UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20172020
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-34269
SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware | | 74-2657168 | | | |
| Delaware | 74-2657168 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 9220 Kirby Drive, Suite 500, Houston, Texas | 77054 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (713) 432-0300
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Shares, $0.01 Par Value | SMED | The NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐☒ | Smaller reporting company ☒ |
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| Emerging growth company ☐ | | | |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31, 2016,2019, the aggregate market value of the registrant’s Common Stock held by non-affiliates was approximately $48.8$59.0 million (based on the closing price of $3.83$4.22 on December 31, 20162019 as reported by The NASDAQ Capital Market). For purposes of this computation only, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive offices, directors or 10% beneficial owners are affiliates.
The number of common shares outstanding of the Registrant was 16,008,41216,377,057 as of August 21, 2017.24, 2020.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) | | | | | |
| DOCUMENTS INCORPORATED BY REFERENCE: | |
| (1) | Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on November 16, 201719, 2020 are incorporated by reference into Part III. Such Proxy Statement will be filed within 120 days after the end of the registrant's fiscal year. |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I | | | | | | | | |
Item 1PART I | | 4 |
| Item 1 | | |
| Item 1A | | 13 |
| Item 1B | | 17 |
| Item 2 | | 17 |
| Item 3 | | 17 |
| Item 4 | | 17 |
| PART II | | |
| Item 5 | | 17 |
| Item 6 | | 18 |
| Item 7 | | 19 |
| Item 8 | | 28 |
| Item 9 | | 28 |
| Item 9A | | 28 |
| Item 9B | | 29 |
| PART III | | |
| Item 10 | | 29 |
| Item 11 | | 29 |
| Item 12 | | 29 |
| Item 13 | | 29 |
| Item 14 | | 29 |
| PART IV | | |
| Item 15 | | 30 |
| Item 16 | | 31 |
| 32 | |
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| *This Table of Contents is inserted for convenience of reference only and is not a part of this Report as filed. | |
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This annual reportAnnual Report on Form 10-K contains certain forward-looking statements and information relating to the Company (as defined below) and its subsidiaries 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 “will,” “may,” “position,” “plan,” “potential,” “continue,” “anticipate,” “believe,” “expect,” “estimate,” “project” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect known and unknown risks, uncertainties and assumptions related to certain factors, including without limitation, 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.herein including the impact of the coronavirus COVID-19 (“COVID-19”) pandemic on our operations and financial results. 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. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and as such should not consider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update these forward-looking statements.
PART I
Sharps Compliance Corp. was formed in November 1992 as a Delaware corporation. The information presented herein is for Sharps Compliance Corp. and its 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.), Sharps Safety, Inc., Alpha Bio/Med Services LLC, Bio-Team Mobile LLC and Citiwaste, LLC (collectively, “Sharps” or the “Company”). Unless the context otherwise requires, “Company,” “we,” “us” and “our” refer to Sharps Compliance Corp. and its subsidiaries.
The Company provides access to all of its filings with the Securities and Exchange Commission (“SEC”) through its website www.sharpsinc.com, as soon as reasonably practicable after the reports are filed with the SEC. The filings are also available via the SEC’s website at www.sec.gov.
COMPANY OVERVIEW
Sharps Compliance Corp. is a leading full-service national provider of comprehensivehealthcare waste management servicesprovider specializing in regulated waste streams including medical, pharmaceutical and hazardous. Our solutionsservices facilitate the safe and proper collection, containment, transportation and environmentally-responsible treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, hazardousregulated waste and unused consumer dispensed medications and over-the-counter drugs. We servefrom customers in multiple healthcare-related markets. The markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers,we manage are small to medium-size generators of healthcare waste including professional offices (physicians,(ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, (assisted living, continuinggovernment agencies, home health care, long-term acute care, memory careretail clinics and skilled nursing), government (federal, stateimmunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and local), consumers, commercialultimate-user medications which generates business relationships with pharmaceutical manufacturers and agriculture, as well as distributorsother markets to manyprovide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.
We assist our customers in determining which of our solution offeringssolutions that best fit their needs for the collection, containment, return transportation and treatment of regulated medical, waste, used healthcare materials, pharmaceutical waste,and hazardous waste and unused dispensed medications.waste. Our differentiated approach provides our customers the flexibility to return and properly treat medicaltransport waste used healthcare materials or unused dispensed medications through a variety of solutions and products transported primarily throughvia direct route-based services, the United States Postal Service (“USPS”). For customers with facilities or locations that may generate larger quantitiescommon carrier dependent upon quantity of waste we integrate the route-based pickup service into our complete offering. The benefits of thisgenerated, cost savings and facility needs. Our comprehensive offering includeservices approach includes a single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings.repository. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pickup services).
Our key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, surgery centers, retail pharmaciesflagship products are the Sharps Recovery System™ and clinics and the professional market, which is comprisedMedSafe® Medication Disposal System. These two product offerings account for over 50% of physicians, dentists and veterinary practices.company revenues. The Company’s flagship product, the Sharps® Recovery System is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste management mailback solution used in all markets due to its cost-effective nature and used healthcare materials. In October 2014,nationwide availability. The MedSafe solution meets the Company launched MedSafe®, a patent pending solution for the safe collection, transportation and proper disposalimmediate needs of unwanted and expired prescription medications including controlled substances from ultimate users. MedSafehas been designed to meet or exceed the regulations issued byan increasing community risk associated with unused, ultimate-user, medications. Developed in accordance with the Drug Enforcement Administration (“DEA”) implementingimplementation of the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), which became effective October 9, 2014. In July 2015MedSafe is a superior solution used in both private and December 2015,public sectors to properly remove medications from communities and aid in the prevention of drug abuse.
Over the past few years, the Company augmented its networkhas made a series of investments to build a robust direct service, route-based, pickup offering for medical, pharmaceutical and hazardous waste. We have built an infrastructure capable of covering more than 70% of the U.S. population with permitted trucks, transfer stations and treatment facilities. We continue to add routes and the infrastructure required for operational efficiency to reach more customers and prospects directly. Our route-based services, matched with comprehensive mailback solutions, offer us a key differentiator in the market and the ability to capitalize on larger or regional contracts within the healthcare market. With the growth in infrastructure to support the route-based service, we have strategically added new distribution for faster and more cost-effective delivery of products to customers.
We continue to develop new solutions to meet market demands. Over the past five years, we have added a robust portfolio of ultimate-user medication disposal solutions for controlled substances, a system for DEA-inventory controlled medication disposal for professionals, the Black Pail Program for disposal of most unused pharmaceuticals, including Resource Conservation and Recovery Act ("RCRA") hazardous medications, and the Inhaler Disposal system. We have also developed route-based services for medical, pharmaceutical and hazardous waste, service providers with acquisitionsthe TakeAway Recycle System™ for single-use devices ("SUDs") and the Hazardous Drug Spill Control Kit™, a USP <800> (as defined below) compliant spill kit for cleanup of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohiochemotherapy and other neighboring states. Additionally,hazardous drug spills.
As hospitals and surgery centers increase their sustainability efforts, they are looking for ways to recycle more materials, such as SUDs. SUDs are constructed of materials capable of being recycled, primarily plastics and metals. With a greater emphasis for more sustainable solutions, the Company now services parts of Texas and Louisiana with route-based pickup services. In July 2016,TakeAway Recycle System is a much-needed complement to the Company acquired another route-basedsingle-use device market.
Our dually permitted trucks allow our hazardous waste direct pickup service which expandedto align with our medical waste so that we can fully service all our customers. Most healthcare professionals have hazardous waste in addition to New York and New Jersey and strengthened the Company’s position in the Northeast. The Company now offers its route-based pickup services inmedical waste. By also transporting hazardous waste, we have a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States.competitive advantage over local haulers while still offering cost-effective pricing.
Our principal executive offices are located at 9220 Kirby Drive, Suite 500, Houston, Texas. Our telephone number at that location is (713) 432-0300. We currently have 124182 full-time employees and 62 part-time employees.employees. We have manufacturing, assembly, distribution and warehousing operations located in Houston, Texas.
We own and operate a fully-permitted treatment facility in Carthage, Texas that incorporates our processing and treatment operations. Over six years ago, we supplemented the treatment facility’s existing incineration process withThe Carthage facility offers both steam sterilization in an autoclave system, which is a cost-effective alternative to traditionaland high heat incineration that treatsfor the proper treatment of regulated medical waste with steam at high temperature and pressure to kill pathogens.non-hazardous pharmaceuticals. The autoclave system is utilized alongside the incinerator for day-to-day operations. We believe thatThe Carthage location also serves as the Company's main facility for managing our recycling solution. In August 2020, the Company added a second autoclave to the Texas facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste, used healthcare materials and unused or expired dispensed medications (i.e., both incineration and autoclave capabilities). This arrangement not only reduces the Company’s return transportation costs associated with its solutions but also provides back-up treatment facility capabilities in the event of disruption at the Company’s treatment facilities. The Company’s route-based pickup service business covers a twenty-three state region in the South, Southeast and Northeast portions of the United States. facility.
In August 2016, the Company received the Commonwealth of Pennsylvania Department of Environmental Protection Bureau of Waste Management permit for the processing of medical waste at its treatment facility located in northeastern Pennsylvania. The 40,000 square foot facility has been permitted as both a medical waste treatment facility, using an autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The facility is designed to cost-effectively and efficiently process medical waste generated by the Company’s route-based and mailback customers and also doubles as a distribution center of mailback solutions andsolutions. It has been in operation since November 2016. The Company is in the process of adding a second autoclave to the Pennsylvania facility with expected completion in October 2020.
Uncertainty Relating to COVID-19 and the Company’s Continuation of Its Infrastructure Build Out
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we did not incur significant disruptions during the year ended June 30, 2020 from COVID-19, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on our operations or mandates to provide products or services), impacts on our supply chain, the effect on customer demand or
changes to our operations. The health of our workforce, and our ability to meet staffing needs in our route-based, treatment and distribution operations and other critical functions cannot be predicted and is vital to our operations.
The Company has taken precautionsto ensure the safety of its employees, while at the same time remaining active as a leading national provider of comprehensive medical waste solutions, bringing uninterrupted essential support to its customers and the healthcare industry. For example, the Company increased its route-based drivers, plant and operations personnel by ten percent (10%) in advance of the COVID-19 pandemic to make sure that its operations and servicing of customers would not be adversely affected by the potential absence of employees due to COVID-19. The Company also temporarily increased the pay for its front-line operations personnel and drivers during the pandemic.
Related to customer demand, the Company has seen temporary closures of about 1,000 dental, dermatology and physician practices equating to about $0.1 million in lost monthly revenue for the Company. Offsetting this is increased volumes of medical waste generated by many of the Company’s long-term care customers who are utilizing the Company’s systems and services to contain and dispose of personal protective equipment (“PPE”) utilized in their facilities.
The Company is continuing to focus on expanding its infrastructure, programs which began in calendar 2019, to support what it believes will be a strong 2020 flu and immunization season as well as medical waste disposal related to a potential COVID-19 vaccine which may become available for administration in the U.S. Additionally, the Company sees other potential increased medical waste volumes related to COVID-19 such as the long-term care market where PPE in many facilities is being disposed of as medical waste and not as trash which has been the historical practice. Finally, the Company’s route-based footprint now extends to 32 states, or 70% of the population, significantly increasing the pipeline of larger small and medium quantity generator sales opportunities.
To address these opportunities, the Company is:
•Significantly increasing its production and inventory of medical waste mailback and shipback solutions to ensure it remains well positioned to meet an expected increase in customer demand related to the 2020 season flu and the potential COVID-19 vaccine;
•Increasing its medical waste processing capacity from 10 million to 27 million pounds per year through the addition of a larger autoclave at its Texas facility as well as an additional autoclave at its Pennsylvania facility;
•Securing a larger warehouse and distribution facility in Pennsylvania to store and distribute larger volumes of medical waste mailbacks; and
•Expanding its route-based truck fleet and drivers necessary to facilitate the potential increase in volumes from its expanded 32 state route-based footprint and related larger prospect opportunities.
The Company applied for and received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP was established as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
On a broader note, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, suppliers and other business partners; however, any material adverse effect on these parties could adversely impact our results of operations, cash flows and financial conditions. External effects from the COVID-19 pandemic began at the end of the third quarter and were not material to the year ended June 30, 2020 results. Given the timing of when the COVID-19 quarantine manifested itself (middle of third quarter) in the U.S., the financial impacts to the Company may have only partially been captured within the results of operations reported to date. The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with customers, employees and business partners and assessing potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, please see item Part I, Item 1A, Risk factors in this report.
SOLUTIONS OVERVIEW
We offer a broad line of product and service solutions to manage the medical waste and unused dispensed medications generated by our customers. Our primary solutions include the following:
SharpsRecovery System™ (formerly(also known as the industry-leading Sharps Disposal by Mail System®): a comprehensive solution for the containment, transportation, treatment and tracking of regulated medical waste generated outside the hospital and large health care facility setting. The Sharps Recovery System includes a securely sealed, leak and puncture resistant sharps container in several sizes ranging from one quart to twenty-eighttwenty gallons; USPS-approved shipping box with prepaid priority mail postage; absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment and complete documentation and tracking manifest. The Sharps Recovery System is transported to our owned or contracted facilities for treatment. Upon treatment or conversion of the waste, we provide electronic proof of receipt and treatment documentation to the customer through our proprietary SharpsTracer®system.
TakeAway Medication Recovery System™System:a comprehensive solution designed to meet or exceed the regulations issued by the DEA implementing the Act, which became effective October 9, 2014. The solution facilitates the proper disposal of unused medications (including controlled substances) from:
| · | ultimate users, which is designed for use in the long-term care, hospice and consumer markets. |
| · | DEA registrants, which DEA Reverse Distribution solution is a DEA-compliant collection, return and destruction solution for DEA registrants’ expired or unused controlled substances. Theinnovative system includes prepaid return transportation, materials to package for return, complete documentation of returned pharmaceuticals and proper disposal with online proof of destruction. |
MedSafe®: a patent-pending solution for the safe collection, transportation and proper disposal of unwanted and expired prescription medications, including controlled substances, from ultimate users. MedSafe has been designed to meet or exceed the regulations issued by the DEA implementing the Act, which became effective October 9, 2014. MedSafe is designed for usesimplified and environmentally friendly treatment of used needles, syringes, and other used healthcare products. The TakeAway Recovery System includes a sharps container in retail pharmacies, long-term caresizes ranging from one quart to thirty gallons; a prepaid-UPS return shipping box, absorbent material inside the container that can safely hold up to 150 milliliters of fluids; a bag for additional containment and complete documentation and tracking manifest. The TakeAway Recovery System is transported to our owned or contracted facilities hospice, hospitals/clinics with on-site pharmacies, narcoticfor treatment. Upon treatment facilitiesor conversion of the waste, we provide electronic proof of receipt and licensed law enforcement.treatment documentation to the customer through our proprietary SharsTracer® system.
Route-Based Pickup Service: Service:as a full-service waste management services company, we offer route-based medical and hazardous waste pickup services towith our dually permitted trucks. We service customers and prospects that have facilities or branches that generate larger quantities of medical, pharmaceutical (non-controlled) and limited quantities of hazardous waste or where the route-based pickup service is preferred. This blended service of mailback and pickup provides cost-savings benefits by customizing the right solution with each location to reach the best outcome for the customer.
MedSafe®: a patent-pending solution for the safe collection, transportation and proper disposal of unwanted or expired ultimate-user medications, including controlled substances. MedSafe has been designed to meet or exceed the regulations issued by the DEA implementing the Act, which became effective October 9, 2014. MedSafe is designed for use in retail pharmacies, long-term care facilities, hospice, hospitals/clinics with on-site pharmacies, narcotic treatment facilities and licensed law enforcement.
TakeAway Medication Recovery System™: a comprehensive solution designed to meet or exceed the regulations issued by the DEA implementing the Act, which became effective October 9, 2014. The solution facilitates the proper disposal of unused medications (including controlled substances) from ultimate users, which is designed for use in the long-term care, hospice and consumer markets.
TakeAway Medication Recovery™DEA Reverse Distribution for Registrants: a DEA-compliant collection, return and destruction solution for DEA registrants’ expired or unused controlled substances. The system includes prepaid return transportation, materials to package for return, complete documentation of returned pharmaceuticals and proper disposal with online proof of destruction.
Black Pail Program for Rx: one-step solution with minimal segregation for the disposal of most pharmaceuticals, excluding aerosols and controlled substances. This 5-gallon pail includes the delivery, containment, pickup and proper disposal of unused inventory medications for one all-inclusive price.
Inhaler Disposal: an all-in-one solution for effectively collecting, transporting and destroying used pharmaceutical inhalers. Long-term care facilities can dispose of all medication (controlled and non-controlled substances, harzardous waste pharmaceuticals and inhalers) with our MedSafe collection receptacle combined with our Inhaler Disposal system.
Hazardous Drug Spill Control Kit™: in response to the United States Pharmacopeia ("USP") publishing General Chapter <800> ("USP <800>") which sets standards for handling hazardous drugs ("HD") in healthcare settings effective December 2019, the Company launched this USP <800> compliant spill kit for the cleanup of chemotherapy and other HD spills.
TakeAway Recycle System™:a solution for the collection and recycling of single-use medical devices from surgical centers and other healthcare facilities. The system consists of containers designed for use in operating rooms or sterile processing departments. The containers are placed in a pre-paid return box for shipping to our treatment facilities where devices are stripped to their basic components and sent to appropriate recycling facilities. The system adds a much neededmuch-needed solution to the market in which many single-use devices are reprocessed or disposed of as regulated medical waste, resulting in wastes that could be recycled.
ComplianceTRACSM: a more advanced web-based version of the Company’s compliance and training program. ComplianceTRAC is designed to improve worker safety while satisfying applicable Occupational Safety and Health Administration (“OSHA”) and other requirements for the end-user. The program includes employee training for bloodborne pathogens, compliance with the Health Insurance Portability and Accountability Act of 1996 and the Hazardous Communication Standard. The online program also provides access to a database of over a million safety data sheets (formerly, material safety data sheets), safety plans, regulatory information and facility self-audits. The program is designed to replace outdated hard copy manuals with an updated platform available 24/7.
Universal Waste Shipback Systems: Systems:a jointly-promoted program with Veolia Environmental Services using their RECYCLEPAK solutions for the collection, transportation and recycling of light bulbs, batteries and other mercury-containing devices. The solution is marketed to existing and prospective customers as a complement to the Company’s line of medical waste and unused medication management solutions.
Other Solutions: a wide variety of other solutions including TakeAway Environmental Return System™, SharpsTracer®, Sharps Secure® Needle Disposal System, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps®MWMS™ (a Medical Waste Management System (“MWMS”)) and Spill Kit and Recovery System.
MARKET OVERVIEW
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics and the professional market which is comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.
The Company believes its growth opportunities are supported by the following:
•A large professional market that consists of dentists, veterinarians, clinics, physician groups, urgent care facilities, ambulatory surgical centers, labs, dialysis centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing over 70% of the U.S. population.
| · | A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing about 155 million people or 48% of the U.S. population. |
•From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened the Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a thirty-two (32) state region of the South, Southeast, Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened transfer stations and offices in strategic locations. The Company directly serves more than 13,750 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.•The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2019 Population Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over the past decade), which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility.
•The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control
| · | In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 9,500 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering. |
("CDC"), 44.9% of U.S. adults received a flu shot and 32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2020, the Company saw growth in the retail flu shot related orders in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite the volatility, Sharps believes the retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
•The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long-standing issue within long-term care.
| · | The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility. |
•Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste. The Company’s Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal. The federal government, state agencies and non-profits are recognizing the need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medication disposal are being funded for prevention programs.
•With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.
| · | The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control (“CDC”), 24% of flu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. Despite the decrease in Retail flu business for fiscal year 2017 (the 2016 flu season) of 15% due to a mild flu season and the loss of one retail pharmacy customer, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations. |
•A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.
•The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System).
| · | The passage of regulations for ultimate user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long standing issue within long-term care. |
| · | Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company’s Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal. |
| · | With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively. |
| · | A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes. |
| · | The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System). |
7
syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry.COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
Leading full-service national provider of comprehensive and cost-effectivehealthcare waste management services,provider specializing in regulated waste streams, including medical, pharmaceutical, and hazardous.hazardous
We offerSharps Compliance Corp. is a full line of solutions and services that address the properleading national healthcare waste management of medicalprovider specializing in regulated waste used healthcare materials and medication or pharmaceuticals (including controlled substances). We offer a blended product portfolio that includes both a mailback and route-based pickup service to target prospective customers with multi-site and multi-sized locations that may include facilities that generate larger quantities of waste,streams including medical, pharmaceutical and hazardous. This blended offeringOur services facilitate the safe and proper collection, transportation and environmentally-responsible treatment of regulated waste from customers in multiple healthcare-related markets. The markets we manage are small to medium-size generators of healthcare waste including professional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, government agencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and ultimate-user medications which generates business relationships with
pharmaceutical manufacturers and other markets to provide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.
We assist our customers in determining solutions that best fit their needs for the collection, transportation and treatment of regulated medical, pharmaceutical and hazardous waste. Our differentiated approach provides our customers the flexibility to transport waste via direct route-based services, USPS or common carrier dependent upon quantity of waste generated, cost savings and facility needs. Our comprehensive services approach includes a single point of contact, consolidated billing, regulatory supportintegrated manifest and complete integrationproof of destruction repository. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our SharpsTracer system. Our proprietary SharpsTracer tracking and documentation systems provide customers a comprehensive electronic record of receipt and treatment of their waste to meet regulatory requirements. The Company’s mail or ship-back based services are generally offered at a significantly lower cost as compared to the traditional route-based pickup services for small quantity generators since the Company utilizes the existing infrastructure of USPS or in some cases United Parcel Service (“UPS”) for return transportation. While competitors may attempt to replicate our comprehensive solution offerings, we believe the ability to offer such a comprehensive, value-added turnkey solutionoperations is a significant competitive advantage. We have only begunkey factor leading to offer this comprehensive solution overour success and continued recurring revenue growth. Over the past fivefew years, with the primary focus of our marketing efforts has been on educating the marketplace about us as an alternative to the historical provider of waste services, including medical, pharmaceutical and hazardous.
services.
Vertically-integrated full-service operations.
operations
Our operations are fully integrated, including manufacturing, assembly, distribution, treatment, online tracking and customer reporting. We have manufacturing, assembly, distribution and warehousing operations located in Houston, Texas. We own and operate a fully-permitted treatment facility in Carthage, Texas that incorporates our processing and treatment operations. Over six years ago, we supplemented the treatment facility’s existing incineration process withThe Carthage facility offers both steam sterilization, in an autoclave system, which is a cost-effective alternative to traditionaland high heat incineration that treatsfor the proper treatment of regulated medical waste with steam at high temperature and pressure to kill pathogens.non-hazardous pharmaceuticals. The autoclave system is utilized alongside the incinerator for day-to-day operations. We believe that our Texas facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste used healthcare materials and unused or expired medications including controlled substancespharmaceuticals (i.e., both incineration and autoclave capabilities). The Carthage location also serves as the Company's main facility for managing our recycling solution. In August 2016, the Company received the Commonwealth of Pennsylvania Department of Environmental Protection Bureau of Waste Management permit for the processing of medical waste asat its treatment facility located in northeastern Pennsylvania. The 40,000 square foot facility has been permitted as both a medical waste treatment facility, using an autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The facility is designed to cost-effectively and efficiently process medical waste generated by the Company’s route-based and mailback customers and also doubles as a distribution center of mailback solutions and has been in operation since November 2016. The Company’s route-based pickup service business covers over 70% of the U.S. population in areas throughout the South, Southeast, Midwest and Northeast. We track the movement of each shipment from outbound shipping to ultimate treatment and provide confirmation to the customer for their records using our proprietary SharpsTracer tracking and documentation system. We also track treatment volumes associated with pickup services provided as part of our blended product portfolio using SharpsTracer. We also provide customized reporting and comprehensive regulatory support for many of our customers. By controlling all aspects of the process internally, the Company is able to provide a one-stop solution and simplify the tracking and record-keeping processes to meet regulatory requirements for our customers. We believe the fully-integrated nature of our operations is a key factor and differentiator leading to our success and leadership position in our industry.
Highly scalable business model.
model
Because of our business model, we can add new business while leveraging our existing infrastructure. Our facilities are able tocan accommodate significant additional volume, incurring only variable costs of transportation and processing. Once we gain a new customer, our profitability typically increases as our customer base grows with minimal additional overhead expense due to the embedded nature of our products and the ease with which we can accommodate additional volume.
Diverse product markets.
markets
Sharps offers services and products to a wide variety of end markets. The Company’s growth strategies are focused on our key markets which include professional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, government agencies, home healthcare, facilities,retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers home healthcare providers, assisted living/long-term care, surgery centers, retail pharmacies and clinicsother markets to provide safe and the professional market, which is comprised of physicians, dentists and veterinary practices.
proper disposal.
Our billings by market for the years ended June 30, 2017, 20162020, 2019 and 20152018 are below (as expressed in percentages of revenues):
| | | | | | | | | | | | | | | | | |
| | Year Ended June 30, | | | | |
| | 2020 | | 2019 | | 2018 |
BILLINGS BY MARKET*: | | | | | |
| Retail | 30 | % | | 26 | % | | 20 | % |
| Professional | 29 | % | | 34 | % | | 33 | % |
| Home Health Care | 19 | % | | 17 | % | | 20 | % |
| Pharmaceutical Manufacturer | 9 | % | | 9 | % | | 11 | % |
| Assisted Living | 6 | % | | 6 | % | | 7 | % |
| Government | 4 | % | | 5 | % | | 5 | % |
| Environmental | 1 | % | | 1 | % | | 2 | % |
| Other | 2 | % | | 2 | % | | 2 | % |
| | 100 | % | | 100 | % | | 100 | % |
| | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
BILLINGS BY MARKET: | | | | | | | | | |
| Professional | | | 31 | % | | | 22 | % | | | 20 | % |
| Home Health Care | | | 21 | % | | | 22 | % | | | 22 | % |
| Retail | | | 19 | % | | | 26 | % | | | 28 | % |
| Pharmaceutical Manufacturer | | | 16 | % | | | 17 | % | | | 15 | % |
| Assisted Living | | | 6 | % | | | 6 | % | | | 6 | % |
| Government | | | 4 | % | | | 4 | % | | | 5 | % |
| Environmental | | | 1 | % | | | 1 | % | | | 1 | % |
| Other | | | 2 | % | | | 2 | % | | | 3 | % |
| | | | 100 | % | | | 100 | % | | | 100 | % |
*Customer billings, a non-GAAP measure, includes all invoiced amounts for 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, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain rebates, product returns, and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. See Note 2 “Summary of Significant Accounting Policies” in “Notes to Consolidated Financial Statements”. The Company believes this information about customer billings is useful to investors and other interested parties.
Increased state and federal regulatory attention.
To protect citizens and waste workers from needle stick injuries, ten states have passed state-wide legislation or regulations making it illegal to discard used sharps into household trash. Numerous cities, such as Seattle, have passed ordinances making householddisposal of sharps disposalin the trash illegal. Almost all other states, as well as the District of Columbia and territories have passed educational requirements, or released strict guidelines regarding home sharps disposal. Whether legislation or strict guidelines, most of the U.S. population is required or strongly encouraged to not place usedfirst properly contain their home generated sharps inbefore placing into the household trash. In addition, severalcertain states and counties have passed ordinances requiring businesses such as hospitals and those that sell syringes to the public, such as retail pharmacies and veterinary clinics, to take back syringes, once used, in regulatory-compliant sharps containers at no charge to the consumer.
In order to reduce accidental poisonings and pollution of our water and municipal water systems, twenty-two22 states and the District of Columbia have introduced legislation over the last few years intended to manage the disposal of consumer unused medications. Seven states and the District of Columbia have successfully passed such legislation. Passed or pending legislation related to disposal of consumer medications covers about two-thirds of the U.S. population. Further, since 2009, the federal government, nine states and several counties have introduced legislation requiring manufacturer responsibility for consumer generated unused medications. Statemedications and in some cases home sharps disposal. Both Federal and state regulatory agencies are also addressing this issue including multiple states which now require healthcare providersby banning the sewering of medications by medical facilities and by strongly encouraging the public to avoid sewer and trash disposalprohibit sewering of non-hazardous unused medications within their facilities.unwanted drugs. States such as California, Washington and Minnesota have required assessment and proper treatment by a medical waste disposal company for years. However, other states such as Colorado and Florida are now requiring even small healthcare providers to segregate unused medications for proper disposal. In 2010, Congress passed the Secure and Responsible Drug Disposal Act, leading to DEA changes to the Controlled Substances Act in 2014, allowing certain DEA registrants to collect controlled substances from the public. Collection receptacles can now be found in retail pharmacies, long-term care facilities and hospitals throughout the country. In addition, states are beginning to more closely scrutinize generators returning through reverse distribution unused inventory medications classified as qualifying
The Environmental Protection Agency (“EPA”) has recently passed regulations that will affect the healthcare industry including the Generator Improvement Rule passed in November 2016 and the Management Standards for manufacturer creditHazardous Waste Pharmaceuticals passed in February 2019 (the “Pharmaceutical Rule”). The Pharmaceutical Rule mandates that are actuallyhealthcare facilities compliantly manage the hazardous waste pharmaceuticals generated on their sites through less rigorous and should be disposedmore streamlined regulatory requirements. The Pharmaceutical Rule also instituted a national ban on the sewering of any hazardous waste pharmaceuticals generated by healthcare facilities as such.of August 19, 2019. As state adoption of these federal regulations occurs over the next 24 months and federal enforcement of these statutes increases, more companies could turn to solutions such as ours to help manage their medicalhazardous waste andpharmaceutical, especially in the long-term care setting, providing the needed regulatory compliance. We believe we are well positioned to benefit given our strict adherence to established standards and extensive documentation and records.
Environmentally-conscious solution provider.
In addition to providing cost-effective solutions for our customers, the Company is committed to discovering new sustainable initiatives that mitigate the effects of potentially hazardous waste on the environment. Our patented Waste Conversion Process™repurposes regulated medical waste and unused medications into new resources used in industrial applications, such as the generation of electricity or recycled plastics used in the industrial sector. Our TakeAway Recycle System is a solution for the collection and recycling of single-use medical devices from surgical centers and other healthcare facilities. The system consists of containers designed for use in operating rooms or sterile processing departments. The containers are placed in a pre-paid return box for shipping to our treatment facilities where devices are stripped to their basic components and sent to appropriate recycling facilities. The system adds a much neededmuch-needed solution to the market in which many single-use devices are reprocessed or disposed of as regulated medical waste, resulting in wastes that could be recycled. Our Universal Waste Shipback Program recycles the materials in light bulbs, batteries and other mercury-containing devices for use in new applications. In addition, the use of recycled paper and plastic materials for many of our products further demonstrates our total commitment to environmentally sound business practices. As an organization, the Company is a leading proponent for the development of solutions for the safe disposal of sharps, unused medications (including controlled substances), light bulbs, batteries and other mercury-containing devices in the community and continually works to raise public awareness of the issue.
Experienced and accomplished management team.
Our senior management team has extensive industry experience and is committed to the continued growth and success of our company. Mr. David P. Tusa, CEO and President, in addition to his ten-plus years with the Company has over 20 years of business and public company experience in multiple industries and in companies with revenues up to $500 million. Ms. Diana P. Diaz, CPA, MBA, Vice President and Chief Financial Officer, has over 25 years of finance, accounting, healthcare and public company industry experience. Mr. Adrian W. Burke, Senior Vice President of Operations, has over 25 years of operations, logistics and transportation experience in the private sector for a variety of multinational companies, as well as the United States Marine Corps. Mr. Gregory C. Davis, Vice President of Operations, has over 20 years of information technology and operations-related experience. Mr. Khairan Aladwani, Vice President of Assurance/Quality Control, has over 25 years of quality assurance and operations experience, including medical devices, at a variety of companies both private and public. Mr. Dennis Halligan, Vice President of Marketing, has broad marketing experience with the Company and at a variety of firms, including Stir Creative and R.J. Reynolds.
GROWTH STRATEGIES
We plan to grow our business by employing the following primary growth strategies:
Develop new products and services.
We continue to develop new solution offerings including ultimate-user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for the collection and recycling of single-use devices (TakeAway Recycle System). These innovative product and service offerings allow us to gain further sales from existing customers as well as gain new customers who have a need for more comprehensive products. We will continue our efforts to develop new solution offerings designed to facilitate the proper and cost effective management of medical waste, pharmaceutical waste, hazardous waste and ultimate-user medication disposals to better serve our customers and the environment. Additionally, we will continue to seek out and identify prospective new customers and markets for new solutions designed to meet the needs of these new customer segments.
Further penetrate existing customers and markets.
The addition of direct-service hazardous waste capabilities to our existing route-based regulated medical waste customers adds a viable cross-selling opportunity for the Company. While we offer hazardous waste services nationwide, the ability to directly service increases operational efficiencies and provides a better priced solution for the customer. In addition to hazardous waste services, the Company has multiple pharmaceutical waste solutions for cross-selling within the existing customer base including DEA-registrant disposal, non-controlled medication disposal and RCRA pharmaceutical disposal. The Company is a single-service provider for multiple healthcare-related waste generated in small to mid-size generators.
A new market for the Company is recycling of single-use devices. The interest from healthcare institutions in safer and more sustainable offerings has generated a full line of single-use devices and a tendency towards recycling at end of life rather than disposal in landfills. The opportunity to provide a recycling solution to surgical operatories that use these single-use devices offers the Company an exciting and sustainable solution in a new market. Further, we are able to develop solutions specific for single-use device manufacturers, building new relationships with manufacturers looking for a key marketing differentiator.
Many of our customers who currently use the Sharps Recovery System and TakeAway Recovery System could also benefit from the TakeAway Medication Recovery System, Medsafe,MedSafe, our hazardous waste solutions, our universal waste solutions or other specialized products. Although currently focused primarily on the proper management of medical and pharmaceutical wastes generated by medical professionals, pharmacies (including chains and mail order), assisted living facilities and other related organizations will develop needs for our other product lines as they expand their patient service offerings. As an entrenched and value-added supplier of treatment solutions, we believe the Company has the ability to capture incremental business from our existing customers.
The Company’s Pharmaceutical Manufacturer billings have grown from $0.3 million to $6.0$4.7 million for the years ended June 30, 2011 and 2017,2020, respectively. We continue to see increased interest in our patient support program solution among pharmaceutical manufacturers as it relates to self-injectable medications especially related to new drug launches. We believe manufacturers are now, more than ever, focused on (i) product differentiation, (ii) improved interaction with patients and (iii) creating a touch point for individual patient follow-up that could lead to improved therapy outcomes. The patient support programs include the direct fulfillment of the Sharps Recovery System to the pharmaceutical manufacturers’ program participants, which provides the proper containment, return and treatment of the needles or injection devices utilized in therapy. Sharps’ proprietary SharpsTracer system tracks the return of the Sharps Recovery System by the patient to the treatment facility and then makes available to the pharmaceutical manufacturer electronic data. This data assists them in monitoring medication discipline and provides them with a touch point for individual patient follow-up, which potentially could lead to better outcomes. We believe the Company is thea leader in providing solutions of this type to this market.
We are positive about anticipated growth opportunities in the Retail market. According to the CDC, 24%44.9% of U.S. adults received a flu shot, and 32.2% of flu shots for adults were administered in a retail clinic. clinic in 2018. Over the flu seasons from 2011 to 2014,2020, the Company saw growth in the Retailretail flu business for Sharps was between 24%shot related orders in seven years of 10% to 36%, including a 25% increase in 2020, and 36%declines in three years of 13% to 17%. Despite the decrease in Retail flu business for fiscal year 2017 (the 2016 flu season) of 15% due to a mild flu season and the loss of one retail pharmacy customer,volatility, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
Active Acquisition Programacquisition program
Over the past five years, the Company has developed a network of medical and hazardous waste service providers including those with route-based pickup services, which allows the Company to serve the entire U.S. medical and hazardous waste market. InFrom July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. Onto July 1, 2016, the Company acquired anotherthree route-based pickup service companies, which expanded service to New York and New Jersey and strengthened the Company’sCompany's position in the Northeast. Through a combination of acquisitionsacquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23)thirty-two (32) state region of the South, Southeast, Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened offices and transfer stations in strategic locations. The Company directly serves more than 9,50013,750 customer locations with route-based pickup services offered to areas encompassing about 155 million people or 48%over 70% of the U.S. population.
With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers serving the entire U.S., the Company offers clients a blended product portfolio to effectively target current and prospective customers with multi-site and multi-sized locations including those that generate larger quantities of medical and hazardous waste. The offering includes a single point of contact, consolidated billing, regulatory support and complete integration of our SharpsTracer system. The Company believes the comprehensive offering will continue to assist the Company in obtaining larger opportunities whereby the customer has both larger and smaller facilities generating medical waste, used healthcare materials and hazardous waste resulting in a more consistent and predictable revenue base for the Company.
Develop new products and services.
We continue to develop new solution offerings including ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for the collection and recycling of single-use devices (TakeAway Recycle System). These innovative product and service offerings allow us to gain further sales from existing customers as well as gain new customers who have a need for more comprehensive products. We will continue our efforts to develop new solution offerings designed to facilitate the proper and cost effective management of medical waste, used healthcare materials, pharmaceutical waste, hazardous waste and unused dispensed medications to better serve our customers and the environment. Additionally, we will continue to seek out and identify prospective new customers and markets for new solutions designed to meet the needs of these new customer segments.
Enhance sales and marketing efforts.
Over the past five years, the Company has made ongoing investments in sales and marketing initiatives to drive growth in two areas:
| · | Web and Inside Sales — Through targeted telemarketing initiatives (inside sales), e-commerce driven website and web-based promotional activities, we believe we can drive significant additional growth as we increase awareness of the Company’s innovative solution offerings with a focus on individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities.
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| · | Field Sales – The field sales team focuses on larger dollar and nationwide opportunities in most of the markets served. The field sales team is able to address larger opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive waste management offering.
|
We have seen success with this approach in fiscal years 2014 through 2017 and believe the comprehensive offering capabilities will continue to accelerate revenue growth of the Company.
Improve product and service awareness to attract new customers.
As we grow, we continue to focus additional marketing and sales efforts designed to educate professional offices, retail pharmacies and clinics, assisted living and long-term care facilities, home healthcare, government, pharmaceutical manufacturers and other commercial organizations that require cost-effective services for managing medical, pharmaceutical and hazardous waste ofon the benefits of our solution offeringssolutions and the need for safe, cost-effective and environmentally-friendly methods of waste treatment, including medical, pharmaceutical and hazardous.hazardous waste treatment. We believe that the full-service nature of our solution offerings and the ease and convenience of our mailmail- and ship-back based delivery system and convenience will attract new customers who are not yet aware of the services we provide. In addition to providing a convenient, cost-effective solution to waste and used healthcare materials treatment, weWe believe future growth will be driven by the need for our customers to properly document and track the disposal of their waste to maintain compliance with new and existing legislation. We believe our understanding of the legislative process and focus on accurate and thorough electronic tracking of waste disposal or treatment will provide substantial benefits to new customers looking to comply with new standards and promote environmentally cleaner business practices.
Enhance sales and marketing efforts.
Over the past five years, the Company has made ongoing investments in sales and marketing initiatives to drive growth in two areas:
•Inside and Online Sales – Through targeted telemarketing initiatives (inside sales), e-commerce driven website and web-based promotional activities, we believe we can drive significant additional growth as we increase awareness of the Company’s innovative solution offerings with a focus on individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities.
•Field Sales – The field sales team focuses on larger dollar and nationwide opportunities in most of the markets served. The field sales team is able to address larger opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive waste management offering.
We have seen success with this approach over the past few years and believe the comprehensive offering capabilities will continue to accelerate revenue growth of the Company.
CONCENTRATION OF CREDIT AND SUPPLIERS
There is an inherent concentration of credit risk associated with accounts receivable arising from sales to our major customers.customers. For the fiscal year ended June 30, 2017, one customer2020, two customers represented approximately 17%35% of revenue. Thisrevenues. Two of these customer also represented approximately 10%44%, or $0.8$5.2 million of the total accounts receivable balance at June 30, 2017.2020. For the fiscal year ended June 30, 2016, one2019, two customer represented approximately 17%27% of revenue and 17%19%, or $1.0$1.7 million, of the total accounts receivable balance at June 30, 2016.2019. For the fiscal year ended June 30, 2015,2018, one customer represented approximately 17% of revenue. We may be adversely affected by our dependence on a limited number of high volume customers. Management believes that the risks are mitigated by (i) the contractual relationships with key customers, (ii) the high quality and reputation of the Company and its solution offerings and (iii) the continued diversification of our solution offerings into additional markets outside of our traditional customer base.
WeThe Company currently transporttransports (from the patient or user to the Company’s facilityfacilities or subcontracted treatment facilities) the majoritymany of ourits mailback and unused medication solution offerings using USPS; therefore,USPS. Therefore, any long-term interruption in USPS delivery services would disrupt the return transportation and treatment element of our business. Postal delivery interruptions are rare. Additionally, since USPS employees are federal employees, such employees may be prohibited from engaging in or continuing a postal work stoppage, although there can be no assurance that such work stoppage can be avoided. We also have an arrangement with UPS whereby UPS transports certain other mailback and unused medication solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated by the government and related agencies. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or expired dispensed pharmaceuticals through these channels would be detrimental to our ability to conduct operations.
We maintain relationships with multiple raw materials suppliers and vendors in order to meet customer demands and assure availability of our products and solutions. With respect to the Sharps Recovery System solutions, we own proprietary molds and dies and utilize several contract manufacturers for the production of the primary raw materials. We believe that alternative suitable contract manufacturers are readily available to meet the production specifications of our products and solutions. We utilize national suppliers for the majority of the raw materials used in our other products and solutions and international suppliers for Pitch-It IV Poles.
INTELLECTUAL PROPERTY
We have a portfolio of trademarks and patents, both granted and pending. We consider our trademarks important in the marketing of our products and services, including the Sharps logo, Sharps Recovery System, TakeAway Medication Recovery System, MedSafe, SharpsTracer, Sharps Secure, TakeAway Environmental Return System, Complete Needle and PELLA-DRX™ among others. With respect to our registered marks, we continue using such marks and will file all necessary documentation to maintain their registrations for the foreseeable future. We have a number of patents issued over the period from June 1998 to December 2018, including those applicable to some of the unique design features of our MedSafe solution (patent number US 10,150,613), our PELLA-DRX waste conversion process (patent numbers US 8,163,045, US 8,100,989, US 8,268,073 and US 4,440,534), our Sharps Secure Needle Disposal System (patent numbers US 8,162,139 and US 8,235,883), our unique design features related to the TakeAway Environmental Return System drop-off boxes (patent number US 8,324,443) and our Complete Needle Collection & Disposal System (patent number US 4,463,106). We have patents pending on our MWMS rapid deployment system and additional features of our MedSafe solution.
Solely for convenience, the trademarks and service marks referred to in this Annual Report on Form 10-K may appear without the ® or ™, but such references are not intended to indicate, in any way, that we will not assert to the fullest extent under applicable law our rights to such trademarks and service marks.
COMPETITION
There are several competitors who offer similar or identical products and services that facilitate the disposal of smaller quantities of medical waste. There are also a number of companies that focus specifically on the marketing of products and services which facilitate disposal through transport by the USPS (similar to the Company’s products). These companies include (i) smaller private companies or (ii) divisions of larger companies. Additionally, we compete in certain markets with Stericycle, the largest medical waste company in the country, which focuses primarily on a pickup service business model. With the addition of the route-based pickup services offered on a direct basis in a twenty-three (23) state regioncovering over 70% of the U.S. population throughout the South, Southeast, Midwest and Northeast portions of the United States and through a network of medical and hazardous waste services providers, the Company believes it is betterwell positioned with its comprehensive medical waste management offering to compete with Stericycle. As Sharps continues to grow and increase awareness of the proper disposal of syringes and unused medications (including controlled substances), it could face additional and possibly significant competition. We believe our comprehensive line of proven solution offerings, comprehensive medical waste management service offerings, first mover advantages, excellent industry reputation, significant history of market and customer success, quality solutions and products, as well as our capabilities as a vertically-integrated producer of products and services provide significant differentiation in the current competitive market.
GOVERNMENT REGULATION
Sharps is subject to extensive federal, state and/orand local laws, rules and regulations. We are required to obtain permits, authorizations, approvals, certificates and other types of governmental permission from the EPA, the Department of Transportation, the U.S. Food and Drug Administration, the State of Texas, the State of Pennsylvania and local governments with respect to our facilities and operations. Such laws, rules and regulations 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 transported medical waste. Our estimated annual costs of complying with these laws, regulations and guidelines, including environmental laws, is currently less than $200,000 per year. In the event additional laws, rules or regulations are adopted which affect our business, additional expenditures may be required in order for Sharps to be in compliance with such changing laws, rules and regulations.
TREATMENT FACILITIES
ITEM 1A. | The Company’s treatment facility in Carthage, Texas is currently permitted to process 100 tons per day. The incinerator at the facility is currently permitted to treat 40 tons per day of municipal solid waste with 10% of this amount identified as applicable to healthcare facility generated medical waste. The Company has supplemented the treatment facility’s incineration process with an autoclave system and technology capable of treating up to 8 tons per day of medical waste at the same facility. In August 2020, the Company added a second autoclave capable of treating up to an additional 34 tons per day of medical waste. Autoclaving is a cost-effective alternative to traditional incineration that treats medical waste with steam at high temperature and pressure to kill pathogens. The autoclave system is utilized alongside the incinerator for day-to-day operations. The autoclave system is not impacted by the EPA amended Clean Air Act (discussed below). We believe that our facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste, used healthcare materials and unused or expired dispensed medications (i.e., both incineration and autoclave capabilities). The Company also leases 54,228 square feet of space in Pennsylvania, including 40,000 square feet, which the Company utilizes as a fully-permitted facility to house a treatment and distribution facility. The facility is permitted as both a medical waste treatment facility, utilizing an autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day. The Company is in the process of adding a second autoclave to this facility with expected completion in October 2020. ITEM 1A. RISK FACTORS |
We may be unable to manage our growth effectively.
We continued to experience core revenue growth in fiscal year 20172020 as we saw the benefits of our marketing activities in all of our target markets. Revenue increased 14%15% to $38.2$51 million for the fiscal year ended June 30, 20172020 driven by increases in the retail, home health care, assisted living, professional marketand pharmaceutical manufacturer markets due primarilymainly to increased flu shot
related orders, increased route-based pickup services, increased order activity for unused medication solutions, including the MedSafe and TakeAway Recovery System envelopes, an expanded relationship with a major healthcare distributor, increased COVID-19 related wasted management and targeted telemarketing initiatives and promotional activities, continued rollout of new patient support programs in the pharmaceutical market and increases in the home health care and assisted living markets.activities. The increase in revenue and execution of our growth strategies has placed and will continue to place significant demands on our financial, operational and management resources. In order to continue our growth, we may need, at some point, to add operations, administrative and other personnel and to make additional investments in the infrastructure and systems. There can be no assurance that we will be able to find and train qualified personnel, do so on a timely basis or expand our operations and systems to the extent and in the time required.
If the flu related business of our customers decreases, the revenues generated by our business could decrease.
Our operating results are dependent in part upon the amount and types of solutions necessary to service our customers’ needs which are heavily influenced by the total number of patients our customers are serving at any time, especially related to the administration of flu shots. At times of lower patient activity, our customers have a decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on the timing and severity of the flu season as well as other factors affecting the volume of flu shots administered in the retail setting.
Our quarterly results may fluctuate significantly.
Our operating results have historically varied on a quarterly basis and may continue to fluctuate significantly in the future. Factors that may affect our quarterly operating results, some of which are beyond the control of management, include, but are not limited to, seasonality; the timing of inventory builds for patient support programs of our pharmaceutical manufacturer customers; the timing and severity of the flu season; fluctuations in inventory, energy, transportation, labor, healthcare and other costs; significant acquisitions, dispositions, joint ventures and other strategic initiatives; and many of the other risk factors discussed herein. Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and investors should not rely on the results of any particular quarter as an indication of our future performance.
Our business is dependent on a small number of customers. To the extent we are not successful in winning additional business mandates from our government and commercial customers or attracting new customers, our results of operations and financial condition would be adversely affected.
We are dependent on a small group of customers. In addition, there is an inherent concentration of credit risk associated with accounts receivable arising from sales to our major customers. For the fiscal year ended June 30, 2017, one customer2020, two customers represented approximately 17%35% of revenue. This customerrevenues. Two of these customers also represented approximately 10%44%, or $0.8$5.2 million, of the total accounts receivable balance atas of June 30, 2017. 2020. To the extent significant customers are delinquent or delayed in paying, or we are not successful in obtaining consistent and additional business from our existing and new customers, our results of operations and financial condition would be adversely affected.
The loss of the Company’sour senior executives could affect the Company’sour ability to manage the business profitability.
Our growth and development to date has been largely dependent on the active participation and leadership of our senior management team consisting of the Company’s CEO and President, Vice President and CFO, Senior Vice President of Operations, Vice President of Quality AssuranceOperations and Vice President of Marketing. We believe that the continued success of the business is largely dependent upon the continued employment of the senior management team and have, therefore, (i) entered into individual employment arrangements with key personnel and (ii) approved the Compensation and Incentive Plan for participation by the senior management team in order to provide an incentive for their continued employment with the Company.us. The unplanned loss or illness of one or more members of the senior management team and our inability to hire key employees could disrupt and adversely impact the Company’sour ability to execute itsour business plan.
The recent COVID-19 pandemic could have an adverse effect on our operations, results of operations, cash flows and financial condition
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which could adversely affect our business operations and may materially and adversely affect our results of operations, cash flows and financial position.
For example, related to customer demand, during the period from March 2020 to May 2020, the Company saw temporary closures of about 1,000 dental, dermatology and physician practices equating to about $0.1 million in lost monthly revenue for
the Company. Offsetting this has been increased volumes of medical waste generated by many of the Company’s long-term care customers who are utilizing the Company’s systems and services to contain and dispose of PPE utilized in their facilities.
In addition to volatility in customer demand and buying habits, we may restrict operations if we deem it necessary or if recommended or mandated by governmental authorities which would have a further adverse impact on us. We have incurred additional costs to ensure we meet the needs of our customers, including increases in headcount for route-based, treatment and distribution personnel, pay increases for these front-line employees and working capital costs to increase inventory levels to meet expected customer demand later in the calendar year.
Further, our management is focused on mitigating COVID-19, which has required and will continue to require, a large investment of time and resources across our enterprise. Additionally, currently some of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
If we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation, which could adversely affect our business.
The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that we are not able to predict, including: the severity of the virus; the duration of the outbreak; governmental, business and other actions (which could include limitations on our operations or mandates to provide products or services); the promotion of social distancing and the adoption of shelter-in-place orders affecting foot traffic in our customers’ facilities; the impacts on our supply chain; the impact of the pandemic on the U.S. economic activity overall; the extent and duration of the effect on customer demand and buying patterns including spend on discretionary categories; the effects of additional customer closures or other changes to our operations; the health of and availability on our workforce and our ability to meet staffing needs in our route-based, treatment and distribution operations and other critical functions, particularly if members of our work force are quarantined as a result of exposure; any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions; and the potential effects on our internal controls including those over financial reporting as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our employees and business partners, among others. In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, or impacts our credit ratings, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted. In addition, we cannot predict the impact that COVID-19 will have on our customers, suppliers, vendors, and other business partners, and each of their financial conditions; however, any material adverse effect on these parties could adversely impact our business operations, results of operations, cash flow, and financial position. The impact of COVID-19 may also exacerbate other risks discussed herein, any of which could have a material adverse effect on our business. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
Risks associated with our acquisition strategy could adversely affect our operating results.
We expect a portion of our growth to come from acquisitions, and we continue to evaluate opportunities for acquiring businesses that may supplement our internal growth. However, there can be no assurance that we will be able to identify and purchase suitable operations. In addition, the success of any acquisition depends in part on our ability to integrate the acquired business. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of management’s attention and the Company’sour financial and other resources. There can be no assurance that any acquisitions, if completed, will be successful.
Aggressive pricing by existing competitors and the entrance of new competitors could drive down the Company’sour profits and slow its growth.
There are several competitors who offer similar or identical products and services that facilitate the disposal of smaller quantities of medical waste. There are also a number of companies that focus specifically on the marketing of products and services, which facilitate disposal through transport by the USPS (similar to the Company’s products). These companies include (i) smaller private companies or (ii) divisions of larger companies. Additionally, we compete in certain markets with Stericycle, the largest medical waste company in the country, which focuses primarily on a pickup service business model. As Sharps continues to grow and increase awareness of the proper disposal of syringes and unused medications, it could face additional and possibly significant competition. As a result, we could experience increased pricing pressures that could reduce our margins. In addition, as we expand our business into other markets, the number, type and size of our competitors may expand. Many of these potential competitors may have greater financial and operational resources, flexibility to reduce prices and other competitive advantages that could adversely impact our current competitive position.
The lack of customer long-term volume commitments could adversely affect the Company’s profits and future growth.
Although we enter into exclusive contracts with the majority of our enterprise customers, these contracts do not have provisions for firm long-term volume commitments. In general, customer purchase orders may be canceled and order volume levels can be changed or delayed with limited or no penalties. Canceled, delayed or reduced purchase orders could significantly affect our financial performance.
The Company is subject to extensive and costly federal, state and local laws, and existing or future regulations may restrict the Company’s operations, increase our costs of operations and subject us to additional liability.
We are subject to extensive federal, state and/orand local laws, rules and regulations. We are required to obtain permits, authorizations, approvals, certificates and other types of governmental permission from the EPA, the Department of Transportation, the U.S. Food and Drug Administration, the State of Texas, the State of Pennsylvania and local governments with respect to our facilities and operations. Such laws, rules and regulations 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 transported medical waste. We believe that we are currently in compliance in all material respects with all applicable laws and regulations governing our business, including the permits and authorizations for our incinerator facility. Our estimated annual costs of complying with these laws, regulations and guidelines, including environmental laws, is currently less than $200,000 per year. In the event additional laws, rules or regulations are adopted which affect our business, additional expenditures may be required in order for us to be in compliance with such changing laws, rules and regulations. Furthermore, any material relaxation of any existing regulatory requirements governing the transportation and disposal of medical waste could result in a reduced demand for our products and services and could have a material adverse effect on our 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.
The inability of the Company to operate its treatment facilities would adversely affect its operations
The Company has two (2) fully-permitted facilities that house our processing and treatment operations. Our business utilizes aprocessing and treatment facility for the proper disposal or treatment of medical waste, used health care materials and unused pharmaceuticals. Our owned facility has both incineration and autoclave technologiesfacilities which, are located in Carthage, Texas. In August 2016, the Company received the Commonwealth ofTexas and in Nesquehoning, Pennsylvania, Department of Environmental Protection Bureau of Waste Management permit for the processing of medical waste at its treatment facility located in northeastern Pennsylvania. The 40,000 square foot facility has beenare currently permitted as both a medical waste treatment facility, using an autoclave,to treat and as a transfer station forprocess 182 tons of medical, pharmaceutical and trace chemotherapyother healthcare related waste of up to 82 tons per day. The facility is designed to cost-effectivelyCompany owns one of these processing and efficiently process medical waste generated bytreatment facilities and leases the Company’s route-based and mailback customers and also doubles as a distribution center of mailback solutions and has been in operation since November 2016.other. Sharps believes it operates and maintains the facilities in compliance in all material respects with all federal, state and local laws and/or any other regulatory agency requirements involving treatment and disposal and the operation of the incinerator and autoclave facilities. The failure to maintain the permits for the treatment facilityfacilities or unfavorable conditions contained in the permits or new regulations could substantially impair our operations and reduce our revenues. Any disruption in the availability of athe disposal or treatment facility,facilities, whether as a result of action taken by governmental authorities, natural disasters or otherwise, would have an adverse effect on our operations and results of operations.
The handling, transportation and disposal or treatment of regulated waste carries with it the risk of personal injury to employees and others.
Our business requires us to handle materials that may be infectious or hazardous to life and property in other ways. Although our products and procedures are designed to minimize exposure to these materials, the possibility of accidents, leaks, spills and acts of God always exists. Examples of possible exposure to such materials include: truck accidents, damaged or leaking containers, improper storage of regulated waste by customers, improper placement by customers of materials into the waste stream that we are not authorized or able to process, such as certain body parts and tissues; or malfunctioning treatment plant equipment. Human beings, animals or property could be injured, sickened or damaged by exposure to regulated waste. This in turn could result in lawsuits in which we are found liable for such injuries, and substantial damages could be awarded against us. While we carry liability insurance intended to cover these contingencies, particular instances may occur that are not insured against or that are inadequately insured against. An uninsured or underinsured loss could be substantial and could impair our profitability and reduce our liquidity.
Increases in transportation costs may adversely affect our business and results of operation.
We maintain a transportation network and a fleet of transportation vehicles. A significant increase in market prices for trucks, fuel or driver wages could adversely affect our business through higher transportation costs and reduce our operating margins and reported results of operations.
Restrictions in our Credit Agreement could adversely affect our business, financial condition, results of operations and value of our securities.
The Credit Agreement containsand the Loan Agreement, as defined in Note 5 “Notes Payable and Long-Term Debt” in “Notes to the Consolidated Financial Statements,” contain affirmative and negative covenants that, among other things, require the Company to maintain beginning with the twelve-month period ending September 30, 2017, a maximum cash flow leverage ratio of no more than 3.53.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The maximum cash flow leverage ratio decreases to 3.25 to 1.0 on December 31, 2017 and to 3.0 to 1.0 on March 31, 2018. The Credit Agreement, which expires on March 29, 2019,2021 for the working capital portion of the Credit Agreement, and the Loan Agreement also containscontain customary events of default which, if uncured, may terminate the Credit Agreementagreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount of our borrowing available under the agreements. These covenants could affect our ability to operate our business and may limit our ability to have sufficient funding or otherwise to take advantage of potential business opportunities as they arise.
Our ability to comply with the covenants and restrictions contained in the Credit Agreement and the Loan Agreement may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A failure to comply with these provisions could result in a default or an event of default. Upon an event of default, unless waived, the lenders could elect to terminate commitments, cease making further loans, require cash collateralization of letters of credit, cause its loans to become due and payable in full and force us into bankruptcy or liquidation. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and the holders of our stock could experience a partial or total loss of their investment.
An inability to win additional government contracts could have a material adverse effect on our operations and adversely affect our future revenue.
Although the Company has secured some U.S. government business during fiscal year 2017,2020, there can be no assurances that future periods will include similar business. All contracts with, or subcontracts involving, the federal government are terminable or subject to renegotiation by the applicable governmental agency on 30 days’30-day notice at the option of the governmental agency. If a material contract is terminated or renegotiated in a manner that is materially adverse to us, our revenues and future operations could be materially adversely affected.
As a government contractor, we are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.
business.
Governmental contracts or subcontracts involving governmental facilities are often subject to specific procurement regulations, contract provisions and a variety of other requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable regulations and contractual provisions. If we fail to comply with any regulations, requirements or statutes, our existing governmental contracts or subcontracts involving governmental facilities could be terminated, or we could be suspended from government contracting or subcontracting. If one or more of our governmental contracts or subcontracts are terminated for any reason, or if we are suspended or barred from government work, we could suffer a significant reduction in expected revenues and profits. Furthermore, as a result of our governmental contracts or subcontracts involving governmental facilities, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes.
The possibility of postal work interruptions and restrictions on shipping through the mail would adversely affect the disposal or treatment element of the Company’s business and have an adverse effect on our operations, results of operations and financial condition.
We currently transport (from the patient or user to the Company’s facilityour facilities or subcontracted treatment facilities) the majority of our solution offerings using USPS; therefore,USPS. Therefore, any long-term interruption in USPS delivery services would disrupt the return transportation and treatment element of our business. Postal delivery interruptions are rare. Additionally, since USPS employees are federal employees, such employees may be prohibited from engaging in or continuing a postal work stoppage, although there can be no assurance that such work stoppage can be avoided. As noted above, we entered into an arrangement with UPS whereby UPS transports certain other solution offerings. The ability to ship items, whether through the USPS or UPS, is regulated by the government and related agencies. Any change in regulation restricting the shipping of medical waste, used healthcare materials or unused or expired dispensed pharmaceuticals through these channels would be detrimental to our ability to conduct operations. Any disruption in the transportation of products would have an adverse effect on our operations, results of operations and financial condition.
The Company’s stock has experienced, and may continue to experience, low trading volume and price volatility.
The Company’s common stock is quoted on the NASDAQ Capital Market (“NASDAQ”) under the symbol “SMED.” The daily trading volumes for our common stock are, and may continue to be, relatively small compared to many other publicly traded securities. Over the past three years, the Company’s common stock has had an average trading volume of approximately 55,00058,000 shares traded per month. It may be difficult for investors to sell shares in the public market at any given time at prevailing prices, and the price of our common stock may, therefore, be volatile.
We are subject to the reporting requirements of federal securities laws, and compliance with such requirements can be expensive and may divert resources from other projects, thus impairing our ability to grow.
We are subject to the information and reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission and furnishing audited reports to stockholders will cause our expenses to be higher than they would have been if we were privately held.
It may be time consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by the Sarbanes-Oxley Act and the Dodd-Frank Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures.
If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. An inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent and detect errors or fraud. If we cannot provide reliable financial reports or prevent or detect errors or fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with any policies and procedures may deteriorate.
We may be subject to information technology system failures, network disruptions and breaches in data security.
We rely upon sophisticated information technology systems, infrastructure and security procedures and systems to operate our business and ensure the secure storage and transmission of information. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, computer networks and the internet are, by nature, vulnerable to unauthorized access. An accidental or willful security breach could result in unauthorized access and/or use of sensitive data. Our security measures could be breached by third-party action, computer viruses, accidents or error or misconduct by an employee or contractor. Because techniques used to obtain unauthorized access, disable or degrade service or to sabotage computer systems change frequently, it may be difficult to detect immediately and we may be unable to implement adequate preventive measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving employees, contractors and temporary staff. We have encountered threats of this type from time to time, none of which have materially impacted our operations or financial results. Although we maintain a system of information security and controls, a party that is able to circumvent our security measures could cause interruption in our operations, damage our computers or those of our users or otherwise damage our reputation. Depending on the severity, any of these events could adversely affect our operations and financial results. In addition, if we were to experience an information security breach, we may be required to expend significant amounts of time and money to remedy, protect against or mitigate the effect of the breach, and we may not be able to remedy the situation in a timely manner, or at all. While we have invested in protection of data and information technology, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this report, we do not have any unresolved staff comments.
The Company utilizes approximately 200,000 333,000square feet of space across the U.S. including space for corporate offices in Houston, Texas. Sharps has manufacturing, assembly, storage, distribution and warehousing operations as well as two (2) fully-permitted facilities that house our processing and treatment operations. Our processing and treatment facilities which, are located in Carthage, Texas and in Nesquehoning, Pennsylvania, are currently permitted to treat and process 182 tons of medical, pharmaceutical and other healthcare related waste per day. The Company owns one of these processing and treatment facilities and leases all other spaces. The leases expire between fiscal years 2020 to 20222031 with options to renew ranging from 31 years to 10 5 years.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters willis not anticipated to have a material adverse effect on the Company’s consolidated financial position or consolidated results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information: The Company’s common stock is quoted on the NASDAQ capital market under the symbol “SMED”. Over the past three years, the Company’s common stock has had an average trading volume of approximately 55,000 58,000 shares traded per month. The table below sets forth the high and low closing prices of the Company’s common stock on the NASDAQ (July 1, 2015 throughStockholders: At August 23, 2017) for each quarter within the last two fiscal years.
| | | Common Stock | |
| | | High | | | Low | |
| | | | | | | |
Fiscal Year Ending June 30, 2016 | | | | | | |
| First Quarter | | $ | 9.53 | | | $ | 6.10 | |
| Second Quarter | | $ | 10.11 | | | $ | 7.32 | |
| Third Quarter | | $ | 8.57 | | | $ | 4.75 | |
| Fourth Quarter | | $ | 6.03 | | | $ | 4.16 | |
| | | | | | | | | |
Fiscal Year Ending June 30, 2017 | | | | | | | | |
| First Quarter | | $ | 5.84 | | | $ | 4.29 | |
| Second Quarter | | $ | 4.51 | | | $ | 3.40 | |
| Third Quarter | | $ | 4.86 | | | $ | 4.17 | |
| Fourth Quarter | | $ | 4.61 | | | $ | 4.00 | |
| | | | | | | | | |
Fiscal Year Ending June 30, 2018 | | | | | | | | |
| First Quarter (August 21, 2017) | | $ | 5.67 | | | $ | 4.17 | |
Stockholders: At August 21, 2017,24, 2020, there were 16,008,412 16,377,057,shares of common stock held by approximately 151142 holders of record; however, the Company believes the number of beneficial owners exceeds this number. The last reported sale of the common stock onon August 21, 201724, 2020 was $5.26 $7.64 per share.
Dividend Policy: The Company has never declared nor paid any cash dividends on its common stock. The Company currently intends to retain its cash generated from operations for working capital purposes and to fund the continued expansion of its business and does not anticipate paying any dividends on our common stock in the foreseeable future. Moreover, future payment of dividends may be restricted by credit or other agreements to which the Company is a party.
Issuer Purchases of Equity Securities: On January 7, 2013, the Company announced that its Board of Directors approved a stock repurchase program effective January 3, 2013, authorizing the Company to repurchase in the aggregate up to $3 million of its outstanding common stock over a two-year period. On March 5, 2015, the Board approved a two-year extension of the stock repurchase program through January 1, 2017. The program has not been further extended. There were no repurchases of shares during the year ended June 30, 2017.
Securities Authorized for Issuance under Equity Compensation Plans:
The following equity compensation plan information is provided as of June 30, 2017:2020:
| | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights | | Weighted average
exercise price of
outstanding
options, warrants
and rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) |
Plan Category | | (a) | | | (b) | | | (c) | | Plan Category | (a) | | (b) | | (c) |
| | | | | | | | | | | |
| 2010 Stock Plan as approved by shareholders (1) (2) | | | 877,904 | | | $ | 4.53 | | | | 1,561,891 | | 2010 Stock Plan as approved by shareholders (1) (2) | 1,166,756 | | | 4.45 | | 938,862 | |
Notes:
(1) Represents stock options issued under the Sharps Compliance Corp. 2010 Stock Plan. The 2010 Stock Plan replaced the Sharps Compliance Corp. 1993 Stock Plan in November 2010.
(2) Number of securities to be issued and weighted average exercise price include the effect of 13,24822,000 shares of restricted stock issued to the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data has been derived from our audited financial statements and should be read in conjunction with the historical Consolidated Financial Statements and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands except earnings per share data):
| | | For the Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 38,188 | | | $ | 33,383 | | | $ | 30,902 | | | $ | 26,570 | | | $ | 21,530 | |
| Operating Income (Loss) | | $ | (1,187 | ) | | $ | 5 | | | $ | 1,236 | | | $ | 965 | | | $ | (2,709 | ) |
| Net Income (Loss) | | $ | (1,293 | ) | | $ | 13 | | | $ | 1,160 | | | $ | 956 | | | $ | (2,712 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net Income (Loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.08 | | | $ | 0.06 | | | $ | (0.18 | ) |
| Diluted | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.07 | | | $ | 0.06 | | | $ | (0.18 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 34,464 | | | $ | 30,147 | | | $ | 29,751 | | | $ | 26,461 | | | $ | 25,532 | |
| Total Debt | | $ | 2,603 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Cash and Cash Equivalents | | $ | 4,675 | | | $ | 12,435 | | | $ | 15,157 | | | $ | 13,717 | | | $ | 15,503 | |
| Working Capital | | $ | 10,488 | | | $ | 17,232 | | | $ | 19,623 | | | $ | 17,888 | | | $ | 16,643 | |
| Total Stockholders’ Equity | | $ | 25,287 | | | $ | 23,843 | | | $ | 23,586 | | | $ | 21,904 | | | $ | 21,070 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended June 30, | | | | |
| | 2020 | 2019 | 2018 | 2017 | 2016 |
| Revenues | $ | 51,146 | | $ | 44,312 | | $ | 40,141 | | $ | 38,188 | | $ | 33,383 | |
| Operating income (loss) | $ | 910 | | $ | 447 | | $ | (577) | | $ | (1,187) | | $ | 5 | |
| Net income (loss) | $ | 2,266 | | $ | 214 | | $ | (672) | | $ | (1,293) | | $ | 13 | |
| | | | | |
| Net income (loss) per share: | | | | | |
| Basic and diluted | $ | 0.14 | | $ | 0.01 | | $ | (0.04) | | $ | (0.08) | | $ | 0.00 | |
| | | | | |
| Total assets | $ | 54,136 | | $ | 36,040 | | $ | 33,231 | | $ | 34,464 | | $ | 30,147 | |
| Total debt | $ | 5,163 | | $ | 1,465 | | $ | 2,002 | | $ | 2,603 | | $ | — | |
| Cash | $ | 5,416 | | $ | 4,512 | | $ | 5,155 | | $ | 4,675 | | $ | 12,435 | |
| Working capital | $ | 11,050 | | $ | 10,575 | | $ | 10,258 | | $ | 10,488 | | $ | 17,232 | |
| Total stockholders’ equity | $ | 29,578 | | $ | 26,126 | | $ | 25,174 | | $ | 25,287 | | $ | 23,843 | |
Notes:
· | 2014 Operating income and net income include $1.5 million for a legal settlement received by the Company. |
· | 2016 Revenues, operating income and net income include the results of operations for the acquisitions during the year which were not individually or in the aggregate material to the Company’s financial position. Additionally, the acquisitions pro forma results would not have a material impact on the Company’s results had the acquisitions occurred at the beginning of the current year or previous year. |
•2016 Revenues, operating income and net income include the results of operations for the acquisitions during the year which were not individually or in the aggregate material to the Company’s financial position.· | 2017 Revenues, operating income and net income include the results of operations for the acquisition during the year. See Note 12 in the notes to the consolidated financial statements for acquisition pro forma results. |
•2017 Revenues, operating income and net income include the results of operations for the acquired business during the year.ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. See “Information Regarding Forward Looking Statements.Statements and "Item 1A, Risk Factors.”
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and financial condition of the Company during the years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively. The following table sets forth for the periods indicated certain items from the Company’s Consolidated Statements of Operations (dollars in thousands except for percentages expressed as a percentage of revenues)revenues):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, | | | | | | | |
| | 2020 | % | | 2019 | % | | 2018 | % |
| Revenues | $ | 51,146 | | 100.0 | % | | $ | 44,312 | | 100.0 | % | | $ | 40,141 | | 100.0 | % |
| Cost of revenues | 35,384 | | 69.2 | % | | 31,042 | | 70.1 | % | | 28,739 | | 71.6 | % |
| Gross profit | 15,762 | | 30.8 | % | | 13,270 | | 29.9 | % | | 11,402 | | 28.4 | % |
| SG&A expense | 14,046 | | 27.5 | % | | 12,003 | | 27.1 | % | | 11,168 | | 27.8 | % |
| Depreciation and amortization | 806 | | 1.6 | % | | 820 | | 1.9 | % | | 811 | | 2.0 | % |
| Operating income (loss) | 910 | | 1.8 | % | | 447 | | 1.0 | % | | (577) | | (1.4) | % |
| Other expense | (226) | | (0.4) | % | | (63) | | (0.1) | % | | (74) | | (0.2) | % |
| Income (loss) before income taxes | 684 | | 1.3 | % | | 384 | | 0.9 | % | | (651) | | (1.6) | % |
| Income tax expense (benefit) | (1,582) | | (3.1) | % | | 170 | | 0.4 | % | | 21 | | 0.1 | % |
| Net income (loss) | $ | 2,266 | | 4.4 | % | | $ | 214 | | 0.5 | % | | $ | (672) | | (1.7) | % |
| | | Year Ended June 30, | |
| | | 2017 | | | % | | | 2016 | | | % | | | 2015 | | | % | |
| | | | | | | | | | | | | |
| Revenues | | $ | 38,188 | | | | 100.0 | % | | $ | 33,383 | | | | 100.0 | % | | $ | 30,902 | | | | 100.0 | % |
| Cost of revenues | | | 26,351 | | | | 69.0 | % | | | 22,272 | | | | 66.7 | % | | | 19,907 | | | | 64.4 | % |
| Gross profit | | | 11,837 | | | | 31.0 | % | | | 11,111 | | | | 33.3 | % | | | 10,995 | | | | 35.6 | % |
| SG&A expense | | | 12,223 | | | | 32.0 | % | | | 10,812 | | | | 32.4 | % | | | 9,496 | | | | 30.7 | % |
| Depreciation and amortization | | | 801 | | | | 2.1 | % | | | 294 | | | | 0.9 | % | | | 263 | | | | 0.9 | % |
| Operating income (loss) | | | (1,187 | ) | | | (3.1 | %) | | | 5 | | | | 0.0 | % | | | 1,236 | | | | 4.0 | % |
| Other income (expense) | | | (102 | ) | | | (0.3 | %) | | | 32 | | | | 0.1 | % | | | 36 | | | | 0.1 | % |
| Income (loss) before income taxes | | | (1,289 | ) | | | | | | | 37 | | | | | | | | 1,272 | | | | | |
| Income tax expense | | | 4 | | | | 0.0 | % | | | 24 | | | | 0.1 | % | | | 112 | | | | 0.4 | % |
| Net income (loss) | | $ | (1,293 | ) | | | (3.4 | %) | | $ | 13 | | | | 0.0 | % | | $ | 1,160 | | | | 3.8 | % |
YEAR ENDED JUNE 30, 20172020 AS COMPARED TO YEAR ENDED JUNE 30, 20162019
Total revenues for the fiscal year ended June 30, 20172020 of $38.2 $51.1 million increased by $4.8$6.8 million, or 14% 15.4%, from the total revenues for the fiscal year ended June 30, 20162019 of $33.4$44.3 million. The increase in revenue is mainly due to increased billings in the Retail, Home Health Care, Assisted Living, Professional and Pharmaceutical Manufacturer market. The increase in billings is partially offset by current year deferred revenue net of product returns on sales in prior periods. Billings by market are as follows (in thousands):
| | | | Year Ended June 30, | | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | Variance | | | 2020 | | 2019 | | Variance |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | |
BILLINGS BY MARKET: | | | | | | | | | | BILLINGS BY MARKET: | | | | | |
| Retail | | Retail | $ | 16,033 | | | $ | 11,481 | | | $ | 4,552 | |
| Professional | | $ | 11,962 | | | $ | 7,571 | | | $ | 4,391 | | Professional | 15,637 | | | 15,071 | | | 566 | |
| Home Health Care | | | 7,901 | | | | 7,378 | | | | 523 | | Home Health Care | 9,938 | | | 7,800 | | | 2,138 | |
| Retail | | | 7,010 | | | | 8,798 | | | | (1,788 | ) | |
| Pharmaceutical Manufacturer | | | 5,961 | | | | 5,708 | | | | 253 | | Pharmaceutical Manufacturer | 4,661 | | | 4,146 | | | 515 | |
| Assisted Living | | | 2,442 | | | | 2,194 | | | | 248 | | Assisted Living | 3,324 | | | 2,542 | | | 782 | |
| Government | | | 1,680 | | | | 1,541 | | | | 139 | | Government | 2,292 | | | 2,468 | | | (176) | |
| Environmental | | | 414 | | | | 259 | | | | 155 | | Environmental | 247 | | | 290 | | | (43) | |
| Other | | | 763 | | | | 845 | | | | (82 | ) | Other | 876 | | | 1,175 | | | (299) | |
| Subtotal | | | 38,133 | | | | 34,294 | | | | 3,839 | | Subtotal | 53,008 | | | 44,973 | | | 8,035 | |
| GAAP Adjustment * | | | 55 | | | | (911 | ) | | | 966 | | GAAP Adjustment * | (1,862) | | | (661) | | | (1,201) | |
| Revenue Reported | | $ | 38,188 | | | $ | 33,383 | | | $ | 4,805 | | Revenue Reported | $ | 51,146 | | | $ | 44,312 | | | $ | 6,834 | |
*Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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 productsproduct returned for treatment and destruction. The difference between customer billingsdestruction and GAAP revenue is reflected(iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the Company’s balance sheet as deferred revenue.same period the related sales are recorded. See Note 2 “Revenue Recognition”“Summary of Significant Accounting Policies” in “Notes to Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings):
| | Year Ended June 30, | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | | % Total | | | | 2016 | | | | % Total | | | Year Ended June 30, | |
REVENUES BY SOLUTION: | | | | | | | | | | | | | | | | | |
| | | 2020 | | % Total | | 2019 | | % Total |
| BILLINGS BY SOLUTION: | | BILLINGS BY SOLUTION: | | | | | | | |
| Mailbacks | | $ | 24,080 | | | | 63.1 | % | | $ | 24,654 | | | | 71.9 | % | Mailbacks | $ | 28,440 | | | 53.7 | % | | $ | 25,162 | | | 55.9 | % |
| Route-based pickup services | | | 6,348 | | | | 16.6 | % | | | 2,061 | | | | 6.0 | % | Route-based pickup services | 10,390 | | | 19.6 | % | | 9,029 | | | 20.1 | % |
| Unused medications | | | 3,377 | | | | 8.9 | % | | | 3,531 | | | | 10.3 | % | Unused medications | 9,163 | | | 17.3 | % | | 6,936 | | | 15.4 | % |
| Third party treatment services | | | 413 | | | | 1.1 | % | | | 258 | | | | 0.8 | % | Third party treatment services | 247 | | | 0.5 | % | | 290 | | | 0.6 | % |
Other(1) | | | 3,915 | | | | 10.3 | % | | | 3,790 | | | | 11.0 | % | Other (1) | 4,768 | | | 8.9 | % | | 3,556 | | | 8.0 | % |
| Total billings | | $ | 38,133 | | | | 100.0 | % | | $ | 34,294 | | | | 100.0 | % | Total billings | 53,008 | | | 100.0 | % | | 44,973 | | | 100.0 | % |
GAAP adjustment(2) | | | 55 | | | | | | | | (911 | ) | | | | | GAAP adjustment (2) | (1,862) | | | | | (661) | | | |
| Revenue reported | | $ | 38,188 | | | | | | | $ | 33,383 | | | | | | Revenue reported | $ | 51,146 | | | | | $ | 44,312 | | | |
| (1) | The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items. |
(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items. | (2) | Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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 products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. |
(2)Represents the net impact of the revenue recognition adjustments to arrive at reported GAAP revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded.
The increase in billings was primarily attributable to increased billings in the ProfessionalRetail ($4.44.6 million), Home Health Care ($0.52.1 million), Assisted Living ($0.8 million), Professional ($0.6 million), and Pharmaceutical Manufacturer ($0.30.5 million) markets.
The increase in Retail billings was due mainly to a $2.2 million increase in flu shot-related orders and increased unused medication billings of $2.0 million including both MedSafe and Take Away Recovery System envelopes. The increase in Home Health Care billings was due primarily to an expanded relationship with a major healthcare distributor. Assisted Living ($0.2 million) markets. The increase was partially offset by decreasedmarket billings in the Retail market ($1.8 million).increased primarily due to increased COVID-19 related waste management and ancillary supplies. The increase in Professional market billings is due to a combination of acquired andreflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery SystemSystem™ and the Company’s route-based pickuppick-up services. Of the $4.4 millionThe overall increase in Professional market billings $3.1 millionfrom organic growth was generatedpartially offset by decreases from our acquired businesses based on their pre-acquisition run-ratemid March 2020 through early June 2020 related to state mandated closures associated with the difference being attributable to organic growth. The increase in Home Health Care market billings is due toCOVID-19 pandemic that temporarily closed some of our dental, physician and other customer facilities. Most of the timing of distributor purchases. The increase inaffected customers have since re-opened. Pharmaceutical Manufacturer market billings isincreased primarily due to inventory builds for several current and new patient support programs. The increase in Assisted Living market billings is primarily a result of the increased sales focus as well as the Company’s route-based services. The decrease in Retail market billings was the result of a decrease in billings for the TakeAway Medication Recovery System envelopes which were launched by several Retail customers in the prior year, a decline in overall flu shot related orders and the loss of one retail pharmacy customer. Billings for Mailbacks in the year ended June 30, 2017 decreased 2.3%2020 increased 13% to $24.1$28.4 million as compared to $24.7$25.2 million in 20162019 and represented 63.1%53.7% of total billings.billings is primarily due to flu shot-related orders in our retail market. Billings for Route-Based Pickup Services increased 208%15% to $6.3$10.4 million in the year ended June 30, 20172020 due to organic growth as compared to $2.1$9.0 million in 20162019 and represented 16.6%19.6% of total billings. OfBillings for Unused Medications increased 32% to $9.2 million in the $4.3year ended June 30, 2020 as compared to $6.9 million increase in 2019due to retail market sales of both MedSafe and TakeAway Recovery System envelopes and represented 17.3% of total billings for Route-Based Pickup Services, $3.1 million was generated from our acquired businesses based on their pre-acquisition run-rate with the difference being attributable to organic growth.
.
Cost of revenuerevenues for the year ended June 30, 20172020 of $26.4$35.4 million was 69.0%69.2% of revenue. Cost of revenue for the year ended June 30, 20162019 of $22.3$31.0 million was 66.7%70.1% of revenue. The lower gross margin for the year ended June 30, 20172020 of 31.0% (versus 33.3%30.8% increased compared to the gross margin for the year ended June 30, 2016)2019 of 29.9%. Gross margin was primarilypositively impacted for the year ended June 30, 2020 due to higher revenues than the adverse impact of duplicative costs as the Company transitioned from third-party processing of medical waste in the Northeast Region to internal processing at the new facility in Pennsylvania.
prior year.
Selling, general and administrative (“SG&A”) expenses for the yearyears ended June 30, 20172020 and 20162019 were $12.2$14.0 million and $10.8$12.0 million, respectively. The increase in SG&A expenses for the year ended June 30, 2017 included $0.7 million of acquisition related costs associated with the completion of the Company’s acquisition of Citiwaste. Without these acquisition related costs and the $0.2 million of acquisition related costs incurred in the prior year, SG&A increased 8% compared to the prior year periodexpense was due to the Company’s ongoing investmentcontinued investments in sales and marketing initiatives.
as well as increased professional fees.
The Company recorded an operating lossincome of $1.2$0.9 million for the year ended June 30, 20172020 compared to minimalan operating income for the year ended June 30, 2016. The operating loss was negatively impacted by lower gross profit and higher SG&A expense (discussed above).
The Company reported loss before income taxes of $1.3$0.4 million for the year ended June 30, 2017 compared2019. The operating income increased mainly due to minimalhigher revenue and higher gross margin (discussed above) partially offset by higher SG&A expense.
The Company reported income before income taxes of $0.7 million for the year ended June 30, 2016. Loss2020 compared to income before income taxes was negatively impacted byof $0.4 million for the year ended June 30, 2019. Income before income taxes increased due to the increase in operating lossincome (discussed above).
The Company’s effective tax rate for the yearyears ended June 30, 20172020 and 20162019 was (0.3%) (232)% and 64.9%44%, respectively, reflecting estimated staterespectively. The 2020 effective tax rate is primarily due to a $1.7 million income taxes. The Company’s nettax benefit as a result of the release of the tax valuation allowance on the basis of the Company's reassessment of the recoverability of its deferred tax assets have been fully reserved by a valuation allowance.assets.
The Company reportedreported a net lossincome of $1.3$2.3 million for the year ended June 30, 20172020 compared to minimala net income of $0.2 million for the year ended June 30, 2016.2019. Net loss was negatively impacted byincome increased due to the increase in operating income (discussed above) and to the non-cash benefit recorded to income tax expense resulting from the release of the valuation allowance of approximately $1.7 million.
The Company reported basic and diluted income per share of $0.14 for the year ended June 30, 2020 versus basic and diluted income per share of $0.01 for the year ended June 30, 2019. Basic and diluted income per share increased due to the increase in net loss before income taxes (discussed above).
YEAR ENDED JUNE 30, 20162019 AS COMPARED TO YEAR ENDED JUNE 30, 2015
2018
Total revenues for the fiscal year ended June 30, 20162019 of $33.4$44.3 million increased by $2.5$4.2 million, or 8%10.4%, from the total revenues for the fiscal year ended June 30, 20152018 of $30.9$40.1 million. Billings by market are as follows (in thousands):
| | | | Year Ended June 30, | | | Year Ended June 30, | |
| | | 2016 | | | 2015 | | | Variance | | | 2019 | | 2018 | | Variance |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | |
BILLINGS BY MARKET: | | | | | | | | | | BILLINGS BY MARKET: | | | | | |
| Professional | | Professional | $ | 15,071 | | | $ | 13,110 | | | $ | 1,961 | |
| Retail | | $ | 8,798 | | | $ | 8,726 | | | $ | 72 | | Retail | 11,481 | | | 7,885 | | | 3,596 | |
| Professional | | | 7,571 | | | | 6,225 | | | | 1,346 | | |
| Home Health Care | | | 7,378 | | | | 6,802 | | | | 576 | | Home Health Care | 7,800 | | | 7,989 | | | (189) | |
| Pharmaceutical Manufacturer | | | 5,708 | | | | 4,855 | | | | 853 | | Pharmaceutical Manufacturer | 4,146 | | | 4,482 | | | (336) | |
| Assisted Living | | | 2,194 | | | | 1,879 | | | | 315 | | Assisted Living | 2,542 | | | 2,515 | | | 27 | |
| Government | | | 1,541 | | | | 1,756 | | | | (215 | ) | Government | 2,468 | | | 2,074 | | | 394 | |
| Environmental | | | 259 | | | | 368 | | | | (109 | ) | Environmental | 290 | | | 891 | | | (601) | |
| Other | | | 845 | | | | 891 | | | | (46 | ) | Other | 1,175 | | | 818 | | | 357 | |
| Subtotal | | | 34,294 | | | | 31,502 | | | | 2,792 | | Subtotal | 44,973 | | | 39,764 | | | 5,209 | |
| GAAP Adjustment * | | | (911 | ) | | | (600 | ) | | | (311 | ) | GAAP Adjustment * | (661) | | | 377 | | | (1,038) | |
| Revenue Reported | | $ | 33,383 | | | $ | 30,902 | | | $ | 2,481 | | Revenue Reported | $ | 44,312 | | | $ | 40,141 | | | $ | 4,171 | |
*Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”)GAAP revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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 productsproduct returned for treatment and destruction. The difference between customer billingsdestruction and GAAP revenue is reflected(iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the Company’s balance sheet as deferred revenue.same period the related sales are recorded. See Note 2 “Revenue Recognition”“Summary of Significant Accounting Policies” in “Notes to Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings):
| | | Year Ended June 30, | | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | | % Total | | | 2015 | | | % Total | | | Year Ended June 30, | |
REVENUES BY SOLUTION: | | | | | | | | | | | | | |
| | | 2019 | | % Total | | 2018 | | % Total |
| BILLINGS BY SOLUTION: | | BILLINGS BY SOLUTION: | | | | | | | |
| Mailbacks | | $ | 24,654 | | | | 71.9 | % | | $ | 23,643 | | | | 75.1 | % | Mailbacks | $ | 25,162 | | | 55.9 | % | | $ | 21,895 | | | 55.1 | % |
| Route-based pickup services | | | 2,061 | | | | 6.0 | % | | | 862 | | | | 2.7 | % | Route-based pickup services | 9,029 | | | 20.1 | % | | 7,492 | | | 18.8 | % |
| Unused medications | | | 3,531 | | | | 10.3 | % | | | 2,667 | | | | 8.5 | % | Unused medications | 6,936 | | | 15.4 | % | | 5,907 | | | 14.9 | % |
| Third party treatment services | | | 258 | | | | 0.8 | % | | | 367 | | | | 1.2 | % | Third party treatment services | 290 | | | 0.6 | % | | 891 | | | 2.2 | % |
Other(1) | | | 3,790 | | | | 11.0 | % | | | 3,963 | | | | 12.5 | % | Other (1) | 3,556 | | | 8.0 | % | | 3,579 | | | 9.0 | % |
| Total billings | | $ | 34,294 | | | | 100.0 | % | | $ | 31,502 | | | | 100.0 | % | Total billings | 44,973 | | | 100.0 | % | | 39,764 | | | 100.0 | % |
GAAP adjustment(2) | | | (911 | ) | | | | | | | (600 | ) | | | | | GAAP adjustment (2) | (661) | | | | | 377 | | | |
| Revenue reported | | $ | 33,383 | | | | | | | $ | 30,902 | | | | | | Revenue reported | $ | 44,312 | | | | | $ | 40,141 | | | |
| (1) | The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items. |
(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items. | (2) | Represents the net impact of the revenue recognition adjustments required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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 products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. |
(2)Represents the net impact of the revenue recognition adjustments to arrive at reported GAAP revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered 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, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded.
The increase in billings was primarily attributable to increased billings in the Retail ($3.6 million), Professional ($1.32.0 million), Pharmaceutical Manufacturerand Government ($0.9 million), Home Health Care ($0.6 million) and Assisted Living ($0.30.4 million) markets. The increase was partially offset by decreased billings in the GovernmentEnvironmental ($0.20.6 million) and EnvironmentalPharmaceutical Manufacturer ($0.10.3 million) markets. The increase in Retail billings was due mainly to a $2.8 million increase in flu shot-related orders and a $0.8 million increase in MedSafe billings. The increase in Professional market
billings is mainly a resultreflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of continued targeted telemarketing initiatives and promotional activities to educate doctors,physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, aboutwho benefit from the favorable economicscost-effective and convenience of the Company’sconvenient Sharps Recovery SystemSystem™ and the Company’s route-based pick-up services. The increase in Pharmaceutical Manufacturer market billings is primarily due to new inventory builds for existing and new customers. The increase in Home Health Care market billings is due to the timing of distributor purchases. The increase in Assisted Living market billings is primarily a result of the increased sales focus as well as the Company’s route-based services. The decrease in Government market billings was due primarily to billings for unused medication related to slower than expected demand for our TakeAway Envelopes from the United States Department of Veteran Affairs (“VA”).orders. The decrease in Environmental market billings was primarily due to more project related activitylower third party treatment billings from our treatment facilities in Texas and Pennsylvania. The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventory builds for patient support programs. Although there were new pharmaceutical manufacturer programs launched in fiscal 2019, the impact is offset by significant inventory builds for larger programs in the prior year. Retail billings,first half of fiscal 2018 which increased slightlydid not re-occur in 2016, were negatively impacted by a mild flu season, but positively impacted by the launch of the TakeAway Medication Recovery System envelopes by certain retail customers when compared with the prior year.fiscal 2019 due to their significant size. Billings for Mailbacks in the year ended June 30, 20162019 increased 4.3%14.9% to $24.7$25.2 million as compared to $23.6$21.9 million in 20152018 and represented 71.9%56.0% of total billings. Billings for Route-Based Pickup Services increased 139%21.0% to $2.1$9.0 million in the year ended June 30, 20162019 due to organic growth as compared to $0.9$7.5 million in 20152018 and represented 6.0%20.0% of total billings. Billings for Unused Medications increased 17.0% to $6.9 million in the year ended June 30, 2019 as compared to $5.9 million in 2018 and represented 15.0% of total billings.
Cost of revenue for the year ended June 30, 20162019 of $22.3$31.0 million was 66.7%70.1% of revenue. Cost of revenue for the year ended June 30, 20152018 of $19.9$28.7 million was 64.4%71.6% of revenue. The gross margin for the year ended June 30, 20162019 of 33.3% (versus 35.6%29.9% increased compared to the gross margin for the year ended June 30, 2015)2018 of 28.4%. Gross margin was lower mainly due to an increase in infrastructure costs including rent on the new Pennsylvania treatment facility and higher return transportation costs associated with a USPS rate increase effective February 1, 2016.
SG&A expensespositively impacted for the year ended June 30, 2016 and 2015 were $10.8 million and $9.5 million, respectively. 2019 due to higher revenues than the prior year.
SG&A expenses for the yearyears ended June 30, 2016 included $0.22019 and 2018 were $12.0 million of acquisition related costs associated with the Company’s acquisition program, $0.2and $11.2 million, of additional costs relatedrespectively. The increase in SG&A expense was due to the Company’s audit of internal controls over financial reporting for fiscal year 2016 which was not requiredcontinued investments in fiscal year 2015 and increased sales and marketing related spending compared to the prior year.marketing.
The Company generated minimalrecorded operating income for the year ended June 30, 2016 compared to $1.2of $0.4 million for the year ended June 30, 2015. Operating2019 compared to an operating loss of $0.6 million for the year ended June 30, 2018. The operating income was negatively impacted by lower gross profitincreased mainly due to higher revenue and higher SG&Agross margin (discussed above).
The Company reported income before income taxes of $37,000 for the year ended June 30, 2016 versus $1.3$0.4 million for the year ended June 30, 2015.2019 compared to loss before income taxes of $0.7 million for the year ended June 30, 2018. Income before income taxes was negatively impacted by lowerincreased due to the increase in operating income (discussed above).
The Company’s effective tax rate for the yearyears ended June 30, 20162019 and 20152018 was 64.9%44.3% and 8.8%(3.2)%, respectively, reflecting estimatedrespectively. The 2019 effective tax rate is primarily due to deferred tax expense related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets and state income taxes. The significant percentage increase is2018 effective tax rate reflects the resultimpact of consistentthe 2017 tax law change on the Company's alternative minimum tax credits net of estimated state taxes with lower operating income (discussed above). The Company’s nettax expense and deferred tax assets have been fully reserved by a valuation allowance.expenses related to indefinite lived assets.
The Company reported a net income of $13,000 for the year ended June 30, 2016 compared to $1.2$0.2 million for the year ended June 30, 2015.2019 compared to a net loss of $0.7 million for the year ended June 30, 2018. Net income was negatively impacted by lowerincreased due to the increase in operating income before income taxes (discussed above).
PROSPECTS FOR THE FUTURE
As a result of the COVID-19 outbreak, the Company has implemented some and may take additional precautionary measures intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of customers and minimize business disruptions. For example, the following have recently been implemented to address some of the uncertainties related to COVID-19:
•The Company has increased its headcount for route-based drivers, plant and operations personnel by 10% as a result of COVID-19 to make sure that its operations and servicing of customers would not be adversely affected by the potential absence of employees due to COVID-19. The cost of this increased headcount which is recorded as cost of sales is about $0.1 million per quarter.
•The Company has temporarily increased pay to route-based drivers, plant and operations personnel due to the additional potential risks associated with those functions in light of the COVID-19 environment.
•While some areas of the business have seen increased revenue, COVID-19 has caused many of the Company’s customers to temporarily close starting in mid-March 2020. For example, there have been temporary closures of approximately 1,000 customer offices including dental, dermatology and physician practices which equates to almost $0.1 million per month in lost revenue. Most of these offices have now re-opened.
•The Company is considered an essential business and could incur elevated costs to maintain uninterrupted essential support to its customers and the overall healthcare industry.
•Inventory levels have been increased significantly (approximately 39%) in the current year, which has also precipitated the need for additional warehouse space for the Company’s products. The Company is working to ensure it has adequate products and solutions to address the potential additional needs that could reasonably be expected to follow a pandemic of this magnitude. Whether it be supporting an expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry, we are well positioned to take advantage of these growth opportunities.
•Given the timing of when the COVID-19 quarantine manifested itself (middle of third quarter) in the U.S., the financial impacts to the Company may have only partially been captured within the results of operations reported to date.
The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company. To date, the Company has not identified any material adverse impact of COVID-19 on its financial position and results of operations.
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics and the professional market which is comprised of physicians, dentists, surgery centers, veterinary practices and veterinary practices.other healthcare facilities. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.
The Company believes its growth opportunities are supported by the following:
•A large professional market that consists of dentists, veterinarians, clinics, physician groups, urgent care facilities, ambulatory surgical centers, labs, dialysis centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing over 70% of the U.S. population.
| · | A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing about 155 million people or 48% of the U.S. population. |
•From July 2015 to July 2016, the Company acquired three route-based pickup service companies, which strengthened the Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a thirty-two (32) state region of the South, Southeast, Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened transfer stations and offices in strategic locations. The Company directly serves more than 13,750 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.•The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2019 Population Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over the past decade), which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility.
•The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control ("CDC"), 44.9% of U.S. adults received a flu shot, and 32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2020, the Company saw growth in the retail flu shot related orders in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite
| · | In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 9,500 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering. |
the volatility, Sharps believes the retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
•The passage of regulations for ultimate-user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate-user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long-standing issue within long-term care.
| · | The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility. |
•Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste. The Company’s Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal. The federal government, state agencies and non-profits are recognizing the need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medication disposal are being funded for prevention programs.
•With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.
| · | The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control (“CDC”), 24% of flu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. Despite the decrease in Retail flu business for fiscal year 2017 (the 2016 flu season) of 15% due to a mild flu season and the loss of one retail pharmacy customer, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations. |
•A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.
•The Company continually develops new solution offerings, such as ultimate-user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System).
| · | The passage of regulations for ultimate user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long standing issue within long-term care. |
•COVID-19 prompted healthcare demands and opportunities including the expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry.
| · | Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company’s Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal. |
| · | With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively. |
| · | A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes. |
| · | The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System). |
| · | The Company’s strong financial position with a cash balance of $4.7 million, debt of $2.6 million and additional availability under the Credit Agreement. |
$5.4 million (used for working capital needs), debt of $5.2 million and additional availability under the Credit and Loan Agreements as of June 30, 2020 (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance).
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash flow has historically been primarily influenced by demand for products and services, operating margins and related working capital needs as well as more strategic activities including acquisitions, stock repurchases and fixed asset additions. Cash and cash equivalents decreasedincreased by $7.8 $0.9 million to $4.7$5.4 million at June 30, 20172020 from $12.4$4.5 million at June 30, 20162019 due to the following:
•Cash Flows from Operating Activities - Cash flow from operating activities increased primarily due to an increase in operating income, increase in accounts payable and accrued liabilities of $1.0 million and an increase in net contract liabilities of $1.1 million partially offset by an increase in accounts receivable of $3.0 million and an increase in inventory of $1.9 million.
•Cash Flows from Investing Activities - Cash flow from investing activities is for permitting and capital expenditures for plant and equipment additions of $4.2 million, including approximately $2.9 million for expenditures at the following:Company's treatment facility in Carthage, Texas.
| · | Cash Flows used in Operating Activities - Working capital decreased by $6.7 million to $10.5 million at June 30, 2017 from $17.2 million at June 30, 2016. The decrease is primarily attributed to a decrease in cash and cash equivalents offset by:
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| · | An increase in accounts receivable of $1.2 million, net of assets acquired, to $7.6 million at June 30, 2017 from $5.8 million at June 30, 2016 due to timing of billings and collections, |
| · | An increase in inventory of $0.1 million to $4.1 million at June 30, 2017 from $3.9 million at June 30, 2016 due to timing of sales and adjustment of inventory levels to facilitate customer orders and |
| · | An increase in accounts payable and accrued liabilities of $0.1 million, net of liabilities assumed and unpaid consideration, to $3.5 million at June 30, 2017 from $3.2 million at June 30, 2016 due to the timing of payments. |
| · | Cash Flows used in Investing Activities - Investing activities include capital expenditures and business acquisitions as follows:
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| · | Capital expenditures of $2.5 million are attributable primarily to investments in treatment facility improvements. |
| · | The Company acquired Citiwaste for $9.0 million during the year ended June 30, 2017 of which $1.9 million was for 415,527 shares of common stock of the Company. |
| · | Cash Flows provided by Financing Activities – Financing activities include $5.6 million of proceeds from long-term debt in connection with the Citiwaste acquisition and the new debt agreement (see Note 5 “Notes Payable and Long-Term Debt”), proceeds from the exercise of stock options of $0.3 million offset in part by repayments of debt of $3.2 million.
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•Cash Flows from Financing Activities – Cash flow from financing activities provided an increase in cash from proceeds from long-term debt of $4.3 million and proceeds from the exercise of stock options of $0.7 million offset by the repayment of debt of $0.5 million.
Off-Balance Sheet Arrangements
The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K.
S-K for the years ended June 30, 2020, 2019 and 2018.
Credit Facility
On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (the “Creditwhich was subsequently amended on June 29, 2018 to extend the maturity date by two years to March 29, 2021 for the working capital portion of the Credit Agreement (“Credit Agreement”). The Company expects the Credit Agreement which replacedwill be renewed and extended prior to the Company’s prior credit agreement,maturity date. The Credit Agreement provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the borrower’sCompany’s assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80%80.0% of eligible accounts receivable plus the lessorlesser of 50%(i) 50.0% of eligible inventory and $3(ii) $3.0 million. Advances under the acquisition portion of the credit facility are limited to 75%75.0% of the purchase price of an acquired company and convert to a five-year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Margin may increase to as high as 3.0% after September 30, 2017 depending on the Company’s cash flow leverage ratio. The interest rate as of June 30, 20172020 was approximately 3.63%2.79%. The Company pays a fee of 0.25% per annum on the unused amount of the credit facility. At June 30, 2017, $2.52020, $0.9 million was outstanding related to the acquisition portion of the credit facility. No amounts were outstanding under the working capital portion of the credit facility at June 30, 2017 or2020.
On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreement with its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the prior credit facility asLoan Agreement is secured by the Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August 21, 2019") with monthly payments beginning in the month after the advancing period ends based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of the Loan Agreement. The advancing period extends through October 2020 and August 2020 for the real estate portion and the equipment portion of the Loan Agreement, respectively. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which was a rate of 2.79% on June 30, 2016.2020. The Company has entered into a forward rate lock to fix the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at 4.15%. At June 30, 2020, $0.9 million and $1.1 million was outstanding related to the equipment portion and real estate portion, respectively, of the Loan Agreement.
On April 20, 2020, the Company received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable after eight to twenty-four weeks providing that the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition,
the health of the Company’s workforce, and its ability to meet staffing needs in its route-based, treatment and distribution operations and other critical functions are uncertain and is vital to its operations.
The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under its Credit Agreement, $8.0 million of such availability can only be used for acquisitions and the $6.0 million that is available is in place to support working capital needs, along with current cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements.
The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The Company is in the process of applying for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by the Small Business Administration ("SBA") and the Department of Treasury. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during at least the six-month period beginning on the date of the PPP Loan. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.
The Company has availability under the Credit Agreement of $11.5$13.0 million ($6.05.9 million for the working capital and $5.5$7.1 million forfor the acquisitions) as of June 30, 2017 which may be limited by its leverage covenant.2020 (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance). The Company has availability under the Loan Agreement of $1.2 million ($0.9 million for the real estate and $0.3 million for the equipment) as of June 30, 2020.The Company also has $10,000had $0.1 million in letters of credit outstanding as of June 30, 2017.2020.
The Credit Agreementand Loan Agreements contains affirmative and negative covenants that, among other things, require the Company to maintain beginning with the twelve-month period ending September 30, 2017, a maximum cash flow leverage ratio of no more than 3.53.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The maximum cash flow leverage ratio decreases to 3.25 to 1.0 on December 31, 2017Credit and to 3.0 to 1.0 on March 31, 2018. The Credit Agreement, which expires on March 29, 2019,Loan Agreements also contains customary events of default which, if uncured, may terminate the Credit Agreementagreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the Credit and Loan Agreements. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of June 30, 2020.
The Company utilizes performance bonds to support operations based on certain state requirements. At June 30, 2020, the Company had performance bonds outstanding covering financial assurance up to $1.0 million.
Management believes that the Company’s current cash resources (cash on hand)hand and cash flows from operations) will be sufficient to fund operations for at least the next twelve months ending August 31, 2018.
Treatment Facility
The Company’s treatment facility in Carthage, Texas is currently permitted to process 100 tons per day. The incinerator at the facility is currently permitted to treat 40 tons per day of municipal solid waste with 10% of this amount identified as applicable to healthcare facility generated medical waste. Approximately six years ago, the Company supplemented the treatment facility’s existing incineration process with an autoclave system and technology capable of treating up to eight tons per day of medical waste at the same facility. Autoclaving is a cost-effective alternative to traditional incineration that treats medical waste with steam at high temperature and pressure to kill pathogens. The autoclave system is utilized alongside the incinerator for day-to-day operations. The autoclave system is not impacted by the EPA amended Clean Air Act (discussed below). We believe that our facility is one of only ten permitted commercial facilities in the United States capable of treating all types of medical waste, used healthcare materials and unused or expired dispensed medications (i.e., both incineration and autoclave capabilities).
The Company also leases 45,480 square feet of space in Pennsylvania, including 40,000 square feet, which the Company utilizes as a fully-permitted facility to house a treatment and distribution facility. The facility is permitted as both a medical waste treatment facility, utilizing an autoclave, and as a transfer station for medical, pharmaceutical and trace chemotherapy waste of up to 82 tons per day.
months.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue, net of applicable sales tax, when servicesperformance obligations are provided and from product sales when (i)satisfied through the transfer of control of promised goods are shipped or delivered and title and risk of loss passservices to the Company’s customers. Control transfers once a customer (ii)has the price isability to direct the use of, and obtain substantially fixedall of the benefits from, the promised goods or determinableservices. Outbound shipping and (iii) collectability is reasonably assuredhandling activities to customers are considered fulfillment activities with the exception of mailbacks sold as part of the vendor managed inventory ("VMI") program. Shipping and handling are considered separate performance obligations for mailbacks sold under the VMI program. For performance obligations satisfied at a point in time, which applies to all contracts except for those sales via multiple-deliverable arrangements.route-based pickup services, revenue recognition occurs when there is a transfer of control or completion of service. For performance obligations satisfied over time, which applies to the route-based pickup services, revenue is recognized in the amount to which the Company has a right to invoice pursuant to the right to invoice practical expedient. Provisions for certain rebates, product returns and discounts to customers are estimated at the inception of the contract, updated as needed throughout the contract term, and accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in
Other than the Company’s warehouse.
Certain products offered bymailbacks and unused medication contract categories, the CompanyCompany’s solutions have a single performance obligation. The Company's mailbacks and unused medication solutions have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System™ (formerly the Sharps Disposal by Mail Systems®)System and various other solutions like the TakeawayMedSafe and
TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps® Pump and Asset Return Boxes, referred to as “Pump Returns”“mailbacks” or "unused medications") and can consist of up to three separate elements,two performance obligations, or units of measure, as follows: (1) the sale of the compliance and container system, and (2) return transportation and (3) treatment service. In accordanceFor mailbacks that are part of the VMI program, there is an additional element, or unit of measure, for outbound transportation. For contracts with the relative selling price methodology,multiple performance obligations, an estimated stand-alone selling price is determined for all deliverables that qualify for separate units of accounting.performance obligations. The actual consideration received in a multiple-deliverable arrangement is then allocated to the unitsperformance obligations based on their relative salesstand-alone selling price. The selling price for theperformance obligations for transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided, including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.expected cost plus a margin.
RevenueThe allocated transaction price for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customer takes titlehas control. The allocated transaction price for the return transportation and assumes risk of ownership. Transportationtreatment revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized uponfacilities at which point the destruction or conversion and proof of receipt and treatment having beenare performed on the container. SinceConsideration received and allocated to the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenueperformance obligation is deferredrecorded as a contract liability until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, throughThrough regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the return transportation and treatment elements areelement is recognized at the point of sale. Furthermore, the current and long-term portions of amounts historically referred to as deferred revenues (shown as Contract Liability on the condensed consolidated balance sheets) are determined through regression analysis and historical trends.
Business Combinations: The VMI program includes terms that meet the “bill and hold” criteria and as such are recognized when the order is placed, title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse for the customer.
The contract asset is related to VMI service agreements within the mailbacks contract type category when the revenue recognition exceeds the amount of consideration the Company includeswas entitled to at the resultspoint in time of operationssatisfying the performance obligation associated with the sale of the businessescompliance and container system. The contract liability is related to the mailbacks and unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed performance obligations. Incremental costs to obtain contracts that are acquired as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of acquisitionsdeemed to be recoverable, primarily related to the assets acquiredpayment of sales incentives for contracts in the route-based pickup service category, are capitalized as contract costs and liabilities assumed based on their estimated fair values. The Company estimatesincluded in prepaids and records the fair value of purchased intangible assets, which primarily consists of customer relationships, trade-names, and non-competes. The excess of the fair value of the purchase price over the fair values of these identifiable assets, both tangible and intangible, and liabilities is recorded as goodwill.other current assets.
Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under GAAP, theThe Company has historically recorded a valuation allowance has been recorded to reduce ourits deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertaintyrealized. However, as of the year ended June 30, 2020, the Company released the full amount of the valuation allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets. The non-cash benefit to income tax expense resulting from the release of the valuation allowance is approximately $1.7 million.
At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of certaindeferred tax assets. As of the year ended June 30, 2020, the Company achieved a cumulative positive amount of pretax income over a period of three years. Given the Company’s average pretax income for the past three years, adjusted for non-recurring items and for modest increases in new and recurring business, the Company expects to generate income before taxes in future period which will be sufficient to fully utilize all U.S. federal and state deferred tax assets related to net operating loss carryforwardscarryforward balances and available credits. The CARES Act, among other things, accelerates the Company’s ability to recover refundable AMT credits to 2018 and 2019. The Company has recorded the remaining balance of its alternative minimum tax attributes.credits of $0.3 million as a current income tax receivable as of June 30, 2020 which includes $0.1 million due to the CARES Act.
Leases: In February 2016, guidance for leases was issued, which supersedes the lease requirements previously followed by the Company. The new guidance requires balance sheet recognition of lease assets and lease liabilities for all leases. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company adopted the standard on July 1, 2019 using the modified retrospective approach and recognized a cumulative effect adjustment to assets and liabilities for existing leases as of July 1, 2019. The Company recognized an additional operating lease liability of $4.6 million, with a corresponding right of use (“ROU”) asset of the same amount based on the present value of the payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the
Company is reasonably certain to exercise. The impact that the new accounting guidance had on its consolidated financial statements and related disclosures included the following:
•Approximately 50 leases have been identified, substantially all of which are classified as operating leases. For these real estate, equipment and vehicle operating leases, we recognized new right of use (“ROU”) assets and lease liabilities on our balance sheet.
•The Company applied the package of practical expedients to not reassess prior conclusions related to (i) contracts containing leases, (ii) lease classification and (iii) initial direct costs. The Company did not adopt the practical expediency surrounding the use of hindsight to determine lease term, termination and purchase options, or in assessing impairment of ROU assets.
•The Company also made the accounting policy election for short-term leases, or leases with terms of twelve months or less, therefore the lease payments are recorded as an expense on a straight-line basis over the lease term with no ROU asset or lease liability recorded.
•The Company has elected to exclude non-lease components of a lease arrangement from the ROU asset and lease liability for certain asset classes such as real estate and field equipment leases but includes non-lease components of a lease arrangement in the ROU asset and lease liability for office equipment and automobiles. Non-lease components for field equipment, which include vehicle maintenance costs which the Company estimates based on third party evidence, are excluded from the ROU asset and lease liability and are expensed each month.
Operating leases are included in Operating Lease Right of Use Asset and Operating Lease Liability on our Consolidated Balance Sheets. Operating lease asset and liability amounts are measured and recognized based on payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the Company is reasonably certain to exercise. The lease liability for leases expected to be settled in twelve-months or less are classified as current liabilities. The general terms of the Company’s lease agreements require monthly payments. Some of the Company’s leases escalate either by a fixed or variable amount. Certain of the Company’s leases, which provide for variable lease payments based on index-based (i.e., the US Consumer Price Index) adjustments to lease payments over the term of the lease, are measured at the lease rate effective at the commencement of the lease or upon adoption, as applicable. Because the Company does not generally have access to the rate implicit in its leases, the Company utilizes its incremental borrowing rate as the discount rate for measuring the lease liability. At commencement, the operating lease ROU asset and lease liability are the same, with adjustments to the ROU asset for lease incentives and initial direct costs incurred. The Company reviews all options to extend, terminate or purchase its ROU assets at the commencement of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. The Company has determined that one lease arrangement's renewal option to extend lease terms from the original maturity of August 2021 to August 2031 is reasonably certain to be exercised due to the costs associated with relocating the lease to another location (including permitting cost as well as specialized equipment). The Company evaluates lease modifications as they occur and records such as a separate lease or an adjustment to the existing ROU asset and lease liability as appropriate.
Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from normal business activities. Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer. The Company maintains an allowance for doubtful accounts to reflect the likelihood of not collecting certain accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. The Company has a history of minimal uncollectible accounts.
Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit’s goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge.
The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the years ended June 30, 2017, 20162020, 2019 and 2015.
Fair Value Measurements: The Company employs a hierarchy which prioritizes the inputs used to measure recurring fair value into three distinct categories based on the lowest level of input that is significant to the fair value measurement. Our methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest levels to unobservable inputs, summarized as follows:
| · | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). |
| · | Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value). |
We use the cost, income or market valuation approaches to estimate the fair value of our assets and liabilities when insufficient market-observable data is available to support our valuation assumptions. The purchase price allocations relating to the acquisitions completed during the years ended June 30, 2017 and 2016 utilized level 3 inputs.
2018.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014,March 2020, guidance for revenue recognitionapplying optional expedients and exceptions to ease the potential burden in accounting for reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are effective for interim periods beginning as of March 12, 2020 through December 31, 2022. There has been no impact on the Company's consolidated financial statements and related disclosures as none of its arrangements have been modified as of June 30, 2020. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.
In June 2016, guidance for credit losses of financial instruments was issued, which supersedesrequires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In March 2016, guidance for revenue from contracts with customers regarding principal versus agent considerations was issued which modified examples to assist in the application of the guidance. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance isare effective for annual reporting periods beginning after December 15, 20172022 (effective July 1, 20182023 for the Company)., including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact thatof the new accounting guidance will have on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.
In July 2015, guidance for inventory measurement was issued, which supersedes the policy currently followed by the Company. The new guidance requires the Company to measure inventory at the lower of cost and net realizable value. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within that reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
In March 2016, new guidance for stock-based compensation was issued, which simplifies the accounting for stock-based compensation related to income taxes and balance sheet and cash flow classifications. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures.
In January 2017, guidance for goodwill was issued which simplifies the test for goodwill impairment. The new guidance eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which the Company’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2019 (effective July 1, 2020 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures; however, it may impact the impairment recognized in future periods.
In September 2015, guidance for business combinations was issued, which simplifies the accounting for measurement-period adjustments. The new guidance eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination and requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The provisions of the new guidance were effective for annual reporting periods beginning after December 15, 2015 (effective July 1, 2016 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2016 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures; however, it may impact the reporting of future acquisitions if and when they occur.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The consolidated financial statements of the Company and the notes thereto, and the related reports of the Company’s independent registered public accounting firms thereon are referenced as pages F-1 to F-23 and are included herein by reference.
ITEM 9. | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures,” ("Disclosure Controls") as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. The Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”)Controls as of June 30, 20172020 pursuant to Rules 13a-15(e)13a-15(b) and 15d-15(e)15d-15(b) of the Exchange Act. In designing and evaluating the Disclosure Controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures. Based on this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of June 30, 2017.
2020.
Changes in Internal Controls
over Financial Reporting
During the quarter ended June 30, 2017,2020, there were no changes in the Company’s internal controlscontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control system over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017.2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control-Integrated Framework (2013). Based on the assessment, the Company’s management concluded that, as of June 30, 2017,2020, the Company’s internal control over financial reporting was effective based on those criteria.criteria.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year relating to its Annual Meeting of Stockholders to be held on November 16, 2017.19, 2020.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and beneficial owners of more than 10% of our common stock to file certain beneficial ownership reports with the SEC. To our knowledge, based solely on our review of copies of reports received by us and written representations by certain reporting persons, we believe that during fiscal year 2020, all Section 16(a) filing requirements applicable to our officers, directors, and persons who own more than 10% of our common stocks were complied with in a timely manner except for one Form 4 for Mr. Dennis Halligan to report a cashless exercise and immediate sale of a stock award executed on May 19, 2020 but reported on Form 4 on June 24, 2020.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating to its Annual Meeting of Stockholders to be held on November 16, 2017.19, 2020.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating to its Annual Meeting of Stockholders to be held on November 16, 2017.19, 2020.
ITEM 13. | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's last fiscal year, relating to its Annual Meeting of Stockholders to be held on November 16, 2017.19, 2020.
ITEM 14. | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by this Item is incorporated herein by reference to the Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A with the SEC no later than 120 days after the close of the Registrant's lat fiscal year, relating to its Annual Meeting of Stockholders to be held on November 16, 2017.
19, 2020.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
Exhibit
Number
| Description of Exhibit | | | |
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10.1 | |
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| Fourth |
| MedBio-Med Services LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 9, 2015).
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10.14 | |
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| Letter Agreement by and between Sharps Compliance Corp. and Al Aladwani dated March 24, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-22390; Film No. 08706090), filed March 12, 2008).* |
10.20 | |
10.21 | |
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| 101.INS | XBRL Instance Document (filed herewith) |
| 101.SCH | XBRL Taxonomy Extension Schema Document (filed herewith) |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) |
| 101.DEF | XBRL Taxonomy Extension Linkbase Document (filed herewith) |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (filed herewith) |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) |
* | | | | | |
| * | This exhibit is a management contract or a compensatory plan or arrangement. |
| + | This certification is deemed furnished for purposes of Section 18 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SHARPS COMPLIANCE CORP.
| | | | | |
Dated: August 23, 201726, 2020 | By: /s/ DAVID P. TUSA |
| David P. Tusa |
| Chief Executive Officer and President |
| (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | |
Dated: August 23, 201726, 2020 | By: /s/ DAVID P. TUSA |
| David P. Tusa |
| Chief Executive Officer and President and Director |
| (Principal Executive Officer) |
| |
Dated: August 23, 201726, 2020 | By: /s/ DIANA P. DIAZ |
| Diana P. Diaz |
| Vice President and |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
| |
Dated: August 23, 201726, 2020 | By: /s/ F. GARDNER PARKERSHARON R. GABRIELSON |
| F. Gardner ParkerSharon R. Gabrielson |
| DirectorChair of the Board of Directors |
| |
Dated: August 23, 201726, 2020 | By: /s/ JOHN W. DALTON |
| John W. Dalton |
| Director |
| |
Dated: August 23, 201726, 2020 | By: /s/ JACK A. HOLMES |
| Jack A. Holmes |
| Director |
| |
| Dated: August 26, 2020 | By: /s/ PARRIS H. HOLMES |
| Parris H. Holmes |
| Director |
| |
Dated:Date: August 23, 201726, 2020 | By: /s/ PHILIP C. ZERRILLOSUSAN N. VOGT |
| Philip C. ZerrilloSusan N. Vogt |
| Chairman of the Board Of DirectorsDirector |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| CONSOLIDATED FINANCIAL STATEMENTS | PAGE |
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Stockholders
Sharps Compliance Corp.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. (a Delaware corporation) and subsidiaries (collectively, the(the “Company”) as of June 30, 20172020 and 2016 and2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended June 30, 2017. 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases effective July 1, 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2017 and 2016, and the results of its operations and its cash flows for each of the three fiscal years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Houston, Texas
August 23, 2017
26, 2020
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
| | | June 30, | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | June 30, | |
| | | | | | | | | 2020 | | 2019 |
| ASSETS | | | | | | | ASSETS | | | |
| CURRENT ASSETS | | | | | | | CURRENT ASSETS | | | |
| Cash and cash equivalents | | $ | 4,675 | | | $ | 12,435 | | |
| Cash | | Cash | $ | 5,416 | | | $ | 4,512 | |
| Accounts receivable, net | | | 7,553 | | | | 5,814 | | Accounts receivable, net | 11,789 | | | 9,289 | |
| Inventory, net | | | 4,098 | | | | 3,919 | | |
| Prepaids and other current assets | | | 694 | | | | 695 | | |
| Inventory | | Inventory | 5,638 | | | 3,770 | |
| Contract asset | | Contract asset | 156 | | | 260 | |
| Prepaid and other current assets | | Prepaid and other current assets | 1,287 | | | 922 | |
| TOTAL CURRENT ASSETS | | | 17,020 | | | | 22,863 | | TOTAL CURRENT ASSETS | 24,286 | | | 18,753 | |
| | | | | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT, net | | | 6,543 | | | | 5,032 | | PROPERTY, PLANT AND EQUIPMENT, net | 9,127 | | | 5,867 | |
| | | | | | | | | | |
| OPERATING LEASE RIGHT OF USE ASSET | | OPERATING LEASE RIGHT OF USE ASSET | 8,747 | | | — | |
| INVENTORY, net of current portion | | INVENTORY, net of current portion | 1,064 | | | 1,046 | |
| OTHER ASSETS | | | 120 | | | | 84 | | OTHER ASSETS | 154 | | | 443 | |
| | | | | | | | | | |
| GOODWILL | | | 6,735 | | | | 1,039 | | GOODWILL | 6,735 | | | 6,735 | |
| | | | | | | | | | |
| INTANGIBLE ASSETS, net | | | 4,046 | | | | 1,129 | | INTANGIBLE ASSETS, net | 2,771 | | | 3,196 | |
| DEFERRED TAX ASSET | | DEFERRED TAX ASSET | 1,252 | | | — | |
| TOTAL ASSETS | | $ | 34,464 | | | $ | 30,147 | | TOTAL ASSETS | $ | 54,136 | | | $ | 36,040 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | CURRENT LIABILITIES | | | |
| Accounts payable | | $ | 1,710 | | | $ | 1,620 | | Accounts payable | $ | 3,291 | | | $ | 2,946 | |
| Accrued liabilities | | | 1,800 | | | | 1,534 | | Accrued liabilities | 2,833 | | | 2,213 | |
| Operating lease liability | | Operating lease liability | 2,192 | | | — | |
| Current maturities of long-term debt | | | 601 | | | | - | | Current maturities of long-term debt | 1,658 | | | 517 | |
| Deferred revenue | | | 2,421 | | | | 2,477 | | |
| Contract liability | | Contract liability | 3,262 | | | 2,502 | |
| TOTAL CURRENT LIABILITIES | | | 6,532 | | | | 5,631 | | TOTAL CURRENT LIABILITIES | 13,236 | | | 8,178 | |
| | | | | | | | | | |
| LONG-TERM DEFERRED REVENUE, net of current portion | | | 478 | | | | 483 | | |
| | | | | | | | | | |
| OTHER LONG-TERM LIABILITIES | | | 165 | | | | 190 | | |
| | | | | | | | | | |
| CONTRACT LIABILITY, net of current portion | | CONTRACT LIABILITY, net of current portion | 705 | | | 503 | |
| OPERATING LEASE LIABILITY, net of current portion | | OPERATING LEASE LIABILITY, net of current portion | 6,671 | | | — | |
| OTHER LIABILITIES | | OTHER LIABILITIES | 441 | | | 42 | |
| DEFERRED TAX LIABILITY | | DEFERRED TAX LIABILITY | — | | | 243 | |
| LONG-TERM DEBT, net of current portion | | | 2,002 | | | | - | | LONG-TERM DEBT, net of current portion | 3,505 | | | 948 | |
| | | | | | | | | | |
| TOTAL LIABILITIES | | | 9,177 | | | | 6,304 | | TOTAL LIABILITIES | 24,558 | | | 9,914 | |
| | | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 8) | | | | | | | | | |
| | | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 9) | | COMMITMENTS AND CONTINGENCIES (Note 9) | | | |
| STOCKHOLDERS’ EQUITY | | | | | | | | | STOCKHOLDERS’ EQUITY | | | |
| Common stock, $0.01 par value per share; 20,000,000 shares authorized; 16,304,027 and 15,740,458 shares issued, respectively and 16,008,412 and 15,444,843 shares outstanding, respectively | | | 163 | | | | 158 | | |
| Common stock, $0.01 par value per share; 40,000,000 shares authorized; 16,667,572 and 16,433,128 shares issued, respectively and 16,371,957 and 16,137,513 shares outstanding, respectively | | Common stock, $0.01 par value per share; 40,000,000 shares authorized; 16,667,572 and 16,433,128 shares issued, respectively and 16,371,957 and 16,137,513 shares outstanding, respectively | 168 | | | 165 | |
| Treasury stock, at cost, 295,615 shares repurchased | | | (1,554 | ) | | | (1,554 | ) | Treasury stock, at cost, 295,615 shares repurchased | (1,554) | | | (1,554) | |
| Additional paid-in capital | | | 28,063 | | | | 25,331 | | Additional paid-in capital | 30,203 | | | 29,020 | |
| Accumulated deficit | | | (1,385 | ) | | | (92 | ) | |
| Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | 761 | | | (1,505) | |
| TOTAL STOCKHOLDERS’ EQUITY | | | 25,287 | | | | 23,843 | | TOTAL STOCKHOLDERS’ EQUITY | 29,578 | | | 26,126 | |
| | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 34,464 | | | $ | 30,147 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 54,136 | | | $ | 36,040 | |
See accompanying notes to consolidated financial statements
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
| | | Year Ended June 30, | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | | | Year Ended June 30, | |
| | | | | | | | | | | | 2020 | | 2019 | | 2018 |
| REVENUES | | $ | 38,188 | | | $ | 33,383 | | | $ | 30,902 | | REVENUES | $ | 51,146 | | | $ | 44,312 | | | $ | 40,141 | |
| | | | | | | | | | | | | | |
| Cost of revenues | | | 26,351 | | | | 22,272 | | | | 19,907 | | Cost of revenues | 35,384 | | | 31,042 | | | 28,739 | |
| GROSS PROFIT | | | 11,837 | | | | 11,111 | | | | 10,995 | | GROSS PROFIT | 15,762 | | | 13,270 | | | 11,402 | |
| | | | | | | | | | | | | | |
| Selling, general and administrative | | | 12,223 | | | | 10,812 | | | | 9,496 | | Selling, general and administrative | 14,046 | | | 12,003 | | | 11,168 | |
| Depreciation and amortization | | | 801 | | | | 294 | | | | 263 | | Depreciation and amortization | 806 | | | 820 | | | 811 | |
| | | | | | | | | | | | | | |
| OPERATING INCOME (LOSS) | | | (1,187 | ) | | | 5 | | | | 1,236 | | OPERATING INCOME (LOSS) | 910 | | | 447 | | | (577) | |
| | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | | OTHER INCOME (EXPENSE) | | | | | |
| Interest income | | | 13 | | | | 32 | | | | 36 | | Interest income | 14 | | | 24 | | | 20 | |
| Interest expense | | | (115 | ) | | | - | | | | - | | Interest expense | (127) | | | (87) | | | (94) | |
| TOTAL OTHER (EXPENSE) INCOME | | | (102 | ) | | | 32 | | | | 36 | | |
| | | | | | | | | | | | | | |
| Loss associated with derivative instrument | | Loss associated with derivative instrument | (113) | | | — | | | — | |
| TOTAL OTHER EXPENSE | | TOTAL OTHER EXPENSE | (226) | | | (63) | | | (74) | |
| INCOME (LOSS) BEFORE INCOME TAXES | | | (1,289 | ) | | | 37 | | | | 1,272 | | INCOME (LOSS) BEFORE INCOME TAXES | 684 | | | 384 | | | (651) | |
| | | | | | | | | | | | | | |
| INCOME TAX EXPENSE - Current | | | 4 | | | | 24 | | | | 112 | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| INCOME TAX EXPENSE (BENEFIT) | | INCOME TAX EXPENSE (BENEFIT) | |
| Current | | Current | (87) | | | (81) | | | 29 | |
| Deferred | | Deferred | (1,495) | | | 251 | | | (8) | |
| TOTAL INCOME TAX EXPENSE (BENEFIT) | | TOTAL INCOME TAX EXPENSE (BENEFIT) | (1,582) | | | 170 | | | 21 | |
| NET INCOME (LOSS) | | $ | (1,293 | ) | | $ | 13 | | | $ | 1,160 | | NET INCOME (LOSS) | $ | 2,266 | | | $ | 214 | | | $ | (672) | |
| | | | | | | | | | | | | | |
| NET INCOME (LOSS) PER COMMON SHARE | | | | | | | | | | | | | NET INCOME (LOSS) PER COMMON SHARE | | | | | |
| Basic | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.08 | | |
| | | | | | | | | | | | | | |
| Diluted | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.07 | | |
| Basic and Diluted | | Basic and Diluted | $ | 0.14 | | | $ | 0.01 | | | $ | (0.04) | |
| | | | | | | | | | | | | | |
| WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE: | | | | | | | | | | | | | WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE: | | | | | |
| | | | | | | | | | | | | | |
| Basic | | | 15,949 | | | | 15,448 | | | | 15,327 | | Basic | 16,249 | | | 16,116 | | | 16,055 | |
| Diluted | | | 15,949 | | | | 15,838 | | | | 15,564 | | Diluted | 16,431 | | | 16,123 | | | 16,055 | |
See accompanying notes to consolidated financial statements
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | Common Stock | | | Treasury Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Additional Paid- in Capital | | | Accumulated Deficit | | | Total Stockholders’ Equity | | | | Common Stock | | | Treasury Stock | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Shares | | Amount | | Shares | | Amount | | Additional Paid-
in Capital | | Retained Earnings (Accumulated
Deficit) | | Total Stockholders’
Equity |
| Balances, June 30, 2014 | | | 15,460,940 | | | $ | 155 | | | | (161,801 | ) | | $ | (681 | ) | | $ | 23,695 | | | $ | (1,265 | ) | | $ | 21,904 | | |
| Balances, June 30, 2017 | | Balances, June 30, 2017 | | 16,304,027 | | | $ | 163 | | | (295,615) | | | $ | (1,554) | | | $ | 28,063 | | | $ | (1,385) | | | $ | 25,287 | |
| | Stock-based compensation | | Stock-based compensation | | — | | | — | | | — | | | — | | | 476 | | | — | | | 476 | |
| Issuance of common shares for lease | | Issuance of common shares for lease | | 20,617 | | | — | | | — | | | — | | | 83 | | | — | | | 83 | |
| Issuance of restricted stock | | Issuance of restricted stock | | 52,992 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
| | Net loss | | Net loss | | — | | | — | | | — | | | — | | | — | | | (672) | | | (672) | |
| Balances, June 30, 2018 | | Balances, June 30, 2018 | | 16,377,636 | | | 164 | | | (295,615) | | | (1,554) | | | 28,621 | | | (2,057) | | | 25,174 | |
| | Stock-based compensation | | Stock-based compensation | | — | | | — | | | — | | | — | | | 400 | | | — | | | 400 | |
| | Issuance of restricted stock | | Issuance of restricted stock | | 55,492 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
| Cumulative effect of new accounting standard (Note 2) | | Cumulative effect of new accounting standard (Note 2) | | — | | | — | | | — | | | — | | | — | | | 338 | | | 338 | |
| Net income | | Net income | | — | | | — | | | — | | | — | | | — | | | 214 | | | 214 | |
| Balances, June 30, 2019 | | Balances, June 30, 2019 | | 16,433,128 | | | 165 | | | (295,615) | | | (1,554) | | | 29,020 | | | (1,505) | | | 26,126 | |
| | Exercise of stock options | | | 61,109 | | | | - | | | | - | | | | - | | | | 139 | | | | - | | | | 139 | | Exercise of stock options | | 154,444 | | | 2 | | | — | | | — | | | 666 | | | — | | | 668 | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 511 | | | | - | | | | 511 | | Stock-based compensation | | — | | | — | | | — | | | — | | | 518 | | | — | | | 518 | |
| | Issuance of restricted stock | | | 52,992 | | | | 1 | | | | - | | | | - | | | | (1 | ) | | | - | | | | - | | Issuance of restricted stock | | 80,000 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
| Shares repurchased | | | - | | | | - | | | | (29,449 | ) | | | (128 | ) | | | - | | | | - | | | | (128 | ) | |
| | Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,160 | | | | 1,160 | | Net income | | — | | | — | | | — | | | — | | | — | | | 2,266 | | | 2,266 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, June 30, 2015 | | | 15,575,041 | | | | 156 | | | | (191,250 | ) | | | (809 | ) | | | 24,344 | | | | (105 | ) | | | 23,586 | | |
| Exercise of stock options | | | 112,425 | | | | 1 | | | | - | | | | - | | | | 312 | | | | - | | | | 313 | | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 676 | | | | - | | | | 676 | | |
| Issuance of restricted stock | | | 52,992 | | | | 1 | | | | - | | | | - | | | | (1 | ) | | | - | | | | - | | |
| Shares repurchased | | | - | | | | - | | | | (104,365 | ) | | | (745 | ) | | | - | | | | - | | | | (745 | ) | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 13 | | | | 13 | | |
| Balances, June 30, 2016 | | | 15,740,458 | | | | 158 | | | | (295,615 | ) | | | (1,554 | ) | | | 25,331 | | | | (92 | ) | | | 23,843 | | |
| Exercise of stock options | | | 95,050 | | | | 1 | | | | - | | | | - | | | | 341 | | | | - | | | | 342 | | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 496 | | | | - | | | | 496 | | |
| Issuance of common shares for acquisition | | | 415,527 | | | | 4 | | | | - | | | | - | | | | 1,895 | | | | - | | | | 1,899 | | |
| Issuance of restricted stock | | | 52,992 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,293 | ) | | | (1,293 | ) | |
| Balances, June 30, 2017 | | | 16,304,027 | | | $ | 163 | | | | (295,615 | ) | | $ | (1,554 | ) | | $ | 28,063 | | | $ | (1,385 | ) | | $ | 25,287 | | |
| Balances, June 30, 2020 | | Balances, June 30, 2020 | | 16,667,572 | | | $ | 168 | | | (295,615) | | | $ | (1,554) | | | $ | 30,203 | | | $ | 761 | | | $ | 29,578 | |
See accompanying notes to consolidated financial statements
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Year Ended June 30, | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | | | Year Ended June 30, | |
| | | | | | | | | 2020 | | 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net income (loss) | | $ | (1,293 | ) | | $ | 13 | | | $ | 1,160 | | Net income (loss) | $ | 2,266 | | | $ | 214 | | | $ | (672) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | |
| | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| | Depreciation and amortization | | | 1,485 | | | | 816 | | | | 830 | | Depreciation and amortization | 1,606 | | | 1,663 | | | 1,561 | |
| Loss on inventory write-down | | | - | | | | 17 | | | | - | | |
| Bad debt expense | | Bad debt expense | 111 | | | 81 | | | 62 | |
| Non-cash lease expense | | Non-cash lease expense | — | | | 46 | | | 37 | |
| Inventory write-offs | | Inventory write-offs | 29 | | | 55 | | | — | |
| Loss on disposal of property, plant and equipment | | | 10 | | | | - | | | | - | | Loss on disposal of property, plant and equipment | 16 | | | 21 | | | 13 | |
| Stock-based compensation expense | | | 496 | | | | 676 | | | | 511 | | Stock-based compensation expense | 518 | | | 400 | | | 476 | |
| Changes in operating assets and liabilities, net of effects of business acquisitions: | | | | | | | | | | | | | |
| Restricted cash | | | - | | | | - | | | | 111 | | |
| Loss on derivative instrument | | Loss on derivative instrument | 113 | | | — | | | — | |
| Deferred tax expense (benefit) | | Deferred tax expense (benefit) | (1,495) | | | 251 | | | (8) | |
| Vendor receivable write-off | | Vendor receivable write-off | 657 | | | — | | | — | |
| Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | | | | | |
| | Accounts receivable | | | (1,244 | ) | | | 926 | | | | (1,919 | ) | Accounts receivable | (2,971) | | | (3,000) | | | 1,121 | |
| Legal settlement receivable | | | - | | | | - | | | | 1,538 | | |
| | Inventory | | | (61 | ) | | | (1,055 | ) | | | (1,418 | ) | Inventory | (1,887) | | | (492) | | | 305 | |
| Prepaid and other assets | | | (35 | ) | | | (46 | ) | | | (259 | ) | Prepaid and other assets | (373) | | | (531) | | | (20) | |
| Accounts payable and accrued liabilities | | | 125 | | | | (759 | ) | | | 1,109 | | Accounts payable and accrued liabilities | 1,036 | | | 1,498 | | | 29 | |
| Deferred revenue | | | (61 | ) | | | 600 | | | | 499 | | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (578 | ) | | | 1,188 | | | | 2,162 | | |
| Contract asset and contract liability | | Contract asset and contract liability | 1,066 | | | 719 | | | (535) | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | NET CASH PROVIDED BY OPERATING ACTIVITIES | 692 | | | 925 | | | 2,369 | |
| | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Purchase of property, plant and equipment | | | (2,486 | ) | | | (1,926 | ) | | | (727 | ) | Purchase of property, plant and equipment | (3,969) | | | (749) | | | (1,212) | |
| Cash proceeds from sale of property, plant and equipment | | | 23 | | | | - | | | | - | | Cash proceeds from sale of property, plant and equipment | 3 | | | — | | | 10 | |
| Additions to intangible assets | | | (163 | ) | | | - | | | | (6 | ) | Additions to intangible assets | (188) | | | (282) | | | (86) | |
| Payments for business acquisitions, net of cash acquired | | | (7,314 | ) | | | (1,552 | ) | | | - | | |
| | NET CASH USED IN INVESTING ACTIVITIES | | | (9,940 | ) | | | (3,478 | ) | | | (733 | ) | NET CASH USED IN INVESTING ACTIVITIES | (4,154) | | | (1,031) | | | (1,288) | |
| | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Proceeds from exercise of stock options | | | 342 | | | | 313 | | | | 139 | | Proceeds from exercise of stock options | 668 | | | — | | | — | |
| Repayments of long-term debt | | | (3,184 | ) | | | - | | | | - | | Repayments of long-term debt | (517) | | | (537) | | | (601) | |
| Payments of debt issuance costs | | Payments of debt issuance costs | (50) | | | — | | | — | |
| Proceeds from long-term debt | | | 5,600 | | | | - | | | | - | | Proceeds from long-term debt | 4,265 | | | — | | | — | |
| Shares repurchased | | | - | | | | (745 | ) | | | (128 | ) | |
| | NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 2,758 | | | | (432 | ) | | | 11 | | NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 4,366 | | | (537) | | | (601) | |
| | | | | | | | | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (7,760 | ) | | | (2,722 | ) | | | 1,440 | | |
| NET INCREASE (DECREASE) IN CASH | | NET INCREASE (DECREASE) IN CASH | 904 | | | (643) | | | 480 | |
| | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, beginning of year | | | 12,435 | | | | 15,157 | | | | 13,717 | | |
| CASH, beginning of year | | CASH, beginning of year | 4,512 | | | 5,155 | | | 4,675 | |
| | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of year | | $ | 4,675 | | | $ | 12,435 | | | $ | 15,157 | | |
| | | | | | | | | | | | | | |
| CASH, end of year | | CASH, end of year | $ | 5,416 | | | $ | 4,512 | | | $ | 5,155 | |
| | | | | | | | | | | | | | | | | | | |
| SUPPLEMENTAL CASH FLOW DISCLOSURES: | | | | | | | | | | | | | SUPPLEMENTAL CASH FLOW DISCLOSURES: | | | | | |
| Income taxes paid | | $ | 9 | | | $ | 152 | | | $ | 58 | | Income taxes paid | $ | 99 | | | $ | 37 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | |
| Interest paid on long-term debt | | $ | 107 | | | $ | - | | | $ | - | | Interest paid on long-term debt | $ | 127 | | | $ | 89 | | | $ | 87 | |
| | | | | | | | | | | | | | | | | | | |
| NON-CASH INVESTING ACTIVITIES: | | | | | | | | | | | | | NON-CASH INVESTING ACTIVITIES: | | | | | |
| Issuance of common stock for acquisition | | $ | 1,899 | | | $ | - | | | $ | - | | |
| Unpaid consideration related to acquisitions | | $ | - | | | $ | 181 | | | $ | - | | |
| | Issuance of common stock for lease | | Issuance of common stock for lease | $ | — | | | $ | — | | | $ | 83 | |
| | Transfer of equipment to inventory | | $ | 118 | | | $ | 143 | | | $ | - | | Transfer of equipment to inventory | $ | 28 | | | $ | 393 | | | $ | 193 | |
| Property, plant and equipment financed through accounts payable | | $ | 28 | | | $ | - | | | $ | - | | Property, plant and equipment financed through accounts payable | $ | 331 | | | $ | 12 | | | $ | (13) | |
|
See accompanying notes to consolidated financial statements
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 1 - ORGANIZATION AND BACKGROUND
Organization: The accompanying consolidated financial statements include the financial transactions and accounts of Sharps Compliance Corp. and its 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.), Sharps Safety, Inc., Alpha Bio/Med Services LLC, Bio-Team Mobile LLC and Citiwaste, LLC (collectively, “Sharps”“Sharps", the “Company”, "we" or the “Company”"our"). All significant intercompany accounts and transactions have been eliminated upon consolidation.
Business: Sharps is a leading full-service national provider of comprehensive waste management services including medial,medical, pharmaceutical and hazardous for small and medium quantity generators. The Company’s solutions include Sharps Recovery System™ (formerly Sharps Disposal by Mail System®), TakeAway Recovery System, TakeAway Medication Recovery System™, MedSafe®, TakeAway Recycle System™, ComplianceTRACSM, SharpsTracer®, Sharps Secure®Needle Disposal System, Complete Needle™ Collection & Disposal System, TakeAway Environmental Return System™, Pitch-It IV™ Poles, Asset Return System and Spill Kit and Recovery System. The Company also offers route-based pickup services in a twenty-three (23)thirty-two (32) state region of the South, Southeast, Midwest and Northeast portions of the United States.
A novel strain of coronavirus ("COVID-19") was first identified in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in servicing customers. The Company has implemented some and may take additional precautionary measures intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of customers and minimize business disruptions. The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company. To date, the Company has not identified any material adverse impact of COVID-19 on its financial position and results of operations.
Concentration of Customers and Service Providers: There is an inherent concentration of credit risk associated with accounts receivable arising from sales to major customers.customers. For the fiscal year ended June 30, 2017, one customer2020, 2 customers represented approximately 17%35% of revenues. This customerNaN of these customers also represented approximately 10%44%, or $0.8$5.2 million, of the total accounts receivable balance as of June 30, 2017. 2020. For the fiscal year ended June 30, 2016, one customer2019, 2 customers represented approximately 17%27% of revenues and 17%one of these customers also represented approximately 19%, or $1.0$1.7 million, of the total accounts receivable balance as of June 30, 2016.2019. For the fiscal year ended June 30, 2015, one2018, 1 customer represented approximately 17% of revenues. TheIn the event a major customer is lost, the Company may be adversely affected by its dependence on a limited number of high volume customers.
Currently,The Company currently transports (from the majoritypatient or user to the Company's facility or subcontracted treatment facilities) many of Sharps transportation is sourced withits mailback and unused medication solution offerings using the United States Postal Service (“USPS”("USPS"), which consists of delivering the Sharps Recovery System from the end user to the Company’s facilities.. The Company also has an arrangement with United Parcel Service Inc. (“UPS”) whereby UPS transports certain of the Company’s products from the end user to the Company’s facilities.other mailback and unused medication solution offerings. Sharps maintains relationships with multiple raw materials suppliers and vendors in order to meet customer demands and assure availability of our products and solutions. With respect to the Sharps Recovery System solutions, the Company owns proprietary molds and dies and utilizes several contract manufacturers for the production of the primary raw materials. Sharps believes that alternative suitable contract manufacturers are readily available to meet the production specifications of our products and solutions. The Company utilizes national suppliers for the majority of the raw materials used in our other products and solutions and international suppliers for Pitch-It IV Poles.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: In May 2014 and as subsequently amended, guidance for revenue recognition was issued which supersedes the revenue recognition requirements previously followed by the Company. The guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The Company adopted the standard on July 1, 2018 using the modified retrospective approach, which involves retrospectively adopting the standard by recording a cumulative effect adjustment for all uncompleted contracts at July 1, 2018. This cumulative effect was $0.3 million which decreased accumulated deficit (and increased stockholders' equity) and increased contract assets by $0.3 million. The impact that the accounting guidance had on its consolidated financial statements and related disclosures included the following:
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
•The transportation and treatment performance obligations related to the mail back and unused medication solutions, which were historically accounted for as separate performance obligations, will be accounted for as a single performance obligation under the revenue recognition guidance. The impact of this was not material.
•Certain costs associated with obtaining long-term contracts with customers will be capitalized and amortized over the expected economic life of the contract in future periods. The impact of this was not material.
•The guidance changed the timing of revenue recognition on certain of the Company’s vendor managed inventory contracts. This constituted a material portion of the cumulative effect noted above as under the guidance, revenue recognition is no longer limited to the amounts that may be billed to the customer at the point in time in which performance obligations are satisfied.
•The Company made a number of practical expedient elections related to the accounting guidance, including: (i) right to invoice practical expedient that allows revenue for route-based pickup services to be recognized in the amount to which the Company has a right to invoice over time; (ii) sales and use taxes have been excluded from the transaction price; (iii) for incremental costs to obtain a contract that would be recognized over one year or less, the Company expenses those costs as incurred; and (iv) at the implementation date, guidance was applied only to contracts that were not completed as of the date of initial application.
The impact of adopting the accounting guidance on the Company's consolidated statement of operations for the year ended June 30, 2019 was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended June 30, 2019 | | |
| | As Reported | Adjustments | Balance Without Adoption |
| Revenues | | $ | 44,312 | | $ | 267 | | $ | 44,579 | |
| Cost of revenues | | 31,042 | | 162 | | 31,204 | |
| Gross profits | | 13,270 | | 105 | | 13,375 | |
| Selling, general and administrative | | 12,003 | | 49 | | 12,052 | |
| Operating income | | 447 | | 56 | | 503 | |
| Net income | | $ | 214 | | $ | 56 | | $ | 270 | |
The components of revenues by solution which reflect a disaggregation of revenue by contract type are as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, | | | | | | | | | | |
| | 2020 | | % Total | | 2019 | | % Total | | 2018 | | % Total |
| REVENUES BY SOLUTION: | | | | | | | | | | | |
| Mailbacks | $ | 26,578 | | | 52.0 | % | | $ | 24,501 | | | 55.2 | % | | $ | 22,272 | | | 55.5 | % |
| Route-based pickup services | 10,390 | | | 20.3 | % | | 9,029 | | | 20.4 | % | | 7,492 | | | 18.7 | % |
| Unused medications | 9,163 | | | 17.9 | % | | 6,936 | | | 15.7 | % | | 5,907 | | | 14.7 | % |
| Third party treatment services | 247 | | | 0.5 | % | | 290 | | | 0.7 | % | | 891 | | | 2.2 | % |
Other (1) | 4,768 | | | 9.3 | % | | 3,556 | | | 8.0 | % | | 3,579 | | | 8.9 | % |
| Total revenues | $ | 51,146 | | | 100.0 | % | | $ | 44,312 | | | 100.0 | % | | $ | 40,141 | | | 100.0 | % |
(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items with single performance obligations.
The Company recognizes revenue, net of applicable sales tax, when servicesperformance obligations are provided and from product sales when (i)satisfied through the transfer of control of promised goods are shipped or delivered, and title and risk of loss passservices to the Company’s customers. Control transfers once a customer (ii)has the price isability to direct the use of, and obtain substantially fixedall of the benefits from, the promised goods or determinableservices. Outbound shipping and (iii) collectability is reasonably assuredhandling activities to customers are considered fulfillment activities with the exception of mailbacks sold as part of the vendor managed inventory ("VMI") program. Shipping and handling are considered separate performance obligations for mailbacks sold under the VMI program. For performance obligations satisfied at a point in time, which applies to all contracts except for those sales via multiple-deliverableroute-based
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
pickup services, revenue arrangements.recognition occurs when there is a transfer of control or completion of service. For performance obligations satisfied over time, which applies to the route-based pickup services, revenue is recognized in the amount to which the Company has a right to invoice pursuant to the right to invoice practical expedient. Provisions for certain rebates, product returns and discounts to customers are estimated at the inception of the contract, updated as needed throughout the contract term, and accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in
Other than the Company’s warehouse. Duringmailbacks and unused medication solutions, the fiscal years ended June 30, 2017, 2016Company’s solutions have a single performance obligation. The Company's mailbacks and 2015, the Company recorded revenue from inventory builds that are held in vendor managed inventory under these service agreements of $3.4 million, $3.2 million and $2.6 million, respectively. As of June 30, 2017 and 2016, $2.7 million and $2.1 million, respectively, ofunused medication solutions sold through that date were held in vendor managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to patients in an ongoing patient support program.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the MedSafe and TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps Pump and Asset Return Systems, referred to as “Pump Returns”“mailbacks” or "unused medications") and can consist of up to three separate elements,two performance obligations, or units of measure, as follows: (1) the sale of the compliance and container system, and (2) return transportation and (3) treatment service.
In accordance For mailbacks that are part of the VMI program, there is an additional element, or unit of measure, for outbound transportation. For contracts with the relative selling price methodology,multiple performance obligations, an estimated stand-alone selling price is determined for all deliverables that qualify for separate units of accounting.performance obligations. The actual consideration received in a multiple-deliverable arrangement is then allocated to the unitsperformance obligations based on their relative salesstand-alone selling price. The selling price for theperformance obligations for transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided, including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.expected cost plus a margin.
RevenueThe allocated transaction price for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customer takes titlehas control. The allocated transaction price for the return transportation and assumes risk of ownership. Transportationtreatment revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized uponfacilities at which point the destruction or conversion and proof of receipt and treatment having beenare performed on the container. SinceConsideration received and allocated to the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenueperformance obligation is deferredrecorded as a contract liability until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, throughThrough regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the return transportation and treatment elements areelement is recognized at the point of sale. Furthermore, the current and long-term portions of amounts historically referred to as deferred revenues (shown as Contract Liability on the condensed consolidated balance sheets) are determined through regression analysis and historical trends.
Business Combinations: The VMI program includes terms that meet the “bill and hold” criteria and as such are recognized when the order is placed, title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse for the customer. For the fiscal years ended June 30, 2020 and 2019, the Company includesrecorded billings from inventory builds that are held in vendor managed inventory under these service agreements of $3.5 million and $2.7 million, respectively. As of both June 30, 2020 and 2019, $2.8 million of solutions sold through that date were held in vendor managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to patients in an ongoing patient support program.
The contract asset is related to VMI service agreements within the resultsmailbacks contract type category when the revenue recognition exceeds the amount of operationsconsideration the Company was entitled to at the point in time of satisfying the performance obligation associated with the sale of the businessescompliance and container system. The contract liability is related to the mailbacks and unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed performance obligations. The estimated timing of recognition of amounts included at June 30, 2020 are as follows: for the twelve months ended June 30, 2020 - contract asset of $0.2 million and contract liability of $3.3 million and for the twelve months ending June 30, 2022 - contract liability of $0.7 million. Incremental costs to obtain contracts that are acquireddeemed to be recoverable, primarily related to the payment of sales incentives for contracts in the route-based pickup service category, are capitalized as contract costs and included in prepaids and other current assets in the amount of $0.1 million as of the respective datesboth June 30, 2020 and 2019. The amortization of acquisition. The Company allocates the fair valuecapitalized sales incentives, which is included in selling, general and administrative expense, totaled less than $0.1 million for each of the purchase price of acquisitions to the assets acquiredyears ended June 30, 2020 and liabilities assumed based on their estimated fair values. The Company estimates and records the fair value of purchased intangible assets, which primarily consists of customer relationships, trade-names, and non-competes. The excess of the fair value of the purchase price over the fair values of these identifiable assets, both tangible and intangible, and liabilities is recorded as goodwill.2019.
Income Taxes: Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under generally accepted accounting principles, the valuation allowance has been recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.
The income tax provision reflects the full benefit of all positions that have been taken in the Company’s income tax returns, except to the extent that such positions are uncertain and fall below the recognition requirements. In the event that the Company determines that a tax position meets the uncertainty criteria, an additional liability or benefit will result. The amount of unrecognized tax benefit requires management to make significant assumptions about the expected outcomes of certain tax positions included in filed or yet to be filed tax returns. At June 30, 2017 and 2016, the Company did not have any uncertain tax positions. The Company is subject to income taxes in the United States and in numerous state tax jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company accounts for uncertain tax positions in accordance with FASB ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The Company has not recognized any material uncertain tax positions for the years ended June 30, 2020, 2019 and 2018. Tax return filings which are subject to review by federal and state tax authorities by jurisdiction are as follows:
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE•United States – fiscal years ended June 30, 2017 and after
•State of Texas – fiscal years ended June 30, 2015 and after
•State of Georgia – fiscal years ended June 30, 2017 and after
•State of Pennsylvania – fiscal years ended June 30, 2017 and after
•Other States – fiscal years ended June 30, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| · | United States – fiscal years ended June 30, 2014 and after |
| · | State of Texas – fiscal years ended June 30, 2012 and after |
| · | State of Georgia – fiscal years ended June 30, 2014 and after |
| · | State of Pennsylvania – fiscal years ended June 30, 2014 and after |
| · | Other States – fiscal years ended June 30, 2013 and after |
None of the Company’s federal or state tax returns are currently under examination. The Company records income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were no such amounts recognized in the consolidated statements of operations in 2017,the years ended June 30, 2020, 2019 and 2018.
Leases: In February 2016, guidance for leases was issued, which supersedes the lease requirements previously followed by the Company. The new guidance requires balance sheet recognition of lease assets and 2015.lease liabilities for all leases. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company adopted the standard on July 1, 2019 using the modified retrospective approach and recognized a cumulative effect adjustment to assets and liabilities for existing leases as of July 1, 2019. The Company recognized an additional operating lease liability of $4.6 million, with a corresponding right of use (“ROU”) asset of the same amount based on the present value of the payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the Company is reasonably certain to exercise. The impact that the new accounting guidance had on its consolidated financial statements and related disclosures included the following:
•Approximately 50 leases have been identified, substantially all of which are classified as operating leases. For these real estate, equipment and vehicle operating leases, we recognized new right of use (“ROU”) assets and lease liabilities on our balance sheet.
•The Company applied the package of practical expedients to not reassess prior conclusions related to (i) contracts containing leases, (ii) lease classification and (iii) initial direct costs. The Company did not adopt the practical expediency surrounding the use of hindsight to determine lease term, termination and purchase options, or in assessing impairment of ROU assets.
•The Company also made the accounting policy election for short-term leases, or leases with terms of twelve months or less, therefore the lease payments are recorded as an expense on a straight-line basis over the lease term with no ROU asset or lease liability recorded.
•The Company has elected to exclude non-lease components of a lease arrangement from the ROU asset and lease liability for certain asset classes such as real estate and field equipment leases but includes non-lease components of a lease arrangement in the ROU asset and lease liability for office equipment and automobiles. Non-lease components for field equipment, which include vehicle maintenance costs which the Company estimates based on third party evidence, are excluded from the ROU asset and lease liability and are expensed each month.
Operating leases are included in Operating Lease Right of Use Asset and Operating Lease Liability on our Consolidated Balance Sheets. Operating lease asset and liability amounts are measured and recognized based on payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the Company is reasonably certain to exercise. The lease liability for leases expected to be settled in twelve-months or less are classified as current liabilities. The general terms of the Company’s lease agreements require monthly payments. Some of the Company’s leases escalate either by a fixed or variable amount. Certain of the Company’s leases, which provide for variable lease payments based on index-based (i.e., the US Consumer Price Index) adjustments to lease payments over the term of the lease, are measured at the lease rate effective at the commencement of the lease or upon adoption, as applicable. Because the Company
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
does not generally have access to the rate implicit in its leases, the Company utilizes its incremental borrowing rate as the discount rate for measuring the lease liability. At commencement, the operating lease ROU asset and lease liability are the same, with adjustments to the ROU asset for lease incentives and initial direct costs incurred. The Company reviews all options to extend, terminate or purchase its ROU assets at the commencement of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. The Company has determined that one lease arrangement's renewal option to extend lease terms from the original maturity of August 2021 to August 2031 is reasonably certain to be exercised due to the costs associated with relocating the lease to another location (including permitting cost as well as specialized equipment). The Company evaluates lease modifications as they occur and records such as a separate lease or an adjustment to the existing ROU asset and lease liability as appropriate.
Accounts Receivable: Accounts receivable consist primarily of amounts due to the Company from normal business activities. Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer. The Company maintains an allowance for doubtful accounts to reflect the likelihood of not collecting certain accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third-party collection agency. The Company has a history of minimal uncollectible accounts. See rollforward of allowance activity below:
Allowance for Doubtful Accounts | | Balance Beginning of Year | | | Charges to Expense | | | Write-offs /Payments | | | Balance End of Year | |
| | | | | | | | | | | | | |
| 2017 | | $ | 63 | | | $ | 20 | | | $ | (5 | ) | | $ | 78 | |
| 2016 | | $ | 34 | | | $ | 34 | | | $ | (5 | ) | | $ | 63 | |
| 2015 | | $ | 23 | | | $ | 22 | | | $ | (11 | ) | | $ | 34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful
Accounts | | Balance
Beginning
of Year | | Charges to
Expense | | Write-offs
/Recoveries | | Balance End
of Year |
| | | | | | | | |
| 2020 | | $ | 132 | | | $ | 111 | | | $ | (81) | | | $ | 162 | |
| 2019 | | $ | 102 | | | $ | 81 | | | $ | (51) | | | $ | 132 | |
| 2018 | | $ | 78 | | | $ | 62 | | | $ | (38) | | | $ | 102 | |
Stock-Based Compensation: Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grant date based on the calculated fair value of the award and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Total stock-based compensation expense for the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 are as follows:
| | | | Year Ended June 30, | | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2020 | | 2019 | | 2018 |
| Stock-based compensation expense included in: | | | | | | | | | | Stock-based compensation expense included in: | | | | | |
| Cost of revenue | | $ | 41 | | | $ | 31 | | | $ | 22 | | Cost of revenue | $ | 4 | | | $ | 9 | | | $ | 43 | |
| Selling, general and administrative | | | 455 | | | | 645 | | | | 489 | | Selling, general and administrative | 514 | | | 391 | | | 433 | |
| Total | | $ | 496 | | | $ | 676 | | | $ | 511 | | Total | $ | 518 | | | $ | 400 | | | $ | 476 | |
The Company estimates the fair value of restricted stock awards based on the closing price of the Company’s common stock on the date of the grant. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk free interest rate over the option’s expected term and the Company’s expected annual dividend yield. The risk free interest rate is derived using the U.S. Treasury yield curve in effect at date of grant. Volatility, expected life and dividend yield are based on historical experience and activity.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The fair value of the Company’s stock options was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | | | | | | | | | |
| | Year Ended June 30, | | | | |
| | 2020 | | 2019 | | 2018 |
| Weighted average risk-free interest rate | 0.3 | % | | 2.6 | % | | 1.2 | % |
| Weighted average expected volatility | 49 | % | | 44 | % | | 48 | % |
| Weighted average expected life (in years) | 3.13 | | 3.08 | | 3.03 |
| Dividend yield | — | | | — | | | — | |
| | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Weighted average risk-free interest rate | | | 1.1 | % | | | 1.0 | % | | | 0.4 | % |
| Weighted average expected volatility | | | 47 | % | | | 45 | % | | | 45 | % |
| Weighted average expected life (in years) | | | 5.15 | | | | 4.56 | | | | 3.49 | |
| Dividend yield | | | - | | | | - | | | | - | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated forfeiture rates during the future contract life.
Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains funds in bank accounts that, at times, may exceed the limit insured by the Federal Deposit Insurance Corporation (“FDIC”). The risk of loss attributable to these uninsured balances is mitigated by depositing funds only in high credit quality financial institutions. The Company has not experienced any losses in such accounts.
Inventory: Inventory consists primarily of raw materials and finished goods held for sale and are stated at the lower of cost or market using the average cost method. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of physical deterioration, obsolescence, changes in price levels and other causes. At June 30, 2017, total inventory was $4.1 million of which $2.8 million was finished goods, and $1.3 million was raw materials. At June 30, 2016, total inventory was $3.9 million of which $2.5 million was finished goods, and $1.4 million was raw materials. There were no write-downs of inventory for the fiscal years ended June 30, 2017 and 2015. Total write-downs for the fiscal year ended June 30, 2016 were $17,000 and were included in cost of goods sold.
Property, Plant and Equipment: Property, plant and equipment, including third party software and implementation costs, is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Additions, improvements and renewals significantly adding to the asset value or extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or economic life of the property or equipment, are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the results of operations for the period.
Computer and software development costs, which include costs of computer software developed or obtained for internal use, all programming, implementation and costs incurred with developing internal-use software, are capitalized during the development project stage. External direct costs of materials and services consumed in developing or obtaining internal-use computer software are capitalized.
The Company expenses costs associated with developing or obtaining internal-use software during the preliminary project stage. Training and maintenance costs associated with system changes or internal-use software are expensed as incurred. Additionally, the costs of data cleansing, reconciliation, balancing of old data to the new system, creation of new/additional data and data conversion costs are expensed as incurred.
Goodwill and Other Identifiable Intangible Assets:Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit’s goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no0 impairment during the years ended June 30, 2017, 20162020, 2019 and 2015.2018.
Intangible Assets: Intangible assets consist of (i) acquired customer relationships, (ii) permit costs related to the Company’s treatment facilities and transfer stations, and (iii) eleven12 patents (two acquired in June 1998, one in November 2003, one in January 2012, two in April 2012, one in August 2012, one in September 2012, one in December 2012, one in November 2013 and one in January 2014), and (iv) defense costs related to certain existing patents.
Cash: The Company maintains funds in bank accounts that, at times, may exceed the limit insured by the Federal Deposit Insurance Corporation (“FDIC”). The risk of loss attributable to these uninsured balances is mitigated by depositing funds only in high credit quality financial institutions. The Company has not experienced any losses in such accounts.
Inventory: Inventory consists primarily of raw materials and finished goods held for sale and are stated at the lower of cost or net realizable value using the average cost method. The Company periodically reviews the value and classification of items in inventory and provides write-downs or write-offs of inventory based on its assessment of physical deterioration, obsolescence, changes in price levels and other causes. Write-offs totaled less than $0.1 million for each of the fiscal years ended June 30, 2020, 2019 and 2018. The components of inventory are as follows (in thousands):
| | | | | | | | | | | |
| As of June 30, | | |
| 2020 | | 2019 |
| Raw materials | $ | 1,402 | | | $ | 1,273 | |
| Finished goods | 5,300 | | | 3,543 | |
| Total inventory | 6,702 | | | 4,816 | |
| Less: current portion | 5,638 | | | 3,770 | |
| Inventory, net of current portion | $ | 1,064 | | | $ | 1,046 | |
The current portion of inventory includes amounts which the Company expects to sell in the next twelve month period based on historical sales.
Property, Plant and Equipment: Property, plant and equipment, including third party software and implementation costs, is stated at cost, or fair value if acquired in a business combination, less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Additions, improvements and renewals significantly adding to the asset value or extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or economic life of the property or equipment, are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the results of operations for the period.
Computer and software development costs, which include costs of computer software developed or obtained for internal use, all programming, implementation and costs incurred with developing internal-use software, are capitalized during the development project stage. External direct costs of materials and services consumed in developing or obtaining internal-use computer software are capitalized.
The Company expenses costs associated with developing or obtaining internal-use software during the preliminary project stage. Training and maintenance costs associated with system changes or internal-use software are expensed as incurred.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
Additionally, the costs of data cleansing, reconciliation, balancing of old data to the new system, creation of new/additional data and data conversion costs are expensed as incurred.
Impairment of Long-lived Assets: The Company evaluates the recoverability of property, plant and equipment and intangible or other assets if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write-down to fair value is necessary. NaN impairment loss was recognized during the years ended June 30, 2020, 2019 and 2018.
Accrued Liabilities: The components of Accrued Liabilities on the balance sheet as of June 30, 2020 and 2019 are as follows:
| | | | | | | | | | | |
| | As of June 30, | | |
| | 2020 | | 2019 (1) |
| Accrued payroll | $ | 509 | | | $ | 376 | |
| Customer-related payables | 1,108 | | | 834 | |
| | | |
| | | |
| Other | 1,216 | | | 1,003 | |
| Total | $ | 2,833 | | | $ | 2,213 | |
(1) Certain prior year amounts have been reclassified to conform to current year presentation.
Shipping and Handling Fees and Costs: The Company records amounts billed to customers for shipping and handling as revenue. Costs incurred by the Company for shipping and handling have been classified as cost of revenues.
Additional Product Related Costs: The Company records inbound shipping, purchasing and receiving costs, inspection costs, warehousing costs and other product related costs as cost of revenues.
Advertising Costs: Advertising costs are charged to expenses when incurred and totaled $0.8$0.9 million, $0.6$0.9 million and $0.6$0.7 million for the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively.
Research and Development Costs: Research and development costs are charged to expense when incurred. Research activities represent an important part of the Company’s business and include both internal labor costs and payments to third parties related to the processes of discovering, testing and developing new products, improving existing products, as well as demonstrating product efficacy and regulatory compliance prior to launch of new products and services. Research and development expenses paid to third parties totaled less than $0.1 million for each of the fiscal years ended June 30, 2017, 20162020, 2019 and 2015.2018.
Realization of Long-lived Assets: The Company evaluates the recoverability of property, plant and equipment and intangible or other assets if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write-down to fair value is necessary. No impairment loss was recognized during the years ended June 30, 2017, 2016 and 2015.
Employee Benefit Plans: In addition to group health-related benefits, the Company maintains a 401(k) employee savings plan available to all full-time employees. The Company matches a portion of employee contributions with cash (25% of employee contribution up to 6%). Company contributions to the 401(k) plan were less than $0.1 million in each of the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively and are included in selling, general and administrative expenses. For purposes of the group health benefit plan, and beginning February 1, 2016, the Company self-insures an amount equal to the excess of the employees’ deductible (range from $2,500 for each individual and family member covered) up to the amount by which the third-party insurance coverage begins (ranges from $2,500 for individual up to $10,000 for family coverage). The amount of liability at June 30, 20172020 and 20162019 was less than $0.1 million and is included in accrued liabilities. The Company also has an incentive plan for executives of the Company, which provides for performance based cash and stock-based compensation awards. The aggregateNaN expense was recognized during the yearyears ended June 30, 2017, 20162020, 2019 and 20152018 for the cash awards pursuant to the plan was $0, $0 and $0.3 million, respectively.plan.
Net Income (Loss) Per Share: Basic earnings per share excludes dilution and is determined by dividing net income available to common stockholders(loss) by the weighted average number of common shares outstanding including participating securities during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments: The Company considers the fair value of all financial instruments, including cash, and cash equivalents, accounts receivable and accounts payable to approximate their carrying values at year-end due to their short-term nature. The carrying value of the Company’s debt approximates fair value due to the market rates of interest. The fair value of the Company's interest rate swap related to a portion of its long-term debt is included in other long-term liabilities in the amount of $0.1 million as of June 30, 2020.
Fair Value Measurements: The Company employs a hierarchy which prioritizes the inputs used to measure recurring fair value into three distinct categories based on the lowest level of input that is significant to the fair value measurement. OurThe methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest levels to unobservable inputs, summarized as follows:
| · | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES | · | Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | · | Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value). |
JUNE 30, 2020, 2019 and 2018
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
•Level 3 – Significant unobservable inputs (including our own assumptions in determining fair value).
We use the cost, income or market valuation approaches to estimate the fair value of our assets and liabilities when insufficient market-observable data is available to support our valuation assumptions. The purchase price allocations relating toWe determine the acquisitions completedfair value of our interest rate swap executed during the yearsyear ended June 30, 2017 and 2016 utilized2020 using third-party pricing information that is derived from observable market inputs, which we classify as level 3 inputs.2 with respect to the fair value hierarchy.
Segment Reporting: The Company operates in a single segment, focusing on developing cost-effective management solutions for medical waste and unused dispensed medications generated by small and medium quantity generators.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. The Company uses estimates to determine many reported amounts, including but not limited to allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes and valuation allowances, stock-based compensation, fair values of assets and liabilities acquired in business combinations, selling price used in multiple-deliverable arrangements and return rates used to estimate the percentage of container systems sold that will not be returned. Actual results could differ from these estimates.
Business Combinations: The Company includes the results of operations of the businesses that are acquired as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The Company estimates and records the fair value of purchased intangible assets, which primarily consists of customer relationships, trade-names, and non-competes. The excess of the fair value of the purchase price over the fair values of these identifiable assets, both tangible and intangible, and liabilities is recorded as goodwill.
Recently Issued Accounting Standards:
In May 2014,March 2020, guidance for revenue recognitionapplying optional expedients and exceptions to ease the potential burden in accounting for reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are effective for interim periods beginning as of March 12, 2020 through December 31, 2022. There has been no impact on the Company's consolidated financial statements and related disclosures as none of its arrangements have been modified as of June 30, 2020. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.
In June 2016, guidance for credit losses of financial instruments was issued, which supersedesrequires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In March 2016, guidance for revenue from contracts with customers regarding principal versus agent considerations was issued which modified examples to assist in the application of the guidance. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance isare effective for annual reporting periods beginning after December 15, 20172022 (effective July 1, 20182023 for the Company)., including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact thatof the new accounting guidance will have on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.
In July 2015, guidance for inventory measurement was issued, which supersedes the policy currently followed by the Company. The new guidance requires the Company to measure inventory at the lower of cost and net realizable value. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within that reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
In March 2016, new guidance for stock-based compensation was issued, which simplifies the accounting for stock-based compensation related to income taxes and balance sheet and cash flow classifications. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures.
In January 2017, guidance for goodwill was issued which simplifies the test for goodwill impairment. The new guidance eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which the Company’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2019 (effective July 1, 2020 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures; however, it may impact the impairment recognized in future periods.
In September 2015, guidance for business combinations was issued, which simplifies the accounting for measurement-period adjustments. The new guidance eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination and requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The provisions of the new guidance were effective for annual reporting periods beginning after December 15, 2015 (effective July 1, 2016 for the Company) including interim periods within the reporting period. The Company adopted this guidance on July 1, 2016 and it did not have a material effect on the Company’s consolidated financial statements and related disclosures; however, it may impact the reporting of future acquisitions if and when they occur.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
At June 30, 20172020 and 2016,2019, property, plant and equipment consisted of the following (in thousands):
| | | | | June 30, | | | | | | June 30, | |
| Useful Life | | 2017 | | | 2016 | | | Useful Life | | 2020 | | 2019 |
| Furniture and fixtures | 3 to 5 years | | $ | 260 | | | $ | 247 | | Furniture and fixtures | | 3 to 5 years | | $ | 245 | | | $ | 245 | |
| Plant and equipment | 3 to 17 years | | | 7,975 | | | | 6,524 | | Plant and equipment | | 3 to 17 years | | 9,053 | | | 8,683 | |
| Manufacturing | 15 years | | | 220 | | | | 220 | | Manufacturing | | 15 years | | 169 | | | 169 | |
| Computers and software | 3 to 5 years | | | 2,246 | | | | 2,009 | | Computers and software | | 3 to 5 years | | 2,132 | | | 2,179 | |
| Leasehold improvements | Life of Lease | | | 2,681 | | | | 964 | | Leasehold improvements | | Life of Lease | | 3,192 | | | 2,792 | |
| Land | | | | 19 | | | | 19 | | Land | | | | 19 | | | 19 | |
| Construction-in-progress | | | | 347 | | | | 1,372 | | Construction-in-progress | | | | 3,507 | | | 275 | |
| | | | | 13,748 | | | | 11,355 | | | | | | 18,317 | | | 14,362 | |
| Less: accumulated depreciation | | | | 7,205 | | | | 6,323 | | Less: accumulated depreciation | | | | 9,190 | | | 8,495 | |
| | | | | | | | | | | |
| Net property, plant and equipment | | | $ | 6,543 | | | $ | 5,032 | | Net property, plant and equipment | | | | $ | 9,127 | | | $ | 5,867 | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT (continued)
Total depreciation and amortization expense in the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $0.9$1.0 million $0.7, $1.1 million and $0.8$1.0 million, respectively. Depreciation expense included in cost of revenues infor each of the fiscal years ended 2017, 20162020, 2019 and 20152018 was $0.7 million, $0.5 million and $0.6 million, respectively.$0.8 million.
NOTE 4 – INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
| | | Year ended June 30, | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | | | Year ended June 30, | |
| | | | | | | | | | | | 2020 | | 2019 | | 2018 |
| Current | | | | | | | | | | |
| Current: | | Current: | | | | | |
| Federal | | $ | - | | | $ | - | | | $ | 29 | | Federal | $ | (122) | | | $ | (123) | | | $ | — | |
| State | | | 4 | | | | 24 | | | | 83 | | State | 35 | | | 42 | | | 29 | |
| Total current | | Total current | $ | (87) | | | $ | (81) | | | $ | 29 | |
| | | $ | 4 | | | $ | 24 | | | $ | 112 | | | | | | | |
| Deferred: | | Deferred: | | | | | |
| Federal | | Federal | $ | (1,406) | | | $ | 217 | | | $ | (8) | |
| State | | State | (89) | | | 34 | | | — | |
| Total deferred | | Total deferred | (1,495) | | | 251 | | | (8) | |
| Net income tax expense (benefit) | | Net income tax expense (benefit) | $ | (1,582) | | | $ | 170 | | | $ | 21 | |
The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 is as follows:
| | | Year Ended June 30, | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | | | Year Ended June 30, | |
| | | | | | | | | | | | 2020 | | 2019 | | 2018 |
| Statutory rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | Statutory rate | 21.0 | % | | 21.0 | % | | 27.6 | % |
| State income taxes, net | | | (4.5 | %) | | | (18.6 | %) | | | 5.3 | % | State income taxes, net | (1.0) | % | | 22.9 | % | | (3.7) | % |
| Impact of 2017 tax reform | | Impact of 2017 tax reform | — | % | | — | % | | (107.0) | % |
| Meals and entertainment | | | (1.5 | %) | | | 38.7 | % | | | 1.2 | % | Meals and entertainment | 1.6 | % | | 2.7 | % | | (1.8) | % |
| AMT and research and development credits | | | 0.0 | % | | | (218.9 | %) | | | 0.0 | % | |
| Stock-based compensation | | Stock-based compensation | 0.7 | % | | 16.1 | % | | 22.6 | % |
| Research and development credits | | Research and development credits | (5.3) | % | | 7.3 | % | | 22.4 | % |
| | Other | | | 0.2 | % | | | 1.5 | % | | | 0.0 | % | Other | (1.5) | % | | 1.5 | % | | (2.0) | % |
| Effective rate before valuation allowance | | | 28.2 | % | | | (163.3 | %) | | | 40.5 | % | Effective rate before valuation allowance | 15.5 | % | | 71.5 | % | | (41.9) | % |
| | | | | | | | | | | | | | |
| Change in valuation allowance | | | (28.5 | %) | | | 228.2 | % | | | (31.7 | %) | Change in valuation allowance | (247.1) | % | | (27.2) | % | | 38.7 | % |
| Effective tax rate | | | (0.3 | %) | | | 64.9 | % | | | 8.8 | % | Effective tax rate | (231.6) | % | | 44.3 | % | | (3.2) | % |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
The statutory rate for the year ended June 30, 2018 is a blended rate which was calculated based on the Company's fiscal year and the date that the tax rate changes were effective.
The Company has historically recorded a valuation allowance has been recorded to reduce the Company’s netits deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertaintyrealized. However, as of the year ended June 30, 2020, the Company released the full amount of the valuation allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets. The non-cash benefit to income tax expense resulting from the release of the valuation allowance is approximately $1.7 million.
At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of certaindeferred tax assets. As of the year ended June 30, 2020, the Company achieved a cumulative positive amount of pretax income over a period of three years. Given the Company’s average pretax income for the past three years, adjusted for non-recurring items and for modest increases in new and recurring business, the Company expects to generate income before taxes in future periods which will be sufficient to fully utilize all U.S. federal and state deferred tax assets related to net operating loss carryforwardscarryforward balances and other tax attributes. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.available credits.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 4 – INCOME TAXES (continued)
At June 30, 20172020 and 2016,2019, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):
| | | | | | | | | | | |
| | June 30, | | |
| | 2020 | | 2019 (1) |
| Deferred tax assets relating to: | | | |
| Stock-based compensation | $ | 211 | | | $ | 261 | |
| AMT and research and development credits | 490 | | | 517 | |
| | | |
| Inventory | 98 | | | 158 | |
| Professional fees | 175 | | | 124 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Deferred tax assets related to other items | 140 | | | 109 | |
| Net operating loss carryforwards | 1,016 | | | 1,067 | |
| Total deferred tax assets | 2,130 | | | 2,236 | |
| Deferred tax liabilities related to depreciable and amortizable assets | (836) | | | (728) | |
| Deferred tax liabilities related to other items | (42) | | | (63) | |
| Net deferred tax assets before valuation allowance | 1,252 | | | 1,445 | |
| Valuation allowance | — | | | (1,688) | |
| Net deferred tax (liability) asset | $ | 1,252 | | | $ | (243) | |
| | | June 30, | |
| | | 2017 | | | 2016 | |
| Deferred tax assets relating to: | | | |
| Stock compensation | | $ | 398 | | | $ | 627 | |
| AMT and research and development credits | | | 523 | | | | 523 | |
| Deferred rent | | | 77 | | | | 82 | |
| Inventory | | | 211 | | | | 169 | |
| Professional fees | | | 155 | | | | 140 | |
| Accrued vacation | | | 43 | | | | 33 | |
| Accounts receivable allowance | | | 49 | | | | 24 | |
| Contribution carryovers | | | 12 | | | | 8 | |
| Net operating loss carryforwards | | | 1,443 | | | | 1,044 | |
| Total deferred tax assets | | | 2,911 | | | | 2,650 | |
| Deferred tax liablities related to depreciation differences | | | (783 | ) | | | (621 | ) |
| Net deferred tax assets before valuation allowance | | | 2,128 | | | | 2,029 | |
| Valuation allowance | | | (2,128 | ) | | | (2,029 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
(1) Certain prior year amounts have been reclassified to conform to current year presentation.
At June 30, 2017,2020, the Company had net operating loss carryforwards of $4.8 million, which will expire, if unused, between June 30, 2032 and June 30, 2037.2038. At June 30, 2017,2020, the Company had various tax credit carryforwards of $0.5 million of which $0.3 million will expire beginning on June 30, 2030 and $0.22030.
Given the release of the valuation allowance, a net deferred tax asset was recorded for $1.3 million which may be carried forward indefinitely.
Asas of June 30, 2017, the Company’s estimated net operating losses2020. A deferred tax liability of $0.2 million was recorded as of June 30, 2019 for deferred tax return filing purposes exceeds the gross amount for financial reporting purposes by $0.6 millionliabilities related to excessindefinite lived assets which cannot be used as a source of future taxable income, tax benefits on stock-based compensation. The tax effectsuch as goodwill, in the amount of this excess tax expense will be$0.3 million offset by the valuation allowancealternative minimum tax credit carryforward of $0.1 million.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, accelerates the Company’s ability to recover refundable AMT credits to 2018 and 2019. As such, the Company has recorded the remaining balance of its AMT credits as a current income tax receivable at June 30, 2020. The CARES Act did not have no net effect.a material impact on the Company's income taxes.
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (the “Creditwhich was subsequently amended on June 29, 2018 to extend the maturity date by two years to March 29, 2021 for the working capital portion of the Credit Agreement (“the Credit Agreement”). The Company expects the Credit Agreement which replacedwill be renewed and extended prior to the Company’s prior credit agreement,maturity date. The Credit Agreement, provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the borrower’sCompany’s assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
in the Credit Agreement) equal to 80% of eligible accounts receivable plus the lessorlesser of (i) 50% of eligible inventory and $3(ii) $3.0 million. Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-yearfive-year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) zero0 percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Margin may increase to as high as 3.0% after September 30, 2017 depending on the Company’s cash flow leverage ratio. The interest rate as of June 30, 2017 2020 was approximately 3.63%2.79%. The Company pays a fee of 0.25% per annum on the unused amount of the credit facility.
On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreement with its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August 21, 2019") with monthly payments beginning in the month after the advancing period ends based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of the Loan Agreement. The advancing period extends through October 2020 and August 2020 for the real estate portion and the equipment portion of the Loan Agreement, respectively. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which was a rate of 2.79% on June 30, 2020. The Company has entered into a forward rate lock to fix the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at 4.15%.
On April 20, 2020, the Company received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable after eight to twenty-four weeks providing that the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s workforce, and its ability to meet staffing needs in its route-based, treatment and distribution operations and other critical functions are uncertain and is vital to its operations.
The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under its Credit Agreement, $8.0 million of such availability can only be used for acquisitions and the $6.0 million that is available is in place to support working capital needs, along with current cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements.
The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The Company is in the process of applying for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by the Small Business Administration ("SBA") and the Department of Treasury. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during at least the six-month period beginning on the date of the PPP Loan. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (continued)
At June 30, 2017,2020 and 2019, long-term debt consisted of the following (in thousands):
| Non-interest bearing, unsecured note payable assumed in acquisition (See Note 12), monthly payments of $7; maturing September 2018. | | $ | 104 | |
| | | | | |
| Term loan, bearing interest at 3.63%, monthly payments of $43; maturing March 2022. | | | 2,499 | |
| | | | | |
| Total long-term debt | | | 2,603 | |
| Less: current portion | | | 601 | |
| Long-term debt, net of current portion | | $ | 2,002 | |
| | | | | | | | | | | |
| June 30, | | |
| 2020 | | 2019 |
| Acquisition loan, monthly payments of $43; maturing March 2022. | $ | 948 | | | $ | 1,465 | |
| Equipment loan, monthly principal payments begin upon completion of the advancing period, net of debt issuance costs of $50 thousand. | 929 | | | — | |
| Real estate loan, monthly principal payments begin upon completion of the advancing period. | 1,103 | | | — | |
| Paycheck Protection Program loan | 2,183 | | | — | |
| Total long-term debt | 5,163 | | | 1,465 | |
| Less: current portion | 1,658 | | | 517 | |
| Long-term debt, net of current portion | $ | 3,505 | | | $ | 948 | |
The Company has availability under the Credit Agreement of $11.5 $13.0 million ($6.05.9 million for the working capital portion and $5.5$7.1 million forfor the acquisitions) as of June 30, 2017 which may be limited by its leverage covenant.2020. The Company has availability under the Loan Agreement of $1.2 million ($0.9 million for the real estate and $0.3 million for the equipment) as of June 30, 2020. The Company also has $10,000$0.1 million in letters of credit outstanding as of June 30, 2017.
2020.
The Credit Agreement containsand Loan Agreements contain affirmative and negative covenants that, among other things, require the Company to maintain beginning with the twelve-month period ending September 30, 2017, a maximum cash flow leverage ratio of no more than 3.53.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The maximum cash flow leverage ratio decreases to 3.25 to 1.0 on December 31, 2017Credit and to 3.0 to 1.0 on March 31, 2018. The Credit Agreement, which expires on March 29, 2019,Loan Agreements also containscontain customary events of default which, if uncured, may terminate the Credit Agreementagreements and require immediate repayment of all indebtedness to the lenders.
The leverage ratio covenant may limit the amount available under the Credit Agreement. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of June 30, 2020.
Payments due on long-term debt during each of the five years subsequent to June 30, 20172020 are as follows (in thousands):
| | Twelve Months Ending June 30, | | | | Twelve Months Ending June 30, | |
| 2018 | | $ | 601 | | |
| 2019 | | | 537 | | |
| 2020 | | | 517 | | |
| 2021 | | | 517 | | 2021 | $ | 1,658 | |
| 2022 | | | 431 | | 2022 | 1,851 | |
| 2023 | | 2023 | 220 | |
| 2024 | | 2024 | 220 | |
| 2025 | | 2025 | 1,264 | |
| | | $ | 2,603 | | |
| | | | $ | 5,213 | |
The prior credit agreement, which was effective through March 29, 2017, provided for a $9.0 million line of credit facility with a maturity date of April 9, 2018. No amounts related to the prior credit agreement were outstanding as of June 30, 2017.
NOTE 6 - EQUITY TRANSACTIONS
During the year ended June 30, 2018, the Company issued 20,617 shares of common stock as a portion of consideration for a third-party lease agreement. The shares were issued at $4.00 per share based on the closing price on the date of grant. This issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act. Non-cash expense recorded during the years ended June 30, 2020, 2019, and 2018 was $0, $46,000 and $37,000, respectively.
On January 7, 2013,November 15, 2018, the Company announced that its BoardCompany's stockholders approved an amendment to the Company's certificate of Directors approved a stock repurchase program effective January 3, 2013, authorizingincorporation to increase the Company to repurchase in the aggregate up to $3 millionauthorized shares of its outstanding common stock over a two-year period. On March 5, 2015, the Board approved a two-year extension of the stock repurchase program through January 1, 2017. The program has not been extended.from 20,000,000 to 40,000,000 shares.
During the years ended June 30, 2017, 20162020, 2019, and 2015,2018, stock options to purchase shares of the Company's common stock were repurchasedexercised as follows:follows (in thousands except per share amounts):
| | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Shares repurchased | | | - | | | | 104,365 | | | | 29,449 | |
| Cash paid for shares repurchased (in thousands) | | $ | - | | | $ | 745 | | | $ | 128 | |
| Average price paid per share | | $ | - | | | $ | 7.14 | | | $ | 4.35 | |
Total shares repurchased under the program are 295,615 shares at a cost of $1.6 million. | | | | | | | | | | | | | | | | | |
| | Year ended June 30, | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| Options exercised | 154 | | | — | | | — | |
| Proceeds | $ | 668 | | | $ | — | | | $ | — | |
| Average exercise price per share | $ | 4.32 | | | $ | — | | | $ | — | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 7 - STOCK BASED COMPENSATION
The Company sponsors the Sharps Compliance Corp. 2010 Stock Plan (the “2010 Plan”) covering employees, consultants and non-employee directors. The 2010 Stock Plan replaced the Sharps Compliance Corp. 1993 Stock Plan (the “1993 Plan”). The 2010 Plan provides for the granting of stock-based compensation (stock options or restricted stock) of up to 3,000,000 shares of the Company’s common stock of which 877,9041,166,756 options and restrictedrestricted shares are outstanding as of June 30, 2017.2020. Options granted generally vest over a period of three to four years and expire seven years after the date of grant. Restricted stock generally vests over one year. There are no remaining options outstanding under the 1993 Plan. As of June 30, 2017,2020, there were 1,561,891 938,862 options available for grant under the 2010 Plan.
The summary of activity for all restricted stock during the fiscal years ended June 30, 2017, 20162020, 2019 and 2015 2018 is presented in the table below (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year ended June 30, | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| Unvested at beginning of the year | 13 | | | 13 | | | 13 | |
| Granted | 80 | | | 63 | | | 53 | |
| Vested | (71) | | | (55) | | | (53) | |
| Forfeited | — | | | (8) | | | — | |
| Unvested at end of the year | 22 | | | 13 | | | 13 | |
| | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Unvested at beginning of the year | | | 13 | | | | 13 | | | | 15 | |
| Granted | | | 53 | | | | 53 | | | | 53 | |
| Vested | | | (53 | ) | | | (53 | ) | | | (55 | ) |
| Unvested at end of the year | | | 13 | | | | 13 | | | | 13 | |
The weighted average fair value per share of restricted stock granted during the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $4.38, $8.00$4.31, $3.53 and $4.28,$4.17, respectively. The weighted average fair value per share of restricted stock which vested during the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $5.29, $7.07 $4.12, $3.69 and $4.44,$4.22, respectively.
The summary of activity for all stock options during the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 is presented in the table below (in thousands except per share amounts):
| | | Options Outstanding | | | Weighted Average Exercise Price | | | | | | | | | | | |
| Options Outstanding at June 30, 2014 | | | 950 | | | $ | 4.27 | | |
| | | | Options
Outstanding | | Weighted
Average
Exercise
Price |
| Options Outstanding at June 30, 2017 | | Options Outstanding at June 30, 2017 | 865 | | | $ | 4.53 | |
| Granted | | Granted | 137 | | | $ | 4.79 | |
| | Forfeited or canceled | | Forfeited or canceled | (82) | | | $ | 4.50 | |
| | Options Outstanding at June 30, 2018 | | Options Outstanding at June 30, 2018 | 920 | | | $ | 4.57 | |
| Granted | | Granted | 578 | | | $ | 3.73 | |
| | Forfeited or canceled | | Forfeited or canceled | (218) | | | $ | 4.16 | |
| | Options Outstanding at June 30, 2019 | | Options Outstanding at June 30, 2019 | 1,280 | | | $ | 4.26 | |
| Granted | | | 516 | | | $ | 4.63 | | Granted | 82 | | | $ | 6.74 | |
| Exercised | | | (61 | ) | | $ | 2.30 | | Exercised | (154) | | | $ | 4.32 | |
| Forfeited or canceled | | | (30 | ) | | $ | 4.68 | | Forfeited or canceled | (63) | | | $ | 3.95 | |
| | | | | | | | | | | | |
| Options Outstanding at June 30, 2015 | | | 1,375 | | | $ | 4.49 | | |
| Granted | | | 45 | | | $ | 6.62 | | |
| Exercised | | | (112 | ) | | $ | 2.77 | | |
| Forfeited or canceled | | | (18 | ) | | $ | 5.99 | | |
| Options Outstanding at June 30, 2020 | | Options Outstanding at June 30, 2020 | 1,145 | | | $ | 4.45 | |
| | | | | | | | | | |
| Options Outstanding at June 30, 2016 | | | 1,290 | | | $ | 4.69 | | |
| Granted | | | 38 | | | $ | 4.55 | | |
| Exercised | | | (95 | ) | | $ | 3.60 | | |
| Forfeited or canceled | | | (368 | ) | | $ | 5.32 | | |
| | | | | | | | | | |
| Options Outstanding at June 30, 2017 | | | 865 | | | $ | 4.53 | | |
| | | | | | | | | | |
| Options Exercisable at June 30, 2017 | | | 561 | | | $ | 4.39 | | |
| Options Exercisable at June 30, 2020 | | Options Exercisable at June 30, 2020 | 591 | | | $ | 4.59 | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 7 - STOCK BASED COMPENSATION (continued)
The following table summarizes information about stock options outstanding as of June 30, 20172020 (in thousands except per share amounts):
| | | Options Outstanding | |
Range of Exercise Price | | Outstanding as of
June 30, 2017 | | Weighted Average Remaining Life
(in Years) | | Weighted Average Exercise Price | |
| | | | | | | | |
| | $ | 2.51 - $3.50 | | | | 41 | | | | 2.49 | | | $ | 2.95 | |
| | $ | 3.51 - $5.50 | | | | 692 | | | | 3.27 | | | $ | 4.35 | |
| | $ | 5.51 - $7.50 | | | | 132 | | | | 4.82 | | | $ | 5.97 | |
| | | | | | | 865 | | | | | | | $ | 4.53 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | | |
Range of Exercise
Price | | Outstanding as
of
June 30, 2020 | | Weighted
Average
Remaining
Life
(in Years) | | Weighted
Average
Exercise
Price |
| | | | | | |
| $2.51 - $3.75 | | 58 | | | 4.72 | | $ | 3.18 | |
| $3.76 - $5.00 | | 882 | | | 4.14 | | $ | 4.10 | |
| $5.01 - $7.50 | | 205 | | | 3.78 | | $ | 6.29 | |
| | | | | | |
| | | 1,145 | | | | | $ | 4.45 | |
The following table summarizes information about stock options exercisable as of June 30, 20172020 (in thousands except per share amounts):
| | | | Options Exercisable | |
Range of Exercise Price | | | Exercisable as of
June 30, 2017 | | | Weighted Average Remaining Life
(in Years) | | | Weighted Average Exercise Price | |
| | | | | | | | | | | |
| $ | 2.51 - $3.50 | | | | 39 | | | | 2.46 | | | $ | 2.96 | |
| $ | 3.51 - $5.50 | | | | 464 | | | | 2.66 | | | $ | 4.32 | |
| $ | 5.51 - $7.50 | | | | 58 | | | | 4.78 | | | $ | 5.87 | |
| | | | | | 561 | | | | | | | $ | 4.39 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Options Exercisable | | | | |
Range of Exercise
Price | | Exercisable as
of
June 30, 2020 | | Weighted
Average
Remaining
Life
(in Years) | | Weighted
Average
Exercise
Price |
| | | | | | |
| $2.51 - $3.75 | | 20 | | | 3.42 | | $ | 3.02 | |
| $3.76 - $5.00 | | 444 | | | 2.86 | | $ | 4.27 | |
| $5.01 - $7.50 | | 127 | | | 1.81 | | $ | 5.95 | |
| | | | | | |
| | | 591 | | | | | $ | 4.59 | |
As of June 30, 2017,2020, there was $0.2$0.6 million of stock option and restricted stock compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 1.62.7 years.
NOTE 8 - LEASES
The Company has operating leases for real estate, field equipment, office equipment and vehicles. Operating leases are included in Operating Lease ROU Asset and Operating Lease Liability on our Consolidated Balance Sheets.
During the twelve months ended June 30, 2020, lease cost amounts, which reflect the fixed rent expense associated with operating leases, are as follows (in thousands):
| | | | | | | | |
| | Year Ended
June 30, 2020 |
Lease cost (1) -operating lease cost - fixed rent expense included in: | | |
| Cost of revenues | | $ | 1,851 | |
| Selling, general and administrative | | 451 | |
| Total | | $ | 2,302 | |
(1) Finance lease cost, short-term lease cost and variable lease cost were not significant during the period.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
During the twelve months ended June 30, 2020, the Company modified several of its leases to extend the terms of the leases. This resulted in a non-cash change to the ROU asset and lease liability upon remeasurement of $4.4 million which is included in the non-cash changes to ROU asset and lease liability shown below. The leases remain operating leases upon re-evaluation by the Company and there were no material direct costs incurred in any of the lease modifications or in any of the leases acquired during the period. During the twelve months ended June 30, 2020, the Company had the following cash and non-cash activities associated with leases (in thousands):
| | | | | |
| Year Ended
June 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $ | 2,274 | |
| Non-cash changes to the Operating ROU Asset and Operating Lease Liability | |
| Additions and modifications to ROU asset obtained from new operating lease liabilities | $ | 6,214 | |
| Additions to ROU asset obtained from operating lease liabilities upon adoption of new guidance | $ | 4,591 | |
As of June 30, 2020, the weighted average remaining lease term for all operating leases is 5.0 years. The weighted average discount rate associated with operating leases as of June 30, 2020 is 4.7%.
The future payments due under operating leases as of June 30, 2020 is as follows (in thousands):
| | | | | |
| Future payments due in the year ended June 30, | |
| 2021 | $ | 2,790 | |
| 2022 | 2,420 | |
| 2023 | 1,976 | |
| 2024 | 1,793 | |
| 2025 | 1,444 | |
| Thereafter | 1,114 | |
| Total undiscounted lease payments | 11,537 | |
| Less effects of discounting | (2,674) | |
| Lease liability recognized | $ | 8,863 | |
As of June 30, 2019, future lease payments under non-cancelable operating leases were $4.1 million in the aggregate, which consisted of the following: $2.1 million in 2020, $1.3 million in 2021, $0.5 million in 2022, $0.2 million in 2023, and $38 thousand in 2024.
NOTE 89 - COMMITMENTS AND CONTINGENCIES
Operating Leases:Performance bonds: The Company operates in a number of locations across the U.S. including space for corporate offices in Houston, Texas. Sharps has manufacturing, assembly, storage, distribution and warehousing operations as well as two (2) fully-permitted facilities that house our processing and treatment operations. The Company owns one processing and treatment facility and leases all other spaces. The leases expire between 2020 to 2023 with options to renew ranging from 3 years to 10 years.
Rent expense for the fiscal years ended June 30, 2017, 2016 and 2015 was $2.3 million, $1.5 million and $1.3 million, respectively. Future minimum lease payments under non-cancelable operating leases as of June 30, 2017 are as follows (in thousands):
| | | Year Ended June 30, | |
| | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Thereafter | |
| Operating lease obligations | | $ | 1,812 | | | $ | 1,827 | | | $ | 1,725 | | | $ | 943 | | | $ | 274 | | | $ | 5 | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
Performance Bonds: The Company also utilizes performance bonds to support operations based on certain state requirements. At June 30, 2017,2020, the Company had performance bonds outstanding covering financial assurance up to $0.6 million.$1.0 million
Other:Other: From time to time, the Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters willis not anticipated to have a material adverse effect on the Company’s consolidated financial position or consolidated results of operations.
NOTE 910 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings 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 and restricted stock. In
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020, 2019 and 2018
computing diluted earnings per share, the outstanding common stock options are considered dilutive using the treasury stock method.
The Company’s restricted stock awards are treated as outstanding for earnings per share calculations since these shares have full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic and diluted EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material.
The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per share amounts):
| | | | Year Ended June 30, | | | Year Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2020 | | 2019 | | 2018 |
| | | | | | | | |
| Net income (loss), as reported | | $ | (1,293 | ) | | $ | 13 | | | $ | 1,160 | | Net income (loss), as reported | $ | 2,266 | | | $ | 214 | | | $ | (672) | |
| | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 15,949 | | | | 15,448 | | | | 15,327 | | Weighted average common shares outstanding | 16,249 | | | 16,116 | | | 16,055 | |
| Effect of dilutive stock options | | | - | | | | 390 | | | | 237 | | Effect of dilutive stock options | 182 | | | 7 | | | — | |
| Weighted average diluted common shares outstanding | | | 15,949 | | | | 15,838 | | | | 15,564 | | Weighted average diluted common shares outstanding | 16,431 | | | 16,123 | | | 16,055 | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) per common share | | | | | | | | | | | | | Net income (loss) per common share | | | | | |
| Basic | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.08 | | |
| Diluted | | $ | (0.08 | ) | | $ | 0.00 | | | $ | 0.07 | | |
| Basic and diluted | | Basic and diluted | $ | 0.14 | | | $ | 0.01 | | | $ | (0.04) | |
| | | | | | | | | | | | | |
| Employee stock options excluded from computation of diluted income per share amounts because their effect would be anti-dilutive | | | 304 | | | | 137 | | | | 210 | | Employee stock options excluded from computation of diluted income per share amounts because their effect would be anti-dilutive | 206 | | | 1,173 | | | 402 | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 1011 – GOODWILL AND INTANGIBLE ASSETS
At June 30, 20172020 and June 30, 2016,2019, intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, | | | | | | | | | | |
| | | 2020 | | | | | | 2019 | | | | |
| Estimated
Useful Lives | Original
Amount | | Accumulated
Amortization | | Net
Amount | | Original
Amount | | Accumulated
Amortization | | Net
Amount |
| | | | | | | | | | | | |
| Customer relationships | 7 years | $ | 3,007 | | | $ | (1,780) | | | $ | 1,227 | | | $ | 3,007 | | | $ | (1,348) | | | $ | 1,659 | |
| Permits | 6 - 15 years | 1,892 | | | (596) | | | 1,296 | | | 1,704 | | | (492) | | | 1,212 | |
| Patents | 5 - 17 years | 420 | | | (311) | | | 109 | | | 420 | | | (296) | | | 124 | |
| Tradename | 7 years | 270 | | | (154) | | | 116 | | | 270 | | | (116) | | | 154 | |
| Non-compete | 5 years | 117 | | | (94) | | | 23 | | | 117 | | | (70) | | | 47 | |
| Total intangible assets, net | | $ | 5,706 | | | $ | (2,935) | | | $ | 2,771 | | | $ | 5,518 | | | $ | (2,322) | | | $ | 3,196 | |
| | | | June 30, | |
| | | | 2017 | | | 2016 | |
| Estimated Useful Lives | | Original Amount | | | Accumulated Amortization | | | Net Amount | | | Original Amount | | | Accumulated Amortization | | | Net Amount | |
| | | | | | | | | | | | | | | | | | | | |
| Customer relationships | 7 years | | $ | 3,007 | | | $ | (490 | ) | | $ | 2,517 | | | $ | 580 | | | $ | (60 | ) | | $ | 520 | |
| Permits | 6 - 15 years | | | 1,373 | | | | (288 | ) | | | 1,085 | | | | 668 | | | | (191 | ) | | | 477 | |
| Patents | 5 - 17 years | | | 383 | | | | (264 | ) | | | 119 | | | | 383 | | | | (251 | ) | | | 132 | |
| Tradename | 7 years | | | 270 | | | | (39 | ) | | | 231 | | | | - | | | | - | | | | - | |
| Non-compete | 5 years | | | 117 | | | | (23 | ) | | | 94 | | | | - | | | | - | | | | - | |
| Total intangible assets, net | | | $ | 5,150 | | | $ | (1,104 | ) | | $ | 4,046 | | | $ | 1,631 | | | $ | (502 | ) | | $ | 1,129 | |
DuringAmortization expense was $0.6 million for each of the fiscal years ended June 30, 2017, 20162020, 2019 and 2015 amortization expense was $0.6 million, $0.1 million and $0.1 million, respectively.
The changes in the carrying amount of goodwill since June 30, 2015 was as follows (in thousands):
| | | Year Ended June 30, | |
| | | 2017 | | | 2016 | |
| Beginning Balance | | $ | 1,039 | | | $ | - | |
| Goodwill Acquired | | | 5,696 | | | | 1,039 | |
| Ending Balance | | $ | 6,735 | | | $ | 1,039 | |
2018.
As of June 30, 2017,2020, future amortization of intangible assets is as follows (in thousands):
| Year Ending June 30, | | | |
| 2018 | | $ | 616 | |
| 2019 | | | 616 | |
| 2020 | | | 616 | |
| 2021 | | | 615 | |
| 2022 | | | 590 | |
| Thereafter | | | 993 | |
| | | $ | 4,046 | |
NOTE 11 – REVENUES BY SOLUTION
The components of revenues by solution are as follows (dollars in thousands):
| | | Year Ended June 30, | |
| | | 2017 | | | % Total | | | 2016 | | | % Total | | | 2015 | | | % Total | |
REVENUES BY SOLUTION: | | | | | | | | | | | | | | | | | | |
| Mailbacks | | $ | 24,135 | | | | 63.2 | % | | $ | 23,743 | | | | 71.1 | % | | $ | 23,043 | | | | 74.6 | % |
| Route-based pickup services | | | 6,348 | | | | 16.6 | % | | | 2,061 | | | | 6.2 | % | | | 862 | | | | 2.8 | % |
| Unused medications | | | 3,377 | | | | 8.8 | % | | | 3,531 | | | | 10.6 | % | | | 2,667 | | | | 8.6 | % |
| Third party treatment services | | | 413 | | | | 1.1 | % | | | 258 | | | | 0.8 | % | | | 367 | | | | 1.2 | % |
Other(1) | | | 3,915 | | | | 10.3 | % | | | 3,790 | | | | 11.3 | % | | | 3,963 | | | | 12.8 | % |
| Total revenues | | $ | 38,188 | | | | 100.0 | % | | $ | 33,383 | | | | 100.0 | % | | $ | 30,902 | | | | 100.0 | % |
| | | | | |
| Year Ended June 30, | |
| 2021 | $ | 639 | |
| 2022 | 622 | |
| 2023 | 562 | |
| 2024 | 151 | |
| 2025 | 150 | |
| Thereafter | 647 | |
| | $ | 2,771 | |
| (1) | The Company’s other products include non-mailback products such as IV poles, accessories, containers, asset return boxes and other miscellaneous items. |
F-22
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 20162020, 2019 and 20152018
NOTE 12 – ACQUISITIONS
Effective on July 17, 2015, the Company acquired Alpha Bio/Med Services LLC, a route-based pickup service located in Pennsylvania for total cash consideration of $0.7 million of which $0.1 million was withheld for payment of adjusted escrow amounts which settled in July 2016.
The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):
| Accounts receivable | | $ | 51 | |
| Fixed assets | | | 70 | |
| Intangibles | | | 267 | |
| Goodwill | | | 413 | |
| Accounts payable and accrued liabilities | | | (101 | ) |
| Total purchase price | | $ | 700 | |
Effective on December 14, 2015, the Company acquired Bio-Team Mobile LLC, a route-based pickup service located in Pennsylvania for total cash consideration of $1.0 million of which $0.1 million was withheld for payment of adjusted escrow amounts which settled in January 2017.
The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):
| Accounts receivable | | $ | 42 | |
| Fixed assets | | | 68 | |
| Intangibles | | | 313 | |
| Goodwill | | | 626 | |
| Accounts payable and accrued liabilities | | | (16 | ) |
| Total purchase price | | $ | 1,033 | |
Effective July 1, 2016, the Company acquired Citiwaste, LLC (“Citiwaste”), a route-based pickup service located in New York, which is in the business of medical, pharmaceutical and hazardous waste management primarily in the healthcare industry. The purchase price consisted of $7.0 million in cash ($3.0 million of which was borrowed under the acquisition portion of its Credit Agreement), 415,527 shares of common stock of the Company (the “Common Stock Consideration”) valued at $1.9 million, and a lease obligation paid to the seller for $0.1 million for a total consideration of $9.0 million. The issuance of the Common Stock Consideration was not registered under the Securities Act of 1933, as amended, and was issued pursuant to an exemption from the registration requirements thereunder. The Company held shares of the Common Stock Consideration in escrow for the one-year period to cover indemnification obligations of the sellers under the purchase agreement which were released on June 30, 2017.
For the year ended June 30, 2017, the Company recognized approximately $3.6 million in revenues related to the operations of Citiwaste.
The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):
| Cash | | $ | 5 | |
| Accounts receivable | | | 495 | |
| Fixed assets | | | 30 | |
| Intangibles | | | 3,357 | |
| Goodwill | | | 5,696 | |
| Accounts payable and accrued liabilities | | | (356 | ) |
| Debt assumed | | | (187 | ) |
| Total purchase price | | $ | 9,040 | |
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 12 – ACQUISITIONS (continued)
The Company incurred acquisition related expenses for investment banking, legal and accounting fees which are included within selling, general and administrative expenses in the consolidated statements of operations as follows (in thousands):
| | | Twelve-Months Ended June 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Acquisition-related expenses | | $ | 702 | | | $ | 190 | | | $ | - | |
The results of operations of the acquired business have been included in the consolidated statements of operations from the date of acquisition. Pro forma results of operations for Alpha Bio/Med Services and Bio-Team Mobile are not presented because the pro forma effects, individually or in the aggregate, were not material to the Company’s consolidated results of operations. The goodwill recorded for the Alpha Bio/Med Services, Bio-Team Mobile, and Citiwaste acquisitions will be deductible for income taxes.
The goodwill recognized for the acquisitions since July 1, 2015 is attributable to expected revenue synergies generated by the integration of our products and services with those acquisitions, cost synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do not qualify for separate recognition such as the assembled workforce of each acquisition.
Supplemental Pro Forma Data (Unaudited)
Citiwaste’s financial results since the date of the acquisition have been included in our consolidated financial results for the year ended June 30, 2017. The following table presents summarized unaudited pro forma financial information as if the Citiwaste acquisition occurred on July 1, 2015 (in thousands, except per-share data):
| | | Twelve-Months Ended June 30, | |
| | | 2016 | |
| | | | |
| Revenues | | $ | 36,306 | |
| Net loss | | $ | (159 | ) |
| Weighted average common shares outstanding | | | 15,861 | |
| Net loss per common share basic and diluted | | $ | (0.01 | ) |
The pro forma financial information for the period presented includes the estimated business combination accounting effects resulting from the acquisition, including primarily amortization expense of $0.5 million from the acquired intangible assets as well as interest expense as a result of debt financing used to fund the acquisition and tax effects from the pro forma adjustments.
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017, 2016 and 2015
NOTE 13 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables show quarterly financial information for the years ended June 30, 20172020 and 2016.2019. The Company believes that all necessary adjustments have been included in the amounts below to present fairly the results of such periods (in thousands expect per share amounts).
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | | | | | |
| | September 30,
2019 | | December 31,
2019 | | March 31,
2020 | | June 30,
2020 |
| Total revenues | $ | 13,599 | | | $ | 14,565 | | | $ | 10,414 | | | $ | 12,568 | |
| Gross profit | $ | 4,484 | | | $ | 4,872 | | | $ | 2,223 | | | $ | 4,183 | |
| Operating income (loss) | $ | 768 | | | $ | 1,069 | | | $ | (1,578) | | | $ | 651 | |
| Net income (loss) | $ | 686 | | | $ | 970 | | | $ | (1,556) | | | $ | 2,166 | |
| Net income (loss) per share - basic and diluted | $ | 0.04 | | | $ | 0.06 | | | $ | (0.10) | | | $ | 0.13 | |
| Weighted average shares - diluted | 16,168 | | | 16,303 | | | 16,264 | | | 16,791 | |
| | | Quarter Ended | |
| | | September 30, 2016 | | | December 31, 2016 | | | March 31, 2017 | | | June 30, 2017 | |
| Total revenues | | $ | 9,531 | | | $ | 9,707 | | | $ | 8,588 | | | $ | 10,362 | |
| Gross profit | | $ | 2,959 | | | $ | 2,895 | | | $ | 2,352 | | | $ | 3,631 | |
| Operating income (loss) | | $ | (940 | ) | | $ | (204 | ) | | $ | (638 | ) | | $ | 595 | |
| Net income (loss) | | $ | (967 | ) | | $ | (227 | ) | | $ | (668 | ) | | $ | 569 | |
| Net income (loss) per share - basic and diluted | | $ | (0.06 | ) | | $ | (0.01 | ) | | $ | (0.04 | ) | | $ | 0.04 | |
| Weighted average shares-diluted | | | 15,868 | | | | 15,929 | | | | 15,994 | | | | 16,029 | |
| | | | Quarter Ended | | | Quarter Ended | |
| | | September 30, 2015 | | | December 31, 2015 | | | March 31, 2016 | | | June 30, 2016 | | | September 30,
2018 | | December 31,
2018 | | March 31,
2019 | | June 30,
2019 |
| Total revenues | | $ | 7,869 | | | $ | 9,992 | | | $ | 6,652 | | | $ | 8,870 | | Total revenues | $ | 10,293 | | | $ | 12,394 | | | $ | 9,451 | | | $ | 12,174 | |
| Gross profit | | $ | 2,879 | | | $ | 3,319 | | | $ | 1,693 | | | $ | 3,220 | | Gross profit | $ | 3,352 | | | $ | 3,991 | | | $ | 2,035 | | | $ | 3,892 | |
| Operating income (loss) | | $ | 231 | | | $ | 664 | | | $ | (1,104 | ) | | $ | 214 | | Operating income (loss) | $ | 125 | | | $ | 827 | | | $ | (1,073) | | | $ | 568 | |
| Net income (loss) | | $ | 220 | | | $ | 615 | | | $ | (1,042 | ) | | $ | 220 | | Net income (loss) | $ | 70 | | | $ | 779 | | | $ | (1,125) | | | $ | 490 | |
| Net income (loss) per share - basic and diluted | | $ | 0.01 | | | $ | 0.04 | | | $ | (0.07 | ) | | $ | 0.01 | | Net income (loss) per share - basic and diluted | $ | 0.00 | | | $ | 0.05 | | | $ | (0.07) | | | $ | 0.03 | |
| Weighted average shares-diluted | | | 15,926 | | | | 16,062 | | | | 15,462 | | | | 15,575 | | |
| Weighted average shares - diluted | | Weighted average shares - diluted | 16,089 | | | 16,106 | | | 16,138 | | | 16,150 | |