UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the transition period from to .
---------- ------------
Commission File Number: 0-22390
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SHARPS COMPLIANCE CORP.
(Name of small business issuer in its charter)
Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9350 Kirby Drive, Suite 300, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
(713) 432-0300
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 10,547,311 shares of Common Stock,
$0.01 par value as of November 7, 2005.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005
(Unaudited) and June 30, 2005........................................3
Unaudited Condensed Consolidated Statements of Operations for the three
months ended September 30, 2005 and 2004.............................4
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2005 and 2004.............................5
Notes to Unaudited Condensed Consolidated Financial Statements........6
Item 2. Management's Discussion and Analysis or Plan of Operation............10
Item 3. Controls and Procedures..............................................12
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................14
SIGNATURES....................................................................15
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, June 30,
2005 2005
-------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 262,647 $ 258,427
Restricted cash 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of $22,182 and
$21,757, respectively 1,201,530 964,148
Inventory 321,792 368,495
Prepaid and other assets 164,786 79,320
-------------- -------------
TOTAL CURRENT ASSETS 1,960,765 1,680,400
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $683,204 and $650,532
respectively 413,297 438,064
INTANGIBLE ASSETS, net of accumulated amortization of $102,386 and $102,195
respectively 11,588 11,779
TOTAL ASSETS $2,385,650 $2,130,243
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 559,482 $ 567,398
Accrued liabilities 295,098 283,953
Current portion of deferred revenue - incineration 197,446 171,300
Current portion of deferred revenue - transportation 870,469 825,297
Current maturities of capital lease obligations 50,613 48,558
-------------- -------------
TOTAL CURRENT LIABILITIES 1,973,108 1,896,506
LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion 57,668 47,142
LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion 243,017 225,639
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities 28,731 42,112
OTHER LIABILITIES 62,250 62,500
-------------- -------------
TOTAL LIABILITIES 2,364,774 2,273,899
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFECIT)
Common stock, $.01 par value per share; 20,000,000 shares authorized;
10,547,311 shares issued and outstanding 105,473 105,473
Additional paid-in capital 7,464,381 7,464,381
Accumulated deficit (7,548,978) (7,713,510)
----------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFECIT) 20,876 (143,656)
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFECIT) $2,385,650 $2,130,243
============== =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended September 30,
---------------------------------------------
2005 2004
---------------------------------------------
(Unaudited)
REVENUES:
Distribution, net 2,602,644 2,352,596
Consulting services 1,741 11,771
Environmental revenue 55,727 55,019
TOTAL REVENUES $2,660,112 $2,419,386
------------ ------------
COSTS AND EXPENSES:
Cost of revenues 1,560,919 1,387,544
Selling, general and administrative 892,377 867,905
Depreciation and amortization 32,863 42,901
------------ ------------
TOTAL COSTS AND EXPENSES 2,486,159 2,298,350
------------ ------------
OPERATING INCOME 173,953 121,036
OTHER EXPENSE
Interest expense (3,916) (7,924)
------------ ------------
INCOME BEFORE INCOME TAXES 170,037 113,112
INCOME TAXES (5,505) (4,200)
------------ ------------
NET INCOME $ 164,532 $ 108,912
============ ============
NET INCOME PER COMMON SHARE
Basic $ .02 $ .01
============ ============
Diluted $ .02 $ .01
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
NET INCOME PER COMMON SHARE
Basic 10,547,311 10,538,144
============ ============
Diluted 10,720,142 10,887,750
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended September 30,
--------------------------------
2005 2004
--------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 164,532 $ 108,912
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 32,863 42,901
Change in allowance for doubtful accounts 425 -
Loss on disposal of equipment - 275
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash - 2,029
(Increase) decrease in accounts receivable (237,807) 58,285
(Increase) decrease in inventory 46,703 (63,453)
(Increase) decrease in prepaids and other assets (85,466) 23,320
Increase (decrease) in accounts payable and accrued liabilities 2,979 (135,751)
Increase in deferred revenue 99,222 75,711
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,451 112,229
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,905) (19,148)
Proceeds from sale of equipment - 17,876
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,905) (1,272)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt - (31,675)
Net payments on factoring agreement - (165,083)
Payments on capital lease obligations (11,326) (9,450)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (11,326) (206,208)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,220 (95,251)
CASH AND CASH EQUIVALENTS, beginning of period 258,427 242,803
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 262,647 $ 147,552
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions acquired under capital lease - $ 8,931
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1. ORGANIZATION AND BACKGROUND
The accompanying consolidated financial statements include the financial
transactions and accounts of Sharps Compliance Corp. and it's wholly owned
subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.),
Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing, Inc., Sharps
Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.)
and Sharps Safety, Inc. (collectively, "Sharps" or the "Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") and, accordingly, do not include all information and
footnotes required under accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements contain
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated financial position of the
Company as of September 30, 2005 and the results of its operations and cash
flows for the three months ended September 30, 2005 and 2004. The results of
operations for the three months ended September 30, 2005, are not necessarily
indicative of the results to be expected for the entire fiscal year ending June
30, 2006. These condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the year ended
June 30, 2005. Certain prior year amounts have been reclassified to current form
presentation.
NOTE 3. REVENUE RECOGNITION
The Company adopted the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. Under SAB No. 101, certain products offered by the Company
have revenue producing components that are recognized over multiple delivery
points (Sharps Disposal by Mail Systems, referred to as "Mailback" and Sharps
Return Boxes, referred to as "Pump Returns") and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. The individual fair value of the
transportation and incineration services are determined by the sales price of
the service offered by third parties, with the fair value of the container being
the residual value. Revenue for the sale of the container is recognized upon
delivery to the customer, at which time the customer takes title and assumes
risk of ownership. Transportation revenue on Mailbacks is recognized when the
customer returns the mailback container system and the container has been
received at the Company's treatment facility. The Mailback container system is
mailed to the incineration facility using the United States Postal Service
("USPS"). Incineration revenue is recognized upon the destruction and
certification of destruction having been prepared on the container. Since the
transportation element and the incineration elements are undelivered services at
the point of initial sale of the container, the Mailback revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are determined through regression analysis and historical trends.
Furthermore, through regression analysis of historical data, the Company has
determined that a certain percentage of all container systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
is recognized at the point of sale.
NOTE 4. INCOME TAXES
During the three months ended September 30, 2005 the Company recorded a $5,505
provision for estimated Alternative Minimum Tax (AMT). The Company anticipates
net-operating profits for the year ended June 30, 2006, although no assurance
can be made. The Company expects to utilize its net operating loss carryforwards
to offset any ordinary taxable income for the year ended June 30, 2006.
6
NOTE 5. ACCOUNT RECEIVABLE
During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
January 2004, the Company secured a Garnishment Order against MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order were scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court.
In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees estimated
at one-third of any amounts collected will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains an arrangement with a financial institution for a $1.25
million asset-based line of credit. The agreement allows the Company to factor
customer receivables generated out of its ordinary course of business. The
maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement automatically renews on
an annual basis (August 30 of each year) unless terminated by either party. The
Company may borrow up to 80% of the eligible receivables presented and incurs
interest on gross invoices financed at a prime rate of interest plus 2%, plus
administrative fees of .25% on gross receivables presented. The interest rate
decreases to prime plus 1.25% (versus 2%) at such times as the Company's
Adjusted Quick Ratio is 1.25 to 1.00 or greater. Adjusted Quick Ratio is defined
as cash plus accounts receivable (less than 90 days from invoice date), divided
by current liabilities less deferred revenue. During the quarter ended September
30, 2005, there were no borrowings under the arrangement.
NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
September 30, June 30,
2005 2005
--------------- ---------------
Capital lease for purchase of accounting and operating system
software and hardware, due in monthly installments of $4,061,
interest imputed at 21% through February 2007 $ 59,467 $ 68,313
Capital lease for purchase of phone system due in monthly
installments of $455, interest imputed at 12% through August 2007 9,304 10,368
Capital lease for purchase of copier/printer due in monthly
installments of $157, interest imputed at 21% through August 2006 1,428 1,811
Capital lease for purchase of phone system upgrades due in monthly
installments of $157, interest imputed at 16% through December 2007 3,583 3,905
Capital lease for purchase of forklift due in monthly installments
of $290, interest imputed at 11% through July 2007 5,562 6,273
--------------- ---------------
79,344 90,670
Less: current portion 50,613 48,558
--------------- ---------------
$ 28,731 $ 42,112
=============== ===============
7
NOTE 8. STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", but elected to continue to
account for its employee stock-based compensation plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations in accounting for its stock option
plan. While the Company continues to use APB No. 25, pro forma information
regarding net income (loss) and earnings per share is required under SFAS No.
123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS Statement No. 123", including that the
information be determined as if the Company had accounted for its stock options
under the fair value method prescribed by SFAS No. 123.
The Company uses the Black-Scholes option valuation model to value options
granted. Because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The Company used the following
weighted-average assumptions for options granted during the quarters ended
September 30, 2005 and 2004, as follows: risk-free interest rates of 4.07% and
3.74%, respectively expected annual dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of approximately 80.0%
and 53%, respectively; and a weighted-average expected life of the options of
4.5 and 7 years, respectively.
Had compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123 (and as amended by SFAS No. 148), the
Company's net income (loss) would have been increased, as follows:
Three Months Ended September 30,
----------------------------------
2005 2004
------------- -------------
Net income, as reported $ 164,532 $ 108,912
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects $ (67,907) $ (64,937)
------------- -------------
Net income, pro forma $ 96,625 $ 43,975
============= =============
Basic and diluted net income per share, as reported $ 0.02 $ 0.01
============= =============
Basic and diluted net income per share, pro forma $ 0.01 $ 0.00
============= =============
8
NOTE 9. EARNINGS PER SHARE
Earnings per share is measured at two levels: basic per share and diluted per
share. Basic per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the year. Diluted per share
is computed by dividing net income (loss) by the weighted average number of
common shares after considering the additional dilution related to common stock
options. In computing diluted per share, the outstanding common stock options
are considered dilutive using the treasury stock method. The following
information is necessary to calculate per share for the periods presented:
Three Months Ended September 30,
--------------------------------
2005 2004
------------- ---------------
Net income, as reported $ 164,532 $ 108,912
------------- ---------------
Weighted average common shares outstanding 10,547,311 10,538,144
Effect of Dilutive stock options 172,831 349,606
------------- ---------------
Weighted average diluted common shares outstanding 10,720,142 10,887,750
------------- ---------------
Net income per common share
Basic $ 0.02 $ 0.01
Diluted $ 0.02 $ 0.01
Employee stock options excluded from computation of diluted per
share amounts because their effect would be anti-dilutive 2,894,890 1,075,000
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains certain forward-looking statements
and information relating to Sharps that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate" and "intend" and words or phrases of similar
import, as they relate to Sharps or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.
GENERAL
Sharps is a leading developer of cost effective solutions for improving safety
and efficiency related to the proper disposal of medical waste by industry and
consumers. These solutions include Sharps Disposal by Mail System(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box, Sharps Secure(R), Sharps SureTemp Tote(R), IsoWash(R) Linen
Recovery System, Biohazard Spill Clean-Up Kit and Disposal System, Sharps
e-Tools, Sharps Environmental Services and Sharps Consulting. Some products and
services facilitate compliance with state and federal regulations by tracking,
incinerating and documenting the disposal of medical waste. Additionally, some
products and services facilitate compliance with educational and training
requirements required by federal, state, and local regulatory agencies.
The Pro-Tec product line offers medical sharps disposal containers, specialized
for safe disposal of biomedical waste in a full range of services. The Pro-Tec
product line is a vertical business integration of the sharps disposal by mail
products for the Company. The Company will have savings in product cost on its
Sharps Disposable by Mail System(R) and sales to third parties of this product.
The Company's products are marketed to the following segments: healthcare,
agriculture, commercial / industrial, hospitality, professional, retail and
pharmaceutical.
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and
financial condition of the Company during the three months ended September 30,
2005 and 2004.
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Statements of Operations, expressed as a
percentage of revenue:
Three Months Ended September 30,
2005 2004
------------------ -------------------
Net revenues 100% 100%
Costs and expenses:
Cost of revenues (59%) (57%)
Selling, general and administrative (34%) (36%)
Depreciation and amortization (1%) (2%)
------------------ ------------------
Total operating expenses (94%) (95%)
------------------ -------------------
Income from operations 6% 5%
Total other expense 0% 0%
------------------ -------------------
Net income 6% 5%
================== ===================
10
THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004
Total revenues for the three months ended September 30, 2005 of $2,660,112
increased by $240,726, or 10%, over the total revenues for the three months
ended September 30, 2004 of $2,419,386. The increase in revenues is primarily
attributable to increased billings in Retail ($189,373) and Hospitality
($45,110) markets.
Cost of revenues for the three months ended September 30, 2005 of $1,560,919
were 59% of revenues versus $1,387,543 or 57% of the revenues for the
corresponding period of the previous year. The increase in the cost of revenues
as a percentage of revenue for the three months ended September 30, 2005 versus
September 30, 2004 is a result of the increased inventory and handling costs.
Selling, general and administrative ("SG&A") expenses for the three months ended
September 30, 2005 of $892,377 were less than three percent (3%) higher than the
SG&A for the three months ended September 30, 2004 of $867,905.
Interest expense for the three months ended September 30, 2005 of $3,916
decreased by $4,008, or 51%, over interest expense for the three months ended
September 30, 2004 of $7,924. The decrease in interest expense is primarily due
to the reduction in Notes Payable and Long-term Debt (See Note 6 of the Notes to
the Condensed Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $4,220 to $262,647 at September 30, 2005
from $258,427 at June 30, 2005.
Accounts Receivable increased by $237,382 to $1,201,530 at September 30, 2005
from $964,148 at June 30, 2005 directly as a result of the increase in billings
generated by the Company for the quarter ended September 30, 2005 versus the
quarter ended June 30, 2005.
Inventory decreased by $46,703 to $321,792 at September 30, 2005 from $368,495
at June 30, 2005. The decrease was primarily due to timing of the bulk purchase
of Pitch-It(TM) IV Poles affecting the inventory balance at June 30, 2005.
Property and equipment decreased by $24,767 to $413,297 at September 30, 2005
from $438,064 at June 30, 2005. This decrease is primarily attributable to
depreciation expense of $32,672 recognized for the quarter.
Management believes that the Company's current cash resources along with its
asset-based factoring line will be sufficient to fund operations for the twelve
months ended September 30, 2006.
CRITICAL ACCOUNTING ESTIMATES
Certain products offered by the Company have revenue producing components that
are recognized over multiple delivery points and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. Since the transportation element and the
incineration elements are undelivered services at the point of initial sale of
the container, the revenue is deferred until the services are performed. The
current and long-term portions of deferred revenues are determined through
regression analysis and historical trends. Furthermore, through regression
analysis of historical data, the Company has determined that a certain
percentage of all container systems sold may not be returned. Accordingly, a
portion of the transportation and incineration elements is recognized at the
point of sale.
INCINERATOR FACILITY- REGULATORY DEVELOPMENTS
The EPA has proposed a change in the Clean Air Act, which could effect the
operations of the leased incineration facility located in Carthage, Texas. The
proposed regulation modifies the emission limits and monitoring procedures
required to operate an incineration facility. The proposed rule could
necessitate changes to the Company's leased incinerator and pollution control
equipment at the facility or require installation of an alternative treatment
method to ensure compliance. Such change, if enacted in its current form, would
require the Company to incur significant capital expenditures in order to meet
the requirements of the proposed regulations. The proposed regulation, as
currently written, allows a minimum period of three years and a maximum of five
years to comply after the date the final rule is published. Management is not
able to predict when, or if, the proposed rule change may be enacted; however,
based upon correspondence received from the EPA, the new regulation could be
enacted as early as November 30, 2005.
11
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.
In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments, such as stock options granted to employees. The Company is required to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in their pro forma
disclosures that had been required by FAS 123. For public entities that file as
small business issuers, FAS 123 (R) is effective as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
Management has not completed its evaluation of the effect that FAS 123 (R) will
have, but believes that the effect will be consistent with the application
disclosed in its pro forma disclosures.
In May 2005, the FASB issued Statement No. 154, Accounting Changes & Error
Corrections, which replaced APB Opinion No. 20 and FASB Statement No. 3. This
statement changes the requirement for accounting and reporting of a voluntary
change in accounting principle and changes required by an accounting
pronouncement when the specific transition provisions are absent. This statement
requires retrospective application to prior periods' financial statements of
changes in accounting principle. If it is impracticable to determine either the
period-specific effect or the cumulative effect of the change, this statement
requires that the new accounting principle be adopted prospectively from the
earliest practicable date. SFAS No. 154 is effective in the period that begins
after December 15, 2005, and early adoption is permitted in the fiscal years
beginning after SFAS No. 154 was issued. The Company does not expect the new
standard to have any material impact on our financial position and results of
operations.
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ITEM 3. CONTROLS AND PROCEDURES
As of the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13(a) - 15(e) and 15(d) - 15(c).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the Company's evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
January 2004, the Company secured a Garnishment Order against MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order were scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court.
In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees estimated
at one-third of any amounts collected will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.
On June 14, 2004, the Company provided Mr. Ronald E. Pierce, its then current
Chief Operating Officer ("Mr. Pierce"), with notice of non-renewal of his
employment agreement. As such, July 14, 2004 was Mr. Pierce's last day of
employment. The Company has advised Mr. Pierce that under the terms of the
employment contract no further compensation (including services) was due. The
Company then received various letters from Mr. Pierce's attorney advising that
Mr. Pierce is taking the position that the non-renewal of the employment
agreement was not timely and, therefore, Mr. Pierce was terminated without
cause. Additionally, Mr. Pierce claims that the Company had no right to
terminate him on the anniversary date of his Agreement without the obligation of
paying Mr. Pierce as if he were terminated without cause. Mr. Pierce has
demanded severance related payments totaling approximately $280,000 (including
an $80,000 bonus) along with the full accelerated vesting of 500,000 stock
options previously awarded to Mr. Pierce. The Company believes that notice of
such non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement, the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce. On July 30, 2004, the Company received notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. No further communications have been received from Mr. Pierce's attorney
since July 30, 2004. The Company believes it has meritorious defenses against
Mr. Pierce's claims and has not recorded a liability related to this matter.
On or about February 25, 2003, Jason Jodway, a then employee of the Company
since April 1999, resigned in lieu of termination of employment by the Company.
Thereafter, Mr. Jodway formed Attentus Medical Sales, Inc., a competing entity
of the Company. In March 2005, the Company's wholly-own subsidiary Sharps
Compliance, Inc., filed a lawsuit in Harris County District Court, Texas against
Mr. Jodway and Attentus Medical Sales, Inc. The lawsuit claims, (i) breach of a
confidentiality agreement, (ii) misappropriation of trade secrets and (iii)
tortious interference with the Company's existing and prospective contracts and
business relationships. On April 7, 2005, the defendant filed its answer and
counter claims against Sharps Compliance, Inc. asserting breach of contract,
quantum merit and violation of the Texas Payday Act alleging that his last day
of employment was March 29, 2003 and that he is entitled to receive two weeks of
back wages and commissions. On September 19, 2005, the Company amended its
pleadings and added claims asserting conversion, unjust enrichment, unfair
competition and trademark infringement in violation of the Lanham Act, false
advertising in violation of the Lanham Act, trademark dilution under the Texas
Business and Commerce Code, and tortious interference with existing and/or
prospective customers. On April 28, 2005, Defendants filed an Amended Answer and
Counterclaims adding counter claims asserting slander, business disparagement
and tortious interference with contractual and prospective relationships. On
April 29, 2005, Mr. Jodway and Attentus Medical Sales, Inc. filed a Notice of
Removal of the action from Harris County Circuit Court to the United States
District Court, Southern District of Texas. The Company denies any obligation to
Mr. Jodway for his back wages, commissions and denies all other allegations. The
Company intends to vigorously pursue its affirmative claims against Mr. Jodway
and Attentus Medical Sales, Inc., seek injunctive relief for violations of the
Lanham Act, money damages and attorneys fees, although the Company has not
quantified its damages to date.
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ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification of Chief Executive Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certification of Chief Financial Officer in Accordance with Section
302 of the Sarbanes-Oxley Act (filed herewith)
32.1 Certification of Chief Executive Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
32.2 Certification of Chief Financial Officer in Accordance with Section
906 of the Sarbanes-Oxley Act (filed herewith)
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
SHARPS COMPLIANCE CORP.
Dated: November 8, 2005 By: /s/ Dr. Burton J. Kunik
-------------------------------
Chairman of the Board, Chief
Executive Officer and President
Dated: November 8, 2005 By: /s/ David P. Tusa
-------------------------------
Executive Vice President,
Chief Financial Officer,
Business Development
and Corporate Secretary
16