##### Table of Contents



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, 2010
 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)
 (772) 287-2414  (Registrants telephone number, including area code)
   o þ
 o þ
 þ o
 o o
 þ
  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




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##### 



LIBERATOR MEDICAL HOLDINGS, INC.  TABLE OF CONTENTS
 PART IItem 1. Business
    
    3Item 1A. Risk Factors
    
    6Item 1B. Unresolved Staff Comments
    
    9Item 2. Properties
    
    9Item 3. Legal Proceedings
    
    9PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    10Item 6. Selected Financial Data
    
    11Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    19Item 8. Financial Statements and Supplementary Data
    
    19Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    20Item 9A. Controls and Procedures
    
    20Item 9B. Other Information
    
    22PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    23Item 11. Executive Compensation
    
    23Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    23Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    23Item 14. Principal Accountant Fees and Services
    
    23PART IVItem 15. Exhibits and Financial Statement Schedules
    
    24Signatures
    
    25EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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FORWARD-LOOKING STATEMENTS
 Some of the information contained in this Report constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide
current expectations of future events based on certain assumptions and include any statement that
does not directly relate to any historical or current fact. When used in this 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, or in oral statements made with the
approval of an authorized executive officer, the words or phrases will likely result, are
expected to, will continue, is anticipated, estimate, project, or similar expressions are
intended to identify forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak as of the date made, and
to advise readers that various factors, including regional and national economic conditions,
substantial changes in levels of market interest rates, credit and other risks of manufacturing,
distributing or marketing activities, competitive and regulatory factors, and those factors set 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
 Background of the Company
     3




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Market
       Target Market
    
    Diagnosed
    
    Undiagnosed
    
    Current Market SizeUrological
    
    Not Available
    
    Not Available
    
    $4.4 billion*Diabetes
    
    >18 million
    
    >6 million
    
    $38 billion **Mastectomy
    
    >3.2 million
    
    Not Available
    
    $1.1 billion ***Ostomy
    
    > 600,000
    
    Not Available
    
    $1.2 billion ***Total
    
    >21.8 million
    
    >6 million
    
    $44.7 billion
 
 *
    
    BCC Research, 2009**
    
    BCC Research, 2010***
    
    Center for Disease Control 2005 Sales and Marketing
  4




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Suppliers
  Competitive Analysis
 Urological
  Diabetes
  Mastectomy
  Ostomy
  Litigation
  5




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Technology Systems
    www.liberatormedical.com
 Employees
  
 Item 1A. Risk Factors
  Risks Relating to Our Business
 
    
    The Company has aggressive marketing plans that require the Company to spend substantial sums
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.
    
    We could experience significantly reduced profits if Medicare changes, delays or denies
reimbursement or directs Medicare consumers to other companies through the process of
competitive bidding, governmental contracts or any kind of nationwide managed care or
governmental program.
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
    
    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. The Company is regularly audited by all four
regional Medicare carriers and has on some occasions had to reimburse claims previously paid.
This type of reimbursement is common to all Medicare participants. 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, returns, patients having similar equipment,
patient not seen by physician recently enough, and lack of adequate medical necessity.
Although the Company has set aside reserves for these repayments, 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 are generated from the sale of urological
products. 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 the rapid growth which the Company presently plans. However, we cannot be sure that our
existing staffing levels will be sufficient if we expand as rapidly as we currently believe.
Further, (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.
    
    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.
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
    
    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 and cost of our advertising campaigns; 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, Cynthia Libratore, the beneficiary of $1,000,000.
    
    As of December 31, 2010, Mark Libratore, our President and Chief Executive Officer, held
approximately 32.6% of our outstanding common stock, excluding options to purchase up to
4,111,009 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:
 
    
    the election of directors;
    
    the adoption of stock option plans;
    
    the amendment of charter documents; or
    
    the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.
 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 are 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 long
period of time.
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
    
    We anticipate that we will retain any future earnings and other cash
resources for future operation and development of our business and do
not intend to declare or pay any cash dividends in the foreseeable
future. 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
  
 Item 2. Properties
    
 Item 3. Legal Proceedings
  9




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
  Stock PriceHigh
    
    
    LowQuarter Ended:December 31, 2008
    
    $
    .80
    
    
    $
    .37March 31, 2009
    
    $
    .64
    
    
    $
    .31June 30, 2009
    
    $
    .70
    
    
    $
    .33September 30, 2009
    
    $
    1.49
    
    
    $
    .49December 31, 2009
    
    $
    2.47
    
    
    $
    1.40March 31, 2010
    
    $
    2.44
    
    
    $
    1.74June 30, 2010
    
    $
    2.25
    
    
    $
    1.41September 30, 2010
    
    $
    1.68
    
    
    $
    1.15
       Stock Repurchase Program
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Item 6. Selected Financial Data
  
 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 Operation 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
   Results of Operations
  2010
    
    
    2009Amount
    
    
    %
    
    
    Amount
    
    
    %Sales
    
    $
    40,919
    
    
    
    100.0
    
    
    $
    25,818
    
    
    
    100.0Cost of Sales
    
    
    14,349
    
    
    
    35.1
    
    
    
    9,050
    
    
    
    35.1Gross Profit
    
    
    26,570
    
    
    
    64.9
    
    
    
    16,768
    
    
    
    64.9Operating Expenses
    
    
    21,945
    
    
    
    53.6
    
    
    
    13,479
    
    
    
    52.2Income from Operations
    
    
    4,625
    
    
    
    11.3
    
    
    
    3,289
    
    
    
    12.7Other Income (Expense)
    
    
    (1,927
    )
    
    
    (4.7
    )
    
    
    (1,035
    )
    
    
    (4.0
    )Income Before Income Taxes
    
    
    2,698
    
    
    
    6.6
    
    
    
    2,254
    
    
    
    8.7Income Tax Expense
    
    
    98
    
    
    
    0.2
    
    
    
    32
    
    
    
    0.1Net Income
    
    $
    2,600
    
    
    
    6.4
    
    
    $
    2,222
    
    
    
    8.6
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Revenues
  Gross Profit
  Operating Expenses
  2010
    
    
    2009Amount
    
    
    %
    
    
    Amount
    
    
    %Operating Expenses:Payroll, taxes and benefits
    
    $
    9,973
    
    
    
    24.4
    
    
    $
    5,406
    
    
    
    20.9Advertising
    
    
    4,629
    
    
    
    11.3
    
    
    
    2,042
    
    
    
    7.9Bad debts
    
    
    2,653
    
    
    
    6.5
    
    
    
    2,488
    
    
    
    9.6Depreciation
    
    
    593
    
    
    
    1.4
    
    
    
    306
    
    
    
    1.2General and administration
    
    
    4,097
    
    
    
    10.0
    
    
    
    3,237
    
    
    
    12.5Total Operating Expenses
    
    $
    21,945
    
    
    
    53.6
    
    
    $
    13,479
    
    
    
    52.2
   2010
    
    
    2009Advertising Expenses:Amortization of direct-response costs
    
    $
    4,557
    
    
    $
    1,866Other advertising expenses
    
    
    72
    
    
    
    176Total Advertising Expenses
    
    $
    4,629
    
    
    $
    2,042
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Income from Operations
  Other Income (Expense)
  2010
    
    
    2009Other Income (Expense):Interest Expense
    
    $
    (1,256
    )
    
    $
    (1,054
    )Change in fair value of derivative liabilities
    
    
    (691
    )
    
    
    Loss on sale of assets
    
    
    (2
    )
    
    
    Interest income
    
    
    22
    
    
    
    19Total Other Income (Expense)
    
    $
    (1,927
    )
    
    $
    (1,035
    )
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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
    
    
    
    (5,099
    )March 31, 2010, Q2 2010
    
    
    2.20
    
    
    
    (59
    )June 30, 2010, Q3 2010
    
    
    1.49
    
    
    
    3,698September 30, 2010, Q4 2010
    
    
    1.26
    
    
    
    769Total Change in FV of Derivative Liabilities
    
    
    
    
    
    $
    (691
    )
   Liquidity and Capital Resources
  2010
    
    
    2009Cash Flows:Net cash provided by (used in) operating activities
    
    $
    (2,336
    )
    
    $
    1,712Net cash used in investing activities
    
    
    (1,307
    )
    
    
    (941
    )Net cash provided by financing activities
    
    
    7,273
    
    
    
    1,854Net increase in cash
    
    
    3,630
    
    
    
    2,625Cash at beginning of period
    
    
    3,798
    
    
    
    1,173Cash at end of period
    
    $
    7,428
    
    
    $
    3,798
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Operating Activities
   Investing Activities
   Financing Activities
   15




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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.
  
    
    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;
    
    Expanded our Board of Directors to include five directors, four of whom are non-employee
directors, and formed an Audit Committee, a Compensation Committee, and a Governance and
Nominating Committee;
    
    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;
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
    
    Leased an additional 24,000 square foot facility to house our expanding workforce and support
our continued growth. We completed the build out of this facility to house our call center and
other administrative functions and moved into the new facility in January, 2010.
    
    Created a HIPAA 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
adapt to changing market conditions; and
    
    Established methods of testing our current and new advertising methods to meet changing market
conditions.
  Off-Balance Sheet Arrangements
  Critical Accounting Policies, Judgments and Estimates
   Accounts Receivable
    17




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##### Table of Contents



Deferred Advertising
   Stock-Based Compensation Expense
       Derivative Financial Instruments
  18




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Income Taxes
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements
  Reports of Independent Registered Public Accounting Firms
    
    F-1Consolidated Balance Sheets as of September 30, 2010 and 2009
    
    F-3Consolidated Statements of Operations for the fiscal years ended
September 30, 2010 and 2009
    
    F-4Consolidated Statements of Changes in Stockholders Equity for the
fiscal years ended September 30, 2010 and 2009
    
    F-5Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2010 and 2009
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Managements Report on 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 and plans to file restated interim financial
statements for the interim periods.
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
    
    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 Deferred 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.
  Changes in Internal Controls
  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
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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.
 Limitations on the Effectiveness of Controls
  
 Item 9B. Other Information
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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  23




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##### Table of Contents



PART IV.
 
 Item 15. Exhibits and Financial Statement Schedules
  Number
    
    Description21.1
    
    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. 24




---



##### Table of Contents



SIGNATURES
  LIBERATOR MEDICAL HOLDINGS, INC.By:
    /s/ Mark A. LibratoreMark A. LibratorePresident, Chief
Executive Officer and Director  Signature
    
    Title
    
    Date/s/                  Mark A. Libratore

Mark A. Libratore
    
    President,
Chief Executive
Officer and
Director (principal
executive officer)
    
    January 13, 2011/s/             Robert J. Davis

Robert J. Davis
    
    Chief
Financial Officer
(principal
financial and
accounting officer)
    
    January 13, 2011/s/             Jeannette Corbett

Jeannette Corbett
    
    Director
    
    January 13, 2011/s/             Robert Cuillo

Robert Cuillo
    
    Director
    
    January 13, 2011/s/             Morgan Duke

Morgan Duke
    
    Director
    
    January 13, 2011/s/             Tyler Wick

Tyler Wick
    
    Director
    
    January 13, 2011
 25




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Reports of Independent Registered Public Accounting Firms
    
    
    F-1Consolidated Balance Sheets as of September 30, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations for the fiscal years ended September 30, 2010 and 2009
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity for the fiscal years ended
September 30, 2010 and 2009
    
    
    F-5Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2010 and 2009
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 26




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-1




---



##### Table of Contents



This audit report has not been reissued by Berenfeld in connection with the
filing of this Annual Report on Form 10-K for the year ended September 30, 2010.
 Report of Independent Registered Public Accounting Firm
 
    
 F-2




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries


Consolidated Balance Sheets
As of September 30, 2010 and 2009
 2010
    
    
    2009AssetsCurrent Assets:Cash
    
    $
    7,428
    
    
    $
    3,798Restricted cash
    
    
    
    
    
    
    500Accounts receivable, net of allowance of $3,312 and $2,327, respectively
    
    
    6,744
    
    
    
    3,850Inventory, net of allowance for obsolete inventory of $110 and $110, respectively
    
    
    1,985
    
    
    
    902Deferred taxes, current portion
    
    
    1,696
    
    
    
    Prepaid and other current assets
    
    
    355
    
    
    
    483Total Current Assets
    
    
    18,208
    
    
    
    9,533Property and equipment, net of accumulated depreciation of $1,527 and $1,021, respectively
    
    
    1,862
    
    
    
    1,041Deferred advertising
    
    
    10,006
    
    
    
    3,755Other assets
    
    
    139
    
    
    
    130Total Assets
    
    $
    30,215
    
    
    $
    14,459Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    3,826
    
    
    $
    2,089Accrued liabilities
    
    
    1,077
    
    
    
    716Derivative liabilities
    
    
    1,698
    
    
    
    Stockholder loan
    
    
    565
    
    
    
    1,515Convertible notes payable, net of unamortized discount of $21 and $292, respectively
    
    
    2,516
    
    
    
    3,893Other current liabilities
    
    
    146
    
    
    
    140Total Current Liabilities
    
    
    9,828
    
    
    
    8,353Convertible notes payable, net of unamortized discount of $0 and $90, respectively
    
    
    
    
    
    
    2,447Deferred tax liability
    
    
    1,826
    
    
    
    Other long-term liabilities
    
    
    145
    
    
    
    235Total Liabilities
    
    
    11,799
    
    
    
    11,035Commitments and contingencies (see Note 11)Stockholders Equity:Common stock, $.001 par value, 200,000 shares authorized, 44,707 and 32,462 shares
issued, respectively; 44,617 and 32,377 shares outstanding at September 30, 2010 and
2009, respectively
    
    
    45
    
    
    
    32Additional paid-in capital
    
    
    28,927
    
    
    
    11,705Accumulated deficit
    
    
    (10,506
    )
    
    
    (8,272
    )Treasury stock, at cost; 89 and 85 shares at September 30, 2010 and 2009, respectively
    
    
    (50
    )
    
    
    (41
    )Total Stockholders Equity
    
    
    18,416
    
    
    
    3,424Total Liabilities and Stockholders Equity
    
    $
    30,215
    
    
    $
    14,459
  F-3




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries


Consolidated Statements of Operations
For the fiscal years ended September 30, 2010 and 2009
 2010
    
    
    2009Net Sales
    
    $
    40,919
    
    
    $
    25,818Cost of Sales
    
    
    14,349
    
    
    
    9,050Gross Profit
    
    
    26,570
    
    
    
    16,768Operating ExpensesPayroll, taxes and benefits
    
    
    9,973
    
    
    
    5,406Advertising
    
    
    4,629
    
    
    
    2,042Bad debts
    
    
    2,653
    
    
    
    2,488Depreciation
    
    
    593
    
    
    
    306General and administrative
    
    
    4,097
    
    
    
    3,237Total Operating Expenses
    
    
    21,945
    
    
    
    13,479Income from Operations
    
    
    4,625
    
    
    
    3,289Other Income (Expense)Loss on sale of assets
    
    
    (2
    )
    
    
    Interest expense
    
    
    (1,256
    )
    
    
    (1,054
    )Interest income
    
    
    22
    
    
    
    19Change in fair value of derivative liabilities
    
    
    (691
    )Total Other Income (Expense)
    
    
    (1,927
    )
    
    
    (1,035
    )Income before Income Taxes
    
    
    2,698
    
    
    
    2,254Provision for Income Taxes
    
    
    98
    
    
    
    32Net Income
    
    $
    2,600
    
    
    $
    2,222Basic earnings per share:Weighted average shares outstanding
    
    
    38,493
    
    
    
    32,128Earnings per share
    
    $
    0.07
    
    
    $
    0.07Diluted earnings per share:Weighted average shares outstanding
    
    
    52,595
    
    
    
    43,620Earnings per share
    
    $
    0.05
    
    
    $
    0.06
  F-4




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders Equity
For the fiscal years ended September 30, 2010 and 2009
 TotalCommon
    
    
    Common
    
    
    Paid in
    
    
    Accumulated
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    EquityBalance at September 30, 2008
    
    
    32,050
    
    
    $
    32
    
    
    $
    11,177
    
    
    $
    (10,494
    )
    
    $
    
    
    
    $
    715Options issued to employees
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Warrants issued with convertible debt
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    106Intrinsic value of conversion rights issued with convertible debt
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Common stock issued for interest on convertible debt
    
    
    172
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Common stock issued upon conversion of debt
    
    
    170
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Common stock issued for services
    
    
    60
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Common stock issued for exercise of warrants
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Purchase common treasury stock
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    (41
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,222
    
    
    
    
    
    
    
    2,222Balance at September 30, 2009
    
    
    32,377
    
    
    $
    32
    
    
    $
    11,705
    
    
    $
    (8,272
    )
    
    $
    (41
    )
    
    $
    3,424Cumulative effect of change in accounting (see Note 6)
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    (4,834
    )
    
    
    
    
    
    
    (5,224
    )Options issued to employees and directors
    
    
    
    
    
    
    
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    365Common stock issued for interest on convertible debt
    
    
    19
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Common stock issued upon conversion of debt
    
    
    5,578
    
    
    
    6
    
    
    
    8,907
    
    
    
    
    
    
    
    
    
    
    
    8,913Common stock issued for employee stock purchase plan
    
    
    192
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    117Common stock issued for exercise of warrants
    
    
    1,788
    
    
    
    2
    
    
    
    1,591
    
    
    
    
    
    
    
    
    
    
    
    1,593Common stock issued for cash
    
    
    4,667
    
    
    
    5
    
    
    
    6,588
    
    
    
    
    
    
    
    
    
    
    
    6,593Purchase of common treasury stock
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Deferred tax liability related to discounts on convertible notes
payable
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600
    
    
    
    
    
    
    
    2,600Balance at September 30, 2010
    
    
    44,617
    
    
    $
    45
    
    
    $
    28,927
    
    
    $
    (10,506
    )
    
    $
    (50
    )
    
    $
    18,416
  F-5




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2010 and 2009
 2010
    
    
    2009Cash flow from operating activities:Net Income
    
    $
    2,600
    
    
    $
    2,222Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    5,150
    
    
    
    2,172Equity based compensation
    
    
    388
    
    
    
    420Provision for doubtful accounts and sales returns and adjustments
    
    
    3,096
    
    
    
    2,488Non-cash interest related to convertible notes payable
    
    
    1,003
    
    
    
    701Change in fair value of derivative liabilities
    
    
    691
    
    
    
    Deferred income taxes
    
    
    130
    
    
    
    Amortization of non-cash debt issuance costs
    
    
    26
    
    
    
    37Reserve for inventory obsolescence
    
    
    
    
    
    
    60Loss on disposal of assets
    
    
    2
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,988
    )
    
    
    (3,933
    )Deferred advertising
    
    
    (10,808
    )
    
    
    (4,191
    )Inventory
    
    
    (692
    )
    
    
    (176
    )Prepaid expenses and other current assets
    
    
    (235
    )
    
    
    (97
    )Other assets
    
    
    305
    
    
    
    424Accounts payable
    
    
    1,736
    
    
    
    1,189Accrued expenses
    
    
    266
    
    
    
    433Other liabilities
    
    
    (6
    )
    
    
    (37
    )Net Cash Flows Provided by (Used in) Operating Activities
    
    
    (2,336
    )
    
    
    1,712Cash flows from investing activitiesPurchase of property and equipment and other
    
    
    (1,812
    )
    
    
    (441
    )Proceeds from the sale of assets
    
    
    5
    
    
    
    Purchase of certificates of deposit
    
    
    (562
    )
    
    
    (500
    )Proceeds from the sale of certificates of deposit
    
    
    1,062
    
    
    
    Net Cash Flows Used in Investing Activities
    
    
    (1,307
    )
    
    
    (941
    )Cash flows from financing activitiesProceeds from the sale of common stock
    
    
    7,000
    
    
    
    Costs associated with the sale of common stock
    
    
    (407
    )
    
    
    Proceeds from the exercise of warrants
    
    
    1,592
    
    
    
    10Proceeds from issuance of convertible notes
    
    
    
    
    
    
    2,500Costs associated with the issuance of convertible notes
    
    
    
    
    
    
    (326
    )Proceeds from employee stock purchase plan
    
    
    128
    
    
    
    27Purchase of treasury stock
    
    
    (9
    )
    
    
    (41
    )Payments of debt and capital lease obligations
    
    
    (1,031
    )
    
    
    (316
    )Net Cash Flows Provided by Financing Activities
    
    
    7,273
    
    
    
    1,854Net increase in cash
    
    
    3,630
    
    
    
    2,625Cash at beginning of period
    
    
    3,798
    
    
    
    1,173Cash at end of period
    
    $
    7,428
    
    
    $
    3,798Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    337
    
    
    $
    319Cash paid for income taxes
    
    
    13
    
    
    
    21Supplemental schedule of non-cash investing and financing activities:Capital expenditures funded by capital lease borrowings
    
    $
    
    
    
    $
    91Common stock issued for interest expense
    
    
    45
    
    
    
    105Common stock issued for conversion of debt
    
    
    8,913
    
    
    
    85
  F-6




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##### Table of Contents



Liberator Medical Holdings, Inc. and Subsidiaries

Notes To The Consolidated Financial Statements
September 30, 2010
 Note 1  Description of Business
  Note 2  Summary of Significant Accounting Policies
  Principles of Consolidation
  Use of Estimates
  Reclassifications
  
    
    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 being amortized
over a period longer than twelve months; and
    
    On the Consolidated Statement of Cash Flows for the fiscal year ended September 30,
2009, $22,000 of Deposits was reclassified within the Changes in Operating Assets and
Liabilities section from Prepaid Expenses and Other Current Assets to Other Assets. In
addition, $446,000 of Debt Issuance Costs was reclassified to Other Assets within the
Changes in Operating Assets section.
 F-7




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##### Table of Contents



Cash and Cash Equivalents
  Restricted Cash
  Accounts Receivable
    Inventories
  Deferred Advertising Costs
   F-8




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##### Table of Contents



2010
    
    
    2009Deferred Advertising Costs:Beginning Balance, 10/1
    
    $
    3,755
    
    
    $
    1,430Plus: Direct-response advertising spend
    
    
    10,808
    
    
    
    4,191Less: Amortization of deferred
advertising costs
    
    
    (4,557
    )
    
    
    (1,866
    )Ending Balance, 9/30
    
    $
    10,006
    
    
    $
    3,755
  Debt Issuance Costs
  Property and Equipment
  Treasury Stock
  Revenue Recognition
  F-9




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##### Table of Contents



Shipping and Handling Costs
  Stock-Based Compensation
       Derivative Financial Instruments
   F-10




---



##### Table of Contents



Fair Value Measurements
  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.
  September 30, 2010Instrument
    
    Fair Value
    
    
    Carrying Value
    
    
    Level
    
    
    Valuation MethodologyDerivative liabilities (See Note 6)
    
    $
    1,698
    
    
    $
    1,698
    
    
    
    3
    
    
    Monte Carlo Simulation model
   2010Beginning balance: Derivative liabilities
    
    $
    Adoption of change in accounting principle
    
    
    5,820Total (gains) losses
    
    
    691Purchases, sales, issuances and settlements, net
    
    
    (4,813
    )Ending balance: Derivative liabilities
    
    $
    1,698
 F-11




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##### Table of Contents



Income Taxes
   Leases
 Leases
 Earnings per Share
  Recently Adopted Accounting Pronouncements
  Fair Value Measurements and Disclosures,
 F-12




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##### Table of Contents



NOTE 3  Property and Equipment
  Estimated
    
    
    September 30,
    
    
    September 30,Life
    
    
    2010
    
    
    2009Leased equipment
    
    3  5 years
    
    $
    582
    
    
    $
    582Transportation equipment
    
    5  10 years
    
    
    95
    
    
    
    95Warehouse equipment
    
    5  10 years
    
    
    84
    
    
    
    56Office furniture
    
    5  10 years
    
    
    484
    
    
    
    150Computer equipment
    
    3  5 years
    
    
    277
    
    
    
    87Telephone equipment
    
    5 years
    
    
    77
    
    
    
    33Rental equipment
    
    10 years
    
    
    18
    
    
    
    18Web Site
    
    5 years
    
    
    6
    
    
    
    6Server Software
    
    3 years
    
    
    233
    
    
    
    130Training guides
    
    5 years
    
    
    3
    
    
    
    3Leasehold improvements
    
    Shorter of life of asset or lease
    
    
    1,509
    
    
    
    889Signage
    
    5  10 years
    
    
    21
    
    
    
    13Total property and equipment
    
    
    
    
    
    
    3,389
    
    
    
    2,062Less: accumulated depreciation
    
    
    
    
    
    
    (1,527
    )
    
    
    (1,021
    )Property and equipment, net
    
    
    
    
    
    $
    1,862
    
    
    $
    1,041
  NOTE 4  Stockholder Loans
  NOTE 5  Convertible Notes Payable
 April 2008 Convertible Notes
   F-13




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##### Table of Contents



May 2008 Convertible Note
     October 2008 Convertible Note
  F-14




---



##### Table of Contents



Oct08 NoteNotes Payable, face amount
    
    $
    2,500Discounts on Notes:Initial valuation of Warrants
    
    
    (86
    )Initial valuation of Bifurcated Embedded Derivative
    
    
    (841
    )Accumulated Amortization
    
    
    906Total Discounts
    
    
    (21
    )Accrued Interest
    
    
    37Convertible Notes Payable, net
    
    $
    2,516
  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 Option
    
    
    
    
    
    
    (303
    )
    
    
    (303
    )Accumulated Amortization
    
    
    126
    
    
    
    621
    
    
    
    747Total Discounts
    
    
    
    
    
    
    (292
    )
    
    
    (292
    )Accrued Interest
    
    
    40
    
    
    
    44
    
    
    
    84Convertible Notes Payable, net
    
    $
    641
    
    
    $
    3,252
    
    
    $
    3,893
 F-15




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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 6  Derivative Liabilities
   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
 F-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
    October 2008 NoteRisk-free interest rate:
    
    
    0.14
    %Expected term:
    
    17 daysExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    49.30
    %Probability of triggering reset provision:
    
    
    0.01
    %Existing conversion price per share
    
    $
    0.75Companys stock price per share
    
    $
    1.26
 NOTE 7  Credit Line Facility
    F-17




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##### Table of Contents



NOTE 8  Stockholders Equity
 Sale of Common Stock
    Warrants
  Shares
    
    Expiration Date25,000

    
    November 2010
  Shares
    
    Expiration Date169,167
    
    October 2010145,000
    
    November 201031,250
    
    December 20106,250
    
    January 2011
 F-18




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##### Table of Contents



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 2013487,000
    
    April 2013
  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
    %
 F-19




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##### Table of Contents



Risk-free interest rate:
    
    
    2.34
    %Expected term:
    
    5 yearsExpected dividend yield:
    
    
    0.00
    %Expected volatility:
    
    
    63.66
    %
  WeightedAvg.ExerciseWarrants:
    
    Shares
    
    
    PriceBalance at September 30, 2008
    
    
    9,234,759
    
    
    $
    1.04Issued
    
    
    1,433,334
    
    
    
    1.25Exercised
    
    
    (10,000
    )
    
    
    1.00Expired
    
    
    (200,000
    )
    
    
    1.00Balance at September 30, 2009
    
    
    10,458,093
    
    
    $
    1.07Issued
    
    
    233,333
    
    
    
    2.50Exercised
    
    
    (1,945,375
    )
    
    
    1.00Expired
    
    
    (1,352,717
    )
    
    
    1.00Balance at September 30, 2010
    
    
    7,393,334
    
    
    $
    1.14
 Options
  Employee and Director Stock Options
    F-20




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##### Table of Contents



2010
    
    
    2009Risk-free interest rate:
    
    
    1.32
    %
    
    
    1.68
    %Expected term:
    
    3 years
    
    3 yearsExpected dividend yield:
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility:
    
    
    68.59
    %
    
    
    57.32
    %
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    Intrinsic2007 Stock Plan:
    
    Shares
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOptions outstanding at September 30, 2008
    
    
    490,000
    
    
    $
    0.77
    
    
    
    2.45
    
    
    $
    242,400Granted, 2009
    
    
    1,100,000
    
    
    
    0.83Expired or forfeited, 2009
    
    
    (10,000
    )
    
    
    0.75Options outstanding at September 30, 2009
    
    
    1,580,000
    
    
    $
    0.81
    
    
    
    3.21
    
    
    $
    706,300Granted, 2010
    
    
    200,000
    
    
    
    2.00Expired or forfeited, 2010
    
    
    (125,000
    )
    
    
    1.30Options outstanding at September 30, 2010
    
    
    1,655,000
    
    
    $
    0.92
    
    
    
    3.32
    
    
    $
    656,800Options exercisable at September 30, 2010
    
    
    1,017,500
    
    
    $
    0.84
    
    
    
    3.06
    
    
    $
    447,050Options vested or expected to vest at
September 30, 2010
    
    
    1,655,000
    
    
    $
    0.92
    
    
    
    3.32
    
    
    $
    656,800
 2009 Employee Stock Purchase Plan
 st th
   F-21




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##### Table of Contents



NOTE 9  Basic and Diluted Earnings per Common Share
  2010
    
    
    2009Numerator:Net income  basic
    
    $
    2,600
    
    
    $
    2,222Effect of dilutive securities:Convertible debt
    
    
    146
    
    
    
    196Net income  diluted
    
    $
    2,746
    
    
    $
    2,418Denominator:Weighted average shares outstanding  basic
    
    
    38,493
    
    
    
    32,128Effect of dilutive securities:Stock options and warrants
    
    
    8,060
    
    
    
    3,939Convertible debt
    
    
    6,042
    
    
    
    7,553Weighted average shares outstanding  diluted
    
    
    52,595
    
    
    
    43,620Earnings per share  basic
    
    $
    0.07
    
    
    $
    0.07Earnings per share  diluted
    
    $
    0.05
    
    
    $
    0.06
  2010
    
    
    2009Stock options
    
    
    100
    
    
    
    1,580Warrants
    
    
    358
    
    
    
    10,458Convertible Debt
    
    
    
    
    
    
    1,203Totals
    
    
    458
    
    
    
    13,241
 NOTE 10  Income Taxes
  Fiscal year ended September 30,2010
    
    
    2009Current income tax expense (benefit):Federal
    
    $
    (32
    )
    
    $
    32State
    
    
    
    
    
    
    (32
    )
    
    
    32Deferred income tax expense:Federal
    
    
    1,358
    
    
    
    State
    
    
    208
    
    
    
    1,566
    
    
    
    32Change in valuation allowance (benefit):Federal
    
    
    (1,247
    )
    
    
    State
    
    
    (189
    )
    
    
    (1,436
    )
    
    
    Total income tax expense
    
    $
    98
    
    
    $
    32
 F-22




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##### Table of Contents



Fiscal year ended September 30,2010
    
    
    2009Computed expected income tax expense (benefit)
    
    $
    944
    
    
    $
    789State income taxes, net of federal benefit
    
    
    135
    
    
    
    108True-up of prior year differences
    
    
    (34
    )
    
    
    121Change in valuation allowance
    
    
    (1,436
    )
    
    
    (1,060
    )Non-deductible amortization of notes payable
    
    
    335
    
    
    
    Other nondeductible expenses
    
    
    154
    
    
    
    74Total income tax expense (benefit)
    
    $
    98
    
    
    $
    32
  September 30,2010
    
    
    2009Deferred tax assets  current:Allowance for bad debts
    
    $
    1,278
    
    
    $
    898Capitalization of costs to inventory
    
    
    10
    
    
    
    Inventory reserve
    
    
    42
    
    
    
    42Derivative mark-to-market adjustment
    
    
    267
    
    
    
    Deferred expenses
    
    
    55
    
    
    
    7Accrued expenses
    
    
    44
    
    
    
    55Deferred tax assets  current
    
    
    1,696
    
    
    
    1,002Less: Valuation allowance
    
    
    
    
    
    
    (1,002
    )Net deferred tax assets  current
    
    $
    1,696
    
    
    $
    Deferred tax assets  non-currentNet operating loss carry-forwards
    
    $
    2,094
    
    
    $
    1,874Charitable contribution carry-forwards
    
    
    2
    
    
    
    Amortization of value of warrants
    
    
    
    
    
    
    320Minimum tax credit carry-forward
    
    
    
    
    
    
    32Deferred tax assets  non-current
    
    
    2,096
    
    
    
    2,226Less: Valuation allowance
    
    
    (17
    )
    
    
    (771
    )Net deferred tax assets  non-current
    
    $
    2,079
    
    
    $
    1,455Deferred tax liability  non-current:Deferred advertising
    
    
    3,860
    
    
    
    1,449Property and equipment
    
    
    45
    
    
    
    6Deferred tax liability  non-current
    
    $
    3,905
    
    
    $
    1,455Net deferred tax asset (liability)
    
    $
    (130
    )
    
    $
    Deferred tax liability for discounts on notes
    
    
    (1
    )
    
    
    Total deferred tax liabilities
    
    $
    (131
    )
    
    $
    
 F-23




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##### Table of Contents



NOTE 11  Commitments and Contingencies
 Capital Lease Obligations
   AmountFiscal year ending September 30:2011
    
    $
    632012
    
    
    13Total minimum lease payments
    
    
    76Less: Interest on capitalized lease obligations
    
    
    (6
    )Present value of capitalized lease obligations
    
    
    70Less: Current portion
    
    
    (57
    )Capitalized lease obligations, net of current portion
    
    $
    13
  Operating Leases
  F-24




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##### Table of Contents



AmountFiscal year ending September 30:2011
    
    $
    8282012
    
    
    7652013
    
    
    3872014
    
    
    3322015
    
    
    25Total minimum lease payments
    
    $
    2,337
  Purchase Commitments
  Litigation
  NOTE 12  401(K) Plan
   NOTE 13  Concentration of Credit Risk
   F-25




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##### Table of Contents



NOTE 14  Subsequent Events
 st
  F-26