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, 2007
|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ____ to ____ .
Commission File Number: 0-22390
-----------------------
SHARPS COMPLIANCE CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9220 Kirby Drive, Suite 500, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
(713) 432-0300
(Issuer's telephone number)
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: 11,808,100 shares of Common Stock,
$0.01 par value as of May 4, 2007.
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..................................................3
Condensed Consolidated Statements of Income (Loss) for the three
months ended March 31, 2007 and 2006...............................................4
Condensed Consolidated Statements of Income for the nine
months ended March 31, 2007 and 2006...............................................5
Condensed Consolidated Statements of Cash Flows .......................................6
Notes to Condensed Consolidated Financial Statements ..................................7
Item 2. Management's Discussion and Analysis or Plan of Operation.............................11
Item 3. Controls and Procedures...............................................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................18
Item 6. Exhibits..............................................................................19
SIGNATURES.....................................................................................20
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2007 2006
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 1,591,114 $ 296,959
Restricted cash .............................................................. 10,010 10,010
Accounts receivable, net of allowance for doubtful
accounts of $18,940 and $20,024, respectively .............................. 1,327,840 935,283
Inventory .................................................................... 469,972 325,688
Prepaid and other assets ..................................................... 174,943 88,348
----------- -----------
TOTAL CURRENT ASSETS ....................................................... 3,573,879 1,656,288
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $901,077 and $790,397, respectively ..................................... 582,043 473,387
INTANGIBLE ASSETS, net of accumulated amortization of
$117,365 and $116,805, respectively ........................................ 62,074 60,427
----------- -----------
TOTAL ASSETS .................................................................... $ 4,217,996 $ 2,190,102
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................. $ 641,701 $ 526,582
Accrued liabilities .......................................................... 325,621 262,219
Deferred revenue ............................................................. 881,933 826,764
Current maturities of capital lease obligations ............................ 4,412 40,260
----------- -----------
TOTAL CURRENT LIABILITIES .................................................. 1,853,667 1,655,825
LONG-TERM DEFERRED REVENUE ...................................................... 375,256 211,568
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities ..................... -- 1,809
RENT ABATEMENT .................................................................. 71,250 69,000
----------- -----------
TOTAL LIABILITIES .......................................................... 2,300,173 1,938,202
COMMITMENTS
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000
shares authorized; 11,705,100 and 10,551,310 shares
issued and outstanding, respectively ....................................... 117,051 105,513
Additional paid-in capital ................................................... 8,337,899 7,478,268
Accumulated deficit .......................................................... (6,537,127) (7,331,881)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................................................. 1,917,823 251,900
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 4,217,996 $ 2,190,102
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Three Months
Ended March,
----------------------------
2007 2006
------------ ------------
(Unaudited)
REVENUES
Product ............................................................ $ 2,803,128 $ 2,408,306
Environmental services ............................................. 90,523 122,904
------------ ------------
TOTAL REVENUES .................................................. 2,893,651 2,531,210
COSTS AND EXPENSES
Cost of revenues ................................................... 1,681,437 1,466,906
Selling, general and administrative ................................ 952,608 1,024,505
Special Charge ..................................................... 138,000 --
Depreciation and amortization ...................................... 52,313 42,629
------------ ------------
TOTAL COSTS AND EXPENSES ........................................ 2,824,358 2,534,040
------------ ------------
OPERATING INCOME (LOSS) .............................................. 69,293 (2,830)
OTHER INCOME (EXPENSE)
Interest income .................................................... 16,133 3,262
Interest expense ................................................... (322) (2,945)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) .................................... 15,811 (317)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .................................... 85,104 (2,513)
INCOME TAXES ......................................................... (3,134) --
------------ ------------
NET INCOME (LOSS) .................................................... $ 81,970 $ (2,513)
============ ============
NET INCOME PER COMMON SHARE
Basic .............................................................. $ .01 $ --
============ ============
Diluted ............................................................ $ .01 $ --
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
Basic .............................................................. 11,552,360 10,547,827
Diluted ............................................................ 13,395,644 10,547,827
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months
Ended March 31,
----------------------------
2007 2006
------------ ------------
(Unaudited)
REVENUES
Product ............................................................ $ 8,819,371 $ 7,588,028
Environmental services ............................................. 246,941 266,671
------------ ------------
TOTAL REVENUES .................................................. 9,066,312 7,854,699
COSTS AND EXPENSES
Cost of revenues ................................................... 5,194,825 4,524,517
Selling, general and administrative ................................ 2,831,152 2,879,355
Special Charge ..................................................... 138,000 --
Depreciation and amortization ...................................... 142,002 110,732
------------ ------------
TOTAL COSTS AND EXPENSES ........................................ 8,305,979 7,514,604
------------ ------------
OPERATING INCOME ..................................................... 760,333 340,095
OTHER INCOME (EXPENSE)
Interest income .................................................... 27,601 8,251
Interest expense ................................................... (4,500) (10,539)
Other Income ....................................................... 32,500 --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) .................................... 55,601 (2,288)
------------ ------------
INCOME BEFORE INCOME TAXES ........................................... 815,934 337,807
INCOME TAXES ......................................................... (21,180) (8,815)
------------ ------------
NET INCOME ........................................................... $ 794,754 $ 328,992
============ ============
NET INCOME PER COMMON SHARE
Basic .............................................................. $ .07 $ .03
============ ============
Diluted ............................................................ $ .07 $ .03
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:
Basic .............................................................. 10,918,402 10,547,481
Diluted ............................................................ 11,971,720 10,814,019
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
March 31,
--------------------------
2007 2006
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................ $ 794,754 $ 328,992
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 142,002 110,732
Bad debt expense ......................................... -- --
Stock based compensation expense ......................... 1,762 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............... (392,557) 96,264
(Increase) decrease in inventory ......................... (144,284) 1,180
Increase in prepaid and other assets ..................... (86,595) (374)
Increase (decrease) in accounts payable
and accrued liabilities ................................... 180,771 (182,583)
Increase (decrease) in deferred revenue .................. 218,857 (31,566)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 714,710 322,645
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ....................... (250,098) (144,621)
Purchase of intangible assets ............................ (2,207) (60,308)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................. (252,305) (204,929)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations .................... (37,657) (35,581)
Proceeds from exercise of stock options .................. 869,407 1,141
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 831,750 (34,440)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 1,294,155 83,276
CASH AND CASH EQUIVALENTS, beginning of period ............... 296,959 258,427
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 1,591,114 $ 341,703
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................... $ 4,498 $ 10,539
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
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 March 31, 2007 and the results of its operations and cash flows
for the three and nine months ended March 31, 2007 and 2006. The results of
operations for the three and nine months ended March 31, 2007, are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2007. 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, 2006. Certain prior year amounts have
been reclassified to conform to current period presentation.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
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") 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 will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the requirements of FIN No. 48.
7
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance on the SEC's views regarding the process of quantifying materiality of
financial statement misstatements. SAB 108 is effective for fiscal years ending
after November 15, 2006, with early application for the first interim period
ending after November 15, 2006. The Company does not expect that the application
of SAB 108 will have any material impact on its financial position and results
of operations.
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 and nine months ended March 31, 2007 the Company recorded a
provision of $3,134 and $21,180, respectively, for estimated Alternative Minimum
Tax ("AMT"). During the three and nine months ended March 31, 2006 the Company
recorded a provision of $0 and $8,815, respectively, 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, 2007.
NOTE 6 - 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 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.
8
NOTE 7 - 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 March 31, 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 March 31, 2007 level of
accounts receivable and inventory, the amount available to borrow at quarter end
was $1.3 million.
NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
March 31, June 30,
2007 2006
---------- ----------
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 ..................................... $ -- $ 30,160
Capital lease for purchase of phone system due in monthly
installments of $455, interest imputed at 12%
through August 2007 ....................................... 2,209 5,916
Capital lease for purchase of copier/printer due in monthly
installments of $157, interest imputed at 21%
through August 2006 ....................................... -- 155
Capital lease for purchase of phone system upgrades due
in monthly installments of $157, interest imputed at
16% through December 2007 ................................. 1,342 2,530
Capital lease for purchase of forklift due in monthly
installments of $290, interest imputed at 11% through
June 2007 ................................................. 861 3,308
---------- ----------
4,412 42,069
Less: current portion ...................................... 4,412 40,260
---------- ----------
$ -- $ 1,809
========== ==========
NOTE 9 - STOCK-BASED COMPENSATION
The Company sponsors the 1993 Stock Plan (the "Plan") covering employees,
consultants and non-employee directors. The Plan is more fully described in Note
9 in the Company's 2006 Annual Report on Form 10-KSB. Prior to July 1, 2006,
awards granted under the Plan were accounted for under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations. Under APB 25, no compensation expense was reflected in the
Consolidated Statement of Operations for the Company's stock options, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common shares on the date of grant. The pro forma effects on
income for stock options were instead disclosed in a footnote to the unaudited
consolidated financial statements.
Effective July 1, 2006, the Company adopted the fair value recognition
provisions for FASB Statement of Financial Accounting Standard No. 123(R),
"Share-Based Payment," ("SFAS 123(R)"), using the modified prospective
transition method. Under this transition method, the Company is required to
record compensation expense for all stock option awards granted after the date
of adoption as well as any unvested portion of previously granted options. There
is no compensation expense related to the unvested portion of previously granted
stock option awards that remain outstanding at the date of adoption since the
Company's Board of Directors approved, in June 2006, the acceleration of all
unvested stock options previously awarded. Stock based compensation expense of
$1,762 was recorded in the Company's unaudited condensed consolidated statement
of income for the three and nine months ended March 31, 2007.
9
The most significant difference between the fair value approaches prescribed by
SFAS No. 123 and SFAS No. 123(R) and the intrinsic value method prescribed by
APB No. 25 relates to the recognition of compensation expense for stock option
awards based on their grant date fair value. Under SFAS No. 123, the Company
used the following weighted-average assumptions for the quarter ended March 31,
2006 as follows: risk-free interest rates of 4.7% expected annual dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of approximately 122%; and a weighted-average expected life of the options
of 2.0 years. The Company estimates the fair value of stock option grants using
the Black-Scholes option-pricing model. The fair value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model that
uses the assumptions for the risk-free interest rate, volatility, dividend yield
and the expected term of the options. The risk-free interest rate is based on
the U.S. Treasury interest rates in effect at the time of grant for a period
equal to the expected term of the option. Expected volatilities are based on
implied volatilities from historical trades of the Company's common shares and
other applicable factors. Historical data is used to estimate the expected term
of the options and employee terminations within the option-pricing model;
separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of the options
represents the period of time that the options granted are expected to be
outstanding.
The following table reflects the pro forma effect on net income (loss) and
income (loss) per share for the three and nine months ended March 31, 2006 as if
we had applied the fair value recognition provision of SFAS 123(R):
Three Nine
Months Ended Months Ended
March 31, March 31,
------------ ------------
2006 2006
------------ ------------
(Unaudited) (Unaudited)
Net income (loss), as reported ......................... $ (2,513) $ 328,992
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects ........................... $ (77,270) $ (227,380)
------------ ------------
Net income (loss), pro forma ........................... $ (79,783) $ 101,612
============ ============
Basic and diluted net income per share, as reported .... $ -- $ 0.03
============ ============
Basic and diluted net income (loss) per share, pro forma $ (0.01) $ 0.01
============ ============
NOTE 10 - 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:
Nine Months Ended March 31,
-------------------------------
2007 2006
-------------- --------------
(Unaudited)
Net income, as reported .......................... $ 794,754 $ 328,992
-------------- --------------
Weighted average common shares outstanding ....... 10,918,402 10,547,481
Effect of Dilutive stock options ................. 1,053,318 266,538
-------------- --------------
Weighted average diluted common shares outstanding 11,971,720 10,814,019
-------------- --------------
Net income per common share
Basic ......................................... $ 0.07 $ 0.03
Diluted ....................................... $ 0.07 $ 0.03
Employee stock options excluded from computation
of diluted per share amounts because
their effect would be anti-dilutive ........... -- 2,478,890
10
NOTE 11 - STOCK TRANSACTIONS
During the quarter ended March 31, 2007, stock options to purchase 992,802 of
common shares were exercised. Total proceeds to the Company were $748,767
(average price of $0.75 per share).
During the nine months ended March 31, 2007 stock options to purchase 1,153,790
shares of common stock were exercised. Total proceed to the Company were
$869,407 (average price of $0.75 per share).
NOTE 12 - SPECIAL CHARGE
During the three months ended March 31, 2007, the Company recorded a special
charge of $138,000, $0.01 per diluted share, related to the re-alignment of the
leadership in the Company's sales and marketing department. The charge includes
a severance accrual of $102,000 and an executive recruiter fee of $36,000.
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(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 and nine months ended March
31, 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):
11
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net revenues ......................... 100% 100% 100% 100%
Costs and expenses:
Cost of revenues .................. (58%) (58%) (57%) (58%)
Selling, general and administrative (33%) (40%) (31%) (37%)
Special Charge .................... (5%) 0% (2%) 0%
Depreciation and amortization ..... (2%) (2%) (2%) (1%)
---------- ---------- ---------- ----------
Total operating expenses ............. (98%) (100%) (92%) (96%)
---------- ---------- ---------- ----------
Income from operations .......... 2% 0% 8% 4%
Total other income (expense) ......... 1% 0% 1% 0%
---------- ---------- ---------- ----------
Net income ........................... 3% 0% 9% 4%
========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2007 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 2006
Total revenues for the three months ended March 31, 2007 of $2,893,651 increased
by $362,441, or 14.3%, over the total revenues for the three months ended March
31, 2006 of $2,531,210. Billings by market are as follows:
Three Months Ended March 31,
----------------------------------------
2007 2006 Variance
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Billings by Market:
Health Care ............. $ 1,650,912 $ 1,687,148 $ (36,236)
Pharmaceutical .......... 450,678 -- 450,678
Hospitality ............. 330,403 127,843 202,560
Professional ............ 157,706 110,579 47,127
Commercial/Industrial ... 100,882 65,718 35,164
Agriculture ............. 98,073 118,063 (19,990)
Protec .................. 93,424 104,575 (11,151)
Retail .................. 49,413 64,395 (14,982)
Government .............. 43,158 42,417 741
Other ................... 23,056 51,525 (28,469)
----------- ----------- -----------
Subtotal ............ 2,997,705 2,372,263 625,442
GAAP Adjustment* ........ (104,054) 158,947 (263,001)
----------- ----------- -----------
Revenue Reported . $ 2,893,651 $ 2,531,210 $ 362,441
=========== =========== ===========
*Represents the net impact of the revenue recognition adjustment required to
arrive at reported GAAP revenues. 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 Condensed Consolidated Financial
Statements".
The increase in revenues is primarily attributable to increased billings in the
Pharmaceutical ($450,678), Hospitality ($202,560), Professional ($47,127) and
Commercial/Industrial ($35,164) markets. These increases were partially offset
by decreased billings in the Health Care ($36,236), Agriculture ($19,990) and
Retail ($14,982) markets. The increase in the billings in the Pharmaceutical
market is a result of the initial portion of the Company's first major
pharmaceutical order of the Sharps Disposal by Mail System(R). The increase in
the Hospitality market is a result of a large order for the Sharps Disposal by
Mail System(R) from a national hair care chain that will use the product to
dispose of razor blades. 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.).
Cost of revenues for the three months ended March 31, 2007 of $1,681,437 was 58%
of revenues, which is consistent with the corresponding period of the prior
year.
12
Selling, general and administrative ("S, G & A") expenses for the three months
ended March 31, 2007 of $952,608, decreased by $71,897, or 7%, lower than S,G &
A expenses for the three months ended March 31, 2006. The decrease in S, G & A
expense is primarily due to lower, (i) travel expenses ($21,124), (ii)
compensation expense ($20,242) and (iii) professional fees ($19,120). The
decrease in professional fees is related to the July 2006 settlement of the
Attentus Medical litigation. The decrease in travel expense and compensation is
due to the decrease in employed sales persons and travel related expenses.
During the three months ended March 31, 2007, the Company recorded a special
charge of $138,000, $0.01 per diluted share, related to the re-alignment of the
leadership in the Company's sales and marketing department. The charge includes
a severance accrual of $102,000 and an executive recruiter fee of $36,000.
The Company generated operating income of $69,293 for the three months ended
March 31, 2007 versus an operating loss of $2,830 for the corresponding period
of the prior year. The improvement in operating income is due to higher revenue
and gross profit, partially offset by the special charge noted above.
The Company generated income before tax of $85,104 for the three months ended
March 31, 2007 versus a pre-tax loss of $2,513 for the three months ended March
31, 2006. The improvement of the income before tax is a result of the higher
operating income (discussed above) coupled with the higher interest income
(result of higher cash balances).
The Company reported earnings per share of $0.01 for the three months ended
March 31, 2007 versus earnings per share of $0.00 for the three months ended
March 31, 2006. The improvement of the earnings per share is a result of the
higher net income (discussed above).
Excluding the special charge, the Company generated operating income, net income
and earnings per diluted share for the quarter ended March 31, 2007 of $207,293,
$217,210 and $0.02, respectively.
NINE MONTHS ENDED MARCH 31, 2007 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2006
Total revenues for the nine months ended March 31, 2007 of $9,066,312 increased
by $1,211,613, or 15.4%, over the total revenues for the nine months ended March
31, 2006 of $7,854,699. Billings by market are as follows:
Nine Months Ended March 31,
2007 2006 Variance
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Billings by Market:
Health Care .................. $ 5,367,774 $ 5,309,558 $ 58,216
Pharmaceutical ............... 507,611 95,172 412,439
Hospitality .................. 638,320 443,974 194,346
Professional ................. 432,758 321,781 110,977
Commercial/Industrial ........ 417,736 205,586 212,150
Agriculture .................. 439,978 474,783 (34,805)
Protec ....................... 311,497 310,250 1,247
Retail ....................... 921,265 513,002 408,263
Government ................... 148,324 53,021 95,303
Other ........................ 103,888 102,939 949
----------- ----------- -----------
Subtotal ................. 9,289,151 7,830,066 1,459,085
GAAP Adjustment* ............. (222,838) 24,633 (247,471)
----------- ----------- -----------
Revenue Reported ...... $ 9,066,313 $ 7,854,699 $ 1,211,614
=========== =========== ===========
*Represents the net impact of the revenue recognition adjustment required to
arrive at reported GAAP revenues. 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 Condensed Consolidated Financial
Statements".
The increase in revenues is primarily attributable to increased billings in the
Pharmaceutical ($412,439), Retail ($408,263), Commercial/Industrial ($212,150),
Hospitality ($194,346), Professional ($110,977), Government ($95,303), and
Health Care ($58,216) markets. These increases were partially offset by
decreased billings in the Agriculture market of $34,805. The increase in the
billings in the Pharmaceutical market is a result of the initial portion of the
Company's first major pharmaceutical manufacturing order of the Sharps Disposal
by Mail System(R). The increase in the Hospitality market billings is a result
of a large order for the Sharps Disposal by Mail System(R) from a national hair
care chain that will use the product to dispose of razor blades. The increase in
the Retail market billings is a result of the increased use of the Company's
Sharps Disposal By Mail System (R) products in grocery stores and retail
pharmacies to properly dispose of syringes utilized to administer flu and other
inoculations. The increase in the Commercial/Industrial and Professional 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 increase in the Government market is attributable to the
billings associated with a three year award received by the Company during mid -
March in the third quarter of FY 2006 by an agency of the United States
Government.
13
Cost of revenues for the nine months ended March 31, 2006 of $5,194,825 was 57%
of revenues, which is consistent with the corresponding period of the prior
year.
Selling, general and administrative ("S, G & A") expenses for the nine months
ended March 31, 2007 of $2,831,152 decreased by $48,203, or 1.7%, lower than the
S, G & A expenses for the nine months ended March 31, 2006. The decrease in S, G
& A expenses is primarily a result of a decrease in professional fees of
$55,918. The decrease in professional fees is related to the July 2006
settlement of the Attentus Medical litigation.
During the nine months ended March 31, 2007, the Company recorded a special
charge of $138,000, $0.01 per diluted share, related to the re-alignment of the
leadership in the Company's sales and marketing department. The charge includes
a severance accrual of $102,000 and an executive recruiter fee of $36,000.
The Company generated operating income of $760,333 for the nine months ended
March 31, 2007 versus $340,095 for the corresponding period of the prior year.
The improvement in operating income is due to higher revenue and gross profit,
partially offset by the special charge noted above.
The Company generated income before tax of $815,934 for the nine months ended
March 31, 2007 versus a pre-tax income of $337,807 for the nine months ended
March 31, 2006. The improvement of the income before tax is a result of the
higher operating income (discussed above) coupled with the higher interest
income (result of higher cash balances).
The Company reported earnings per share of $0.07 for the nine months ended March
31, 2007 versus earnings per share of $0.03 for the nine months ended March 31,
2006. The improvement of the earnings per share is a result of the higher net
income (discussed above).
Excluding the special charge, the Company generated operating income, net income
and earnings per diluted share for the nine months ended March 31, 2007 of
$898,333, $929,994 and $0.08, respectively.
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. 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(R) 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(R), and Sharps SureTemp Tote(R) 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 expected to begin in May 2007. The remaining
portion of the order is expected to be completed in calendar year 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,294,155 to $1,591,114 at March 31,
2007 from $296,959 at June 30, 2006. The increase in cash and cash equivalents
is primarily a result of cash generated from operations of $714,710 plus
proceeds from the exercise of stock options of $869,407, partially offset by
additions to property and equipment of $250,098 and payments on capital lease
obligations of $37,657.
14
Accounts receivable increased by $392,557 to $1,327,840 at March 31, 2007 from
$935,283 at June 30, 2006. The increase is a direct result of the increase in
billings generated by the Company for the quarter ended March 31, 2007 versus
the quarter ended June 30, 2006. Additionally, the increase in accounts
receivable was attributable to the above noted pharmaceutical manufacturing
billing in mid-March of $450,000 (less a prepayment previously received of
$225,000).
Property and equipment increased by $108,656 to $582,043 at March 31, 2007 from
$473,387 at June 30, 2006 due to capital expenditures of $250,098 partially
offset by depreciation expense of $141,443. The capital expenditures consisted
of, (i) custom software programming of $36,952, (ii) computer equipment of
$30,442, (iii) incinerator facility improvements of $26,715 and (iv) office
equipment of $59,818 and assembly / warehouse-related equipment of $24,982. The
custom software program was incurred to accommodate the change from FedEx to UPS
and an upgrade to the Company's financial and operations system including the
Sharps Tracer (TM) system. The computer equipment was purchased to facilitate
the upgrade of outdated equipment. Office and other equipment purchased were
related to equipment necessary to accommodate the in-house assembly of the
Company's products and the move to the new facility including office furniture
and equipment ($31,471), a new phone system ($28,347) and warehouse equipment
and racks ($24,982).
Stockholder's equity increased by $1,665,923 from $251,900 to $1,917,823. This
increase is attributable to net income for the nine months ended March 31, 2007
of $794,754 and the effect of stock options to purchase 1,153,790 common stock
exercised with proceeds of $869,407 (average exercise price of $0.75 per share).
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 March 31, 2008.
OFFICE LEASE
On July 13, 2006 Sharps executed a new lease agreement for 18,231 square feet of
rentable (office and warehouse) space ("New Lease") located near the previous
leased facility in Houston, Texas ("New Premises"). The New Lease commenced and
the prior lease was terminated on March 1, 2007. The New Lease will expire on
February 28, 2012. The move to a larger facility enables the Company to, (i)
facilitate the transition of its product assembly operations from an outsourced
vendor to an in-house function (estimated to be completed by May 31, 2007) and
(ii) accommodate its recent and planned future growth.
TRENDS
Consistent with the recent growth in billings and revenue (26% and 14% for the
three months ended March 31, 2007, respectively) and increased operating margins
and net income, the trend of earnings and cash from operations continue to be
positive. The Company's internal plans contemplate additional growth in all of
its markets served led by growth in the Pharmaceutical Manufacturer and Retail
(flu shot and non-emergency clinics in the retail setting).
In May 2007, the USPS will implement an increase in postage. The Company
utilized the USPS to facilitate the transportation of the Sharps Disposal by
Mail System(R) products from the end user to the Company's incineration facility
in Carthage, Texas. In preparation for this increase in postage the Company has
announced to its customers a price increase for the Sharps Disposal by Mail
System(R) products designed to increase revenue necessary to compensate for the
increased transportation costs.
While the Company has no material expected change in the level of capital
expenditures in the near-term, it may incur significant capital costs should it
decide to upgrade its current incineration facility in Carthage, Texas
consistent with the November 2005 amended EPA Clean Air Act (see Government
Regulation - Operations and Incinerator 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
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.
15
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, but has not yet made a decision regarding how it will
comply with the new rules. Should the Company decide to upgrade its incineration
facility to comply with the new regulations or install alternative technology,
it would do so not only to comply with the new regulations but also to
potentially generate additional revenue sources including medical waste disposal
(in additional to the incineration of sharps, syringes, lancets, etc.).
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 3 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.
16
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(R). The Massachusetts legislation
addresses the need for proper disposal of used syringes, needles and lancets
outside of the traditional healthcare setting.
Several other states are considering legislation similar to California and
Massachusetts.
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 will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the requirements of FIN No. 48.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance on the SEC's views regarding the process of quantifying materiality of
financial statement misstatements. SAB 108 is effective for fiscal years ending
after November 15, 2006, with early application for the first interim period
ending after November 15, 2006. The Company does not expect that the application
of SAB 108 will have any material impact on its financial position and results
of operations.
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 disclosers
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
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
17
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.
Attentus Medical Sales, Inc.
In March 2005, the Company's wholly-own subsidiary Sharps Compliance, Inc.,
filed a lawsuit in Harris County District Court, Texas against Mr. Jodway (a
former employee) and Attentus Medical Sales, Inc. ("Attentus"). The lawsuit
claimed, (i) breach of a confidentiality agreement, (ii) misappropriation of
trade secrets and (iii) tortuous 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. 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 tortuous interference with existing and/or prospective customers. On July 6,
2006, the Company, Attentus and Mr. Jodway reached settlement on all matters
related to this litigation and dismissed all claims against each other. In
conjunction with the resolution of the matter, the Company entered into a
business relationship whereby Attentus now markets and sells the Company's
Sharps Disposal By Mail Systems(R) to its current and future customers.
Sylvia Haist Matter
In July 2006, the Company received a Notice of Charge of Discrimination from the
U.S. Equal Employment Opportunity Commission ("EEOC") filed by a former
employee, Sylvia Haist. The charge alleged sex discrimination and retaliation.
Sylvia Haist was an employee of the Company from July 1998 until her termination
in January 2006. The Company believes the charges to be totally without merit
and frivolous.
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On March 1, 2007, the Company received notice from the EEOC dismissing all
charges against the Company. Ms. Haist has ninety (90) days to file a lawsuit
against the Company should she so choose. The Company will vigorously defend
itself against the erroneous allegations should Ms. Haist file suit.
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 (TM) 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.
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.
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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: May 9, 2007 By: /s/ Dr. Burton J. Kunik
--------------------------------------
Chairman of the Board of Directors,
Chief Executive Officer and President
Dated: May 9, 2007 By: /s/ David P. Tusa
--------------------------------------
Executive Vice President,
Chief Financial Officer,
Business Development and
Corporate Secretary
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