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, 2004
|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the transition period from to .
------ ------
Commission File Number: 0-22390
___________________
SHARPS COMPLIANCE CORP.
(Name of small business issuer in its charter)
Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9350 Kirby Drive, Suite 300, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
(713) 432-0300
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 10,538,144 shares of Common Stock,
$0.01 par value as of November 5, 2004.
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, 2004
(Unaudited) and June 30, 2004....................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended September 30, 2004 and 2003...........4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2004 and 2003...........5
Notes to Unaudited Condensed Consolidated Financial Statements.......6
Item 2. Management's Discussion and Analysis or Plan of Operations..........10
Item 3. Controls and Procedures.............................................11
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................12
Item 2. Changes in Securities...............................................12
Item 6. Exhibits............................................................12
SIGNATURES...................................................................13
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, June 30,
2004 2004
----------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 147,552 $ 242,803
Restricted cash............................................................... 12,649 14,678
Accounts receivable, net of allowance for doubtful accounts of $12,986 and
$12,986, respectively................................................... 923,123 981,408
Inventory..................................................................... 456,691 393,238
Prepaid and other assets...................................................... 115,478 138,798
----------- ------------
TOTAL CURRENT ASSETS....................................................... 1,655,493 1,770,925
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $536,432 and 507,945
respectively................................................................. 506,980 539,800
INTANGIBLE ASSETS, net of accumulated amortization of $101,735 and $101,582
respectively............................................................ 9,898 10,051
OTHER ASSETS.................................................................... - -
TOTAL ASSETS......................................................... $ 2,172,371 $ 2,320,776
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 495,605 $ 592,943
Accrued liabilities........................................................... 289,490 338,153
Deferred revenue - pump return................................................ 80,008 110,702
Current portion of deferred revenue - incineration............................ 132,806 108,299
Current portion of deferred revenue - transportation.......................... 625,838 553,938
Notes payable and current portion of long-term debt........................... - 185,932
Current maturities of capital lease obligations............................... 42,139 37,513
----------- ------------
TOTAL CURRENT LIABILITIES........................................... 1,665,886 1,927,480
LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion............... 32,531 30,408
LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion............. 187,381 179,506
LONG-TERM DEBT, net of current portion.......................................... - 10,826
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities..................... 79,301 84,446
OTHER LIABILITIES............................................................... 55,750 45,500
----------- ------------
TOTAL LIABILITIES.................................................... 2,020,849 2,278,166
COMMITMENTS AND CONTINGENCIES................................................... - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; 20,000,000 shares authorized;10,538,144
and 10,538,144 shares issued and outstanding, respectively.............. 105,381 105,381
Additional paid-in capital.................................................... 7,457,639 7,457,639
Accumulated deficit........................................................... (7,411,498) (7,520,410)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY........................................... 151,522 42,610
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $ 2,172,371 $ 2,320,776
=========== ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended September 30,
-----------------------------------
2004 2003
--------------- ----------------
(Unaudited)
REVENUES:
Distribution, net............................................................ $ 2,238,014 $ 1,802,104
Consulting and environmental services........................................ 66,790 70,426
Manufacturing................................................................ 114,582 124,682
--------------- ----------------
TOTAL REVENUES.......................................................... 2,419,386 1,997,212
COSTS AND EXPENSES:
Cost of revenues............................................................. 1,387,544 1,217,710
Selling, general and administrative.......................................... 867,905 836,386
Depreciation and amortization................................................ 42,901 38,658
--------------- ----------------
TOTAL COSTS AND EXPENSES............................................... 2,298,350 2,092,754
--------------- ----------------
OPERATING INCOME (LOSS)......................................................... 121,036 (95,542)
OTHER INCOME (EXPENSE)
Interest income.............................................................. - 48
Interest expense............................................................. (7,924) (21,083)
--------------- ----------------
TOTAL OTHER INCOME (EXPENSE)........................................... (7,924) (21,035)
--------------- ----------------
NET INCOME (LOSS) BEFORE INCOME TAXES........................................... 113,112 (116,577)
INCOME TAXES.................................................................... (4,200) -
--------------- ----------------
NET INCOME (LOSS)............................................................... $ 108,912 $ (116,577)
=============== ================
NET INCOME (LOSS) PER COMMON SHARE
Basic...................................................................... $ .01 $ (.01)
=============== ================
Diluted.................................................................... $ .01 $ (.01)
=============== ================
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE
Basic..................................................................... 10,538,144 9,960,811
=============== ================
Diluted................................................................... 10,887,750 9,960,811
=============== ================
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,
------------------------------------
2004 2003
------------------------------------
(Unaudited)
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)............................................................ $ 108,912 $ (116,577)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 42,901 38,658
Change in allowance for doubtful accounts.................................. 0 (18,909)
Loss on disposal of equipment.............................................. 275 -
Changes in operating assets and liabilities:
Decrease in restricted cash................................................ 2,029 109,237
(Increase) decrease in accounts receivable................................. 58,285 (3,473)
Increase in inventory...................................................... (63,453) (104,650)
Decrease in prepaids and other assets...................................... 23,320 25,555
Decrease in accounts payable and accrued liabilities....................... (135,751) (44,947)
Increase (decrease) in deferred revenue.................................... 75,711 (47,263)
---------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... 112,229 (162,369)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (19,148) (14,168)
Patent..................................................................... - (1,950)
Proceeds from sale of equipment ........................................... 17,876 -
---------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES................................... (1,272) (16,118)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................. (31,675) (29,342)
Net payments on factoring agreement........................................ (165,083) (145,567)
Payments on capital lease obligations...................................... (9,450) (981)
Issuance of common stock................................................... - 500,000
---------------- -----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..................... (206,208) 324,110
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT............................. (95,251) 145,623
CASH AND CASH EQUIVALENTS, beginning of period.................................. 242,803 135,884
---------------- -----------------
CASH AND CASH EQUIVALENTS, end of period........................................ $ 147,552 $ 281,507
================ =================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions acquired under capital lease obligations.. $ 8,931 $ 4,157
================ =================
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, 2004
NOTE 1. ORGANIZATION AND BACKGROUND
The accompanying consolidated financial statements include the financial
transactions and accounts of Sharps Compliance Corp. and it's wholly owned
subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.),
Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing, Inc., Sharps
Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.)
and Sharps Safety, Inc. (collectively, "Sharps" or the "Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") and, accordingly, do not include all information and
footnotes required under accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, these
interim condensed consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the consolidated financial position of the Company as of
September 30, 2004 and the results of its operations and cash flows for the
three months ended September 30, 2004 and 2003. The results of operations for
the three months ended September 30, 2004, are not necessarily indicative of the
results to be expected for the entire fiscal year ending June 30, 2005. These
condensed consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-KSB for the year ended June 30, 2004.
NOTE 3. REVENUE RECOGNITION
The Company adopted the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. Under SAB No. 101, certain products offered by the Company
have revenue producing components that are recognized over multiple delivery
points (Sharps Disposal by Mail Systems, referred to as "Mailback" and Sharps
Return Boxes, referred to as "Pump Returns") and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. The individual fair value of the
transportation and incineration services are determined by the sales price of
the service offered by third parties, with the fair value of the container being
the residual value. Revenue for the sale of the container is recognized upon
delivery to the customer, at which time the customer takes title and assumes
risk of ownership. Transportation revenue on Mailbacks is recognized when the
customer returns the mailback container system and the container has been
received at the Company's treatment facility. The Mailback container system is
mailed to the incineration facility using the United States Postal Service
("USPS"). Incineration revenue is recognized upon the destruction and
certification of destruction having been prepared on the container. Since the
transportation element and the incineration elements are undelivered services at
the point of initial sale of the container, the Mailback revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are determined through regression analysis and historical trends.
Furthermore, through regression analysis of historical data, the Company has
determined that a certain percentage of all container systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
are recognized at the point of sale.
NOTE 4. INCOME TAX
During the three months ended September 30, 2004 the Company recorded a $4,200
provision for estimated Alternative Minimum Tax (AMT). The Company anticipates
net operating profits for the year ended June 30, 2005, although no assurance
can be given. The Company expects to utilize its net operating loss
carryforwards to offset any ordinary taxable income for the year ended June 30,
2005.
NOTE 5. ACCOUNT RECEIVABLE
In September and October 2003, the Company secured judgments against Ameritech
Environmental, Inc. ("Ameritech") totaling $176,958 related to the non-payment
by Ameritech for services provided by the Company in 2002. The assets of
Ameritech representing collateral for the judgments were sold by Ameritech to
MedSolutions, Inc. of Dallas, Texas
6
("MedSolutions") in November 2003. In January 2004, the Company secured a
Garnishment Order against MedSolutons whereby MedSolutions was ordered to pay to
the Company $170,765, plus interest at 5%. Payments under the Garnishment Order
are scheduled to be made monthly in the amount of $4,375 (inclusive of interest)
with a balloon payment of $137,721 due November 7, 2004. MedSolutions is
currently in breach of the Garnishment Order. On November 9, 2004, the Company
filed, in the 234th Judicial District Court of Harris County, Texas, an
Application For Writ Of Garnishment After Judgment against MedSolutions' primary
financial institution, J. P Morgan Chase Bank. The total amount currently owed
by MedSolutions to the Company is $142,097.
In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Any recovery that may be received by the
Company will be reduced by collection-related legal fees estimated at one-third
of any amounts collected. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
September 30, June 30,
2004 2004
---------------- -----------------
Factoring agreement with financial
institution............................. $ - $ 165,083
Note payable to Futura.................... - 13,889
Promissory note to a finance company for
the purchase of an automobile........... - 17,786
---------------- -----------------
- 196,758
Less: current portion of notes payable
and long-term debt - 185,932
---------------- -----------------
Total notes payable and long-term debt ... $ - $ 10,826
================ =================
The Company maintains an arrangement with a financial institution for a
$1.25 million asset-based line of credit. The agreement allows the Company to
factor customer receivables generated out of its ordinary course of business.
The maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement is automatically renews
on an annual basis (August 30 of each year) unless terminated by either party.
The Company may borrow up to 80% of the eligible receivables presented and will
incur interest on borrowings at a prime rate of interest (4.5% as of September
30, 2004) plus 2%, plus administrative fees of .25% on gross receivables
financed. During the quarter ended September 30, 2004 the maximum borrowed under
the arrangement was $165,083. The balance at September 30, 2004 was zero.
NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
------------------------------
September 30, June 30,
2004 2004
------------- -------------
Capital lease for the purchase of accounting
and operating system software and hardware,
due in monthly installments of $4,061,
interest imputed at 21% through February 2007 $ 92,131 $ 99,315
Capital lease for purchase of phone system due
in monthly installments of $455, interest
imputed at 12% through August 2007 13,372 14,315
Capital lease for purchase of copier/printer due
in monthly installments of $157, interest
imputed at 21% through August 2006 2,843 3,252
Capital lease for purchase of phone system
upgrades due in monthly installments of $157,
interest imputed at 16% through December 2007 4,801 5,077
Capital lease for purchase of forklift due in
monthly installments of $290, interest imputed
at 11% through July 2007 8,293 -
---------- ----------
7
---------------- -----------------
121,440 121,959
Less: current portion .............. 42,139 37,513
---------------- -----------------
$ 79,301 $ 84,446
================ =================
NOTE 8. STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", but elected to continue to
account for its employee stock-based compensation plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations in accounting for its stock option
plan. While the Company continues to use APB No. 25, pro forma information
regarding net income (loss) and earnings per share is required under SFAS No.
123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS Statement No. 123", including that the
information be determined as if the Company had accounted for its stock options
under the fair value method prescribed by SFAS No. 123.
The Company uses the Black-Scholes option valuation model to value options
granted. Because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The Company used the following
weighted-average assumptions for options granted during the quarters ended
September 30, 2004 and 2003, as follows: risk-free interest rates of 3.7% and
3.6%, respectively; expected annual dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of approximately 53% and
32%, respectively; and a weighted-average expected life of the options of 7
years.
Had compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123 (and as amended by SFAS No. 148), the
Company's net income (loss) would have been increased, as follows:
Three Months Ended September 30,
------------------------------------
2004 2003
---------------- -----------------
Net income (loss), as reported .......... $ 108,912 $ (116,577)
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects ........................... $ (64,937) $ (73,403)
---------------- -----------------
Net loss, pro forma .................... $ 43,975 $ (189,980)
================ =================
Basic and diluted net loss per share,
as reported ........................... $ 0.01 $ (0.01)
================ =================
Basic and diluted net loss per share,
pro forma ............................. $ 0.00 $ (0.02)
================ =================
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,
------------------------------------
2004 2003
---------------- -----------------
Net income (loss), as reported ....... $ 108,912 $ (116,577)
---------------- -----------------
Weighted average common
shares outstanding.................. 10,538,144 9,822,023
Effect of Dilutive stock options...... 349,606 -
---------------- -----------------
Weighted average diluted common
shares outstanding.................. 10,887,750 9,822,023
---------------- -----------------
Net income per common share
Basic.............................. $ 0.01 $ (0.01)
Diluted............................ $ 0.01 $ (0.01)
Employee stock options excluded
from computation of diluted per
share amounts because their
effect would be dilutive............ 1,075,000 NA
8
NOTE 9. RELATED PARTY TRANSACTION
On January 2, 2003, the Chief Executive Officer of the Company sold 356,000
shares of common stock in Sharps Compliance Corp. through a private sale.
Purchasers of these shares included, among others, New Century Equity Holdings
Corp. ("New Century") (200,000 shares), a 3% shareholder in the Company, John
Dalton (50,000 shares), a 10.1% holder in the Company, and Philip Zerrillo
(10,000 shares), a member of the Company's Board of Directors.
On September 24, 2003, the Company completed a private placement of 625,000
unregistered shares of its common stock for net proceeds of $500,000.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This quarterly report on Form 10-QSB contains certain forward-looking statements
and information relating to Sharps that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate" and "intend" and words or phrases of similar
import, as they relate to Sharps or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.
GENERAL
Sharps is a leading developer of cost effective solutions for improving safety
and efficiency related to the proper disposal of medical waste by industry and
consumers. These solutions include Sharps Disposal by Mail System(TM),
Pitch-It(TM) IV Poles, Trip LesSystem(TM), Sharps Pump Return Box, Sharps
Enteral Pump Return Box, Sharps Secure(TM), Sharps SureTemp Tote(TM),
IsoWash(TM) Linen Recovery System, Sharps e-Tools, Sharps Environmental Services
and Sharps Consulting. Some products and services facilitate compliance with
state and federal regulations by tracking, incinerating and documenting the
disposal of medical waste. Additionally, some products and services facilitate
compliance with educational and training requirements required by federal,
state, and local regulatory agencies.
The Pro-Tec product line offers medical sharps disposal containers, specialized
for safe disposal of biomedical waste in a full range of services. The Pro-Tec
product line is a vertical business integration of the sharps disposal by mail
products for the Company. The Company will have savings in product cost on its
Sharps Disposable by Mail System(TM) and sales to third parties of this product.
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and
financial condition of the Company during the three months ended September 30,
2004 and 2003.
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Statements of Operations, expressed as a
percentage of revenue:
Three Months Ended September 30,
2004 2003
------------- --------------
Net revenues.................................. 100% 100%
Costs and expenses:
Cost of revenues........................... (57%) (61%)
Selling, general and administrative........ (36%) (42%)
Depreciation and amortization.............. (2%) (2%)
------------- --------------
Total operating expenses...................... (95%) (105%)
------------- --------------
Income (Loss) from operations............ 5% (5%)
Total other income............................ 0% (1%)
------------- --------------
Net loss...................................... 5% (6%)
============= ==============
THREE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Total revenues for the three months ended September 30, 2004 of $2,419,386
increased by $422,174, or 21%, over the total revenues for the three months
ended September 30, 2003 of $1,997,212. The increase in revenues is primarily
attributable to increased billings in Healthcare ($169,396), Retail ($159,312)
and the Agriculture ($126,412) markets.
Cost of revenues for the three months ended September 30, 2004 of $1,387,544
were 57% of revenues versus $1,217,710 or 61% of the revenues for the
corresponding period of the previous year. The decrease in the cost of revenues
as a percentage of revenue for the three months ended September 30, 2004 versus
September 30, 2003 is a result of the increased revenue since a portion of the
cost of revenues is relatively fixed.
10
Selling, general and administrative ("SG&A") expenses for the three months ended
September 30, 2004 of $867,905 were reasonably consistent with SG&A for the
three months ended September 30, 2003 of $836,386.
Interest expense for the three months ended September 30, 2004 of $7,924
decreased by $13,159, or 62%, over interest expense for the three months ended
September 30, 2003 of $21,083. The decrease in interest expense is primarily due
to the reductions in Notes Payable and Long-term Debt (See Note 6 of the Notes
to the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $95,251 to $147,552 at September 30, 2004
from $242,803 at June 30, 2004. The decrease in cash and cash equivalents is
primarily a result the payment on the balance of the factoring agreement debt of
$165,083 and the reduction in accrued liabilities of $135,751. These reductions
were partially offset by the net income of $108,912 and depreciation and
amortization of $42,901.
Inventory increased by $63,453 to $456,691 at September 30, 2004 from $393,238
at June 30, 2004. The increase was primarily due to the bulk purchase of
Pitch-It(TM) IV Poles for $100,548 at the end of September 2004.
Property and equipment decreased by $32,820 to $506,980 at September 30, 2004
from $539,800 at June 30, 2004. This decrease is primarily attributable to
depreciation expense of $42,901 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, 2005.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", and subsequently revised the
interpretation in December 2003 ("FIN 46R") which requires that companies that
control another entity through interests other than voting rights should
consolidate the controlled entity. As revised, FIN 46R is generally effective
for financial statements for interim or annual periods ending on or after March
15, 2004. The related disclosure requirements are effective immediately.
Management does not believe the adoption of FIN 46R will have any impact on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics to be accounted for on a comparable basis. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 will not have a material impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.
ITEM 3. CONTROLS AND PROCEDURES
Within the ninety days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the Company's evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 2004, the Company provided Mr. Ronald E. Pierce, its then current
Chief Operating Officer ("Mr. Pierce"), with notice of non-renewal of his
employment agreement. As such, July 14, 2004 was Mr. Pierce's last day of
employment. The Company has advised Mr. Pierce that under the terms of the
employment contract no further compensation (including services) was due. The
Company then received various letters from Mr. Pierce's attorney advising that
Mr. Pierce is taking the position that the non-renewal of the employment
agreement was not timely and, therefore, Mr. Pierce was terminated without
cause. Additionally, Mr. Pierce claims that the Company had no right to
terminate him on the anniversary date of his Agreement without the obligation of
paying Mr. Pierce as if he were terminated without cause. Mr. Pierce has
demanded severance related payments totaling approximately $280,000 (including a
$80,000 bonus) along with the full accelerated vesting of 500,000 stock options
previously awarded to Mr. Pierce. The Company believes that notice of such
non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement, the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce. On July 30, 2004, the Company received notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. The Company believes it has meritorious defenses against Mr. Pierce's
claims and has not recorded a liability related to this matter.
ITEM 2. CHANGES IN SECURITIES
On September 24, 2003 the Company completed a private placement of 625,000
shares of common stock at a price of $0.80 per share. The proceeds of $500,000
have been utilized by the Company for working capital purposes as well as to
support growth plans to further expand the business into the industrial, retail,
and other markets.
ITEM 6. EXHIBITS
(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)
10.5 Employment Agreement Amendment (filed herewith)
ITEMS 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 11, 2004 By:/s/ Dr. Burton J. Kunik
-----------------------
Dr. Burton J. Kunik
Chairman of the Board, Chief
Executive Officer and President
Dated: November 11, 2004 By:/s/ David P. Tusa
-----------------
David P. Tusa
Senior Vice President,
Chief Financial Officer
and Corporate Secretary
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