mr. Narr was the Chief Information Officer at Simplex Healthcare in Franklin, Tennessee.

Compliance With Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended September 30, 2012 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2012, as well as any written representation from a reporting person that no Form 5 is required, we are aware of no officer, director or 10% or greater shareholder that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during the fiscal year ended September 30, 2012.

Director Committees

Our Board of Directors has an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee. The Board of Directors has also determined that Jeannette Corbett is an audit committee financial expert, as that term is defined in Item 407 of Regulation S-K.

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Compensation Committee Interlocks and Insider Participation

The members of the Company’s Compensation Committee are non-employee directors.  The Compensation Committee, with the advice of an outside consulting firm, will determine compensation for our executive officers and managers by multiple factors, including individual performance, compensation of persons in similar capacities in other companies having a size and business comparable to the Company, performance, and our financial results. Base salaries are supplemented by cash performance bonuses determined by our Compensation Committee in October of each year based on the prior year financial results.

Code of Ethics

We adopted a Code of Conduct and Ethics that applies to all officers, directors and employees of our Company on January 14, 2008, as amended on August 10, 2010. Any person may, without charge, request a copy of our Code of Ethics by writing to our Chief Financial Officer at 2979 SE Gran Park Way, Stuart, Florida 34997.

Item 11. Executive Compensation

Employment Agreements

We have entered employment agreements with Mark A. Libratore, our President and Chief Executive Officer; Robert Davis, our Chief Financial Officer; and John Leger, our Chief Operating Officer. The employment agreements are renewed annually in accordance with their terms or until either we or the executive officer notifies the other party at least 90 days prior to the end of the term that such party does not wish to further extend the term. Each employment agreement provides for a minimum annual salary of $400,000, $275,000 and $200,000, in the case of Messrs. Libratore, Davis and Leger, respectively, which salary is reviewed annually by our board of directors (or committee thereof) and adjusted upward, at the sole discretion of our board of directors (or committee thereof). Pursuant to the agreements, each of Messrs. Libratore, Davis and Leger is eligible to receive additional cash incentive compensation pursuant to our annual bonus plan then in effect, and the target annual bonus for each of Messrs. Libratore, Davis and Leger is up to 15%, 10% and 10%, respectively, of such executive officer’s annual base salary, with the actual bonus to be based upon such individual and/or Company performance criteria established for each fiscal year by our board of directors in consultation with the executive officer. Each executive officer is eligible to participate in distributions from the quarterly executive bonus plan configured by our President and Chief Financial Officer.

Each executive officer is entitled to participate in our stock purchase plan and to be considered by our board of directors (or compensation committee of our board of directors, if any) for grants or awards of stock, stock options or warrants under any of our stock incentive or similar plans in effect from time to time. During the term, each executive officer shall be eligible to participate in such health and other group insurance and other employee benefit plans and programs in effect from time to time on the same basis as other senior executives. In addition, during the term of his agreement, Mr. Libratore shall be entitled to a minimum monthly automobile allowance of $800, plus gas expense.

The employment agreements provide that each executive officer is entitled to severance benefits. If the executive officer’s employment is terminated during the term by us other than for Cause or Disability (each as defined below), or by the executive officer for Good Reason (as defined herein), the executive officer will be entitled to receive (i) his pro-rata bonus for the fiscal year of termination, (ii) payment of an amount equal to the sum of 1/12 of his annual base salary and 1/12 of the target annual bonus each month for 18 months, 12 months and six months, in the case of Messrs. Libratore, Davis and Leger, respectively, following termination, and (iii) continuation of medical benefits on the same terms as active senior executives for 18 months, 12 months and six months, in the case of Messrs. Libratore, Davis and Leger, respectively, following termination. In addition, all of the executive officer’s unvested options outstanding at the time of such termination will become fully vested. If the executive officer’s employment with us is terminated due to the executive officer’s death or Disability, the executive officer (or his estate, if applicable) will be entitled to receive (i) the pro-rata bonus and (ii) option vesting. Receipt of the severance payments, continued medical coverage and option vesting shall be conditioned on the executive officer’s continued compliance with the non-disclosure, non-competition and non-solicitation obligations under the employment agreement. For purposes of the employment agreements, the following terms have the following meanings:

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“Cause” means termination upon (i) the willful and continued failure by executive officer to substantially perform his duties or the oral or written instructions of our President, Chief Executive Officer and/or Board of Directors (other than any such failure resulting from executive officer’s incapacity due to physical or mental illness) after an oral or written demand for substantial performance is delivered to the executive officer by our President, Chief Executive Officer, and/or Board of Directors, which demands specifically identifies the manner in which the President, Chief Executive Officer, and/or the Board of Directors believes that executive officer has not substantially performed his duties or complied with an instruction from our President, Chief Executive Officer, and/or Board of Directors; (ii) the willful engaging by executive officer in conduct that is demonstrably and materially injurious to us; (iii) the failure to observe material policies generally applicable to our officers or employees; (iv) the failure to cooperate with any internal investigation of our Company or any of our affiliates; (v) commission of any act of fraud, theft or financial dishonesty with respect us or any of our affiliates or indictment or conviction of any felony; or (vi) material violation of the provisions of the employment agreement.

“Disability” means the executive officer is entitled to receive long-term disability benefits under our long-term disability plan in which the executive officer participates, or, if there is no such plan, the executive officer’s inability, due to physical or mental ill health, to perform the essential functions of the executive officer’s job, with or without a reasonable accommodation, for 180 days during any 365 day period irrespective of whether such days are consecutive.

“Good Reason” means (i) a material and adverse change in the executive officer’s duties or responsibilities; (ii) a reduction in the executive officer’s base salary or target annual bonus; (iii) a relocation of the executive officer’s principal place of employment by more than 50 miles; or (iv) breach by us of any material provision of the employment agreement; provided, that the executive officer must give notice of termination for Good Reason within 60 days of the occurrence of the first event giving rise to Good Reason.

During the term of the employment agreements and for a period of 18 months thereafter, subject to applicable law, the executives will be subject to restrictions on competition with us and restrictions on the solicitation of our customers and employees. For all periods during and after the term, the executives will be subject to nondisclosure and confidentiality restrictions relating to our confidential information and trade secrets.

SUMMARY COMPENSATION TABLE

The following table provides summary information regarding compensation earned by the named executive officers during the fiscal years ended September 30, 2012 and 2011.

								All Other
Name						Option		Compensation
and Principal Position	Year	Salary($)		Bonus ($)		Awards($)		($)(1)		Total ($)
Mark A. Libratore	2012	$	400,000	$	174,610	$	11,270	$	38,130	$	624,010
President and Chief	2011	$	397,850	$	209,990	$	35,660	$	38,340	$	681,840
Executive Officer
Robert Davis	2012	$	275,000	$	107,630	$	11,090	$	4,570	$	398,290
Chief Financial Officer	2011	$	280,100	$	134,750	$	41,710	$	4,500	$	461,060
John Leger	2012	$	200,000	$	61,820	$	2,960	$	4,680	$	269,460
Chief Operating Officer	2011	$	203,310	$	47,330	$	22,820	$	4,490	$	277,950

(1) All Other Compensation includes expenses paid on behalf of the named executive officers for health insurance, life insurance, transportation and certain other personal expenses.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The Company’s outstanding equity awards to the named executive officers at September 30, 2012, are set forth in the following table:

	Number of
	Securities
	Underlying
	Unexercised		Option		Option
	Options (#)		Exercise		Expiration
Name	Exercisable		Price ($)		Date
Mark A. Libratore		100,000	$	0.825	April 14, 2013
		90,000	$	1.10	August 18, 2014
		75,000	$	1.32	December 27, 2015
Robert J. Davis		100,000	$	0.75	April 14, 2013
		100,000	$	0.60	October 30, 2013
		100,000	$	1.00	August 18, 2014
		75,000	$	1.20	December 27, 2015
John Leger		60,000	$	0.75	April 14, 2013
		60,000	$	0.60	October 30, 2013
		80,000	$	1.00	August 18, 2014
		20,000	$	1.20	December 27, 2015

The Company’s 2007 Stock Plan (the “Stock Plan”) provides that the Board of Directors may grant to those individuals who are eligible under the terms of the Stock Plan nonqualified stock options, incentive stock options, restricted stock, stock appreciation rights, performance awards, performance units and other incentives payable in shares of the Company’s common stock as the Board of Directors may determine.  Such grants may be made to officers, employees or members of the Board of Directors of the Company and its subsidiaries as well as the Company’s consultants, agents, advisors and independent contractors in exchange for bona fide services rendered.  The number of shares of common stock to be reserved and available for awards under the Stock Plan (subject to certain adjustments as provided therein) is 2,105,000.

The purpose of the Stock Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company by providing them the opportunity to acquire a proprietary interest in the Company and to link their interests and efforts to the long-term interests of the Company’s shareholders. See “Description of the Stock Plan,” below.

Equity Compensation Plan Information

The following table presents details of the Company’s equity compensation plan as of September 30, 2012:

					Number of securities remaining
					available for future issuance under
	Number of securities to be		Weighted-average		equity compensation plans
	issued upon exercise of		exercise price of		(excluding securities reflected in
	outstanding options		outstanding options		column (a))
Plan Category	(a)		(b)		(c)
2007 Employee Stock Incentive Plan		2,035,000	$	0.97		70,000

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Description of the Stock Plan

The Stock Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company.  The maximum number of shares of common stock available for issuance under the Stock Plan is 2,105,000.

The Stock Plan permits awards of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentives payable in cash or in shares of common stock.  The Stock Plan provides that the exercise price of any option will not be less than the fair market value of the common stock on the date of grant or, for a 10% shareholder, 110% of fair market value.

Eligibility

An award under the Stock Plan can be made to any employee, officer or director of the Company or a subsidiary, as selected by the Committee.  Subject to certain limitations, an award under the plan can also be made to any consultant, agent, advisor or independent contractor to the Company or a related company, as selected by the Committee.  As of September 30, 2012, there were approximately 326 employees, including officers, and 4 directors eligible to participate in the Stock Plan.

Shares Covered by the Stock Plan

The Stock Plan permits the granting of awards covering an aggregate of 2,105,000 shares of Company common stock.  The shares of Company common stock may be either authorized but unissued shares or treasury shares.

Any shares that are reserved for options or performance shares that lapse, expire, terminate or are cancelled, or if shares of Company common stock are issued under the plan and are thereafter reacquired by the Company, the shares subject to such awards and the reacquired shares may be available for subsequent awards under the Stock Plan.

Stock Options and Rights

Options granted under the Stock Plan may be either non-qualified stock options or incentive stock options qualifying for special tax treatment under Section 422 of the Internal Revenue Code.  The exercise price of any stock option may not be less than the fair market value of the shares of common stock on the date of grant and 110% of fair market value for 10% shareholders.  The exercise price is payable in cash, shares of common stock previously owned by the optionee or a combination of cash and shares of common stock previously owned by the optionee, or by a recourse or non-recourse note executed by the nominee (subject to Sarbanes-Oxley prohibitions on officer loans).  Both non-qualified stock options and incentive stock options will generally expire on the tenth anniversary of the date of grant, unless otherwise specified.

Stock appreciation rights may be granted in tandem with stock options or alone as freestanding stock appreciation rights.  The grant price of a tandem stock appreciation right shall be equal to the exercise price of the related option, and the grant price of a freestanding stock appreciation right shall be the fair market value of the common stock on the grant date.  The exercise of a stock appreciation right will entitle the holder to receive payment equal to the product of (i) the excess of the fair market value of the common stock on the date of exercise over the grant price and (ii) the number of shares with respect to which the stock appreciation right is exercised.  At the discretion of the Compensation Committee, payment upon an exercise of a stock appreciation right may be in cash, common stock or some combination thereof.

Restricted Stock and Stock Units

Under the Stock Plan, the Committee may grant shares of restricted stock and stock units on terms and conditions, including performance criteria, repurchase and forfeiture, as determined by the Committee.  Upon satisfaction of the terms and conditions of the award, shares of restricted stock become transferable, and the stock units become payable in cash, shares of common stock, or a combination of both, in the discretion of the Committee.

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Amendment and Termination of the Stock Plan

The Board or the Committee may, at any time, amend, suspend or terminate the Stock Plan or any portion of the plan, provided that to the extent required by law or a stock exchange rule, shareholder approval is required for any amendment to the plan.  By its terms, the Stock Plan terminates ten years after its effective date.

New Plan Benefits

In the fiscal year which ended September 30, 2012, the Company did not grant any options to its executive officers or to employees who are not executive officers in the 2012 fiscal year.

DIRECTOR COMPENSATION

Directors other than Mr. Libratore receive (i) an annual fee of $12,000 (plus an additional $6,000 if Audit Committee chairman, and $3,000 if chairman of another Board committee); (ii) a per Board meeting fee of $1,000 ($500 if by telephone) and $500 for each committee meeting ($250 if by telephone) and (iii) a one-time issuance of options for the purchase of 50,000 common shares of the Company, exercisable at the market price at the date of grant and vesting over a two-year period.  Mr. Libratore is not compensated as a director of the Company.

The following table sets forth each Director’s compensation for the year ended September 30, 2012:

Name	Fees Earned or Paid in Cash ($)		Option Awards ($)		Total ($)
Mark A. Libratore (1)		—		—		—
Jeannette Corbett	$	24,750	$	9,440	$	34,190
Morgan Duke (2)	$	19,500	$	12,430	$	31,930
Tyler Wick	$	19,500	$	12,410	$	31,910

(1) Mr. Libratore is not compensated for his services as a director.

(2) At the direction of Mr. Duke, his compensation is paid to Kinderhook Capital Management, LLC.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information regarding ownership of shares of our common stock, as of November 30, 2012:

· by each person known by us to be the beneficial owner of 5% or more of our common stock;

· by each of our directors and executive officers; and

· by all of our directors and executive officers as a group.

Except as otherwise indicated, each person and each group shown in the table has sole voting and investment power with respect to the shares of common stock indicated. For purposes of the table below, in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed to be the beneficial owner, of any shares of our common stock over which he or she has or shares, directly or indirectly, voting or investment power or of which he or she has the right to acquire beneficial ownership at any time within 60 days. As used in this prospectus, “voting power” is the power to vote or direct the voting of shares and “investment power” includes the power to dispose or direct the disposition of shares. Common stock beneficially owned and percentage ownership was based on 48,143,257 shares outstanding on November 30, 2012, plus 6,988,342 shares deemed outstanding pursuant to Rule 13d-3, for a total of 55,131,599 shares outstanding. Unless otherwise indicated, the address of each beneficial owner is c/o Liberator Medical Holdings, Inc., 2979 SE Gran Park Way, Stuart, Florida 34997.

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Name and Address	Number of Shares			Percent
5% Beneficial Owners:
Millennium Partners, L.P.(1) c/o Millennium Management LLC 666 Fifth Avenue, 8th Floor New York, NY 10103		8,838,202	(2)		16.03	%
Kinderhook Partners, L.P. One Executive Drive, Suite 160 Fort Lee, NJ 07024		4,716,667	(3)		8.55	%
Directors and Executive Officers:
Mark A. Libratore President and Chief Executive Officer and Director		19,885,867	(4)		36.07	%
Robert Davis Chief Financial Officer		719,904	(5)		1.31	%
John Leger, Vice President, Operations		324,749	(6)		*
Tyler Wick		125,000	(7)		*
Jeannette Corbett		50,000	(8)		*
Morgan Duke		0	(9)		0	%
All directors and executive officers as a group (6 persons)		21,105,520	(10)		38.28	%

* Less than one percent (1%).

(1) Millennium Management LLC, a Delaware limited liability company (“Millennium Management”), is the general partner of Millennium Partners, L.P., a Cayman Islands exempted limited partnership (“Millennium Partners”), and may be deemed to have shared voting control and investment discretion over securities owned by Millennium Partners. Millennium Management is also the general partner of the 100% shareholder of ICS Opportunities, Ltd., and may be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Millennium International Management, L.P., a Delaware limited liability partnership, is the investment manager of ICS Opportunities, Ltd., and may be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Millennium International Management GP LLC, a Delaware limited liability company, is the general partner of Millennium International Management, and may also be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities, Ltd. Israel A. Englander is the managing partner of Millennium Management and Millennium International Management GP LLC, and consequently may also be deemed to have shared voting control and investment discretion over securities owned by Millennium Partners or ICS Opportunities, as the case may be. The foregoing information is derived from the reporting persons as set forth in a Schedule 13D Amendment filed with the SEC on behalf of the reporting persons on October 19, 2010.

(2) Represents as of January 11, 2011, an aggregate 7,899,079 shares owned beneficially by Millennium Partners, L.P., 8,838,202 shares owned beneficially by Millennium Management LLC and Israel Englander (See footnote (1), above), and 939,123 shares owned beneficially by Millennium International Management GP LLC, Millennium International Management LP, and ICS Opportunities, Ltd. Does not include 4,375,000 shares of our common stock issuable upon exercise of a warrant held by Millennium Partners at an initial exercise price of $1.25 per share, subject to adjustment, which has a term of five years. The number of shares of our common stock for which such warrants can be exercised is limited pursuant to the terms of the warrants so that number of shares of the common stock which will result in Millennium Partners, together with its affiliates, having aggregate beneficial ownership of not more than 9.99% of our total issued and outstanding common stock. Thus, as of December 16, 2012, Millennium Partners may be deemed not to beneficially own any of the shares of common stock underlying its warrants pursuant to Rule 13d-3 under the Securities Exchange Act of 1934.

31

(3) In connection with the Kinderhook Partners, L.P.’s (the “Partnership”) designation of Morgan Duke, a partner of the Partnership, as its representative on the Board of Directors of the Company, Kinderhook Capital Management LLC (“Kinderhook Capital”), an affiliate of the Partnership, received an option to purchase 50,000 shares of the Company’s Common Stock at $1.55 per share, vesting semi-annually over two years beginning on December 4, 2010. Shah Tushar Shah and Stephen J. Clearman are the co-managing members of the Kinderhook GP, LLC (the “General Partner”) responsible for making investment decisions with respect to the Partnership and, as a result, Mr. Shah and Mr. Clearman may be deemed to control such entities. In addition, Mr. Shah and Mr. Clearman are responsible for making investment decisions with respect to Kinderhook Capital. Accordingly, Mr. Shah and Mr. Clearman may be deemed to have a beneficial interest in the shares of Common Stock by virtue of their indirect control of the Partnership’s, the General Partner’s and Kinderhook Capital’s power to vote and/or dispose of the shares of Common Stock. Mr. Shah and Mr. Clearman each disclaims beneficial ownership of the shares of Common Stock except to the extent of his respective pecuniary interest, if any, therein.

(4) Includes 4,186,009 shares underlying options exercisable by Mr. Libratore within 60 days of November 30, 2012.

(5) Includes 375,000 shares underlying options exercisable, and 6,000 shares underlying warrants exercisable by Mr. Davis within 60 days of November 30, 2012.

(6) Includes 220,000 shares underlying options exercisable by Mr. Leger within 60 days of November 30, 2012.

(7) Includes 50,000 shares underlying options exercisable by Mr. Wick within 60 days of November 30, 2012.

(8) Includes 50,000 shares underlying options exercisable by Ms. Corbett within 60 days of November 30, 2012.

(9) Mr. Duke is a director of the Company and is a Partner of the Partnership. Mr. Duke’s appointment to the Board of Directors of the Company was made pursuant to commitments of the Company and its principal shareholder and President, Mark Libratore, to the Partnership in connection with the Partnership’s purchase of common stock of the Company on March 9, 2010. As set forth in a Form 3 filed by Mr. Duke on June 11, 2010, Mr. Duke disclaims beneficial ownership in any securities of the Company.

(10) See Footnote Nos. (4) through (9)

Item 13. Certain Relationships and Related Transactions, and Director Independence

All transactions between the Company and related parties are reviewed and approved by our Audit Committee, which is made up entirely of independent directors. We collect information about related party transactions from our officers and directors through annual questionnaires distributed to officers and directors. Each director and officer agrees to abide by our Code of Conduct and Ethics, which provides that officers and directors should avoid conflicts of interest and that any transaction or situation that could involve a conflict of interest between the Company and the officer or director must be reported to the Audit Committee of the Board and is subject to approval by the Audit Committee if and when appropriate. The Code of Conduct and Ethics identifies a non-exclusive list of situations that may present a conflict of interest, including significant dealings with a competitor, customer or supplier, similar dealings by an immediate family member, personal investments in entities that do business with the Company, and gifts and gratuities that influence a person’s business decisions, as well as other transactions between an individual and the Company. The Audit Committee’s charter provides that the Audit Committee will review, investigate and monitor matters pertaining to the integrity or independence of the Board, including related party transactions. The Audit Committee reviews and makes determinations about related party transactions or other conflicts of interest as they arise. Policies requiring review and approval of any transaction or arrangement with a director or executive officer that may present a conflict of interest are set forth in the Code of Conduct and Ethics.

32

The Company paid $565,000 during fiscal year 2011 to its President and CEO, Mark Libratore, as repayment of stockholder loans. There are no stockholder loans outstanding as of the date of this Report.

Item 14. Principal Accountant Fees and Services

Crowe Horwath LLP has served as the Company’s independent registered public accounting firm for the fiscal years ended September 30, 2012 and 2011.

Independent Auditor Fees

The following table sets forth fees billed, or expected to be billed, to the Company by the Company’s independent auditors for the years ended September 30, 2012 and 2011, for (i) services rendered for the audit of the Company’s annual financial statements and the review of the Company’s quarterly financial statements; (ii) services rendered that are reasonably related to the performance of the audit or review of the Company’s financial statements that are not reported as Audit Fees; (iii) services rendered in connection with tax preparation, compliance, advice and assistance; and (iv) all other services:

	Crowe Horwath, LLP
	2012		2011
Audit Fees	$	116,358	$	131,391
Audit related fees		3,000		12,750
Tax fees		—		—
All other fees		—		—
Total Fees	$	116,358	$	144,141

Audit Committee

The audit and non-audit related fees of the Company’s independent auditors are subject to an engagement letter between the Company and the independent auditors. Each engagement letter is reviewed and approved by the Company’s Audit Committee.

33

PART IV.

Item 15. Exhibits and Financial Statement Schedules

The following exhibits designated with a footnote reference are incorporated herein by reference to a prior registration statement or a periodic report filed by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act:

Number	Description
21.1	Subsidiaries (1)
23.1	Consent of Crowe Horwath LLP. (1)
31.1	Section 302 Certificate of Chief Executive Officer (1)
31.2	Section 302 Certificate of Chief Financial Officer (1)
32.1	Section 906 Certificate of Chief Executive Officer (1)
32.2	Section 906 Certificate of Chief Financial Officer (1)

(1) Filed herewith.

34

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LIBERATOR MEDICAL HOLDINGS, INC.
By:	/s/ Mark A. Libratore
	Mark A. Libratore
	President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.

Signature	Title	Date
/s/ Mark A. Libratore	President, Chief Executive Officer and Director	December 20, 2012
Mark A. Libratore	(principal executive officer)
/s/ Robert J. Davis	Chief Financial Officer	December 20, 2012
Robert J. Davis	(principal financial and accounting officer)
/s/ Jeannette Corbett	Director	December 20, 2012
Jeannette Corbett
/s/ Morgan Duke	Director	December 20, 2012
Morgan Duke
/s/ Tyler Wick	Director	December 20, 2012
Tyler Wick

35

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of September 30, 2012 and 2011	F-2
Consolidated Statements of Operations for the fiscal years ended September 30, 2012 and 2011	F-3
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2012 and 2011	F-4
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2012 and 2011	F-5
Notes to the Consolidated Financial Statements	F-6

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Liberator Medical Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Liberator Medical Holdings, Inc. and Subsidiaries (the “Company”) as of September 30, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the period ended September 30, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2012 in conformity with U.S. generally accepted accounting principles.

Crowe Horwath LLP

Fort Lauderdale, Florida

December 20, 2012

F-1

Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets
As of September 30, 2012 and 2011
(In thousands, except dollar per share amounts)

	2012			2011
Assets
Current Assets:
Cash	$	3,326		$	3,016
Accounts receivable, net of allowances of $5,044 and $4,177, respectively		10,365			7,860
Inventory, net of allowance for obsolete inventory of $310 and $144, respectively		2,627			3,009
Deferred taxes, current portion		2,254			1,877
Prepaid and other current assets		287			333
Total Current Assets		18,859			16,095
Property and equipment, net of accumulated depreciation of $2,888 and $2,186, respectively		1,250			1,626
Deferred advertising		22,426			17,191
Intangible assets, net of accumulated amortization of $91 and $25, respectively		239			305
Other assets		88			163
Total Assets	$	42,862		$	35,380
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	6,537		$	5,008
Accrued liabilities		1,221			1,119
Other current liabilities		92			103
Total Current Liabilities		7,850			6,230
Deferred tax liability		5,421			3,347
Credit line facility		2,500			1,500
Other long-term liabilities		132			48
Total Liabilities		15,903			11,125
Commitments and contingencies (see Note 13)
Stockholders’ Equity:
Common stock, $.001 par value, 200,000 shares authorized, 48,232 and 48,135 shares issued, respectively; 48,143 and 48,046 shares outstanding at September 30, 2012 and 2011, respectively		48			48
Additional paid-in capital		34,707			34,504
Accumulated deficit		(7,746	)		(10,247	)
Treasury stock, at cost;  89 shares at September 30, 2012 and 2011, respectively		(50	)		(50	)
Total Stockholders’ Equity		26,959			24,255
Total Liabilities and Stockholders’ Equity	$	42,862		$	35,380

See accompanying notes to consolidated financial statements 

F-2

Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations
For the fiscal years ended September 30, 2012 and 2011
(In thousands, except dollar per share amounts)

	2012			2011
Net Sales	$	60,943		$	52,698
Cost of Sales		23,924			20,601
Gross Profit		37,019			32,097
Operating Expenses:
Payroll, taxes and benefits		14,136			12,174
Advertising		8,099			8,206
Bad debts		4,664			3,746
Depreciation and amortization		794			730
General and administrative		5,019			4,644
Total Operating Expenses		32,712			29,500
Income from Operations		4,307			2,597
Other Income (Expense)
Gain on sale of assets		-			2
Interest expense		(75	)		(42	)
Interest income		-			5
Change in fair value of derivative liabilities		-			(902	)
Total Other Income (Expense)		(75	)		(937	)
Income before Income Taxes		4,232			1,660
Provision for Income Taxes		1,731			1,401
Net Income	$	2,501		$	259
Basic earnings per share:
Weighted average shares outstanding		48,097			47,869
Earnings per share	$	0.05		$	0.01
Diluted earnings per share:
Weighted average shares outstanding		52,266			53,613
Earnings per share	$	0.05		$	0.00

See accompanying notes to consolidated financial statements 

F-3

Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity
For the fiscal years ended September 30, 2012 and 2011
(In thousands)

					Additional								Total
	Common		Common		Paid in		Accumulated			Treasury			Stockholders’
	Shares		Stock		Capital		Deficit			Stock			Equity
Balance at October 1, 2010		44,617	$	45	$	28,927	$	(10,506	)	$	(50	)	$	18,416
Options issued to employees and directors		—		—		385		—			—			385
Common stock issued upon conversion of debt		3,333		3		5,097		—			—			5,100
Common stock issued for employee stock purchase plan		82		—		95		—			—			95
Common stock issued for cashless exercise of warrants		14		—		—		—			—			—
Net income		—		—		—		259			—			259
Balance at September 30, 2011		48,046	$	48	$	34,504	$	(10,247	)	$	(50	)	$	24,255
Options issued to employees and directors		—		—		122		—			—			122
Common stock issued for employee stock purchase plan		97		—		81		—			—			81
Net income				—		—		2,501			—			2,501
Balance at September 30, 2012		48,143	$	48	$	34,707	$	(7,746	)	$	(50	)	$	26,959

See accompanying notes to consolidated financial statements 

F-4

Liberator Medical Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2012 and 2011
(In thousands)

	2012			2011
Cash flow from operating activities:
Net income	$	2,501		$	259
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		8,672			8,790
Equity based compensation		122			385
Provision for doubtful accounts and contractual adjustments		4,787			3,950
Non-cash interest related to convertible notes payable		—			21
Change in fair value of derivative liabilities		—			902
Deferred income taxes		1,697			1,340
Reserve for inventory obsolescence		166			35
Gain on disposal of assets		—			(2	)
Changes in operating assets and liabilities:
Accounts receivable		(7,293	)		(5,065	)
Deferred advertising		(13,113	)		(15,245	)
Inventory		216			(1,025	)
Other assets		143			49
Accounts payable		1,529			1,182
Accrued expenses		116			13
Other liabilities		(89	)		(83	)
Net Cash Flows Used in Operating Activities		(546	)		(4,494	)
Cash flows from investing activities
Purchase of property and equipment and other		(151	)		(369	)
Acquisition of SGV Medical Supplies (see Note 10)		—			(466	)
Proceeds from the sale of assets		—			3
Net Cash Flows Used in Investing Activities		(151	)		(832	)
Cash flows from financing activities
Proceeds from credit line facility		1,000			1,500
Costs associated with credit line facility		(21	)		(51	)
Proceeds from employee stock purchase plan		67			86
Payments of debt and capital lease obligations		(39	)		(621	)
Net Cash Flows Provided by Financing Activities		1,007			914
Net increase (decrease) in cash		310			(4,412	)
Cash at beginning of period		3,016			7,428
Cash at end of period	$	3,326		$	3,016
Supplemental disclosure of cash flow information:
Cash paid for interest	$	73		$	56
Cash refunded for income taxes		—			(8	)
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures funded by capital lease borrowings		202			—
Common stock issued for conversion of debt		—			5,100

See accompanying notes to consolidated financial statements

F-5

Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Consolidated Financial Statements
September 30, 2012

Note 1 — Description of Business

Liberator Medical Holdings, Inc. and subsidiaries (the “Company”) distributes direct-to-consumer durable medical supplies to customers in all fifty states within the United States. The Company’s revenue is primarily derived from four product lines; urological, diabetic, ostomy, and mastectomy supplies. We provide a simple and reliable way for patients to obtain supplies. Our employees communicate directly with the patients and their physicians regarding patients’ prescriptions and supply requirements on a regular basis. The Company bills Medicare and third-party insurers on behalf of its patients. The Company markets its products directly to consumers, primarily through targeted media, direct-response television, Internet, and print advertising to patients throughout the United States. Our patient service representatives are specifically trained to communicate with patients, in particular seniors, helping them to follow their doctors’ orders and manage their chronic diseases. The Company’s operating platforms enable it to efficiently collect and process required documents from physicians and patients and bill and collect amounts due from Medicare, other third party payers and directly from patients.

Note 2 — Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. A summary of the more significant policies is set forth below:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education Services, Inc., Liberator Health and Wellness, Inc., and Practica Medical Manufacturing, Inc., its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Such estimates include, but are not limited to, (i) the net realizable value of accounts receivable; (ii) the reserve for excess and obsolete inventory; (iii) the expected period and amounts of future benefits to be realized directly from deferred direct advertising costs; (iv) the fair values of derivative financial instruments and stock compensation expense; (v) the valuation of intangible assets; and (vi) valuation allowances for deferred income tax assets. Actual results could differ from management’s estimates.

Fair Value of Financial Instruments

Financial instruments include cash, receivables, payables and debt obligations. Except as described below, due to the short-term nature of the financial instruments, the carrying value is representative of their fair value. The carrying value of the Credit Line Facility approximates fair value as interest rates are indexed to the Daily LIBOR Rate.

Accounts Receivable

Accounts receivable are reported net of allowances for contractual adjustments and uncollectible accounts. Contractual adjustments are recorded against revenues. Contractual adjustments result from differences between the payment amount received and the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payer’s inability or refusal to pay.

F-6

The Company performs analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have a material impact on the Company’s results of operations and cash flows. The Company does not accrue interest on its accounts receivable.

The bad debts written off against the allowance for uncollectible accounts for the years ended September 30, 2012 and 2011 were $3,919,000 and $3,085,000, respectively.

Inventories

Inventories are comprised of finished goods and are stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. Allowances for excess and obsolete inventory are recorded for inventory considered to be in excess or obsolete.

Deferred Advertising Costs

We capitalize and amortize direct-response advertising and related costs when we can demonstrate among other things that patients have directly responded to our advertisements. We assess the realizability of the amounts of direct-response advertising costs reported as assets at the end of each reporting period by comparing the carrying amounts of such assets to the probable remaining future net cash flows expected to result directly from such advertising. Management’s judgments include determining the period over which such net cash flows are estimated to be realized.

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.

A summary of deferred advertising costs for the fiscal years ending September 30, 2012 and 2011 is as follows (in thousands):

	2012			2011
Deferred Advertising Costs:
Beginning Balance, 10/1	$	17,191		$	10,006
Plus: Direct-response advertising spend		13,113			15,245
Less: Amortization of deferred advertising costs		(7,878	)		(8,060	)
Ending Balance, 9/30	$	22,426		$	17,191

A business change, including a change in reimbursement rates, that reduces or increases expected net cash flows or that shortens or lengthens the period over which such net cash flows are estimated to be realized could result in accelerated or reduced charges against our earnings.

F-7

Debt Issuance Costs

Costs associated with obtaining and closing loans and/or debt instruments such as, but not limited to placement agent fees, attorney fees and state documentary fees are capitalized and expensed over the term of the loan. Debt issuance costs of $21,000 and $51,000 were deferred during the years ended September 30, 2012 and 2011, respectively.

Debt issuance costs amortized for the years ended September 30, 2012 and 2011 were $24,000 and $16,000, respectively.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful life of the respective assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or useful life. Maintenance, repairs, and minor improvements are charged to expense as incurred; major renewals and betterments that extend the useful life of the associated asset are capitalized. When items of property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in results of operations for the period.

Intangible Assets

Intangible assets with definite lives are amortized over their estimated useful lives. We currently amortize acquired intangible assets with definite lives over a period of five years.

Long –lived Assets

We review property and equipment and intangible assets for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. We did not record any impairments of long-lived assets during fiscal year 2012 and 2011.

Treasury Stock

Treasury stock is accounted for using the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

Revenue Recognition

We recognize revenue related to product sales upon delivery to customers, provided that we have received and verified any written documentation required to bill Medicare, other government agencies, third-party payers, and patients. For product shipments for which we have not yet received the required written documentation, revenue recognition is delayed until the period in which those documents are collected and verified. We record revenue at the amounts expected to be collected from government agencies, other third-party payers, and from patients directly. We record, if necessary, contractual adjustments equal to the difference between the reimbursement amounts defined in the fee schedule and the revenue recorded per the billing system. These adjustments are recorded as a reduction of both gross revenues and accounts receivable. We analyze various factors in determining revenue recognition, including a review of specific transactions, current Medicare regulations and reimbursement rates, historical experience and the credit-worthiness of patients.

Revenue related to Medicare reimbursements is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined prices for reimbursable supplies, and we bill the remaining balance to either third-party payers or directly to patients.

F-8

Shipping and Handling Costs

Shipping and handling costs are not charged to the patients in compliance with Medicare policy. Shipping and handling costs for the years ended September 30, 2012 and 2011, were $2,905,000 and $2,284,000, respectively. These amounts are included in cost of sales on the accompanying consolidated statements of operations.

Stock-Based Compensation

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award.

Since the Company’s common stock has only been trading publicly since July 2007 with relatively light volume, we do not have sufficient company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the historical volatilities of similar entities within our industry as the expected volatility of our share price.

The expected dividend yield is 0% as the Company has not paid any dividends on its common stock.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a remaining term equal to the expected term of the stock-based award.

In December 2007, the SEC issued guidance allowing companies, under certain circumstances, to utilize a simplified method, based on the average of the vesting term and contractual term of the award, in determining the expected term of stock-based awards. Since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time that our equity shares have been publicly traded, we utilize the simplified method to calculate the expected term of stock-based awards.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, we have entered into certain other financial instruments and contracts with embedded conversion features on convertible debt instruments that had to be separated from the host instrument and were not afforded equity classification. These instruments were required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.

Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as assets or liabilities. The changes in fair values at each reporting period, or interim period, are recorded as a charge or a benefit to earnings included in the Other Income (Expense) section of the Company’s Consolidated Statement of Operations.

We estimate fair values of derivative financial instruments using various techniques that are considered to be consistent with the objective measurement of fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income or loss will reflect the volatility in changes to these estimates and assumptions.

F-9

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels. The three levels of the fair value hierarchy are defined as follows:

Level 1	—	Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2	—	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, as of the reporting date.
Level 3	—	Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.

As of September 30, 2012 and 2011, the Company had no assets or liabilities measured at fair value, based on the hierarchy input levels defined above, on a recurring basis.

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended September 30, 2011:

	2011
Beginning balance, 10/1: Derivative liabilities	$	1,698
Total (gains) losses		902
Purchases, sales, issuances and settlements, net		(2,600	)
Ending balance, 9/30: Derivative liabilities	$	—

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company files consolidated federal and state income tax returns.

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense.

Leases

The Company performs a review of newly acquired leases to determine whether a lease should be treated as a capital or operating lease. Capital lease assets are capitalized and depreciated over the term of the initial lease. A liability equal to the present value of the aggregated lease payments is recorded utilizing the stated lease interest rate. If an interest rate is not stated, the Company will determine an estimated cost of capital and utilize that rate to calculate the present value. For operating leases, the Company records rent expense and amortization of leasehold improvements on a straight-line basis over the initial term of the lease. All leasehold incentives, rent holidays, and/or other incentives are factored into the calculation of the deferred rent liability in order to record rent expense on a straight-line basis over the initial term of the lease. Leasehold incentives are capitalized and depreciated over the initial term of the lease.

F-10

Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated using the treasury stock method and reflect the potential dilution that could occur if stock options, warrants, or convertible debt instruments were exercised or converted into common stock and were not anti-dilutive.

Recent Accounting Pronouncements

In July 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that requires health care entities to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional disclosures relating to a company’s sources of patient revenue and its allowance for doubtful accounts related to patient accounts receivable will also be required. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. Upon adoption of this guidance on October 1, 2012, we will reclassify the provision for bad debts related to prior period patient service revenue as a deduction from patient service revenue as required by this guidance. The adoption of this guidance is not expected to have a material impact on our financial condition, overall results of operations or cash flows.

NOTE 3 — Property and Equipment

A summary of property and equipment at September 30, 2012 and 2011 is as follows (dollars in thousands):

	Estimated
	Life	2012			2011
Leased equipment	3 — 5 years	$	784		$	582
Transportation equipment	5 — 10 years		51			73
Warehouse equipment	5 — 10 years		131			110
Office furniture	5 — 10 years		495			492
Computer equipment	3 — 5 years		507			486
Telephone equipment	5 years		87			82
Website	5 years		114			114
Server software	3 years		318			312
Training guides	5 years		-			3
Leasehold improvements	Shorter of life of asset or lease		1,630			1,537
Signage	5 — 10 years		21			21
Total property and equipment			4,138			3,812
Less: accumulated depreciation			(2,888	)		(2,186	)
Property and equipment, net		$	1,250		$	1,626

The amounts charged to operating expenses for depreciation of property and equipment for the years ended September 30, 2012 and 2011 were $729,000 and $705,000, respectively.

Note 4 — Intangible Assets

A summary of intangible assets at September 30, 2012 and 2011, is as follows (in thousands):

	2012			2011
Customer list (see Note 10 below)	$	330		$	330
Less: accumulated amortization		(91	)		(25	)
Net intangible assets	$	239		$	305

F-11

Amortization expense associated with intangible assets for fiscal years 2012 and 2011 was $66,000 and $25,000, respectively. Estimated amortization expense for intangible assets as of September 30, 2012, for the next four fiscal years is as follows (in thousands):

	Amount
Fiscal year ending September 30:
2013	$	66
2014		66
2015		66
2016		41
		239

NOTE 5 — Stockholder Loan

As of September 30, 2012 and 2011, there were no outstanding loans due to stockholders. During the fiscal year ended September 30, 2011, $565,000 of principal was repaid to the President and principal stockholder of the Company, Mark Libratore. The stockholder loan consisted of various 8% and 11% notes payable to Mr. Libratore. The notes payable were non-collateralized and due on demand. However, the notes were subordinated to senior, unsecured, convertible notes payable that were converted into shares of the Company's common stock in May 2010 and October 2010.

Interest expense related to the stockholder loan for the fiscal years ended September 30, 2012 and 2011, was $0, and $4,000, respectively.

NOTE 6 — Convertible Notes Payable

October 2008 Convertible Note

On October 17, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $2,500,000. The note was convertible into shares of our common stock at an initial conversion price of $0.75 per share, subject to adjustment, and matured on October 17, 2010. The note was a senior unsecured obligation of ours and accrued interest at the rate of 3% per annum, paid semi-annually on each October 15 and April 15. The note was unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of the note could have been reduced if, among other things, we issued shares of common stock or securities exercisable, exchangeable or convertible for or into shares of common stock (“common stock equivalents”) at a price per share less than both the conversion price then in effect and $0.75, subject to certain exclusions. The Company concluded that the adjustment feature for the conversion price of the note was not indexed to the Company’s own stock and, therefore, was an embedded derivative financial liability that required bifurcation and separate accounting.

The warrant had a term of 3 years and was exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share. The warrant expired in October 2011.

On October 15, 2010, the $2,500,000 note was converted into 3,333,333 shares of the Company’s common stock at a conversion price of $0.75 per share.

Interest expense related to the October 2008 convertible note was $0 and $24,000 for the fiscal years ended September 30, 2012 and 2011, respectively.

F-12

NOTE 7 — Derivative Liabilities

The October 2008 convertible note, discussed above in Note 6, contained an embedded adjustment feature whereby the conversion price could have been adjusted if the Company had issued additional shares of common stock or securities exercisable, exchangeable, or convertible into shares of common stock at a price per share less than both the conversion price then in effect and $0.75. The embedded adjustment feature was not indexed to the Company’s own stock and, therefore, was an embedded derivative financial liability (the “Embedded Derivative”) that required bifurcation and separate accounting. Accordingly, the Company recorded a cumulative effect adjustment to the opening balance of retained earnings on October 1, 2009. Subsequently, the Company adjusted the Embedded Derivative to fair value at each interim period and recognized the changes in fair value as a charge or a benefit to earnings included in the Other Income (Expense) section of the Company’s Consolidated Statement of Operations.

On October 15, 2010, the October 2008 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, which was the intrinsic value of the conversion, based on the Company’s stock price as of the conversion date. 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 fiscal year ended September 30, 2011.

NOTE 8 — Credit Line Facility

PNC 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, the PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal property, including inventory and accounts receivable. Interest is payable on any advance at LIBOR plus 2.75%. Advances under the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Company’s accounts receivable and inventory that can constitute the permitted borrowing base. The PNC Credit Line Facility originally expired in February 2013; however, in January 2012 the expiration was extended to February 2014, with all other terms and conditions remaining the same.

The PNC Credit Line Facility requires the Company to comply with certain financial covenants which are defined in the credit agreement. As of September 30, 2012, these financial covenants included:

· 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; and

· The Company will maintain as of the end of each fiscal quarter, on a rolling four quarters basis, a Fixed Charge Coverage Ratio of at least 1.25 to 1.

As of September 30, 2012, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility. As of September 30, 2012, the availability under the PNC Credit Line Facility was $5,254,000 with an outstanding balance of $2,500,000. The interest rate for the outstanding balance as of September 30, 2012, was 2.96%. For fiscal years ended September 30, 2012 and 2011, the Company incurred $69,000 and $8,000, respectively, in interest expense related to the PNC Credit Line Facility.

NOTE 9 — Stockholders’ Equity

Warrants

In November 2007, the Company issued warrants to purchase 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share as compensation for consulting services. These warrants were still outstanding as of September 30, 2012, and expired in November 2012. The fair value of these warrants of $24,000 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	4.11	%
Expected term:	5 years
Expected dividend yield:	0.00	%
Expected volatility:	27.97	%

F-13

In connection with convertible notes issued in February, March, and April 2008, the Company issued warrants to purchase 829,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holders and 51,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the placement agent. As of September 30, 2012, 81,000 of these warrants have been exercised. The remaining 799,000 warrants will expire as follows:

Shares	Expiration Date
263,000	February 2013
100,000	March 2013
436,000	April 2013

The fair value of these warrants of $133,000 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	Range of 2.39% to 2.93%
Expected term:	5 years
Expected dividend yield:	0.00	%
Expected volatility:	27.97	%

In connection with a convertible note payable issued in May 2008, the Company issued warrants to purchase 4,375,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holder. The warrants held by the note holder are still outstanding as of September 30, 2012, and expire in May 2013.

The fair value of these warrants of $610,000 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	3.24	%
Expected term:	5 years
Expected dividend yield:	0.00	%
Expected volatility:	27.97	%

In connection with a convertible note payable issued in October 2008 and discussed above in Note 6, the Company issued warrants to purchase 1,166,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the note holder and 266,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the placement agent. These warrants expired unexercised in October 2011. The fair value of these warrants of $86,264 and $19,717, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	1.90	%
Expected term:	3 years
Expected dividend yield:	0.00	%
Expected volatility	35.19	%

In connection with the sale of common stock on March 9, 2010, for gross proceeds of $7 million, the Company issued warrants to purchase 233,333 shares of the Company’s common stock at an exercise price of $2.50 per share to the placement agent. These warrants are still outstanding as of September 30, 2012, and expire in October 2015. The fair value of these warrants of $228,961 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:	2.34	%
Expected term:	5 years
Expected dividend yield:	0.00	%
Expected volatility:	63.66	%

F-14

A summary of warrants issued, exercised and expired during the fiscal years ended September 30, 2012 and 2011, is as follows:

				Weighted
				Avg.
				Exercise
Warrants:	Shares			Price
Balance at October 1, 2010		7,393,334		$	1.14
Issued		-			-
Exercised		(51,000	)		1.00
Expired		(376,667	)		1.59
Balance at September 30, 2011		6,965,667		$	1.12
Issued		-			-
Exercised		-			-
Expired		(1,433,334	)		1.25
Balance at September 30, 2012		5,532,333		$	1.09

Options

In connection with conversion of $1,589,000 of debt to equity and under the terms of the reverse merger in June 2007, Mr. Libratore, the Company’s founder, principal shareholder and President, received options to purchase 4,541,009 shares of the Company’s common stock at an exercise price of $0.0001. As of September 30, 2012, a total of 3,921,009 options were outstanding.

Employee and Director Stock Options

On September 14, 2007, the Board of Directors adopted the Company’s 2007 Stock Plan with an aggregate of 1,000,000 shares of the Company’s unissued common stock. The Plan was approved by the shareholders at the Company’s annual meeting in September 2008. The 1,000,000 shares authorized under the 2007 Stock Plan are reserved for issuance to officers, directors, employees, prospective employees and consultants as incentive stock options, non-qualified stock options, restricted stock awards, other equity awards and performance based stock incentives. The option price, number of shares and grant date are determined at the discretion of the Company’s board of directors or the committee overseeing the 2007 Stock Plan.

On July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number of shares authorized under the plan from 1,000,000 to 2,000,000 shares. The amendment was approved at the Company’s annual meeting on September 4, 2009.

On September 12, 2011, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number of shares authorized under the plan from 2,000,000 to 2,105,000 shares. This amendment was approved at the Company’s annual meeting on October 20, 2011.

As of September 30, 2012, there are 2,035,000 shares outstanding and 70,000 shares available for grant under the 2007 Stock Plan.

There were no options granted during the fiscal year 2012. The weighted-average grant date fair value of options granted during the fiscal year 2011 was $0.40. There were no options exercised during the fiscal years 2012 or 2011. The fair values of stock-based awards granted during the fiscal year ended September 30, 2011, was calculated with the following weighted-average assumptions:

	2011
Risk-free interest rate:		1.05	%
Expected term:		3 years
Expected dividend yield:		0.00	%
Expected volatility:		48.91	%

F-15

For the fiscal years ended September 30, 2012 and 2011, the Company recorded $95,000 and $353,000, 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 September 30, 2012, there was $1,000 in total unrecognized compensation expense related to non-vested employee stock options granted under the 2007 Stock Plan, which is expected to be recognized during the first quarter of fiscal year 2013.

Stock option activity for the fiscal years ended September 30, 2012 and 2011 is summarized as follows:

				Weighted		Weighted
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
2007 Stock Plan:	Shares			Price		Life (Years)		Value
Options outstanding at October 1, 2010		1,655,000		$	0.92		3.32	$	656,800
Granted		500,000			1.25
Expired or forfeited		(70,000	)		1.03
Options outstanding at September 30, 2011		2,085,000		$	0.99		2.75	$	141,750
Granted		-			-
Expired or forfeited		(50,000	)		2.18
Options outstanding at September 30, 2012		2,035,000		$	0.97		1.74	$	92,150
Options exercisable at September 30, 2012		2,022,500		$	0.96		1.73	$	92,150
Options vested or expected to vest at September 30, 2012		2,035,000		$	0.97		1.74	$	92,150

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “ESPP”) provides a means by which employees of the Company are given an opportunity to purchase common stock of the Company through payroll deductions. The maximum number of shares to be offered under the ESPP is 500,000 shares of the Company’s common stock, subject to changes authorized by the Board of Directors of the Company. Shares are offered through consecutive offering periods with durations of approximately six (6) months, commencing on the first trading day on or after June 1^st and November 30^th of each year and terminating on the last trading day before the commencement of the next offering period. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. The ESPP allows employees to designate up to 15% of their cash compensation to purchase shares of the Company’s common stock at 85% of the lesser of the fair market value at the beginning of the offering period or the exercise date, which is the last trading day of the offering period. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of the Company’s common stock are not eligible to participate in the ESPP.

As of September 30, 2012, 371,188 shares of the Company’s common stock have been purchased through the ESPP, using $293,000 of proceeds received from employee payroll deductions. For the fiscal years ended September 30, 2012 and 2011, the Company received $67,000 and $86,000, respectively, through payroll deductions under the ESPP.

The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares expected to be issued under the ESPP at the grant date, the beginning date of the offering period, and recognizes compensation expense ratably over the offering period. If an employee elects to increase their payroll withholdings during the offering period, the increase is treated as a modification to the original option granted under the ESPP. As a result of the modification, the incremental fair value, if any, associated with the modified award is recognized as compensation expense at the date of the modification. Compensation expense is recognized only for shares that vest under the ESPP. For the fiscal years ended September 30, 2012 and 2011, the Company recognized $27,000 and $32,000, respectively, of compensation expense related to the ESPP.

F-16

NOTE 10 – Acquisition

On May 13, 2011, the Company entered into an Asset Purchase Agreement with Kruin Medical Products, Inc., a California corporation, which had been doing business as SGV Medical Supplies ("SGV"), and its sole shareholder. Under the Asset Purchase Agreement, the Company purchased SGV's customer list, inventory, and website (the "Purchased Assets") used in its ostomy supply business. The purchase price for the Purchased Assets was $466,000.

With the acquisition of SGV's ostomy supply customers, the Company was able to acquire new customers at a cost that was below the Company's advertising costs per acquired customer, which is consistent with the Company's growth strategy.

The fair values of the customer list and the website acquired were estimated using an income approach and incorporate significant inputs not observable in the market, which are Level 3 fair value inputs. Key assumptions in the estimated valuation included: (1) a discount rate of 18.92%; (2) the number of SGV customers expected to place orders with the Company; and (3) net cash flow projections over the projected life of the assets.

The following table summarizes the allocation of the purchase price consideration paid to the fair value of the assets acquired as of the date of the acquisition (in thousands):

Purchase Price Allocation:
Intangible assets (customer list)	$	330
Inventory		33
Property and equipment (website)		103
Total assets acquired	$	466

Disclosure of supplemental pro forma information for revenue and earnings related to the acquired assets, assuming the acquisition was made at the beginning of the earliest period presented, has not been disclosed since the effects of the acquisition would not have been material to the results of operations for the periods presented.

NOTE 11 — 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 fiscal years ended September 30, 2012 and 2011 (in thousands, except per share amounts):

	2012		2011
Numerator:
Net income — diluted	$	2,501	$	259
Denominator:
Weighted average shares outstanding — basic		48,097		47,869
Effect of dilutive securities:
Stock options and warrants		4,169		5,744
Weighted average shares outstanding — diluted		52,266		53,613
Earnings per share — basic	$	0.05	$	0.01
Earnings per share — diluted	$	0.05	$	0.00

The following table summarizes the number of shares outstanding for each of the periods presented, but not included in the calculation of diluted earnings per share because the impact would have been anti-dilutive for the fiscal years indicated (in thousands):

	2012		2011
Stock options		1,150		640
Warrants		5,532		358
Totals		6,682		998

F-17

NOTE 12 — Income Taxes

Income tax expense is as follows (in thousands):

	Fiscal year ended September 30,
	2012		2011
Current income tax expense:
Federal	$	3	$	—
State		31		61
	$	34	$	61
Deferred income tax expense:
Federal	$	1,454	$	1,149
State		243		191
	$	1,697	$	1,340
Total income tax expense	$	1,731	$	1,401

Income tax expense differs from the amounts that would result from applying the federal statutory rate of 35% to the Company’s income before taxes as follows (in thousands):

	Fiscal year ended September 30,
	2012		2011
Computed “expected” income tax expense	$	1,481	$	581
State income taxes, net of federal benefit		178		163
True-up of prior year differences		18		(23	)
Non-deductible amortization of notes payable		—		242
Change in fair value of derivatives		—		316
Other nondeductible expenses		54		122
Total income tax expense	$	1,731	$	1,401

Temporary differences that give rise to the components of deferred tax assets and liabilities are as follows (in thousands):

	As of September 30,
	2012			2011
Deferred tax assets — current:
Allowance for bad debts	$	1,946		$	1,611
Capitalization of costs to inventory		33			41
Inventory reserve		120			56
Deferred expenses		94			104
Accrued expenses		61			65
Deferred tax assets — current		2,254			1,877
Less: Valuation allowance		—			—
Net deferred tax assets — current	$	2,254		$	1,877
Deferred tax assets — non-current:
Net operating loss carry-forwards	$	3,074		$	3,287
Charitable contribution carry-forwards		5			2
Maximum tax credit carry-forward		3			—
Property and equipment		165			12
Deferred tax assets — non-current		3,247			3,301
Less: Valuation allowance		(17	)		(17	)
Net deferred tax assets — non-current	$	3,230		$	3,284
Deferred tax liability — non-current:
Deferred advertising		(8,651	)		(6,631	)
Deferred tax liability — non-current	$	(8,651	)	$	(6,631	)
Net deferred tax asset (liability)	$	(3,167	)	$	(1,470	)

F-18

As of September 30, 2012, the Company had net operating losses of approximately $8.0 million for federal income tax purposes and $7.3 million for Florida income tax purposes that can be carried forward for up to twenty years and deducted against future taxable income. The net operating loss carry-forwards expire in various years through 2031. Of the total federal and Florida net operating losses, $46,000 are subject to limitations under the provisions of Internal Revenue Code section 382 due to a prior year ownership change.

As of September 30, 2012 and 2011, management determined a valuation allowance against the net deferred tax assets of $17,000. In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment.

The Company and its subsidiaries file a consolidated federal and Florida income tax return. One of the Company’s subsidiaries will file an additional separate state income tax return. These returns remain subject to examination by taxing authorities for all years after December 31, 2008.

For fiscal years 2012 and 2011, the Company recorded as part of its income tax expense an unrecognized tax benefit for certain state taxes of $26,000 and $52,000, respectively, and interest and/or penalties related to the unrecognized tax benefit of $4,000 and $9,000, respectively. The Company had $92,000 and $61,000 of total unrecognized tax benefits, including accrued interest and penalties that are included in accrued liabilities in the accompanying balance sheet as of September 30, 2012 and 2011, respectively. The state statutes and regulations and their applicability to specific situations vary by state.

The following is a reconciliation of the beginning and ending liabilities for unrecognized tax benefits for the fiscal years ended September 30, 2012 and 2011 (dollars in thousands):

	2012		2011
Balance at October 1	$	52	$	—
Gross increases – tax positions in prior periods		—		31
Gross decreases – tax positions in prior periods		—		—
Gross increases – tax positions in current period		26		21
Gross decreases – tax positions in current period		—		—
Balance at September 30	$	78	$	52
Accrued interest and penalties		14		9
Total liability for unrecognized tax benefits	$	92	$	61

We do not believe it is reasonably possible that unrecognized tax benefits will significantly change within the next twelve months. We also do not believe that the recognition of any of the unrecognized tax benefits would affect the Company’s effective tax rate.

NOTE 13 — Commitments and Contingencies

Capital Lease Obligations

The Company leases certain computer equipment, software, office furniture, and warehouse equipment under capital leases. The net book value of these assets was $179,000 and $15,000 as of September 30, 2012, and 2011, respectively. The payment terms of the capital leases expire between November 2013 and June 2015.

F-19

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2012 (in thousands):

	Amount
Fiscal year ending September 30:
2013	$	79
2014		71
2015		41
Total minimum lease payments		191
Less: Interest on capitalized lease obligations		(14	)
Present value of capitalized lease obligations		177
Less: Current portion		(70	)
Capitalized lease obligations, net of current portion	$	107

The present value of capital lease obligations is included in other current liabilities and other long-term liabilities on the Company’s Consolidated Balance Sheet as of September 30, 2012. Interest expense on capitalized leases was $6,000 and $6,000 for the fiscal years ended September 30, 2012 and 2011, respectively.

Operating Leases

The Company leases various office and warehouse facilities, software, and equipment under non-cancelable operating leases that expire at various times through April 2016. Future minimal rental and lease commitments under non-cancelable operating leases with terms in excess of one year as of September 30, 2012 are as follows (in thousands):

	Amount
Fiscal year ending September 30:
2013	$	1,025
2014		824
2015		105
2016		41
2017		—
Total minimum lease payments	$	1,995

Rent, software, and equipment lease expense for the years ended September 30, 2012 and 2011, was $1,205,000 and $1,029,000, respectively.

Purchase Commitments

In May 2009, the Company entered into a long distance telephone service agreement that requires the company to purchase a minimum of $6,000 per month, excluding vendor rebates, of long distance service through December 2009. Effective January 2010, the agreement was revised to $10,000 per month, excluding additional vendor rebates. The long distance service agreement expires in April 2014. The Company purchased $161,000 and $225,000 of long distance service under the agreement for the fiscal years ended September 30, 2012 and 2011, respectively.

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Litigation

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

NOTE 14 — Concentration of Credit Risk

From time to time, the Company has cash in financial institutions in excess of federally insured limits. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances. Cash exceeding federally insured limits amounted to $1,000 and $6,000 as of September 30, 2012 and 2011, respectively.

The Company generally does not require collateral or other security in extending credit to its customers; however, the Company routinely accepts assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans, or policies covering its customers. Accounts receivable due from government sources under Medicare, Medicaid, and other federally funded programs was approximately 58% and 60% of total gross receivables as of September 30, 2012 and 2011, respectively.

A significant portion of the Company’s revenues are generated from the sale of urological products. As a result, changes in the external environment, including regulatory changes, could be beneficial or detrimental depending on market conditions. The impact of these changes cannot be determined at this time.

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