##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q/A
 (Amendment No. 1)
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2009
 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.
  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) (Zip Code)
 (772) 287-2414  (Registrants telephone number, including area code)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ
   Class
    
    Outstanding as of February 10, 2010Common Stock, $.001
    
    33,933,666




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##### 



TABLE OF CONTENTS
 PageExplanatory Note
    
    
    3PART I  FINANCIAL INFORMATION
    
    
    4Item 1.
    
    Condensed Consolidated Financial Statements
    
    
    4Balance Sheets as of December 31, 2009 (unaudited) and September 30, 2009
    
    
    4Statements of Operations for the three months ended December 31, 2009 and 2008 (unaudited)
    
    
    5Statement of Changes in Stockholders Equity for the three months ended December 31, 2009 (unaudited)
    
    
    6Statements of Cash Flows for the three months ended December 31, 2009 and 2008 (unaudited)
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4T.
    
    Controls and Procedures
    
    
    28PART II  OTHER INFORMATION
    
    
    30Item 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Other Information
    
    
    30Item 5.
    
    Exhibits
    
    
    30SIGNATURES
    
    
    
    
    31EX-31.1EX-31.2EX-32.1EX-32.2
   
 2




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##### Table of Contents



Explanatory Note  Restatement of Previously Issued Financial Statements
  
    
    The Companys adoption of accounting principles related to embedded conversion features
included in certain convertible notes payable issued in May and October 2008 that became
effective for the Company on October 1, 2009.
    
    The effect of a change in a valuation allowance that resulted from a change in judgment
about the realizability of the related deferred tax asset in future years.
    
    In addition, certain reclassifications related to the accounting for deferred
advertising costs and deferred income taxes have been made in order to maintain consistency
and comparability with our subsequent presentations in fiscal year 2010 on Forms 10-Q and
10-K.
   
    
    Part I  Item 1  Condensed Consolidated Financial Statements
    
    Part I  Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    Part I  Item 4T  Controls and Procedures
    
    Part II  Item 6  Exhibits
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Liberator Medical Holdings, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets
  As RestatedDecember 31,
    
    
    September 30,2009
    
    
    2009(unaudited)AssetsCurrent AssetsCash
    
    $
    2,881
    
    
    $
    3,798Restricted cash
    
    
    1,053
    
    
    
    500Accounts receivable, net of allowances of $2,717 and $2,327, respectively
    
    
    4,664
    
    
    
    3,850Inventory, net of allowance for obsolete inventory of $110 and $110, respectively
    
    
    933
    
    
    
    902Deferred taxes, current portion
    
    
    1,073
    
    
    
    Debt issuance costs, current portion
    
    
    242
    
    
    
    347Other current assets
    
    
    246
    
    
    
    136Total Current Assets
    
    
    11,092
    
    
    
    9,533Property and equipment, net of accumulated depreciation of $1,116 and $1,021,
respectively
    
    
    1,726
    
    
    
    1,041Deferred advertising
    
    
    4,983
    
    
    
    3,755Debt issuance costs, net of current portion
    
    
    
    
    
    
    7Deposits
    
    
    258
    
    
    
    123Total Assets
    
    $
    18,059
    
    
    $
    14,459Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    2,834
    
    
    $
    2,089Accrued liabilities
    
    
    560
    
    
    
    716Credit line facility
    
    
    750
    
    
    
    Stockholder loans
    
    
    1,315
    
    
    
    1,515Convertible notes payable, net of unamortized discount of $670 and $292,
respectively
    
    
    5,863
    
    
    
    3,893Derivative liabilities
    
    
    10,918
    
    
    
    Capital lease obligations, current portion
    
    
    77
    
    
    
    80Deferred rent liability, current portion
    
    
    38
    
    
    
    60Total Current Liabilities
    
    
    22,355
    
    
    
    8,353Convertible notes payable, net of unamortized discount of $0 and $90, respectively
    
    
    
    
    
    
    2,447Capital lease obligations, net of current portion
    
    
    53
    
    
    
    70Deferred rent liability, net of current portion
    
    
    185
    
    
    
    165Deferred tax liability
    
    
    64
    
    
    
    Total Liabilities
    
    
    22,657
    
    
    
    11,035Stockholders Equity (Deficit)Common stock, $.001 par value, 200,000 shares authorized; 33,298 and 32,462 shares
issued, respectively; 33,209 and 32,377 shares outstanding at December 31, 2009 and
September 30, 2009, respectively
    
    
    33
    
    
    
    32Additional paid-in capital
    
    
    11,870
    
    
    
    11,705Accumulated deficit
    
    
    (16,451
    )
    
    
    (8,272
    )(4,548
    )
    
    
    3,465Less: Treasury stock, at cost; 89 and 85 shares at December 31, 2009 and September
30, 2009, respectively
    
    
    (50
    )
    
    
    (41
    )Total Stockholders Equity (Deficit)
    
    
    (4,598
    )
    
    
    3,424Total Liabilities and Stockholders Equity (Deficit)
    
    $
    18,059
    
    
    $
    14,459
  4




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Liberator Medical Holdings, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations
 For the three months ended December 31, 2009 and 2008
 (Unaudited)
  As Restated2009
    
    
    2008Sales
    
    $
    9,158
    
    
    $
    5,342Cost of Sales
    
    
    3,248
    
    
    
    1,841Gross Profit
    
    
    5,910
    
    
    
    3,501Operating ExpensesPayroll, taxes and benefits
    
    
    2,169
    
    
    
    1,065Advertising
    
    
    806
    
    
    
    298Bad debts
    
    
    655
    
    
    
    679Depreciation
    
    
    95
    
    
    
    66General and administrative
    
    
    1,025
    
    
    
    882Total Operating Expenses
    
    
    4,750
    
    
    
    2,990Income from Operations
    
    
    1,160
    
    
    
    511Other Income (Expense)Interest expense
    
    
    (416
    )
    
    
    (273
    )Change in fair value of derivative liabilities
    
    
    (5,098
    )
    
    
    Interest income
    
    
    3
    
    
    
    8Total Other Income (Expense)
    
    
    (5,511
    )
    
    
    (265
    )Income (Loss) before Income Taxes
    
    
    (4,351
    )
    
    
    246Benefit from Income Taxes
    
    
    (1,006
    )
    
    
    Net Income (Loss)
    
    $
    (3,345
    )
    
    $
    246Basic earnings (loss) per share:Weighted average shares outstanding
    
    
    32,848
    
    
    
    32,049Earnings (Loss) per share
    
    $
    (0.10
    )
    
    $
    0.01Diluted earnings (loss) per share:Weighted average shares outstanding
    
    
    32,848
    
    
    
    35,970Earnings (Loss) per share
    
    $
    (0.10
    )
    
    $
    0.01
  5




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Liberator Medical Holdings, Inc. and Subsidiaries
 
 Condensed Consolidated Statement of Changes in Stockholders Equity (Deficit)
 For the three months ended December 31, 2009 As Restated
(Unaudited)
 TotalCommon
    
    
    Common
    
    
    Paid in
    
    
    Accumulated
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    Equity (Deficit)Balance at September 30, 2009
    
    
    32,377
    
    
    $
    32
    
    
    $
    11,705
    
    
    $
    (8,272
    )
    
    $
    (41
    )
    
    $
    3,424Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    (4,834
    )
    
    
    
    
    
    
    (5,224
    )Options issued to employees
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Common stock issued for interest on convertible debt
    
    
    19
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Common stock issued upon conversion of debt
    
    
    300
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Common stock issued for exercise of warrants
    
    
    355
    
    
    
    1
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    163Common stock issued for employee stock purchase plan
    
    
    162
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Purchase common treasury stock
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,345
    )
    
    
    
    
    
    
    (3,345
    )Balance at December 31, 2009
    
    
    33,209
    
    
    $
    33
    
    
    $
    11,870
    
    
    $
    (16,451
    )
    
    $
    (50
    )
    
    $
    (4,598
    )
  6




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 For the three months ended December 31, 2009 and 2008
(Unaudited)
 Restated2009
    
    
    2008Cash flow from operating activities:Net Income (Loss)
    
    $
    (3,345
    )
    
    $
    246Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    905
    
    
    
    357Change in fair value of derivative liabilities
    
    
    5,098
    
    
    
    Equity based compensation
    
    
    133
    
    
    
    136Provision for doubtful accounts and sales returns and adjustments
    
    
    763
    
    
    
    679Non-cash interest related to convertible notes payable
    
    
    353
    
    
    
    162Deferred income taxes
    
    
    (1,009
    )
    
    
    Amortization of non-cash debt issuance costs
    
    
    9
    
    
    
    10Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,576
    )
    
    
    (1,190
    )Deferred advertising
    
    
    (2,037
    )
    
    
    (680
    )Inventory
    
    
    (31
    )
    
    
    (275
    )Other assets
    
    
    (150
    )
    
    
    80Accounts payable
    
    
    744
    
    
    
    928Accrued expenses
    
    
    (179
    )
    
    
    6Deferred rent
    
    
    (2
    )
    
    
    (12
    )Net Cash Flow Provided by (Used in) Operating Activities
    
    
    (324
    )
    
    
    447Cash flow from investing activities:Purchase of property and equipment
    
    
    (780
    )
    
    
    (29
    )Purchase of certificates of deposit
    
    
    (553
    )
    
    
    Net Cash Flow Used in Investing Activities
    
    
    (1,333
    )
    
    
    (29
    )Cash flow from financing activities:Proceeds from issuance of convertible notes
    
    
    
    
    
    
    2,500Costs associated with issuance of convertible notes
    
    
    
    
    
    
    (310
    )Proceeds from the exercise of warrants
    
    
    163
    
    
    
    Proceeds from employee stock purchase plan
    
    
    56
    
    
    
    Proceeds from credit line facility
    
    
    750
    
    
    
    Purchase of treasury stock
    
    
    (9
    )
    
    
    (3
    )Payments of debt and capital lease obligations
    
    
    (220
    )
    
    
    (16
    )Net Cash Flow Provided by Financing Activities
    
    
    740
    
    
    
    2,171Net increase (decrease) in cash
    
    
    (917
    )
    
    
    2,589Cash at beginning of period
    
    
    3,798
    
    
    
    1,173Cash at end of period
    
    $
    2,881
    
    
    $
    3,762Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    105
    
    
    $
    93Cash paid for income taxes
    
    $
    12
    
    
    $
    Supplemental schedule of non-cash investing and financing activities:Capital expenditures funded by capital lease borrowings
    
    $
    
    
    
    $
    17Common stock issued for interest expense
    
    $
    45
    
    
    $
    Common stock issued for conversion of debt
    
    $
    150
    
    
    $
    
  7




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Unaudited Condensed Consolidated Financial Statements
December 31, 2009
 Note 1  Basis of Presentation (Restated)
    
    
    On the Consolidated Balance Sheet as of September 30, 2009, $2,016,000 of Deferred
Advertising was reclassified from Current Assets to Non-current Assets in order to be
consistent with accounting guidance issued for deferred advertising costs.
 Note 2  Summary of Significant Accounting Policies (Restated)
  Derivative Financial Instruments
   8




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Recent Accounting Pronouncements
   Financial Instruments
 Fair Value Measurements and Disclosures
 Subsequent Events
 The Hierarchy of Generally Accepted Accounting
Principles Generally
Accepted Accounting Principles
 Measuring
Liabilities at Fair Value
 9




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Multiple-Deliverable Revenue Arrangements,
 Note 3  Restatement of Previously Issued Financial Statements (Restated)
  
    
    Previously, the Company had concluded that embedded anti-dilution provisions included in
certain convertible notes payable issued in May and October 2008 were indexed to the Companys
own stock under accounting principles that became effective for the Company on October 1, 2009
and did not change the accounting treatment for the embedded conversion features when the
guidance became effective for the Company on October 1, 2009. However, after re-evaluating the
accounting principles issued and our accounting treatment for the embedded conversion
features, the Company concluded that an error was made in the application of the accounting
principles, that the embedded anti-dilution provisions are not indexed to the Companys own
stock, and, therefore, they are embedded derivative financial liabilities (the Embedded
Derivatives) that require bifurcation and separate accounting. Accordingly, the Company
should have recorded a cumulative effect adjustment to the opening balance of paid in capital
and accumulated deficit on October 1, 2009. In addition, the Company is required to adjust the
Embedded Derivatives 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, recorded as a
component of other income (expense) in the Companys condensed consolidated statement of
operations.
 
    
    Previously, the Company included a change in the valuation allowance as an adjustment to
the estimated annual tax rate used in the calculation of interim period deferred taxes, which
allocated the tax benefits proportionately throughout the four quarters of fiscal year 2010.
Based on a re-evaluation of generally accepted accounting principles, the Company recorded the
effect of the change in the valuation allowance as a discrete event, which resulted in an
additional $1,072,000 in tax benefits during the interim period ending December 31, 2009.
 
    
    In addition, certain reclassifications related to the accounting for deferred advertising
costs and deferred income taxes have been made in order to maintain consistency and
comparability with our subsequent presentations in fiscal year 2010 on Forms 10-Q and 10-K.
The Company had reflected both a current and long term portion of the deferred advertising
assets on the condensed consolidated balance sheet as of December 31, 2009. In accordance with
an SEC interpretation (SPCH.T.1995.22.Glynn), the SEC would object to the classification of
any unamortized cost of advertising as a current asset. As a result, the Company reclassified
the amount previously recorded as current assets to non-current assets. The Company had
reflected its deferred tax assets and deferred tax liabilities as a consolidated deferred tax
liability amount on the condensed consolidated balance sheet as of December 31, 2009. The
Company has reclassified the current portion of the deferred tax assets from the consolidated
deferred tax liability and presented the amounts separately in accordance with generally
accepted accounting principles.
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CumulativeEffectAs
    
    
    Adjustment
    
    
    CurrentPreviously
    
    
    as of
    
    
    Period
    
    
    AsBalance Sheet Data:
    
    Reported
    
    
    10/1/2009
    
    
    Effect
    
    
    RestatedDeferred advertising, current portion
    
    
    2,678
    
    
    
    
    
    
    
    (2,678
    )
    
    
    Deferred taxes, current portion
    
    
    
    
    
    
    
    
    
    
    1,073
    
    
    
    1,073Current Assets
    
    
    12,697
    
    
    
    
    
    
    
    (1,605
    )
    
    
    11,092Deferred advertising
    
    
    2,305
    
    
    
    
    
    
    
    2,678
    
    
    
    4,983Total Assets
    
    
    16,986
    
    
    
    
    
    
    
    1,073
    
    
    
    18,059Notes payable, net
    
    $
    6,286
    
    
    $
    (596
    )
    
    $
    173
    
    
    $
    5,863Derivative liabilities
    
    
    
    
    
    
    5,820
    
    
    
    5,098
    
    
    
    10,918Current Liabilities
    
    
    11,860
    
    
    
    5,224
    
    
    
    5,271
    
    
    
    22,355Deferred tax liability
    
    
    503
    
    
    
    
    
    
    
    (439
    )
    
    
    64Total Liabilities
    
    
    12,601
    
    
    
    5,224
    
    
    
    4,832
    
    
    
    22,657Additional Paid in Capital
    
    
    11,820
    
    
    
    (390
    )
    
    
    440
    
    
    
    11,870Accumulated Deficit
    
    
    (7,418
    )
    
    
    (4,834
    )
    
    
    (5,268
    )
    
    
    (16,451
    )Total Equity (Deficit)
    
    $
    4,385
    
    
    $
    (5,224
    )
    
    $
    (3,759
    )
    
    $
    (4,598
    )
 For the three months ended December 31, 2009As
    
    
    CurrentPreviously
    
    
    Period
    
    
    AsStatement of Operations Data:
    
    Reported
    
    
    Effect
    
    
    RestatedOther Income (Expense):Interest Expense
    
    $
    (243
    )
    
    $
    (173
    )
    
    $
    (416
    )Change in fair value of derivative liabilities
    
    
    
    
    
    
    (5,098
    )
    
    
    (5,098
    )Total Other Income (Expense)
    
    
    (240
    )
    
    
    (5,271
    )
    
    
    (5,511
    )Provision for (Benefit from) Income Taxes
    
    
    66
    
    
    
    (1,072
    )
    
    
    (1,006
    )Net Income (Loss)
    
    $
    854
    
    
    $
    (4,199
    )
    
    $
    (3,345
    )Basic Earnings (Loss) per Share
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    
    (0.10
    )Diluted Earnings (Loss) per Share
    
    $
    0.02
    
    
    $
    (0.12
    )
    
    
    (0.10
    )
 Note 4  Fair Value Measurements (Restated)
  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.
 11




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December 31, 2009Instrument
    
    Fair Value
    
    Carrying Value
    
    Level
    
    Valuation MethodologyDerivative liabilities (See Note 10 below)
    
    $
    10,918
    
    
    $
    10,918
    
    
    
    3
    
    
    Monte Carlo
Simulation model
   FY 2010Beginning balance: Derivative liabilities
    
    $
    Adoption of change in accounting principle
    
    
    5,820Total loss on change in derivative liabilities
    
    
    5,098Purchases, sales, issuances and settlements, net
    
    
    Ending balance: Derivative liabilities
    
    $
    10,918
 Note 5  Property and Equipment
  Estimated
    
    
    December 31,
    
    
    September 30,Life
    
    
    2009
    
    
    2009Leased equipment
    
    5 years
    
    $
    582
    
    
    $
    582Transportation equipment
    
    3 years


    
    
    95
    
    
    
    95Warehouse equipment
    
    5 years
    
    
    64
    
    
    
    56Office furniture
    
    5 years
    
    
    339
    
    
    
    150Computer equipment
    
    3 years
    
    
    150
    
    
    
    87Telephone equipment
    
    5 years
    
    
    33
    
    
    
    33Rental equipment
    
    7 years
    
    
    18
    
    
    
    18Web site
    
    3 years
    
    
    6
    
    
    
    6Server software
    
    3 years
    
    
    158
    
    
    
    130Training guides
    
    3 years
    
    
    3
    
    
    
    3Leasehold improvements
    
    5 years
    
    
    901
    
    
    
    889Signage
    
    3 years
    
    
    13
    
    
    
    13Fixed assets under construction
    
    
    
    
    
    
    480
    
    
    
    Total property and equipment
    
    
    
    
    
    
    2,842
    
    
    
    2,062Less: accumulated depreciation
    
    
    
    
    
    
    (1,116
    )
    
    
    (1,021
    )Property and equipment, net
    
    
    
    
    
    $
    1,726
    
    
    $
    1,04
  Note 6  Deposits
  December 31,
    
    
    September 30,2009
    
    
    2009Deposits on leased equipment
    
    $
    14
    
    
    $
    9Building rent deposits
    
    
    64
    
    
    
    67Utility deposits
    
    
    9
    
    
    
    9Deposits on software consulting
    
    
    25
    
    
    
    25Deposits for building expansion
    
    
    66
    
    
    
    3Deposits for professional fees
    
    
    80
    
    
    
    10Total deposits
    
    $
    258
    
    
    $
    123
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Note 7  Stockholder Loan
  Note 8  Credit Line Facility
  
 Note 9  Convertible Notes Payable (Restated)
 April 2008 Convertible Notes
  Amount DueFebruary 2010
    
    $
    263March 2010
    
    
    50April 2010
    
    
    138Total April 2008 Convertible Notes Due
    
    $
    451
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##### Table of Contents



May 2008 Convertible Note
    October 2008 Convertible Note
  14




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April08
    
    
    May08
    
    
    Oct08Notes
    
    
    Note
    
    
    Note
    
    
    TotalsNotes Payable, face amount
    
    $
    452
    
    
    $
    3,500
    
    
    $
    2,500
    
    
    $
    6,452Discounts on Notes:Initial valuation of Warrants
    
    
    (126
    )
    
    
    (610
    )
    
    
    (86
    )
    
    
    (822
    )Initial valuation of Embedded Derivative
    
    
    
    
    
    
    (930
    )
    
    
    (841
    )
    
    
    (1,771
    )Accumulated Amortization
    
    
    126
    
    
    
    1,239
    
    
    
    558
    
    
    
    1,923Total Discounts
    
    
    
    
    
    
    (301
    )
    
    
    (369
    )
    
    
    (670
    )Accrued Interest
    
    
    45
    
    
    
    17
    
    
    
    19
    
    
    
    81Convertible Notes Payable, net
    
    $
    497
    
    
    $
    3,216
    
    
    $
    2,150
    
    
    $
    5,863
  April08 Notes
    
    
    May08 Note
    
    
    TotalsNotes Payable, face amount
    
    $
    601
    
    
    $
    3,500
    
    
    $
    4,101Discounts on Notes:Initial valuation of Warrants
    
    
    (126
    )
    
    
    (610
    )
    
    
    (736
    )Initial valuation of Beneficial Conversion Options
    
    
    
    
    
    
    (303
    )
    
    
    (303
    )Accumulated Amortization
    
    
    126
    
    
    
    621
    
    
    
    747Total Discounts
    
    
    
    
    
    
    (292
    )
    
    
    (292
    )Accrued Interest
    
    
    40
    
    
    
    44
    
    
    
    84Convertible Notes Payable, net
    
    $
    641
    
    
    $
    3,252
    
    
    $
    3,893
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##### Table of Contents



Oct08 NoteNotes Payable, face amount
    
    $
    2,500Discounts on Notes:Initial valuation of Warrants
    
    
    (86
    )Initial valuation of Beneficial Conversion Option
    
    
    (86
    )Accumulated Amortization
    
    
    82Total Discounts
    
    
    (90
    )Accrued Interest
    
    
    37Convertible Notes Payable, net
    
    $
    2,447
 NOTE 10  Derivative Liabilities (Restated)
   Balance
    
    
    CumulativeSeptember
    
    
    Effect of
    
    
    Balance30, 2009
    
    
    Adjustment
    
    
    October 1, 2009Derivative liabilities
    
    $
    
    
    
    $
    5,820
    
    
    $
    5,820Convertible Notes Payable, net
    
    
    6,340
    
    
    
    (596
    )
    
    
    5,744Additional paid-in capital
    
    
    11,705
    
    
    
    (390
    )
    
    
    11,315Accumulated deficit
    
    
    (8,272
    )
    
    
    (4,834
    )
    
    
    (13,106
    )
   May 2008 Note
    
    October 2008 NoteRisk-free interest rate:
    
    
    2.56
    %
    
    
    1.64
    %Expected term:
    
    2 years
    
    2 yearsExpected dividend yield:
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility:
    
    
    45.29
    %
    
    
    50.87
    %Probability of triggering reset provision:
    
    
    64.17
    %
    
    
    61.62
    %Existing conversion price per share
    
    $
    0.80
    
    
    $
    0.75Companys stock price per share
    
    $
    0.73
    
    
    $
    0.75
 16




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##### Table of Contents



May 2008 Note
    
    October 2008 NoteRisk-free interest rate:
    
    
    0.40
    %
    
    
    0.40
    %Expected term:
    
    0.64 years
    
    1.05 yearsExpected dividend yield:
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility:
    
    
    56.03
    %
    
    
    56.03
    %Probability of triggering reset provision:
    
    
    22.42
    %
    
    
    19.18
    %Existing conversion price per share
    
    $
    0.80
    
    
    $
    0.75Companys stock price per share
    
    $
    1.45
    
    
    $
    1.45
   May 2008 Note
    
    October 2008 NoteRisk-free interest rate:
    
    
    0.47
    %
    
    
    0.47
    %Expected term:
    
    0.39 years
    
    0.79 yearsExpected dividend yield:
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility:
    
    
    51.99
    %
    
    
    51.99
    %Probability of triggering reset provision:
    
    
    2.91
    %
    
    
    2.11
    %Existing conversion price per share
    
    $
    0.80
    
    
    $
    0.75Companys stock price per share
    
    $
    2.18
    
    
    $
    2.18
 Note 11  Capital Lease Obligations
   AmountYear ending September 30:2010
    
    $
    752011
    
    
    622012
    
    
    13Total minimum lease payments
    
    
    150Less: Interest on capitalized lease obligations
    
    
    (20
    )Present value of capitalized lease obligations
    
    
    130Less: Current portion
    
    
    (77
    )Capitalized lease obligations, net of current portion
    
    $
    53
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##### Table of Contents



Note 12  Stockholders Equity
 Warrants
  Shares
    
    Expiration Date7,188
    
    April 201031,250
    
    May 20102,070,904
    
    June 2010337,500
    
    July 201012,500
    
    August 201025,000
    
    November 2010
  Shares
    
    Expiration Date6,250
    
    July 2010234,375
    
    August 201075,625
    
    September 2010169,167
    
    October 2010145,000
    
    November 201031,250
    
    December 20106,250
    
    January 2011
  Risk-free interest rate:
    
    
    4.11
    %Expected term:
    
    5
    yearsExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    27.97
    %
  Shares
    
    Expiration Date263,000
    
    February 2013100,000
    
    March 2013497,000
    
    April 2013
 18




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##### Table of Contents



Risk-free interest rate:
    
    Range of 2.39% to 2.93%Expected term:
    
    5 yearsExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    27.97
    %
   Risk-free interest rate:
    
    
    3.24
    %Expected term:
    
    5
    yearsExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    27.97
    %
  Risk-free interest rate:
    
    
    1.90
    %Expected term:
    
    3
    yearsExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    35.19
    %
  WeightedAvg.ExerciseWarrants:
    
    Shares
    
    
    PriceBalance at September 30, 2009
    
    
    10,458,093
    
    
    $
    1.07Issued
    
    
    
    
    
    
    Exercised
    
    
    (512,500
    )
    
    
    1.00Expired
    
    
    
    
    
    
    Balance at December 31, 2009
    
    
    9,945,593
    
    
    $
    1.07
 Options
  19




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##### Table of Contents



Employee & Director Stock Options
   Compensation  Stock
Compensation,
     2009
    
    
    2008Risk-free interest rate:
    
    
    1.38
    %
    
    
    1.82
    %Expected term:
    
    3
    years

    
    3
    yearsExpected dividend yield:
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility:
    
    
    66.35
    %
    
    
    36.05
    %
  20




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##### Table of Contents



WeightedAvg.
    
    
    AggregateExercise
    
    
    Intrinsic2007 Stock Plan:
    
    Shares
    
    
    Price
    
    
    ValueOptions outstanding at September 30, 2009
    
    
    1,580,000
    
    
    $
    0.81Granted
    
    
    100,000
    
    
    
    2.27Exercised
    
    
    
    
    
    
    Expired or forfeited
    
    
    
    
    
    
    Options outstanding at December 31, 2009
    
    
    1,680,000
    
    
    $
    0.90
    
    
    $
    2,144,100Options exercisable at December 31, 2009
    
    
    600,000
    
    
    $
    0.73
    
    
    $
    862,500
 2009 Employee Stock Purchase Plan
 st th
   Note 13  Basic and Diluted Earnings (Loss) per Common Share (Restated)
  For the Quarters EndedDecember 31,2009
    
    
    2008Numerator:Net income (loss)  basic
    
    $
    (3,345
    )
    
    $
    246Effect of dilutive securities:Convertible debt
    
    
    
    
    
    
    Net income (loss)  diluted
    
    $
    (3,345
    )
    
    $
    246Denominator:Weighted average shares outstanding  basic
    
    
    32,848
    
    
    
    32,049Effect of dilutive securities:Stock options
    
    
    
    
    
    
    3,921Convertible debt
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    32,848
    
    
    
    35,970Earnings per share  basic
    
    $
    (0.10
    )
    
    $
    0.01Earnings per share  diluted
    
    $
    (0.10
    )
    
    $
    0.01
 21




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##### Table of Contents



2009
    
    
    2008Stock options
    
    
    5,601
    
    
    
    975Warrants
    
    
    9,946
    
    
    
    10,668Convertible Debt
    
    
    8,611
    
    
    
    8,650Totals
    
    
    24,158
    
    
    
    20,293
 Note 14  Income Taxes (Restated)
    Note 15  Commitments
  AmountFiscal year ending September 30:2010
    
    $
    4322011
    
    
    6612012
    
    
    6082013
    
    
    1612014
    
    
    121$
    1,983
  22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements can also be identified by words such as
intends, anticipates, expects, believes, plans, predicts, and similar terms.
Forward-looking statements are not guarantees of future performance and our actual results may
differ significantly from the results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those set forth below under Certain
Risk Factors. The following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in this Form 10-Q and the audited
financial statements of the Company, included in our Report on Form 10-K for the year ended
September 30, 2009, filed with the Securities and Exchange Commission and managements discussion
and analysis contained therein. We assume no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
 Overview
   Results of Operations
  As Restated2009
    
    
    2008Amount
    
    
    %
    
    
    Amount
    
    
    %Sales
    
    $
    9,158
    
    
    
    100.0
    
    
    $
    5,342
    
    
    
    100.0Cost of Sales
    
    
    3,248
    
    
    
    35.5
    
    
    
    1,841
    
    
    
    34.5Gross Profit
    
    
    5,910
    
    
    
    64.5
    
    
    
    3,501
    
    
    
    65.5Operating Expenses
    
    
    4,750
    
    
    
    51.9
    
    
    
    2,990
    
    
    
    56.0Income from Operations
    
    
    1,160
    
    
    
    12.7
    
    
    
    511
    
    
    
    9.6Other Income (Expense)
    
    
    (5,511
    )
    
    
    (60.2
    )
    
    
    (265
    )
    
    
    (5.0
    )Income (Loss) Before Income Taxes
    
    
    (4,351
    )
    
    
    (47.5
    )
    
    
    246
    
    
    
    4.6Benefit from Income Taxes
    
    
    (1,006
    )
    
    
    (11.0
    )
    
    
    
    
    
    
    Net Income (Loss)
    
    $
    (3,345
    )
    
    
    (36.5
    )
    
    $
    246
    
    
    
    4.6
 Revenues:
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##### Table of Contents



Gross Profit:
  Operating Expenses:
  As Restated2009
    
    
    2008Amount
    
    
    %
    
    
    Amount
    
    
    %Operating Expenses:Payroll, taxes and benefits
    
    $
    2,169
    
    
    
    23.7
    
    
    $
    1,065
    
    
    
    20.0Advertising
    
    
    806
    
    
    
    8.8
    
    
    
    298
    
    
    
    5.6Bad debts
    
    
    655
    
    
    
    7.2
    
    
    
    679
    
    
    
    12.7Depreciation
    
    
    95
    
    
    
    1.0
    
    
    
    66
    
    
    
    1.2General and administration
    
    
    1,025
    
    
    
    11.2
    
    
    
    882
    
    
    
    16.5Total Operating Expenses
    
    $
    4,750
    
    
    
    51.9
    
    
    $
    2,990
    
    
    
    56.0
  Income from Operations:
  Other Income (Expense)
  As Restated2009
    
    
    2008Other Income (Expense):Interest Expense
    
    $
    (416
    )
    
    $
    (273
    )Change in fair value of derivative liabilities
    
    
    (5,098
    )
    
    
    Interest income
    
    
    3
    
    
    
    8Total Other Income (Expense)
    
    $
    (5,511
    )
    
    $
    (265
    )
  24




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##### Table of Contents



Change inClosing
    
    Fair Value ofMarket
    
    DerivativePrice of
    
    LiabilitiesCommon
    
    Income /Stock
    
    (Expense)Interim period ending:September 30, 2009, Q4 2009
    
    $
    1.45
    
    
    $
    n/aDecember 31, 2009, Q1 2010
    
    
    2.18
    
    
    
    (5,098
    )
 Liquidity and Capital Resources
  For the Quarters EndedDecember 31,As Restated2009
    
    
    2008Cash Flows:Net cash provided by (used in) operating activities
    
    $
    (324
    )
    
    $
    447Net cash used in investing activities
    
    
    (1,333
    )
    
    
    (29
    )Net cash provided by financing activities
    
    
    740
    
    
    
    2,171Net increase (decrease) in cash
    
    
    (917
    )
    
    
    2,589Cash at beginning of period
    
    
    3,798
    
    
    
    1,173Cash at end of period
    
    $
    2,881
    
    
    $
    3,762
   25




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##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
   Outlook
   
    
    Continue our advertising and marketing efforts;
    
    Increase our customer base;
    
    Continue to service our current customer base and increase the retention rate;
    
    Continue to invest in the expansion of our infrastructure; and
    
    Increase our accounts receivable collection efforts.
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##### Table of Contents




    
    Identified and presented to many large funding sources, soliciting terms for long-term capital
in the form of debt, equity or a combination of both;
    
    Retained an investor relations firm to further enhance our exposure and opportunities for
long-term capital requirements;
    
    Identified products and related target customers through extensive market research;
    
    Established efficient and cost effective methods to reach qualified customers;
    
    Established an infrastructure of management and knowledgeable staff to support substantial
growth in sales with a minimal amount of additional staff members, maximizing our revenue per
employee;
    
    Completed the build out of an additional 24,000 square foot facility to house our expanding
workforce and support our continued growth;
    
    Created a HIPPA compliant IT infrastructure and staff to accommodate additional growth in sales;
    
    Established a marketing plan that can be monitored for effectiveness and is flexible enough to
adjust to changing market conditions; and
    
    Tested our advertising methods and established methods of testing additional advertising
methods to meet with changing market conditions.
  Contractual Obligations
  Payments due by periodTotals
    
    
    FY 2010
    
    
    FY 2011
    
    
    FY 2012
    
    
    FY 2013
    
    
    FY 2014Convertible debt obligations (1)
    
    $
    6,642
    
    
    $
    4,101
    
    
    $
    2,541
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    1,983
    
    
    
    432
    
    
    
    661
    
    
    
    608
    
    
    
    161
    
    
    
    121Capital lease obligations
    
    
    150
    
    
    
    75
    
    
    
    62
    
    
    
    13
    
    
    
    
    
    
    
    Purchase commitment (2)
    
    
    514
    
    
    
    84
    
    
    
    120
    
    
    
    120
    
    
    
    120
    
    
    
    70Total contractual obligations
    
    $
    9,289
    
    
    $
    4,692
    
    
    $
    3,384
    
    
    $
    741
    
    
    $
    281
    
    
    
    191
 
 (1)
    
    The convertible debt obligations that are due in fiscal year 2010
include $452,000 of convertible notes that are convertible into shares
of our common stock at a conversion price of $0.50 per share and
$3,500,000 of convertible notes that are convertible into shares of
our common stock at a conversion price of $0.80 per share. Based on
the current price of our common stock, we anticipate that the majority
of this debt will be converted into shares of common stock at some
point during fiscal year 2010. If for some reason the notes are not
converted, we believe we have sufficient financial resources to meet
our debt obligations.(2)
    
    The purchase commitment consists of a long distance service agreement
that requires us to purchase a minimum of $10,000 per month, partially
offset by rebates for the first five months of calendar year 2010, of
long distance service through April 2014. Off-Balance Sheet Arrangements
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##### Table of Contents



Critical Accounting Policies
  Effect of Inflation
  
 Item 3. Qualitative and Quantitative Disclosure about Market Risk
  
 Item 4T. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Change in Internal Control over Financial Reporting
   
    
    Assess and Identify the Impact of Recently Issued Accounting Pronouncements:The
Companys procedures to assess and identify the impact of Recently Issued Accounting
Pronouncements were not sufficient, as evidenced by the Companys failure to timely
identify the impact of ASC 815-40-15, Derivatives and Hedging  Contracts in Entitys
Own Equity (Scope and Scope Exceptions),which became effective for the Company on October
1, 2009. The Company did not become aware of the new guidance until June 2010, and the
impacts of the accounting guidance were not properly identified by the Company until
December 2010. As a result, the Company determined that the previously issued interim
financial statements for fiscal year 2010 should no longer be relied upon, which resulted
in the restatement of the interim financial statements for the interim period ending
December 31, 2009. The Company plans to file restated interim financial statements for the
interim periods ending March 31, 2010, and June 30, 2010.
 28




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##### Table of Contents




    
    Accounting for Derivative Financial Instruments:Management has identified a material
weakness related to accounting for embedded derivatives included in certain convertible
notes payable that were outstanding when ASC 815-40-15 became effective for the Company on
October 1, 2009. When the Company first assessed the impacts of ASC 815-40-15, management
erred in its conclusion that certain embedded derivatives met the scope exceptions of ASC
815-40-15 and did not require adjustments to its accounting. The Company lacked a
technical review process which might have enabled the Company to identify the error and
prevent a misstatement of the Companys interim financial statements.
    
    Accounting for Direct-Response Advertising Costs:Management has identified a material
weakness related to the classification and measurement of our capitalized direct-response
advertising costs due to the following:
 
    
    The Company had not previously defined what constituted a separate
stand-alone cost pool as defined by ASC 340-20-35-1.
    
    The amortization of capitalized direct-response advertising costs was
not calculated by taking the ratio of current period revenues over the total period
revenues associated with each cost pool as required by ASC 340-20-35-3.
    
    Prior to September 30, 2010, the Company had reflected both a current
and long term portion of the assets on the consolidated balance sheet. In
accordance with an SEC interpretation (SPCH.T.1995.22.Glynn), the SEC would object
to the classification of any unamortized cost of advertising as a current asset.
This resulted in the Company reclassifying the fiscal year 2009 comparative balance
to conform to the current fiscal year classification.
 In the fourth quarter of fiscal year 2010, management completed the above analysis as
required, including defining a separate stand-alone cost pool. In addition, management
determined that no restatements of prior period financial statements were required as a
result of the above analysis.
    
    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 Board of Directors 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 control. After a review of our
current review and approval of certain aspects of the accounting process, management
concluded that the inadequate documented review and approval process represented a
material weakness.
  Remediation of Material Weaknesses in Internal Control over Financial Reporting
  
    
    Subscribe to an outside service that provides the Companys Chief Financial Officer and
Controller with timely guidance on Recently Issued Accounting Pronouncements. In addition,
the Company intends to supplement its current interim and annual financial reporting
processes with documentation of the Controllers and Chief Financial Officers review and
assessment of the timing and impacts, if any, that the new accounting pronouncements will
have on the Companys financial statements; and
    
    Engage outside experts, as needed, to provide counsel and guidance on non-routine
technical accounting issues that can be associated with future financial instruments. The
Company has determined that it is not economically feasible for the Company to maintain the
required expertise internally due to the limited number of complex transactions that the
Company may undertake and the current size of the Company. As
the Company continues to grow, management will continually re-assess its staffing levels,
particularly within the accounting and finance areas, required to maintain effective
internal controls over financial reporting.
    
    Document all significant accounting policies and ensure that the accounting policies are
in accordance with accounting principles generally accepted in the United States and that
internal controls are designed effectively to ensure that the financial information is
properly reported. Management will engage independent accounting specialists to ensure that
there is an independent verification of the accounting positions taken.
    
    In connection with the reported inadequate documented review and approval of certain
aspects of the accounting process, management has plans to review the current review and
approval processes and implement changes to ensure that all accounting reconciliations and
journal entries are reviewed and approved on a timely basis and that this review is
documented by a member of management separate from the preparer.
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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased as
    
    
    Value of Shares thatNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    May Yet BeShares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePurchased
    
    
    per Share
    
    
    Programs(2)
    
    
    Plans or Programs(2)October 131, 2009(1)
    
    
    
    
    
    $
    November 130, 2009(1)
    
    
    4,000
    
    
    $
    2.26December 131, 2009(1)
    
    
    
    
    
    $
    Total
    
    
    4,000
    
    
    $
    2.26
    
    
    
    89,600
    
    
    $
    0
 
 (1)
    
    In December 2008, we opened a separate money market account with an
investment bank pursuant to which we transferred $50,000 into the
account, of which $9,055 was used to purchase 4,000 shares during the
three months ended December 31, 2009.(2)
    
    As of December 31, 2009, 89,600 cumulative shares have been purchased
under our stock repurchase program for $49,634. The stock repurchase
program ended on December 31, 2009 and no additional shares have been
authorized to be repurchased. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Other Information
  
 Item 5. Exhibits
 
 30




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##### Table of Contents



SIGNATURES
   
  /s/ Mark A. Libratore

Mark A. Libratore
    
    President
    
    February 22, 2011/s/ Robert J. Davis

Robert J. Davis
    
    Chief Financial
Officer
    
    February 22, 2011
 31