<PAGE> 1
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ____________ to ______________.
Commission File Number: 0-22390
SHARPS COMPLIANCE CORP.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
Delaware 74-2657168
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9050 Kirby Drive, Houston, Texas 77054
-------------------------------- -----
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number (713) 432-0300
Securities Registered under 12(g) of the Exchange Act: Title of Each Class
-------------------
Common Stock, $0.01
Par Value
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 [ ]
Number of shares outstanding of the issuer's Capital Stock as of October 26,
1998: 7,626,444
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
SHARPS COMPLIANCE CORP.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1998 (Unaudited) and June
30, 1998 3
Condensed Consolidated Statements of Operations (Unaudited) - For the three months
ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the three
months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II OTHER INFORMATION 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30,
1998 June 30,
Unaudited 1998
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,000 $ 444,000
Short-term investments 2,500,000 2,600,000
Accounts receivable 363,000 204,000
Inventory 111,000 172,000
Prepaids and other 59,000 81,000
----------- -----------
Total current assets 3,084,000 3,501,000
PROPERTY AND EQUIPMENT, net 140,000 122,000
INTANGIBLE ASSETS, net 100,000 101,000
NOTE RECEIVABLE FROM STOCKHOLDER 400,000 400,000
----------- -----------
Total assets $ 3,724,000 $ 4,124,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 324,000 $ 418,000
Accrued disposal costs 781,000 646,000
Current maturities of long-term debt 41,000 41,000
----------- -----------
Total current liabilities 1,146,000 1,105,000
LONG-TERM DEBT, net of current maturities 31,000 40,000
----------- -----------
Total liabilities 1,177,000 1,145,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share; -0- and 1,000,000 shares authorized;
-0- and 1,000,000 shares issued and outstanding, respectively -- 10,000
Common stock, $.01 par value per share; 20,000,000 shares authorized;
7,593,944 and 583,944 shares issued and outstanding, respectively 76,000 6,000
Additional paid-in capital 4,247,000 4,287,000
Accumulated deficit (1,776,000) (1,324,000)
---------- -----------
Total stockholders' equity 2,547,000 2,978,000
----------- -----------
Total liabilities and stockholders' equity $ 3,724,000 $ 4,124,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended September 30
1998 1997
------------ ------------
<S> <C> <C>
SALES, net $578,000 $229,000
COSTS AND EXPENSES:
Cost of revenues 354,000 218,000
Selling, general and administrative expenses 711,000 99,000
Depreciation and amortization 10,000 3,000
Operating loss (497,000) (91,000)
------------ ------------
INTEREST EXPENSE -- (2,000)
INTEREST INCOME 45,000 --
------------ ------------
Net loss $(452,000) $(93,000)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (.06) $ (.03)
============ ============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 7,586,987 3,000,000
============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended September 30
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(452,000) $ (93,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Depreciation and amortization 11,000 3,000
Changes in operating assets and liabilities-
(Increase) in accounts receivable (159,000) (11,000)
(Increase) decrease in inventory 61,000 (30,000)
Decrease in other current assets 22,000 --
Increase (decrease) in accounts payable and accrued
liabilities (74,000) 4,000
Increase in accrued disposal costs 135,000 112,000
---------- ---------
Net cash used in operating activities (456,000) (15,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,000) --
Sales of short-term investments 100,000 --
---------- ---------
Net cash used in investing activities 72,000 --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 30,000
Payments on notes payable (9,000) (4,000)
---------- ---------
Net cash provided by (used in) financing
activities (9,000) 26,000
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (393,000) 11,000
CASH AND CASH EQUIVALENTS, beginning of period 444,000 13,000
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 51,000 $ 24,000
========== =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
1. ORGANIZATION AND BACKGROUND:
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Sharps Compliance Corp., formerly U.S. Medical Systems, Inc. ("SCC"), and its
wholly owned subsidiaries, Sharps Compliance, Inc., d.b.a. Sharps Compliance,
Inc. of Texas ("Sharps"), and U.S. Medical, Inc. ("USM") (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
On February 27, 1998, SCC and Sharps entered into an agreement and plan of
reorganization (the "Agreement"). SCC acquired all of the issued and
outstanding common stock, $.01 par value, of Sharps in consideration for the
issuance of 1,000,000 shares of preferred stock, $.01 par value, such that each
share of Sharps common stock outstanding on the closing date was exchanged for
0.142858 shares of SCC preferred stock. On July 23, 1998, SCC's stockholders
approved a 1-for-5.032715 reverse stock split of its outstanding common stock,
which has been given retroactive effect in the financial statements.
Simultaneously with the reverse stock split, each share of preferred stock was
converted into seven shares of common stock of SCC, resulting in the existing
stockholders of SCC holding 583,944 shares and the former stockholders of
Sharps holding 7,000,000 shares.
The Agreement is treated as a reverse acquisition for accounting and financial
reporting purposes. As such, Sharps is considered the accounting acquiror for
accounting and financial reporting purposes, and the net assets of SCC were
combined with those of Sharps at their historical basis, which approximated
their fair market value on the effective date of the Agreement. Sharps has
reflected the ongoing results of operations of SCC in its financial statements
from the effective date of the Agreement. Financial information for the three
months ended September 30, 1997 reflects the results of operations of Sharps
prior to the Agreement.
On or about September 2, 1998, the Company entered into a severance agreement
(the "Severance Agreement") with Mr. Lee Cooke, SCC's former Chief Executive
Officer and President, to transfer any and all assets and liabilities of USM,
which consisted of (i) all cash on hand, less $40,000, (ii) all accounts
receivable, (iii) all personal property located at the offices in Austin,
Texas, (iv) all patents and trademarks owned or licensed to USM, (v) customer
lists of USM, (vi) rights to the name U. S. Medical Systems, Inc. and (vii) all
of the capital stock of USM. As consideration for the transfer described above,
Mr. Cooke waived and released the Company from any and all liabilities and
severance obligations which were due Mr. Cooke in connection with that certain
employment agreement entered into between Mr. Cooke and the Company. The
Severance Agreement was effective July 31, 1998. The financial results of USM
prior to the effective date of the Severance Agreement were included in the
consolidated statement of operations for the three months ended September 30,
1998. The net book value of the assets and liabilities of USM transferred was
approximately $92,000 and was recorded as compensation expense during July
1998. Summarized financial data relating to the results of operations of USM
are included in the consolidated statement of operations for the three months
ended September 30, 1998 as follows:
Revenue 13,000
Net loss (110,000)
Basic and diluted earnings per share (.01)
BUSINESS
Sharps, which operates as a wholly owned subsidiary of SCC, provides mail
disposal systems for certain medical sharps products (i.e., needles, razors and
syringes) as well as other systems to provide the home healthcare industry with
cost
6
<PAGE> 7
effective alternatives to traditional methods of transporting medical equipment
from home healthcare patients. Sharps' mail disposal systems are primarily
designed to facilitate small waste generators' compliance with state and
federal regulations for the disposal of medical waste.
USM previously developed, produced and marketed products directed at the
over-the-counter consumer market and products related to infection prevention
for the professional dental care industry. Effective July 31, 1998, USM ceased
operating as a subsidiary of SCC.
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 and, accordingly, do not include all information and
footnotes required under generally accepted accounting principles 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
financial position of the Company as of September 30, 1998, and the results of
its operations and its cash flows for the three months ended September 30, 1998
and 1997. The results of operations for the three months ended September 30,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year ending June 30, 1998. These condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-KSB.
3. NET LOSS PER SHARE
Earnings per share data for all periods presented has been computed pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," that requires a presentation of basic earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). Basic EPS excludes dilution
and is determined by dividing income or loss available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities and
other contracts to issue common stock were exercised or converted into common
stock. There are no differences between basic EPS and diluted EPS for all
periods presented.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This quarterly report on Form 10-QSB contains certain forward-looking
statements and information relating to SCC 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," "estimate" 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, estimated, expected or intended. The Company does not intend to
update these forward-looking statements.
The discussion below analyzes changes in the consolidated operating results and
financial condition of the Company during the three months ended September 30,
1998 and 1997. The comparison is made to the operating results and financial
condition of Sharps as an independent entity for the three months ended
September 30, 1997, prior to the Agreement.
GENERAL
7
<PAGE> 8
The Company experienced a 32% increase in revenues (from $439,000 to $578,000)
for the quarter ended September 30, 1998 over the quarter ended June 30, 1998.
During the same periods, Sharps revenues increased 39% (or $159,000), while
revenues of USM, which had its ownership transferred to the Company's former
chief executive officer and president effective July 31, 1998, declined 61% (or
$20,000). The increase in revenues of Sharps is attributed to increased
acceptance of the Sharps Disposal by Mail System ("Mail Disposal System") as a
more cost effective means of disposing of contaminated sharps than is currently
being used by the small waste generator. Additionally, sales of the Trip
LesSystem(TM) increased as home heathcare facilities (the primary customer for
the Trip LesSystem(TM)) continue to seek to reduce costs associated with trips
to the patient's home to retrieve used sharps containers, infusion pumps and IV
poles. Sales to the lodging industry have increased as Ecolab, the Company's
exclusive U.S. distributor of the Mail Disposal System in commercial and
industrial markets, has initiated an active marketing campaign featuring the
Company's products.
Consolidated selling, general and administrative ("SG&A") expenses decreased
5%, or $35,000 (from $746,000 to $711,000), compared to the quarter ended June
30, 1998, while Sharps SG&A decreased 9% (or $59,000). USM recorded $119,000 in
SG&A expenses, $92,000 of which pertained to the effects of the Severance
Agreement with the SCC's former chief executive officer and president. The
decrease was due to the elimination of costs attributable to the acquisition
of Sharps.
The Company's net loss narrowed 28% from $629,000 for the quarter ended June
30, 1998 to $452,000 in the quarter ended September 30, 1998. Included in the
current quarter loss of $452,000 is $110,000 attributable to USM.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Financial Statements of Operations,
expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended
September 30
1998 1997
------ ------
<S> <C> <C> <C>
Net sales 100% 100%
Costs and expenses:
Cost of sales (61%) (95%)
Selling, general and administrative (123%) (43%)
Depreciation and amortization (2%) (2%)
------ ------
Total operating expenses (186%) (140%)
------ ------
Loss from operations (86%) (40%)
Total other income (expense) 8% (1%)
------ ------
Net loss (78%) (41%)
====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Net sales increased 152% (or $349,000) during the three months ended September
30, from $229,000 in 1997 to $578,000 in 1998. Included in net sales for the
three months ended September 30, 1998 were sales of USM products (PDS Clean(R)
and Miracle Grip(R)) of $13,000. These net sales were for the period prior to
the closing of the Severance Agreement with SCC's former chief executive
officer and president. The Company's increase in net sales can be attributed to
a wider acceptance of the Mail Disposal System as a more cost effective means
of disposing of contaminated sharps than is currently being used by the small
waste generator. Secondly, Sharps has created a product line defined as the
Trip LesSystem(TM) which will further decrease the need for Sharps' primary
customer, home healthcare facilities, to make an additional trip to the
patient's home to retrieve the used sharps container. Finally, due to the
overall increase in exposure to contaminated sharps, the Company is continually
finding new markets where the Sharps product is a natural fit. Sharps has been
successfully working with Ecolab, a major supplier of hotel and restaurant
cleansing products, to place the Mail Disposal System within many major hotel
and motel chains across the U.S.
The increase in SG&A expenses of $604,000, or 564%, is due to expansion of the
Company's infrastructure and additional resources expended to penetrate new
markets. This increase began in January 1998. Since January 1998, the Company
has
8
<PAGE> 9
incurred significant SG&A expenses, which is the primary reason for the
Company's net loss. SG&A expenses have significantly increased in the first
three months of fiscal 1998 in relation to the same period in 1997 due to
additional support and sales staffing, travel expenses associated with Sharps
sales personnel and additional overall increased marketing effort.
Sharps completed a $4 million private equity offering immediately prior to its
acquisition by SCC on February 27, 1998. A portion of these capital resources
are being used to provide Sharps with a more nationally identifiable image.
Sharps has retained a Houston, Texas based marketing firm to better assist the
Company with this new image effort. Additionally, a sales team has been
assembled to strategically cover the U.S. to better identify, qualify and
assist the existing and new customer base in the use and efficiency benefits of
the Sharps product line. At September 30, 1998, the Company had approximately
$2,551,000 in cash and short-term investments.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1998 was $1,938,000. The relatively favorable
liquidity ratios are primarily due to the successful private placement of
2,000,000 shares of Sharps common stock in February 1998.
Capital expenditures for the consolidated Company during the three months ended
September 30, 1998 were approximately $28,000 and consisted of office
equipment, computers and furniture and fixtures.
At September 30, 1998, total long-term debt outstanding was approximately
$31,000 for the Company.
The Company expects to incur substantial costs related to sales, marketing and
administrative activities. The amount and timing of anticipated expenditures
will depend upon numerous factors both within and outside the Company's
control, including the nature and timing of marketing and sale activities.
Moreover, the Company's ability to generate income from operations will be
dependent upon, among other things, sufficient penetration of the home
healthcare, industrial and other markets. Management believes that the
Company's available resources will satisfactorily fund operations for the next
12 to 24 months. There can be no assurance that the Company will be able to
obtain additional financing on acceptable terms, if at all, to fund operations
beyond that time frame.
YEAR 2000 ISSUES
Many currently installed computer systems and software products were coded
using two digits rather than four to define the applicable year. As a result
these computer systems and software products have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year 2000. This
could cause a system failure or miscalculations, causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, to send invoices or to engage in similar normal business
activities. Finally, computer systems and software product devices may fail to
process accurately leap year logic associated with the Year 2000.
The Company believes that the adverse impact of Year 2000 issues on its
internal computer systems will not be material. Most of the personal computers
and computer systems used by the Company have been installed in the past year
as the Company has been growing its organization. The Company has conducted a
manual review of all of its software and has found no incidence of Year 2000
coding issues.
The Company has not contacted its material vendors and suppliers to determine
if such vendors and suppliers have any Year 2000 issues that have not been
resolved or may not be resolved in a timely manner. However, the Company does
not believe that its financial condition or results of operations would be
materially adversely affected by Year 2000 issues if its vendors or suppliers
were unable to successfully address these issues.
To date, minimal expenses have been incurred associated with the Company's
evaluation of Year 2000 issues, and the Company does not expect that
expenditures for upgrades or additional testing for Year 2000 issues will be
material.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibit is filed as part of this report.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule (filed herewith)
b) Reports on Form 8-K
None.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
10
<PAGE> 11
SIGNATURE
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: November 6, 1998 By: /s/ Kent D. Manby
------------------------------------
Kent D. Manby, Vice President and
Chief Financial Officer
11
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the Balance
Sheet as of September 30, 1998, and the Statement of Operations for the period
then ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 51,000
<SECURITIES> 2,500,000
<RECEIVABLES> 363,000
<ALLOWANCES> 0
<INVENTORY> 111,000
<CURRENT-ASSETS> 3,084,000
<PP&E> 166,000
<DEPRECIATION> 26,000
<TOTAL-ASSETS> 3,724,000
<CURRENT-LIABILITIES> 1,146,000
<BONDS> 72,000
0
0
<COMMON> 76,000
<OTHER-SE> 2,471,000
<TOTAL-LIABILITY-AND-EQUITY> 3,724,000
<SALES> 578,000
<TOTAL-REVENUES> 578,000
<CGS> 354,000
<TOTAL-COSTS> 354,000
<OTHER-EXPENSES> 721,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 452,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 452,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
