MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words "will," "may," "position," "plan," "potential," "continue," "anticipate," "believe," "expect," "estimate," "project" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the known and unknown risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q or refer to our Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and as such should not consider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update these forward-looking statements.
GENERAL
Sharps Compliance Corp. is a leading full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous. Our solutions facilitate the proper collection, containment, transportation and treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, hazardous waste and unused consumer dispensed medications and over-the-counter drugs. We serve customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), assisted living and long-term care facilities (assisted living, continuing care, long-term acute care, memory care and skilled nursing), government (federal, state and local), consumers, commercial and agriculture, as well as distributors to many of the aforementioned markets. We assist our customers in determining which of our solution offerings best fit their needs for the collection, containment, return transportation and treatment of medical waste, used healthcare materials, pharmaceutical waste, hazardous waste and unused dispensed medications. Our differentiated approach provides our customers the flexibility to return and properly treat medical waste, used healthcare materials or unused dispensed medications through a variety of solutions and products transported primarily through the United States Postal Service (“USPS”). For customers with facilities or locations that may generate larger quantities of medical waste, we integrate the route-based pick-up service into our complete offering. The benefits of this comprehensive offering include single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pick-up services).
Our key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, surgery centers, retail pharmacies and clinics and the professional market, which is comprised of physicians, dentists and veterinary practices. The Company’s flagship product, the Sharps
®
Recovery System, is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste and used healthcare materials. In October 2014, the Company launched MedSafe
®
, a patent pending solution for the safe collection, transportation and proper disposal of unwanted and expired prescription medications including controlled substances from ultimate users. MedSafe has been designed to meet or exceed the regulations issued by the Drug Enforcement Administration (“DEA”) implementing the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), which became effective October 9, 2014. In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. Additionally, the Company now services parts of Texas and Louisiana with route-based pickup services. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. The Company now offers its route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. Our other solutions include TakeAway Medication Recovery System™, TakeAway Recycle System™, ComplianceTRAC
SM
, Universal Waste Shipback Systems, TakeAway Environmental Return System™, SharpsTracer
®
, Sharps Secure
®
Needle Disposal System, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps
®
MWMS™ (a Medical Waste Management System (“MWMS”)) and Spill Kit and Recovery System.
RESULTS OF OPERATIONS
The following analyzes changes in the consolidated operating results and financial condition of the Company during the
three and six
months ended
December 31, 2017
and
2016
. The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations (dollars in thousands and percentages expressed as a percentage of revenue):
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|
Three-Months Ended December 31,
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|
Six-Months Ended December 31,
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2017
|
|
%
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|
2016
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%
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|
2017
|
|
%
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|
2016
|
|
%
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|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues
|
|
$
|
11,119
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|
|
100.0
|
%
|
|
$
|
9,707
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|
|
100.0
|
%
|
|
$
|
20,802
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|
|
100.0
|
%
|
|
$
|
19,238
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|
|
100.0
|
%
|
Cost of revenues
|
|
7,988
|
|
|
71.8
|
%
|
|
6,812
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|
|
70.2
|
%
|
|
14,643
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|
|
70.4
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%
|
|
13,384
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|
|
69.6
|
%
|
Gross profit
|
|
3,131
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|
|
28.2
|
%
|
|
2,895
|
|
|
29.8
|
%
|
|
6,159
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|
|
29.6
|
%
|
|
5,854
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|
|
30.4
|
%
|
SG&A expense
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|
2,821
|
|
|
25.4
|
%
|
|
2,899
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|
|
29.9
|
%
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|
5,546
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|
|
26.7
|
%
|
|
6,598
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|
|
34.3
|
%
|
Depreciation and amortization
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|
203
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|
|
1.8
|
%
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|
200
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|
|
2.1
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%
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|
405
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1.9
|
%
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|
400
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2.1
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%
|
Operating income (loss)
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107
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1.0
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%
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(204
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)
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|
(2.1
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)%
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208
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|
1.0
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%
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(1,144
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)
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(5.9
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)%
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Interest income
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5
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4
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10
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8
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|
Interest expense
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(23
|
)
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(27
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)
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|
(47
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)
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(58
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)
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Total other expense
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(18
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)
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(0.2
|
)%
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(23
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)
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(0.2
|
)%
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(37
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)
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|
(0.2
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)%
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|
(50
|
)
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|
(0.3
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)%
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Income (loss) before income taxes
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89
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|
|
0.8
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%
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(227
|
)
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|
(2.3
|
)%
|
|
171
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|
|
0.8
|
%
|
|
(1,194
|
)
|
|
(6.2
|
)%
|
Income tax benefit
|
|
(67
|
)
|
|
(0.6
|
)%
|
|
—
|
|
|
—
|
%
|
|
(60
|
)
|
|
(0.3
|
)%
|
|
—
|
|
|
—
|
%
|
Net Income (Loss)
|
|
$
|
156
|
|
|
1.4
|
%
|
|
$
|
(227
|
)
|
|
(2.3
|
)%
|
|
$
|
231
|
|
|
1.1
|
%
|
|
$
|
(1,194
|
)
|
|
(6.2
|
)%
|
THREE MONTHS ENDED
DECEMBER 31,
2017
AS COMPARED TO THREE MONTHS ENDED
DECEMBER 31,
2016
Total revenues for the three months ended
December 31, 2017
of
$11.1 million
increased by $1.4 million, or 14.5%, over the total revenues for the three months ended
December 31, 2016
of
$9.7 million
. The increase in revenue is mainly due to increased billings across all markets partially offset by current year deferred revenue net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands):
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|
|
|
|
|
|
|
Three-Months Ended December 31,
|
|
|
(Unaudited)
|
|
|
2017
|
|
2016
|
|
Variance
|
BILLINGS BY MARKET:
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|
Professional
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|
$
|
3,355
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|
|
$
|
3,017
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|
|
$
|
338
|
|
Home Health Care
|
|
2,114
|
|
|
2,021
|
|
|
93
|
|
Retail
|
|
2,581
|
|
|
1,642
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|
|
939
|
|
Pharmaceutical Manufacturer
|
|
1,467
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|
|
1,404
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|
|
63
|
|
Assisted Living
|
|
621
|
|
|
571
|
|
|
50
|
|
Government
|
|
410
|
|
|
371
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|
|
39
|
|
Environmental
|
|
337
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|
|
74
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|
|
263
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Other
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|
186
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|
165
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21
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|
Subtotal
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|
11,071
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|
|
9,265
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|
|
1,806
|
|
GAAP Adjustment *
|
|
48
|
|
|
442
|
|
|
(394
|
)
|
Revenue Reported
|
|
$
|
11,119
|
|
|
$
|
9,707
|
|
|
$
|
1,412
|
|
*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 3 “Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands):
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|
Three-Months Ended December 31,
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|
2017
|
|
% Total
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|
2016
|
|
% Total
|
BILLINGS BY SOLUTION:
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Mailbacks
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|
$
|
6,629
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|
|
59.9
|
%
|
|
$
|
5,973
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|
|
64.5
|
%
|
Route-based pickup services
|
|
1,830
|
|
|
16.5
|
%
|
|
1,580
|
|
|
17.1
|
%
|
Unused medications
|
|
1,317
|
|
|
11.9
|
%
|
|
742
|
|
|
8.0
|
%
|
Third party treatment services
|
|
337
|
|
|
3.0
|
%
|
|
74
|
|
|
0.8
|
%
|
Other
(1)
|
|
958
|
|
|
8.7
|
%
|
|
896
|
|
|
9.6
|
%
|
Total billings
|
|
$
|
11,071
|
|
|
100.0
|
%
|
|
$
|
9,265
|
|
|
100.0
|
%
|
GAAP adjustment
(2)
|
|
48
|
|
|
|
|
|
442
|
|
|
|
|
Revenue reported
|
|
$
|
11,119
|
|
|
|
|
|
$
|
9,707
|
|
|
|
|
|
|
(1)
|
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
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(2)
|
Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.
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The increase in billings was attributable to increased billings in all markets including the Retail ($0.9 million), Professional ($0.3 million), Environmental ($0.3 million) and Home Health Care ($0.1 million) markets. The increase in Retail billings was due mainly to higher flu immunization related orders and increased order activity for unused medication solutions, including the MedSafe. 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 increase in Environmental billings was due to higher third party treatment billings from our treatment facilities in Texas and Pennsylvania. Home Health Care billings increased due to the timing of distributor purchases. Billings for Mailbacks in the three months ended
December 31, 2017
increased 11.0% to
$6.6 million
as compared to
$6.0 million
in the prior year period and represented
59.9%
of total billings. Billings for Route-Based Pickup Services increased 15.8% to
$1.8 million
as compared to
$1.6 million
in the prior year period and represented
16.5%
of total billings.
Cost of revenues for the three months ended
December 31, 2017
of
$8.0 million
was
71.8%
of revenues. Cost of revenues for the three months ended
December 31, 2016
of
$6.8 million
was
70.2%
of revenues. The gross margin for the three months ended
December 31, 2017
of
28.2%
decreased compared to the gross margin for the three months ended
December 31, 2016
of
29.8%
. Gross margin was adversely impacted for the second quarter of fiscal year 2018 by unplanned repair and maintenance costs at our treatment facilities in both Pennsylvania and Texas as well as start-up expenses related to the launch of a second shift at the Pennsylvania plant.
Selling, general and administrative (“SG&A”) expenses for the three months ended
December 31, 2017
and
2016
were
$2.8 million
and
$2.9 million
, respectively. The decrease in SG&A for the three months ended
December 31, 2017
of $0.1 million reflects the impact of cost savings initiatives launched in the second quarter of fiscal year 2017.
The Company reported operating income of
$0.1 million
for the three months ended
December 31, 2017
compared to operating loss of
$0.2 million
for the three months ended
December 31, 2016
. Operating income increased primarily due to increased revenue (discussed above).
The Company reported income before income taxes of
$0.1 million
for the three months ended
December 31, 2017
versus loss before income taxes of
$0.2 million
for the three months ended
December 31, 2016
. Income before income taxes increased due to the change in operating income (discussed above).
The Company’s effective tax rate for the three months ended
December 31, 2017
was
(75.3)%
reflecting the impact of the 2017 tax law change on the Company's alternative minimum tax credits of $74,000 net of estimated state income tax expense of
$7,000. The benefit recorded of $74,000 represents the net benefit of remeasuring the deferred tax assets for recoverable alternative minimum tax credits offset by deferred tax liabilities 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.
No
income tax expense was recorded for the three months ended
December 31, 2016
as it was not material due to the valuation allowance and net operating losses.
The Company reported a net income of
$0.2 million
for the three months ended
December 31, 2017
compared to net loss of
$0.2 million
for the three months ended
December 31, 2016
. Net income increased due to the change in the operating income and tax benefit (discussed above).
The Company reported basic and diluted income per share of
$0.01
for the three months ended
December 31, 2017
versus basic and diluted loss per share of
$(0.01)
for the three months ended
December 31, 2016
. Basic and diluted income per share increased due to the change in net income (discussed above).
SIX
MONTHS ENDED
DECEMBER 31,
2017
AS COMPARED TO
SIX
MONTHS ENDED
DECEMBER 31,
2016
Total revenues for the
six
months ended
December 31, 2017
of
$20.8 million
increased by $1.6 million, or 8.1%, over the total revenues for the
six
months ended
December 31, 2016
of
$19.2 million
. The increase in revenue is mainly due to increased billings across the Professional, Environmental, Retail and Home Health Care markets partially offset by current year deferred revenue net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended December 31,
|
|
|
(Unaudited)
|
|
|
2017
|
|
2016
|
|
Variance
|
BILLINGS BY MARKET:
|
|
|
|
|
|
|
Professional
|
|
$
|
6,456
|
|
|
$
|
5,835
|
|
|
$
|
621
|
|
Home Health Care
|
|
4,115
|
|
|
3,887
|
|
|
228
|
|
Retail
|
|
3,981
|
|
|
3,701
|
|
|
280
|
|
Pharmaceutical Manufacturer
|
|
2,999
|
|
|
3,191
|
|
|
(192
|
)
|
Assisted Living
|
|
1,225
|
|
|
1,164
|
|
|
61
|
|
Government
|
|
964
|
|
|
821
|
|
|
143
|
|
Environmental
|
|
771
|
|
|
142
|
|
|
629
|
|
Other
|
|
404
|
|
|
372
|
|
|
32
|
|
Subtotal
|
|
20,915
|
|
|
19,113
|
|
|
1,802
|
|
GAAP Adjustment *
|
|
(113
|
)
|
|
125
|
|
|
(238
|
)
|
Revenue Reported
|
|
$
|
20,802
|
|
|
$
|
19,238
|
|
|
$
|
1,564
|
|
*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue. See Note 3 “Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.
The components of billings by solution are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended December 31,
|
|
|
2017
|
|
% Total
|
|
2016
|
|
% Total
|
BILLINGS BY SOLUTION:
|
|
|
|
|
|
|
|
|
Mailbacks
|
|
$
|
12,129
|
|
|
58.0
|
%
|
|
$
|
12,539
|
|
|
65.6
|
%
|
Route-based pickup services
|
|
3,591
|
|
|
17.2
|
%
|
|
3,045
|
|
|
15.9
|
%
|
Unused medications
|
|
2,489
|
|
|
11.9
|
%
|
|
1,533
|
|
|
8.0
|
%
|
Third party treatment services
|
|
771
|
|
|
3.7
|
%
|
|
142
|
|
|
0.7
|
%
|
Other
(1)
|
|
1,935
|
|
|
9.2
|
%
|
|
1,854
|
|
|
9.8
|
%
|
Total billings
|
|
$
|
20,915
|
|
|
100.0
|
%
|
|
$
|
19,113
|
|
|
100.0
|
%
|
GAAP adjustment
(2)
|
|
(113
|
)
|
|
|
|
|
125
|
|
|
|
|
Revenue reported
|
|
$
|
20,802
|
|
|
|
|
|
$
|
19,238
|
|
|
|
|
|
|
(1)
|
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
|
|
|
(2)
|
Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.
|
The increase in billings was mainly due to an increase in the Professional ($0.6 million), Environmental ($0.6 million), Retail ($0.3 million), Home Health Care ($0.2 million) and Government ($0.1 million) markets, partially offset by a decrease in the Pharmaceutical Manufacturer ($0.2 million) market. 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 increase in Environmental billings was due to higher third party treatment billings from our treatment facilities in Texas and Pennsylvania. The increase in Retail billings was due mainly to increased order activity for the unused medication solutions, including the MedSafe, partially offset by lower flu immunization related orders. Home Health Care billings increased due to the timing of distributor purchases. The increase in Government billings was due primarily to MedSafe related orders. The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventory builds. Billings for Mailbacks in the
six
months ended
December 31, 2017
decreased 3.3% to
$12.1 million
as compared to
$12.5 million
in the prior year period and represented
58.0%
of total billings. Billings for Route-Based Pickup Services increased 17.9% to
$3.6 million
as compared to
$3.0 million
in the prior year period and represented
17.2%
of total billings.
Cost of revenues for the
six
months ended
December 31, 2017
of
$14.6 million
was
70.4%
of revenues. Cost of revenues for the
six
months ended
December 31, 2016
of
$13.4 million
was
69.6%
of revenues. The gross margin for the
six
months ended
December 31, 2017
of
29.6%
decreased compared to the gross margin for the
six
months ended
December 31, 2016
of
30.4%
. Gross margin was adversely impacted for the
six
months ended
December 31, 2017
by unplanned repair and maintenance costs at our treatment facilities in both Pennsylvania and Texas as well as start-up expenses related to the launch of a second shift at the Pennsylvania plant.
Selling, general and administrative (“SG&A”) expenses for the
six
months ended
December 31, 2017
and
2016
were
$5.5 million
and
$6.6 million
, respectively. The
six
months ended December 31, 2016 included $0.7 million of one-time expenses related to the Company's acquisition of Citiwaste. Without these costs, SG&A for the second quarter of fiscal 2017 was $5.9 million. The decrease in SG&A (after excluding one-time expenses) for the
six
months ended
December 31, 2017
of $0.4 million reflects the impact of cost savings initiatives launched in the second quarter of fiscal year 2017.
The Company reported operating income of
$0.2 million
for the
six
months ended
December 31, 2017
compared to operating loss of
$1.1 million
for the
six
months ended
December 31, 2016
. Operating income increased primarily due to higher revenue and lower SG&A costs (discussed above).
The Company reported income before income taxes of
$0.2 million
for the
six
months ended
December 31, 2017
versus loss before income taxes of
$1.2 million
for the
six
months ended
December 31, 2016
. Income before income taxes increased due to the change in operating income (discussed above).
The Company’s effective tax rate for the
six
months ended
December 31, 2017
was
(35.1)%
reflecting the impact of the 2017 tax law change on the Company's alternative minimum tax credits of $74,000 net of estimated state income tax expense of
$14,000
. The benefit recorded of $74,000 represents the net benefit of remeasuring the deferred tax assets for recoverable alternative minimum tax credits offset by deferred tax liabilities 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.
No
income tax expense was recorded for the
six
months ended
December 31, 2016
as it was not material due to the valuation allowance and net operating losses.
The Company reported a net income of
$0.2 million
for the
six
months ended
December 31, 2017
compared to net loss of
$1.2 million
for the
six
months ended
December 31, 2016
. Net income increased due to the change in the operating income (discussed above).
The Company reported basic and diluted income per share of
$0.01
for the
six
months ended
December 31, 2017
versus basic and diluted loss per share of
$(0.08)
for the
six
months ended
December 31, 2016
. Basic and diluted income per share increased due to the change in net income (discussed above).
PROSPECTS FOR THE FUTURE
The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics, and the professional market which is comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.
The Company believes its growth opportunities are supported by the following:
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A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing about 155 million people or 48% of the U.S. population.
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In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 10,000 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.
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The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility.
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The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control ("CDC"), 38.5% of adults received a flu shot and 28.2% of flu shots for adults were administered in a retail clinic. Over the flu
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seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. Despite the decrease in Retail flu business for fiscal year 2017 (the 2016 flu season) of 15% due to a mild flu season and the loss of one retail pharmacy customer, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.
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The passage of regulations for ultimate user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long standing issue within long-term care.
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Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company's Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal.
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With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.
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A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.
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The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System).
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The Company’s strong financial position with a cash balance of
$5.8 million
, debt of
$2.3 million
and additional availability under the Credit Agreement as of
December 31, 2017
.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash flow has historically been primarily influenced by demand for products and services, operating margins and related working capital needs as well as more strategic activities including acquisitions, stock repurchases and fixed asset additions. Cash and cash equivalents increased by $1.1 million to
$5.8 million
at
December 31, 2017
from
$4.7 million
at
June 30, 2017
due to the following:
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Cash Flows from Operating Activities
- Working capital increased by
$0.4 million
to
$10.9 million
at
December 31, 2017
from
$10.5 million
at
June 30, 2017
. The increase in working capital is primarily attributed to an increase in cash and cash equivalents offset by:
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an increase in accounts payable and accrued liabilities of
$0.9 million
to
$4.5 million
at
December 31, 2017
from
$3.5 million
at
June 30, 2017
due to timing of payments.
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•
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Cash Flows used in Investing Activities
- Investing activities include capital expenditures of
$0.6 million
for normal plant and equipment additions.
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•
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Cash Flows used in Financing Activities
– Financing activities include repayments of debt of
$0.3 million
.
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Off-Balance Sheet Arrangements
The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K for the
six
months ended
December 31, 2017
and the year ended
June 30, 2017
.
Credit Facility
On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior 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 lessor of
50%
of eligible inventory and $3 million. Advances under the acquisition portion of the credit facility are limited to
75%
of the purchase price of an acquired company and convert to a
five
-year term note at the time of the borrowing. Borrowings bear interest at the greater of (a)
zero
percent or (b) the
One
Month ICE LIBOR plus a LIBOR Margin of
2.5%
. The LIBOR Margin may increase to as high as
3.0%
depending on the Company’s cash flow leverage ratio. The interest rate as of
December 31, 2017
was approximately
4.0%
. The Company pays a fee of
0.25%
per annum on the unused amount of credit facility. At
December 31, 2017
,
$2.2 million
was outstanding related to the acquisition portion of the credit facility and
$0.1 million
related to the unsecured note payable assumed in acquisition. No amounts were outstanding under the working capital portion of the credit facility at
December 31, 2017
.
The Company has availability under the Credit Agreement of approximately
$11.7 million
(
$6.0 million
for the working capital and
$5.7 million
for the acquisitions) as of
December 31, 2017
which may be limited by its leverage covenant. The Company also had
$30,000
in letters of credit outstanding as of
December 31, 2017
.
The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than
3.25
to 1.0 and a minimum debt service coverage ratio of not less than
1.15
to 1.00. The maximum cash flow leverage ratio will decrease to
3.0
to 1.0 on March 31, 2018 and onwards. The Credit Agreement, which expires on
March 29, 2019
, also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders.
The Company utilizes performance bonds to support operations based on certain state requirements. At
December 31, 2017
, the Company had performance bonds outstanding covering financial assurance up to
$0.6 million
.
Management believes that the Company’s current cash resources (cash on hand) will be sufficient to fund operations for the twelve months ending January 31, 2019.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
: The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonably assured except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse.
Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the Takeaway Medication Recovery Systems, referred to as “Mailbacks” and Sharps Pump and Asset Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation and (3) treatment service. In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based
on the product and services provided including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.
Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.
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 and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under GAAP, the valuation allowance has been recorded to reduce the Company's deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.
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 prior year ended
June 30, 2017
and there have been no triggering events since that would warrant further impairment testing.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In March 2016, guidance for revenue from contracts with customers regarding principal versus agent considerations was issued which modified examples to assist in the application of the guidance. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company is in the initial stages of evaluating the impact that the new accounting guidance will have 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.
In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is 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.