SHARPS COMPLIANCE CORP. 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 including the
impact of the coronavirus COVID-19 ("COVID-19") pandemic on our operations and
financial results. 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), 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, theUnited 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 theDrug 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 theU.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 pharmaceuticals, including Resource Conservation and Recovery Act ("RCRA") hazardous medications, and the Inhaler Disposal system. We also developed route-based services for medical, pharmaceutical and hazardous waste, the TakeAway Recycling System™ for single-use devices (SUDs) and the Hazardous Drug Spill Control Kit™, a USP <800> (as defined below) compliant spill kit for cleanup of chemotherapy and other hazardous drug spills. As hospitals and surgery centers increase their sustainability efforts, they are looking for ways to recycle more materials, such as SUDs. SUDs are constructed of materials capable of being recycled, primarily plastics and metals. With a greater emphasis for more sustainable solutions, the TakeAway Recycle System is a much-needed complement to the single-use device market. Our dually permitted trucks allow our hazardous waste direct pickup service to align with our medical waste so that we can fully service all our customers. Most healthcare professionals have hazardous waste in addition to medical waste. By also transporting hazardous waste, we have a competitive advantage over local haulers while still offering cost-effective pricing. Uncertainty Relating to COVID-19 and the Company's Continuation of Its Infrastructure Build Out We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we did not incur significant disruptions during the three months endedSeptember 30, 2020 from COVID-19, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on our operations or mandates to provide products or services), impacts on our supply chain, the effect on customer demand or changes to our operations. The health of our workforce, and our ability to meet staffing needs in our route-based, treatment and distribution operations and other critical functions cannot be predicted and is vital to our operations. The Company has taken precautions to ensure the safety of its employees, while at the same time remaining active as a leading national provider of comprehensive medical waste solutions, bringing uninterrupted essential support to its customers and the healthcare industry. For example, the Company increased its route-based drivers, plant and operations personnel by ten percent (10%) in advance of the COVID-19 pandemic 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 Company also temporarily increased the pay for its front-line operations personnel and drivers during the pandemic throughJune 30, 2020 . Related to customer demand, the Company saw temporary closures of about 1,000 dental, dermatology and physician practices equating to about$0.1 million in lost monthly revenue for the Company from midMarch 2020 throughJune 2020 . Offsetting this has been increased volumes of medical waste generated by many of the Company's long-term care customers who are utilizing the Company's systems and services to contain and dispose of personal protective equipment ("PPE") utilized in their facilities. The Company is continuing to focus on expanding its infrastructure, programs which began in calendar 2019, to support what it believes will be a strong 2020 flu and immunization season as well as medical waste disposal related to a potential COVID-19 vaccine which may become available for administration in theU.S. Additionally, the Company sees other potential increased medical waste volumes related to COVID-19 such as the long-term care market where PPE in many facilities is being disposed of as medical waste and not as trash which has been the historical practice. Finally, the Company's route-based footprint now extends to 32 states, or 70% of the population, significantly increasing the pipeline of larger small and medium quantity generator sales opportunities. To address these opportunities, the Company is: •Significantly increasing its production and inventory of medical waste mailback and shipback solutions to ensure it remains well positioned to meet an expected increase in customer demand related to the 2020 season flu and the potential COVID-19 vaccine; •Increasing its medical waste processing capacity from 10 million to 27 million pounds per year through the addition of a larger autoclave at itsTexas facility as well as an additional autoclave at itsPennsylvania facility; •Securing a larger warehouse and distribution facility inPennsylvania to store and distribute larger volumes of medical waste mailbacks; and •Expanding its route-based truck fleet and drivers necessary to facilitate the potential increase in volumes from its expanded 32 state route-based footprint and related larger prospect opportunities. The Company applied for and 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 was established as part of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. On a broader note, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, suppliers and other business partners; however, any material effect on these parties could adversely impact our results of operations, cash flows and financial conditions. External effects from the COVID-19 pandemic began at the end of the third quarter of 2020 and were not material to the three months endedSeptember 30, 2020 results. The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with customers, employees and business partners and assessing potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, please see Item 1A, Risk factors in the Company's annual report on form 10-K for the year endedJune 30, 2020 .
RESULTS OF OPERATIONS
The following analyzes changes in the condensed consolidated operating results and financial condition of the Company during the three months endedSeptember 30, 2020 and 2019. 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):
Three-Months Ended
2020 % 2019 %
Revenues $ 13,151 100.0 % $ 13,599 100.0 %
Cost of revenues 9,528 72.5 % 9,115 67.0 %
Gross profit 3,623 27.5 % 4,484 33.0 %
SG&A expense 3,788 28.8 % 3,512 25.8 %
Depreciation and amortization 204 1.6 % 204 1.5 %
Operating Income (Loss) (369) (2.8) % 768 5.6 %
Total other expense (27) (0.2) % (14) (0.1) %
Income (loss) before income taxes (396) (3.0) % 754 5.5 %
Income tax expense (benefit) (103) (0.8) % 68 0.5 %
Net Income (Loss) $ (293) (2.2) % $ 686 5.0 %
16--------------------------------------------------------------------------------
THREE MONTHS ENDED
Total revenues for the three months endedSeptember 30, 2020 of$13.2 million decreased compared to the total revenues for the three months endedSeptember 30, 2019 of$13.6 million . The decrease in revenue is mainly due to decreased billings in the Retail and Home Health Care markets. The components of billings by market are as follows (in thousands, unaudited): Three-Months Ended September 30, 2020 2019 Variance BILLINGS BY MARKET: Professional$ 4,133 $ 4,135 $ (2) Retail 3,647 4,142 (495) Home Health Care 2,348 3,317 (969) Long-Term Care 1,309 624 685 Pharmaceutical Manufacturer 1,179 937 242 Government 515 764 (249) Environmental 135 19 116 Other 162 281 (119) Subtotal 13,428 14,219 (791) GAAP Adjustment * (277) (620) 343 Revenue Reported$ 13,151 $ 13,599 $ (448) *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 3 "Significant Accounting Policies - Revenue Recognition" in "Notes to Condensed Consolidated Financial Statements". 17 --------------------------------------------------------------------------------
The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited):
Three-Months Ended
2020 % Total 2019 % Total
BILLINGS BY SOLUTION:
Mailbacks $ 6,439 47.9 % $ 7,737 54.4 %
Route-based pickup services 3,156 23.5 % 2,657 18.7 %
Unused medications 2,361 17.6 % 2,383 16.8 %
Third party treatment services 135 1.0 % 19 0.1 %
Other (1) 1,337 10.0 % 1,423 10.0 %
Total billings 13,428 100.0 % 14,219 100.0 %
GAAP adjustment (2) (277) (620)
Revenue reported $ 13,151 $ 13,599
(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 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 decrease in billings was mainly attributable to decreased billings in the
Home Health Care ($1.0 million ) and Retail ($0.5 million ) markets partially
offset by increased billings in the Long-Term Care ($0.7 million ) market. The
decrease in Home Health Care billings was due to a large stocking order of $0.9
million related to a new distributor relationship in the prior year. The
decrease in retail billings is primarily due to lower flu shot / COVID-19
related orders of $0.9 million due to the timing of related orders, partially
offset by higher unused medication billings of $0.3 million from MedSafe and
TakeAway Medication Recovery System envelopes. The increase in Long-Term Care
billings was primarily related to increased volume of COVID-19 related waste
management and ancillary supplies. Billings for the inside and online sales
channel increased 13.3% to $2.9 million in the first quarter of fiscal 2021 as
compared to $2.5 million in the same prior year period primarily due to
increases in route based pickup services to the Long-Term Care and Professional
markets. Professional market billings of $4.1 million in the first quarter of
fiscal 2021 were consistent with the same period of fiscal 2020. The
Professional market is comprised of physicians, clinics, dentists, surgery
centers, labs, veterinarians and other healthcare providers, has recovered to
billing levels higher than the March 2020 , pre-pandemic time period, as most of
the Company's customer locations have reopened.
Billing for Mailbacks decreased 17% to $6.4 million as compared to $7.7 million
in the prior year period and represented 47.9% of total billings. Billings for
Route-Based Pickup Services increased 19% to $3.2 million as compared to $2.7
million in the prior year period and represented 23.5% of total billings.
Billings for Unused Medications were essentially flat at $2.4 million and
represented 17.6% of total billings.
Cost of revenues for the three months ended September 30, 2020 of $9.5 million
was 72.5% of revenues. Cost of revenues for the three months ended September 30,
2019 of $9.1 million was 67.0% of revenues. The gross margin for the three
months ended September 30, 2020 of 27.5% was lower than the gross margin for the
three months ended September 30, 2019 of 33.0%. Gross margin was negatively
impacted for the three months ended September 30, 2020 due to lower revenues
than the prior period driven by the timing of flu and COVID-19 related mailback
orders for the quarter.
Selling, general and administrative ("SG&A") expenses for the three months ended
September 30, 2020 and 2019 were $3.8 million and $3.5 million , respectively.
The increase in SG&A expense, which is consistent with the Company's internal
expectations, was due to continued investments in sales and marketing.
The Company reported operating loss of $0.4 million for the three months ended
September 30, 2020 as compared to operating income of $0.8 million in the prior
year period. Operating loss increased primarily due to lower revenues and higher
SG&A expenses (discussed above).
18
--------------------------------------------------------------------------------
The Company reported loss before income taxes of $0.4 million for the three
months ended September 30, 2020 as compared to income before income taxes of
$0.8 million for the prior year period. Loss before income taxes increased due
to the increase in operating loss (discussed above).
The Company's effective tax rate for the three months ended
The Company reported a net loss of
The Company reported basic and diluted loss per share 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: •SinceJanuary 2020 , 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 temporarily increased pay to route-based drivers, plant and operations personnel throughJune 30, 2020 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 caused many of the Company's customers to temporarily close frommid-March 2020 throughJune 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. •Inventory levels as ofSeptember 30, 2020 were fairly consistent with levels atJune 30, 2020 (decreased approximately 3%) but increased by$2.2 million or 51.8% over the levels atSeptember 30, 2019 . 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 of fiscal year 2020) in theU.S. and in light of ongoing COVID-19 cases, the financial impacts to the Company may have only partially been captured within the result 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, 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:
19
--------------------------------------------------------------------------------
•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 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.
•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 thirty-two (32) state region of the South,
Southeast, Midwest 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 14,175 customer
locations with route-based pickup services. With the addition of these
route-based pickup regions and the network of medical and hazardous waste
service providers servicing the entire U.S. , the Company offers customers a
blended product portfolio to effectively manage multi-site and multi-sized
locations, including those that generate larger quantities of waste. The network
has had a significant positive impact on our pipeline of sales opportunities -
over 60% of this pipeline is attributable to opportunities providing
comprehensive waste management service offerings where both the mailback and
pickup service are integrated into the offering.
•The changing demographics of the U.S. population - according to the U.S. Census
Bureau , 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 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 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 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 long-term care 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
20
--------------------------------------------------------------------------------
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$6.8 million (used for working capital needs), debt of$5.5 million and additional availability under the Credit and Loan Agreements as ofSeptember 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$1.4 million to$6.8 million atSeptember 30, 2020 from$5.4 million atJune 30, 2020 due to the following:
Cash Flows from Operating Activities - Cash flow from operating activities
increased primarily due to a decrease in accounts receivable of
Cash Flows from Investing Activities - Cash flow from investing activities is for normal permitting and capital expenditures for plant and equipment additions of$1.0 million , including approximately$0.7 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$0.5 million and proceeds from the exercise of stock options of$0.2 million offset by the repayment of debt of$0.2 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 three months endedSeptember 30, 2020 and the year endedJune 30, 2020 . 21 --------------------------------------------------------------------------------
Credit Facility
OnMarch 29, 2017 , the Company entered into 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% 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 ofSeptember 30, 2020 was approximately 2.77%. The Company pays a fee of 0.25% per annum on the unused amount of credit facility. AtSeptember 30, 2020 ,$0.8 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 atSeptember 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 2.77% onSeptember 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%. AtSeptember 30, 2020 ,$1.0 million and$1.5 million were outstanding related to the equipment and real estate portions, 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 are forgivable after eight weeks as long as 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, 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 it 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 has applied for forgiveness of the PPP Loan via its 22 -------------------------------------------------------------------------------- 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 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 recently 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 approximately$13.1 million ($5.9 million for the working capital and$7.2 million for the acquisitions) as ofSeptember 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$0.5 million for the real estate as ofSeptember 30, 2020 . The Company also had$0.1 million in letters of credit outstanding as ofSeptember 30, 2020 . 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 was in compliance with all the financial covenants under the Credit and Loan Agreements as ofSeptember 30, 2020 . The Company utilizes performance bonds to support operations based on certain state requirements. AtSeptember 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 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 endedJune 30, 2020 , as filed with theSEC . There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.
© Edgar Online, source
