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 "will," "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, estimated, expected 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 it is not possible to predict or identify all 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 national healthcare waste management provider specializing in regulated waste streams including medical, pharmaceutical and hazardous. Our services facilitate the safe and proper collection, transportation and environmentally-responsible treatment of regulated waste from customers in multiple healthcare-related markets. The markets we manage are small to medium-size generators of healthcare waste including professional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), assisted living and long-term care facilities, government agencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers and other markets to provide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.
We assist our customers in determining solutions that best fit their needs for the collection, transportation and treatment of regulated medical, pharmaceutical and hazardous waste. Our differentiated approach provides our customers the flexibility to transport waste via direct route-based services, the United States Postal Service (“USPS”) or common carrier dependent upon quantity of waste generated, cost savings and facility needs. Our comprehensive services approach includes a single point of contact, consolidated billing, integrated manifest and proof of destruction repository. 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.
Our flagship products are the Sharps Recovery System™ and MedSafe® Medication Disposal System. These two product offerings account for over 50% of company revenues. The Sharps Recovery System is a comprehensive medical waste management mailback solution used in all markets due to its cost-effective nature and nationwide availability. The MedSafe solution meets the immediate needs of an increasing community risk associated with unused, ultimate-user, medications. Developed in accordance with the Drug Enforcement Administration (“DEA”) implementation of the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), MedSafe is a superior solution used in both private and public sectors to properly remove medications from communities and aid in the prevention of drug abuse.
Over the past few years, the Company has made a series of investments to build a robust direct service, route-based, pickup offering for medical, pharmaceutical and hazardous waste. We have built an infrastructure capable of covering more than 70% of the U.S. population with permitted trucks, transfer stations and treatment facilities. We continue to add routes and the infrastructure required for operational efficiency to reach more customers and prospects directly. Our route-based services, matched with comprehensive mailback solutions, offer us a key differentiator in the market and the ability to capitalize on larger or regional contracts within the healthcare market. With the growth in infrastructure to support the route-based service, we have strategically added new distribution for faster and more cost-effective delivery of products to customers.
We continue to develop new solutions to meet market demands. Over the past five years we have added a robust portfolio of ultimate-user medication disposal solutions for controlled substances, DEA-inventory controlled medication disposal for professionals, the Black Pail Program for disposal of most unused inventory of drugs, route-based services for medical, pharmaceutical and hazardous waste and the TakeAway Recycling System™ for single-use devices (SUDs) and the Hazardous Drug Spill Control Kit™, a USP <800> compliant spill kit for cleanup of chemotherapy and other hazardous drug spills.
RESULTS OF OPERATIONS
The following analyzes changes in the condensed consolidated operating results and financial condition of the Company during the three and six months ended December 31, 2019 and 2018. 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 revenues, unaudited):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended December 31,
|
|
Six-Months Ended December 31,
|
|
|
2019
|
|
%
|
|
2018
|
|
%
|
|
2019
|
|
%
|
|
2018
|
|
%
|
Revenues
|
|
$
|
14,565
|
|
|
100.0
|
%
|
|
$
|
12,394
|
|
|
100.0
|
%
|
|
$
|
28,164
|
|
|
100.0
|
%
|
|
$
|
22,687
|
|
|
100.0
|
%
|
Cost of revenues
|
|
9,693
|
|
|
66.5
|
%
|
|
8,403
|
|
|
67.8
|
%
|
|
18,808
|
|
|
66.8
|
%
|
|
15,344
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|
|
67.6
|
%
|
Gross profit
|
|
4,872
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|
|
33.5
|
%
|
|
3,991
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|
|
32.2
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%
|
|
9,356
|
|
|
33.2
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%
|
|
7,343
|
|
|
32.4
|
%
|
SG&A expense
|
|
3,606
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|
|
24.8
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%
|
|
2,959
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|
|
23.9
|
%
|
|
7,118
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|
|
25.3
|
%
|
|
5,985
|
|
|
26.4
|
%
|
Depreciation and amortization
|
|
197
|
|
|
1.4
|
%
|
|
205
|
|
|
1.7
|
%
|
|
401
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|
|
1.4
|
%
|
|
406
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|
|
1.8
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%
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Operating Income
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|
1,069
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|
|
7.3
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%
|
|
827
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|
|
6.7
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%
|
|
1,837
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|
|
6.5
|
%
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|
952
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|
|
4.2
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%
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Total other expense
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|
(22
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)
|
|
(0.2
|
)%
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|
(15
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)
|
|
(0.1
|
)%
|
|
(36
|
)
|
|
(0.1
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)%
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|
(33
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)
|
|
(0.1
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)%
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Income before income taxes
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|
1,047
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|
|
7.2
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%
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|
812
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|
|
6.6
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%
|
|
1,801
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|
|
6.4
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%
|
|
919
|
|
|
4.1
|
%
|
Income tax expense
|
|
77
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|
|
0.5
|
%
|
|
33
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|
|
0.3
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%
|
|
145
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|
|
0.5
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%
|
|
70
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|
|
0.3
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%
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Net Income
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|
$
|
970
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|
|
6.7
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%
|
|
$
|
779
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|
|
6.3
|
%
|
|
$
|
1,656
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|
|
5.9
|
%
|
|
$
|
849
|
|
|
3.7
|
%
|
THREE MONTHS ENDED DECEMBER 31, 2019 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2018
Total revenues for the three months ended December 31, 2019 of $14.6 million increased compared to the total revenues for the three months ended December 31, 2018 of $12.4 million. The increase in revenue is mainly due to an increase in billings partially offset by current period revenue deferred as a contract liability net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands, unaudited):
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|
|
|
|
|
|
|
Three-Months Ended December 31,
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2019
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|
2018
|
|
Variance
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BILLINGS BY MARKET:
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Professional
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|
$
|
4,365
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|
|
$
|
3,828
|
|
|
$
|
537
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|
Retail
|
|
4,218
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|
|
4,152
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|
|
66
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|
Home Health Care
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|
2,606
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|
|
2,161
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|
|
445
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|
Pharmaceutical Manufacturer
|
|
2,274
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|
|
842
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|
|
1,432
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|
Assisted Living
|
|
681
|
|
|
620
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|
|
61
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|
Government
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|
489
|
|
|
543
|
|
|
(54
|
)
|
Environmental
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|
66
|
|
|
78
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|
|
(12
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)
|
Other
|
|
231
|
|
|
249
|
|
|
(18
|
)
|
Subtotal
|
|
14,930
|
|
|
12,473
|
|
|
2,457
|
|
GAAP Adjustment *
|
|
(365
|
)
|
|
(79
|
)
|
|
(286
|
)
|
Revenue Reported
|
|
$
|
14,565
|
|
|
$
|
12,394
|
|
|
$
|
2,171
|
|
*Represents the net impact of the revenue recognition adjustments to arrive at reported generally accepted accounting principles ("GAAP") revenue. Customer billings include all invoiced amounts for 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, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. Most of the difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability. See Note 3 “Significant Accounting Policies - Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited):
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|
|
|
|
|
|
|
|
|
|
Three-Months Ended December 31,
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|
|
2019
|
|
% Total
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|
2018
|
|
% Total
|
BILLINGS BY SOLUTION:
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|
|
|
|
|
|
|
|
Mailbacks
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|
$
|
8,929
|
|
|
59.9
|
%
|
|
8,118
|
|
|
65.1
|
%
|
Route-based pickup services
|
|
2,480
|
|
|
16.6
|
%
|
|
2,078
|
|
|
16.7
|
%
|
Unused medications
|
|
2,321
|
|
|
15.5
|
%
|
|
1,350
|
|
|
10.8
|
%
|
Third party treatment services
|
|
66
|
|
|
0.4
|
%
|
|
78
|
|
|
0.6
|
%
|
Other (1)
|
|
1,134
|
|
|
7.6
|
%
|
|
849
|
|
|
6.8
|
%
|
Total billings
|
|
14,930
|
|
|
100.0
|
%
|
|
12,473
|
|
|
100.0
|
%
|
GAAP adjustment (2)
|
|
(365
|
)
|
|
|
|
|
(79
|
)
|
|
|
|
Revenue reported
|
|
$
|
14,565
|
|
|
|
|
|
$
|
12,394
|
|
|
|
|
|
|
(1)
|
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
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|
|
(2)
|
Represents the net impact of the revenue recognition adjustments required to arrive at reported 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, (ii) recognition of certain revenue associated with products returned for treatment and destruction and (iii) provisions for certain rebates, product returns and discounts to customers which are accounted for as reductions in sales in the same period to related sales are recorded. Most of the difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability.
|
The increase in billings was mainly attributable to increased billings in the Pharmaceutical Manufacturer ($1.4 million), Professional ($0.5 million) and Home Health Care ($0.4 million) markets. The increase in Pharmaceutical Manufacturer billings was due primarily to inventory builds for several current patient support programs. The increase in Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector made up of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery SystemTM and the Company’s route-based pick-up services. The increase in Home Health Care market billings was due primarily to an expanded relationship with a major healthcare distributor. Billings for Mailbacks increased 10% to $8.9 million as compared to $8.1 million in the prior year period and represented 60% of total billings. Billings for Route-Based Pickup Services increased 19% to $2.5 million as compared to $2.1 million in the prior year period and represented 17% of total billings. Billings for Unused Medications increased 72% to $2.3 million as compared to $1.4 million in the prior year period and represented 16% of total billings.
Cost of revenues for the three months ended December 31, 2019 of $9.7 million was 66.5% of revenues. Cost of revenues for the three months ended December 31, 2018 of $8.4 million was 67.8% of revenues. The gross margin for the three months ended December 31, 2019 of 33.5% increased compared to the gross margin for the three months ended December 31, 2018 of 32.2%. Gross margin was positively impacted for the three months ended December 31, 2019 due to higher revenues than in the prior period.
Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2019 and 2018 were $3.6 million and $3.0 million, respectively. The increase in SG&A expense was due to continued investments in sales and marketing as well as increased professional fees incurred.
The Company reported operating income of $1.1 million for the three months ended December 31, 2019 as compared to $0.8 million in the prior year period. Operating income increased primarily due to higher gross margin (discussed above).
The Company reported income before income taxes of $1.0 million for the three months ended December 31, 2019 as compared to $0.8 million for the prior year period. Income before income taxes increased due to the increase in operating income (discussed above).
The Company’s effective tax rate for the three months ended December 31, 2019 and 2018 was 7.4% and 4.1%, respectively, primarily due to deferred tax expense related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets and state income taxes.
The Company reported net income of $1.0 million for the three months ended December 31, 2019 as compared to a net income of $0.8 million for the prior year period. Net income increased due to the increase in the operating income (discussed above).
The Company reported basic and diluted income per share of $0.06 for the three months ended December 31, 2019 as compared to $0.05 for the prior year period.
SIX MONTHS ENDED DECEMBER 31, 2019 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2018
Total revenues for the six months ended December 31, 2019 of $28.2 million increased by $5.5 million, or 24.1%, over the total revenues for the six months ended December 31, 2018 of $22.7 million. The increase in revenue is mainly due to increased billings in the Retail, Home Health Care, Pharmaceutical Manufacturer and Professional markets. The net increase in billings is partially offset by current year deferred revenue net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended December 31,
|
|
|
(Unaudited)
|
|
|
2019
|
|
2018
|
|
Variance
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
Professional
|
|
$
|
8,500
|
|
|
$
|
7,502
|
|
|
$
|
998
|
|
Retail
|
|
8,360
|
|
|
6,412
|
|
|
1,948
|
|
Home Health Care
|
|
5,923
|
|
|
4,088
|
|
|
1,835
|
|
Pharmaceutical Manufacturer
|
|
3,211
|
|
|
1,650
|
|
|
1,561
|
|
Assisted Living
|
|
1,305
|
|
|
1,265
|
|
|
40
|
|
Government
|
|
1,253
|
|
|
1,140
|
|
|
113
|
|
Environmental
|
|
85
|
|
|
181
|
|
|
(96
|
)
|
Other
|
|
512
|
|
|
539
|
|
|
(27
|
)
|
Subtotal
|
|
29,149
|
|
|
22,777
|
|
|
6,372
|
|
GAAP Adjustment *
|
|
(985
|
)
|
|
(90
|
)
|
|
(895
|
)
|
Revenue Reported
|
|
$
|
28,164
|
|
|
$
|
22,687
|
|
|
$
|
5,477
|
|
*Represents the net impact of the revenue recognition adjustments to arrive at reported GAAP revenue. Customer billings include all invoiced amounts for 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, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. Most of the difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability. See Note 3 “Significant Accounting Policies - Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended December 31,
|
|
|
2019
|
|
% Total
|
|
2018
|
|
% Total
|
BILLINGS BY SOLUTION:
|
|
|
|
|
|
|
|
|
Mailbacks
|
|
$
|
16,666
|
|
|
57.2
|
%
|
|
$
|
13,736
|
|
|
60.3
|
%
|
Route-based pickup services
|
|
5,137
|
|
|
17.6
|
%
|
|
4,206
|
|
|
18.5
|
%
|
Unused medications
|
|
4,704
|
|
|
16.1
|
%
|
|
2,989
|
|
|
13.1
|
%
|
Third party treatment services
|
|
85
|
|
|
0.3
|
%
|
|
180
|
|
|
0.8
|
%
|
Other (1)
|
|
2,557
|
|
|
8.8
|
%
|
|
1,666
|
|
|
7.3
|
%
|
Total billings
|
|
$
|
29,149
|
|
|
100.0
|
%
|
|
$
|
22,777
|
|
|
100.0
|
%
|
GAAP adjustment (2)
|
|
(985
|
)
|
|
|
|
|
(90
|
)
|
|
|
|
Revenue reported
|
|
$
|
28,164
|
|
|
|
|
|
$
|
22,687
|
|
|
|
|
|
|
(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 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, (ii) recognition of certain revenue associated with products returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period to related sales are recorded. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as Contract Liability.
|
The increase in billings was mainly due to an increase in the Retail ($1.9 million), Home Health Care ($1.8 million), Pharmaceutical Manufacturer ($1.6 million) and Professional ($1.0 million) markets. The increase in Retail billings was due mainly to a $0.4 million increase in flu shot-related orders and a $1.3 million increase in billings for unused medication solutions including MedSafe. The increase in Home Health Care billings was due primarily to an expanded relationship with a major healthcare distributor. The increase in Pharmaceutical Manufacturer billings was due primarily to inventory builds for several current and new patient support programs. The increase in Professional market billings reflected 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. Billings for Mailbacks, which represented 57.2% of total billings, increased 21.3% to $16.7 million as compared to $13.7 million in the prior year period primarily related to the increase in billings related to Pharmaceutical Manufacturer patient support programs and flu related business. Billings for Route-Based Pickup Services increased 22.1% to $5.1 million as compared to $4.2 million in the prior year period and represented 17.6% of total billings. Billings for Unused Medications increased 57.4% to $4.7 million as compared to $3.0 million in the prior year period and represented 16.1% of total billings.
Cost of revenues for the six months ended December 31, 2019 of $18.8 million was 66.8% of revenues. Cost of revenues for the six months ended December 31, 2018 of $15.3 million was 67.6% of revenues. The gross margin for the six months ended December 31, 2019 of 33.2% increased compared to the gross margin for the six months ended December 31, 2018 of 32.4%. Gross margin was positively impacted for the six months ended December 31, 2019 due to higher revenues than the prior year period.
Selling, general and administrative ("SG&A") expense for the six months ended December 31, 2019 and 2018 was $7.1 million and $6.0 million, respectively. The increase in SG&A expense was due to continued investment in sales and marketing as well as increased professional fees incurred.
The Company reported operating income of $1.8 million for the six months ended December 31, 2019 compared to operating income of $1.0 million for the six months ended December 31, 2018. Operating income increased primarily due to higher revenue and higher gross margin (discussed above).
The Company reported income before income taxes of $1.8 million for the six months ended December 31, 2019 versus income before income taxes of $0.9 million for the six months ended December 31, 2018. Income before income taxes increased due to the increase in operating income (discussed above).
The Company’s effective tax rate for the six months ended December 31, 2019 was 8.1% and 7.6%, respectively, primarily due to deferred tax expense related to indefinite lived assets, such as goodwill, which cannot be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets and state income taxes.
The Company reported net income of $1.7 million for the six months ended December 31, 2019 compared to net income of $0.8 million for the six months ended December 31, 2018. Income before taxes increased due to the increase in operating income (discussed above).
The Company reported basic and diluted income per share of $0.10 for the six months ended December 31, 2019 versus basic and diluted income per share of $0.05 for the six months ended December 31, 2018. Basic and diluted income per share increased due to the increase in net income (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:
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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 over 70% of the U.S. population.
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In July 2015 and July 2016, the Company acquired three route-based pickup service companies, which strengthened the Company's position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-four (24) state region of the South, Southeast and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened transfer stations and offices in strategic locations. The Company directly serves more than 13,100 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.
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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.
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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. According to the Centers for Disease Control ("CDC"), 44.9% of adults received a flu shot and 32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2019, the Company saw growth in six years of 10% to 36%, including a 30% increase in 2019, and declines in three years of 13% to 17%. Despite the volatility, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
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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.
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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. The federal government, state agencies and non-profits are recognizing the need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medication disposal are being funded for prevention programs.
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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.
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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.
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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).
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The Company’s strong financial position with a cash balance of $5.3 million, debt of $1.8 million and additional availability under the Credit and Loan Agreements.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash flow has historically been 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 increased by $0.8 million to $5.3 million at December 31, 2019 from $4.5 million at June 30, 2019 due to the following:
Cash Flows from Operating Activities - Cash flow from operating activities increased primarily due to an increase in operating income, decrease in inventory of $0.6 million, increase in accounts payable and accrued liabilities of $0.6 million and an increase in net contract liabilities of $1.0 million offset by an increase in accrued receivable of $3.1 million.
Cash Flows from Investing Activities - Cash flow from operating activities is offset by cash used in investing activities for normal permitting and capital expenditures for plant and equipment additions of $1.3 million, including approximately $1.0 million for expenditures at the Company's treatment facility in Carthage, Texas.
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Cash Flows from Financing Activities - Cash flow from financing activities provided an increase in cash from proceeds from long-term debt of $0.6 million offset by the repayment 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, 2019 and the year ended June 30, 2019.
Credit Facility
On March 29, 2017, the Company entered into a credit agreement with a commercial bank which was subsequently amended on June 29, 2018 to extend the maturity date by two years to March 29, 2021 for the working capital portion of the Credit Agreement (“Credit Agreement”). The Credit Agreement provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets 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 the lesser of (i) 50% of eligible inventory and (ii) $3.0 million. 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 at the time of the borrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5%. The LIBOR Margin may increase to as high as 3.0% depending on the Company’s cash flow leverage ratio. The interest rate as of December 31, 2019 was approximately 4.39%. The Company pays a fee of 0.25% per annum on the unused amount of credit facility. At December 31, 2019, $1.2 million was outstanding related to the acquisition portion of the credit facility. No amounts were outstanding under the working capital portion of the credit facility at December 31, 2019.
On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreement with its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August 21, 2019") with monthly payments based on a 20-year amortization for the real estate portion and on a 6-year amortization for the equipment portion of the Loan Agreement. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which was a rate of 4.64% on December 31, 2019. The Company has entered into a forward rate lock to fix the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at 4.15%. At December 31, 2019, $0.3 million was outstanding related to the equipment portion of the Loan Agreement.
The Company has availability under the Credit Agreement of approximately $12.7 million ($5.9 million for the working capital and $6.8 million for the acquisitions) as of December 31, 2019. The Company has availability under the Loan Agreement of $2.6 million ($1.8 million for the real estate and $0.8 million for the equipment) as of December 31, 2019. The Company also had $0.1 million in letters of credit outstanding as of December 31, 2019.
The Credit and Loan Agreements contain affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit and Loan Agreements also contain customary events of default which, if uncured, may terminate the agreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the Credit and Loan Agreements.
The Company utilizes performance bonds to support operations based on certain state requirements. At December 31, 2019, the Company had performance bonds outstanding covering financial assurance up to $1.0 million.
Management believes that the Company’s current cash resources (cash on hand and cash flows from operations) will be sufficient to fund operations for at least the next twelve months.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are included in the discussion entitled Critical Accounting Policies in Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2019, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K other than the implementation of the new lease standard described in Note 3 and Note 6 to the condensed consolidated financial statements.