SHARPS COMPLIANCE CORP. The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. See "Information Regarding Forward Looking Statements and "Item 1A, Risk Factors." RESULTS OF OPERATIONS The following analyzes changes in the consolidated operating results and financial condition of the Company during the years endedJune 30, 2020 , 2019 and 2018, respectively. The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Operations (dollars in thousands except for percentages expressed as a percentage of revenues): Year Ended June 30, 2020 % 2019 % 2018 % Revenues$ 51,146 100.0 %$ 44,312 100.0 %$ 40,141 100.0 % Cost of revenues 35,384 69.2 % 31,042 70.1 % 28,739 71.6 % Gross profit 15,762 30.8 % 13,270 29.9 % 11,402 28.4 % SG&A expense 14,046 27.5 % 12,003 27.1 % 11,168 27.8 % Depreciation and amortization 806 1.6 % 820 1.9 % 811 2.0 % Operating income (loss) 910 1.8 % 447 1.0 % (577) (1.4) % Other expense (226) (0.4) % (63) (0.1) % (74) (0.2) % Income (loss) before income taxes 684 1.3 % 384 0.9 % (651) (1.6) % Income tax expense (benefit) (1,582) (3.1) % 170 0.4 % 21 0.1 % Net income (loss)$ 2,266 4.4 %$ 214 0.5 %$ (672) (1.7) % 22
-------------------------------------------------------------------------------- Table of Contents YEAR ENDEDJUNE 30, 2020 AS COMPARED TO YEAR ENDEDJUNE 30, 2019 Total revenues for the fiscal year endedJune 30, 2020 of$51.1 million increased by$6.8 million , or 15.4%, from the total revenues for the fiscal year endedJune 30, 2019 of$44.3 million . The increase in revenue is mainly due to increased billings in the Retail, Home Health Care, Assisted Living, Professional and Pharmaceutical Manufacturer market. The increase in billings is partially offset by current year deferred revenue net of product returns on sales in prior periods. Billings by market are as follows (in thousands): Year Ended June 30, 2020 2019 Variance BILLINGS BY MARKET: Retail$ 16,033 $ 11,481 $ 4,552 Professional 15,637 15,071 566 Home Health Care 9,938 7,800 2,138 Pharmaceutical Manufacturer 4,661 4,146 515 Assisted Living 3,324 2,542 782 Government 2,292 2,468 (176) Environmental 247 290 (43) Other 876 1,175 (299) Subtotal 53,008 44,973 8,035 GAAP Adjustment * (1,862) (661) (1,201) Revenue Reported$ 51,146 $ 44,312 $ 6,834 *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 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 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. See Note 2 "Summary of Significant Accounting Policies" in "Notes to Consolidated Financial Statements". The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings): Year Ended June 30, 2020 % Total 2019 % Total BILLINGS BY SOLUTION: Mailbacks$ 28,440 53.7 %$ 25,162 55.9 % Route-based pickup services 10,390 19.6 % 9,029 20.1 % Unused medications 9,163 17.3 % 6,936 15.4 % Third party treatment services 247 0.5 % 290 0.6 % Other (1) 4,768 8.9 % 3,556 8.0 % Total billings 53,008 100.0 % 44,973 100.0 % GAAP adjustment (2) (1,862) (661) Revenue reported$ 51,146 $ 44,312 (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 adjustments 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 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. The increase in billings was primarily attributable to increased billings in the Retail ($4.6 million ), Home Health Care ($2.1 million ), Assisted Living ($0.8 million ), Professional ($0.6 million ), and Pharmaceutical Manufacturer ($0.5 million ) markets. 23 -------------------------------------------------------------------------------- Table of Contents The increase in Retail billings was due mainly to a$2.2 million increase in flu shot-related orders and increased unused medication billings of$2.0 million including both MedSafe and Take Away Recovery System envelopes. The increase in Home Health Care billings was due primarily to an expanded relationship with a major healthcare distributor. Assisted Living market billings increased primarily due to increased COVID-19 related waste management and ancillary supplies. 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. The overall increase in Professional market billings from organic growth was partially offset by decreases from midMarch 2020 through earlyJune 2020 related to state mandated closures associated with the COVID-19 pandemic that temporarily closed some of our dental, physician and other customer facilities. Most of the affected customers have since re-opened. Pharmaceutical Manufacturer billings increased primarily due to inventory builds for several current and new patient support programs. Billings for Mailbacks in the year endedJune 30, 2020 increased 13% to$28.4 million as compared to$25.2 million in 2019 and represented 53.7% of total billings is primarily due to flu shot-related orders in our retail market. Billings for Route-Based Pickup Services increased 15% to$10.4 million in the year endedJune 30, 2020 due to organic growth as compared to$9.0 million in 2019 and represented 19.6% of total billings. Billings for Unused Medications increased 32% to$9.2 million in the year endedJune 30, 2020 as compared to$6.9 million in 2019 due to retail market sales of both MedSafe and TakeAway Recovery System envelopes and represented 17.3% of total billings . Cost of revenues for the year endedJune 30, 2020 of$35.4 million was 69.2% of revenue. Cost of revenue for the year endedJune 30, 2019 of$31.0 million was 70.1% of revenue. The gross margin for the year endedJune 30, 2020 of 30.8% increased compared to the gross margin for the year endedJune 30, 2019 of 29.9%. Gross margin was positively impacted for the year endedJune 30, 2020 due to higher revenues than the prior year. Selling, general and administrative ("SG&A") expenses for the years endedJune 30, 2020 and 2019 were$14.0 million and$12.0 million , respectively. The increase in SG&A expense was due to continued investments in sales and marketing as well as increased professional fees. The Company recorded operating income of$0.9 million for the year endedJune 30, 2020 compared to an operating income of$0.4 million for the year endedJune 30, 2019 . The operating income increased mainly due to higher revenue and higher gross margin (discussed above) partially offset by higher SG&A expense. The Company reported income before income taxes of$0.7 million for the year endedJune 30, 2020 compared to income before income taxes of$0.4 million for the year endedJune 30, 2019 . Income before income taxes increased due to the increase in operating income (discussed above). The Company's effective tax rate for the years endedJune 30, 2020 and 2019 was (232)% and 44%, respectively. The 2020 effective tax rate is primarily due to a$1.7 million income tax benefit as a result of the release of the tax valuation allowance on the basis of the Company's reassessment of the recoverability of its deferred tax assets. The Company reported a net income of$2.3 million for the year endedJune 30, 2020 compared to a net income of$0.2 million for the year endedJune 30, 2019 . Net income increased due to the increase in operating income (discussed above) and to the non-cash benefit recorded to income tax expense resulting from the release of the valuation allowance of approximately$1.7 million . The Company reported basic and diluted income per share of$0.14 for the year endedJune 30, 2020 versus basic and diluted income per share of$0.01 for the year endedJune 30, 2019 . Basic and diluted income per share increased due to the increase in net income (discussed above). 24 -------------------------------------------------------------------------------- Table of Contents YEAR ENDEDJUNE 30, 2019 AS COMPARED TO YEAR ENDEDJUNE 30, 2018 Total revenues for the fiscal year endedJune 30, 2019 of$44.3 million increased by$4.2 million , or 10.4%, from the total revenues for the fiscal year endedJune 30, 2018 of$40.1 million . Billings by market are as follows (in thousands): Year Ended June 30, 2019 2018 Variance BILLINGS BY MARKET: Professional$ 15,071 $ 13,110 $ 1,961 Retail 11,481 7,885 3,596 Home Health Care 7,800 7,989 (189) Pharmaceutical Manufacturer 4,146 4,482 (336) Assisted Living 2,542 2,515 27 Government 2,468 2,074 394 Environmental 290 891 (601) Other 1,175 818 357 Subtotal 44,973 39,764 5,209 GAAP Adjustment * (661) 377 (1,038) Revenue Reported$ 44,312 $ 40,141 $ 4,171 *Represents the net impact of the revenue recognition adjustments 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 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. See Note 2 "Summary of Significant Accounting Policies" in "Notes to Consolidated Financial Statements". The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings): Year Ended June 30, 2019 % Total 2018 % Total BILLINGS BY SOLUTION: Mailbacks$ 25,162 55.9 %$ 21,895 55.1 % Route-based pickup services 9,029 20.1 % 7,492 18.8 % Unused medications 6,936 15.4 % 5,907 14.9 % Third party treatment services 290 0.6 % 891 2.2 % Other (1) 3,556 8.0 % 3,579 9.0 % Total billings 44,973 100.0 % 39,764 100.0 % GAAP adjustment (2) (661) 377 Revenue reported$ 44,312 $ 40,141 (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 adjustments 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 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. The increase in billings was primarily attributable to increased billings in the Retail ($3.6 million ), Professional ($2.0 million ), and Government ($0.4 million ) markets. The increase was partially offset by decreased billings in the Environmental ($0.6 million ) and Pharmaceutical Manufacturer ($0.3 million ) markets. The increase in Retail billings was due mainly to a$2.8 million increase in flu shot-related orders and a$0.8 million increase in MedSafe billings. The increase in Professional market 25 -------------------------------------------------------------------------------- Table of Contents 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. The increase in Government market billings was due primarily to billings for unused medication related orders. The decrease in Environmental billings was due to lower third party treatment billings from our treatment facilities inTexas andPennsylvania . The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventory builds for patient support programs. Although there were new pharmaceutical manufacturer programs launched in fiscal 2019, the impact is offset by significant inventory builds for larger programs in the first half of fiscal 2018 which did not re-occur in fiscal 2019 due to their significant size. Billings for Mailbacks in the year endedJune 30, 2019 increased 14.9% to$25.2 million as compared to$21.9 million in 2018 and represented 56.0% of total billings. Billings for Route-Based Pickup Services increased 21.0% to$9.0 million in the year endedJune 30, 2019 due to organic growth as compared to$7.5 million in 2018 and represented 20.0% of total billings. Billings for Unused Medications increased 17.0% to$6.9 million in the year endedJune 30, 2019 as compared to$5.9 million in 2018 and represented 15.0% of total billings. Cost of revenue for the year endedJune 30, 2019 of$31.0 million was 70.1% of revenue. Cost of revenue for the year endedJune 30, 2018 of$28.7 million was 71.6% of revenue. The gross margin for the year endedJune 30, 2019 of 29.9% increased compared to the gross margin for the year endedJune 30, 2018 of 28.4%. Gross margin was positively impacted for the year endedJune 30, 2019 due to higher revenues than the prior year.
SG&A expenses for the years ended
The Company recorded operating income of$0.4 million for the year endedJune 30, 2019 compared to an operating loss of$0.6 million for the year endedJune 30, 2018 . The operating income increased mainly due to higher revenue and higher gross margin (discussed above). The Company reported income before income taxes of$0.4 million for the year endedJune 30, 2019 compared to loss before income taxes of$0.7 million for the year endedJune 30, 2018 . Income before income taxes increased due to the increase in operating income (discussed above). The Company's effective tax rate for the years endedJune 30, 2019 and 2018 was 44.3% and (3.2)%, respectively. The 2019 effective tax rate is 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 2018 effective tax rate reflects the impact of the 2017 tax law change on the Company's alternative minimum tax credits net of estimated state income tax expense and deferred tax expenses related to indefinite lived assets.
The Company reported a net income of
PROSPECTS FOR THE FUTURE
As a result of the COVID-19 outbreak, the Company has implemented some and may take additional precautionary measures intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of customers and minimize business disruptions. For example, the following have recently been implemented to address some of the uncertainties related to COVID-19: •The Company has increased its headcount for route-based drivers, plant and operations personnel by 10% as a result of COVID-19 to make sure that its operations and servicing of customers would not be adversely affected by the potential absence of employees due to COVID-19. The cost of this increased headcount which is recorded as cost of sales is about$0.1 million per quarter. •The Company has temporarily increased pay to route-based drivers, plant and operations personnel due to the additional potential risks associated with those functions in light of the COVID-19 environment. •While some areas of the business have seen increased revenue, COVID-19 has caused many of the Company's customers to temporarily close starting inmid-March 2020 . For example, there have been temporary closures of approximately 1,000 customer offices including dental, dermatology and physician practices which equates to almost$0.1 million per month in lost revenue. Most of these offices have now re-opened. •The Company is considered an essential business and could incur elevated costs to maintain uninterrupted essential support to its customers and the overall healthcare industry. 26 -------------------------------------------------------------------------------- Table of Contents •Inventory levels have been increased significantly (approximately 39%) in the current year, which has also precipitated the need for additional warehouse space for the Company's products. The Company is working to ensure it has adequate products and solutions to address the potential additional needs that could reasonably be expected to follow a pandemic of this magnitude. Whether it be supporting an expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry, we are well positioned to take advantage of these growth opportunities. •Given the timing of when the COVID-19 quarantine manifested itself (middle of third quarter) in theU.S. , the financial impacts to the Company may have only partially been captured within the results of operations reported to date. The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company. To date, the Company has not identified any material adverse impact of COVID-19 on its financial position and results of operations. 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, veterinary practices and other healthcare facilities. 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, physician groups, urgent care facilities, ambulatory surgical centers, labs, dialysis 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 theU.S. population. •FromJuly 2015 toJuly 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 thirty-two (32) state region of the South, Southeast, Midwest and Northeast portions ofthe United States . To facilitate operational efficiencies, the Company has opened transfer stations and offices in strategic locations. The Company directly serves more than 13,750 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 entireU.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 theU.S. population - according to theU.S. Census Bureau , 2019 Population Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over the past decade), 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. According to theCenters for Disease Control ("CDC"), 44.9% ofU.S. 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 2020, the Company saw growth in the retail flu shot related orders in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite 27 -------------------------------------------------------------------------------- Table of Contents 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. •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. 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. •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). •COVID-19 prompted healthcare demands and opportunities including the expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry. •The Company's financial position with a cash balance of$5.4 million (used for working capital needs), debt of$5.2 million and additional availability under the Credit and Loan Agreements as ofJune 30, 2020 (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance). 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$0.9 million to$5.4 million atJune 30, 2020 from$4.5 million atJune 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, increase in accounts payable and accrued liabilities of$1.0 million and an increase in net contract liabilities of$1.1 million partially offset by an increase in accounts receivable of$3.0 million and an increase in inventory of$1.9 million . 28 -------------------------------------------------------------------------------- Table of Contents •Cash Flows from Investing Activities - Cash flow from investing activities is for permitting and capital expenditures for plant and equipment additions of$4.2 million , including approximately$2.9 million for expenditures at the Company's treatment facility inCarthage, Texas . •Cash Flows from Financing Activities - Cash flow from financing activities provided an increase in cash from proceeds from long-term debt of$4.3 million and proceeds from the exercise of stock options of$0.7 million offset by the repayment of debt of$0.5 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 years endedJune 30, 2020 , 2019 and 2018. Credit Facility OnMarch 29, 2017 , the Company entered into to a credit agreement with a commercial bank which was subsequently amended onJune 29, 2018 to extend the maturity date by two years toMarch 29, 2021 for the working capital portion of the Credit Agreement ("Credit Agreement"). The Company expects the Credit Agreement will be renewed and extended prior to the maturity date. 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 80.0% of eligible accounts receivable plus the lesser of (i) 50.0% of eligible inventory and (ii)$3.0 million . Advances under the acquisition portion of the credit facility are limited to 75.0% 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 ofJune 30, 2020 was approximately 2.79%. The Company pays a fee of 0.25% per annum on the unused amount of the credit facility. AtJune 30, 2020 ,$0.9 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 atJune 30, 2020 . OnAugust 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 inCarthage, 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 beginning in the month after the advancing period ends 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. The advancing period extends throughOctober 2020 andAugust 2020 for the real estate portion and the equipment portion of the Loan Agreement, respectively. 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 2.79% onJune 30, 2020 . 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%. AtJune 30, 2020 ,$0.9 million and$1.1 million was outstanding related to the equipment portion and real estate portion, respectively, of the Loan Agreement. OnApril 20, 2020 , the Company received loan proceeds of$2.2 million under the Paycheck Protection Program ("PPP") under a promissory note from its existing commercial bank (the "PPP Loan"). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable after eight to twenty-four weeks providing that the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company's operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, 29 -------------------------------------------------------------------------------- Table of Contents the health of the Company's workforce, and its ability to meet staffing needs in its route-based, treatment and distribution operations and other critical functions are uncertain and is vital to its operations. The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under its Credit Agreement,$8.0 million of such availability can only be used for acquisitions and the$6.0 million that is available is in place to support working capital needs, along with current cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company's PPP Loan is two years. The Company is in the process of applying for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by theSmall Business Administration ("SBA") and theDepartment of Treasury . The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during at least the six-month period beginning on the date of the PPP Loan. The PPP Loan is subject to any new guidance and new requirements released by theDepartment of the Treasury who has indicated that all companies that have received funds in excess of$2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. The Company has availability under the Credit Agreement of$13.0 million ($5.9 million for the working capital and$7.1 million for the acquisitions) as ofJune 30, 2020 (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance). The Company has availability under the Loan Agreement of$1.2 million ($0.9 million for the real estate and$0.3 million for the equipment) as ofJune 30 , 2020.The Company also had$0.1 million in letters of credit outstanding as ofJune 30, 2020 . The Credit and Loan Agreements contains 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 contains 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 was in compliance with all the financial covenants under the Credit and Loan Agreements as ofJune 30, 2020 . The Company utilizes performance bonds to support operations based on certain state requirements. AtJune 30, 2020 , 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 Revenue Recognition: The Company recognizes revenue, net of applicable sales tax, when performance obligations are satisfied through the transfer of control of promised goods or services to the Company's customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the promised goods or services. Outbound shipping and handling activities to customers are considered fulfillment activities with the exception of mailbacks sold as part of the vendor managed inventory ("VMI") program. Shipping and handling are considered separate performance obligations for mailbacks sold under the VMI program. For performance obligations satisfied at a point in time, which applies to all contracts except for route-based pickup services, revenue recognition occurs when there is a transfer of control or completion of service. For performance obligations satisfied over time, which applies to the route-based pickup services, revenue is recognized in the amount to which the Company has a right to invoice pursuant to the right to invoice practical expedient. Provisions for certain rebates, product returns and discounts to customers are estimated at the inception of the contract, updated as needed throughout the contract term, and 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. Other than the Company's mailbacks and unused medication contract categories, the Company's solutions have a single performance obligation. The Company's mailbacks and unused medication solutions have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the MedSafe and 30 -------------------------------------------------------------------------------- Table of Contents TakeAway Medication Recovery Systems referred to as "mailbacks" or "unused medications") and can consist of up to two performance obligations, or units of measure, as follows: (1) the sale of the compliance and container system, and (2) return transportation and treatment service. For mailbacks that are part of the VMI program, there is an additional element, or unit of measure, for outbound transportation. For contracts with multiple performance obligations, an estimated stand-alone selling price is determined for all performance obligations. The consideration is then allocated to the performance obligations based on their relative stand-alone selling price. The selling price for performance obligations for transportation and treatment utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the product and services provided, including the expected cost plus a margin. The allocated transaction price for the sale of the compliance and container system is recognized upon delivery to the customer, at which time the customer has control. The allocated transaction price for the return transportation and treatment 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 at which point the destruction or conversion and proof of receipt and treatment are performed on the container. Consideration received and allocated to the transportation and treatment performance obligation is recorded as a contract liability until the services are performed. 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 return transportation and treatment element is recognized at the point of sale. Furthermore, the current and long-term portions of amounts historically referred to as deferred revenues (shown as Contract Liability on the condensed consolidated balance sheets) are determined through regression analysis and historical trends. The VMI program includes terms that meet the "bill and hold" criteria and as such are recognized when the order is placed, title has transferred, there are no acceptance provisions and amounts are segregated in the Company's warehouse for the customer. The contract asset is related to VMI service agreements within the mailbacks contract type category when the revenue recognition exceeds the amount of consideration the Company was entitled to at the point in time of satisfying the performance obligation associated with the sale of the compliance and container system. The contract liability is related to the mailbacks and unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed performance obligations. Incremental costs to obtain contracts that are deemed to be recoverable, primarily related to the payment of sales incentives for contracts in the route-based pickup service category, are capitalized as contract costs and included in prepaids and other current assets. 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 valuation allowances 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. The Company has historically recorded a valuation allowance to reduce its deferred tax assets to an amount that is more likely than not to be realized. However, as of the year endedJune 30, 2020 , the Company released the full amount of the valuation allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets. The non-cash benefit to income tax expense resulting from the release of the valuation allowance is approximately$1.7 million . At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of the year endedJune 30, 2020 , the Company achieved a cumulative positive amount of pretax income over a period of three years. Given the Company's average pretax income for the past three years, adjusted for non-recurring items and for modest increases in new and recurring business, the Company expects to generate income before taxes in future period which will be sufficient to fully utilize allU.S. federal and state net operating loss carryforward balances and available credits. The CARES Act, among other things, accelerates the Company's ability to recover refundable AMT credits to 2018 and 2019. The Company has recorded the remaining balance of its alternative minimum tax credits of$0.3 million as a current income tax receivable as ofJune 30, 2020 which includes$0.1 million due to the CARES Act. Leases: InFebruary 2016 , guidance for leases was issued, which supersedes the lease requirements previously followed by the Company. The new guidance requires balance sheet recognition of lease assets and lease liabilities for all leases. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company adopted the standard onJuly 1, 2019 using the modified retrospective approach and recognized a cumulative effect adjustment to assets and liabilities for existing leases as ofJuly 1, 2019 . The Company recognized an additional operating lease liability of$4.6 million , with a corresponding right of use ("ROU") asset of the same amount based on the present value of the payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the 31 -------------------------------------------------------------------------------- Table of Contents Company is reasonably certain to exercise. The impact that the new accounting guidance had on its consolidated financial statements and related disclosures included the following: •Approximately 50 leases have been identified, substantially all of which are classified as operating leases. For these real estate, equipment and vehicle operating leases, we recognized new right of use ("ROU") assets and lease liabilities on our balance sheet. •The Company applied the package of practical expedients to not reassess prior conclusions related to (i) contracts containing leases, (ii) lease classification and (iii) initial direct costs. The Company did not adopt the practical expediency surrounding the use of hindsight to determine lease term, termination and purchase options, or in assessing impairment of ROU assets. •The Company also made the accounting policy election for short-term leases, or leases with terms of twelve months or less, therefore the lease payments are recorded as an expense on a straight-line basis over the lease term with no ROU asset or lease liability recorded. •The Company has elected to exclude non-lease components of a lease arrangement from the ROU asset and lease liability for certain asset classes such as real estate and field equipment leases but includes non-lease components of a lease arrangement in the ROU asset and lease liability for office equipment and automobiles. Non-lease components for field equipment, which include vehicle maintenance costs which the Company estimates based on third party evidence, are excluded from the ROU asset and lease liability and are expensed each month. Operating leases are included in Operating Lease Right of Use Asset and Operating Lease Liability on our Consolidated Balance Sheets. Operating lease asset and liability amounts are measured and recognized based on payment amounts the Company expects to make over the expected term of the underlying leases, including renewal periods the Company is reasonably certain to exercise. The lease liability for leases expected to be settled in twelve-months or less are classified as current liabilities. The general terms of the Company's lease agreements require monthly payments. Some of the Company's leases escalate either by a fixed or variable amount. Certain of the Company's leases, which provide for variable lease payments based on index-based (i.e., the US Consumer Price Index) adjustments to lease payments over the term of the lease, are measured at the lease rate effective at the commencement of the lease or upon adoption, as applicable. Because the Company does not generally have access to the rate implicit in its leases, the Company utilizes its incremental borrowing rate as the discount rate for measuring the lease liability. At commencement, the operating lease ROU asset and lease liability are the same, with adjustments to the ROU asset for lease incentives and initial direct costs incurred. The Company reviews all options to extend, terminate or purchase its ROU assets at the commencement of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. The Company has determined that one lease arrangement's renewal option to extend lease terms from the original maturity ofAugust 2021 toAugust 2031 is reasonably certain to be exercised due to the costs associated with relocating the lease to another location (including permitting cost as well as specialized equipment). The Company evaluates lease modifications as they occur and records such as a separate lease or an adjustment to the existing ROU asset and lease liability as appropriate. 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.Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable.Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the years endedJune 30, 2020 , 2019 and 2018. RECENTLY ISSUED ACCOUNTING STANDARDS 32
--------------------------------------------------------------------------------
Table of Contents InMarch 2020 , guidance for applying optional expedients and exceptions to ease the potential burden in accounting for reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are effective for interim periods beginning as ofMarch 12, 2020 throughDecember 31, 2022 . There has been no impact on the Company's consolidated financial statements and related disclosures as none of its arrangements have been modified as ofJune 30, 2020 . The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company. InJune 2016 , guidance for credit losses of financial instruments was issued, which requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the new guidance are effective for annual periods beginning afterDecember 15, 2022 (effectiveJuly 1, 2023 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.
© Edgar Online, source
