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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

 
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2012
 
OR

 
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to  .

Commission File Number:  001-34269
_______________________

SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)


Delaware
74-2657168
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 



9220 Kirby Drive, Suite 500, Houston, Texas
77054
(Address of principal executive offices)
(Zip Code)
 
(713) 432-0300
(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
             
Large Accelerated Filer o
 
Accelerated Filer ý
 
Non-accelerated Filer o
 (Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No ý

As of January 28, 2013, there were 15,242,374 outstanding shares of the Registrant's common stock, par value $0.01 per share.
 
 



 
 

 




SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
 
         
PART I
FINANCIAL INFORMATION
 
PAGE
 
         
Item 1.
Financial Statements
     
         
      3  
           
      4  
           
      5  
           
      6  
           
      7  
           
      8  
           
Item 2.
    12  
 
 
       
Item 3.
    19  
           
Item 4.
    19  
           
Part II
       
           
Item 1.
    20  
           
Item 1A.
    20  
           
Item 2.
    20  
           
Item 6.
    20  
           
      21  
           
           


 
2

 

PART IFINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value)


             
   
December 31,
   
June 30,
 
   
2012
   
2012
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS
           
  Cash and cash equivalents
  $ 16,785     $ 17,498  
  Accounts receivable, net of allowance for doubtful accounts of $29 and
               
       $28, respectively
    2,901       2,427  
  Inventory
    1,967       2,219  
  Prepaid and other current assets
    315       398  
    TOTAL CURRENT ASSETS
    21,968       22,542  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    4,492       4,632  
                 
INTANGIBLE ASSETS, net of accumulated amortization of $268 and
               
      $257, respectively
    587       464  
                 
TOTAL ASSETS
  $ 27,047     $ 27,638  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
  Accounts payable
  $ 830     $ 752  
  Accrued liabilities
    1,349       1,302  
  Deferred revenue
    1,706       1,881  
    TOTAL CURRENT LIABILITIES
    3,885       3,935  
                 
LONG-TERM DEFERRED REVENUE
    588       358  
                 
OTHER LONG-TERM LIABILITIES
    135       165  
                 
    TOTAL LIABILITIES
    4,608       4,458  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY
               
  Common stock, $0.01 par value per share; 20,000,000 shares authorized;
               
      15,242,374 and 15,206,127 shares issued and outstanding, respectively
    152       152  
  Additional paid-in capital
    22,863       22,537  
  Retained earnings (accumulated deficit)
    (576 )     491  
    TOTAL STOCKHOLDERS' EQUITY
    22,439       23,180  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 27,047     $ 27,638  



The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)


   
Three-Months
 
   
Ended December 31,
 
   
2012
   
2011
 
   
(Unaudited)
 
             
REVENUES
  $ 5,717     $ 6,212  
  Cost of revenues
    4,017       4,065  
GROSS PROFIT
    1,700       2,147  
                 
  Selling, general and administrative
    2,020       1,997  
  Depreciation and amortization
    111       116  
    TOTAL COSTS AND EXPENSES
    2,131       2,113  
                 
OPERATING INCOME (LOSS)
    (431 )     34  
                 
OTHER INCOME
               
  Interest income
    8       9  
    TOTAL OTHER INCOME
    8       9  
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (423 )     43  
                 
INCOME TAX EXPENSE
               
  Current
    5       2  
  Deferred
    -       13  
    TOTAL INCOME TAX EXPENSE
    5       15  
                 
                 
NET INCOME (LOSS)
  $ (428 )   $ 28  
                 
NET INCOME (LOSS) PER COMMON SHARE
               
    Basic
  $ (0.03 )   $ 0.00  
                 
    Diluted
  $ (0.03 )   $ 0.00  
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING
               
    NET INCOME (LOSS) PER COMMON SHARE:
               
                 
    Basic
    15,232       15,077  
    Diluted
    15,232       15,404  




The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)


   
Six-Months
 
   
Ended December 31,
 
   
2012
   
2011
 
   
(Unaudited)
 
             
REVENUES
  $ 10,870     $ 11,955  
  Cost of revenues
    7,618       7,989  
GROSS PROFIT
    3,252       3,966  
                 
  Selling, general and administrative
    4,100       4,207  
  Depreciation and amortization
    224       223  
    TOTAL COSTS AND EXPENSES
    4,324       4,430  
                 
OPERATING LOSS
    (1,072 )     (464 )
                 
OTHER INCOME (EXPENSE)
               
  Interest income
    16       19  
  Other expense
    -       (13 )
    TOTAL OTHER INCOME (EXPENSE)
    16       6  
                 
LOSS BEFORE INCOME TAXES
    (1,056 )     (458 )
                 
INCOME TAX EXPENSE (BENEFIT)
               
  Current
    10       -  
  Deferred
    1       (161 )
    TOTAL INCOME TAX EXPENSE (BENEFIT)
    11       (161 )
                 
                 
NET LOSS
  $ (1,067 )   $ (297 )
                 
NET LOSS PER COMMON SHARE
               
    Basic
  $ (0.07 )   $ (0.02 )
                 
    Diluted
  $ (0.07 )   $ (0.02 )
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
               
    LOSS PER COMMON SHARE:
               
                 
    Basic
    15,221       15,071  
    Diluted
    15,221       15,071  







The accompanying notes are an integral part of these condensed consolidated financial statements.


 
5

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)

                               
                     
Retained
       
   
Common Stock
   
Additional
   
Earnings
   
Total
 
               
Paid-in
   
(Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit)
   
Equity
 
                               
Balances, June 30, 2011
    15,053,316     $ 151     $ 21,602     $ 4,112     $ 25,865  
                                         
                                         
Exercise of stock options
    89,443       -       65       -       65  
Stock-based compensation
    -       -       786       -       786  
Issuance of restricted stock
    63,368       1       (1 )     -       -  
Excess tax benefit from
                                       
  stock-based award activity
    -       -       85       -       85  
Net loss
    -       -       -       (3,621 )     (3,621 )
                                         
                                         
Balances, June 30, 2012
    15,206,127       152       22,537       491       23,180  
                                         
Exercise of stock options*
    3,500       -       2       -       2  
Stock-based compensation*
    -       -       323       -       323  
Issuance of restricted stock*
    32,747       -       -       -       -  
Excess tax benefit from
                                       
  stock-based award activity*
    -       -       1       -       1  
Net loss*
                            (1,067 )     (1,067 )
                                         
                                         
Balances, December 31, 2012*
    15,242,374     $ 152     $ 22,863     $ (576 )   $ 22,439  
                                         
* unaudited
                                       





The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

 


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


   
Six-Months Ended
 
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
  Net loss
  $ (1,067 )   $ (297 )
  Adjustments to reconcile net loss to net cash (used in) provided by
               
  operating activities:
               
    Depreciation and amortization
    553       548  
    Loss on disposal of fixed assets
    -       13  
    Stock-based compensation expense
    323       376  
    Excess tax benefits from stock-based award activity
    (1 )     (12 )
    Deferred tax expense (benefit)
    1       (161 )
  Changes in operating assets and liabilities:
               
    Accounts receivable
    (474 )     465  
    Inventory
    252       (713 )
    Prepaid and other current assets
    83       (60 )
    Accounts payable and accrued liabilities
    95       156  
    Deferred revenue
    55       (23 )
    NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (180 )     292  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
    Purchase of property, plant and equipment
    (402 )     (189 )
    Additions to intangible assets
    (134 )     (65 )
    NET CASH USED IN INVESTING ACTIVITIES
    (536 )     (254 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
    Excess tax benefits from stock-based award activity
    1       12  
    Proceeds from exercise of stock options
    2       13  
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    3       25  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (713 )     63  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    17,498       18,280  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 16,785     $ 18,343  




The accompanying notes are an integral part of these condensed consolidated financial statements.

 
7

 

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 its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively, “Sharps”, “We” 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-Q 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, 2012, the results of its operations and cash flows for the three and six months ended December 31, 2012 and 2011 and stockholders’ equity for the year ended June 30, 2012 and six months ended December 31, 2012. The results of operations for the three and six months ended December 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2013.  These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition:  The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served.

The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable revenue arrangements. Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps® Recovery System (formerly the Sharps Disposal by Mail Systems®) and various TakeAway Environmental Return Systems™ referred to as “Mailbacks” and Sharps® Pump and Asset Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation  and (3) treatment service.

In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting.  The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price.  The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided including compliance with local, state and Federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.

Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership.  Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s facility. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s facility. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container.  Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container system, transportation and treatment 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 treatment elements are recognized at the point of sale.

 
8

 


Income Taxes:  The liability method is used in accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

Accounts Receivable:  Accounts receivable consist primarily of amounts due to us from our normal business activities.   Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer.  The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts.  Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. The Company has a history of minimal uncollectible accounts.

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

There are no recently issued accounting pronouncements that impact the Company’s condensed consolidated financial statements as of December 31, 2012.

NOTE 5 - INCOME TAXES

During the year ended June 30, 2012, the Company recorded $2.0 million to establish a deferred tax valuation allowance on net deferred tax assets. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under generally accepted accounting principles, the valuation allowance has been recorded to reduce the Company’s  net deferred tax asset to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred assets related to net operating loss carryforwards and other tax attributes.

The Company’s effective tax rate for the six months ended December 31, 2012 was 1.0% reflecting estimated state income taxes. The Company’s effective tax rate for the six months ended December 31, 2011 was 35.2%. The Company’s tax benefit associated with taxable losses during the six months ended December 31, 2012 was offset by a deferred tax valuation allowance.

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT

On July 13, 2012, the Company executed the First Amendment to Credit Agreement (the “Amendment”) with Wells Fargo, National Association (the “Bank”). The Amendment extended the maturity date of the Credit Agreement (the “Credit Agreement”) executed on July 15, 2010 from July 15, 2012 to July 15, 2014. The Company’s Credit Agreement with the Bank provides for a two-year, $5.0 million line of credit facility, the proceeds of which may be utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000), (iv) acquisitions (up to $1,000,000) and (v) general corporate purposes. Pursuant to the Amendment, the aggregate principal amount of advances outstanding at any time under the Credit Agreement shall not exceed the Borrowing Base which is equal to (i) 80% of Eligible Accounts Receivable (as defined in the Amendment) plus (ii) 40% of Eligible Inventory (as defined in the Amendment). As of December 31, 2012, the Company had no outstanding borrowings, $108 thousand in letters of credit outstanding, and $3.0 million of credit available pursuant to its amended credit agreement.

Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2014, the maturity date set under the Amendment. The Company pays a fee of 0.2% per annum on the unused amount of the line of credit. We estimate that the interest rate applicable to the borrowings under the Amendment would be approximately 2.8% as of December 31, 2012.

The Amendment and Credit Agreement contain affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $21 million, not to exceed a ratio of liabilities to tangible net worth of 1.0 to 1.0 and achieve positive annual net income for the fiscal year ending June 30, 2013 (determined ninety days

 
9

 

thereafter). As of December 31, 2012, we are in compliance with all applicable financial covenants. The Amendment and Credit Agreement also contain 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 Company may be required to make immediate repayment of all indebtedness to the lenders.

NOTE 7 – STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).  Reductions in taxes payable resulting from tax deductions that exceed the recognized tax benefit associated with compensation expense (excess tax benefits) are classified as financing cash flows and as an increase to additional paid in capital.   During the three and six months ended December 31, 2012 and 2011, stock-based compensation amounts are as follows (in thousands):


                         
   
Three-Months Ended
   
Six-Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
                         
Stock-based compensation expense included in:
                       
                         
     Cost of revenue
  $ 7     $ 18     $ 8     $ 38  
     General and administrative expense
    143       239       315       338  
Total
  $ 150     $ 257     $ 323     $ 376  
                                 
                                 
Excess tax benefits in cash flows from
                               
    financing activities
   $ -      $ -     $ 1     $ 12  



NOTE 8 - 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 and restricted stock. In computing diluted earnings per share, the outstanding common stock options are considered dilutive using the treasury stock method. Vested restricted shares are included in basic common shares outstanding, and unvested restricted shares are included in the diluted common shares outstanding, if the effect is dilutive.

The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share data):


   
Three-Months Ended
   
Six-Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net income (loss), as reported
  $ (428 )   $ 28     $ (1,067 )   $ (297 )
                                 
Weighted average common shares outstanding
    15,232       15,077       15,221       15,071  
Effect of dilutive stock options
    -       327       -       -  
Weighted average diluted common shares outstanding
    15,232       15,404       15,221       15,071  
                                 
Net income (loss) per common share
                               
    Basic
  $ (0.03 )   $ 0.00     $ (0.07 )   $ (0.02 )
    Diluted
  $ (0.03 )   $ 0.00     $ (0.07 )   $ (0.02 )
                                 
Employee stock options excluded from computation
                               
 of dilutive loss per share amounts because their
                               
   effect would be anti-dilutive
    851       513       831       538  


 
10

 

NOTE 9 - EQUITY TRANSACTIONS

During the three and six months ended December 31, 2012 and 2011, stock options to purchase shares of the Company’s common stock were exercised as follows:

                         
   
Three-Months Ended
   
Six-Months Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
                         
Options exercised
    -       -       3,500       14,103  
Proceeds (in thousands)
  $ -     $ -     $ 2     $ 13  
Average exercise price per share
  $ -     $ -     $ 0.68     $ 0.95  


As of December 31, 2012, there was $578 thousand of stock option and restricted stock compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 2.42 years.

NOTE 10 – INVENTORY

The components of inventory are as follows (in thousands):


   
December 31,
   
June 30,
 
   
2012
   
2012
 
   
(Unaudited)
       
Raw materials
  $ 1,086     $ 1,218  
Finished goods
    881       1,001  
Total
  $ 1,967     $ 2,219  


NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company considers the fair value of all financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, not to be materially different from their carrying values at year-end due to their short-term nature.


 
11

 


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate”, “believe”, “expect”, “estimate”, “project” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements.  Such statements reflect 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, expected, estimated or intended.  The Company does not intend to update these forward-looking statements.

GENERAL

Sharps Compliance Corp. is a leading full-service provider of solutions for the cost-effective management of medical waste, used health care materials and unused dispensed medications. Our solutions facilitate the proper collection, containment, transportation and treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, and unused consumer dispensed medications and over-the-counter drugs..  We serve customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), hospitality (including assisted living facilities, hotels, motels and restaurants), government (federal, state and local), consumers, commercial, industrial and agriculture, and distributors to many of the aforementioned markets.  We assist our customers in determining which of our solution offerings best fit their needs for the collection, containment, return transportation and treatment of medical waste, used healthcare materials and unused dispensed medications.  Our differentiated approach provides our customers the flexibility to return and properly treat medical waste, used healthcare materials or unused dispensed medications through a variety of solutions and products transported primarily through the United States Postal Service (“USPS”). Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical waste disposal and unused dispensed patient medication compliance requirements.  We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pick-up services).

The Company’s solutions include Sharps® Recovery System™ (formerly Sharps Disposal by Mail System®), TakeAway™ Recovery System, Complete Needle Collection & Disposal System™, TakeAway Environmental Return System™, Compliance TRACSM, Sharps Secure® Needle Collection and Containment System™, Pitch-It™ IV Poles, Trip LesSystem®, Sharps® Pump and Asset Return System, and Spill Kit TakeAway Recovery System™.

 
12

 

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, 2012 and 2011. The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations, dollars in thousands and percentages expressed as a percentage of revenue:

   
Three-Months Ended December 31,
   
Six-Months Ended December 31,
 
   
2012
   
%
   
2011
   
%
   
2012
   
%
   
2011
   
%
 
   
(Unaudited)
   
(Unaudited)
 
                                                 
Revenues
  $ 5,717       100.0 %   $ 6,212       100.0 %   $ 10,870       100.0 %   $ 11,955       100.0 %
                                                                 
Cost of revenues
    4,017       70.3 %     4,065       65.4 %     7,618       70.1 %     7,989       66.8 %
Gross profit
    1,700       29.7 %     2,147       34.6 %     3,252       29.9 %     3,966       33.2 %
                                                                 
SG&A expense
    2,020       35.3 %     1,997       32.1 %     4,100       37.7 %     4,207       35.2 %
Depreciation and amortization
    111       1.9 %     116       1.9 %     224       2.1 %     223       1.9 %
                                                                 
Operating income (loss)
  $ (431 )     (7.5 %)   $ 34       0.5 %   $ (1,072 )     (9.9 %)   $ (464 )     (3.9 %)
                                                                 
Other income
    8       0.1 %     9       0.1 %     16       0.1 %     6       0.1 %
                                                                 
Income (loss) before income taxes
    (423 )     (7.4 %)     43       0.7 %     (1,056 )     (9.7 %)     (458 )     (3.8 %)
Income tax expense (benefit)
    5       0.1 %     15       0.2 %     11       0.0       (161 )     (1.3 %)
Net income (loss)
  $ (428 )     (7.5 %)   $ 28       0.5 %   $ (1,067 )     (9.8 %)   $ (297 )     (2.5 %)


THREE MONTHS ENDED DECEMBER 31, 2012 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2011

Total revenues for the three months ended December 31, 2012 of $5.7 million decreased by $0.5 million, or 8.0%, over the total revenues for the three months ended December 31, 2011 of $6.2 million. Billings by market are as follows (in thousands):

   
Three-Months Ended December 31,
 
   
(Unaudited)
 
   
2012
   
2011
   
Variance
 
                   
BILLINGS BY MARKET:
                 
Home Health Care
  $ 1,559     $ 1,740     $ (181 )
Retail
    1,434       1,303       131  
Professional
    950       720       230  
Pharmaceutical
    910       709       201  
Assisted Living / Hospitality
    376       269       107  
Core Government
    108       90       18  
Other
    202       434       (232 )
U.S Government Contract
    -       722       (722 )
Subtotal
    5,539       5,987       (448 )
GAAP Adjustment *
    178       225       (47 )
Revenue Reported
  $ 5,717     $ 6,212     $ (495 )

*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue.  Customer billings include all invoiced amounts associated with products shipped during the period reported.  GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction.  The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.  See Note 3 “Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

This quarter-to-date table contains certain financial information not derived in accordance with GAAP, including customer billings information.  The Company believes this information is useful to investors and other interested parties as customer billings represents all invoiced amounts associated with products shipped during the period reported. Such information should not be considered as a substitute for any measures derived in accordance with GAAP, and may not be comparable to other similarly titled measures of other companies. Reconciliation of this information to the most comparable GAAP measures is included above.

 
13

 
The decrease in revenues is primarily attributable to decreased billings in the U.S. Government contract ($0.7 million), Home Health Care ($0.2 million) and Other ($0.2 million) markets. The decrease in billings was partially offset by increased billings in the Professional ($0.2 million), Pharmaceutical ($0.2 million), Retail ($0.1 million) and Assisted Living/Hospitality ($0.1 million) markets. U.S. Government Contract billings are associated with the Company’s contract with a major U.S. government agency announced in February 2009. The decrease in the U.S. Government contract market billings is associated with the January 31, 2012 termination of the maintenance portion of a U.S. Government contract with the Division of Strategic National Stockpile (“DSNS”) of the Centers for Disease Control (“CDC”). The decrease in the Home Health Care market was primarily due to timing of sales to home health care related distributors addressing the growing trend of patient volumes in the home health care industry.  The decrease in the Other market was due to timing of orders. The increase in the Professional market was a direct result of the Company’s targeted telemarketing activities and corresponding promotional activities to educate doctors, dentists and veterinarians on the significant cost advantage and the convenience of the Sharps® Recovery System over the traditional pick-up service in the small quantity generator sector. The increase in the Pharmaceutical market billings is due to the timing of customer orders including resupply orders from one of the three new patient support programs announced in August and October 2011. The programs include the direct fulfillment of the Sharps® Recovery System to the pharmaceutical manufacturers’ program participants which provides the proper containment, return and treatment of the needles or injection devices utilized in therapy. The increase in Retail market billings is primarily due to the 2012 flu season and reorders of the Complete Needle Collection & Disposal System™ offset by lower sales of the TakeAway Environmental Return System™ due to initial launches in the prior year.
 
Cost of revenues for the three months ended December 31, 2012 of $4.0 million was 70.3% of revenues.  Cost of revenues for the three months ended December 31, 2011 of $4.1 million was 65.4% of revenues.  The lower gross margin for the quarter ended December 31, 2012 of 29.7% (versus 34.6% for the quarter ended December 31, 2011) was due to (i) ongoing facility costs of $0.1 million, or approximately 200 basis points, associated with the maintenance portion of the U.S. government contract that was terminated as of January 31, 2012,  (ii) an additional accrued loss for lease related liabilities for the Atlanta facility of $64 thousand, or 110 basis points, (iii) treatment facility–related repairs and seasonal labor and (iv) lower revenue compared with the prior year which included the U.S. Government contract.
 
Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2012 and 2011 was $2.0 million.

The Company generated an operating loss of $0.4 million for the three months ended December 31, 2012 compared to operating income of $34 thousand for the three months ended December 31, 2011.  The operating margin was (7.5%) for the three months ended December 31, 2012 compared to 0.5% for the three months ended December 31, 2011. The increase in operating loss is a result of the lower billings in the current quarter primarily due to the U.S. government contract that was terminated as of January 31, 2012 partially mitigated by strong cost discipline and focused use of resources on targeted markets primarily Professional, Pharmaceutical and Retail markets (discussed above).

The Company generated a loss before income tax expense of $0.4 million for the three months ended December 31, 2012 versus income before tax of $43 thousand for the three months ended December 31, 2011. The increase in the loss before income tax is a result of the higher operating loss (discussed above).

The Company’s effective tax rate for the three months ended December 31, 2012 was 1.2% reflecting estimated state income taxes. The Company’s effective tax rate for the three months ended December 31, 2011 was 34.9%. During the year ended June 30, 2012, the Company recorded $2.0 million to establish a deferred tax valuation allowance on net deferred tax assets. The Company’s tax benefit associated with taxable losses during the three months ended December 31, 2012 was offset by a deferred tax valuation allowance.

The Company generated a net loss of $0.4 million for the three months ended December 31, 2012 compared to net income of $28 thousand for the three months ended December 31, 2011.  The higher net loss is a result of a higher operating loss and lower tax benefit (discussed above).

The Company reported diluted loss per share of ($0.03) for the three months ended December 31, 2012 versus diluted income per share of $0.00 for the three months ended December 31, 2011.  The decrease in diluted earnings per share is a result of a higher net loss in the current quarter (discussed above).
 

 
14

 

SIX MONTHS ENDED DECEMBER 31, 2012 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2011
Total revenues for the six months ended December 31, 2012 of $10.9 million decreased by $1.1 million, or 9.1%, over the total revenues for the six months ended December 31, 2011 of $12.0 million. Billings by market are as follows (in thousands):


   
Six-Months Ended December 31,
 
   
(Unaudited)
 
   
2012
   
2011
   
Variance
 
                   
BILLINGS BY MARKET:
                 
Home Health Care
  $ 3,306     $ 3,507     $ (201 )
Retail
    2,599       3,026       (427 )
Professional
    1,951       1,422       529  
Pharmaceutical
    1,472       979       493  
Assisted Living / Hospitality
    752       569       183  
Core Government
    500       215       285  
Other
    388       703       (315 )
U.S. Government Contract
    -       1,444       (1,444 )
Subtotal
    10,968       11,865       (897 )
GAAP Adjustment *
    (98 )     90       (188 )
Revenue Reported
  $ 10,870     $ 11,955     $ (1,085 )

*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue.  Customer billings include all invoiced amounts associated with products shipped during the period reported.  GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction.  The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.  See Note 3 “Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

This year-to-date table  contains certain financial information not derived in accordance with GAAP, including customer billings information.  The Company believes this information is useful to investors and other interested parties as customer billings represents all invoiced amounts associated with products shipped during the period reported.  Such information should not be considered as a substitute for any measures derived in accordance with GAAP, and may not be comparable to other similarly titled measures of other companies.  Reconciliation of this information to the most comparable GAAP measures is included above.
 
The decrease in revenues is primarily attributable to decreased billings in the U.S. Government Contract ($1.4 million), Retail ($0.4 million) and Home Health Care ($0.2 million).  The decrease in billings was partially offset by increased billings in the Professional ($0.5 million), Pharmaceutical ($0.5 million) and Core Government ($0.3 million) markets. U.S. Government Contract billings are associated with the Company’s contract with a major U.S. government agency announced in February 2009. The decrease in the U.S. Government contract market billings is associated with the January 31, 2012 termination of the maintenance portion of a U.S. Government contract with the DSNS of the CDC. The decrease in the Retail market billings is primarily due to timing of customer orders and new program launches in the prior-year period of both the Complete Needle Collection & Disposal System™ and the TakeAway Environmental Return System™ solutions. The decrease in billings in the Home Health Care market was primarily due to timing of sales to home health care related distributors addressing the growing trend of patient volumes in the home health care industry. The increase in the Professional market was a direct result of the Company’s targeted telemarketing activities and corresponding promotional activities to educate doctors, dentists and veterinarians on the significant cost advantage and the convenience of the Sharps® Recovery System over the traditional pick-up service in the small quantity generator sector. The increase in the Pharmaceutical market billings is due to the timing of customer orders including resupply orders from one of the three new patient support programs announced in August and October 2011. The programs include the direct fulfillment of the Sharps® Recovery System to the pharmaceutical manufacturers’ program participants which provides the proper containment, return and treatment of the needles or injection devices utilized in therapy. The increase in the Core Government market billings reflects distributor sales to a major U.S. agency to facilitate the launch of our solutions in selected military bases.

Cost of revenues for the six months ended December 31, 2012 of $7.6 million was 70.1% of revenues.  Cost of revenues for the six months ended December 31, 2011 of $8.0 million was 66.8% of revenue.  The lower gross margin for the six months ended December 31, 2012 of 29.9% (versus 33.2% for the six months ended December 31, 2011) was due to (i) ongoing facility costs of $0.2 million, or 210 basis points, associated with the maintenance portion of the U.S. government contract that was terminated as of January 31, 2012, (ii) an additional accrued loss for lease related liabilities for the Atlanta facility of $64 thousand, or 60 basis points, (iii) treatment facility–related repairs and (iv) lower revenue compared with the prior year which included the U.S. Government contract.

Selling, general and administrative (“SG&A”) expenses for the six months ended December 31, 2012 of $4.1 million, decreased by $0.1 million, from SG&A expenses of $4.2 million for the six months ended December 31, 2011.

The Company generated an operating loss of $1.1 million for the six months ended December 31, 2012 compared to an operating loss of $0.5 million for the six months ended December 31, 2011.  The operating margin was (9.9%) for the six months ended December 31, 2012 compared to (3.9%) for the six months ended December 31, 2011. The increase in operating loss is a result of the lower billings in the first half of fiscal year 2013 primarily due to the
 
 
15

 
U.S. government contract that was terminated as of January 31, 2012 partially mitigated by strong cost discipline and focused use of resources on targeted markets primarily Retail, Pharmaceutical, Professional and Core Government markets (discussed above).

 
The Company generated a loss before tax of $1.1 million for the six months ended December 31, 2012 versus a loss before tax of $0.5 million for the six months ended December 31, 2011. The increase in loss before tax is a result of a higher operating loss (discussed above).

The Company’s effective tax rate for the six months ended December 31, 2012 was 1.0% reflecting estimated state income taxes compared to 35.2% for the six months ended December 31, 2011. During the year ended June 30, 2012, the Company recorded $2.0 million to establish a deferred tax valuation allowance on net deferred tax assets. The Company’s tax benefit associated with taxable losses during the six months ended December 31, 2012 was offset by a deferred tax valuation allowance.
 
The Company generated a net loss of $1.1 million for the six months ended December 31, 2012 compared to a net loss of $0.3 million for the six months ended December 31, 2011.  The increase is result of a higher operating loss and lower tax benefit (discussed above).

The Company reported diluted loss per share of ($0.07) for the six months ended December 31, 2012 versus diluted loss per share of ($0.02) for the six months ended December 31, 2011.  The decrease in diluted earnings per share is a result of a higher net loss (discussed above).
 
16

 


PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets served as professional offices, retail pharmacies and clinics, communities, assisted living, home healthcare companies, consumers, pharmaceutical manufacturers, government agencies, health care facilities, individual self-injectors and commercial organizations become more aware of the need for the proper treatment of medical sharps waste, used healthcare materials and unused dispensed medications as well as alternatives to traditional methods of disposal.

 The Company’s growth strategies are focused on the Retail, Pharmaceutical, Professional and Core Government markets. The Company also serves the Home Health Care, Assisted Living/Hospitality and Other markets. The Company believes its growth opportunities are supported by:

·  
An increase in the number of used needles improperly disposed of outside the large healthcare setting and into the solid waste system to 7.8 billion each year (tripled volume over the past ten years) and an increase in the number of self-injectors in the country to 13.5 million over the same period;

·  
An estimated 800,000 doctors, dentists, veterinarians, clinics, tattoo parlors and other businesses in the country that generate smaller quantities of medical waste, including used syringes to whom we offer a lower cost alternative to the traditional pick-up service;

·  
An estimated 40% of the four billion dispensed medication prescriptions which go unused every year in the United States generating an estimated 200 million pounds of unused medication waste;

·  
The pace of regulation of sharps and unused dispensed medications disposal which is gaining momentum at both the state and federal level - as of June 30, 2012, approximately 46 percent of U.S. citizens live in states that have enacted legislation or strict guidelines mandating the proper disposal of used syringes while 67 percent live in states that have enacted or proposed legislation mandating the proper disposal of dispensed unused medications;

·  
New solution offerings including the Complete Needle™ Collection and Disposal System (designed for the traditional under-served home self-injector), the TakeAway line of products for unused medications (including TakeAway Environmental Return System™), the Medical/Professional TakeAway Recovery System and enhanced patient support programs with pharmaceutical manufacturers;

·  
The opportunity to increase the availability to individuals of our consumer focused solutions like Complete Needle™ Collection and Disposal System and the TakeAway line of products through sponsorship by drug and ancillary product manufacturers;

·  
The Company’s joint marketing alliance with Daniels Sharpsmart (“JMA”), announced in May 2012, to serve the entire U.S. medical waste market, offering clients a blended product portfolio to effectively target health care customers with multi-site and multi-sized locations; and

·  
The Company’s strong financial position with a cash balance of $16.8 million, no debt and $3.0 million of credit available pursuant to its amended credit agreement as of December 31, 2012.

TERMINATED CONTRACT

In February 2009, the Company launched Sharps®MWMS™, a Medical Waste Management System (“MWMS”), which is a comprehensive medical waste and dispensed medication solution which includes an array of products and services necessary to effectively collect, store and treat medical waste and unused dispensed medication outside of the hospital or large health care facility setting. In connection with the launch in 2009, the Company signed a five year contract (one year, plus four option years) with a major U.S. government agency for a $40 million program to provide our comprehensive Medical Waste Management System™, or Sharps®MWMS™, which is a rapid-deployment solution offering designed to provide medical waste collection, storage and treatment in the event of natural disasters, pandemics, man-made disasters, or other national emergencies.  Sharps®MWMS™ is unique in that the solution also offers warehousing, inventory management, training, data and other services necessary to provide a comprehensive solution. We received a purchase order for $28.5 million ($6.0 million of which was recognized in fiscal year 2009, and $22.5 million was recognized in the first half of fiscal year 2010).  In January 2010, the Company was awarded the first option year (ending January 31, 2011) valued at approximately $1.6 million which was recognized from February 1, 2010 through January 31, 2011.  In January 2011, we were awarded the second option year (ending January 31, 2012) valued at approximately $3.0 million and was recognized from February 1, 2011 through January 31, 2012.  The Company was notified by an agency of the U. S. Government, acting on behalf of the DSNS, that the maintenance contract would not be renewed for the third option year (beginning February 1, 2012) and that the contract would be terminated effective January 31, 2012. This non-renewal was preceded by a letter dated December 2, 2011 advising the Company of the U.S. Government’s intent to exercise the third option year. Although not stated in the notice provided by the U.S. Government, the Company believes the action is part of a budget reduction program being implemented by the DSNS.

RECENT DEVELOPMENTS
 
On January 7, 2013, the Company announced that its Board of Directors approved a stock repurchase program effective January 3, 2013, authorizing the Company to repurchase in the aggregate up to $3 million of its outstanding common stock over a two-year period. The shares would be purchased from time to time on the open market or in privately negotiated transactions, at the Company's discretion, in each case, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, subject to market and business conditions, applicable legal requirements, explicit black-out dates and
 
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other factors. The purchases will be funded using the Company's available cash balances and cash generated from operations. The program does not obligate the Company to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the Company's discretion in accordance with Rule 10b-18.
 
LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Cash and cash equivalents decreased by $0.7 million to $16.8 million at December 31, 2012 from $17.5 million at June 30, 2012. The decrease in cash and cash equivalents is primarily due to the timing of collections from orders related to billings in December 2012 and capital expenditures and additions to intangible assets of $0.5 million (discussed below).

Accounts receivable increased by $0.5 million to $2.9 million at December 31, 2012 from $2.4 million at June 30, 2012. The increase is due to timing of billings and collections.

Inventory decreased by $0.2 million to $2.0 million at December 31, 2012 from $2.2 million at June 30, 2012. The decrease in inventory is due to timing of sales and new product buildup.

Working capital decreased $0.5 million to $18.1 million at December 31, 2012 from $18.6 million at June 30, 2012. The decrease is primarily due to decreases in cash and cash equivalents and inventory offset by higher accounts receivable (as discussed above).

Property, plant and equipment, net decreased by $0.1 million to $4.5 million at December 31, 2012 from $4.6 million at June 30, 2012.  The decrease in property and equipment is related to depreciation expense of $0.5 million, partially offset by capital expenditures of $0.4 million. The capital expenditures are attributable primarily to (i) treatment facility improvements of $291 thousand, (ii) manufacturing and assembly equipment including molds, dies and printing plates of $54 thousand and (iii) computer equipment and custom software programming of $48 thousand.

Stockholders’ equity decreased by $0.7 million to $22.4 million at December 31, 2012 from $23.2 million at June 30, 2012.  This decrease is primarily attributable to a net loss for the six months ended December 31, 2012 of $1.1 million.  The impact was partially offset by the effect on equity (credit) of non-cash stock based award expense of $0.3 million.

Off -Balance Sheet Arrangements

The Company entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. The Company’s most significant off-balance sheet transactions include commitments associated with non-cancelable operating leases. The Company has other off-balance sheet obligations involving letters of credit.

The Company entered into non-cancelable operating leases for certain of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. At the end of the lease, the Company has no further obligation to the lessor. If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease.

As a result of the termination of the U.S. Government contract, the Company is attempting to buy-out or sublease the Atlanta facility lease obligation. In August 2012, the Company executed an agreement with the Atlanta facility landlord reducing its obligation under the lease for the 51,000 square foot facility by approximately 20,000 square feet effective September 1, 2012.
 
Credit Facility

On July 13, 2012, the Company executed the First Amendment to Credit Agreement (the “Amendment”) with Wells Fargo, National Association (the “Bank”). The Amendment extended the maturity date of the Credit Agreement (the “Credit Agreement”) executed on July 15, 2010 from July 15, 2012 to July 15, 2014. The Company’s Credit Agreement with the Bank provides for a two-year, $5.0 million line of credit facility, the proceeds of which may be utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000), (iv) acquisitions (up to $1,000,000) and (v) general corporate purposes. Pursuant to the Amendment, the aggregate principal amount of advances outstanding at any time under the Credit Agreement shall not exceed the Borrowing Base which is equal to (i) 80% of Eligible Accounts Receivable (as defined in the Amendment) plus (ii) 40% of Eligible Inventory (as defined in the Amendment). As of December 31, 2012, the Company had no outstanding borrowings, $108 thousand in letters of credit outstanding, and $3.0 million of credit available pursuant to its amended credit agreement. The short-term borrowings during the reporting period did not differ from the amount outstanding as of December 31, 2012.

Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2014, the maturity date set under the
Amendment. The Company pays a fee of 0.2% per annum on the unused amount of the line of credit. We estimate that the interest rate applicable to the borrowings under the Amendment would be approximately 2.8% as of December 31, 2012.

The Amendment and Credit Agreement contain affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $21 million, not to exceed a ratio of liabilities to tangible net worth of 1.0 to 1.0 and achieve positive annual net income for the fiscal year ending June 30, 2013 (determined ninety days thereafter).
 
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As of December 31, 2012, the Company was in compliance with all applicable financial covenants. The Amendment and Credit Agreement also contain 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 Company may be required to make immediate repayment of all indebtedness to the lenders.Management believes that the Company’s current cash resources (cash on hand and cash generated from operations) along with its line of credit with the Bank will be sufficient to fund operations for the twelve months ending December 31, 2013.

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition:  The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. 

The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable revenue arrangements. Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System™ (formerly the Sharps Disposal by Mail Systems®) and various TakeAway Environmental Return Systems™ referred to as “Mailbacks” and Sharps® Pump and Asset Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation  and (3) treatment service.

In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting.  The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price.  The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided including compliance with local, state and Federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.

Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership.  Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s facility.  The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s facility. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container.  Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container system, transportation and treatment 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 treatment elements are recognized at the point of sale.

Income Taxes:  The liability method is used in accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

RECENTLY ISSUED ACCOUNTING STANDARDS

There are no recently issued accounting pronouncements that impact the Company’s condensed consolidated financial statements as of December 31, 2012.


The Company does not have exposure to significant financial market risk including commodity price risk, foreign currency exchange risk or interest rate risk. Management does not use derivative instruments. The Company has limited exposure to changes in interest rates due to its lack of indebtedness.  The Company maintains a credit agreement under which we may borrow funds in the future. Currently, the Company does not foresee any borrowing needs.


Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures”, as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including, the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2012, the Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”), pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based upon this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of December 31, 2012.
 
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Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2012, there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
CEO and CFO Certifications

Appearing immediately following the Signatures section of this report are certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This item of this quarterly report on Form 10-Q, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certification and this information should be read in conjunction  with the Section 302 Certifications for a more complete understanding of the topics presented.



The Company is involved in legal proceedings and litigation in the ordinary course of business.  In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position or consolidated results of operations.


Refer to Item 1A. Risk Factors in the Company’s annual report on Form 10-K for the year ended June 30, 2012 for the Company’s risk factors.  During the quarter ended December 31, 2012, there have been no changes to the Company’s risk factors.


Recent Sales of Unregistered Securities.

None.

Issuer Purchases of Equity Securities.

None.


(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)
       
101.INS
 
XBRL Instance Document (filed herewith)
       
101.SCH
 
XBRL Taxonomy Extension Schema Document (filed herewith)
       
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
       
101.DEF
 
XBRL Taxonomy Extension Linkbase Document (filed herewith)
       
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
       
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)


ITEMS 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.




 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
REGISTRANT:
 
SHARPS COMPLIANCE CORP.
   
Dated: January 31, 2013
By: /s/ DAVID P. TUSA 
 
David P. Tusa
 
Chief Executive Officer and President
 
(Principal Executive Officer)

Dated: January 31, 2013
By: /s/ DIANA P. DIAZ 
 
Diana P. Diaz
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)

 
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