Unassociated Document
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 March 31,
2009
|
o
|
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)
Delaware74-2657168
(State or
other jurisdiction of(I.R.S. Employer Identification No.)
incorporation
or organization)
Delaware
|
74-2657168
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
(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 May 8, 2009, there were 13,233,030 outstanding shares of the Registrant's
common stock, par value $0.01 per share.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
|
|
PAGE
|
PART
I
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Item
1.
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3
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4
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5
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6
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7
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Item
2.
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9
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Item
3.
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17
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Item
4.
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17
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PART
II
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Item
1.
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18
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Item
6.
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18
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19
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PART
I FINANCIAL INFORMATION
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
589,501 |
|
|
$ |
2,035,219 |
|
Restricted
cash
|
|
|
- |
|
|
|
10,010 |
|
Accounts receivable, net of allowance for doubtful accounts of $12,334
and
|
|
|
|
|
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$15,301,
respectively
|
|
|
4,150,872 |
|
|
|
1,183,975 |
|
Inventory
|
|
|
1,137,568 |
|
|
|
580,861 |
|
Prepaid
and other assets
|
|
|
623,732 |
|
|
|
359,894 |
|
Deferred
income taxes
|
|
|
17,352 |
|
|
|
- |
|
TOTAL
CURRENT ASSETS
|
|
|
6,519,025 |
|
|
|
4,169,959 |
|
|
|
|
|
|
|
|
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|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of
$1,181,597
|
|
|
|
|
|
and
$933,129, respectively
|
|
|
2,605,608 |
|
|
|
1,375,657 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non current
|
|
|
2,490,072 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS, net of accumulated amortization of $160,609 and
$140,801,
|
|
|
|
|
|
respectively
|
|
|
152,841 |
|
|
|
130,702 |
|
TOTAL
ASSETS
|
|
$ |
11,767,546 |
|
|
$ |
5,676,318 |
|
|
|
|
|
|
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|
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LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
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|
|
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CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,386,185 |
|
|
$ |
778,423 |
|
Accrued
liabilities
|
|
|
386,258 |
|
|
|
432,971 |
|
Deferred
revenue
|
|
|
1,088,388 |
|
|
|
1,063,016 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,860,831 |
|
|
|
2,274,410 |
|
|
|
|
|
|
|
|
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|
LONG-TERM
DEFERRED REVENUE
|
|
|
597,390 |
|
|
|
516,372 |
|
|
|
|
|
|
|
|
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|
TOTAL
LIABILITIES
|
|
|
3,458,221 |
|
|
|
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;
12,921,780
|
|
|
|
|
|
and
12,580,183 shares issued and outstanding, respectively
|
|
|
129,219 |
|
|
|
125,802 |
|
Additional
paid-in capital
|
|
|
11,125,152 |
|
|
|
9,225,342 |
|
Accumulated
deficit
|
|
|
(2,945,046 |
) |
|
|
(6,465,608 |
) |
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
8,309,325 |
|
|
|
2,885,536 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
11,767,546 |
|
|
$ |
5,676,318 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
|
|
Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
REVENUES
|
|
|
|
|
|
|
Product
|
|
$ |
5,873,468 |
|
|
$ |
2,852,682 |
|
Environmental
and other services
|
|
|
97,066 |
|
|
|
75,018 |
|
TOTAL
REVENUES
|
|
|
5,970,534 |
|
|
|
2,927,700 |
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
2,436,131 |
|
|
|
1,786,892 |
|
Selling,
general and administrative
|
|
|
1,442,113 |
|
|
|
1,174,449 |
|
Depreciation
and amoritization
|
|
|
108,030 |
|
|
|
69,684 |
|
TOTAL
COSTS AND EXPENSES
|
|
|
3,986,274 |
|
|
|
3,031,025 |
|
|
|
|
|
|
|
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|
OPERATING
INCOME (LOSS)
|
|
|
1,984,260 |
|
|
|
(103,325 |
) |
|
|
|
|
|
|
|
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|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,323 |
|
|
|
20,565 |
|
Other
income (expense)
|
|
|
(2,492 |
) |
|
|
500 |
|
TOTAL
OTHER INCOME (EXPENSE)
|
|
|
(169 |
) |
|
|
21,065 |
|
|
|
|
|
|
|
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|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
1,984,091 |
|
|
|
(82,260 |
) |
|
|
|
|
|
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INCOME
TAX EXPENSE
|
|
|
|
|
|
|
|
|
Current
|
|
|
37,424 |
|
|
|
1,329 |
|
Deferred
|
|
|
616,318 |
|
|
|
- |
|
TOTAL
INCOME TAX EXPENSE
|
|
|
653,742 |
|
|
|
1,329 |
|
NET
INCOME (LOSS)
|
|
$ |
1,330,349 |
|
|
$ |
(83,589 |
) |
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.09 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS)
|
|
|
|
|
|
PER
COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,905,821 |
|
|
|
12,478,315 |
|
Diluted
|
|
|
14,083,630 |
|
|
|
12,478,315 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
|
|
Nine
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
Product
|
|
$ |
13,291,602 |
|
|
$ |
9,784,250 |
|
Environmental
and other services
|
|
|
318,114 |
|
|
|
285,364 |
|
TOTAL
REVENUES
|
|
|
13,609,716 |
|
|
|
10,069,614 |
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
6,937,914 |
|
|
|
5,890,095 |
|
Selling,
general and administrative
|
|
|
4,043,084 |
|
|
|
3,514,876 |
|
Depreciation
and amoritization
|
|
|
267,264 |
|
|
|
193,301 |
|
TOTAL
COSTS AND EXPENSES
|
|
|
11,248,262 |
|
|
|
9,598,272 |
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
2,361,454 |
|
|
|
471,342 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
26,300 |
|
|
|
73,005 |
|
Other
income
|
|
|
5,896 |
|
|
|
456 |
|
TOTAL
OTHER INCOME
|
|
|
32,196 |
|
|
|
73,461 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
2,393,650 |
|
|
|
544,803 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE (BENEFIT)
|
|
|
|
|
|
|
|
|
Current
|
|
|
63,062 |
|
|
|
6,884 |
|
Deferred
|
|
|
(1,189,974 |
) |
|
|
- |
|
TOTAL
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(1,126,912 |
) |
|
|
6,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
3,520,562 |
|
|
$ |
537,919 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.25 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOME PER
|
|
|
|
|
|
|
|
|
COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,802,421 |
|
|
|
12,231,333 |
|
Diluted
|
|
|
13,874,180 |
|
|
|
13,515,878 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
|
|
Nine
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITES
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,520,562 |
|
|
$ |
537,919 |
|
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
Depreciation
and amoritzation
|
|
|
268,275 |
|
|
|
193,301 |
|
Stock
based compensation expense
|
|
|
275,313 |
|
|
|
44,212 |
|
Excess
tax benefits from stock-based award activity
|
|
|
(20,742 |
) |
|
|
(16,064 |
) |
Deferred
tax benefit
|
|
|
(1,189,974 |
) |
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
10,010 |
|
|
|
- |
|
Decrease
(increase) in accounts receivable
|
|
|
(2,942,290 |
) |
|
|
69,002 |
|
Increase
in inventory
|
|
|
(556,707 |
) |
|
|
(165,990 |
) |
Increase
in prepaid and other assets
|
|
|
(288,445 |
) |
|
|
(20,846 |
) |
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
581,793 |
|
|
|
(442,052 |
) |
Increase
in deferred revenue
|
|
|
106,390 |
|
|
|
288,319 |
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(235,815 |
) |
|
|
487,801 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,478,418 |
) |
|
|
(867,037 |
) |
Additions
to intangible assets
|
|
|
(41,947 |
) |
|
|
(64,702 |
) |
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,520,365 |
) |
|
|
(931,739 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
on capital lease obligations
|
|
|
- |
|
|
|
(1,809 |
) |
Excess
tax benefits from stock-based award activity
|
|
|
20,742 |
|
|
|
16,064 |
|
Proceeds
from exercise of stock options
|
|
|
289,720 |
|
|
|
507,890 |
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
310,462 |
|
|
|
522,145 |
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,445,718 |
) |
|
|
78,207 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
2,035,219 |
|
|
|
2,134,152 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
589,501 |
|
|
$ |
2,212,359 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
(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 March 31, 2009 and the results of its operations for the three and
nine months ended March 31, 2009 and 2008 and the cash flows for the nine months
ended March 31, 2009 and 2008. The results of operations for the
three and nine months ended March 31, 2009, 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 Financial Accounting Standards Board (“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. 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. 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 need for the
valuation allowance on its deferred tax asset balances. Based on that
evaluation the Company determined it was more likely than not that the Company
would realize these deferred tax assets and as such the valuation allowance was
reduced to zero. The Company recorded a reduction in the deferred tax
valuation allowance of $1,806,292 and a corresponding credit to tax expense
during the quarter ended December 31, 2008.
The
Company’s effective tax rate for the three months ended March 31, 2009 was 32.9%
which included non cash 123(R) expense that reduced the rate below the statutory
federal income tax rate for corporations.
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 March 31, 2009 and June 30,
2008 respectively, no amounts related to the Credit Agreement were
outstanding. Under the Credit Agreement and based upon the Company’s
March 31, 2009 level of accounts receivable and inventory, the amount available
to borrow at quarter end was $1.5 million. Interest expense under the line of
credit is computed at prime (3.25% at March 31, 2009).
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 nine months ended March 31, 2009 was $149,406 and $275,313
respectively. The expense for the three and nine months ended March
31, 2008 was $23,774 and $44,212, 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 $7,816 and $20,742 in excess tax benefits in its cash flows from
financing activities for the three and nine months ended March 31, 2009,
respectively. The Company included $8,078 and $16,064 in excess tax benefits in
its cash flows from financing activities for the three and nine months ended
March 31, 2008, 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 (loss) by the weighted
average number of common shares outstanding during the period. Diluted per share
is computed by dividing net income (loss) 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:
|
|
Nine
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$ |
3,520,562 |
|
|
$ |
537,919 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
12,802,421 |
|
|
|
12,231,333 |
|
Effect
of dilutive stock options
|
|
|
1,071,759 |
|
|
|
1,284,545 |
|
Weighted
average diluted common shares outstanding
|
|
|
13,874,180 |
|
|
|
13,515,878 |
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
$ |
0.04 |
|
Diluted
|
|
$ |
0.25 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
Employee
stock options excluded from computation of diluted income per
share
|
|
|
|
|
|
amounts
because their effect would be anti-dilutive
|
|
|
10,000 |
|
|
|
150,000 |
|
NOTE
9 - STOCK TRANSACTIONS
During
the quarter ended March 31, 2009, stock options to purchase 80,500 of common
shares were exercised. Total proceeds to the Company were $73,500
(average price of $0.91 per share). During the quarter ended March
31, 2008 stock options to purchase 320,000 of common shares were
exercised. Total proceeds to the Company were $354,850 (average price
of $1.11 per share).
During
the nine months ended March 31, 2009, stock options to purchase 325,100 shares
of common shares were exercised. Total proceeds to the Company were
$289,720 (average price of $.89 per share). During the nine months
ended March 31, 2008, stock options to purchase 506,730 of common shares were
exercised. Total proceeds to the Company were $507,890 (average price
of $1.00 per share).
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 provider of cost-effective disposal solutions for medical and
pharmaceutical waste generated outside the hospital setting. The
Company’s flagship product, the Sharps Disposal by Mail System®, is a
cost-effective and easy-to-use solution to dispose of medical waste such as
hypodermic needles, lancets and any other medical device or objects used to
puncture or lacerate the skin (referred to as “sharps”).
The
Sharps®MWMS™, a Medical Waste Management System, is a comprehensive medical
waste solution which includes an array of services and products necessary to
effectively collect, store and dispose of medical waste outside of the hospital
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.
The
Company also offers a number of products specifically designed for the home
healthcare market and products for the safe disposal of unused pharmaceuticals,
RxTakeAway™. Sharps Compliance focuses on targeted growth markets such as the
pharmaceutical, retail, commercial, and hospitality markets, as well as serving
a variety of additional markets. 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 as well as unused pharmaceuticals
in the community setting.
RESULTS
OF OPERATIONS
The
following analyzes changes in the consolidated operating results of the Company
during the three and nine months ended March 31, 2009 and 2008.
The
following table sets forth, for the periods indicated, certain items from the
Company's Condensed Consolidated Statements of Operations, expressed as a
percentage of revenue (unaudited):
|
|
Three
Months
|
|
|
Nine Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
(41 |
%) |
|
|
(61 |
%) |
|
|
(51 |
%) |
|
|
(59 |
%) |
Selling,
general and administrative
|
|
|
(24 |
%) |
|
|
(41 |
%) |
|
|
(30 |
%) |
|
|
(35 |
%) |
Depreciation
and amortization
|
|
|
(2 |
%) |
|
|
(2 |
%) |
|
|
(2 |
%) |
|
|
(2 |
%) |
Total
operating expenses
|
|
|
(67 |
%) |
|
|
(104 |
%) |
|
|
(83 |
%) |
|
|
(96 |
%) |
Income
(loss) from operations
|
|
|
33 |
% |
|
|
(4 |
%) |
|
|
17 |
% |
|
|
4 |
% |
Total
other income (expense)
|
|
|
0 |
% |
|
|
1 |
% |
|
|
0 |
% |
|
|
1 |
% |
Income
tax expense (benefit)
|
|
|
11 |
% |
|
|
0 |
% |
|
|
(9 |
%) |
|
|
0 |
% |
Net
income
|
|
|
22 |
% |
|
|
(3 |
%) |
|
|
26 |
% |
|
|
5 |
% |
THREE
MONTHS ENDED MARCH 31, 2009 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2008
Total
revenues for the three months ended March 31, 2009 of $5,970,534 increase by
$3,042,834, or 104%, from the total revenues for the three months ended March
31, 2008 of $2,927,700. Customer billings by market are as
follows:
|
|
Three-Months
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Government
|
|
$ |
2,972,696 |
|
|
$ |
17,759 |
|
|
$ |
2,954,937 |
|
Health
Care
|
|
|
1,824,398 |
|
|
|
1,734,401 |
|
|
|
89,997 |
|
Hospitality
|
|
|
275,455 |
|
|
|
244,377 |
|
|
|
31,078 |
|
Professional
|
|
|
214,585 |
|
|
|
190,433 |
|
|
|
24,152 |
|
Non-Mailable
|
|
|
160,945 |
|
|
|
106,920 |
|
|
|
54,025 |
|
Agriculture
|
|
|
92,303 |
|
|
|
96,848 |
|
|
|
(4,545 |
) |
Commercial
|
|
|
92,256 |
|
|
|
136,796 |
|
|
|
(44,540 |
) |
Pharmaceutical
|
|
|
66,592 |
|
|
|
413,296 |
|
|
|
(346,704 |
) |
Retail
|
|
|
60,273 |
|
|
|
43,951 |
|
|
|
16,322 |
|
Other
|
|
|
37,668 |
|
|
|
22,863 |
|
|
|
14,805 |
|
Subtotal
|
|
|
5,797,171 |
|
|
|
3,007,644 |
|
|
|
2,789,527 |
|
GAAP
Adjustment *
|
|
|
173,363 |
|
|
|
(79,944 |
) |
|
|
253,307 |
|
Revenue
Reported
|
|
$ |
5,970,534 |
|
|
$ |
2,927,700 |
|
|
$ |
3,042,834 |
|
*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
Government ($2,954,937), Health Care ($89,997), Non-mailable ($54,025),
Hospitality ($31,078), Professional ($24,152), Retail ($16,322) and Other
($14,805) markets. These increases were partially offset by decreased
billings in the Pharmaceutical ($346,704), Commercial ($44,540) and Agriculture
($4,545) markets. The increase in the Government market is a result of $2.9
million in billings related to the Company’s Sharps Medical Waste Management
System (“Sharps®MWMS™) to an agency of the United States Government under the
contract announced in February 2009. The increase in the Health Care
market billings is related to the growing number of patients in the healthcare
industry and the increased utilization of the Sharps Disposal by Mail System® by
home care branches. The increase in the Hospitality, 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.). The decrease in the Pharmaceutical market
is related to the timing of billings to a top ten pharmaceutical manufacturer
which billed in the March 31, 2008 prior year quarter ($400K) with no
corresponding billing in the quarter ended March 31, 2009 (next billing expected
in the quarter ended September 30, 2009). The decrease in the Commercial market
is related to the timing of a large order placed in the prior fiscal year
quarter by a distributor versus the timing of corresponding billing in the
fiscal year 2009.
Cost of
revenues for the three months ended March 31, 2009 of $2,436,131 was 40.8% of
revenues. Cost of revenues for the three months ended March 31, 2008
of $1,786,892 was 61% of revenue. The gross margin of 59.2% for the
three months ended March 31, 2009 was positively impacted by (i) the higher
revenue (i.e. higher coverage of fixed cost components in COGS) and (ii) the
effect of the recently announced U. S. Government project. Gross margin was 39%
for the three months ended March 31, 2008.
Selling,
general and administrative (“S, G & A”) expenses for the three months ended
March 31, 2009 of $1,442,113, increased by $267,664, from S, G & A expenses
for the three months ended March 31, 2008. The increase in S, G &
A expense was primarily due to higher (i) non-cash 123(R) stock-based
compensation expense of $125,631, (ii) compensation expense of $101,784, (iii)
offsite server hosted facility which facilitates higher security and disaster
recovery, server backup services and enhanced internet service of $35,700, (iv)
housing-related costs for the Company’s former President and COO of $31,679 and
(v) recruiting fees of $21,218. 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 former President and COO and
the award of options in November 2008 to the Chief Financial Officer and the
Senior Vice President of Sales. The increase in compensation expense is due
primarily to the hiring of the former President and COO in October 2008 and
timing of other positions that have been replaced at higher salaries. The
increased recruiting fees were associated to the hiring of one accounting
professional. The increase in expense was offset by decrease in commission
expense ($26,662) and travel and entertainment expenses ($25,091).
The
Company generated operating income of $1,984,260 for the three months ended
March 31, 2009 compared to operating loss of ($103,325) for the three months
ended March 31, 2008. The operating margin was 33.2% for the three
months ended March 31, 2009 compared to (3.5%) for the three months ended March
31, 2008. The increase in operating income and corresponding margin is a result
of the above mentioned increase in revenue and operating leverage inherent in
the Company’s business model.
The
Company generated a pre-tax income of $1,984,091 for the three months ended
March 31, 2009 versus a pre-tax loss of ($82,260) for the three months ended
March 31, 2008. The increase in pre-tax income is a result of higher operating
income (discussed above).
The
Company recorded a provision for income taxes of $653,742 during the quarter
ended March 31, 2009, representing an effective rate of 32.9%, compared with a
provision for income taxes of $1,329 during the quarter ended March 31,
2008. The increase in the provision for income taxes is primarily due
to the increase in pre-tax income. The Company generated net income
of $1,330,349 for the three months ended March 31, 2009 compared to net loss of
($83,589) for the three months ended March 31, 2008. The increase in net income
is a result of higher operating income (discussed above).
The
Company reported diluted earnings per share of $0.09 for the three months ended
March 31, 2009 versus diluted earnings per share of ($0.01) for the three months
ended March 31, 2008. The increase in diluted earnings per share is a
result of higher net income (discussed above).
NINE
MONTHS ENDED MARCH 31, 2009 AS COMPARED TO NINE MONTHS ENDED MARCH 31,
2008
Total
revenues for the nine months ended March 31, 2009 of $13,609,716 increased by
$3,540,102, or 35%, over the total revenues for the nine months ended March 31,
2008 of $10,069,614. Customer billings by market are as
follows:
|
|
Nine-Months
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$ |
5,440,095 |
|
|
$ |
5,629,418 |
|
|
$ |
(189,323 |
) |
Government
|
|
|
3,093,493 |
|
|
|
158,910 |
|
|
|
2,934,583 |
|
Retail
|
|
|
1,356,112 |
|
|
|
1,044,502 |
|
|
|
311,610 |
|
Pharmaceutical
|
|
|
1,085,717 |
|
|
|
869,579 |
|
|
|
216,138 |
|
Professional
|
|
|
776,183 |
|
|
|
529,934 |
|
|
|
246,249 |
|
Hospitality
|
|
|
706,699 |
|
|
|
914,391 |
|
|
|
(207,692 |
) |
Commercial
|
|
|
386,967 |
|
|
|
413,044 |
|
|
|
(26,077 |
) |
Non-Mailable
|
|
|
384,269 |
|
|
|
348,443 |
|
|
|
35,826 |
|
Agriculture
|
|
|
358,931 |
|
|
|
363,846 |
|
|
|
(4,915 |
) |
Other
|
|
|
112,460 |
|
|
|
107,136 |
|
|
|
5,324 |
|
Subtotal
|
|
|
13,700,926 |
|
|
|
10,379,203 |
|
|
|
3,321,723 |
|
GAAP
Adjustment *
|
|
|
(91,210 |
) |
|
|
(309,589 |
) |
|
|
218,379 |
|
Revenue
Reported
|
|
$ |
13,609,716 |
|
|
$ |
10,069,614 |
|
|
$ |
3,540,102 |
|
*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
Government ($2,934,583), Retail ($311,610), Professional ($246,249),
Pharmaceutical ($216,138), Non-Mailable ($35,826) and Other ($5,324)
markets. These increases were partially offset by decreased billings
in the Hospitality ($207,692), Health Care ($189,323), Commercial ($26,077) and
Agriculture ($4,915) markets. The increase in the Government market is a result
of $2.9 million in billings related to the sale of the Company’s Sharps Medical
Waste Management System (“Sharps®MWMS™) to an agency of the United States
Government under the contract announced in February 2009. 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 market billings is being
driven by higher demand for the Company’s products (including its newly
introduced 18 Gallon Medical Professional Sharps Disposal By Mail System®) as
dentists, doctors, veterinarians and other professions more aware of
cost-effective alternatives to traditional medical waste pick-up
services. The increase in the Pharmaceutical market is 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 nine months ended March 31,
2009. The decrease in the Hospitality market is primarily
attributable to a large order of Biohazard Spill Clean-Up Kits in the nine
months ended March 31, 2008 with lower billings in the corresponding period
ended March 31, 2009. 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 nine months ended March 31, 2009 of $6,937,914 was 51% of
revenues. Cost of revenues for the nine months ended March 31, 2008
of $5,890,095 was 58% of revenue. Gross margin of 49% for the nine months ended
March 31, 2009 was positively impacted by (i) the higher revenue (i.e. higher
coverage of fixed cost components in COGS) and (ii) the effect of the recently
announced U. S. Government project. Gross margin was 41.5% for the nine months
ended March 31, 2008.
Selling,
general and administrative (“S, G & A”) expenses for the nine months ended
March 31, 2009 of $4,043,084, increased by $528,208 from S, G & A expenses
for the nine months ended March 31, 2008. The increase in S, G &
A expense was primarily due to higher (i) non-cash 123(R) stock based
compensation expense of $231,101, (ii) compensation and benefit expense of
$194,360, (iii) professional fees of $63,861 (iv) housing-related costs for the
Company’s former President and COO of $50,860, (v) recruiting fees of $44,000,
(vi) offsite server hosted facility which facilitates higher security and
disaster recovery, server backup services and enhanced internet service of
$43,000, (vi) payroll taxes of $29,810, (vii) property and casualty
insurance of $14,900 and (viii) increase in marketing costs of $14,163. 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 former President and COO and the award of options in November to the
Chief Financial Officer and the Senior Vice President of Sales. The increase in
compensation expense is due primarily to the hiring of the former President and
COO in October 2008 and the timing of other positions that have been replaced at
higher salaries. 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. 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 former 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 increase in expenses was offset by decrease in
commission expense ($60,844) and travel and entertainment expenses
($107,745).
The
Company generated operating income of $2,361,454 for the nine months ended March
31, 2009 compared to $471,342 for the nine months ended March 31,
2008. The operating margin was 17.4% for the three months ended March
31, 2009 compared to 4.7% for the three months ended March 31, 2008. The
increase in operating income and operating margin is a result of the above
mentioned increase in revenue and operating leverage inherent in the Company’s
business model.
The
Company generated income before tax of $2,393,650 (17.6% of revenue)
for the nine months ended March 31, 2009 versus a pre-tax income of $544,803
(5.4% of revenue) for the nine months ended March 31, 2008. The
increase in pre-tax income is a result of higher operating income (discussed
above).
The
Company generated net income of $3,520,562 for the nine months ended March 31,
2009 compared to net income of $537,919 for the nine months ended March 31,
2008. The increase in net income is a result of higher operating
income (discussed above) and the reduction in the deferred tax valuation
allowance of $1,806,292 and corresponding credit to tax expense
recorded in the quarter ending December 31, 2008.
The
Company reported diluted earnings per share of $0.25 for the nine months ended
March 31, 2009 versus diluted earnings per share of $0.04 for the nine months
ended March 31, 2008. 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 has developed 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 existing and 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 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.
The Company generated
approximately $919,500 in billings during the quarters ended June and September
30, 2008 related to sales of the Company’s flagship Sharps Disposal By
Mail System® products which were sold in the retail setting (retail clinics,
grocery stores, etc.) to collect and properly dispose of syringes
used to administer flu shots. These billings are included in the Retail market.
The Company anticipates a strong flu shot business in light of the recent H1N1
flu virus which would have a positive impact of the Company’s Retail market
billings for the quarters ended June and September 30, 2009.
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 of which $2.9 million was
billed in the quarter ending March 31, 2008. The following four option years
represent payment for program maintenance.
The
Sharps®MWMS™, a Medical Waste Management System, 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.
The
Company is actively marketing its Sharps®MWMS™ to federal, state and local
agencies as well as to large corporations.
The
Company recognized $3 million from the above mentioned contract in the quarter
ended March 31, 2009. The Company expects to recognize an additional
$3 million during the quarter ending June 30, 2009 of fiscal year
2009. Based upon the current production schedule, the Company expects
to recognize revenue of about $11.5 million in the first fiscal year 2010
quarter ending September 30, 2009 and an additional $11 million of revenue in
the second fiscal year 2010 quarter ending December 31, 2009. The
remaining $11.5 million is expected to be earned over the fiscal years 2011
through 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 decreased by $1,445,718 to $589,501 at March 31, 2009 from
$2,035,219 at June 30, 2008. The decrease in cash and cash equivalents is
primarily a result of cash used in operations of $235,814 and additions to
property and equipment and intangible assets of $1,520,366, partially offset by
the proceeds from the exercise of stock options of $289,720.
Accounts
receivable increased by $2,966,897 to $4,150,872 at March 31, 2009 from
$1,183,975 at June 30, 2008. The increase was primarily due to the $2.9 million
in billings to the U.S. Government in March of 2009 (such amount was collected
on April 7, 2009).
Inventory
increased by $556,707 to $1,137,568 at March 31, 2009 from $580,861 at June 30,
2008. The increase in inventory is attributable to the (i) build up
of inventory for the U.S. Government contract and (ii) bulk purchases of Sharps
Secure® and Pitch-It™ IV Poles manufactured overseas.
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 of 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. At the quarter
ending March 31, 2009 the deferred income tax benefit balance was
$2,607,897.
Property
and equipment increased by $1,229,951 to $2,605,608 at March 31, 2009 from
$1,375,657 at June 30, 2008 due to capital expenditures of $1,478,419 partially
offset by depreciation expense of $248,468. The capital expenditures are
attributable primarily to, (i) autoclave installation of $492,590 (ii) treatment
facility improvements of $349,302 (ii) new operating and accounting system
software implementation and enhancement fees of $375,876, (iii)
warehouse/operations-related equipment of $146,539, (iv) molds, dies and
printing plates for production of $79,206, (v) computer equipment of $18,387,
(vi) custom software programming of $11,136 and (vii) office furniture of
$5,383. The new operating and accounting system software implementation and
enhancement fees 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 and
the equipment needed for expansion from one to three warehouse
facilities. The molds and printing plates were procured for
development of new product and additional production capacity.
Accounts payable increased by $607,762 to $1,386,185 at March 31, 2009 from
$778,423 at June 30, 2008. The increase is a result of (i) additional
raw materials and equipment needed to fulfill the U.S. Government contract and
(ii) the timing of payments for product purchased and capital
expenditures.
Stockholder’s
equity increased by $5,423,789 from $2,885,536 to $8,309,325. This
increase is attributable to, (i) net income for the nine months ended March 31,
2009 of $3,520,562, (ii) the increase in additional paid-in capital of
$1,317,450 resulting from the reduction of the deferred
tax valuation allowance recorded in the quarter ending December 31,
2008, (iii) the effect of the exercise of stock options to purchase
325,100 common stock with proceeds of $289,720 (average exercise price of $0.89)
to the Company, (iv) the effect on equity of SFAS 123R non-cash stock-based
compensation expense of $275,313 and (v) the excess tax benefits from
stock-based award activity of $20,742.
On May 1,
2009 the Company announced the resignation of John R. Grow as the Company’s
President and Chief Operating Officer. The Company will record a
special charge related to Mr. Grow’s termination of employment in the amount of
approximately $545,000. The charge is expected to consist of (i)
non-cash 123(R) expense of $300,900, (ii) severance-related items totaling
$176,300 and (iii) a cash payment of $67,800.
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 March 31, 2010.
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.
In
February 2009, the Company installed 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.
With the
addition of the autoclave, the Company believes it owns one of only
approximately ten (10) permitted commercial disposal facilities in the country
capable of treating all types of medical waste.
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 decided in the interim to move forward with
the process of adding alternative technology, autoclaving, for medical waste
disposal which became fully operational in February 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 decided in the interim to move forward with
the process of adding alternative technology, autoclaving, for medical waste
disposal which became fully operational in February 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 a
significant incremental 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 Financial Accounting Standards Board (“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. 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. 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.
Not
Applicable
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
March 31, 2009 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 (March 31,
2009).
During
the third 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.
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.
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.
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.
Dated:
May 14, 2009
|
By:/s/
Dr. Burton J. Kunik
|
|
|
Chairman of the Board of
Directors,
and Chief Executive
Officer
Dated:
May 14, 2009
|
By:/s/ David P.
Tusa
|
|
|
Executive
Vice President,
Chief
Financial Officer,
Business
Development and
Corporate
Secretary