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
|
|
For
the quarterly period ended December 31,
2008
|
r
|
TRANSITION REPORT UNDER SECTION
13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
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
|
|
74-2657168
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
|
9220
Kirby Drive, Suite 500, Houston, Texas
|
|
77054
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(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 ý 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.
|
|
|
|
|
|
|
Large
Accelerated Filer o
|
|
Accelerated
Filer o
|
|
Non-accelerated
Filer o
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company ý
|
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 ý
As
of February 9, 2009, there were 12,921,280 outstanding shares of the
Registrant's common stock, par value $0.01 per share.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
|
|
PAGE
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Income for the three months ended December 31,
2008 and 2007
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Income for the six months ended December 31,
2008 and 2007
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
|
|
|
Item
4.
|
Controls
and Procedures
|
17
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
19
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
|
|
Item
6.
|
Exhibits
|
19
|
|
|
|
SIGNATURES
|
21
|
PART
I |
|
FINANCIAL
INFORMATION
|
ITEM 1. |
|
FINANCIAL
STATEMENTS |
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,064,290 |
|
|
$ |
2,035,219 |
|
Restricted
cash
|
|
|
- |
|
|
|
10,010 |
|
Accounts
receivable, net of allowance for doubtful accounts of $14,985 and
$15,301,
respectively
|
|
|
1,133,015 |
|
|
|
1,183,975 |
|
Inventory
|
|
|
830,640 |
|
|
|
580,861 |
|
Prepaid
and other assets
|
|
|
343,638 |
|
|
|
359,894 |
|
Deferred
income taxes
|
|
|
17,352 |
|
|
|
- |
|
TOTAL
CURRENT ASSETS
|
|
|
4,388,935 |
|
|
|
4,169,959 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $1,079,416
and $933,129,
respectively
|
|
|
1,809,641 |
|
|
|
1,375,657 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non current
|
|
|
3,106,390 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS, net of accumulated amortization of $153,748 and $140,801,
respectively
|
|
|
152,932 |
|
|
|
130,702 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
9,457,898 |
|
|
$ |
5,676,318 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
696,002 |
|
|
$ |
778,423 |
|
Accrued
liabilities
|
|
|
245,470 |
|
|
|
432,971 |
|
Deferred
revenue
|
|
|
1,134,994 |
|
|
|
1,063,016 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,076,466 |
|
|
|
2,274,410 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEFERRED REVENUE
|
|
|
633,178 |
|
|
|
516,372 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
2,709,644 |
|
|
|
2,790,782 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value per share; 20,000,000 shares authorized;
12,841,280
|
|
|
|
|
|
and
12,580,183 shares issued and outstanding, respectively
|
|
|
128,413 |
|
|
|
125,802 |
|
Additional
paid-in capital
|
|
|
10,895,236 |
|
|
|
9,225,342 |
|
Accumulated
deficit
|
|
|
(4,275,395 |
) |
|
|
(6,465,608 |
) |
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
6,748,254 |
|
|
|
2,885,536 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
9,457,898 |
|
|
$ |
5,676,318 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
REVENUES
|
|
|
|
|
|
|
Product
|
|
$ |
3,247,581 |
|
|
$ |
3,642,065 |
|
Environmental
and other services
|
|
|
122,065 |
|
|
|
108,737 |
|
TOTAL
REVENUES
|
|
|
3,369,646 |
|
|
|
3,750,802 |
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
2,081,422 |
|
|
|
2,145,468 |
|
Selling,
general and administrative
|
|
|
1,438,016 |
|
|
|
1,185,046 |
|
Depreciation
and amoritization
|
|
|
82,854 |
|
|
|
65,920 |
|
TOTAL
COSTS AND EXPENSES
|
|
|
3,602,292 |
|
|
|
3,396,434 |
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
(232,646 |
) |
|
|
354,368 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
11,904 |
|
|
|
26,100 |
|
Other
income (expense)
|
|
|
5,588 |
|
|
|
(6 |
) |
TOTAL
OTHER INCOME
|
|
|
17,492 |
|
|
|
26,094 |
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
(215,154 |
) |
|
|
380,462 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE (BENEFIT)
|
|
|
|
|
|
|
|
|
Current
|
|
|
6,266 |
|
|
|
558 |
|
Deferred
|
|
|
(1,806,292 |
) |
|
|
- |
|
TOTAL
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(1,800,026 |
) |
|
|
558 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
1,584,872 |
|
|
$ |
379,904 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.12 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.11 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOMER PER
COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,841,280 |
|
|
|
12,157,441 |
|
Diluted
|
|
|
13,839,779 |
|
|
|
13,494,251 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
Six
Months
|
|
|
|
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
REVENUES
|
|
|
|
|
|
|
Product
|
|
$ |
7,427,033 |
|
|
$ |
6,931,568 |
|
Environmental
and other services
|
|
|
212,149 |
|
|
|
210,346 |
|
TOTAL
REVENUES
|
|
|
7,639,182 |
|
|
|
7,141,914 |
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
4,501,783 |
|
|
|
4,103,203 |
|
Selling,
general and administrative
|
|
|
2,600,971 |
|
|
|
2,340,427 |
|
Depreciation
and amoritization
|
|
|
159,234 |
|
|
|
123,617 |
|
TOTAL
COSTS AND EXPENSES
|
|
|
7,261,988 |
|
|
|
6,567,247 |
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
377,194 |
|
|
|
574,667 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
23,977 |
|
|
|
52,440 |
|
Other
income (expense)
|
|
|
8,388 |
|
|
|
(44 |
) |
TOTAL
OTHER INCOME
|
|
|
32,365 |
|
|
|
52,396 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
409,559 |
|
|
|
627,063 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE (BENEFIT)
|
|
|
|
|
|
|
|
|
Current
|
|
|
25,638 |
|
|
|
5,555 |
|
Deferred
|
|
|
(1,806,292 |
) |
|
|
- |
|
TOTAL
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(1,780,654 |
) |
|
|
5,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
2,190,213 |
|
|
$ |
621,508 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOMER PER
COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,751,844 |
|
|
|
12,109,845 |
|
Diluted
|
|
|
13,771,731 |
|
|
|
13,514,774 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six
Months
|
|
|
|
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITES
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,190,213 |
|
|
$ |
621,508 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amoritzation
|
|
|
159,234 |
|
|
|
123,617 |
|
Stock
based compensation expense
|
|
|
125,908 |
|
|
|
20,438 |
|
Excess
tax benefits from stock-based award activity
|
|
|
(12,926 |
) |
|
|
(7,986 |
) |
Deferred
tax benefit
|
|
|
(1,806,292 |
) |
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
10,010 |
|
|
|
- |
|
Decrease
(increase) in accounts receivable
|
|
|
50,960 |
|
|
|
(65,212 |
) |
Increase
in inventory
|
|
|
(249,779 |
) |
|
|
(174,278 |
) |
Decrease
(increase) in prepaid and other assets
|
|
|
16,256 |
|
|
|
(15,304 |
) |
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
(256,996 |
) |
|
|
12,820 |
|
Increase
in deferred revenue
|
|
|
188,784 |
|
|
|
182,858 |
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
415,372 |
|
|
|
698,461 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(580,271 |
) |
|
|
(268,395 |
) |
Additions
to intangible assets
|
|
|
(35,177 |
) |
|
|
(49,465 |
) |
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(615,448 |
) |
|
|
(317,860 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
on capital lease obligations
|
|
|
- |
|
|
|
(1,809 |
) |
Excess
tax benefits from stock-based award activity
|
|
|
12,926 |
|
|
|
7,986 |
|
Proceeds
from exercise of stock options
|
|
|
216,221 |
|
|
|
153,040 |
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
229,147 |
|
|
|
159,217 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
29,071 |
|
|
|
539,818 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
2,035,219 |
|
|
|
2,134,152 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
2,064,290 |
|
|
$ |
2,673,970 |
|
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 December 31, 2008 and the results of its operations for the three
and six months ended December 31, 2008 and 2007 and the cash flows for the six
months ended December 31, 2008. The results of operations for the
three and six months ended December 31, 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, the FASB issued FASB Staff Position No. FAS
157-2. This FSP defers the effective date of Statement 157 for
non-financial assets and 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 quarter ended December 31, 2008, the Company evaluated the valuation
allowance on the deferred tax asset balances. As a result, the
Company determined it was more likely than not that they would realize these
deferred tax assets and as such the valuation allowance was reduced to zero. In
addition to the above, the Company recorded a current income tax provision
relating to AMT and state income taxes of $6,266 and $558 for the quarters ended
December 31, 2008 and 2007, respectively. The current tax provision recorded for
the six months ended December 31, 2008 and 2007 relating to AMT and state income
taxes is $25,638 and $5,555, respectively. As of December 31, 2008
there were deferred tax assets of $3,123,742, $17,352 of which are
current.
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 December 31, 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
December 31, 2008 level of accounts receivable and inventory, the amount
available to borrow at quarter end was $1.6 million. Interest expense under the
line of credit is computed at prime (currently 3.25% per annum).
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 and six months ended December 31, 2008 was $37,063 and $125,908,
respectively. The expense for the three and six months ended December
31, 2007 was ($9,022) and $20,438, 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 cash flows. The Company
included $8,276 and $12,926 excess tax benefits in its cash flows from financing
activities for the three and six months ended December 31, 2008, respectively.
The Company included $0 and $7,986 excess tax benefits in its cash flows from
financing activities for the three and six months ended December 31, 2007,
respectively.
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:
|
|
|
|
|
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$ |
2,190,213 |
|
|
$ |
621,508 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
12,751,844 |
|
|
|
12,109,845 |
|
Effect
of dilutive stock options
|
|
|
1,019,887 |
|
|
|
1,404,929 |
|
Weighted
average diluted common shares outstanding
|
|
|
13,771,731 |
|
|
|
13,514,774 |
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
$ |
0.05 |
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Employee
stock options excluded from computation of diluted income per share
amounts because their effect would be
anti-dilutive
|
|
|
335,000 |
|
|
|
75,000 |
|
NOTE
9 - STOCK TRANSACTIONS
During
the quarter ended December 31, 2008, stock options to purchase 50,000 of common
shares were exercised. Total proceeds to the Company were $55,000
(average price of $1.10 per share). During the quarter ended December
31, 2007 stock options to purchase 30,000 of common shares were
exercised. Total proceeds to the Company were $30,800 (average price
of $1.03 per share).
During
the six months ended December 31, 2008, stock options to purchase 244,600 shares
of common shares were exercised. Total proceeds to the Company were
$216,221 (average price of $.88 per share). During the six months
ended December 31, 2007, stock options to purchase 186,730 of common shares were
exercised. Total proceeds to the Company were $153,040 (average price
of $0.82 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 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.
The
Sharps®MWMS™, a Medical Waste Management System service offering, is a
comprehensive medical waste solution which includes an array of services and
products necessary to effectively collect, store and dispose of medical waste in
the alternate site market (i.e., outside of the hospital or large healthcare
facility setting) . The System, which is designed for rapid deployment, features
the Sharps Disposal By Mail System® products combined with warehousing,
inventory management, training, data and other services necessary to provide a
comprehensive solution. The Sharps®MWMS™ is designed to be an
integral part of governmental and commercial emergency preparedness
programs.
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 of the Company
during the three and six months ended December 31, 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
|
|
|
Six Months
|
|
|
|
Ended
December 31,
|
|
|
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
(62 |
%) |
|
|
(57 |
%) |
|
|
(59 |
%) |
|
|
(57 |
%) |
Selling,
general and administrative
|
|
|
(43 |
%) |
|
|
(32 |
%) |
|
|
(34 |
%) |
|
|
(33 |
%) |
Depreciation
and amortization
|
|
|
(2 |
%) |
|
|
(2 |
%) |
|
|
(2 |
%) |
|
|
(2 |
%) |
Total
operating expenses
|
|
|
(107 |
%) |
|
|
(91 |
%) |
|
|
(95 |
%) |
|
|
(92 |
%) |
Income
(loss) from operations
|
|
|
(7 |
%) |
|
|
9 |
% |
|
|
5 |
% |
|
|
8 |
% |
Total
other income (expense)
|
|
|
1 |
% |
|
|
1 |
% |
|
|
0 |
% |
|
|
1 |
% |
Income
tax expense (benefit)
|
|
|
53 |
% |
|
|
0 |
% |
|
|
23 |
% |
|
|
0 |
% |
Net
income
|
|
|
47 |
% |
|
|
10 |
% |
|
|
29 |
% |
|
|
9 |
% |
THREE
MONTHS ENDED DECEMBER 31, 2008 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2007
Total
revenues for the three months ended December 31, 2008 of $3,369,646 decreased by
$381,156, or 10%, from the total revenues for the three months ended December
31, 2007 of $3,750,802. Customer billings by market are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$ |
1,709,000 |
|
|
$ |
1,933,695 |
|
|
$ |
(224,695 |
) |
Retail
|
|
|
455,077 |
|
|
|
315,115 |
|
|
|
139,962 |
|
Professional
|
|
|
313,157 |
|
|
|
168,317 |
|
|
|
144,840 |
|
Hospitality
|
|
|
221,791 |
|
|
|
306,779 |
|
|
|
(84,988 |
) |
Pharmaceutical
|
|
|
144,512 |
|
|
|
491,157 |
|
|
|
(346,645 |
) |
Commercial
|
|
|
110,212 |
|
|
|
160,137 |
|
|
|
(49,925 |
) |
Non-Mailable
|
|
|
92,972 |
|
|
|
116,253 |
|
|
|
(23,281 |
) |
Agriculture
|
|
|
92,617 |
|
|
|
173,694 |
|
|
|
(81,077 |
) |
Other
|
|
|
36,634 |
|
|
|
35,072 |
|
|
|
1,562 |
|
Government
|
|
|
65,647 |
|
|
|
85,090 |
|
|
|
(19,443 |
) |
Subtotal
|
|
|
3,241,619 |
|
|
|
3,785,309 |
|
|
|
(543,690 |
) |
GAAP
Adjustment *
|
|
|
128,027 |
|
|
|
(34,507 |
) |
|
|
162,534 |
|
Revenue
Reported
|
|
$ |
3,369,646 |
|
|
$ |
3,750,802 |
|
|
$ |
(381,156 |
) |
*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
decrease in revenues is primarily attributable to decreased billings in the
Pharmaceutical ($346,645), Health Care ($224,695), Hospitality ($84,988),
Agriculture ($81,077), Commercial ($49,925), Non-mailable ($23,281) and
Government ($19,443) markets. These decreases were partially offset
by increased billings in the Retail ($139,962), Professional ($144,840) and
Other ($1,562) markets. The decrease in the Pharmaceutical market is related to
the timing of billings to a top ten pharmaceutical manufacturer which billed in
the December 31, 2007 quarter prior year ($429K) with no corresponding billing
in the quarter ended December 31, 2008. This decrease was partially offset by
billings to two major pharmaceutical manufacturers and billings to a major mail
order pharmacy, all of which total $119,615 for the quarter ended December 31,
2008. The decrease in the Health Care market is related to the consolidation of
two key home healthcare companies and resulting purchasing
efficiencies. The decrease in the Hospitality market is primarily
attributable to a large order of Biohazard Spill Clean-Up Kits in the quarter
ended December 30, 2007 with no corresponding billing in the quarter ended
December 31, 2008. The decrease in the Agriculture market is primarily
attributable to timing of orders and billings of the Sharps Disposal by Mail
System ® to a customer serving the Agriculture market. The decrease in
Commercial market is related to a large initial order placed in the prior fiscal
year quarter for a large corporation with locations across the country with no
corresponding billing in the quarter ended December 31, 2008. 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 Professional and Retail 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.).
Cost of
revenues for the three months ended December 31, 2008 of $2,081,422 was 62% of
revenues. Cost of revenues for the three months ended December 31,
2007 of $2,145,468 was 57% of revenue. Gross margin was negatively
impacted by the lower revenue (i.e. lower coverage of fixed cost components in
COGS) and mix of products sold (i.e. lower high margin Sharps Disposal By Mail
Systems® sold as a percentage of total products). The current quarter
gross margins were also adversely impacted by an increase in operations
infrastructure costs as the Company prepares for higher sales volumes including
those anticipated from the recent U.S. Government contract award.
Selling,
general and administrative (“S, G & A”) expenses for the three months ended
December 31, 2008 of $1,438,016, increased by $252,970, from S, G & A
expenses for the three months ended December 31, 2007. The increase
in S, G & A expense was primarily due to higher (i) non-cash 123(R)
stock-based compensation expense of $46,085, (ii) professional fees of $43,860
(iii) compensation expense of $39,765, (iv) payroll taxes of $28,592, (v)
recruiting fees of $23,849 and (vi) housing-related costs for the Company’s new
President and COO of $17,986. The increase in non-cash 123(R)
stock-based award expense was primarily due to the expense associated with the
award of restricted stock in October 2008 to the Company’s recently appointed
President and COO. The increase in professional fees was a result of
expenses associated with, (i) various regulatory filings, (ii) outside
consultation related to the recent U.S. Government contract award, (iii) S-8
(Sharps Compliance 1993 Stock Plan) preparation and related filing expenses, and
(iv) legal fees associated with general corporate matters. The increase in
compensation expense is due primarily to the hiring of a new President and COO
in October 2008. Payroll taxes increased resulting from (i) increased
compensation expense and corresponding Company paid portion of payroll tax, (ii)
the Company portion of payroll taxes generated from the imputed income related
to the October 2008 restricted stock award to the Company’s new President and
COO and (iii) the Company portion of payroll taxes generated by the imputed
income related to the exercise of employee stock options. The increased
recruiting fees were associated to the hiring of two professions (sales and
marketing).
The
Company generated operating loss of $232,646 for the three months ended December
31, 2008 compared to operating income of $354,368 for the three months ended
December 31, 2007. The operating loss is a result of the above
mentioned decrease in revenue (and corresponding reduction in gross profit) and
the increase in S, G & A expense (discussed above).
The
Company generated a pre-tax loss of $215,154 for the three months ended December
31, 2008 versus a pre-tax income of $380,462 for the three months ended December
31, 2007. The decrease in pre-tax income is a result of lower
operating income (discussed above). The Company generated net income of
$1,584,872 for the three months ended December 31, 2008 compared to net income
of $379,904 for the three months ended December 31, 2007. The
increase in net income is a result of the reduction in the deferred tax
valuation allowance of $1,806,292 and corresponding credit to tax expense (see
Note 5 of the Notes to the Condensed Consolidated Financial
Statements).
The
Company reported diluted earnings per share of $0.11 for the three months ended
December 31, 2008 versus diluted earnings per share of $0.03 for the three
months ended December 31, 2007. The increase in diluted earnings per
share is a result of higher net income (discussed above).
SIX
MONTHS ENDED DECEMBER 31, 2008 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2007
Total
revenues for the six months ended December 31, 2008 of $7,639,182 increased by
$497,268, or 7%, over the total revenues for the six months ended December 31,
2007 of $7,141,914. Customer billings by market are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$ |
3,615,697 |
|
|
$ |
3,852,959 |
|
|
$ |
(237,262 |
) |
Retail
|
|
|
1,295,839 |
|
|
|
1,000,551 |
|
|
|
295,288 |
|
Professional
|
|
|
561,598 |
|
|
|
339,501 |
|
|
|
222,097 |
|
Hospitality
|
|
|
431,244 |
|
|
|
670,014 |
|
|
|
(238,770 |
) |
Pharmaceutical
|
|
|
1,019,125 |
|
|
|
498,342 |
|
|
|
520,783 |
|
Commercial
|
|
|
294,711 |
|
|
|
276,246 |
|
|
|
18,465 |
|
Non-Mailable
|
|
|
223,325 |
|
|
|
241,523 |
|
|
|
(18,198 |
) |
Agriculture
|
|
|
266,628 |
|
|
|
266,998 |
|
|
|
(370 |
) |
Other
|
|
|
74,789 |
|
|
|
84,276 |
|
|
|
(9,487 |
) |
Government
|
|
|
120,797 |
|
|
|
141,151 |
|
|
|
(20,354 |
) |
Subtotal
|
|
|
7,903,753 |
|
|
|
7,371,561 |
|
|
|
532,192 |
|
GAAP
Adjustment *
|
|
|
(264,571 |
) |
|
|
(229,647 |
) |
|
|
(34,924 |
) |
Revenue
Reported
|
|
$ |
7,639,182 |
|
|
$ |
7,141,914 |
|
|
$ |
497,268 |
|
*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 ($520,783), Retail ($295,288), Professional ($222,097), and
Commercial ($18,465) markets. These increases were partially offset
by decreased billings in the Hospitality ($238,770), Health Care ($237,262),
Government ($20,354), Non-mailback ($18,198) and Other ($9,487) markets. The
increase in the Pharmaceutical market is led by increased billings to the
Company’s first contract with a top ten pharmaceutical manufacturer for the six
months ended December 31, 2008 of $683 thousand compared to $429 thousand in
billings for the six months ended December 31, 2007. Additionally,
billings in the Pharmaceutical market increased as a result of billings to two
major pharmaceutical manufacturers and billings to a major mail order pharmacy,
all of which total $294,355 for the six-months ended December 31, 2008. 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 of syringes used to
administer flu shots. The increase in the Professional and Commercial
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 a large order of Biohazard Spill Clean-Up Kits in the
six months ended December 30, 2007 with no corresponding billing in the
corresponding period ended December 31, 2008. The decrease in the Health Care
market billings is related to the consolidation of two key home healthcare
companies and resulting purchasing efficiencies.
Cost of
revenues for the six months ended December 31, 2008 of $4,501,783 was 59% of
revenues. Cost of revenues for the six months ended December 31, 2007
of $4,103,203 was 57% of revenue. Gross margin was negatively
impacted during the six months ended December 31, 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 the quarter ended
September 30, 2008. Excluding the $200 thousand in excess air freight
shipping costs, the gross margin for the six months ended December 31, 2008 was
44%. The current quarter gross margins were also adversely impacted
by an increase in operations infrastructure costs as the Company prepares for
higher sales volumes including those anticipated from the recent U.S. Government
contract award.
Selling,
general and administrative (“S, G & A”) expenses for the six months ended
December 31, 2008 of $2,600,971, increased by $260,544, from S, G & A
expenses for the six months ended December 31, 2007. The increase in
S, G & A expense was primarily due to higher (i) non-cash 123(R) stock based
compensation expense of $105,470, (ii) professional fees of $66,918 (iii)
compensation expense of $44,036, (iv) payroll taxes of $27,546 and (v)
housing-related costs for the Company’s new President and COO of
$17,986. The increase in non-cash 123(R) stock-based award expense
was primarily due to the expense associated with the award of restricted stock
in October 2008 to the Company’s recently appointed President and
COO. The increase in professional fees was a result of expenses
associated with, (i) various regulatory filings, (ii) outside consultation
related to the recent U.S. Government contract award, (iii) S-8 (Sharps
Compliance 1993 Stock Plan) preparation and related filing expenses, and (iv)
legal fees associated with general corporate matters. The increase in
compensation expense is due primarily to the hiring of a new President and COO
in October 2008. Payroll taxes increased resulting from (i) increased
compensation expense and corresponding Company paid portion of payroll tax, (ii)
the Company portion of payroll taxes generated from the imputed income related
to the October 2008 restricted stock award to the Company’s new President and
COO and (iii) the Company portion of payroll taxes generated by the imputed
income related to the exercise of employee stock options.
The
Company generated operating income of $377,194 for the six months ended December
31, 2008 compared to $574,667 for the six months ended December 31,
2007. The decrease in operating income is a result of the above
mentioned increase in cost of revenues and S, G & A.
The
Company generated income before tax of $409,599 for the six months ended
December 31, 2008 versus a pre-tax income of $627,063 for the six months ended
December 31, 2007. The decrease in income before tax is a result of
lower operating income (discussed above).
The
Company generated net income of $2,190,213 for the six months ended December 31,
2008 compared to net income of $621,508 for the six months ended December 31,
2007. The increase in net income is a result of the reduction in the
deferred tax valuation allowance of $1,806,292 and corresponding credit to tax
expense (see Note 5 of the Notes to the Condensed Consolidated Financial
Statements).
The
Company reported diluted earnings per share of $0.16 for the six months ended
December 31, 2008 versus diluted earnings per share of $0.05 for the six months
ended December 31, 2007. The increase in diluted earnings per share
is a result of 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 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. 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.
On
February 2, 2009, the Company announced a $40 million contract award to provide
its Sharps Medical Waste Management System (“Sharps®MWMS™”) to an agency of the United
States Government. The total contract is valued at approximately $40
million and is expected to be executed over a five year period. The Company has
received a purchase order for $28.5 million which represents product and
services to be provided during the first contract year. The following four
option years represent payment for program maintenance.
The
Company estimates that it will recognize revenue on the above noted Government
contract as follows (i) $6 million in FY 2009, (ii) $23 million in FY 2010,
(iii) $3 million in FY 2011, (iv) $3 million in FY 2012, (v) $3 million in FY
2013 and (vi) $2 million in FY 2014.
The above
amounts are estimates only and are subject to change. Although the Company
believes the amounts above to be reasonable based upon its current project plan,
it makes no assurances regarding the actual recognition of revenue by fiscal
year which could vary significantly from that noted above.
LIQUIDITY
AND CAPITAL RESOURCES
Cash and
cash equivalents increased by $29,071 to $2,064,290 at December 31, 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 $415,371 plus proceeds
from the exercise of stock options of $216,221 partially offset by additions to
property and equipment and intangible assets of $615,447.
Accounts
receivable decreased by $50,960 to $1,133,015 at December 31, 2008 from
$1,183,975 at June 30, 2008.
Inventory
increased by $249,779 to $830,640 at December 31, 2008 from $580,861 at June 30,
2008. The increase in inventory is attributable to recent bulk
purchases of Sharps Secure® and poles manufactured overseas and additional stock
needed for specialty orders.
Deferred
income tax benefits of $3,123,742 were booked in the quarter ended December 31,
2008 due to the Company’s decision to reduce the deferred tax valuation
allowance to zero. The decision was made after evaluation the
following circumstances (i) recent $40 million U.S. Government contract award to
the Company and the corresponding anticipated taxable income, (ii) the
anticipated taxable income for third and fourth quarters of fiscal 2009 and the
full fiscal year 2010 and (iii) the expected utilization in fiscal 2009 and 2010
of the remaining net operating loss carry forward.
Property
and equipment increased by $433,984 to $1,809,641 at December 31, 2008 from
$1,375,657 at June 30, 2008 due to capital expenditures of $580,271 partially
offset by depreciation expense of $146,287. The capital expenditures are
attributable primarily to, (i) treatment facility improvements of $298,057 (ii)
new system software and implementation of $93,632, (iii) Autoclave permitting
costs of $76,350, (iv) molds, dies and printing plates for production of
$48,181, (v) warehouse/operations-related equipment of $45,928, (vi) custom
software programming of $11,136 and (vii) office furniture of $1,881. The
treatment facility improvements represent (i) capital expenditures related to
the estimated third quarter fiscal year 2009 autoclave technology installation
and (ii) general facility improvements. The new system software and
implementation costs were related to the implementation of a new integrated
sales, operations and financial system in December 2008. 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 decreased by $82,421 to $696,002 at December 31, 2008 from $778,423 at
June 30, 2008. The decrease is a result in the timing of payments for
product purchased and capital expenditures.
Accrued
liabilities decreased by $187,501 to $245,470 at December 31, 2008 from $432,971
at June 30, 2008. The decrease is a result of timing in the receipt
of invoices for product received and payment of related amounts.
Stockholder’s
equity increased by $3,862,718 from $2,885,536 to $6,748,254. This
increase is attributable to, (i) net income for the six months ended December
31, 2008 of $2,190,213, (ii) the increase in additional paid-in capital of
$1,317,450 resulting from the reduction of the deferred
tax valuation allowance (See Note 5 of the Notes To Condensed
Consolidated Financial Statements) (iii) the effect of the exercise of stock
options to purchase 244,600 common stock with proceeds of $216,221 (average
exercise price of $0.88) to the Company, (iv) the effect on equity (credit) of
SFAS 123R non-cash stock-based compensation expense of $125,908 and (v) the
excess tax benefits from stock-based award activity of $12,926.
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
recorded non-cash stock-based compensation expense related to this grant of
$48,935 during the quarter ended December 31, 2008 and expects to record
approximately $65,000 during the quarter ended March 31, 2009, 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. In conjunction with
his employment agreement, the Company is providing Mr. Grow with housing and
related arrangements. The annual cost of this arrangement is estimated to be
$96,000 and is reflected in the Company’s Statement of Income as a component of
S, G & A expense.
As noted
above, The Company was recently awarded a $40 million contract to provide its
Sharps®MWMS™ to an agency of the U.S. Government. The Company believes it will
need up to $4 million in working capital over the first six months of the
project. The Company currently has approximately $2 million in cash on hand as
well as a $2.5 million line of credit with JPMorgan Chase (see note 6 of the
Notes to Condensed Consolidated Financial Statements) with no amounts currently
drawn. The Company has completed preliminary negotiations with the Bank to
increase the line of credit to $4.5 million. Although, no assurance can be made,
the Company believes it will have its new line of credit facility in place by
the quarter ended March 31, 2009.
Management
believes that the Company’s current cash resources (cash on hand and cash
generated from operations) along with its line of credit facility will be
sufficient to fund operations for the twelve
months ending December 31, 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 $744,558 incurred to date. The remainder (which consists primarily
of the autoclave equipment and facility improvements) is expected to be incurred
during the quarter 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 assets and
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
December 31, 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 (December 31,
2008).
During
the second 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 does not believe it has an
obligation 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
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
November 21, 2008, the Company held its Annual Meeting of shareholders whereby
the following items were voted upon, (i) the election of seven directors to hold
office until the next annual shareholders meeting, and (ii) other matters that
may be presented at the meeting for action.
The
following Directors were elected at the meeting, (i) Dr. Burt Kunik, (ii) Ramsay
Gillman, (iii) John R. Grow, (iv) Parris H. Holmes, Jr., (v) F. Gardner Parker,
(vi) Philip C. Zerrillo, and (vii) John Dalton.
As of
September 30, 2008, the record date of the Annual Meeting, 12,787,114 shares of
common stock were outstanding. At the Annual Meeting, holders of 10,164,676
shares of common stock were present in person or represented by proxy. The
following sets forth information regarding the results of the voting at the
Annual Meeting.
|
|
Votes
in Favor
|
|
|
Votes
Withheld
|
|
Proposal
No. 1
|
|
|
|
|
|
|
Dr.
Burt Kunik
|
|
|
10,092,226 |
|
|
|
72,450 |
|
Ramsay
Gillman
|
|
|
10,091,858 |
|
|
|
72,818 |
|
John
R. Grow
|
|
|
10,092,226 |
|
|
|
72,450 |
|
Parris
H. Holmes, Jr.
|
|
|
9,972,262 |
|
|
|
192,414 |
|
F.
Garder Parker
|
|
|
10,092,226 |
|
|
|
72,450 |
|
Philip
C. Zerrillo
|
|
|
10,091,858 |
|
|
|
72,818 |
|
John
W. Dalton
|
|
|
10,092,226 |
|
|
|
72,450 |
|
Proposal
No. 2
|
|
|
|
|
|
|
|
|
Amend
1993 Stock Plan
|
|
|
7,668,878 |
|
|
|
1,856,233 |
|
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, 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.
|
REGISTRANT: |
|
|
|
|
|
SHARPS
COMPLIANCE CORP. |
|
|
|
|
|
|
|
|
|
By:
|
/s/
Dr. Burton J.
Kunik |
|
|
|
Chairman
of the Board of Directors,
and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
David
P. Tusa |
|
|
|
Executive
Vice President, |
|
|
|
Chief
Financial Officer, |
|
|
|
Business
Development and
Corporate Secretary
|
|