UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
___________________
FORM
10-Q
x |
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period ended September
30,
2008 |
¨ |
TRANSITION
REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from
to . |
Commission
File Number: 0-22390
_______________________
SHARPS
COMPLIANCE CORP.
(Exact
name of small business issuer as specified in its charter)
Delaware
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74-2657168
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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9220
Kirby Drive, Suite 500, Houston, Texas
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77054
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(Address
of principal executive offices)
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(Zip
Code)
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(713)
432-0300
(Issuer’s
telephone number)
Indicate
by check mark if the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of "large
accelerated filer", "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Securities Exchange Act of 1934.
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Large
Accelerated Filer o
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Accelerated
Filer o
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Non-accelerated
Filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company ý
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12(b)-2 of the Exchange Act). Yes o No x
As
of
October 31, 2008, there were 12,841,280 outstanding shares of the
Registrant's common stock, par value $0.01 per share.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
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PAGE
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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Condensed
Consolidated Balance Sheets
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3
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Condensed
Consolidated Statements of Income for the three months ended September
30,
2008 and 2007
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4
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Condensed
Consolidated Statements of Cash Flows
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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8
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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13
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Item
4.
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Controls
and Procedures
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14
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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15
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Item
6.
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Exhibits
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15
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SIGNATURES
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16
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PART
I FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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September 30,
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June 30,
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2008
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2008
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(Unaudited)
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ASSETS
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CURRENT
ASSETS
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Cash
and cash equivalents
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$
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2,547,276
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$
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2,035,219
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Restricted
cash
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-
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10,010
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Accounts
receivable, net of allowance for doubtful accounts of $15,308 and
$15,301,
respectively
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1,870,881
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1,183,975
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Inventory
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569,754
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580,861
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Prepaid
and other assets
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282,504
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359,894
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TOTAL
CURRENT ASSETS
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5,270,415
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4,169,959
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PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $1,003,180 and
$933,129,
respectively
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1,547,498
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1,375,657
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INTANGIBLE
ASSETS, net of accumulated amortization of $147,130 and $140,801,
respectively
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141,121
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130,702
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TOTAL
ASSETS
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$
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6,959,034
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$
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5,676,318
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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CURRENT
LIABILITIES
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Accounts
payable
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$
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1,004,492
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$
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778,423
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Accrued
liabilities
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360,743
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432,971
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Deferred
revenue
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1,219,736
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1,063,016
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TOTAL
CURRENT LIABILITIES
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2,584,971
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2,274,410
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LONG-TERM
DEFERRED REVENUE
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676,626
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516,372
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TOTAL
LIABILITIES
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3,261,597
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2,790,782
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COMMITMENTS
AND CONTINGENCIES
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STOCKHOLDERS’
EQUITY
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Common
stock, $0.01 par value per share; 20,000,000 shares authorized; 12,791,280
and 12,580,183 shares issued and outstanding, respectively
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127,914
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125,802
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Additional
paid-in capital
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9,429,790
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9,225,342
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Accumulated
deficit
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(5,860,267
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)
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(6,465,608
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)
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TOTAL
STOCKHOLDERS’ EQUITY
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3,697,437
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2,885,536
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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6,959,034
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$
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5,676,318
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
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Three Months
Ended September 30,
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2008
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2007
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(Unaudited)
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REVENUES
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Product
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$
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4,179,452
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$
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3,289,503
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Environmental
and other services
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90,084
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101,609
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TOTAL
REVENUES
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4,269,536
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3,391,112
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COSTS
AND EXPENSES
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Cost
of revenues
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2,420,360
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1,957,735
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Selling,
general and administrative
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1,162,954
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1,155,381
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Depreciation
and amortization
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76,380
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57,697
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TOTAL
COSTS AND EXPENSES
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3,659,694
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3,170,813
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OPERATING
INCOME
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609,842
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220,299
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OTHER
INCOME (EXPENSE)
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Interest
income
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12,071
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26,340
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Interest
expense
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-
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(38
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)
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Other
income
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2,800
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-
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TOTAL
OTHER INCOME
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14,871
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26,302
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INCOME
BEFORE INCOME TAXES
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624,713
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246,601
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INCOME
TAXES
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(19,372
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)
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(4,997
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NET
INCOME
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$
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605,341
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$
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241,604
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NET
INCOME PER COMMON SHARE
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Basic
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$
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0.05
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$
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0.02
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Diluted
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$
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0.04
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$
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0.02
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON
SHARE:
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Basic
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12,662,408
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12,061,734
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Diluted
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13,703,683
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13,535,520
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended
September 30,
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2008
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2007
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(Unaudited)
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
income
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$
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605,341
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$
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241,604
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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76,380
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57,697
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Stock
based compensation expense
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37,063
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29,460
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Excess
tax benefits from stock-based award activity
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(8,276
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)
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-
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Changes
in operating assets and liabilities:
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Decrease
in restricted cash
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10,010
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-
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Increase
in accounts receivable
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(686,906
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)
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(178,589
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)
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Decrease
(increase) in inventory
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11,107
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(180,011
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)
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Decrease
in prepaid and other assets
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77,390
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14,240
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Increase
(decrease) in accounts payable and accrued liabilities
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162,117
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(37,267
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)
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Increase
in deferred revenue
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316,974
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120,889
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NET
CASH PROVIDED BY OPERATING ACTIVITIES
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601,200
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68,023
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CASH
FLOWS FROM INVESTING ACTIVITIES
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Purchase
of property and equipment
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(241,892
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)
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(75,971
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Purchase
of intangible assets
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(16,748
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)
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(8,903
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)
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NET
CASH USED IN INVESTING ACTIVITIES
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(258,640
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)
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(84,874
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)
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CASH
FLOWS FROM FINANCING ACTIVITIES
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Payments
on capital lease obligations
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-
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(1,344
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)
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Excess
tax benefits from stock-based award activity
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8,276
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-
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Proceeds
from exercise of stock options
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161,221
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122,240
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NET
CASH PROVIDED BY FINANCING ACTIVITIES
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161,222
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120,896
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NET
INCREASE IN CASH AND CASH EQUIVALENTS
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512,057
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104,045
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CASH
AND CASH EQUIVALENTS, beginning of period
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2,035,219
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2,134,152
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CASH
AND CASH EQUIVALENTS, end of period
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$
|
2,547,276
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$
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2,238,197
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - ORGANIZATION AND BACKGROUND
The
accompanying unaudited condensed consolidated financial statements include
the
financial transactions and accounts of Sharps Compliance Corp. and it’s wholly
owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc.,
Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas,
Inc.) and Sharps Safety, Inc. (collectively, “Sharps” or the “Company”). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
NOTE
2
- BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”) for interim financial information and with
instructions to Form 10-Q and, accordingly, do not include all information
and
footnotes required under accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements contain
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated financial position of
the
Company as of September 30, 2008 and the results of its operations and cash
flows for the three months ended September 30, 2008 and 2007. The results of
operations for the three months ended September 30, 2008, are not necessarily
indicative of the results to be expected for the entire fiscal year ending
June
30, 2009. These unaudited condensed consolidated financial statements should
be
read in conjunction with the Company’s Annual Report on Form 10-K for the year
ended June 30, 2008.
NOTE
3
- SIGNIFICANT ACCOUNTING POLICIES
REVENUE
RECOGNITION
The
Company complies with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition”, which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. Under SAB No. 101, certain products offered by the Company
have revenue producing components that are recognized over multiple delivery
points (Sharps Disposal by Mail Systems, referred to as “Mailback” and Sharps
Return Boxes, referred to as “Pump Returns”) and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. The individual fair value of the
transportation and incineration services are determined by the sales price
of
the service offered by third parties, with the fair value of the container
being
the residual value. Revenue for the sale of the container is recognized upon
delivery to the customer, at which time the customer takes title and assumes
risk of ownership. Transportation revenue on Mailbacks is recognized when the
customer returns the mailback container system and the container has been
received at the Company’s treatment facility. The Mailback container system is
mailed to the incineration facility using the United States Postal Service
(“USPS”) or United Parcel Service (“UPS”). Incineration revenue is recognized
upon the destruction and certification of destruction having been prepared
on
the container. Since the transportation element and the incineration elements
are undelivered services at the point of initial sale of the container, the
Mailback revenue is deferred until the services are performed. The current
and
long-term portions of deferred revenues are determined through regression
analysis and historical trends. Furthermore, through regression analysis of
historical data, the Company has determined that a certain percentage of all
container systems sold may not be returned. Accordingly, a portion of the
transportation and incineration elements is recognized at the point of
sale.
NOTE
4 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements; SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years.
The FASB announced a one year deferral for the implementation of SFAS No. 157
for other non-financial assets and liabilities. In February, 2008, FASB issued
FASB Staff Position No. FAS 157-2. This FSP defers the effective date of
Statement 157 for non-financial liabilities on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP. The Company
adopted SFAS No. 157 effective July 1, 2008, except for non financial assets
and
liabilities as permitted by FSP SFAS 157-2, and the adoption of such statement
did not have a significant impact on our consolidated results of operations
or
financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115.” This statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation
and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions
of SFAS No. 157. The
Company adopted SFAS 159 effective July 1, 2008. The Company elected to not
fair value any additional financial instruments and thus the adoption of the
standard did not have a material impact on its financial position and results
of
operations.
NOTE
5 - INCOME TAXES
During
the three months ended September 30, 2008 the Company recorded a provision
of
$11,660 for estimated Alternative Minimum Tax (“AMT”). During the three months
ended September 30, 2007 the Company recorded a provision of $4,997 for the
AMT.
For federal income tax purposes the Company is in an Alternative Minimum Tax
(“AMT”) situation.
NOTE
6 - NOTES PAYABLE AND LONG-TERM DEBT
The
Company maintains a Credit Agreement with JPMorgan Chase Bank, N.A. (“Credit
Agreement”) which provides for a $2.5 million Line of Credit Facility the
proceeds of which may be utilized for, (i) working capital, (ii) letters of
credit (up to $200,000), (iii) acquisitions (up to $500,000) and (iv) general
corporate purposes. Indebtedness under the Credit Agreement is secured by
substantially all of the Company’s assets. As of September 30, 2008 and June 30,
2008 respectively, no amounts related to the Credit Agreement were outstanding.
Under the Credit Agreement and based upon the Company’s September 30, 2008 level
of accounts receivable and inventory, the amount available to borrow at quarter
end was $1.9 million.
NOTE
7 – STOCK-BASED COMPENSATION
The
Company accounts for share-based compensation under the provisions of Statement
of Financial Accounting Standards No. 123R, (“SFAS 123R”) Share-Based
Payment,
which
establishes accounting for equity instruments exchanged for employee services.
Under the provisions of SFAS No. 123R, share-based compensation cost is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity grant). Share-based compensation expense,
included in general and administrative expenses in the Company’s consolidated
statements of income for the three months ended September 30, 2008 and 2007,
was
$37,063 and $29,460 respectively. SFAS No. 123R requires any reduction in taxes
payable resulting from tax deductions that exceed the recognized tax benefit
associated with compensation expense (excess tax benefits) to be classified
as
financing as financing cash flows. The Company included $8,276 excess tax
benefits in its cash flows from financing activities for the three months ended
September 30, 2008. No amounts were included in cash flows from financing
activities for the three months ended September 30, 2007 relating to excess
tax
benefits.
NOTE
8 - EARNINGS PER SHARE
Earnings
per share are measured at two levels: basic per share and diluted per share.
Basic per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted per share is
computed by dividing net income by the weighted average number of common shares
after considering the additional dilution related to common stock options.
In
computing diluted earnings per share, the outstanding common stock options
are
considered dilutive using the treasury stock method. The following information
is necessary to calculate earnings per share for the periods presented:
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
605,341
|
|
$
|
241,604
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
12,662,408
|
|
|
12,061,734
|
|
Effect
of Dilutive stock options
|
|
|
1,041,275
|
|
|
1,473,786
|
|
Weighted
average diluted common shares outstanding
|
|
|
13,703,683
|
|
|
13,535,520
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Employee
stock options excluded from computation of diluted income per share
amounts because their effect would be anti-dilutive
|
|
|
60,000
|
|
|
110,000
|
|
NOTE
9 - STOCK TRANSACTIONS
During
the quarter ended September 30, 2008, stock options to purchase 194,600 of
common shares were exercised. Total proceeds to the Company were $161,221
(average price of $0.83 per share). During the quarter ended September 30,
2007
stock options to purchase 156,730 of common shares were exercised. Total
proceeds to the Company were $122,240 (average price of $0.78 per
share).
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form
10-Q contains certain forward-looking statements and information relating to
Sharps that are based on the beliefs of the Company’s management as well as
assumptions made by and information currently available to the Company’s
management. When used in this report, the words “anticipate,” “believe,”
“estimate” and “intend” and words or phrases of similar import, as they relate
to Sharps or Company management, are intended to identify forward-looking
statements. Such statements reflect the current risks, uncertainties and
assumptions related to certain factors including, without limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or
more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
The
Company does not intend to update these forward-looking
statements.
GENERAL
Sharps
is
a leading developer and manufacturer of cost effective solutions for improving
safety, efficiency and costs related to the proper disposal of medical waste
by
industry and consumers. Sharps primary markets include healthcare, retail,
agriculture, hospitality, professional, industrial, commercial, governmental
and
pharmaceutical.
The
Company’s products and services represent solutions for industries and consumers
dealing with the complexity of managing regulatory compliance, environmental
sensitivity, employee and customer safety, corporate risk and operating costs
related to medical waste disposal. Sharps is a leading proponent and participant
in the development of public awareness and solutions for the safe disposal
of
needles, syringes and other sharps in the community setting.
The
Company’s primary products include Sharps Disposal by Mail System®, Pitch-It™ IV
Poles, Trip LesSystem®, Sharps Pump Return Box, Sharps Enteral Pump Return Box,
Sharps Secure®, Sharps SureTemp Tote®, IsoWash® Linen Recovery System,
RxTakeAway™,
18 gallon Medical Professional Sharps Disposal by Mail System®, Biohazard
Spill Clean-Up Kit and Disposal System, Sharps e-Tools, Sharps Environmental
Services and Sharps Consulting. Some products and services facilitate compliance
with state and federal regulations by tracking, incinerating and documenting
the
disposal of medical waste. Additionally, some products and services facilitate
compliance with educational and training requirements required by federal,
state, and local regulatory agencies.
RESULTS
OF OPERATIONS
The
following analyzes changes in the consolidated operating results and financial
condition of the Company during the three months ended September 30, 2008 and
2007.
The
following table sets forth, for the periods indicated, certain items from the
Company's Condensed Consolidated Statements of Income, expressed as a percentage
of revenue (unaudited):
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
|
100
|
%
|
|
100
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
(57
|
)%
|
|
(58
|
)%
|
Selling,
general and administrative
|
|
|
(27
|
)%
|
|
(34
|
)%
|
Depreciation
and amortization
|
|
|
(2
|
)%
|
|
(2
|
)%
|
Total
operating expenses
|
|
|
(86
|
)%
|
|
(94
|
)%
|
Income
from operations
|
|
|
14
|
%
|
|
6
|
%
|
Total
other income (expense)
|
|
|
0
|
%
|
|
1
|
%
|
Net
income
|
|
|
14
|
%
|
|
7
|
%
|
THREE
MONTHS ENDED SEPTEMBER
30, 2008 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
2007
Total
revenues for the three months ended September 30, 2008 of $4,269,536 increased
by $878,424, or 26%, over the total revenues for the three months ended
September 30, 2007 of $3,391,112. Customer billings by market are as
follows:
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Variance
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Billings
by Market:
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
1,906,697
|
|
$
|
1,919,264
|
|
$
|
(12,567
|
)
|
Pharmaceutical
|
|
|
874,614
|
|
|
7,185
|
|
|
867,429
|
|
Retail
|
|
|
840,762
|
|
|
685,436
|
|
|
155,326
|
|
Professional
|
|
|
248,441
|
|
|
171,184
|
|
|
77,257
|
|
Hospitality
|
|
|
209,453
|
|
|
363,235
|
|
|
(153,782
|
)
|
Commercial/Industrial
|
|
|
184,499
|
|
|
116,109
|
|
|
68,390
|
|
Agriculture
|
|
|
174,011
|
|
|
93,304
|
|
|
80,707
|
|
Protec
|
|
|
130,353
|
|
|
125,270
|
|
|
5,083
|
|
Government
|
|
|
55,150
|
|
|
56,061
|
|
|
(911
|
)
|
Other
|
|
|
38,154
|
|
|
49,202
|
|
|
(11,048
|
)
|
Subtotal
|
|
|
4,662,134
|
|
|
3,586,250
|
|
|
1,075,884
|
|
GAAP
Adjustment*
|
|
|
(392,598
|
)
|
|
(195,138
|
)
|
|
(197,460
|
)
|
Revenue
Reported
|
|
$
|
4,269,536
|
|
$
|
3,391,112
|
|
$
|
878,424
|
|
*Represents
the net impact of the revenue recognition adjustment required to arrive at
reported GAAP revenue. Customer billings includes all invoiced amounts
associated with products shipped during the period reported. GAAP revenue
includes customer billings as well as numerous adjustments necessary to reflect,
(i) the deferral of a portion of current period sales and (ii) recognition
of
certain revenue associated with product returned for treatment and destruction.
The difference between customer billings and GAAP revenue is reflected in the
Company’s balance sheet as deferred revenue. See Note 3 “Revenue Recognition” in
Part I, “Notes to Consolidated Financial Statements”.
The
increase in revenues is primarily attributable to increased billings in the
Pharmaceutical ($867,429), Retail ($155,326), Agriculture ($80,707),
Professional ($77,257), Commercial/Industrial ($68,390), and Protec ($5,083)
markets. These increases were partially offset by decreased billings in the
Hospitality ($153,782), Health Care ($12,567), Other ($11,048), and Government
($911) markets. The increase in the Pharmaceutical market is led by the renewal
of the Company’s first contract with a top ten pharmaceutical manufacturer which
added $683,280 of billings for the first quarter along with $63,525 and $50,000
related to billings for two new patient support programs and $61,215 of billings
to a manufacturer of flu vaccines. The increase in the Retail market is a result
of the strong flu shot business whereby the Company’s flagship Sharps Disposal
By Mail System® products are used in the retail setting to collect and properly
dispose syringes used to administer flu shots. The increase in the Agriculture
market is primarily attributable to increased demand of the Sharps Disposal
by
Mail System® by a customer who provides the product to facilitate the injection
of dairy cattle. The increase in the Professional and Commercial/Industrial
markets is being driven by higher demand for the Company’s products as industry
and consumers become more aware of the proper disposal of medical sharps
(syringes, lancets, etc.). The decrease in the Hospitality market is primarily
attributable to an increase in demand of Biohazard Spill Clean-Up Kits in the
quarter ended September 30, 2007.
Cost
of
revenues for the three months ended September 30, 2008 of $2,420,360 was 57%
of
revenues. Cost of revenues for the three months ended September 30, 2007 of
$1,957,735 was 58% of revenue. Gross margin was negatively impacted during
the
quarter ended September 30, 2008 by approximately $200 thousand due to excess
air freight shipping costs that were incurred to address supply and
manufacturing issues associated with the Company’s Pitch-It IV Poles. These
issues were consequently resolved in August of 2008. Excluding the $200 thousand
in excess air freight shipping costs, the gross margin for the quarter ended
September 30, 2008 was 48%.
Selling,
general and administrative (“S, G & A”) expenses for the three months ended
September 30, 2008 of $1,162,954, increased by $7,573, from S, G & A
expenses for the three months ended September 30, 2007.
The
Company generated operating income of $609,842
for the three months ended September 30, 2008 compared to $220,299 for the
three
months ended September 30, 2007. The increase in operating income is a result
of
a 26% increase in revenues while S, G & A remained flat (i.e. operating
leverage).
The
Company generated income before tax of $624,713 for the three months ended
September 30, 2008 versus a pre-tax income of $246,601 for the three months
ended September 30, 2007. The increase in income before tax is a result of
higher operating income (discussed above).
The
Company reported diluted earnings per share of $0.04 for the three months ended
September 30, 2008 versus diluted earnings per share of $0.02 for the three
months ended September 30, 2007. The increase in diluted earnings per share
is a
result of a higher net income (discussed above).
PROSPECTS
FOR THE FUTURE
The
Company continues to take advantage of the many opportunities in the markets
served as communities, consumers and industries become
more aware of the proper disposal of medical sharps (syringes, lancets, etc.).
This education process was enhanced in March 2004 when the U. S. Environmental
Protection Agency (“EPA”) issued its new guidelines for the proper disposal of
medical sharps (see www.epa.gov/epaoswer/other/medical/sharps.htm).
Additionally, in July 2006 both the states of California and Massachusetts
passed legislation designed to mandate appropriate disposal of sharps waste
necessary to protect the general public and workers from potential exposure
to
contagious diseases and health and safety risks. In August 2008, the U.S. House
of Representative and U.S. Senate introduced bills 3251 and 1909, respectively,
which would provide for Medicare reimbursement, under part D, for the safe
and
effective disposal of used needles and syringes. Among the methods of disposal
recommended as part of the above noted regulatory actions are mail-back programs
such as those marketed by the Company. The Company estimates that there are
an
estimated 2 - 3 billion used syringes disposed of in the United States outside
of the hospital setting. Additionally, the Company estimates that it would
require 30 – 40 million Sharps Disposal by Mail System® products to properly
dispose of all such syringes, which would equate to a $1 billion small quantity
generator market opportunity. Based upon the current level of sales, the Company
estimates that this $1 billion market has only been penetrated by approximately
1% or less.
The
Company continues to develop new products for its Sharps Disposal by Mail
System®, including the new RxTakeAway™ and 18 gallon Medical Professional Sharps
Disposal by Mail System®, and Sharps SureTemp Tote® product lines. The Company
is also developing products designed to facilitate the proper and cost effective
disposal of unused medications. The Company believes its future growth will
be
driven by, among other items, (i) the positive impact and awareness created
by
the above noted regulatory actions as well as additional potential future
legislation, (ii) the effects of the Company’s extensive direct marketing
efforts and (iii) the Company’s leadership position in the development and sale
of products designed to properly and cost effectively dispose of small
quantities of medical waste.
Demand
for the Company’s primary product, the Sharps Disposal by Mail System®, which
facilitates the proper and cost-effective disposal of medical waste including
hypodermic needles, lancets and other devices or objects used to puncture or
lacerate the skin (referred to as “sharps”), has been growing rapidly in the
small quantity generator sector because of its mail-back convenience and unique
data tracking feature. In addition, targeted opportunities continue to expand
as
a result of , (i) legislation mandating the proper disposal of sharps, (ii)
the
growing awareness of the need to properly handle sharps medical waste for safety
and environmental concerns, (iii) the significant increase in self-injectable
medications and (iv) the changing paradigm in the healthcare
industry.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and
cash equivalents increased by $512,057 to $2,547,276 at September 30, 2008
from
$2,035,219 at June 30, 2008. The increase in cash and cash equivalents is
primarily a result of cash generated from operations of $601,200 plus proceeds
from the exercise of stock options of $161,221, partially offset by additions
to
property and equipment and intangible assets of $258,640.
Accounts
receivable increased by $686,906 to $1,870,881 at September 30, 2008 from
$1,183,975 at June 30, 2008. The increase is a direct result of the increase
in
billings generated by the Company for the quarter ended September 30, 2008
versus the quarter ended June 30, 2008.
Property
and equipment increased by $171,841 to $1,547,498 at September 30, 2008 from
$1,375,657 at June 30, 2008 due to capital expenditures of $241,892 partially
offset by depreciation expense of $70,051. The capital expenditures are
attributable primarily to the purchase of, (i) treatment facility improvements
of $102,801 (ii) Autoclave permitting costs of $49,636, (iii)
warehouse/operations-related equipment of $45,928, (iv) molds, dies and printing
plates for production of $21,754, (v) new system software and implementation
of
$11,879, and (vi) custom software programming of $7,386. The treatment facility
improvements are related to pre-installation capital expenditures related to
the
autoclave technology and general facility improvements. The
warehouse/operations-related equipment was related to equipment necessary to
accommodate the automation of in-house assembly of the Company’s products. The
molds and printing plates were procured for development of new product and
additional production capacity.
Accounts
payable increased by $226,069 to $1,004,492 at September 30, 2008 from $778,423
at June 30, 2008. The increase is a result in the timing of payments for product
purchased and capital expenditures.
Accrued
liabilities decreased by $72,228 to $360,743 at September 30, 2008 from $432,971
at June 30, 2008. The decrease is a result of timing in the receipt of invoices
for product received.
Stockholder’s
equity increased by $811,901 from $2,885,536 to $3,697,437. This increase is
attributable to, (i) net income for the three months ended September 30, 2008
of
$605,341 and (ii) the effect of stock options to purchase 194,600 common stock
exercised with proceeds of $161,221 (average exercise price of $0.83), (iii)
the
effect on equity (credit) of SFAS 123R expense of $37,063 and (iv) the excess
tax benefits from stock-based award activity of $8,276.
On
October 27, 2008, the Company appointed John R. Grow as its new President and
Chief Operating Officer. In conjunction with this appointment, Mr. Grow
received a grant of 300,000 restricted shares of unregistered Company common
stock (i.e., issued outside of the Company’s 1993 Stock Plan). The Company
expects to record non-cash stock-based compensation expense related to this
grant as follows: approximately $49,000 and $65,000 during the quarters ended
December 31, 2008 and March 31, 2009, respectively, and approximately $70,000
during each quarter, thereafter, until the quarter ended September 30, 2010.
Non-cash stock based compensation expense is reflected in the Company’s
Statement of Income as a component of S, G & A expense.
Management
believes that the Company’s current cash resources (cash on hand and cash
generated from operations) along with its $2.5 million line of credit will
be
sufficient to fund operations for the twelve months ending September 30,
2009.
Disposal
Facility
In
January 2008, Company purchased its previously leased disposal facility in
Carthage, Texas. The purchase included an incinerator with a maximum capacity
of
thirty (30) tons per day, a 12,000 square foot building and 4.5 acres of land.
The Company incinerator is currently permitted at a capacity of eleven (11)
tons
per day.
Additionally,
the Company has executed a purchase order for a state-of-the-art autoclave
system and technology capable of treating up to seven (7) tons per day of
medical waste at the same facility. Autoclaving is a process that treats medical
waste with steam at high temperature and pressure to kill pathogens.
An
autoclave is environmentally cleaner and is a less costly method of treating
most medical waste versus traditional incineration. The autoclave is expected
to
be placed in service during the quarter ended March 31, 2009.
With
the
addition of the autoclave, the Company believes it will own one of only
approximately ten (10) permitted commercial disposal facilities in the country
capable of treating all types of medical waste.
The
total
cost of (i) the treatment facility purchase, (ii) addition of the autoclave
technology and (iii) facility improvements is estimated to be approximately
$1.1
million with $611,255 incurred to date. The remainder (which consists primarily
of the autoclave equipment and facility improvements) is expected to be incurred
over the six months ended March 31, 2009.
In
November 2005, the EPA amended the Clean Air Act which will affect the
operations of the incineration facility located in Carthage, Texas. The
regulation modifies the emission limits and monitoring procedures required
to
operate an incineration facility. The new rules will necessitate changes to
the
Company’s owned incinerator and pollution control equipment at the facility or
require installation of an alternative treatment method to ensure compliance.
Such change would require the Company to incur significant capital expenditures
in order to meet the requirements of the regulations. The regulation allows
a
minimum period of three years and a maximum of five years to comply after the
date the final rule was published. The Company has studied the amended EPA
Clean
Air Act and its options, and has decided in the interim to move forward with
the
process of adding alternative technology, autoclaving, for medical waste
disposal with plans to be fully operational by March 31, 2009 at its current
facility in Carthage, Texas. Autoclaving is a process that treats regulated
waste with steam at high temperature and pressure to kill pathogens. Combining
the autoclaving with a shredding or grinder process allows the waste to be
disposed in a landfill operation. The Company believes autoclaving is
environmentally cleaner and a less costly method of treating medical waste
than
incineration. The Company has not yet decided if and when it will incur the
additional capital expenditures needed in order to meet the new regulations.
The
additional capital expenditures are estimated at approximately $1.4 million
and
would increase its permitted incineration capacity from eleven (11) tons per
day
to thirty (30) tons per day. Should the Company incur such additional capital
expenditures, it would do so subsequent to the development and launching of
a
business plan designed to generate significant incremental and new revenue
stream from third party medical waste services.
CRITICAL
ACCOUNTING ESTIMATES
Certain
products offered by the Company have revenue producing components that are
recognized over multiple delivery points and can consist of up to three separate
elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. Since the transportation element and
the
incineration elements are undelivered services at the point of initial sale
of
the container, the revenue is deferred until the services are performed. The
current and long-term portions of deferred revenues are determined through
regression analysis and historical trends. Furthermore, through regression
analysis of historical data, the Company has determined that a certain
percentage of all container systems sold may not be returned. Accordingly,
a
portion of the transportation and incineration elements is recognized at the
point of sale.
Governmental
Regulation
Operations
and Incinerator
Sharps
is
required to operate within guidelines established by federal, state, and/or
local regulatory agencies. Such guidelines have been established to promote
occupational safety and health standards and certain standards have been
established in connection with the handling, transportation and disposal of
certain types of medical and solid wastes, including mailed sharps. Sharps
believes that it is currently in compliance in all material respects with all
applicable laws and regulations governing its business. However, in the event
additional guidelines are established to more specifically control the business
of Sharps, including the environmental services subsidiary, additional
expenditures may be required in order for Sharps to be in compliance with such
changing regulations. Furthermore, any material relaxation of any existing
regulatory requirements governing the transportation and disposal of medical
sharps products could result in a reduced demand for Sharps’ products and
services and could have a material adverse effect on Sharps’ revenues and
financial condition. The scope and duration of existing and future regulations
affecting the medical and solid waste disposal industry cannot be anticipated
and are subject to change due to political and economic pressures.
In
November 2005, the EPA amended the Clean Air Act which will affect the
operations of the leased incineration facility located in Carthage, Texas.
The
regulation modifies the emission limits and monitoring procedures required
to
operate an incineration facility. The new rules will necessitate changes to
the
Company’s owned incinerator and pollution control equipment at the facility or
require installation of an alternative treatment method to ensure compliance.
Such change would require the Company to incur significant capital expenditures
in order to meet the requirements of the regulations. The regulation allows
a
minimum period of three years and a maximum of five years to comply after the
date the final rule was published. The Company has studied the amended EPA
Clean
Air Act and its options, and has decided in the interim to move forward with
the
process of adding alternative technology, autoclaving, for medical waste
disposal with plans to be fully operational by March 31, 2009 at its current
facility in Carthage, Texas. Autoclaving is a process that treats regulated
waste with steam at high temperature and pressure to kill pathogens. Combining
the autoclaving with a shredding or grinder process allows the waste to be
disposed in a landfill operation. The Company believes autoclaving is
environmentally cleaner and a less costly method of treating medical waste
than
incineration. The Company has not yet decided if and when it will incur the
additional capital expenditures needed in order to meet the new regulations.
The
additional capital expenditures are estimated at approximately $1.4 million
and
would increase its permitted incineration capacity from eleven (11) tons per
day
to thirty (30) tons per day. Should the Company incur such additional capital
expenditures, it would do so subsequent to the development and launching of
a
business plan designed to generate significant incremental and new revenue
stream from third party medical waste services. See Disposal Facility section
above for further information regarding the purchase of the Carthage, Texas
facility and addition of autoclave technology.
Proper
Disposal of Medical Sharps
The
first
significant regulatory development occurred in December 2004 with the improved
guidance issued by the Environmental Protection Agency (“EPA”) regarding the
safe disposal of medical sharps (needles, syringes and lancets). This new
guidance is a result of disposal problems created by the estimated 2 billion
syringes discarded annually by legal self-injectors of medicines in homes and
non-healthcare commercial facilities. Until December 2004, the EPA guidance
has
instructed consumers to place used sharps in a household container and to place
the container in the household garbage. New guidance posted on the EPA website
reflects information about alternative disposal methods including mail-back
programs. The improved guidance issued by the EPA is a significant step toward
the removal of needles, syringes and other sharps from the solid waste stream,
consistent with the current practice in healthcare facilities. The Company’s
products and services, which are included in the EPA list of recommended
solutions, are designed to improve safety, efficiency and patient concerns
related to the proper disposal of medical sharps.
The
next
regulatory development was the enactment of California Senate Bill 1362, “The
Safe Needle Disposal Act of 2004.” This legislation authorizes California
agencies to expand the scope of their existing household hazardous waste plans
to provide for the safe disposal of medical sharps including hypodermic needles
and syringes. Authorized disposal programs include the mail-back programs
currently marketed by the Company.
In
July
2006, the State of California passed Senate Bill 1305 (“SB 1305”), an amendment
to The Medical Waste Management Act. The new law requires the proper disposal
of
home-generated sharps waste (syringes, needles, lancets, etc.) and acknowledges
mail-back programs as a convenient method for the collection and destruction
of
home-generated sharps. Effective January 1, 2007 (with enforcement beginning
September 1, 2008), SB 1305 addresses the need to meet the changing demands
of
healthcare provided in alternate sites that currently allow hundreds of millions
of home-generated sharps waste to be disposed in solid waste and recycling
containers. The new law is designed to ensure appropriate disposal of sharps
waste necessary to protect the general public and workers from potential
exposure to contagious diseases and health and safety risks.
Also
in
July 2006, The Massachusetts Legislature enacted Senate Bill 2569 which requires
the Massachusetts department of public health, in conjunction with other
relevant state and local agencies and government departments, to design,
establish and implement a program for the collection and disposal of
non-commercially generated, spent hypodermic needles and
lancets. Recommended disposal methods include mail-back products approved
by the U.S. Postal Service such as the Sharps
Disposal By Mail Systems®.
The
Massachusetts legislation addresses the need for proper disposal of used
syringes, needles and lancets outside of the traditional healthcare
setting.
In
addition to California and Massachusetts, many other states are considering
similar legislation.
In
August
2007, the U.S. House of Representatives and U.S. Senate introduced bills 3251
and 1909, respectively, which would provide for Medicare reimbursement, under
part D, for the safe and effective disposal of used needles and syringes through
a sharps-by-mail or similar program. This legislation proposes Medicare coverage
for the safe needle disposal for approximately 1.3 million insulin-dependent
diabetic beneficiaries and is intended to reduce the number of accidental
injuries, infections and subsequent costs associated with the improper disposal
of approximately 4 million needles generated daily by Medicare covered
diabetics. The Company’s Sharps Disposal By Mail Systems® is an example of the
cost-effective and easy-to-use solution recommended in the
legislation.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements; SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years.
The FASB announced a one year deferral for the implementation of SFAS No. 157
for other non-financial assets and liabilities. In February, 2008, FASB issued
FASB Staff Position No. FAS 157-2. This FSP defers the effective date of
Statement 157 for non-financial liabilities on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP. The Company
adopted SFAS No. 157 effective July 1, 2008, except for non financial assets
and
liabilities as permitted by FSP SFAS 157-2, and the adoption of such statement
did not have a significant impact on our consolidated results of operations
or
financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115.” This statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation
and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions
of SFAS No. 157. The
Company adopted SFAS 159 effective July 1, 2008. The Company elected to not
fair value any additional financial instruments and thus the adoption of the
standard did not have a material impact on its financial position and results
of
operations.
ITEM
3. Quantitative and Qualitative Disclosers About Market
Risk
Not
Applicable
ITEM
4.
CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures that are designed to ensure
that material information required to be disclosed in the Company’s periodic
reports filed or submitted under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. The Company’s disclosure
controls and procedures are also designed to ensure that information required
to
be disclosed in the reports the Company files or submits under the Exchange
Act
is accumulated and communicated to the Company’s management, including, its
principal executive officer and principal financial officer as appropriate,
to
allow timely decisions regarding required disclosure.
As
of
September 30, 2008 the Company carried out an evaluation, under the supervision
and with the participation of the Company’s management, including the chief
executive officer and the chief financial officer, of the effectiveness of
the
design and operation of the disclosure controls and procedures, as defined
in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that
evaluation, the Company’s chief executive officer and chief financial officer
concluded that the Company’s disclosure controls and procedures were effective,
as of the end of the period covered by this report (September 30,
2008).
During
the first quarter of the fiscal year 2009, there were no changes in the
Company’s internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are
reasonably likely to materially affect internal control over financial
reporting.
The
certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are
filed as exhibits 31.1 and 31.2, respectively, to this Quarterly Report on
Form
10-Q.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Ronald
E. Pierce Matter
On
July
15, 2008, the Company received a demand for arbitration from Ronald E. Pierce
related to a June 2004 issue summarized below:
On
June
14, 2004, the Company provided Mr. Ronald E. Pierce, its then current Chief
Operating Officer (“Mr. Pierce”), with notice of non-renewal of his employment
agreement. As such, July 14, 2004 was Mr. Pierce’s last day of employment. The
Company has advised Mr. Pierce that under the terms of the employment contract
no further compensation (including services) was due. The Company then received
various letters from Mr. Pierce’s attorney advising that Mr. Pierce is taking
the position that the non-renewal of the employment agreement was not timely
and, therefore, Mr. Pierce was terminated without cause. Additionally, Mr.
Pierce claims that the Company had no right to terminate him on the anniversary
date of his agreement without the obligation of paying Mr. Pierce as if he
were
terminated without cause. The Company believes that notice of such non-renewal
was timely, and that in accordance with Mr. Pierce’s employment agreement, the
Company was entitled to provide notice thirty (30) days prior to the anniversary
of its intent to terminate the agreement, and no severance would therefore
be
due to Mr. Pierce.
The
claim
amount under the July 15, 2008 demand for arbitration is $300,001.
On
July
18, 2008, the Company responded to the July 15, 2008 request for Arbitration
from Mr. Pierce. In its response, the Company advised that the request for
arbitration was filed more than four (4) years from the date upon which Pierce
knew, or should have known, of any alleged breach of contract. Accordingly,
the
Company will not agree to arbitrate a time barred claim.
The
Company believes it has meritorious defenses against Mr. Pierce’s claims and has
not recorded a liability related to this matter.
ITEM
6. EXHIBITS
31.1
Certification of Chief Executive Officer in Accordance with Section 302 of
the
Sarbanes-Oxley Act
(filed
herewith)
31.2
Certification of Chief Financial Officer in Accordance with Section 302 of
the
Sarbanes-Oxley Act
(filed
herewith)
32.1
Certification of Chief Executive Officer in Accordance with Section 906 of
the
Sarbanes-Oxley Act
(filed
herewith)
32.2
Certification of Chief Financial Officer in Accordance with Section 906 of
the
Sarbanes-Oxley Act
(filed
herewith)
ITEMS
2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN
OMITTED.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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REGISTRANT:
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SHARPS
COMPLIANCE CORP.
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Dated:
November 14, 2008
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By:
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/s/
Dr. Burton J. Kunik
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|
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Chairman
of the Board of Directors and
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Chief
Executive Officer
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Dated:
November 14, 2008
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By:
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/s/
David P. Tusa
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Executive
Vice
President, |
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Chief Financial
Officer, |
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Business
Development and
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Corporate
Secretary
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