<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-QSB
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the transition period from _______ to _______.
Commission File Number: 0-22390
------------
SHARPS COMPLIANCE CORP.
(Name of Small Business Issuer in its Charter)
DELAWARE 74-2657168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9050 KIRBY DRIVE, HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
(713) 432-0300
Registrant's telephone number
Securities Registered under 12(g) of the Exchange Act: TITLE OF EACH CLASS
-------------------
Common Stock, $0.01
Par Value
Check whether the registrant (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,
1999: 7,626,444
Transitional Small Business Disclosure Format (check one): Yes No x
<PAGE> 2
SHARPS COMPLIANCE CORP.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
(Unaudited) and June 30, 1999......................................................3
Condensed Consolidated Statements of Operations (Unaudited) -
For the three months ended September 30, 1999 and 1998.............................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the three months ended September 30, 1999 and 1998.............................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......................................................................................10
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
SHARPS COMPLIANCE CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER
30 JUNE 30
1999 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 268,000 $ 15,000
Short-term investments 500,000 1,300,000
Accounts receivable, net 797,000 474,000
Inventory 195,000 132,000
Prepaids and other 83,000 83,000
------------ ------------
Total current assets 1,843,000 2,004,000
PROPERTY AND EQUIPMENT, net 188,000 189,000
INTANGIBLE ASSETS, net 76,000 81,000
NOTE RECEIVABLE FROM STOCKHOLDER 320,000 320,000
------------ ------------
Total assets $ 2,427,000 $ 2,594,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 102,000 $ 162,000
Accrued liabilities 174,000 148,000
Accrued disposal costs 1,268,000 1,073,000
Current maturities of long-term debt 16,000 23,000
------------ ------------
Total current liabilities 1,560,000 1,406,000
LONG-TERM DEBT, net of current maturities 13,000 15,000
------------ ------------
Total liabilities 1,573,000 1,421,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share; 20,000,000 shares
authorized; 7,626,444 shares issued and outstanding 76,000 76,000
Additional paid-in capital 4,371,000 4,371,000
Deferred compensation (8,000) (11,000)
Accumulated deficit (3,585,000) (3,263,000)
------------ ------------
Total stockholders' equity 854,000 1,173,000
------------ ------------
Total liabilities and stockholders' equity $ 2,427,000 $ 2,594,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
SHARPS COMPLIANCE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Sales, net $ 975,000 $ 578,000
Consulting services and other 31,000 --
------------ ------------
Total revenues 1,006,000 578,000
COSTS AND EXPENSES:
Cost of revenues 595,000 354,000
Selling, general and administrative 723,000 711,000
expenses
Depreciation and amortization 24,000 10,000
------------ ------------
Operating loss (336,000) (497,000)
INTEREST INCOME 14,000 45,000
------------ ------------
Net loss $ (322,000) $ (452,000)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (.04) $ (.06)
============ ============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 7,626,444 7,586,987
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
SHARPS COMPLIANCE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (322,000) $ (452,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization 24,000 11,000
Amortization of deferred compensation 3,000 --
Changes in operating assets and liabilities-
Increase in accounts receivable (323,000) (159,000)
(Increase) decrease in inventory (63,000) 61,000
Decrease in other current assets -- 22,000
Decrease in accounts payable and accrued
liabilities (34,000) (74,000)
Increase in accrued disposal costs 195,000 135,000
------------ ------------
Net cash used in operating activities (520,000) (456,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (18,000) (28,000)
Sales of short-term investments 800,000 100,000
------------ ------------
Net cash provided by investing activities 782,000 72,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (9,000) (9,000)
------------ ------------
Net cash used in financing activities (9,000) (9,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 253,000 (393,000)
CASH AND CASH EQUIVALENTS, beginning of period 15,000 444,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 268,000 $ 51,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION AND BACKGROUND:
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Sharps Compliance Corp. ("SCC") (formerly U.S. Medical Systems, Inc.) and its
wholly owned subsidiary, Sharps Compliance of Texas, Inc., d.b.a. Sharps
Compliance, Inc. d.b.a. Inscite ("SCI") collectively, the "Company" or
"Sharps"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS
Sharps provides mail disposal services for certain medical sharps products
(i.e., needles, razors and syringes) as well as other systems to provide the
home healthcare industry with cost effective alternatives to traditional methods
of transporting medical equipment from home healthcare patients. Sharps'
products are designed primarily to facilitate small waste generators' compliance
with local, state and federal regulations for the disposal of medical waste.
Sharps also provides consulting services related to medical sharps products to
other entities.
Waste generators that use the Sharps Disposal By Mail System, (the "Mail
Disposal System") are responsible for mailing the systems to a third party for
incineration. Sharps is responsible for the postage and burn costs associated
with the customer mailing the Mail Disposal Systems directly to the third party
incinerator. Sharps records accrued disposal costs for estimated future postage
and burn costs based on mail disposal systems sold that management estimates
will eventually be returned for incineration. The estimated returns are based on
historical experience. The accrued disposal costs are adjusted prospectively
for revisions in the estimated costs. Depending upon the experience of Sharps,
such revisions could be significant.
Prior to August 1, 1999, Sharps contracted through a third party who held an
exclusive contract to incinerate medical waste at a facility in the City of
Carthage, Texas (the "facility"). Sharps was notified by the City of Carthage in
August 1999 that, effective July 31, 1999, the third party's exclusivity for
medical waste incineration at the facility had been terminated. Sharps continues
to utilize the facility directly with the City of Carthage on a daily basis.
Sharps is currently negotiating a contractual arrangement with the City of
Carthage to allow Sharps to continue to incinerate its medical waste at the
facility. There can be no assurance that the arrangement under negotiations will
ultimately be entered into between Sharps and the City of Carthage, or that
Sharps would be able to enter into another arrangement for the incineration of
its products at a cost that would be acceptable to Sharps.
Sharps has sole-sourced the majority of its manufacturing, assembly and
transportation functions and its disposal function. Sharps may be affected by
its dependence on the suppliers of these functions. The risk is mitigated by the
long-standing business relationships with and reputation of Sharps' suppliers.
Although there are no assurances with regard to future business associations
after expirations of certain agreements between Sharps and its suppliers,
management believes that alternative sources would be available at similar costs
and terms.
Sharps has received limited revenues to date and has incurred cumulative losses
since its inception. The future success of Sharps is dependent upon many
factors, including environmental regulation, continuity of its license
agreements, maintaining an agreement with an incineration facility, successful
completion of its product development activities, the identification and
penetration of markets for its products and services, and obtaining funds
necessary to complete these activities. Furthermore, if Sharps is unable to
achieve its fiscal year 2000 projected results of operations or if the actual
return of Mail Disposal Systems exceeds those estimated by management,
additional financing may be required to fund Sharps' operations. Management
believes Sharps' current resources will be sufficient to fund operations through
at least December 2000.
6
<PAGE> 7
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, 1999, and the results of
its operations and its cash flows for the three months ended September 30, 1999
and 1998. The results of operations for the three months ended September 30,
1999 are not necessarily indicative of the results to be expected for the entire
fiscal year ending June 30, 2000. These condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended June 30, 1999.
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.
Options outstanding as of each period end have not been included in the
calculation of diluted EPS as they would have an anti-dilutive effect on EPS.
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.
GENERAL
The Company's revenues increased 47% (from $685,000 to $1,006,000) for the
quarter ended September 30, 1999 over the quarter ended June 30, 1999. The
increase in revenues is the result of increasing acceptance of Sharps'
logistical solutions for the home healthcare industry. The Sharps Disposal by
Mail System ("Mail Disposal System") is being accepted as a more cost-effective
means of disposing of contaminated sharps. The home healthcare industry is also
increasing its acceptance of Sharps Trip LesSystem(TM) and the Sharps Pitch-It
series of disposable IV poles as they focus on reducing costs associated with
trips to the patient's home to retrieve used sharps containers, infusion pumps
and IV poles.
The increase in cost of revenues of $183,000, or 44%, for the quarter ended
September 30, 1999 over the quarter ended June 30, 1999 is due to the increase
in sales volume. Cost of revenues decreased as a percentage of sales primarily
due to increased coverage of fixed costs through increased sales. Cost of
revenues also decreased as a percentage of sales due to adjustments made to the
estimated rate of return for mail disposal units expected to be returned for
incineration.
7
<PAGE> 8
Selling, general and administrative expenses decreased $82,000, or 10%, from the
quarter ended September 30, 1999 over the quarter ended June 30, 1999 from
$805,000 to $723,000. The decrease is due to staffing adjustments and related
savings during August 1999 as well as an overall decrease in professional
services used during the quarter.
The Company's net loss narrowed 40% from $534,000 for the quarter ended June 30,
1999 to $322,000 in the quarter ended September 30, 1999.
RESULTS OF OPERATIONS
The discussion below analyzes changes in the consolidated operating results and
financial condition of the Company during the three months ended September 30,
1999 and 1998.
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
1999 1998
---------- ----------
<S> <C> <C>
Revenues 100% 100%
Costs and expenses:
Cost of revenues (61%) (59%)
Selling, general and administrative (72%) (123%)
Depreciation and amortization (2%) (2%)
========== ==========
Total operating expenses (133%) (186%)
========== ==========
Loss from operations (33%) (86%)
Total other income 1% 8%
========== ==========
Net loss (32%) (78%)
========== ==========
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Revenues increased $428,000, or 74%, from $578,000 for the quarter ended
September 30, 1998 to $1,006,000 for the quarter ended September 30, 1999. The
sales increase can be attributed to increased marketing efforts, which began in
January 1998. These continuing efforts have created a wider acceptance of the
Mail Disposal System and the Trip LesSystem(TM) as cost effective logistical
solutions for Sharps' primary customer, home healthcare facilities.
Consulting revenue increased from $-0- for the quarter ended September 30, 1998
to $31,000 for the quarter ended September 30, 1999. The increase is due to the
formation of INSCITE, Sharps' consulting division, on March 1, 1999 and its
activities since inception.
The increase in cost of revenues of $241,000, or 68%, is due to the increase in
the Company's sales volume. Cost of revenues decreased as a percentage of sales
primarily due to increased coverage of fixed costs through increased sales
volume. Cost of revenues also decreased as a percentage of sales due to
adjustments made to the estimated rate of return for mail disposal units
expected to be returned for incineration.
Selling, general and administrative expenses increased $12,000, or 2% from
$711,000 to $723,000. The increase is due to Sharps' expansion of its
infrastructure and additional resources expended to penetrate new markets. The
needed additional support and sales staffing, the travel expenses associated
with Sharps' sales personnel and the overall increased marketing efforts have
increased these expense items. These increases were offset by the elimination of
the expenses attributable to Sharps' former subsidiary, U.S. Medical, Inc., of
$122,000. This included the net book value of the assets and liabilities of U.S.
Medical, Inc. (approximately $92,000) which were transferred to SCC's former
Chief Executive Officer and President as noted in fiscal year 1999.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, Sharps has approximately $768,000 in cash and
short-term investments. Working capital at September 30, 1999 was $283,000. The
liquidity ratios are primarily due to the $3,828,000 in net proceeds from the
private placement of 2,000,000 shares of Sharps common stock in February 1998.
Capital expenditures during the year ended September 30, 1999 were approximately
$18,000 and consisted mainly of computer equipment. Although Sharps realized a
decline in its net loss for the quarter ended September 30, 1999, negative
operating cash flows increased primarily due to individually significant
receivables which had not been collected as of September 30, 1999.
At September 30, 1999, total long-term debt outstanding was approximately
$13,000.
Sharps expects to continue 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 Sharps'
control, including the nature and timing of marketing and sale activities.
Moreover, Sharps' 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 Sharps' current resources
will satisfactorily fund operations for the next 18 to 24 months. There can be
no assurance that Sharps will be able to obtain 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
recognizes 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 any potential 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 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 Year 2000 issues would materially adversely affect its financial condition
or results of operations 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.
The above Year 2000 disclosure statement constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.
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.
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: October 27, 1999 By: /s/ Kent D. Manby
--------------------------
Kent D. Manby, Vice President and
Chief Financial Officer
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1999, 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> SEP-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 268,000
<SECURITIES> 500,000
<RECEIVABLES> 798,000
<ALLOWANCES> 24,000
<INVENTORY> 196,000
<CURRENT-ASSETS> 1,844,000
<PP&E> 267,000
<DEPRECIATION> 79,000
<TOTAL-ASSETS> 2,428,000
<CURRENT-LIABILITIES> 1,560,000
<BONDS> 13,000
0
0
<COMMON> 76,000
<OTHER-SE> 778,000
<TOTAL-LIABILITY-AND-EQUITY> 2,428,000
<SALES> 975,000
<TOTAL-REVENUES> 1,006,000
<CGS> 585,000
<TOTAL-COSTS> 595,000
<OTHER-EXPENSES> 747,000
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 322,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322,000)
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
