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 March 31, 2006
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to .
Commission File Number: 0-22390
-----------------------
SHARPS COMPLIANCE CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9350 Kirby Drive, Suite 300, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
(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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] 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: 10,548,810 shares of Common Stock,
$0.01 par value as of May 8, 2006.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2006
(Unaudited) and June 30, 2005.....................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2006 and 2005................4
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended March 31, 2006 and 2005.................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 2006 and 2005.................6
Notes to Unaudited Condensed Consolidated Financial Statements .......7
Item 2. Management's Discussion and Analysis or Plan of Operation............11
Item 3. Controls and Procedures..............................................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES....................................................................17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, June 30,
2006 2005
----------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 341,703 $ 258,427
Restricted cash......................................................................... 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of
$20,111 and $21,757, respectively..................................................... 867,884 964,148
Inventory............................................................................... 367,315 368,495
Prepaid and other assets................................................................ 79,694 79,320
----------------- ----------------
TOTAL CURRENT ASSETS................................................................. 1,666,606 1,680,400
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $752,213
and $650,532, respectively............................................................ 481,004 438,064
INTANGIBLE ASSETS, net of accumulated amortization of $111,246 and $102,195, respectively. 63,036 11,779
----------------- ----------------
TOTAL ASSETS................................................................... $ 2,210,646 $ 2,130,243
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 525,322 $ 567,398
Accrued liabilities..................................................................... 139,196 283,953
Current portion of deferred revenue - incineration...................................... 176,713 171,300
Current portion of deferred revenue - transportation.................................... 809,392 825,297
Current maturities of capital lease obligations......................................... 50,677 48,558
----------------- ----------------
TOTAL CURRENT LIABILITIES..................................................... 1,701,300 1,896,506
LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion......................... 48,263 47,142
LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion....................... 203,444 225,639
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities............................... 4,412 42,112
OTHER LIABILITIES......................................................................... 66,750 62,500
----------------- ----------------
TOTAL LIABILITIES.............................................................. 2,024,169 2,273,899
COMMITMENTS AND CONTINGENCIES............................................................. - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value per share; 20,000,000 shares authorized; 10,548,810
and 10,547,311 shares issued and outstanding, respectively .......................... 105,488 105,473
Additional paid-in capital.............................................................. 7,465,507 7,464,381
Accumulated deficit..................................................................... (7,384,518) (7,713,510)
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................................... 186,477 (143,656)
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........................... $ 2,210,646 $ 2,130,243
================= ================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
------------------------------
2006 2005
------------- -------------
(Unaudited)
REVENUES:
Distribution, net............................$ 2,401,158 $ 2,123,791
Consulting services.......................... 7,148 5,921
Environmental services....................... 122,904 102,932
------------- -------------
TOTAL REVENUES............................. 2,531,210 2,232,644
COSTS AND EXPENSES:
Cost of revenues............................. 1,466,906 1,398,141
Selling, general and administrative.......... 1,024,505 894,205
Depreciation and amortization............... 42,629 37,798
------------- -------------
TOTAL COSTS AND EXPENSES................ 2,534,040 2,330,144
------------- -------------
OPERATING LOSS................................... (2,830) (97,500)
OTHER INCOME EXPENSES:
Interest income.............................. 3,262 1,711
Interest expense............................. (2,945) (5,123)
------------- -------------
TOTAL OTHER INCOME (EXPENSES)........... 317 (3,412)
------------- -------------
LOSS BEFORE INCOME TAXES..................... (2,513) (100,912)
Income Taxes..................................... - 4,693
------------- -------------
NET LOSS......................................... $ (2,513) $ (96,219)
============= =============
NET LOSS PER COMMON SHARE
Basic....................................... $ - $ (.01)
============= =============
Diluted..................................... $ - $ (.01)
============= =============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE
Basic...................................... 10,547,827 10,538,144
============= =============
Diluted.................................... 10,547,827 10,538,144
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months
Ended March 31,
------------------------------
2006 2005
------------ ------------
(Unaudited)
REVENUES:
Distribution, net.............................$ 7,576,365 $ 6,609,598
Consulting services........................... 11,663 28,744
Environmental services........................ 266,671 242,733
------------ ------------
TOTAL REVENUES............................ 7,854,699 6,881,075
COSTS AND EXPENSES:
Cost of revenues.............................. 4,524,517 4,116,632
Selling, general and administrative........... 2,879,355 2,624,776
Depreciation and amortization................. 110,732 121,054
------------ ------------
TOTAL COSTS AND EXPENSES............... 7,514,604 6,862,462
------------ ------------
OPERATING INCOME................................ 340,095 18,613
OTHER INCOME EXPENSES:
Interest income............................. 8,251 3,356
Interest expense............................ (10,539) (18,411)
------------ ------------
TOTAL OTHER INCOME (EXPENSES).......... (2,288) (15,055)
------------ ------------
INCOME BEFORE INCOME TAXES.................. 337,807 3,558
Income Taxes.................................... (8,815) -
------------ ------------
NET INCOME......................................$ 328,992 $ 3,558
============ ============
NET INCOME PER COMMON SHARE
Basic......................................$ .03 $ -
============ ============
Diluted....................................$ .03 $ -
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
NET INCOME PER COMMON SHARE
Basic..................................... 10,547,481 10,538,144
============ ============
Diluted................................... 10,814,019 10,980,340
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended March 31,
------------------------
2006 2005
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net Income ...................................................................... $ 328,992 $ 3,558
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .............................................. 110,732 121,053
Bad debt expense ........................................................... -- 6,842
Loss on disposal of equipment .............................................. -- 275
Changes in operating assets and liabilities:
Decrease in restricted cash ................................................ -- 4,668
Decrease in accounts receivable ............................................ 96,264 197,651
(Increase) decrease in inventory .......................................... 1,180 (33,150)
(Increase) decrease in prepaids and other assets ........................... (374) 51,129
Decrease) in accounts payable and accrued liabilities ...................... (182,583) (189,190)
Increase (decrease) in deferred revenue .................................... (31,566) 96,054
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................... 322,645 258,890
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................ (144,621) (37,986)
Disposal of property and equipment ......................................... -- 17,876
Additions to intangible assets ............................................. (60,308) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................................... (204,929) (20,110)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable .................................................. -- (31,675)
Net payments on factoring agreement ........................................ -- (165,083)
Payments on capital lease obligations ...................................... (35,581) (29,523)
Issuance of common stock ................................................... 1,141 --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ........................................... (34,440) (226,281)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 83,276 12,499
CASH AND CASH EQUIVALENTS, beginning of period .................................. 258,427 242,803
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 341,703 $ 255,302
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions acquired under capital lease .............. $ -- $ 8,931
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
NOTE 1. ORGANIZATION AND BACKGROUND
The accompanying 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") 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, 2006 and the results of its operations and cash flows
for the three and nine months ended March 31, 2006 and 2005. The results of
operations for the three and nine months ended March 31, 2006, are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2006. These 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, 2005. Certain prior year amounts have been reclassified to
conform to current year presentation.
NOTE 3. REVENUE RECOGNITION
The Company adopted 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"). 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. INCOME TAXES
During the three and nine months ended March 31, 2006 the Company recorded a
provision of $0 and $8,815, respectively, for estimated Alternative Minimum Tax
(AMT). The Company anticipates net operating profits for the year ended June 30,
2006, although no assurance can be given. The Company expects to utilize its net
operating loss carryforwards to offset any ordinary taxable income for the year
ended June 30, 2006.
NOTE 5. ACCOUNT RECEIVABLE
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 services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
7
January 2004, the Company secured a Garnishment Order against MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order were scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court. The
Company has recently joined two additional creditors for the purpose of
petitioning the Court for the involuntary bankruptcy of Ameritech. The Company
and the two additional creditors would attempt to recover amounts owed through a
court appointed bankruptcy trustee.
In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees estimated
at one-third of any amounts collected will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.
NOTE 6. LINE OF CREDIT
On March 27, 2006, the Company entered into a Credit Agreement with JPMorgan
Chase Bank, N.A. which provides for a $1.5 million Line of Credit Facility the
proceeds of which may be utilized for, (i) for 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 2.50%. Any outstanding revolving loans, and accrued and unpaid
interest, will be due and payable on March 27, 2008, 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
March 31, 2006, there were no borrowings under this Line Of Credit Facility.
The above noted Line of Credit Facility replaces the Company's previous
arrangement with a financial institution for a $1.25 million asset-based
(accounts receivable factoring) line of credit.
8
NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
March 31, June 30,
2006 2005
--------------- ---------------
Capital lease for the purchase of accounting and operating system
software and hardware, due in monthly installments of $4,061,
interest imputed at 21% through February 2007......................$ 40,432 $ 68,313
Capital lease for purchase of phone system due in monthly
installments of $455, interest imputed at 12% through August 2007.. 7,080 10,368
Capital lease for purchase of copier/printer due in monthly
installments of $157, interest imputed at 21% through August 2006.. 602 1,811
Capital lease for purchase of phone system upgrades due in monthly
installments of $157, interest imputed at 16% through March 2007... 2,895 3,905
Capital lease for purchase of forklift due in monthly installments
of $290, interest imputed at 11% through July 2007................. 4,080 6,273
--------------- ---------------
55,089 90,670
Less: current portion.............................................. 50,677 48,558
--------------- ---------------
$ 4,412 $ 42,112
=============== ===============
NOTE 8. STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", but elected to continue to
account for its employee stock-based compensation plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations in accounting for its stock option
plan. While the Company continues to use APB No. 25, pro forma information
regarding net income (loss) and earnings per share is required under SFAS No.
123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS Statement No. 123", including that the
information be determined as if the Company had accounted for its stock options
under the fair value method prescribed by SFAS No. 123.
The Company uses the Black-Scholes option valuation model to value options
granted. Because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The Company used the following
weighted-average assumptions for options granted during the quarters ended March
30, 2006 and 2005, as follows: risk-free interest rates of 4.7% and 4.33%,
respectively expected annual dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of approximately 122% and
50%, respectively; and a weighted-average expected life of the options of 2.0
and 4.5 years, respectively.
Had compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123 (and as amended by SFAS No. 148), the
Company's net loss would have been increased, as follows:
Three Months Ended March 31,
---------------------------------
2006 2005
--------------- -------------
(Unaudited) (Unaudited)
Net loss, as reported........................ $ (2,513) $ (96,219)
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects..................................... $ (77,270) $ (66,473)
--------------- ----------------
Net loss, pro forma.......................... $ (79,783) $ (162,692)
=============== ================
Basic and diluted net loss per share,
as reported................................. $ - $ (.01)
=============== ================
Basic and diluted net loss per share, pro forma $ (.01) $ (.02)
=============== ================
Had compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123 (and as amended by SFAS No. 148), the
Company's net income for the nine months ended March 31, 2006 and 2005,
respectively, would have been decreased, as follows:
9
Nine Months Ended March 31,
-------------------------------
2006 2005
--------------- ------------
(Unaudited) (Unaudited)
Net income, as reported........................ $ 328,992 $ 3,558
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... $ (227,380) $ (197,520)
------------- ----------------
Net income (loss), pro forma................... $ 101,612 $ (193,962)
============= ================
Basic and diluted net income per share,
as reported $ .03 $ -
============= ================
Basic and diluted net income (loss) per share,
pro forma $ .01 $ (.01)
============= ================
Stock options issued consultants or advisors in exchange for services (other
than those related to an equity offering) are valued utilizing the Black-Scholes
option valuation model and expensed over the corresponding service period.
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments, such as stock options granted to employees. The Company has elected to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. For public entities that file as small
business issuers, FAS 123 (R) is effective as of the beginning of the first
interim or annual reporting period of the first fiscal year beginning on or
after December 15, 2005 (quarter ended September 30, 2006). Management has
completed its evaluation of the effect that FAS 123 (R) will have and believes
that the effect will be consistent with the application disclosed in its pro
forma disclosures (Note 8 of the Notes to the Condensed Consolidated Financial
Statements).
NOTE 9. 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 year. 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 per share, the outstanding common stock options
are considered dilutive using the treasury stock method. The following
information is necessary to calculate per share for the periods presented
(unaudited):
Nine Months Ended March 31,
---------------------------------
2006 2005
------------ ----------------
Net income, as reported.............................. $ 328,992 $ 3,558
-------------- -----------------
Weighted average common shares outstanding........... 10,547,481 10,538,144
Effect of Dilutive stock options..................... 266,538 442,196
-------------- -----------------
Weighted average diluted common shares outstanding... 10,814,019 10,980,340
-------------- -----------------
Net income per common share
Basic............................................. $ 0.03 $ -
Diluted........................................... $ 0.03 $ -
Employee stock options excluded from computation of
diluted per share amounts because their effect would
be dilutive......................................... 2,478,890 2,218,890
10
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 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, agriculture,
hospitality, professional, industrial, commercial, 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(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box, Sharps Secure(R), Sharps SureTemp Tote(R), IsoWash(R) 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 and nine months ended
March 31, 2006 and 2005.
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 Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net revenues 100% 100% 100% 100%
Costs and expenses:
Cost of revenues (58%) (63%) (58%) (60%)
Selling, general and administrative (40%) (40%) (37%) (38%)
Depreciation and amortization (2%) (2%) (1%) (2%)
----------- ----------- ----------- ---------
Total operating expenses (100%) (105%) (96%) 100%
----------- ----------- ----------- ---------
Income (loss) from operations 0% (5%) 4% 0%
Total other income 0% 0% 0% 0%
----------- ----------- ----------- ---------
Net income (loss) 0% (4%) 4% 0%
=========== =========== =========== =========
11
THREE MONTHS ENDED MARCH 31, 2006, COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
Total revenues for the three months ended March 31, 2006 of $2,531,210 increased
by $298,566, or 13%, over the total revenues for the three months ended March
31, 2005 of $2,232,644. The increase in revenues is primarily attributable to
increased billings in the Retail ($53,411), and Government ($38,990),
Professional ($35,099) and Hospitality ($29,669) markets. Also positively
effecting revenue for the quarter ended March 31, 2006 was the increase in
reported revenue resulting from the effects of the Company's revenue recognition
method (See Note 3 of the notes to unaudited consolidated financial statements).
These increases were partially offset by decreased billings in the Healthcare
market of $106,444. The increase in billings in the Professional and Hospitality
markets is being driven higher by demand for the Company's products as industry
and consumers become more aware of the proper disposal of medical sharps
(syringes, lancets, etc.). The increase in revenue in the Government market is
attributable to the billings associated with a three year award received by the
Company during the quarter from an agency of the United States Government. The
increase in the billings in the Retail market is a result of the use of our
products in grocery stores and pharmacies to properly dispose of syringes
utilized to administer flu and other inoculations. The decrease in the billings
in the Healthcare market is primarily attributable to the effect of ordering
patterns by home healthcare customers.
Cost of revenues for the three months ended March 31, 2006 of $1,466,906 were
58% of revenues were lower than the cost of sales of 63% during the
corresponding period of the prior year. The reduction in cost of sales (and
corresponding increase in the gross margin) is due to the increase in revenues
coupled with the mix of product sold.
Selling, general and administrative ("S, G & A") expenses for the three months
ended March 31, 2006 of $1,024,505, increased by $130,300, or 15%, versus
$894,205 for the corresponding period of the previous year. The increase in
S,G&A is a result of increases in the following expenses: (i) compensation
related ($54,907), (ii) professional fees ($46,670), and (iii) travel ($18,512).
The increase in compensation and travel expenses are a result of the increase in
the Company's employed sales persons and travel related expenses. The increase
in professional fees is related to Company litigation and advisory fees.
NINE MONTHS ENDED MARCH 31, 2006, COMPARED TO NINE MONTHS ENDED MARCH 31, 2005
Total revenues for the nine months ended March 31, 2006 of $7,854,699 increased
by $973,624, or 14%, over the total revenues for the nine months ended March 31,
2005 of $6,881,075. The increase in revenues is primarily attributable to
increased billings in the Retail ($290,649), Hospitality ($189,326), Agriculture
($125,592), and Professional ($99,018) and Pharmaceutical ($95,172) markets. The
increase in billings in all 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.). Additionally, the increase
in billings in the Retail market is a result of the use of our products in
grocery stores and pharmacies to properly dispose of syringes utilized to
administer flu and other inoculations. The increase in the Hospitality market
billings is a result of an approximate $100,000 order from one of the nation's
largest contract food service providers for the Company's biohazard spill
clean-up kit. The increase in billings in the Pharmaceutical market is a result
of the demand for our products in the clinical trial setting.
Cost of revenues for the nine months ended March 31, 2006 of $4,524,517 were 58%
of revenues versus $4,116,632, or 60% of the revenues for the corresponding
period of the previous year. The reduction in cost of sales (and corresponding
increase in the gross margin) is due to the increase in revenues coupled with
the mix of product sold.
Selling, general and administrative ("S, G & A") expenses for the nine months
ended March 31, 2006 of $2,879,355, increased by $254,579, or by 10%, versus
$2,624,776 for the corresponding period of the prior year. . The increase in the
S, G & A is primarily a result of increases in the following expenses: (i)
compensation related ($85,272), (ii) professional fees ($102,221), and (iii)
travel ($27,326). The increase in compensation and travel expenses are a result
of the increase in the Company's employed sales persons and travel related
expenses.. The increase in professional fees is related to Company litigation
and advisory fees.
PROSPECTS FOR THE FUTURE
The Company continues to take advantage of the many opportunities in the markets
served as consumers and industries become more aware of the proper disposal of
medical sharps (syringes, lancets, etc.). This education process was
substantially strengthened 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). Among the
recommended methods of disposal are mail-back programs and products such as that
marketed by the Company.
Although the Company's largest market has historically been Healthcare, we
believe the most significant long-term growth opportunities are in the
Agriculture, Pharmaceutical, Retail, Commercial and Hospitality markets. In
order to more effectively address these opportunities, the Company has recently
re-aligned its sales force whereby each regional sales director markets all
Company products across multiple market segments within his or her geographic
territory.
12
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $83,276 to $341,703 at March 31, 2006
from $258,427 at June 30, 2005. The increase in cash and cash equivalents is
primarily a result of operating earnings and corresponding cash flow from
operations of $322,645, partially offset by, (i) additions to property and
equipment of $144,621, (ii) additions to intangible assets of $60,308 and (iii)
payments on capital lease obligations of $35,581.
Accounts receivable decreased by $96,264 to $867,884 at March 31, 2006 from
$964,148 at June 30, 2005. The decrease was a result in the timing of collection
of customer payments.
Property and equipment increased by $42,940 to $481,004 at March 31, 2006 from
$438,064 at June 30, 2005. This increase is attributable to capital expenditures
of $144,621 for the nine months ended March 31, 2006 partially offset by the
depreciation expense for the same period of $101,681. The capital expenditures
represent computer and equipment at the Company's corporate offices in Houston,
Texas plus capital costs incurred at the incineration facility in Carthage,
Texas.
Intangible assets increased by $51,257 to $63,036 at March 31, 2006 from $11,779
at June 30, 2005. This increase is attributable to permit-related expenditures
totaling $60,308 associated with the Company's incineration facility in
Carthage, Texas partially offset by amortization expense of $9,051.
On March 27, 2006, the Company entered into a Credit Agreement with JPMorgan
Chase Bank, N.A. which provides for a $1.5 million Line of Credit Facility the
proceeds of which may be utilized for, (i) for 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 2.50%. Any outstanding revolving loans, and accrued and unpaid
interest, will be due and payable on March 27, 2008, 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
March 31, 2006, there were no borrowings under this Line Of Credit Facility.
The above noted Line of Credit Facility replaces the Company's previous
arrangement with a financial institution for a $1.25 million asset-based
(accounts receivable factoring) line of credit.
Management believes that the Company's current cash resources along with cash
from operations and its line of credit (Note 6) will be sufficient to fund
operations for the twelve months ended March 31, 2007.
TRENDS
Consistent with the recent revenue growth (13% and 14% for the three and nine
months ended March 31, 2006, respectively), the trend of earnings and cash from
operations has been very positive. The Company's internal plans contemplate
additional growth in all of its markets served. While the Company has no
material expected change in the level of capital expenditures in the near-term,
it may incur significant capital cost should it decide to upgrade its current
incineration facility in Carthage, Texas consistent with the November 2005
amended EPA Clean Air Act (see INCINERATOR FACILITY- REGULATORY DEVELOPMENTS
below). The Company could avoid such upgrade and the associated capital costs
should it decide to install alternative technology (at a much lower cost) or
outsource its incineration needs (no additional capital costs). The Company has
studied the amended EPA Clean Air Act and its options, but has not yet made a
decision. It is important to note that should the Company decide to upgrade its
incineration facility to comply with the new regulations or install alternative
technology, it would open up the opportunity for additional revenue sources
including medical waste disposal. As noted below, the new regulation allows a
minimum period of three years and a maximum of five years to comply.
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
13
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.
INCINERATOR FACILITY- REGULATORY DEVELOPMENTS
In November 2005, the EPA amended the Clean Air Act which will effect 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, but has not yet made a decision. It is important to
note that should the Company decide to upgrade its incineration facility to
comply with the new regulations or install alternative technology, it would open
up the opportunity for additional revenue sources including medical waste
disposal.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments, such as stock options granted to employees. The Company has elected to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. For public entities that file as small
business issuers, FAS 123 (R) is effective as of the beginning of the first
interim or annual reporting period of the first fiscal year beginning on or
after December 15, 2005 (quarter ended September 30, 2006). Management has
completed its evaluation of the effect that FAS 123 (R) will have and believes
that the effect will be consistent with the application disclosed in its pro
forma disclosures (Note 8 of the Notes to the Condensed Consolidated Financial
Statements).
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial instruments that contain an embedded derivative that
would otherwise require bifurcation to irrevocably be accounted for at fair
value, with changes in fair value recognized in the statement of income. The
fair value election may be applied on an instrument-by-instrument basis. SFAS
No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying special purpose entity may hold. SFAS No. 155 is effective for
those financial instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial instrument and the fair
value of the combined hybrid financial instrument will be recognized as a
cumulative-effect adjustment to beginning retained earnings. The Company does
not expect the new standard to have any material impact on our financial
position and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. The standard permits an entity
to subsequently measure each class of servicing assets or servicing liabilities
at fair value and report changes in fair value in the statement of income in the
period in which the changes occur. SFAS No. 156 is effective for the Company as
of December 1, 2006. The Company does not expect the new standard to have any
material impact on our financial position and results of operations.
14
ITEM 3. CONTROLS AND PROCEDURES
As of the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13(a)-15(e) and 15(d) - 15(e).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the Company's evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
January 2004, the Company secured a Garnishment Order against MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order were scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court. The
Company has recently joined two additional creditors for the purpose of
petitioning the Court for the involuntary bankruptcy of Ameritech. The Company
and the two additional creditors would attempt to recover amounts owed through a
court appointed bankruptcy trustee.
In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees estimated
at one-third of any amounts collected will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.
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.
On or about February 25, 2003, Jason Jodway, a then employee of the Company
since April 1999, resigned in lieu of termination of employment by the Company.
Thereafter, Mr. Jodway formed Attentus Medical Sales, Inc., a competing entity
of the Company. In March 2005, the Company's wholly-own subsidiary Sharps
Compliance, Inc., filed a lawsuit in Harris County District Court, Texas against
Mr. Jodway and Attentus Medical Sales, Inc. The lawsuit claims, (i) breach of a
confidentiality agreement, (ii) misappropriation of trade secrets and (iii)
tortious interference with the Company's existing and prospective contracts and
business relationships. On April 7, 2005, the defendant filed its answer and
counter claims against Sharps Compliance, Inc. asserting breach of contract,
quantum merit and violation of the Texas Payday Act alleging that his last day
of employment was March 29, 2003 and that he is entitled to receive two weeks of
15
back wages and commissions. On September 19, 2005, the Company amended its
pleadings and added claims asserting conversion, unjust enrichment, unfair
competition and trademark infringement in violation of the Lanham Act, false
advertising in violation of the Lanham Act, trademark dilution under the Texas
Business and Commerce Code, and tortious interference with existing and/or
prospective customers. On April 28, 2005, Defendants filed an Amended Answer and
Counterclaims adding counter claims asserting slander, business disparagement
and tortious interference with contractual and prospective relationships. On
April 29, 2005, Mr. Jodway and Attentus Medical Sales, Inc. filed a Notice of
Removal of the action from Harris County Circuit Court to the United States
District Court, Southern District of Texas. The Company denies any obligation to
Mr. Jodway for his back wages, commissions and denies all other allegations. The
Company intends to vigorously pursue its affirmative claims against Mr. Jodway
and Attentus Medical Sales, Inc., seek injunctive relief for violations of the
Lanham Act, money damages and attorneys fees, although the Company has not
quantified its damages to date.
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)
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.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
REGISTRANT:
SHARPS COMPLIANCE CORP.
Dated: May 8, 2006 By: /s/ Dr. Burton J. Kunik
----------------------------------
Chairman of the Board, Chief
Executive Officer and President
Dated: May 8, 2006 By: /s/ David P. Tusa
----------------------------------
Executive Vice President,
Chief Financial Officer
Business Development &
Corporate Secretary
17