Note 3 — Acquisition

On May 13, 2011, the Company entered into an Asset Purchase Agreement with Kruin Medical Products, Inc., a California corporation, which had been doing business as SGV Medical Supplies ("SGV"), and its sole shareholder. Under the Asset Purchase Agreement, the Company purchased SGV's customer list, inventory, and website (the "Purchased Assets") used in its ostomy supply business. The purchase price for the Purchased Assets was $716,000, of which the Company paid $466,000 in cash and $250,000 pursuant to a non-interest bearing promissory note due on November 13, 2011, subject to the Company's right of setoff based on the number of SGV customers that purchase ostomy supplies from the Company within six months following the acquisition date.

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

As of June 30, 2011, the estimated fair values of the contingent consideration, that is, the promissory note due on November 13, 2011, and the assets acquired are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of the contingent consideration and of the assets acquired. The Company believes that the information provides a reasonable basis for estimating the fair values of assets and is obtaining additional information necessary to finalize those fair values. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

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

Preliminary Purchase Price Consideration:
Cash	$	466
Promissory note, net of right of setoff		107
Total fair value of consideration	$	573

Preliminary Purchase Price Allocation:
Intangible assets (customer list)	$	482
Inventory		33
Property and equipment (website)		58
Total assets acquired	$	573

The fair value of the promissory note was calculated based on an estimate of the number of SGV customers expected to purchase ostomy supplies from the Company within six months from the date of the acquisition. The range of potential amounts due pursuant to the terms of the promissory note is between $0 and $250,000. The fair values of the customer list and the website acquired were estimated using an income approach and incorporate significant inputs not observable in the market, which are Level 3 fair value inputs. Key assumptions in the estimated valuation included: (1) a discount rate of 18.92%; (2) the number of SGV customers expected to place orders with the Company; and (3) net cash flow projections over the projected life of the assets.

For the nine months ended June 30, 2011, the Company recognized $271,000 of revenue and approximately $12,000 of earnings generated from customers acquired from SGV since the acquisition date. Disclosure of supplemental pro forma information for revenue and earnings related to the acquired assets, assuming the acquisition was made at the beginning of the earliest period presented, has not been disclosed since the effects of the acquisition would not have been material to the results of operation for the periods presented.