Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x |
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended September 30, 2007
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)
Delaware
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74-2657168
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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9220
Kirby Drive, Suite 500, Houston, Texas
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77054
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(Address
of principal executive offices)
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(Zip
Code)
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(713)
432-0300
(Issuer’s
telephone number)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirements for the past 90 days. Yes
x
No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
12,155,183
shares of Common Stock, $0.01 par value as of November 2, 2007.
Transitional
Small Business Disclosure Format (check one): Yes
o
No
x
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
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INDEX
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PAGE
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PART
I
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FINANCIAL
INFORMATION
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Financial
Statements
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Condensed
Consolidated Balance Sheets
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3
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Condensed
Consolidated Statements of Income for the three months ended September
30,
2007 and 2006
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4
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Condensed
Consolidated Statements of Cash Flows
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis or Plan of Operation.
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9
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Item
3.
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Controls
and Procedures
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14
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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15
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Item
6.
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Exhibits
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16
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SIGNATURES |
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17
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PART
I FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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ASSETS
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CURRENT
ASSETS
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Cash
and cash equivalents
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$
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2,238,197
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$
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2,134,152
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Restricted
cash
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10,010
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10,010
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Accounts
receivable, net of allowance for doubtful accounts of $15,661 and
$15,793,
respectively
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1,509,320
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1,330,731
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Inventory
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544,016
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364,005
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Prepaid
and other assets
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171,861
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186,101
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TOTAL
CURRENT ASSETS
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4,473,404
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4,024,999
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PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $932,536 and $878,248,
respectively
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612,250
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590,567
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INTANGIBLE
ASSETS, net of accumulated amortization of $123,736 and $120,327,
respectively
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80,496
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75,002
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TOTAL
ASSETS
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$
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5,166,150
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$
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4,690,568
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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CURRENT
LIABILITIES
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Accounts
payable
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$
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813,346
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$
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557,302
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Accrued
liabilities
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321,290
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613,851
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Deferred
revenue
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1,005,063
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883,678
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Current
maturities of capital lease obligations
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465
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1,809
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TOTAL
CURRENT LIABILITIES
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2,140,164
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2,056,640
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LONG-TERM
DEFERRED REVENUE
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392,307
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392,803
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RENT
ABATEMENT
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71,250
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72,000
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TOTAL
LIABILITIES
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2,603,721
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2,521,443
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COMMITMENTS
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-
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-
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STOCKHOLDERS’
EQUITY
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Common
stock, $0.01 par value per share; 20,000,000 shares authorized; 12,155,183
and 11,998,453 shares issued and outstanding, respectively
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121,552
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119,985
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Additional
paid-in capital
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8,746,454
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8,596,321
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Accumulated
deficit
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(6,305,577
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)
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(6,547,181
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)
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TOTAL
STOCKHOLDERS’ EQUITY
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2,562,429
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2,169,125
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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5,166,150
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$
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4,690,568
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
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Three
Months
Ended
September 30,
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2007
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2006
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(Unaudited)
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REVENUES
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Product
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$
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3,289,503
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$
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2,921,298
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Environmental
services
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101,609
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69,586
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TOTAL
REVENUES
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3,391,112
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2,990,884
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COSTS
AND EXPENSES
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Cost
of revenues
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1,957,735
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1,693,588
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Selling,
general and administrative
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1,155,381
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954,422
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Depreciation
and amortization
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57,697
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44,212
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TOTAL
COSTS AND EXPENSES
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3,170,813
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2,692,222
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OPERATING
INCOME
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220,299
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298,662
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OTHER
INCOME (EXPENSE)
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Interest
income
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26,340
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3,549
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Interest
expense
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(38
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)
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(
1,909
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)
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TOTAL
OTHER INCOME
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26,302
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1,640
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INCOME
BEFORE INCOME TAXES
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246,601
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300,302
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INCOME
TAXES
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(4,997
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)
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(8,714
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)
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NET
INCOME
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$
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241,604
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$
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291,588
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NET
INCOME PER COMMON SHARE
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Basic
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$
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.02
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$
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.03
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Diluted
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$
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.02
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$
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.03
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
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Basic
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12,061,734
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10,562,723
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Diluted
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13,535,520
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10,991,339
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SHARPS
COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three
Months Ended
September
30,
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2007
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2006
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(Unaudited)
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
income
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$
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241,604
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$
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291,588
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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57,697
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44,212
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Bad
debt expense
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-
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186
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Stock
based compensation expense
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29,460
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-
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Changes
in operating assets and liabilities:
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Increase
in accounts receivable
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(178,589
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)
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(276,634
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)
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Increase
in inventory
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(180,011
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)
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(74,820
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)
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Decrease
(increase) in prepaid and other assets
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14,240
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(41,841
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)
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Increase
(decrease) in accounts payable and accrued liabilities
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(37,267
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)
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37,070
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Increase
in deferred revenue
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120,889
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116,509
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NET
CASH PROVIDED BY OPERATING ACTIVITIES
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68,023
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96,270
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CASH
FLOWS FROM INVESTING ACTIVITIES
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Purchase
of property and equipment
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(75,971
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)
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(42,207
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)
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Purchase
of intangible assets
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(8,903
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)
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(1,070
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)
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NET
CASH USED IN INVESTING ACTIVITIES
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(84,874
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)
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(43,277
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)
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CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
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Payments
on capital lease obligations
|
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(1,344
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)
|
|
(13,339
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)
|
Proceeds
from exercise of stock options
|
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122,240
|
|
|
17,850
|
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NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
120,896
|
|
|
4,511
|
|
|
|
|
|
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NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
104,045
|
|
|
57,504
|
|
|
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|
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CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
2,134,152
|
|
|
296,959
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
2,238,197
|
|
$
|
354,463
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
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|
Cash
paid for interest
|
|
$
|
38
|
|
$
|
1,909
|
|
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-QSB and, accordingly, do not include all information
and
footnotes required under accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements contain
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated financial position of
the
Company as of September 30, 2007 and the results of its operations and cash
flows for the three months ended September 30, 2007 and 2006. The results of
operations for the three months ended September 30, 2007, are not necessarily
indicative of the results to be expected for the entire fiscal year ending
June
30, 2008. These unaudited condensed consolidated financial statements should
be
read in conjunction with the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2007.
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
July
2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109”. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It
prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN No. 48 for the quarter ended
September 30, 2007 and it did not have a material impact on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the new standard to
have
a material impact on its financial position and results of
operations.
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 expects to adopt SFAS 159 beginning
July 1, 2008. The Company is currently evaluating the impact that this
pronouncement may have on our consolidated financial statements.
NOTE
5 - INCOME TAXES
During
the three months ended September 30, 2007 the Company recorded a provision
of
$4,997 for estimated Alternative Minimum Tax (“AMT”). During the three months
ended September 30, 2006 the Company recorded a provision of $8,714 for the
AMT.
The Company expects to utilize its net operating loss carry forwards to offset
any ordinary taxable income for the year ending June 30, 2008.
NOTE
6 - NOTES PAYABLE AND LONG-TERM DEBT
Effective
February 5, 2007, the Company entered into an Amended 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. Borrowings bear interest at a fluctuating rate per annum equal to
either, (i) prime rate or (ii) LIBOR plus a margin of 2.75%. Any outstanding
revolving loans, and accrued and unpaid interest, will be due and payable on
March 27, 2009, the maturity date of the facility. The aggregate principal
amount of advances outstanding at any time under the Facility shall not exceed
the Borrowing Base which is equal to, (i) 80% of Eligible Accounts Receivable
(as defined) plus (ii) 50% of Eligible Inventory (as defined). The Credit
Agreement contains affirmative and negative covenants that, among other items,
require the Company to maintain a specified tangible net worth and fixed charge
coverage ratio. The Credit Agreement also contains customary events of default.
Upon the occurrence of an event of default that remains uncured after any
applicable cure period, the lenders’ commitment to make
further loans may terminate and the Borrower may be required to make immediate
repayment of all indebtedness to the lenders. The lender would also be entitled
to pursue other remedies against the Company and the collateral. As of September
30, 2007, there were no borrowings under this Line Of Credit Facility and the
Company was in compliance with all loan covenants. Under the Credit Agreement,
and based upon the Company’s September 30, 2007 level of accounts receivable and
inventory, the amount available to borrow at quarter end was $1.5
million.
NOTE
7 - STOCK-BASED COMPENSATION
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
Share-Based
Payment
(“SFAS
123R”) that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for equity
instruments of the enterprise or liabilities that are based on the fair value
of
the enterprise’s equity instruments or that may be settled by the issuance of
such equity instruments. SFAS 123R eliminates the ability to account for
share-based compensation transactions using the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (“APB
25”), and generally requires instead that such transactions be accounted for
using a fair-value-based method. We adopted SFAS 123R beginning July 1,
2006. There is no compensation expense related to the unvested portion of stock
options granted prior to July 1, 2006 since the Company’s Board of Directors
approved, in June 2006, the acceleration of the vesting of all unvested stock
options previously awarded.
SFAS
123R
requires the use of a valuation model to calculate the fair value of stock-based
awards. The Company has elected to use the Black-Scholes-Merton (“BSM”) pricing
model to determine the fair value of stock- options on the dates of grant,
consistent with that used for pro forma disclosures under SFAS No. 123,
Accounting
for Stock-Based Compensation.
Restricted Stock Units (“RSUs”) are measured based on the fair market values of
the underlying stock on the dates of grant. The Company first awarded RSUs
on
July 2, 2007 (49,500 units).
The
Company elected the modified prospective transition method as permitted by
SFAS
123R, and accordingly, prior periods have not been restated to reflect the
impact of SFAS 123R. Under this method, the Company is required to recognize
stock-based compensation for all new and unvested stock-based awards that are
ultimately expected to vest as the requisite service is rendered beginning
July 1, 2006. Stock-based compensation is measured based on the fair values
of all stock-based awards on the dates of grant.
For
the
three months ended September 30, 2007, the Company recognized stock-based
compensation expense of $29,460 which is included in the line item “selling,
general and administrative expenses” of the Condensed Consolidated Statement of
Income. There was no stock-based compensation expense recognized for the period
ended September 30, 2006.
NOTE
8 - EARNINGS PER SHARE
Earnings
per share are measured at two levels: basic per share and diluted per share.
Basic per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted per share is
computed by dividing net income by the weighted average number of common shares
after considering the additional dilution related to common stock options.
In
computing diluted earnings per share, the outstanding common stock options
are
considered dilutive using the treasury stock method. The following information
is necessary to calculate earnings per share for the periods presented:
|
|
Three
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
Net
income, as reported
|
|
$
|
241,604
|
|
$
|
291,588
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
12,061,734
|
|
|
10,562,723
|
|
Effect
of Dilutive stock options
|
|
|
1,473,786
|
|
|
428,616
|
|
Weighted
average diluted common shares outstanding
|
|
|
13,535,520
|
|
|
10,991,339
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Employee
stock options excluded from computation of diluted income per share
amounts because their effect would be anti-dilutive
|
|
|
110,000
|
|
|
947,500
|
|
NOTE
9 - STOCK TRANSACTIONS
During
the quarter ended September 30, 2007, stock options to purchase 156,730 of
common shares were exercised. Total proceeds to the Company were $122,240
(average price of $0.78 per share). During the quarter ended September 30,
2006
stock options to purchase 35,000 of common shares were exercised. Total proceeds
to the Company were $17,850 ($0.51 per share).
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form 10-QSB contains certain forward-looking statements
and
information relating to Sharps that are based on the beliefs of the Company’s
management as well as assumptions made by and information currently available
to
the Company’s management. When used in this report, the words “anticipate,”
“believe,” “estimate” and “intend” and words or phrases of similar import, as
they relate to Sharps or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or
more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
The
Company does not intend to update these forward-looking
statements.
GENERAL
Sharps
is
a leading developer and manufacturer of cost effective solutions for improving
safety, efficiency and costs related to the proper disposal of medical waste
by
industry and consumers. Sharps primary markets include healthcare, retail,
agriculture, hospitality, professional, industrial, commercial, governmental
and
pharmaceutical.
The
Company’s products and services represent solutions for industries and consumers
dealing with the complexity of managing regulatory compliance, environmental
sensitivity, employee and customer safety, corporate risk and operating costs
related to medical waste disposal. Sharps is a leading proponent and participant
in the development of public awareness and solutions for the safe disposal
of
needles, syringes and other sharps in the community setting.
The
Company’s primary products include Sharps Disposal by Mail System®, Pitch-It™ IV
Poles, Trip LesSystem®, Sharps Pump Return Box, Sharps Enteral Pump Return Box,
Sharps Secure®, Sharps SureTemp Tote®, IsoWash® Linen Recovery System, Biohazard
Spill Clean-Up Kit and Disposal System, Sharps e-Tools, Sharps Environmental
Services and Sharps Consulting. Some products and services facilitate compliance
with state and federal regulations by tracking, incinerating and documenting
the
disposal of medical waste. Additionally, some products and services facilitate
compliance with educational and training requirements required by federal,
state, and local regulatory agencies.
RESULTS
OF OPERATIONS
The
following analyzes changes in the consolidated operating results and financial
condition of the Company during the three months ended September 30, 2007 and
2006.
The
following table sets forth, for the periods indicated, certain items from the
Company's Condensed Consolidated Statements of Income, expressed as a percentage
of revenue (unaudited):
|
|
Three
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
|
100
|
%
|
|
100
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
(58
|
%)
|
|
(57
|
%)
|
Selling,
general and administrative
|
|
|
(34
|
%)
|
|
(32
|
%)
|
Depreciation
and amortization
|
|
|
(2
|
%)
|
|
(1
|
%)
|
Total
operating expenses
|
|
|
(94
|
%)
|
|
(90
|
%)
|
Income
from operations
|
|
|
6
|
%
|
|
10
|
%
|
Total
other income (expense)
|
|
|
1
|
%
|
|
0
|
%
|
Net
income
|
|
|
7
|
%
|
|
10
|
%
|
THREE
MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,
2006
Total
revenues for the three months ended September 30, 2007 of $3,391,112 increased
by $400,228, or 13.4%, over the total revenues for the three months ended
September 30, 2006 of $2,990,884. Billings by market are as
follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Variance
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Billings
by Market:
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
1,919,264
|
|
$
|
1,817,585
|
|
$
|
101,679
|
|
Hospitality
|
|
|
363,235
|
|
|
116,333
|
|
|
246,902
|
|
Retail
|
|
|
685,436
|
|
|
633,003
|
|
|
52,433
|
|
Professional
|
|
|
171,184
|
|
|
136,339
|
|
|
34,845
|
|
Commercial/Industrial
|
|
|
116,109
|
|
|
110,634
|
|
|
5,475
|
|
Protec
|
|
|
125,270
|
|
|
117,129
|
|
|
8,141
|
|
Agriculture
|
|
|
93,304
|
|
|
120,691
|
|
|
(27,387
|
)
|
Pharmaceutical
|
|
|
7,185
|
|
|
15,163
|
|
|
(7,978
|
)
|
Government
|
|
|
56,061
|
|
|
53,858
|
|
|
2,203
|
|
Other
|
|
|
49,202
|
|
|
21,594
|
|
|
27,608
|
|
Subtotal
|
|
|
3,586,250
|
|
|
3,142,329
|
|
|
443,921
|
|
GAAP
Adjustment*
|
|
|
(195,138
|
)
|
|
(151,445
|
)
|
|
(43,693
|
)
|
Revenue
Reported
|
|
$
|
3,391,112
|
|
$
|
2,990,884
|
|
$
|
400,228
|
|
*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
Hospitality ($246,902), Health Care ($101,679) Retail ($52,433), Professional
($34,845), Other ($27,608), Protec ($8,141) and Commercial/Industrial ($5,475)
markets. These increases were partially offset by decreased billings in the
Agriculture ($27,387) and Pharmaceutical ($7,978) markets. The increase in
the
Hospitality market reflects increased demand of the Sharps Disposal by Mail
System® and Biohazard Spill Clean-UP Kit products by hotels, restaurants and
assisted living facilities. The increase in the Health Care market billings
is a
result of the growing number of patients in the health care industry and the
increased utilization of the Sharps Disposal by Mail System® by home care
branches. The increase in the Professional and Commercial/Industrial markets
is
being driven by higher demand for the Company’s products as industry and
consumers become more aware of the proper disposal of medical sharps (syringes,
lancets, etc.). The decrease in the Agriculture market is primarily attributable
to decreased demand of the Sharps Disposal by Mail System® by a customer who
provides the product to facilitate the injection of dairy cattle due to growing
public concern over the use of hormones.
Cost
of
revenues for the three months ended September 30, 2007 of $1,957,735 was 58%
of
revenues. Cost of revenues for the three months ended September 30, 2006 of
$1,693,588 was 57% of revenue for the corresponding period.
Selling,
general and administrative (“S, G & A”) expenses for the three months ended
September 30, 2007 of $1,155,381, increased by $200,959, or 21%, higher than
S,
G & A expenses for the three months ended September 30 2006. The increase in
S, G & A expense is primarily due to higher, (i) compensation expense
($57,815) (ii) office lease expense ($34,774), (iii) recruiting fees ($33,857),
(iv) non-cash stock-based compensation expense ($29,460), (v) sales and
marketing related expenses ($24,908), (vi) the cash portion of Board of Director
compensation expense ($20,000) and (vii) investor relations expenses ($13,532).
The increase in compensation expense was due to the hiring of a full time
director of information/ technology (previously an outside services expense),
and increased sales and support staff. The recruiting fee expenses were related
to the hiring of a director of operations and a new inside sales person. The
increase in travel is directly related to the Company’s increased sales and
marketing efforts. The investor relations expense increased due to the hiring
of
an investor relation firm in January of 2007.
The
Company generated operating income of $220,299 for the three months ended
September 30, 2007 compared to $298,662 for the three months ended September
30,
2006. The decrease in operating income is a result of (i) 110 basis point
reduction in the gross margin (product mix) and (ii) the increase in S, G &
A.
Other
income included in the Company’s statement of operations reflects increased
interest income of $26,340 resulting from the corresponding higher cash
balances.
The
Company generated income before tax of $246,601 for the three months ended
September 30, 2007 versus a pre-tax income of $300,302 for the three months
ended September 30, 2006.
The
Company reported earnings per share of $0.02 for the three months ended
September 30, 2007 versus earnings per share of $0.03 for the three months
ended
September 30, 2006. The reduction in diluted earnings per share is a result
of a
$2.5 million, or 23%, increase in the diluted shares outstanding due to stock
options exercised and a higher stock price (treasury stock method).
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 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. 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 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 disposal of
all such disposed 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® and Sharps SureTemp Tote® product lines. 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 and (ii) the effects of the Company’s extensive
direct marketing efforts. The result of these direct marketing efforts was
recognized with the receipt of the first major pharmaceutical manufacturer
order, valued at $1.4 million, from a recognized and leading pharmaceutical
manufacturer. The initial $0.45 million order was billed during March 2007
with
fulfillment services to patients having started in May 2007. The remaining
portion of the order is expected to ship approximately $400 thousand in each
December 2007 and January 2008 achieving virtually the entire contract value
of
$1.4 million.
Looking
forward, the Company is targeting customer billings of $15 million to $16
million for fiscal year 2008 led by expected growth in the pharmaceutical,
retail, hospitality and professional markets. The Company anticipates gross
margin to remain in the low to mid-40% range for the remainder of fiscal year
2008 and an increase in SG&A of approximately 12%, exclusive of any non-cash
stock-based compensation expense (SFAS 123R). The expected investment in
SG&A expense is primarily related to increased sales and marketing related
activities.
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 the growing awareness of the need to properly handle sharps medical
waste for safety and environmental concerns, the expanding need for
self-injectable medications and the changing paradigm in the health
industry.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and
cash equivalents increased by $104,045 to $2,238,197 at September 30, 2007
from
$2,134,152 at June 30, 2007. The increase in cash and cash equivalents is
primarily a result of cash generated from operations of $68,023 plus proceeds
from the exercise of stock options of $122,240, partially offset by additions
to
property and equipment and intangible assets of $84,874 and payments on capital
lease obligations of $1,344.
Accounts
receivable increased by $178,589 to $1,509,320 at September 30, 2007 from
$1,330,731 at June 30, 2007. The increase is a direct result of the increase
in
billings generated by the Company for the quarter ended September 30, 2007
versus the quarter ended June 30, 2007.
Property
and equipment increased by $21,683 to $612,250 at September 30, 2007 from
$590,567 at June 30, 2007 due to capital expenditures of $75,971 partially
offset by depreciation expense of $54,288. The capital expenditures consisted
of, (i) custom software programming of $40,295, (ii) computer equipment of
$12,209, (iii) assembly / warehouse-related equipment of $11,193, (iv) molds
and
printing plates of $7,320 and (v) incinerator facility improvements of $4,954.
The custom software program was incurred to upgrade Company’s financial and
operations system including the Sharps Tracer ™ system. The computer equipment
was purchased to facilitate the upgrade of outdated equipment. The
assembly/warehouse-related equipment were related to equipment necessary to
accommodate the in-house assembly of the Company’s products. The molds and
printing plates were procured for development of new product.
Stockholder’s
equity increased by $393,304 from $2,169,125 to $2,562,429. This increase is
attributable to net income for the three months ended September 30, 2007 of
$241,604, the effect of stock options to purchase 156,730 common stock exercised
with proceeds of $122,240 (average exercise price of $0.78 per share), and
the
effect on equity of SFAS 123(R) expense of $29,460.
Management
believes that the Company’s current cash resources (cash on hand and cash
generated from operations) along with its $2.5 million line of credit will
be
sufficient to fund operations for the twelve months ending September 30,
2008.
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 leased 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 in fiscal year 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 autoclaving technology is planned to be used in addition
to
incineration and is estimated to cost approximately $300,000.
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 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 one of the most convenient alternatives 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 sights that currently
allows 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, other states are considering similar
options.
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
July
2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109. This interpretation clarifies
the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It
prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN No. 48 for the quarter ended
September 30, 2007 and it did not have a material impact on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the new standard to
have
a material impact on its financial position and results of
operations.
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 expects to adopt SFAS 159 beginning
July 1, 2008. The Company is currently evaluating the impact that this
pronouncement may have on our consolidated financial statements.
ITEM
3. 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.
During
the quarter the Company carried out an evaluation, under the supervision and
with the participation of the Company’s management, including the chief
executive officer and the chief financial officer, of the effectiveness of
the
design and operation of the disclosure controls and procedures, as defined
in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that
evaluation, the Company’s chief executive officer and chief financial officer
concluded that the Company’s disclosure controls and procedures were effective,
as of the end of the period covered by this report (September 30,
2007).
During
the first quarter of the fiscal year 2008, 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-QSB.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Ameritech
Environmental, Inc.
During
September and October 2003, the Company secured judgments against Ameritech
Environmental, Inc. (“Ameritech”) totaling $176,958 related to the non-payment
by Ameritech for incineration services provided by the Company in 2002. In
November 2003, Ameritech sold its assets representing collateral for the
judgments to MedSolutions, Inc. of Dallas, Texas (“MedSolutions”). During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased
the
Ameritech assets. A balloon payment of $137,721 due November 7,
2004, under the Garnishment Order, was not made by MedSolutions to the Company.
This represented the then outstanding remaining amount due to the
Company.
In
August
2006, the Company filed an amended suit against Ameritech, its officers and
directors (Jasper S. Howard, Alton H. Howard and Jonathon S. Howard) alleging
fraudulent
conveyance, fraud on creditors, civil conspiracy, breach of court order and
conversion. In October 2006, the Company sold certain assets secured by the
above noted Garnishment Order for $50,000 cash, $17,500 of which was paid to
an
attorney under a contingency fee arrangement. The net proceeds of $32,500 were
recorded as other income during the quarter ended December 31, 2006. In
conjunction with this partial recovery, the Company and MedSolutions entered
into a mutual release whereby the Company dismissed MedSolutions from the
litigation.
Prior
to
the year ended June 30, 2003, the Company wrote-off all outstanding amounts
due
from Ameritech. Any recovery that may be received by the Company will be reduced
by collection-related legal fees computed at thirty-five percent of any amounts
collected plus expenses. Although the Company will continue to aggressively
pursue collection of the remaining outstanding amount of approximately $90,000
(plus interest and attorney fees), no assurances can be made regarding ultimate
collection.
Ronald
E. Pierce Matter
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. Mr. Pierce has demanded severance related payments
totaling approximately $280,000 (including an $80,000 bonus) along with the
full
accelerated vesting of 500,000 stock options previously awarded to Mr. Pierce.
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.
On July 30, 2004, the Company received notice from Mr. Pierce’s attorney
requesting commencement of arbitration to resolve the claim. No further
communications have been received from Mr. Pierce’s attorney since July 30,
2004. The Company believes it has meritorious defenses against Mr. Pierce’s
claims and has not recorded a liability related to this matter.
Patent
Infringement Litigation
In
May
2007, the Company filed patent infringement lawsuits in the United States
District Court for the Southern District of Texas in Houston against MediSupply,
Inc. (a/k/a or f/k/a Medi-Supply Alliance, LLC and Medi-Supply, Inc.
“MediSupply”) and Drive Medical Design & Manufacturing (“Drive Medical”) for
infringement of three U.S. patents. The complaints allege that MediSupply and
Drive Medical infringe the patents by making, selling, and offering for sale
disposable IV poles which are identical to the Company’s Pitch-It ™ IV Pole. In
its cases against MediSupply and Drive Medical, the Company is seeking
injunctions and damages or other monetary relief, including pre-judgment
interest and awarding of attorney fees. The parties to the litigation are
scheduled for mediation prior to December 31, 2007.
ITEM
6. EXHIBITS
(a)
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)
|
|
|
|
Certification
of Chief Financial Officer in Accordance with Section 906 of the
Sarbanes-Oxley Act
|
|
(filed
herewith)
|
ITEMS
2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
REGISTRANT:
|
|
|
|
SHARPS COMPLIANCE CORP. |
|
|
|
Dated: November 6, 2007 |
By: |
/s/ Dr.
Burton J. Kunik |
|
Chairman
of the Board of Directors, |
|
Chief Executive Officer and
President |
|
|
|
Dated:
November 6, 2007
|
By: |
/s/ David
P.
Tusa |
|
Executive
Vice President, |
|
Chief Financial Officer, |
|
Business Development and |
|
Corporate
Secretary |