WASHINGTON, D.C. 20549
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 ☒ No ☐
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).
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒
As of January 30, 2017, there were 15,986,857 outstanding shares of the Registrant's common stock, par value $0.01 per share.
|
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 “may,” “position,” “plan,” potential,” “continue,” “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 known and unknown 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. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q or refer to our Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that is not possible to predict or identify such factors and as such should not consider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update these forward-looking statements.
GENERAL
Sharps Compliance Corp. is a leading full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous. 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, hazardous waste 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), assisted living and long-term care facilities (assisted living, continuing care, long-term acute care, memory care and skilled nursing), government (federal, state and local), consumers, commercial and agriculture, as well as 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, pharmaceutical waste, hazardous waste 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”). For customers with facilities or locations that may generate larger quantities of medical waste, we integrate the route-based pick-up service into our complete offering. The benefits of this comprehensive offering include single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and 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).
Our key markets include heathcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, surgery centers, retail pharmacies and clinics and the professional market which is comprised of physicians, dentists and veterinary practices. The Company’s flagship product, the Sharps
®
Recovery System, is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste and used healthcare materials. In October 2014, the Company launched MedSafe
®
, a patent pending solution for the safe collection, transportation and proper disposal of unwanted and expired prescription medications including controlled substances from ultimate users. MedSafe
has been designed to meet or exceed the new regulations issued by the Drug Enforcement Administration (“DEA”) implementing the Secure and Responsible Drug Disposal Act of 2010 (the “Act”) which became effective October 9, 2014. In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of a route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. Additionally, the Company now services parts of Texas and Louisiana with route-based pickup service. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast where we serve an eleven contiguous state region. Our other solutions include TakeAway Medication Recovery System™, TakeAway Recycle System™, ComplianceTRAC
SM
, Universal Waste Shipback Systems, TakeAway Environmental Return System™, SharpsTracer
®
, Sharps Secure
®
Needle Disposal System™, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps
®
MWMS™ (a Medical Waste Management System (“MWMS”)) and Spill Kit and Recovery System.
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, 2016 and 2015. 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,
|
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,707
|
|
|
|
100.0
|
%
|
|
$
|
9,992
|
|
|
|
100.0
|
%
|
|
$
|
19,238
|
|
|
|
100.0
|
%
|
|
$
|
17,861
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
6,812
|
|
|
|
70.2
|
%
|
|
|
6,673
|
|
|
|
66.8
|
%
|
|
|
13,384
|
|
|
|
69.6
|
%
|
|
|
11,663
|
|
|
|
65.3
|
%
|
Gross profit
|
|
|
2,895
|
|
|
|
29.8
|
%
|
|
|
3,319
|
|
|
|
33.2
|
%
|
|
|
5,854
|
|
|
|
30.4
|
%
|
|
|
6,198
|
|
|
|
34.7
|
%
|
SG&A expense
|
|
|
2,899
|
|
|
|
29.8
|
%
|
|
|
2,585
|
|
|
|
25.9
|
%
|
|
|
6,598
|
|
|
|
34.3
|
%
|
|
|
5,181
|
|
|
|
29.0
|
%
|
Depreciation and amortization
|
|
|
200
|
|
|
|
2.0
|
%
|
|
|
70
|
|
|
|
0.7
|
%
|
|
|
400
|
|
|
|
2.0
|
%
|
|
|
122
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(204
|
)
|
|
|
(2.1
|
%)
|
|
|
664
|
|
|
|
6.6
|
%
|
|
|
(1,144
|
)
|
|
|
(5.9
|
%)
|
|
|
895
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Interest expense
|
|
|
(27
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total other income (expense)
|
|
|
(23
|
)
|
|
|
(0.2
|
%)
|
|
|
9
|
|
|
|
0.1
|
%
|
|
|
(50
|
)
|
|
|
(0.3
|
%)
|
|
|
18
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(227
|
)
|
|
|
(2.3
|
%)
|
|
|
673
|
|
|
|
6.7
|
%
|
|
|
(1,194
|
)
|
|
|
(6.2
|
%)
|
|
|
913
|
|
|
|
5.1
|
%
|
Income tax expense
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
58
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
78
|
|
|
|
0.4
|
%
|
Net income (loss)
|
|
$
|
(227
|
)
|
|
|
(2.3
|
%)
|
|
$
|
615
|
|
|
|
6.2
|
%
|
|
$
|
(1,194
|
)
|
|
|
(6.2
|
%)
|
|
$
|
835
|
|
|
|
4.7
|
%
|
THREE MONTHS ENDED DECEMBER 31, 2016 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2015
Total revenues for the three months ended December 31, 2016 of $9.7 million decreased by $0.3 million, or 2.9%, over the total revenues for the three months ended December 31, 2015 of 10.0 million. Billings by market are as follows (in thousands):
|
|
Three-Months Ended December 31,
|
|
|
|
(Unaudited)
|
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Professional
|
|
$
|
3,017
|
|
|
$
|
1,861
|
|
|
$
|
1,156
|
|
Retail
|
|
|
1,642
|
|
|
|
3,037
|
|
|
|
(1,395
|
)
|
Home Health Care
|
|
|
2,021
|
|
|
|
2,091
|
|
|
|
(70
|
)
|
Pharmaceutical Manufacturer
|
|
|
1,404
|
|
|
|
2,515
|
|
|
|
(1,111
|
)
|
Assisted Living
|
|
|
571
|
|
|
|
518
|
|
|
|
53
|
|
Government
|
|
|
371
|
|
|
|
242
|
|
|
|
129
|
|
Environmental
|
|
|
74
|
|
|
|
75
|
|
|
|
(1
|
)
|
Other
|
|
|
165
|
|
|
|
188
|
|
|
|
(23
|
)
|
Subtotal
|
|
|
9,265
|
|
|
|
10,527
|
|
|
|
(1,262
|
)
|
GAAP Adjustment *
|
|
|
442
|
|
|
|
(535
|
)
|
|
|
977
|
|
Revenue Reported
|
|
$
|
9,707
|
|
|
$
|
9,992
|
|
|
$
|
(285
|
)
|
*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 or services rendered 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”.
The Company has expanded its reporting to include information by solution reflecting recent changes in the Company’s business primarily due to recent acquisitions.
|
|
Three-Months Ended December 31,
|
|
|
|
2016
|
|
|
% Total
|
|
|
2015
|
|
|
% Total
|
|
BILLINGS BY SOLUTION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mailbacks
|
|
$
|
5,973
|
|
|
|
64.5
|
%
|
|
$
|
7,949
|
|
|
|
75.5
|
%
|
Route-based pickup services
|
|
|
1,580
|
|
|
|
17.1
|
%
|
|
|
480
|
|
|
|
4.6
|
%
|
Unused medications
|
|
|
742
|
|
|
|
8.0
|
%
|
|
|
1,034
|
|
|
|
9.8
|
%
|
Third party treatment services
|
|
|
74
|
|
|
|
0.8
|
%
|
|
|
75
|
|
|
|
0.7
|
%
|
Other
(1)
|
|
|
896
|
|
|
|
9.6
|
%
|
|
|
989
|
|
|
|
9.4
|
%
|
Total billings
|
|
$
|
9,265
|
|
|
|
100.0
|
%
|
|
$
|
10,527
|
|
|
|
100.0
|
%
|
GAAP adjustment
(2)
|
|
|
442
|
|
|
|
|
|
|
|
(535
|
)
|
|
|
|
|
Revenue reported
|
|
$
|
9,707
|
|
|
|
|
|
|
$
|
9,992
|
|
|
|
|
|
|
(1)
|
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
|
|
(2)
|
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 or services rendered 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.
|
These quarter-to-date tables contain 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 billings was primarily attributable to decreased billings in the Retail ($1.4 million) and Pharmaceutical Manufacturer ($1.1 million) markets partially offset by increased billings in the Professional market ($1.2 million). The increase in the Professional market was a combination of acquired and organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System™ and the Company’s route-based pick-up services. The decrease in the Retail billings reflected a decrease in flu shot related orders of approximately $0.7 million, as well as a decrease of approximately $0.6 million in billings for the TakeAway Medication Recovery System envelopes, which were launched by a major retail pharmacy customer in the prior year period.
The decrease in Pharmaceutical Manufacturer market billings is related to the timing of inventory builds for patient support programs.
Billings for Mailbacks in the three months ended December 31, 2016 decreased 24.9% to $6.0 million as compared to $7.9 million in the prior year period and represented 64.5% of total billings. Billings for Route-Based Pickup Services increased 229% to $1.6 million as compared to $0.5 million in the prior year period and represented 17.1% of total billings.
Cost of revenues for the three months ended December 31, 2016 of $6.8 million was 70.2% of revenues. Cost of revenues for the three months ended December 31, 2015 of $6.7 million was 66.8% of revenues. The gross margin for the three months ended December 31, 2016 of 29.8% was lower than gross margin for the three months ended December 31, 2015 of 33.2%. Gross margin for the three months ended December 31, 2016 was adversely impacted by duplicative costs as the Company transitioned from third-party processing of medical waste in the Northeast Region to internal processing at the new facility in Pennsylvania.
Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2016 and 2015 were $2.9 million and $2.6 million, respectively. SG&A for the three months ended December 31, 2016 increased by $0.3 million over the prior year primarily due to ongoing expenses associated with acquired businesses and higher sales and marketing costs.
The Company reported an operating loss of $0.2 million for the three months ended December 31, 2016 compared to operating income of $0.7 million for the three months ended December 31, 2015. The operating income decreased mainly due to lower revenues, gross margin and higher SG&A expenses (discussed above).
The Company reported a loss before income taxes of $0.2 million for the three months ended December 31, 2016 versus income before income taxes of $0.7 million for the three months ended December 31, 2015. Loss before income taxes was adversely impacted by the operating loss (discussed above).
No state tax expense was recorded for the three months ended December 31, 2016 as it was not material due to the valuation allowance and net operating losses. The Company’s effective tax rate for the three months ended December 31, 2015 was 8.6% reflecting estimated state income taxes.
The Company reported a net loss of $0.2 million for the three months ended December 31, 2016 compared to net income of $0.6 million for the three months ended December 31, 2015. Net loss was adversely impacted by the operating loss (discussed above).
The Company reported basic and diluted loss per share of ($0.01) for the three months ended December 31, 2016 versus basic and diluted income per share of $0.04 for the three months ended December 31, 2015. Basic and diluted loss per share was adversely impacted by the net loss (discussed above).
SIX MONTHS ENDED DECEMBER 31, 2016 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2015
Total revenues for the six months ended December 31, 2016 of $19.2 million increased by $1.4 million, or 7.7%, over the total revenues for the six months ended December 31, 2015 of $17.9 million. Billings by market are as follows (in thousands):
|
|
Six-Months Ended December 31,
|
|
|
|
(Unaudited)
|
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
|
|
|
Professional
|
|
$
|
5,835
|
|
|
$
|
3,572
|
|
|
$
|
2,263
|
|
Retail
|
|
|
3,701
|
|
|
|
4,786
|
|
|
|
(1,085
|
)
|
Home Health Care
|
|
|
3,887
|
|
|
|
4,042
|
|
|
|
(155
|
)
|
Pharmaceutical Manufacturer
|
|
|
3,191
|
|
|
|
3,754
|
|
|
|
(563
|
)
|
Assisted Living
|
|
|
1,164
|
|
|
|
1,044
|
|
|
|
120
|
|
Government
|
|
|
821
|
|
|
|
706
|
|
|
|
115
|
|
Environmental
|
|
|
142
|
|
|
|
154
|
|
|
|
(12
|
)
|
Other
|
|
|
372
|
|
|
|
450
|
|
|
|
(78
|
)
|
Subtotal
|
|
|
19,113
|
|
|
|
18,508
|
|
|
|
605
|
|
GAAP Adjustment *
|
|
|
125
|
|
|
|
(647
|
)
|
|
|
772
|
|
Revenue Reported
|
|
$
|
19,238
|
|
|
$
|
17,861
|
|
|
$
|
1,377
|
|
*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”.
The Company has expanded its reporting to include information by solution reflecting recent changes in the Company’s business primarily due to recent acquisitions.
|
|
Six-Months Ended December 31,
|
|
|
|
2016
|
|
|
% Total
|
|
|
2015
|
|
|
% Total
|
|
BILLINGS BY SOLUTION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mailbacks
|
|
$
|
12,539
|
|
|
|
65.7
|
%
|
|
$
|
13,585
|
|
|
|
73.5
|
%
|
Route-based pickup services
|
|
|
3,045
|
|
|
|
15.9
|
%
|
|
|
841
|
|
|
|
4.5
|
%
|
Unused medications
|
|
|
1,533
|
|
|
|
8.0
|
%
|
|
|
2,036
|
|
|
|
11.0
|
%
|
Third party treatment services
|
|
|
142
|
|
|
|
0.7
|
%
|
|
|
154
|
|
|
|
0.8
|
%
|
Other
(1)
|
|
|
1,854
|
|
|
|
9.7
|
%
|
|
|
1,892
|
|
|
|
10.2
|
%
|
Total billings
|
|
$
|
19,113
|
|
|
|
100.0
|
%
|
|
$
|
18,508
|
|
|
|
100.0
|
%
|
GAAP adjustment
(2)
|
|
|
125
|
|
|
|
|
|
|
|
(647
|
)
|
|
|
|
|
Revenue reported
|
|
$
|
19,238
|
|
|
|
|
|
|
$
|
17,861
|
|
|
|
|
|
|
(1)
|
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
|
|
(2)
|
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 or services rendered 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.
|
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 represent 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 increase in billings was primarily attributable to increased billings in the Professional ($2.3 million), Assisted Living ($0.1 million) and Government ($0.1 million) markets. The increase was partially offset by decreased billings in the Retail ($1.1 million) and Pharmaceutical Manufacturer ($0.6 million) markets. Home Health Care billings remained relatively flat at $3.9 million in the first six months of fiscal 2017 as compared to $4.0 million in the prior year’s period. The increase in Professional market billings was a combination of acquired and organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System and the Company’s route-based pick-up services. The increase in Assisted Living market billings is a result of increased sales focus as well as our new route-based pickup service. The increase in Government market billings was primarily related to increased sales of the Company’s MedSafe solutions to multiple Government agencies. The decrease in Retail market billings is primarily due to a decrease in billings for the TakeAway Medication Recovery System envelopes which were launched by several Retail customers in the prior year. The decrease in Pharmaceutical Manufacturer market billings is primarily due to the timing of inventory builds for patient support programs.
Cost of revenues for the six months ended December 31, 2016 of $13.4 million was 69.6% of revenues. Cost of revenues for the six months ended December 31, 2015 of $11.7 million was 65.3% of revenues. The lower gross margin for the six months ended December 31, 2016 of 30.4% (versus 34.7% for the six months ended December 31, 2015) was primarily due to the adverse impact of duplicative costs as the Company transitioned from third party processing of medical waste in the Northeast Region to internal processing at the new facility in Pennsylvania. There was also a negative impact from higher return transportation costs associated with a USPS rate increase effective from February 1, 2016 through October 10, 2016.
Selling, general and administrative (“SG&A”) expenses for the six months ended December 31, 2016 and 2015 were $6.6 million and $5.2 million, respectively. SG&A for the six months ended December 31, 2016 included $0.7 million of acquisition related costs associated with the completion of the Company’s acquisition of Citiwaste in July 2016. Without these acquisition related costs, SG&A costs increased 13.8% compared to the prior period due to increased sales, marketing and compensation related spending.
The Company reported an operating loss of $1.1 million for the six months ended December 31, 2016 compared to operating income of $0.9 million for the six months ended December 31, 2015. The operating income decreased mainly due to the lower gross margin and higher SG&A expenses (discussed above).
The Company reported a loss before income taxes of $1.2 million for the six months ended December 31, 2016 versus income before income taxes of $0.9 million for the six months ended December 31, 2015. Loss before income taxes was adversely impacted by the operating loss (discussed above).
No state tax expense was recorded for the six months ended December 31, 2016 as it was not material due to the valuation allowance and net operating losses. The Company’s effective tax rate for the six months ended December 31, 2015 was 8.5% reflecting estimated state income taxes.
The Company reported a net loss of $1.2 million for the six months ended December 31, 2016 compared to net income of $0.8 million for the six months ended December 31, 2015. Net loss was adversely impacted by the operating loss (discussed above).
The Company reported basic and diluted loss per share of ($0.08) for the six months ended December 31, 2016 versus basic and diluted income per share of $0.05 for the six months ended December 30, 2015. Basic and diluted loss per share were adversely impacted by the net loss (discussed above).
PROSPECTS FOR THE FUTURE
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics, and the professional market which is comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.
The Company believes its growth opportunities are supported by the following:
|
·
|
A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing about 100 million people or 31% of the U.S. population.
|
|
·
|
In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey. Additionally, the Company now services parts of Texas and Louisiana with route-based pickup services. As of December 31, 2016, the Company directly serves more than 9,100 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.
|
|
·
|
The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility.
|
|
·
|
The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. A recently published report by Accenture states that the number of U.S. retail clinics is projected to increase, as much as 12%-17% per year, driven by patients looking for more convenient care and retail pharmacies increasing the variety and volume of healthcare services they provide. According to the Centers for Disease Control ("CDC"), 25% of flu shots for adults were administered in a retail clinic with the trend expected to increase. Over the flu seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. Despite the decrease in Retail flu business for fiscal 2016 (the 2015 flu season) of 13% due to a mild flu season, Sharps believes the Retail market should continue to drive long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
|
|
·
|
The passage of regulations for ultimate user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long standing issue within long-term care.
|
|
·
|
Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company's Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal.
|
|
·
|
With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.
|
|
·
|
A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.
|
|
·
|
The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System).
|
|
·
|
The Company’s strong financial position with a cash balance of $7.2 million and debt of $2.9 million as of December 31, 2016.
|
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash flow is primarily influenced by demand for products and services, operating margins and related working capital needs as well as more strategic activities including acquisitions, stock repurchases and fixed asset additions. Cash and cash equivalents decreased by $5.2 million to $7.2 million at December 31, 2016 from $12.4 million at June 30, 2016 due to the following:
|
·
|
Cash Flows from Operating Activities
- Working capital decreased by $7.2 million to $10.0 million at December 31, 2016 from $17.2 million at June 30, 2016. The decrease is primarily attributed to a decrease in cash and cash equivalents and:
|
|
·
|
Accounts receivable decreased by $0.5 million, net of assets acquired, to $5.8 million at December 31, 2016 from $5.8 million at June 30, 2016.
|
|
·
|
Inventory increased by $0.4 million to $4.4 million at December 31, 2016 from $3.9 million at June 30, 2016. The increase in inventory is due to timing of sales and adjustment of inventory levels to facilitate customer orders.
|
|
·
|
Accounts payable and accrued liabilities increased by $1.1 million, net of assets acquired and unpaid consideration, to $5.1 million at December 31, 2016 from $3.2 million at June 30, 2016. The increase is the result of the timing of payments.
|
|
·
|
Cash Flows used in Investing Activities
- Investing activities include capital expenditures and business acquisitions as follows:
|
|
·
|
Capital expenditures of $2.0 million are attributable primarily to investments in treatment facility improvements purchased.
|
|
·
|
The Company acquired Citiwaste for $9.0 million during the six months ended December 31, 2016 of which $1.9 million was for 413,272 shares of common stock of the Company and $0.1 million was unpaid consideration as of December 31, 2016.
|
|
·
|
Cash Flows used in Financing Activities
– Financing activities include $3.0 million of proceeds from long-term debt in connection with the Citiwaste acquisition, proceeds from the exercise of stock options of $0.3 million offset in part by repayments of debt of $0.3 million.
|
Off-Balance Sheet Arrangements
The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K for the six months ended December 31, 2016 and the year-ended June 30, 2016.
Credit Facility
The Company’s credit agreement, which was effective on April 9, 2015 with a commercial bank and subsequently amended on June 20, 2016 and November 2, 2016 (“Credit Agreement”), provides for a $9.0 million line of credit facility, the proceeds of which may be utilized as follows: (i) $4.0 million for working capital, letters of credit (up to $1.0 million) and general corporate purposes and (ii) $5.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by the Company’s accounts receivable and inventory with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus 50% of eligible inventory. Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-year term note. Borrowings bear interest at WSJ Prime (for the working capital line) and WSJ Prime plus 0.25% (for the acquisition line) with a floor of 3.0%. The interest rates as of December 31, 2016 were approximately 3.75% (for the working capital line) and 4.00% (for the acquisition line). Interest rates as of June 30, 2016 were 3.5% (for the working capital line) and 3.75% (for the acquisition line). The Company pays a fee of 0.25% per annum on the unused amount of the line of credit.
At December 31, 2016, long-term debt consisted $2.9 million in borrowings of which $0.7 million was current. Th
e Company also had $0.3 million in letters of credit. The Company’s availability under its credit facilities is currently approximately $5.9 million ($3.7 million for the working capital and $2.2 million for the acquisitions).
The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $7.0 million, minimum liquidity of $6.0 million and a minimum debt service coverage ratio of not less than 1.35 to 1.00. The Credit Agreement, which expires on April 9, 2018, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders. At December 31, 2016, the Company was in compliance with all the financial covenants under the Credit Agreement except the minimum debt service coverage ratio. A waiver was granted by the lender to the Company to cover the three months ended December 31, 2016. With an amendment executed in November 2016, which revised the calculation of the debt coverage ratio, the Company expects to be in compliance with all amended covenants through at least December 31, 2017.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
:
The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered, and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonably assured except for those sales via multiple-deliverable revenue 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.
Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse.
Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps Pump and Asset Return Systems, 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 owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. 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, 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 compliance and container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.
Business Combinations
: The Company includes the results of operations of the businesses that are acquired as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Income Taxes
: 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 a valuation allowance 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 deferred tax assets 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 tax assets related to net operating loss carryforwards and other tax attributes.
Accounts Receivable
: Accounts receivable consist primarily of amounts due to the Company from 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 likelihood of not collecting certain 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.
Stock-Based Compensation
: Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grant date, based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company.) The Company is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures and has not yet determined the method by which it will adopt the standard.
In July 2015, guidance for inventory measurement was issued, which supersedes the policy currently followed by the Company. The new guidance requires the Company to measure inventory at the lower of cost and net realizable value. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within that reporting period. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In March 2016, new guidance for stock-based compensation was issued, which simplifies the accounting for stock-based compensation related to income taxes and balance sheet and cash flow classifications. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016 (effective July 1, 2017 for the Company) including interim periods within the reporting period. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.