UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended December 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to .
------ ------
Commission File Number: 0-22390
-----------------------
SHARPS COMPLIANCE CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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: 11,641,600 shares of Common Stock,
$0.01 par value as of February 2, 2006.
Transitional Small Business Disclosure Format (check one): Yes [] No [X]
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets..................................................3
Condensed Consolidated Statements of Income for the three
months ended December 31, 2006 and 2005............................................4
Condensed Consolidated Statements of Income for the six
months ended December 31, 2006 and 2005............................................5
Condensed Consolidated Statements of Cash Flows .......................................6
Notes to Condensed Consolidated Financial Statements ..................................7
Item 2. Management's Discussion and Analysis or Plan of Operation.............................12
Item 3. Controls and Procedures...............................................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................18
Item 4. Submission of Matters to a Vote of Security Holders .................................19
Item 6. Exhibits..............................................................................19
SIGNATURES.....................................................................................20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2006 2006
----------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................................. $ 883,353 $ 296,959
Restricted cash ....................................................................... 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of $18,856 and $20,024,
respectively ......................................................................... 1,444,627 935,283
Inventory .............................................................................. 296,340 325,688
Prepaid and other assets ............................................................... 145,594 88,348
-------------- -------------
TOTAL CURRENT ASSETS ................................................................. 2,779,924 1,656,288
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $882,089 and $790,397,
respectively ........................................................................... 445,124 473,387
INTANGIBLE ASSETS, net of accumulated amortization of $114,803 and $116,805, respectively.. 63,499 60,427
-------------- -------------
TOTAL ASSETS .............................................................................. $ 3,288,547 $ 2,190,102
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................................... $ 661,682 $ 526,582
Accrued liabilities .................................................................... 299,379 262,219
Deferred revenue........................................................................ 915,796 826,764
Current maturities of capital lease obligations........................................ 14,906 40,260
-------------- -------------
TOTAL CURRENT LIABILITIES ............................................................ 1,891,763 1,655,825
LONG-TERM DEFERRED REVENUE ................................................................ 240,959 211,568
OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities ............................... - 1,809
RENT ABATEMENT ............................................................................ 70,500 69,000
-------------- -------------
TOTAL LIABILITIES .................................................................... 2,203,222 1,938,202
COMMITMENTS ...............................................................................
- -
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 10,712,298 and
10,551,310 shares issued and outstanding, respectively ............................... 107,123 105,513
Additional paid-in capital ............................................................. 7,597,298 7,478,268
Accumulated deficit .................................................................... (6,619,096) (7,331,881)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY............................................................ 1,085,325 251,900
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................ $ 3,288,547 $ 2,190,102
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months
Ended December 31,
---------------------------------------
2006 2005
------------------ -----------------
(Unaudited)
REVENUES
Product ............................................................. $ 3,094,945 $ 2,575,337
Environmental services .............................................. 86,832 88,039
-------------- --------------
TOTAL REVENUES ................................................... 3,181,777 2,663,376
COSTS AND EXPENSES
Cost of revenues .................................................... 1,819,800 1,496,692
Selling, general and administrative ................................. 924,122 960,325
Depreciation and amortization ....................................... 45,477 35,240
-------------- --------------
TOTAL COSTS AND EXPENSES ......................................... 2,789,399 2,492,257
-------------- --------------
OPERATING INCOME ...................................................... 392,378 171,119
OTHER INCOME (EXPENSE)
Interest income ..................................................... 7,919 2,841
Interest expense .................................................... (2,269) (3,678)
Other Income ........................................................ 32,500 -
-------------- --------------
INCOME BEFORE INCOME TAXES ............................................ 430,528 170,282
INCOME TAXES .......................................................... (9,332) (3,310)
-------------- --------------
NET INCOME............................................................. $ 421,196 $ 166,972
============== ==============
NET INCOME PER COMMON SHARE
Basic ............................................................... $ .04 $ .02
============== ==============
Diluted ............................................................. $ .04 $ .02
============== ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON
SHARE:
Basic ............................................................... 10,664,557 10,547,311
Diluted ............................................................. 11,576,162 10,720,512
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Six Months
Ended December 31,
---------------------------------------
2006 2005
------------------ -----------------
(Unaudited)
REVENUES
Product ............................................................. $ 6,016,243 $ 5,179,722
Environmental services .............................................. 156,418 143,766
--------------- --------------
TOTAL REVENUES ................................................... 6,172,661 5,323,488
COSTS AND EXPENSES
Cost of revenues .................................................... 3,513,388 3,057,611
Selling, general and administrative ................................. 1,878,545 1,854,848
Depreciation and amortization ....................................... 89,689 68,104
--------------- --------------
TOTAL COSTS AND EXPENSES ......................................... 5,481,622 4,980,563
--------------- --------------
OPERATING INCOME ...................................................... 691,039 342,925
OTHER INCOME (EXPENSE)
Interest income ..................................................... 11,468 4,988
Interest expense .................................................... (4,176) (7,594)
Other Income ........................................................ 32,500 -
--------------- --------------
INCOME BEFORE INCOME TAXES ............................................ 730,831 340,319
INCOME TAXES .......................................................... (18,046) (8,815)
--------------- --------------
NET INCOME............................................................. $ 712,785 $ 331,504
=============== ==============
NET INCOME PER COMMON SHARE
Basic ............................................................... $ .07 $ .03
=============== ==============
Diluted ............................................................. $ .06 $ .03
=============== ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON
SHARE:
Basic ............................................................... 10,608,314 10,547,311
Diluted ............................................................. 11,275,236 10,726,626
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31,
---------------------------------------
2006 2005
----------------- ------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 712,785 $ 331,504
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 89,689 68,104
Bad debt expense ..................................................... - (406)
Changes in operating assets and liabilities:
Increase in accounts receivable ...................................... (509,344) (99,322)
(Increase) decrease in inventory ..................................... 29,348 (54,810)
Increase in prepaid and other assets ................................. (57,246) (55,127)
Increase in accounts payable and accrued liabilities ................. 173,760 23,189
Increase in deferred revenue ......................................... 118,423 89,702
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 557,415 302,834
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................................... (63,429) (76,832)
Purchase of intangible assets......................................... (1,069) (53,624)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES .............................. (64,498) (130,456)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ............................... (27,163) (23,165)
Proceeds from exercise of stock options ............................. 120,640 -
------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 93,477 (23,165)
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................... 586,394 149,213
CASH AND CASH EQUIVALENTS, beginning of period ........................... 296,959 258,427
------------- --------------
CASH AND CASH EQUIVALENTS, end of period ................................. $ 883,353 $ 407,640
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .............................................. $ 4,176 $ 7,594
============= ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BACKGROUND
The accompanying unaudited condensed consolidated financial statements include
the financial transactions and accounts of Sharps Compliance Corp. and it's
wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps
Compliance, Inc.), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps
Manufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps
Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively,
"Sharps" or the "Company"). All significant intercompany accounts and
transactions have been eliminated upon consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") for interim financial information and with
instructions to Form 10-QSB and, accordingly, do not include all information and
footnotes required under accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements contain
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated financial position of the
Company as of December 31, 2006 and the results of its operations and cash flows
for the three and six months ended December 31, 2006 and 2005. The results of
operations for the three and six months ended December 31, 2006, are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2007. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended June 30, 2006. Certain prior year amounts have
been reclassified to conform to current period presentation.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company adopted the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. Under SAB No. 101, certain products offered by the Company
have revenue producing components that are recognized over multiple delivery
points (Sharps Disposal by Mail Systems, referred to as "Mailback" and Sharps
Return Boxes, referred to as "Pump Returns") and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. The individual fair value of the
transportation and incineration services are determined by the sales price of
the service offered by third parties, with the fair value of the container being
the residual value. Revenue for the sale of the container is recognized upon
delivery to the customer, at which time the customer takes title and assumes
risk of ownership. Transportation revenue on Mailbacks is recognized when the
customer returns the mailback container system and the container has been
received at the Company's treatment facility. The Mailback container system is
mailed to the incineration facility using the United States Postal Service
("USPS") or United Parcel Service ("UPS"). Incineration revenue is recognized
upon the destruction and certification of destruction having been prepared on
the container. Since the transportation element and the incineration elements
are undelivered services at the point of initial sale of the container, the
Mailback revenue is deferred until the services are performed. The current and
long-term portions of deferred revenues are determined through regression
analysis and historical trends. Furthermore, through regression analysis of
historical data, the Company has determined that a certain percentage of all
container systems sold may not be returned. Accordingly, a portion of the
transportation and incineration elements is recognized at the point of sale.
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the requirements of FIN No. 48.
7
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," SAB 108 provides
interpretive guidance on the SEC's views regarding the process of quantifying
materiality of financial statement misstatements. SAB 108 is effective for
fiscal years ending after November 15, 2006, with early application for the
first interim period ending after November 15, 2006. The Company does not expect
that the application of SAB 108 will have any material impact on its financial
position and results of operations.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the new standard to have
a material impact on its financial position and results of operations.
NOTE 5 - INCOME TAXES
During the three and six months ended December 31, 2006 the Company recorded a
provision of $9,332 and $18,046, respectively for estimated Alternative Minimum
Tax (AMT). During the three and six months ended December 31, 2005 the Company
recorded a provision of $3,310 and $8,815, respectively for the AMT. The Company
expects to utilize its net operating loss carry forwards to offset any ordinary
taxable income for the year ending June 30, 2007.
NOTE 6 - ACCOUNT RECEIVABLE
During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for incineration services provided by the Company in
2002. In November 2003, Ameritech sold its assets representing collateral for
the judgments to MedSolutions, Inc. of Dallas, Texas ("MedSolutions"). During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. This represented
the then outstanding remaining amount due to the Company.
In August 2006, the Company filed an amended suit against Ameritech, its
officers and directors (Jasper S. Howard, Alton H. Howard and Jonathon S.
Howard) alleging fraudulent conveyance, fraud on creditors, civil conspiracy,
breach of court order and conversion. In October 2006, the Company sold certain
assets secured by the above noted Garnishment Order for $50,000 cash, $17,500 of
which was paid to an attorney under a contingency fee arrangement. The net
proceeds of $32,500 were recorded as other income during the quarter ended
December 31, 2006. In conjunction with this partial recovery, the Company and
MedSolutions entered into a mutual release whereby the Company dismissed
MedSolutions from the litigation.
Prior to the year ended June 30, 2003, the Company wrote-off all outstanding
amounts due from Ameritech. Any recovery that may be received by the Company
will be reduced by collection-related legal fees computed at thirty-five percent
of any amounts collected plus expenses. Although the Company will continue to
aggressively pursue collection of the remaining outstanding amount of
approximately $90,000 (plus interest and attorney fees), no assurances can be
made regarding ultimate collection.
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
Effective February 5, 2007, the Company entered into an Amended Credit Agreement
with JPMorgan Chase Bank, N.A. ("Credit Agreement") which provides for a $2.5
million Line of Credit Facility the proceeds of which may be utilized for, (i)
working capital, (ii) letters of credit (up to $200,000), (iii) acquisitions (up
to $500,000) and (iv) general corporate purposes. Indebtedness under the Credit
Agreement is secured by substantially all of the Company's assets. Borrowings
bear interest at a fluctuating rate per annum equal to either, (i) prime rate or
(ii) LIBOR plus a margin of 2.75%. Any outstanding revolving loans, and accrued
and unpaid interest, will be due and payable on March 27, 2009, the maturity
date of the facility. The aggregate principal amount of advances outstanding at
any time under the Facility shall not exceed the Borrowing Base which is equal
to, (i) 80% of Eligible Accounts Receivable (as defined) plus (ii) 50% of
Eligible Inventory (as defined). The Credit Agreement contains affirmative and
negative covenants that, among other items, require the Company to maintain a
specified tangible net worth and fixed charge coverage ratio. The Credit
Agreement also contains customary events of default. Upon the occurrence of an
event of default that remains uncured after any applicable cure period, the
lenders' commitment to make further loans may terminate and the Borrower may be
required to make immediate repayment of all indebtedness to the lenders. The
lender would also be entitled to pursue other remedies against the Company and
the collateral. As of December 31, 2006, there were no borrowings under this
Line Of Credit Facility and the Company was in compliance with all loan
covenants.
8
NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASES
Capital lease obligations consist of the following:
December 31, June 30,
2006 2006
------------------ -------------------
Capital lease for the purchase of accounting and operating system software and
hardware, due in monthly installments of $4,061, interest imputed at 21%
through February 2007 ......................................................... $ 7,971 $ 30,160
Capital lease for purchase of phone system due in monthly installments of $455,
interest imputed at 12% through August 2007 ................................... 3,482 5,916
Capital lease for purchase of copier/printer due in monthly installments of $157,
interest imputed at 21% through August 2006 ................................... - 155
Capital lease for purchase of phone system upgrades due in monthly installments of
$157, interest imputed at 16% through December 2007............................ 1,754 2,530
Capital lease for purchase of forklift due in monthly installments of $290,
interest imputed at 11% through June 2007 ..................................... 1,699 3,308
------------------ -------------------
14,906 42,069
Less: current portion ........................................................... 14,906 40,260
------------------ -------------------
$ - $ 1,809
================== ===================
NOTE 9 - STOCK-BASED COMPENSATION
The Company sponsors a Stock Plan (the "Plan") covering employees, consultants
and non-employee directors. The Plan is more fully described in Note 9 in the
Company's 2006 Annual Report on Form 10-KSB. Prior to July 1, 2006, awards
granted under the Plan were accounted for under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and related interpretations. Under APB
25, no compensation expense was reflected in the Consolidated Statement of
Operations for the Company's stock options, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
shares on the date of grant. The pro forma effects on income for stock options
were instead disclosed in a footnote to the unaudited consolidated financial
statements.
Effective July 1, 2006, the Company adopted the fair value recognition
provisions for FASB Statement of Financial Accounting Standard No. 123(R),
"Share-Based Payment," ("SFAS 123(R)"), using the modified prospective
transition method. Under this transition method, the Company is required to
record compensation expense for all stock option awards granted after the date
of adoption as well as any unvested portion of previously granted options. There
is no compensation expense related to the unvested portion of previously granted
stock option awards that remain outstanding at the date of adoption since the
Company's Board of Directors approved, in June 2006, the acceleration of all
unvested stock options previously awarded.
The most significant difference between the fair value approaches prescribed by
SFAS No. 123 and SFAS No. 123(R) and the intrinsic value method prescribed by
APB No. 25 relates to the recognition of compensation expense for stock option
awards based on their grant date fair value. Under SFAS No. 123, the Company
used the following weighted-average assumptions for the quarter ended December
31, 2005 as follows: risk-free interest rates of 4.33% expected annual dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of approximately 116.0%; and a weighted-average expected life of
the options of 2.0 years. The Company estimates the fair value of stock option
grants using the Black-Scholes option-pricing model. The fair value of each
option award is estimated on the date of grant using the Black-Scholes
option-pricing model that uses the assumptions for the risk-free interest rate,
volatility, dividend yield and the expected term of the options. The risk-free
interest rate is based on the U.S. Treasury interest rates in effect at the time
of grant for a period equal to the expected term of the option. Expected
volatilities are based on implied volatilities from historical trades of the
Company's common shares and other applicable factors. Historical data is used to
estimate the expected term of the options and employee terminations within the
option-pricing model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The expected
term of the options represents the period of time that the options granted are
expected to be outstanding.
The following table reflects the pro forma effect on net income and income per
share for the three and six months ended December 31, 2005 as if we had applied
the fair value recognition provision of SFAS 123(R):
9
Three Six
Months Ended Months Ended
December 31, December 31,
--------------------- --------------------
2005 2005
--------------------- --------------------
(Unaudited) (Unaudited)
Net income, as reported ............................ $ 166,972 $ 331,504
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects ........... $ (82,203) (150,110)
----------------- -----------------
Net income, pro forma ............................. $ 84,769 $ 181,394
================= =================
Basic and diluted net income per share, as reported $ 0.02 $ 0.03
================= =================
Basic and diluted net income per share, pro forma $ 0.01 $ 0.02
================= =================
No stock options were granted under the Plan during the six months ended
December 31, 2006. Therefore, no SFAS 123(R) compensation expense is reflected
in the Company's unaudited condensed consolidated statement of income for the
three and six months ended December 31, 2006.
NOTE 10 - EARNINGS PER SHARE
Earnings per share are measured at two levels: basic per share and diluted per
share. Basic per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted per share
is computed by dividing net income by the weighted average number of common
shares after considering the additional dilution related to common stock
options. In computing diluted earnings per share, the outstanding common stock
options are considered dilutive using the treasury stock method. The following
information is necessary to calculate earnings per share for the periods
presented:
Six Months Ended December 31,
----------------------------------------
2006 2005
---------------- -----------------
(Unaudited)
Net income, as reported ......................................... $ 712,785 $ 331,504
---------------- ----------------
Weighted average common shares outstanding....................... 10,608,314 10,547,311
Effect of Dilutive stock options................................. 666,922 179,315
---------------- ----------------
Weighted average diluted common shares outstanding............... 11,275,236 10,726,626
---------------- ----------------
Net income per common share
Basic......................................................... $ 0.07 $ 0.03
Diluted....................................................... $ 0.06 $ 0.03
Employee stock options excluded from computation of diluted per
share amounts because their effect would be anti-dilutive...... - 2,925,890
NOTE 11 - STOCK TRANSACTIONS
During the quarter ended December 31, 2006, stock options to purchase 125,988 of
common shares were exercised. Total proceeds to the Company were $102,790
(average price of $0.82 per share).
During the six months ended December 31, 2006, stock options to purchase 160,988
shares of common stock were exercised. Total proceed to the Company were
$120,640 (average price of $0.75 per share).
During the month of January 2007, stock options to purchase 929,302 of common
shares were exercised. Total proceeds to the Company were $700,002 (average
price of $0.75 per share).
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains certain forward-looking statements
and information relating to Sharps that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate" and "intend" and words or phrases of similar
import, as they relate to Sharps or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.
GENERAL
Sharps is a leading developer and manufacturer of cost effective solutions for
improving safety, efficiency and costs related to the proper disposal of medical
waste by industry and consumers. Sharps primary markets include healthcare,
retail, agriculture, hospitality, professional, industrial, commercial,
governmental and pharmaceutical. The Company's products and services represent
solutions for industries and consumers dealing with the complexity of managing
regulatory compliance, environmental sensitivity, employee and customer safety,
corporate risk and operating costs related to medical waste disposal. Sharps is
a leading proponent and participant in the development of public awareness and
solutions for the safe disposal of needles, syringes and other sharps in the
community setting.
The Company's primary products include Sharps Disposal by Mail System(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box, Sharps Secure(R), Sharps SureTemp Tote(R), IsoWash(R) Linen
Recovery System, Biohazard Spill Clean-Up Kit and Disposal System, Sharps
e-Tools, Sharps Environmental Services and Sharps Consulting. Some products and
services facilitate compliance with state and federal regulations by tracking,
incinerating and documenting the disposal of medical waste. Additionally, some
products and services facilitate compliance with educational and training
requirements required by federal, state, and local regulatory agencies.
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and
financial condition of the Company during the three and six months ended
December 31, 2006 and 2005.
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Statements of Income, expressed as a
percentage of revenue (unaudited):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net revenues 100% 100% 100% 100%
Costs and expenses:
Cost of revenues (57%) (56%) (57%) (57%)
Selling, general and administrative (30%) (36%) (30%) (35%)
Depreciation and amortization (1%) (1%) (1%) (1%)
----------- ----------- ----------- ---------
Total operating expenses (88%) (93%) (88%) (93%)
----------- ----------- ----------- ---------
Income from operations 12% 7% 11% 7%
Total other income (expense) 1% (1%) 1% (1%)
----------- ----------- ----------- ---------
Net income 13% 6% 12% 6%
=========== =========== =========== ========
11
THREE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2005
Total revenues for the three months ended December 31, 2006 of $3,181,777
increased by $518,401, or 19.5%, over the total revenues for the three months
ended December 31, 2005 of $2,663,376. Billings by market are as follows:
Three Months Ended December 31,
------------------------------------------------------------------
2006 2005 Variance
------------------ ------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Billings by Market:
Health Care $ 1,899,277 $ 1,834,536 $ 64,740
Retail 238,850 67,130 171,720
Agriculture 221,214 240,240 (19,026)
Commercial/Industrial 206,220 75,671 130,549
Hospitality 191,584 105,382 86,202
Professional 138,713 109,699 29,014
Protec 100,944 91,141 9,803
Other 59,236 29,016 30,220
Government 51,308 1,965 49,343
Pharmaceutical 41,770 95,172 (53,402)
------------------ ------------------ -----------------
Subtotal 3,149,116 2,649,952 499,163
GAAP Adjustment* 32,661 13,424 19,237
------------------ ------------------ -----------------
Revenue Reported $ 3,181,777 $ 2,663,376 $ 518,401
================== ================== =================
* Represents the net impact of the revenue recognition adjustment required to
arrive at reported revenues. See Note 3 "Revenue Recognition" in Part I;
"Notes to Condensed Consolidated Financial Statements".
The increase in revenues is primarily attributable to increased billings in the
Retail ($171,720), Commercial/Industrial ($130,549), Hospitality ($86,202) and
Health Care ($64,740) markets. These increases were partially offset by
decreased billings in the Pharmaceutical market of $53,402. The increase in the
billings in the Retail market is a result of the use of the Company's Sharps
Disposal By Mail System (R) products in grocery stores and retail pharmacies to
properly dispose of syringes utilized to administer flu and other inoculations.
The increase in the Commercial/Industrial, Hospitality, and Healthcare markets
is being driven by higher demand for the Company's products as industry and
consumers become more aware of the proper disposal of medical sharps (syringes,
lancets, etc.). The decrease in the billings in the Pharmaceutical market is a
result of the use of the Company's Sharps Disposal By Mail System(R) product in
a clinical trial setting in November and December 2005.
Cost of revenues for the three months ended December 31, 2006 of $1,819,800 was
57% of revenues. Cost of revenues for the three months ended December 31, 2005
of $1,496,692 was 56% of revenues for the corresponding period. The
corresponding decrease in the gross margin is a result of increased raw material
costs and the mix of products sold.
Selling, general and administrative ("S, G & A") expenses for the three months
ended December 31, 2006 of $924,122, decreased by $36,203, or 4%, over the S,G&A
expenses for the three months ended December 31, 2005. The decrease in the S,G&A
expenses is primarily a result of a decrease in professional fees of $56,378.
The decrease in professional fees is related to the July 2006 settlement of the
Attentus Medical litigation.
SIX MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005
Total revenues for the six months ended December 31, 2006 of $6,172,661
increased by $849,173, or 19.5%, over the total revenues for the six months
ended December 31, 2005 of $5,323,488. Billings by market are as follows:
12
Six Months Ended December 31,
2006 2005 Variance
-------------------- -------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
Billings by Market:
Health Care $ 3,716,863 $ 3,622,410 $ 94,453
Retail 871,853 448,605 423,248
Agriculture 341,905 356,720 (14,815)
Commercial/Industrial 316,854 139,867 176,987
Hospitality 307,917 316,131 (8,214)
Professional 275,052 211,201 63,851
Protec 218,073 205,675 12,398
Government 105,166 10,604 94,562
Other 80,830 51,418 29,412
Pharmaceutical 56,933 95,172 (38,239)
-------------------- -------------------- ------------------
Subtotal 6,291,445 5,457,803 833,642
GAAP Adjustment* (118,784) (134,315) 15,531
-------------------- -------------------- ------------------
Revenue Reported $ 6,172,661 $ 5,323,488 $ 849,173
==================== ==================== ==================
*Represents the net impact of the revenue recognition adjustment required to
arrive at reported revenues. See Note 3 "Revenue Recognition" in Part I; "Notes
to Condensed Consolidated Financial Statements".
The increase in revenues is primarily attributable to increased billings in the
Retail ($423,248), Commercial/Industrial ($176,987), Government ($94,562) and
Health Care ($94,453) markets. These increases were partially offset by
decreased billings in the Pharmaceutical market of $38,239. The increase in the
billings in the Retail market is a result of the use of the Company's Sharps
Disposal By Mail System (R) products in grocery stores and retail pharmacies to
properly dispose of syringes utilized to administer flu and other inoculations.
The increase in the Commercial/Industrial, and Healthcare markets is being
driven by higher demand for the Company's products as industry and consumers
become more aware of the proper disposal of medical sharps (syringes, lancets,
etc.). The increase in the Government market is attributable to the billings
associated with a three year award received by the Company during the third
quarter of FY 2006 by an agency of the United States Government.
Cost of revenues for the six months ended December 31, 2006 of $3,513,388 was
57% of revenues, which is consistent with the corresponding period of the prior
year.
Selling, general and administrative ("S, G & A") expenses for the six months
ended December 31, 2006 of $1,878,545, increased by $23,697, or 1%, over the
SG&A expenses for the six months ended December 31, 2005. The increase in the
SG&A expenses is primarily a result of increase in the following expenses: (i)
employment recruiting fees of $30,000, and (ii) salary expenses of $38,950. The
employment recruiting fee and increase in salary expense are a result of
increased sales - related personnel. These expenses were offset by the decrease
in professional fees of $36,798 related to the July 2006 settlement of the
Attentus Medical litigation.
PROSPECTS FOR THE FUTURE
The Company continues to take advantage of the many opportunities in the markets
served as communities, consumers and industries become more aware of the proper
disposal of medical sharps (syringes, lancets, etc.). This education process was
enhanced in March 2004 when the U. S. Environmental Protection Agency ("EPA")
issued its new guidelines for the proper disposal of medical sharps (see
www.epa.gov/epaoswer/other/medical/sharps.htm). Additionally, in July 2006 both
the states of California and Massachusetts passed legislation designed to
mandate appropriate disposal of sharps waste necessary to protect the general
public and workers from potential exposure to contagious diseases and health and
safety risks. Among the methods of disposal recommended as part of the above
noted regulatory actions are mail-back programs such as those marketed by the
Company. The Company believes its future growth will be driven by, among other
items, (i) the positive impact and awareness created by the above noted
regulatory actions as well as additional potential future legislation and (ii)
the effects of the Company's extensive direct marketing efforts.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $586,394 to $883,353 at December 31, 2006
from $296,959 at June 30, 2006. The increase in cash and cash equivalents is
primarily a result of cash generated from operations of $557,415 plus proceeds
from the exercise of stock options of $120,640, partially offset by, (i)
additions to property and equipment of $64,498 and (ii) payments on capital
lease obligations of $27,163.
Accounts receivable increased by $509,344 to $1,444,627 at December 31, 2006
from $935,283 at June 30, 2006. The increase is a direct result of the increase
in billings generated by the Company for the quarter ended December 31, 2006
versus the quarter ended June 30, 2006. Additionally, the increase in accounts
receivable was attributable to heavy billings during the month of December 2006
of $1.2 million.
13
Property and equipment decreased by $28,263 to $445,124 at December 31, 2006
from $473,387 at June 30, 2006. This decrease is attributable to depreciation
expense of $91,692 for the six months ended December 31, 2006, partially offset
by capital expenditures for the same period of $63,429. The capital expenditures
are attributable to the purchase of, (i) custom software programming of $30,553,
(ii) computer equipment of $6,214, (iii) incinerator facility improvements of
$11,450 and (iv) office and other equipment of $15,212. The custom software
program was incurred to accommodate the change from FedEx to UPS and an upgrade
to the Company's financial and operations system. The computer equipment was
purchased to facilitate the upgrade of outdated equipment. Other equipment
purchased was related to equipment necessary to accommodate the in-house
assembly of the Company's products.
Stockholder's equity increased by $833,425 from $251,900 to $1,085,325. This
increase is attributable to (i) net income for the six months ended December 31,
2006 of $712,785 and (ii) the effect of stock options exercised.
During the month of January 2007 stock options to purchase 929,302 of common
shares were exercised. Total proceeds to the Company were $700,002 (average
price of $0.75 per share).
Management believes that the Company's current cash resources along with its
$2.5 million line of credit will be sufficient to fund operations for the twelve
months ending December 31, 2007.
OFFICE LEASE
On July 13, 2006 Sharps executed a new lease agreement for 18,231 square feed to
rentable (office and warehouse) space ("New Lease") near the existing leased
facility in Houston, Texas ("New Premises"). The new lease period will commence
upon the completion of the construction of the New Premises, which the Company
originally anticipated to be in October or November of 2006, but now anticipates
being February or March 2007. The New Lease will expire on the five (5) year
anniversary of the New Lease commencement date. The existing lease will be
terminated upon acceptance of the New Premises by the Company in accordance with
the terms of the New Lease. The move to a larger facility will enable the
Company to (i) facilitate the transition of its product assembly operations from
an outsourced vendor to an in-house function and (ii) accommodate its current
and planned future growth.
TRENDS
Consistent with the recent revenue growth (19.5% for the three months ended
December 31, 2006) and increased operating margins and net income, the trend of
earnings and cash from operations continue to be positive. The Company's
internal plans contemplate additional growth in all of its markets served.
While the Company has no material expected change in the level of capital
expenditures in the near-term, it may incur significant capital costs should it
decide to upgrade its current incineration facility in Carthage, Texas
consistent with the November 2005 amended EPA Clean Air Act (see Government
Regulation - Operations and Incinerator below). The Company could avoid such
upgrade and the associated capital costs should it decide to install alternative
technology (at a much lower cost) or outsource its incineration needs (no
additional capital costs). The Company has studied the amended EPA Clean Air Act
and its options, but has not yet made a decision. It is important to note that
should the Company decide to upgrade its incineration facility to comply with
the new regulations or install alternative technology, it would open up the
opportunity for additional revenue sources including medical waste disposal. As
noted below, the new regulation allows a minimum period of three years and a
maximum of five years to comply.
The Company's cash and stockholder equity balance at December 31, 2006 was $0.9
and $1.1 million, respectively. During the month of January 2007 stock options
to purchase 759,902 of common shares were exercised with total proceeds to the
Company of $542,022. As a result of the above noted exercise of stock options,
the Company's cash and stockholder's equity balances will increase accordingly.
At January 31, 2007, the Company's stock price was $3.11 per share. Utilizing a
stock price of $3.11, the weighted average diluted common shares outstanding for
the three months ended December 31, 2006 would be increased by 1,606,395 to
approximately 13.2 million shares.
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.
14
Governmental Regulation
Operations and Incinerator
Sharps is required to operate within guidelines established by federal, state,
and/or local regulatory agencies. Such guidelines have been established to
promote occupational safety and health standards and certain standards have been
established in connection with the handling, transportation and disposal of
certain types of medical and solid wastes, including mailed sharps. Sharps
believes that it is currently in compliance in all material respects with all
applicable laws and regulations governing its business. However, in the event
additional guidelines are established to more specifically control the business
of Sharps, including the environmental services subsidiary, additional
expenditures may be required in order for Sharps to be in compliance with such
changing regulations. Furthermore, any material relaxation of any existing
regulatory requirements governing the transportation and disposal of medical
sharps products could result in a reduced demand for Sharps' products and
services and could have a material adverse effect on Sharps' revenues and
financial condition. The scope and duration of existing and future regulations
affecting the medical and solid waste disposal industry cannot be anticipated
and are subject to change due to political and economic pressures.
In November 2005, the EPA amended the Clean Air Act which will affect the
operations of the leased incineration facility located in Carthage, Texas. The
regulation modifies the emission limits and monitoring procedures required to
operate an incineration facility. The new rules will necessitate changes to the
Company's leased incinerator and pollution control equipment at the facility or
require installation of an alternative treatment method to ensure compliance.
Such change would require the Company to incur significant capital expenditures
in order to meet the requirements of the regulations. The regulation allows a
minimum period of three years and a maximum of five years to comply after the
date the final rule was published. The Company has studied the amended EPA Clean
Air Act and its options, but has not yet made a decision regarding how it will
comply with the new rules. Should the Company decide to upgrade its incineration
facility to comply with the new regulations or install alternative technology,
it would do so not only to comply with the new regulations but also to
potentially generate additional revenue sources including medical waste disposal
(in additional to the incineration of sharps, syringes, lancets, etc.).
Proper Disposal of Medical Sharps
The first significant regulatory development occurred in December 2004 with the
improved guidance issued by the Environmental Protection Agency ("EPA")
regarding the safe disposal of medical sharps (needles, syringes and lancets).
This new guidance is a result of disposal problems created by 3 billion syringes
discarded annually by self-injectors of medicines in homes and non-healthcare
commercial facilities. Until December 2004, the EPA guidance has instructed
consumers to place used sharps in a household container and to place the
container in the household garbage. New guidance posted on the EPA website
reflects information about alternative disposal methods including mail-back
programs. The improved guidance issued by the EPA is a significant step toward
the removal of needles, syringes and other sharps from the solid waste stream,
consistent with the current practice in healthcare facilities. The Company's
products and services, which are included in the EPA list of recommended
solutions, are designed to improve safety, efficiency and patient concerns
related to the proper disposal of medical sharps.
The next regulatory development was the enactment of California Senate Bill
1362, "The Safe Needle Disposal Act of 2004." This legislation authorizes
California agencies to expand the scope of their existing household hazardous
waste plans to provide for the safe disposal of medical sharps including
hypodermic needles and syringes. Authorized disposal programs include the
mail-back programs currently marketed by the Company.
In July 2006, the State of California passed Senate Bill 1305 ("SB 1305"), an
amendment to The Medical Waste Management Act. The new law requires the proper
disposal of home-generated sharps waste (syringes, needles, lancets, etc.) and
acknowledges mail-back programs as one of the most convenient alternatives for
the collection and destruction of home-generated sharps. Effective January 1,
2007 (with enforcement beginning September 1, 2008), SB 1305 addresses the need
to meet the changing demands of healthcare provided in alternate sights that
currently allows hundreds of millions of home-generated sharps waste to be
disposed in solid waste and recycling containers. The new law is designed to
ensure appropriate disposal of sharps waste necessary to protect the general
public and workers from potential exposure to contagious diseases and health and
safety risks.
Also in July 2006, The Massachusetts Legislature enacted Senate Bill 2569 which
requires the Massachusetts Department of Public Health, in conjunction with
other relevant state and local agencies and government departments, to design,
establish and implement a program for the collection and disposal of
non-commercially generated, spent hypodermic needles and lancets. Recommended
disposal methods include mail-back products approved by the U.S. Postal Service
such as the Sharps Disposal By Mail Systems(R). The Massachusetts legislation
addresses the need for proper disposal of used syringes, needles and lancets
outside of the traditional healthcare setting.
15
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes"- an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the requirements of FIN No. 48.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," SAB 108 provides
interpretive guidance on the SEC's views regarding the process of quantifying
materiality of financial statement misstatements. SAB 108 is effective for
fiscal years ending after November 15, 2006, with early application for the
first interim period ending after November 15, 2006. The Company does not expect
that the application of SAB 108 will have any material impact on its financial
position and results of operations.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosers
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the new standard to have
a material impact on its financial position and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
As of the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13(a)-15(e) and 15(d) - 15(e).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the Company's evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ameritech Environmental, Inc.
During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for incineration services provided by the Company in
2002. In November 2003, Ameritech sold its assets representing collateral for
the judgments to MedSolutions, Inc. of Dallas, Texas ("MedSolutions"). During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. This represented
the then outstanding remaining amount due to the Company.
In August 2006, the Company filed an amended suit against Ameritech, its
officers and directors (Jasper S. Howard, Alton H. Howard and Jonathon S.
Howard) alleging fraudulent conveyance, fraud on creditors, civil conspiracy,
breach of court order and conversion. In October 2006, the Company sold certain
assets secured by the above noted Garnishment Order for $50,000 cash, $17,500 of
which was paid to an attorney under a contingency fee arrangement. The net
proceeds of $32,500 were recorded as other income during the quarter ended
December 31, 2006. In conjunction with this partial recovery, the Company and
MedSolutions entered into a mutual release whereby the Company dismissed
MedSolutions from the litigation.
Prior to the year ended June 30, 2003, the Company wrote-off all outstanding
amounts due from Ameritech. Any recovery that may be received by the Company
will be reduced by collection-related legal fees computed at thirty-five percent
of any amounts collected plus expenses. Although the Company will continue to
aggressively pursue collection of the remaining outstanding amount of
approximately $90,000 (plus interest and attorney fees), no assurances can be
made regarding ultimate collection.
16
Ronald E. Pierce Matter
On June 14, 2004, the Company provided Mr. Ronald E. Pierce, its then current
Chief Operating Officer ("Mr. Pierce"), with notice of non-renewal of his
employment agreement. As such, July 14, 2004 was Mr. Pierce's last day of
employment. The Company has advised Mr. Pierce that under the terms of the
employment contract no further compensation (including services) was due. The
Company then received various letters from Mr. Pierce's attorney advising that
Mr. Pierce is taking the position that the non-renewal of the employment
agreement was not timely and, therefore, Mr. Pierce was terminated without
cause. Additionally, Mr. Pierce claims that the Company had no right to
terminate him on the anniversary date of his Agreement without the obligation of
paying Mr. Pierce as if he were terminated without cause. Mr. Pierce has
demanded severance related payments totaling approximately $280,000 (including
an $80,000 bonus) along with the full accelerated vesting of 500,000 stock
options previously awarded to Mr. Pierce. The Company believes that notice of
such non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement, the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce. On July 30, 2004, the Company received notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. No further communications have been received from Mr. Pierce's attorney
since July 30, 2004. The Company believes it has meritorious defenses against
Mr. Pierce's claims and has not recorded a liability related to this matter.
Attentus Medical Sales, Inc.
In March 2005, the Company's wholly-own subsidiary Sharps Compliance, Inc.,
filed a lawsuit in Harris County District Court, Texas against Mr. Jodway (a
former employee) and Attentus Medical Sales, Inc. ("Attentus"). The lawsuit
claimed, (i) breach of a confidentiality agreement, (ii) misappropriation of
trade secrets and (iii) tortuous interference with the Company's existing and
prospective contracts and business relationships. On April 7, 2005, the
defendant filed its answer and counter claims against Sharps Compliance, Inc.
asserting breach of contract, quantum merit and violation of the Texas Payday
Act. On September 19, 2005, the Company amended its pleadings and added claims
asserting conversion, unjust enrichment, unfair competition and trademark
infringement in violation of the Lanham Act, false advertising in violation of
the Lanham Act, trademark dilution under the Texas Business and Commerce Code,
and tortuous interference with existing and/or prospective customers. On July 6,
2006, the Company, Attentus and Mr. Jodway reached settlement on all matters
related to this litigation and dismissed all claims against each other. In
conjunction with the resolution of the matter, the Company entered into a
business relationship whereby Attentus now markets and sells the Company's
Sharps Disposal By Mail Systems(R) to its current and future customers.
Sylvia Haist Matter
In July 2006, the Company received a Notice of Charge of Discrimination from the
U.S. Equal Employment Opportunity Commission ("EEOC") filed by a former
employee, Sylvia Haist. The charge alleges sex discrimination and retaliation.
Sylvia Haist was an employee of the Company from July 1998 until her termination
in January 2006. The Company believes the charges to be totally without merit
and frivolous. The Company has filed a response with the EEOC in the form of a
position statement and believes the EEOC will rule in favor of the Company. The
Company intends to vigorously defend itself against the erroneous allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 2006, the Company held its Annual Meeting of shareholders whereby
the following items were voted upon, (i) the election of six directors to hold
office until the next annual shareholders meeting, and (ii) other matters that
may be presented at the meeting for action.
The following Directors were elected at the meeting, (i) Dr. Burt Kunik, (ii)
Ramsay Gillman, (iii) John R. Grow, (iv) Parris H. Holmes, Jr., (v) F. Gardner
Parker and (vi) Philip C. Zerrillo.
As of September 21, 2006, the record date of the Annual Meeting, 10,551,310
shares of common stock were outstanding. At the Annual Meeting, holders of
8,309,361 shares of common stock were present in person or represented by proxy.
The following sets forth information regarding the results of the voting at the
Annual Meeting.
17
Proposal I - Election of Directors
Votes in Favor Votes Withheld
-------------- --------------
Dr. Burt Kunik 8,304,761 4,600
Ramsay Gillman 8,309,361 -
John R. Grow 8,308,993 368
Parris H. Holmes, Jr. 8,125,935 183,426
F. Gardner Parker 8,304,705 4,656
Philip C. Zerrillo 8,309,361 -
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, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
REGISTRANT:
SHARPS COMPLIANCE CORP.
Dated: February 8, 2007 By: /s/ Dr. Burton J. Kunik
-------------------------------------
Chairman of the Board of Directors,
Chief Executive Officer and President
Dated: February 8, 2007 By: /s/ David P. Tusa
-------------------------------------
Executive Vice President,
Chief Financial Officer,
Business Development and
Corporate Secretary
19