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 December 31, 2004
| | 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.
(Name of small business issuer 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
--- ---
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: 10,538,144 shares of Common
Stock, $0.01 par value as of February 9, 2005.
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 December 31,
2004 (Unaudited) and June 30, 2004.................................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 2004 and 2003..............................4
Unaudited Condensed Consolidated Statements of Operations
for the six months ended December 31, 2004 and 2003................................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended December, 2004 and 2003...................................6
Notes to Unaudited Condensed Consolidated Financial
Statements ........................................................................7
Item 2. Management's Discussion and Analysis or
Plan of Operations....................................................................11
Item 3. Controls and Procedures...............................................................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................15
Item 2. Changes in Securities.................................................................15
Item 6. Exhibits..............................................................................15
SIGNATURES.....................................................................................16
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS December 31, June 30,
2004 2004
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $200,795 $242,803
Restricted cash 66,993 14,678
Accounts receivable, net 796,009 981,408
Inventory 415,735 393,238
Prepaid and other assets 106,032 138,798
------------ -----------
TOTAL CURRENT ASSETS 1,585,564 1,770,925
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $576,633 and $507,945,
respectively 467,417 539,800
INTANGIBLE ASSETS, net of accumulated amortization of $101,888 and $101,582, respectively 9,745 10,051
------------ -----------
TOTAL ASSETS $2,062,726 $2,320,776
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $397,226 $592,943
Accrued liabilities 296,557 338,153
Deferred revenue - pump return 70,807 110,702
Current portion of deferred revenue - incineration 121,816 108,299
Current portion of deferred revenue - transportation 646,852 553,938
Notes payable and current portion of long-term debt - 185,932
Current maturities of capital lease obligations 44,181 37,513
------------ -----------
TOTAL CURRENT LIABILITIES 1,577,439 1,927,480
LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion 27,442 30,408
LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion 189,998 179,506
LONG-TERM DEBT, net of current portion - 10,826
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities 67,460 84,446
OTHER LIABILITIES 58,000 45,500
------------ -----------
TOTAL LIABILITIES 1,920,339 2,278,166
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; 20,000,000 shares authorized;10,538,144 and 10,538,256
shares issued and outstanding, respectively 105,381 105,381
Additional paid-in capital 7,457,639 7,457,639
Accumulated deficit (7,420,633) (7,520,410)
------------------------
TOTAL STOCKHOLDERS' EQUITY 142,387 42,610
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,062,726 $2,320,776
============ ===========
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 December 31,
------------------------------------
2004 2003
---------------- ----------------
(Unaudited)
REVENUES:
Distribution, net $2,142,616 $1,968,904
Consulting and environmental services 86,429 105,316
TOTAL REVENUES 2,229,045 2,074,220
COSTS AND EXPENSES:
Cost of revenues 1,330,947 1,251,600
Selling, general and administrative 861,021 798,339
Depreciation and amortization 40,355 39,590
---------------- ----------------
TOTAL COSTS AND EXPENSES 2,232,323 2,089,529
---------------- ----------------
OPERATING LOSS (3,278) (15,309)
OTHER EXPENSE
Interest expense (5,364) (6,812)
Other - (240)
---------------- ----------------
TOTAL OTHER EXPENSE (5,364) (7,052)
---------------- ----------------
NET LOSS BEFORE INCOME TAXES (8,642) (22,361)
INCOME TAXES (493) -
---------------- ----------------
NET LOSS $(9,135) $(22,361)
================ ================
NET LOSS PER COMMON SHARE
Basic $.00 $.00
================ ================
Diluted $.00 $.00
================ ================
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER
COMMON SHARE
Basic 10,538,144 10,538,256
================ ================
Diluted 10,538,144 10,538,256
================ ================
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 Six Months
Ended December 31,
2004 2003
---------------- ---------------
(Unaudited)
REVENUES:
Distribution, net $4,495,512 $3,895,690
Consulting and environmental services 153,219 175,742
TOTAL REVENUES 4,648,431 4,071,432
---------------- ---------------
COSTS AND EXPENSES:
Cost of revenues 2,718,491 2,469,310
Selling, general and administrative 1,728,926 1,634,725
Depreciation and amortization 83,256 78,248
---------------- ---------------
TOTAL COSTS AND EXPENSES 4,530,673 4,182,283
---------------- ---------------
OPERATING INCOME (LOSS) 117,758 (110,851)
OTHER EXPENSE
Interest expense (13,288) (27,895)
Other - (192)
---------------- ---------------
TOTAL OTHER EXPENSE (13,288) (28,087)
---------------- ---------------
NET INCOME (LOSS) BEFORE INCOME TAXES 104,470 (138,938)
INCOME TAXES (4,693) -
---------------- ---------------
NET INCOME (LOSS) $99,777 $(138,938)
================ ===============
NET INCOME (LOSS) PER COMMON SHARE
Basic $.01 $(.01)
================ ===============
Diluted $.01 $(.01)
================ ===============
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER
COMMON SHARE
Basic 10,538,144 10,247,955
================ ===============
Diluted 10,869,494 10,247,955
================ ===============
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 Six Months
Ended December 31,
---------------------------------
2004 2003
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net loss $99,777 $(138,938)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 83,256 78,248
Loss on disposal of equipment 275 240
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (52,315) 61,504
(Increase) decrease in accounts receivable 185,399 (2,268)
Increase in inventory (22,497) (132,978)
Decrease in prepaids and other assets 32,766 34,834
Increase (decrease) in accounts payable and accrued liabilities (224,813) 50,709
Increase (decrease) in deferred revenue 74,062 (86,889)
---------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 175,910 (135,538)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (19,787) (23,253)
Disposal of fixed asset 17,876 -
Patent - (10,409)
---------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,911) (33,662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable (31,675) (72,602)
Net payments on factoring agreement (165,083) (193,641)
Payments on capital lease obligations (19,249) (10,413)
Issuance of common stock - 500,000
---------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (216,007) 223,344
---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT (42,008) 54,144
CASH AND CASH EQUIVALENTS, beginning of period 242,803 135,884
---------------- --------------
CASH AND CASH EQUIVALENTS, end of period $200,795 $190,028
================ ==============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions acquired under capital lease $8,931 $4,157
================ ==============
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
December 31, 2004
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 for complete financial statements. In the opinion of management, these
interim condensed consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the consolidated financial position of the Company as of
December 31, 2004 and the results of its operations and cash flows for the six
months ended December 31, 2004 and 2003. The results of operations for the six
months ended December 31, 2004, are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 2005. 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, 2004.
Certain reclassifications have been made in the prior year consolidated
statement of operations 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
are recognized at the point of sale.
7
NOTE 4. INCOME TAX
During the three and six months ended December 31, 2004 the Company recorded a
provision of $493 and $4,200, respectively, for estimated Alternative Minimum
Tax (AMT). The Company anticipates net operating profits for the year ended June
30, 2005, 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, 2005.
NOTE 5. ACCOUNT RECEIVABLE
In 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. The assets of
Ameritech representing collateral for the judgments were sold by Ameritech to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. In
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 are 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. In 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.
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. Any recovery that may be received by the
Company will be reduced by collection-related legal fees estimated at one-third
of any amounts collected. 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. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
December 31, June 30,
2004 2004
---------------- ----------------
(Unaudited)
Factoring agreement with financial institution $ - $ 165,083
Note payable to Futura - 13,889
Promissory note to a finance company for the purchase of an automobile - 17,786
---------------- ----------------
- 196,758
Less: current portion of notes payable and long-term debt - 185,932
---------------- ----------------
Total notes payable and long-term debt $ - $ 10,826
================ ================
The Company maintains an arrangement with a financial institution for a
$1.25 million asset-based line of credit. The agreement allows the Company to
factor customer receivables generated out of its ordinary course of business.
The maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement is automatically renews
on an annual basis (August 30 of each year) unless terminated by either party.
The Company may borrow up to 80% of the eligible receivables presented and
incurs interest on gross invoices financed at a prime rate of interest plus 2%,
plus administrative fees of .25% on gross receivables presented. During the
quarter ended December 31, 2004, there were no borrowings under the arrangement.
8
NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
December 31, June 30,
2004 2004
----------------- -----------------
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 $ 84,571 $ 99,315
Capital lease for purchase of phone system due in monthly installments of
$455, interest imputed at 12% through August 2007 12,400 14,315
Capital lease for purchase of copier/printer due in monthly installments of
$157, interest imputed at 21% through August 2006 2,517 3,252
Capital lease for purchase of phone system upgrades due in monthly
installments of $157, interest imputed at 16% through December 2007 4,515 5,077
Capital lease for purchase of forklift due in monthly installments of $290,
interest imputed at 11% through July 2007 7,638 -
----------------- -----------------
111,641 121,959
Less: current portion 44,181 37,513
----------------- -----------------
$ 67,460 $ 84,446
================= =================
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 December 31, 2004 and 2003, as follows: risk-free
interest rates of 4.04% and 3.50%, respectively; expected annual dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of approximately 45.24% and 34%, respectively; and a weighted-average
expected life of the options of 7 years.
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 for the quarters ended December 31, 2004 and 2003,
respectively, would have been increased, as follows:
Three Months Ended December 31,
------------------------------------------
2004 2003
------------------- --------------------
(Unaudited) (Unaudited)
Net loss, as reported $ (9,135) $ (22,361)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects $ (66,110) $ (73,911)
------------------- --------------------
Net loss, pro forma $ (75,755) $ (96,272)
=================== ====================
Basic and diluted net loss per share, as reported $ .00 $ .00
=================== ====================
Basic and diluted net loss per share, pro forma $ (.01) $ (.01)
=================== ====================
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 (loss) for the six months ended December 31, 2004 and 2003,
respectively, would have been increased, as follows:
Six Months Ended December 31,
-----------------------------------------
2004 2003
-------------------- --------------------
(Unaudited) (Unaudited)
Net loss, as reported $ 99,777 $ (138,938)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects $ (131,047) $ (147,314)
-------------------- --------------------
Net loss, pro forma $ (31,270) $ (286,252)
==================== ====================
Basic and diluted net loss per share, as reported $ .01 $ (.01)
==================== ====================
Basic and diluted net loss per share, pro forma $ .00 $ (.03)
==================== ====================
NOTE 9. EARNINGS PER SHARE
Earnings per share is measured at two levels: basic per share and diluted per
share. Basic per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the year. Diluted per share
is computed by dividing net income (loss) by the weighted average number of
common shares after considering the additional dilution related to common stock
options. In computing diluted 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:
Six Months Ended December 31,
------------------------------------------
2004 2003
----------------- --------------------
Net income (loss), as reported $ 99,777 $ (138,458)
---------------- --------------------
Weighted average common shares outstanding 10,538,144 10,247,955
Effect of Dilutive stock options 331,350 -
---------------- --------------------
Weighted average diluted common shares outstanding 10,869,494 10,247,955
---------------- --------------------
Net income per common share
Basic $ 0.01 $ (0.01)
Diluted $ 0.01 $ (0.01)
Employee stock options excluded from computation of diluted
per share amounts because their effect would be dilutive 2,737,295 NA
NOTE 10. RELATED PARTY TRANSACTION
On January 2, 2003, the Chief Executive Officer of the Company sold 356,000
shares of common stock in Sharps Compliance Corp. through a private sale.
Purchasers of these shares included, among others, New Century Equity Holdings
Corp. ("New Century") (200,000 shares), a 3% shareholder in the Company, John
Dalton (50,000 shares), a 10.1% holder in the Company, and Philip Zerrillo
(10,000 shares), a member of the Company's Board of Directors.
On September 24, 2003, the Company completed a private placement of 625,000
unregistered shares of its common stock for net proceeds of $500,000.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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
and efficiency related to the proper disposal of medical waste by industry and
consumers. These solutions include Sharps Disposal by Mail System(TM),
Pitch-It(TM) IV Poles, Trip LesSystem(TM), Sharps Pump Return Box, Sharps
Enteral Pump Return Box, Sharps Secure(TM), Sharps SureTemp Tote(TM),
IsoWash(TM) Linen Recovery 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.
The Pro-Tec product line offers medical sharps disposal containers, specialized
for safe disposal of biomedical waste in a full range of services. The Pro-Tec
product line is a vertical business integration of the sharps disposal by mail
products for the Company. The Company will have savings in product cost on its
Sharps Disposable by Mail System(TM) and sales to third parties of this product.
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and
financial condition of the Company during the three months and six months ended
December 31, 2004 and 2003.
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:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues 100% 100% 100% 100%
Costs and expenses:
Cost of revenues (60%) (60%) (58%) (61%)
Selling, general and administrative (38%) (39%) (37%) (40%)
Depreciation and amortization (2%) (2%) (2%) (2%)
----------- ----------- ----------- ---------
Total operating expenses (100%) (101%) 97% (103%)
----------- ----------- ----------- ---------
Income (loss) from operations 0% (1%) 3% (3%)
Total other income 0% 0% (1)% 0%
----------- ----------- ------------ --------
Net income (loss) 0% (1%) 2% (3%)
=========== =========== =========== =========
11
THREE MONTHS ENDED DECEMBER 31, 2004, COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2003
Total revenues for the three months ended December 31, 2004 of $2,229,045
increased by $154,825, or 7.5%, over the total revenues for the three months
ended December 31, 2003 of $2,074,220. The increase in revenues is primarily
attributable to increased billings in the Agriculture ($107,520), Healthcare
($45,549), and Retail ($44,131) markets.
Cost of revenues for the three months ended December 31, 2004 of $1,330,947 were
60% of revenues which was consistent with the gross margin percentage generated
during the corresponding period of the prior year.
Selling, general and administrative ("S,G&A") expenses for the three months
ended December 31, 2004 of $861,021, increased by $62,682, or 8%, versus
$798,339 for the corresponding period of the previous year. The increase in the
S,G&A is primarily a result of increases in the following expenses: (i)
compensation ($35,837), (ii) professional fees ($15,742) and (iii) travel and
entertainment ($10,811).
SIX MONTHS ENDED DECEMBER 31, 2004, COMPARED TO SIX MONTHS ENDED DECEMBER
31, 2003
Total revenues for the six months ended December 31, 2004 of $4,648,431
increased by $576,999, or 14%, over the total revenues for the six months ended
December 31, 2003 of $4,071,432. The increase in revenues is primarily
attributable to increased billings in the Agriculture ($233,932), Healthcare
($212,945), Retail ($171,626) and Hospitality ($69,686) markets.
Cost of revenues for the six months ended December 31, 2004 of $2,718,491 were
58% of revenues versus $2,469,310, or 61% of the revenues for the corresponding
period of the previous year. The increase in the gross margin for the six months
ended December 31, 2004, versus the corresponding period of the prior year, is
due to the increase in revenues as described in the preceding paragraph and the
mix of product sold.
Selling, general and administrative ("S,G&A") expenses for the six months ended
December 31, 2004 of $1,728,926, increased by $94,201, or by 6%, versus
$1,634,725 for the corresponding period of the previous. The increase in the
S,G&A is primarily a result of increases in the following expenses: (i)
commissions ($23,188), (ii) compensation ($22,886), (iii) professional fees
($19,537), (iv) advertising and PR consulting ($8,086) and (v) computer costs
($7,921).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $42,008 to $200,795 at December 31, 2004
from $242,803 at June 30, 2004. The decrease in cash and cash equivalents is
primarily a result of the payoff of the balance of the factoring agreement
($165,083) and the note payable ($31,675). Also, payments on capital lease
obligations ($19,249) and net changes in other working capital items ($7,891)
contributed to the decrease. This decrease was partially offset by $183,033 in
income (net of amortization) generated for the six months ended December 31,
2004.
Restricted cash increased by $52,315 to $66,993 at December 31, 2004 from
$14,678 at June 30, 2004. Restricted cash represents funds held in the Company's
account receivable lockbox that have not yet cleared the Company's operating
account. Therefore, this account fluctuates based on deposit activities at the
balance sheet date.
Accounts receivable decreased by $185,399 to $796,009 at December 31, 2004 from
$981,408 at June 30, 2004. The decrease was consistent with the decrease in
revenues during the quarter ending December 2004 of $2,229,045 as compared to
the revenues during the quarter ending June 2004 of $2,468,015.
Property and equipment decreased by $72,383 to $467,417 at December 31, 2004
from $539,800 at June 30, 2004. This decrease is primarily attributable to
depreciation expense recognized for the corresponding six month period.
Accounts payable decreased by $195,717 to $397,226 at December 31, 2004 from
$592,943 at June 30, 2004. The decrease was due the timing of vendor payments.
Notes payable and long-term debt of $196,758 at June 30, 2004 was completely
paid as of December 31, 2004.
Management believes that the Company's current cash resources along with its
asset-based factoring line of credit will be sufficient to fund operations for
the twelve months ended December 31, 2005.
12
The Company maintains an arrangement with a financial institution for a $1.25
million asset-based line of credit. The agreement allows the Company to factor
customer receivables generated out of its ordinary course of business. The
maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement is automatically renews
on an annual basis (August 30 of each year) unless terminated by either party.
The Company may borrow up to 80% of the eligible receivables presented and
incurs interest on gross invoices financed at a prime rate of interest plus 2%,
plus administrative fees of .25% on gross receivables presented. During the
quarter ended December 31, 2004, the maximum borrowed under the arrangement was
$0.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", and subsequently revised the
interpretation in December 2003 ("FIN 46R") which requires that companies that
control another entity through interests other than voting rights should
consolidate the controlled entity. As revised, FIN 46R is generally effective
for financial statements for interim or annual periods ending on or after March
15, 2004. The related disclosure requirements are effective immediately.
Management does not believe the adoption of FIN 46R will have any impact on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics to be accounted for on a comparable basis. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 will not have a material impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.
In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.
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In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certainexceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
In December 2004, the Financial Accounting Standards Board issued Statement
Number 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 is required 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. In addition, the Company may elect to adopt FAS 123 (R) by restating
previously issued financial statements, basing the amounts on the expense
previously calculated and reported in their pro forma disclosures that had been
required by FAS 123. 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 that begins after December 15, 2005. Management has not
completed its evaluation of the effect that FAS 123 (R) will have, but believes
that the effect will be consistent with the application disclosed in its pro
forma disclosures.
ITEM 3. CONTROLS AND PROCEDURES
Within the ninety days prior to 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 13a-14. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 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. The assets of
Ameritech representing collateral for the judgments were sold by Ameritech to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. In
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 are 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. In 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.
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 a
$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.
ITEM 2. CHANGES IN SECURITIES
On September 24, 2003 the Company completed a private placement of 625,000
shares of common stock at a price of $0.80 per share. The proceeds of $500,000
have been utilized by the Company for working capital purposes as well as to
support growth plans to further expand the business into the industrial, retail,
and other markets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
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: February 9, 2005 By: /s/ Dr. Burton J. Kunik
-------------------------------
Chairman of the Board, Chief
Executive Officer and President
Dated: February 9, 2005 By: /s/ David P. Tusa
-------------------------------
Senior Vice President,
Chief Financial Officer
and Corporate Secretary
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