Sharps Compliance Corporation
SHARPS COMPLIANCE CORP (Form: 10-Q, Received: 05/05/2011 13:38:03)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                           to _________.

Commission File Number:  001-34269
_______________________

SHARPS COMPLIANCE CORP.
(Exact name of registrant as specified in its charter)

Delaware
74-2657168
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
9220 Kirby Drive, Suite 500, Houston, Texas
77054
(Address of principal executive offices)
(Zip Code)

(713) 432-0300
(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o No o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Large Accelerated Filer  o
Accelerated Filer  x
Non-accelerated Filer  o
 (Do not check if a smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes  o  No  x

As of May 2, 2011, there were 14,963,716 outstanding shares of the Registrant's common stock, par value $0.01 per share.
 


 
 

 

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

PART I
FINANCIAL INFORMATION
PAGE
     
Item 1.
Financial Statements
 
     
  3
     
  4
     
  5
     
  6
     
  7
     
  8
     
Item 2.
12
 
  
 
Item 3.
20
     
Item 4.
20
     
PART II
21
     
Item 1.
21
     
Item 1A.
21
     
Item 4.   
21
     
Item 6.
21
     
  22
 

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 16,836     $ 18,068  
Accounts receivable, net of allowance for doubtful accounts of $23 and $21, respectively
    2,142       2,033  
Inventory
    2,079       1,738  
Prepaid and other current assets
    3,751       3,369  
Deferred income taxes
    74       83  
TOTAL CURRENT ASSETS
    24,882       25,291  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    5,459       5,631  
                 
DEFERRED INCOME TAXES, non-current
    486       503  
                 
INTANGIBLE ASSETS, net of accumulated amortization of $219 and $196, respectively
    309       207  
                 
TOTAL ASSETS
  $ 31,136     $ 31,632  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 1,257     $ 1,220  
Accrued liabilities
    1,304       1,079  
Deferred revenue
    1,547       1,375  
TOTAL CURRENT LIABILITIES
    4,108       3,674  
                 
LONG-TERM DEFERRED REVENUE
    417       583  
                 
OTHER LONG TERM LIABILITIES
    305       434  
                 
TOTAL LIABILITIES
    4,830       4,691  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY
               
Common stock, $0.01 par value per share; 20,000 shares authorized;14,962 and 14,892 shares issued and outstanding, respectively
    150       149  
Additional paid-in capital
    21,332       19,705  
Retained earnings
    4,824       7,087  
TOTAL STOCKHOLDERS' EQUITY
    26,306       26,941  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 31,136     $ 31,632  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)

   
Three-Months
 Ended March 31,
 
   
2011
   
2010
 
   
(Unaudited)
 
             
REVENUES
  $ 4,518     $ 3,639  
                 
COSTS AND EXPENSES
               
Cost of revenues
    3,109       2,756  
Selling, general and administrative
    2,438       2,195  
Depreciation and amortization
    89       127  
TOTAL COSTS AND EXPENSES
    5,636       5,078  
                 
OPERATING LOSS
    (1,118 )     (1,439 )
                 
OTHER INCOME
               
Interest income
    14       12  
TOTAL OTHER INCOME
    14       12  
                 
LOSS BEFORE INCOME TAXES
    (1,104 )     (1,427 )
                 
INCOME TAX EXPENSE (BENEFIT)
               
Current
    81       (445 )
Deferred
    (526 )     (7 )
TOTAL INCOME TAX EXPENSE (BENEFIT)
    (445 )     (452 )
                 
                 
NET LOSS
  $ (659 )   $ (975 )
                 
NET LOSS PER COMMON SHARE
               
Basic
  $ (0.04 )   $ (0.07 )
                 
Diluted
  $ (0.04 )   $ (0.07 )
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
               
LOSS PER COMMON SHARE:
               
                 
Basic
    14,948       14,585  
Diluted
    14,948       14,585  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)

   
Nine-Months
 Ended March 31,
 
   
2011
   
2010
 
   
(Unaudited)
 
             
REVENUES
  $ 14,362     $ 35,004  
                 
COSTS AND EXPENSES
               
Cost of revenues
    9,915       12,572  
Selling, general and administrative
    7,152       6,115  
Special charge
    570       -  
Depreciation and amortization
    265       335  
TOTAL COSTS AND EXPENSES
    17,902       19,022  
                 
OPERATING INCOME (LOSS)
    (3,540 )     15,982  
                 
OTHER INCOME
               
Interest income
    42       25  
TOTAL OTHER INCOME
    42       25  
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (3,498 )     16,007  
                 
INCOME TAX EXPENSE (BENEFIT)
               
Current
    (1,261 )     4,286  
Deferred
    26       1,260  
TOTAL INCOME TAX EXPENSE (BENEFIT)
    (1,235 )     5,546  
                 
                 
NET INCOME (LOSS)
  $ (2,263 )   $ 10,461  
                 
NET INCOME (LOSS) PER COMMON SHARE
               
Basic
  $ (0.15 )   $ 0.75  
                 
Diluted
  $ (0.15 )   $ 0.70  
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
               
INCOME (LOSS) PER COMMON SHARE:
               
                 
Basic
    14,925       13,988  
Diluted
    14,925       14,872  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)

   
Common Stock
   
Additional
Paid-in
   
Retained
Earnings
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
Equity
 
                               
Balances, June 30, 2009
    13,257,507     $ 133     $ 11,706     $ (2,269 )   $ 9,570  
                                         
Issuance of Common Stock, net of direct expenses
    577,146       6       4,867       -       4,873  
                                         
Exercise of stock options
    972,874       9       1,064       -       1,073  
                                         
Stock-based compensation
    -       -       980       -       980  
                                         
Issuance of restricted stock
    84,227       1       (1 )             -  
                                         
Excess tax benefit from stock-based award activity
    -       -       1,089       -       1,089  
                                         
Net Income
    -       -       -       9,356       9,356  
                                         
Balances, June 30, 2010
    14,891,754       149       19,705       7,087       26,941  
                                         
Exercise of stock options*
    5,000       -       3       -       3  
                                         
Stock-based compensation*
                    686       -       686  
                                         
Issuance of restricted stock*
    65,458       1       (1 )     -       -  
                                         
Excess tax benefit from stock-based award activity*
    -       -       939       -       939  
                                         
Net Loss*
                            (2,263 )     (2,263 )
                                         
Balances, March 31, 2011*
    14,962,212     $ 150     $ 21,332     $ 4,824     $ 26,306  
 
* unaudited

The accompanying notes are an integral part of these condensed consolidated financial statements.


SHARP S COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
Nine-Months Ended
March 31,
 
   
2011
   
2010
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (2,263 )   $ 10,461  
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    751       558  
Stock-based compensation expense
    686       732  
Excess tax benefits from stock-based award activity
    (939 )     (917 )
Deferred tax expense
    26       1,260  
Changes in operating assets and liabilities:
               
(Increase) decrease  in accounts receivable
    (109 )     26  
(Increase) decrease in inventory
    (341 )     449  
(Increase) decrease in prepaid and other current assets
    (382 )     (1,996 )
Increase (decrease) in accounts payable and accrued liabilities
    1,072       (272 )
Increase in deferred revenue
    6       (138 )
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (1,493 )     10,163  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property, plant and equipment
    (556 )     (1,707 )
Additions to intangible assets
    (125 )     (48 )
NET CASH USED IN INVESTING ACTIVITIES
    (681 )     (1,755 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Excess tax benefits from stock-based award activity
    939       917  
Proceeds from stock offering, net of offering costs
    -       4,832  
Proceeds from exercise of stock options
    3       873  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    942       6,622  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (1,232 )     15,030  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    18,068       4,792  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 16,836     $ 19,822  
                 
                 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
               
Income taxes paid
  $ -     $ 5,560  

The accompanying notes are an integral part of these condensed consolidated financial statements.


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - ORGANIZATION AND BACKGROUND

The accompanying unaudited condensed consolidated financial statements include the financial transactions and accounts of Sharps Compliance Corp. and its wholly owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.), Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.) and Sharps Safety, Inc. (collectively, “Sharps”, “We” or the  “Company”).  All significant intercompany accounts and transactions have been eliminated upon consolidation.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and with instructions to Form 10-Q and, accordingly, do not include all information and footnotes required under accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, these interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of March 31, 2011, the results of its operations and cash flows for the three and nine months ended March 31, 2011 and 2010 and stockholders’ equity for the year ended June 30, 2010 and nine months ended March 31, 2011. The results of operations for the three and nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2011.  These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2010.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable revenue arrangements. On July 1, 2010, the Company adopted ASU No. 2009-13 which further clarified guidance on revenue recognition for multiple-deliverable revenue arrangements, changing the way the Company allocates arrangement consideration to the separate units of accounting.  Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps ® Recovery System™ (formerly the Sharps ® Disposal by Mail Systems ® ) and various TakeAway™ Environmental Return Systems referred to as “Mailbacks” and Sharps Pump 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.

Prior to July 1, 2010, the individual fair value of the transportation and treatment services were determined by the sales price of the service offered by third parties, with the fair value of the compliance and container being the residual value.  Beginning July 1, 2010, under 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.  Because an estimated selling price must be set for each unit, the residual method used previously by the Company to allocate consideration to the compliance and container system is no longer allowed.  The selling price for the transportation revenue and the treatment revenue, which utilizes third party evidence, did not change from the prior method.  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 facility.  The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s facility. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been prepared 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 container systems sold may not be returned.  Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.


The Company has calculated the change in revenue assigned to each of the units of accounting under the relative selling price methodology as compared to using the residual allocation method and determined that the change is not material.  The Company has determined that the implementation of ASU No. 2009-13 did not have a material effect on the consolidated financial statements when compared to its previous revenue recognition methodology.

ACCOUNTS RECEIVABLE

Accounts receivable consist primarily of amounts due to us from our normal business activities.  Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual terms with the customer.  The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts.  Accounts receivable are charged to the allowance for doubtful accounts when we have determined that the receivable will not be collected and/or when the account has been referred to a third party collection agency. The Company has a history of minimal uncollectible accounts.

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the FASB issued guidance expanding disclosure requirements related to receivables. The guidance was issued to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The guidance is for receivables, off-balance sheet credit exposures and foreclosed and repossessed assets. The Company’s summary of significant accounting policies shall now include: (i) basis for accounting for loans, trade receivables, and lease financing (including those classified as held for sale), (ii) method used in determining the lower of cost or fair value of nonmortgage loans held for sale, (iii) classification and method of accounting for interest-only strips, loans and other receivables and (iv) method for recognizing interest income on loan and trade receivables.

In addition, the allowance for credit losses, the allowance for doubtful accounts, and as applicable any unearned income, any unamortized premiums and discounts, and any net unamortized deferred fees and costs, shall be disclosed in the financial statements. The Company adopted this guidance, as required for both interim and annual reporting periods, effective December 15, 2010. The adoption of this guidance does not impact the Company’s consolidated results of operations or financial position. The Company has included its Accounts Receivable policy in Note 3 – Significant Accounting Policies.

NOTE 5 - INCOME TAXES

The Company’s effective tax rate for the nine months ended March 31, 2011 was 35.3% compared to 34.6% for the nine months ended March 31, 2010.  The Company received a Federal Tax refund of $2.7 million in April 2011. This amount is included in Prepaid and Other Current Assets as of March 31, 2011.

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
 
On July 15, 2010, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association. The Credit Agreement replaces the Prior Credit Agreement executed on March 9, 2010 with JPMorgan Chase Bank N.A. As of March 31, 2011, the Company had no outstanding borrowings, $106 thousand in letters of credit outstanding, and $4.9 million of credit available.
 
The Credit Agreement provides for a two-year, $5.0 million line of credit facility, the proceeds of which may be utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000), (iv) acquisitions (up to $1,000,000) and (v) general corporate purposes. Unlike the Prior Credit Agreement, there is no borrowing base computation that limits the amount of borrowings under the Credit Agreement.
 
Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2012, the maturity date of the Credit Agreement. The Company paid a one-time non-refundable commitment fee of $10,000 applicable to the entire two year term of the Credit Agreement. The Company will pay a fee of 0.2% per annum on the unused amount of the line of credit. We estimate that the interest rate applicable to the borrowings under the Credit Agreement would be approximately 2.8% as of March 31, 2011.
 
The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $21 million and not exceed a ratio of liabilities to tangible net worth of 1.0 to 1.0. As of March 31, 2011, the Company is in compliance with all financial covenants. The Credit Agreement also contains customary events of default. Upon the occurrence of an event of default that remains uncured after any applicable cure period, the lenders’ commitment to make further loans may terminate and the Company may be required to make immediate repayment of all indebtedness to the lenders.

 
NOTE 7 – STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).  Total stock-based compensation for the three months ended March 31, 2011 and 2010 was $179 thousand ($5 thousand included in cost of revenues and $174 thousand included in general and administrative expense in the Company’s consolidated statement of operations) and $231 thousand ($13 thousand included in cost of revenues and $218 thousand included in general and administrative expense in the Company’s consolidated statement of operations), respectively. Total stock-based compensation for the nine months ended March 31, 2011 and 2010 was $686 thousand ($50 thousand included in cost of revenues and $636 thousand included in general and administrative expense in the Company’s consolidated statement of operations) and $732 thousand ($38 thousand included in cost of revenues and $694 thousand included in general and administrative expense in the Company’s consolidated statement of operations). Reductions in taxes payable resulting from tax deductions that exceed the recognized tax benefit associated with compensation expense (excess tax benefits) are classified as financing cash flows and as an increase to additional paid in capital. The Company’s excess tax benefits included in its cash flows from financing activities for the nine months ended March 31, 2011 was $939 thousand. The Company’s excess tax benefits included in its cash flows from financing activities for the nine months ended March 31, 2010 was $917 thousand.

In conjunction with the retirement and separation agreement of Dr. Burton Kunik, effective September 30, 2010, the Company recognized an additional $73 thousand in stock-based compensation expense which is included in the Special Charge on the accompanying statement of operations for the nine months ended March 31, 2011.
 
NOTE 8 - EARNINGS PER SHARE
 
Earnings per share are measured at two levels: basic per share and diluted per share. Basic per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to common stock options and restricted stock. In computing diluted earnings per share, the outstanding common stock options are considered dilutive using the treasury stock method. Vested restricted shares are included in basic common shares outstanding, and unvested restricted shares are included in the diluted common shares outstanding, if the effect is dilutive.
 
The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share data):

   
Three-Months Ended
   
Nine-Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net income (loss), as reported
  $ (659 )   $ (975 )   $ (2,263 )   $ 10,461  
                                 
Weighted average common shares outstanding
    14,948       14,585       14,925       13,988  
Effect of dilutive stock options
    -       -       -       884  
Weighted average diluted common shares outstanding
    14,948       14,585       14,925       14,872  
                                 
Net income (loss) per common share
                               
Basic
  $ (0.04 )   $ (0.07 )   $ (0.15 )   $ 0.75  
Diluted
  $ (0.04 )   $ (0.07 )   $ (0.15 )   $ 0.70  
                                 
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive
    390       233       390       233  
 

NOTE 9 - EQUITY TRANSACTIONS

During the three months ended March 31, 2011, stock options to purchase 3,000 common shares were exercised. Total proceeds to the Company were approximately $2 thousand (average price of $0.60 per share). During the three months ended March 31, 2010, stock options to purchase 28,333 common shares were exercised.  Total proceeds to the Company were approximately $46 thousand (average price of $1.61 per share).
 
During the nine months ended March 31, 2011, stock options to purchase 5,000 common shares were exercised.  Total proceeds to the Company were approximately $3 thousand (average price of $0.70 per share).  During the nine months ended March 31, 2010, stock options to purchase 722,874 common shares were exercised.  Total proceeds to the Company were approximately $873 thousand (average price of $1.21 per share).

In the second quarter of fiscal 2010, the Company completed a public offering of 577,146 shares, of which 77,146 were sold to cover the over-allotment option, at a price of $9.165 per shares (net of underwriting commission). The net proceeds of $4.8 million from the shares sold by the Company (net of offering expenses) is expected to be used for general corporate purposes, including expansion of our product offering, facilities, and infrastructure to meet the continued expected growth of the Company.

As of March 31, 2011, there was $735 thousand of stock option and restricted stock compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 1.9 years.

NOTE 10 – INVENTORIES

The components of inventories are as follows (in thousands):

   
March 31, 2011
   
June 30,2010
 
   
(Unaudited)
       
Finished goods
  $ 1,038     $ 933  
Raw materials
    1,041       805  
Total
  $ 2,079     $ 1,738  

NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company considers the fair value of all financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, not to be materially different from their carrying values at year-end due to their short-term nature.



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 “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 current risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein.  Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, expected, estimated or intended.  The Company does not intend to update these forward-looking statements.

GENERAL

Sharps is a leading full-service provider of cost-effective solutions for management of medical waste and unused dispensed medications generated outside of the hospital and large health care facility setting. The Company’s solutions facilitate the proper treatment of numerous types of medical waste and unused dispensed medications, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, and unused dispensed prescription and over-the-counter drugs and medications.  We serve customers in multiple markets such as government (federal, state and local), home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), hospitality (including assisted living facilities, hotels, motels and restaurants), consumers, commercial, industrial and agriculture, and distributors to many of the aforementioned markets.  We assist our customers in determining which of our distinct solution offerings best fit their needs for the collection, storage, return transportation and treatment of their or their patients’ medical waste and unused dispensed medications.  Our differentiated approach provides our customers the flexibility to return and ultimately properly treat their or their patients’ medical waste or unused dispensed medications through pre-paid mail services primarily through the United States Postal Service (“USPS”). Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical waste disposal and unused dispensed patient medication compliance requirements. The Company’s primary solutions include Sharps ® Recovery System™ (formerly Sharps ® Disposal by Mail System ® ), RxTakeAway System, Sharps ® MWMS , and SharpsTracer ® . The Company offers a wide variety of other logistical products solutions including Pitch-It IV™ Poles, Trip LesSystem ® , Sharps ® Pump and Asset Return Box, SharpsSecure ® Needle Recovery System, Sharps SureTemp Tote ® , IsoWash ® Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal System and Sharps Environmental Services.


RESULTS OF OPERATIONS

The following analyzes changes in the consolidated operating results and financial condition of the Company during the three and nine months ended March 31, 2011 and 2010. The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations, dollars in thousands and percentages expressed as a percentage of revenue:

   
Three-Months Ended March 31,
   
Nine-Months Ended March 31,
 
   
2011
   
%
   
2010
   
%
   
2011
   
%
   
2010
   
%
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
                                                 
Revenue
  $ 4,518       100.0 %   $ 3,639       100.0 %   $ 14,362       100.0 %   $ 35,004       100.0 %
                                                                 
Cost of revenue
    3,109       68.8 %     2,756       75.7 %     9,915       69.0 %     12,572       35.9 %
Gross profit
    1,409       31.2 %     883       24.3 %     4,447       31.0 %     22,432       64.1 %
                                                                 
SG&A expense
    2,438       54.0 %     2,195       60.3 %     7,152       49.8 %     6,115       17.5 %
Special charge
    -       0.0 %     -       0.0 %     570       4.0 %     -       0.0 %
Depreciation and amortization
    89       2.0 %     127       3.5 %     265       1.8 %     335       1.0 %
                                                                 
Operating income (loss)
    (1,118 )     (24.7 %)     (1,439 )     (39.5 %)     (3,540 )     (24.6 %)     15,982       45.7 %
                                                                 
Other income
    14       0.3 %     12       0.3 %     42       0.3 %     25       0.1 %
                                                                 
Net income (loss) before income taxes
  $ (1,104 )     (24.4 %)   $ (1,427 )     (39.2 %)   $ (3,498 )     (24.4 %)   $ 16,007       45.7 %
Income tax expense (benefit)
    (445 )     (9.8 %)     (452 )     (12.4 %)     (1,235 )     (8.6 %)     5,546       15.8 %
Net income (loss)
  $ (659 )     (14.6 %)   $ (975 )     (26.8 %)   $ (2,263 )     (15.8 %)   $ 10,461       29.9 %
 
 
THREE MONTHS ENDED MARCH 31, 2011 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2010

Total revenues for the three months ended March 31, 2011 of $4.5 million increased by $0.9 million, or 24.2%, over the total revenues for the three months ended March 31, 2010 of $3.6 million. Billings by market are as follows (in thousands):

   
Three-Months Ended March 31,
 
   
(Unaudited)
 
   
2011
   
2010
   
Variance
 
                   
BILLINGS BY MARKET:
                 
Home Health Care
  $ 1,615     $ 1,524     $ 91  
Retail
    810       257       553  
U.S Government Contract
    608       391       217  
Core Government
    226       118       108  
Professional
    439       373       66  
Assisted Living / Hospitality
    373       258       115  
Pharmaceutical
    72       332       (260 )
Other
    310       219       91  
Subtotal
    4,453       3,472       981  
GAAP Adjustment *
    65       167       (102 )
Revenue Reported
  $ 4,518     $ 3,639     $ 879  

*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue.  Customer billings include all invoiced amounts associated with products shipped during the period reported.  GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction.  The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.  See Note 3 “Revenue Recognition” in “Notes to Consolidated Financial Statements”.

This Quarterly Report on Form 10-Q contains certain financial information not derived in accordance with GAAP, including customer billings information.  The Company believes this information is useful to investors and other interested parties as customer billings represents all invoiced amounts associated with products shipped during the period reported.  Such information should not be considered as a substitute for any measures derived in accordance with GAAP, and may not be comparable to other similarly titled measures of other companies.  Reconciliation of this information to the most comparable GAAP measures is included above.


The increase in revenues is primarily attributable to increased billings in the Retail ($0.6 million), U.S. Government contract ($0.2 million), Core Government ($0.1 million), Assisted Living / Hospitality ($0.1 million), and Professional ($0.1 million) markets.  These increases in billings were partially offset by decreased billings in the Pharmaceutical ($0.3 million) market. The increase in the Retail market billings is primarily due to a large national retail pharmacy and two food and drug chains which selected the Company’s TakeAway™ Environmental Return System™ envelope solution to feature in their pharmacies across the nation. U.S. Government Contract billings in the current year and prior year included $0.6 million and $0.4 million, respectively, associated with the Company’s contract with a major U.S. government agency announced in February 2009. The current quarter and prior year billings were for the maintenance phase of the contract with this major U.S. government agency. In calendar year 2011, billings which are related to the maintenance portion of the government contract are expected to be approximately $3.0 million for the period from February 1, 2011 through January 31, 2012. The increase in Core Government billings of $108 thousand is a result of the TakeAway™ Environmental Return System™ envelope program sales, which was a component of the Veterans Administration (VA) Pilot. The increase in billings in the Assisted Living / Hospitality market was primarily due to increased sales to existing customers as they realize growth from the aging patient population using their services as well as an increase in our assisted living facility customer base. The decrease in the pharmaceutical market is primarily due to timing patterns of customer orders and the discontinuation of one of the Company’s six patient support programs.

Cost of revenues for the three months ended March 31, 2011 of $3.1 million was 68.8% of revenues.  Cost of revenues for the three months ended March 31, 2010 of $2.8 million was 75.7% of revenue.  The higher gross margin for the quarter ended March 31, 2011 of 31.2% (versus 24.3% for the quarter ended March 31, 2010) was a result of (i) the higher revenue (i.e. higher coverage of fixed costs components in cost of goods sold) and (ii) the impact of the cost savings initiatives which reduced the fixed component of cost of sales.  Prior year gross margin was adversely impacted as a result of the combination of lower volume and greater capacity which created negative leverage. The Company, which is largely leveraged on volume, made investments in its infrastructure during the first half of calendar year 2010 in order to provide for the capacity to take on large increases in volume.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2011 of $2.4 million, increased by $243 thousand, from SG&A expenses of $2.2 million for the three months ended March 31, 2010.  The increase in SG&A is primarily due to higher (i) compensation and benefit expense including payroll tax of $168 thousand (primarily due to higher compensation expense as a result of an increased number of employees year-over-year headcount of 7 which are focused on sales and marketing-related activities partially offset by lower commissions as a result of lower sales), (ii) professional fee expenses of $149 thousand (primarily due to regulatory and consulting related fees, legal fees, audit and related fees, other sales-related consulting fees), and (iii) marketing expenses of $34 thousand (primarily due to consulting expenses and timing of new campaigns). These increases in SG&A were offset by decreases in (i) non-cash stock-based compensation expense of $44 thousand (primarily due to the lower stock price of the equity portion of the fiscal year 2011 Board of Directors compensation (vesting over fiscal year 2011) and (ii) recruiting fees of $70 thousand (primarily related to executive recruiting fees in the prior year quarter).

The Company generated an operating loss of $1.1 million for the three months ended March 31, 2011 compared to an operating loss of $1.4 million for the three months ended March 31, 2010.  The operating margin was (24.7%) for the three months ended March 31, 2011 compared to (39.5%) for the three months ended March 31, 2010. The improvement in operating income and operating margin is a result of the above mentioned increase in revenue and operating leverage inherent in the Company’s business model.

The Company generated a loss before tax of $1.1 million for the three months ended March 31, 2011 versus a loss before tax of $1.4 million for the three months ended March 31, 2010.  The improvement in income before tax is a result of the higher revenue and operating leverage (discussed above).

The Company’s effective tax rate for the three months ended March 31, 2011 was 40.3% compared to 31.7% for the three months ended March 31, 2010. The increase in the effective tax rate (benefit) resulted primarily from an adjustment of $55 thousand (increase in tax benefit) related to finalizing the prior year’s tax return offset by a reduction in the statutory rate from 35% to 34%. The Company uses estimates in providing for income taxes on a year to date basis and those estimates may change in subsequent interim periods.

The Company generated a net loss of $0.7 million for the three months ended March 31, 2011 compared to a net loss of $1.0 million for the three months ended March 31, 2010.  The improvement is result of the positive impact on leverage from higher revenue (discussed above).

The Company reported diluted loss per share of ($0.04) for the three months ended March 31, 2011 versus diluted loss per share of ($0.07) for the three months ended March 31, 2010.  The improvement in diluted earnings per share is a result of the positive impact on leverage from higher revenue (discussed above).


NINE MONTHS ENDED MARCH 31, 2011 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2010

Total revenues for the nine months ended March 31, 2011 of $14.4 million decreased by $20.6 million, or 59.0%, over the total revenues for the nine months ended March 31, 2010 of $35.0 million. Billings by market are as follows (in thousands):

   
Nine-Months Ended March 31,
 
   
(Unaudited)
 
   
2011
   
2010
   
Variance
 
                   
BILLINGS BY MARKET:
                 
Home Health Care
  $ 5,270     $ 4,789     $ 481  
Retail
    3,473       3,225       248  
U.S. Government Contract
    1,367       22,820       (21,453 )
Core Government
    516       406       110  
Professional
    1,430       1,169       261  
Assisted Living / Hospitality
    946       759       187  
Pharmaceutical
    249       642       (393 )
Other
    990       984       6  
Subtotal
    14,241       34,794       (20,553 )
GAAP Adjustment *
    121       210       (89 )
Revenue Reported
  $ 14,362     $ 35,004     $ (20,642 )
 
*Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue.  Customer billings include all invoiced amounts associated with products shipped during the period reported.  GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction.  The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.  See Note 3 “Revenue Recognition” in “Notes to Consolidated Financial Statements”.

This Year-to-Date Report on Form 10-Q contains certain financial information not derived in accordance with GAAP, including customer billings information.  The Company believes this information is useful to investors and other interested parties as customer billings represents all invoiced amounts associated with products shipped during the period reported.  Such information should not be considered as a substitute for any measures derived in accordance with GAAP, and may not be comparable to other similarly titled measures of other companies.  Reconciliation of this information to the most comparable GAAP measures is included above.

The decrease in revenues is primarily attributable to decreased billings in the U.S. Government Contract ($21.5 million) and Pharmaceutical ($0.4 million) markets.  These decreases in billings were partially offset by increased billings in the Home Health Care ($0.5 million), Professional ($0.3 million), Retail ($0.3 million), Assisted Living / Hospitality ($0.2 million), and Core Government ($0.1 million) markets. U.S. Government Contract billings are associated with the Company’s contract with a major U.S. government agency announced in February 2009. The current year billings were for maintenance and the prior year billings include (i) $22.4 million recognized in the first half of fiscal year 2010 for the sale of the Company’s Sharps MWMS to this major U.S. government agency and (ii) $0.4 million recognized in the third quarter of fiscal year 2010 attributable to the transition from the product build out to the maintenance phase of the Company’s contract with the U.S. government agency. This resulted in a decrease in billings under this contract of $21.5 million. The decrease in the Pharmaceutical market billings is due to the timing of customer orders and the discontinuation of one of the Company’s six patient support programs. The increase in billings in the Home Health Care market is a result of increased sales to home healthcare related distributors addressing the growing trend of patient volumes in the home health care industry. The increase in the Professional market was a direct result of the Company’s targeted telemarketing activities to educate doctors, dentists and veterinarians on the significant cost advantage and the convenience of the Sharps ® Recovery System™ over the traditional pick-up service. The increase in the Retail market billings is due to the initial orders of the Company’s TakeAway™ Environmental Return System™ envelope solution by two large retail pharmacy chains and several food and drug chains to address growing concerns regarding the hazards of unused medications in the home and environment. The increase in the Assisted Living/Hospitality market was primarily due to increased sales to existing customers as they realize growth from the aging patient population using their services as well as an increase in our assisted living facility customer base.


Cost of revenues for the nine months ended March 31, 2011 of $9.9 million was 69.0% of revenues.  Cost of revenues for the nine months ended March 31, 2010 of $12.6 million was 35.9% of revenue.  The lower gross margin for the nine months ended March 31, 2011 of 31.0% (versus 64.1% for the nine months ended March 31, 2010) was a result of lower volume. The Company, which is largely leveraged on volume, made investments in its infrastructure during the first half of calendar year 2010 in order to provide for the capacity to take on large increases in volume. As a result, the combination of lower volume and greater capacity creates negative leverage and adversely impacts gross margin.

Selling, general and administrative (“SG&A”) expenses for the nine months ended March 31, 2011 of $7.1 million, increased by $1.0 million, from SG&A expenses of $6.1 million for the nine months ended March 31, 2010.  The increase in SG&A is primarily due to higher (i) professional expenses of $546 thousand (primarily due to regulatory and consulting related fees, legal fees, audit and related fees, and other sales-related consulting fees), (ii) compensation and benefit expense including payroll tax of $406 thousand (primarily due to increased number of employees year-over-year headcount of 7 which are focused on sales and marketing-related activities) and (iii) research and development expenses of $78 thousand.

During the first quarter of fiscal year 2011, the Company recorded a special charge of $570 thousand, or $0.02 per diluted loss per share, which represents expenses incurred with the retirement of the Company’s former Chief Executive Officer, Dr. Burton Kunik. The special charge consists of (i) severance-related items totaling $491 thousand, (ii) non-cash stock-based compensation expense of $73 (resulting from accelerated vesting of stock option awards),  and (iii) legal fees related to the separation agreement of $6 thousand. The Company paid Dr. Kunik $68 thousand on September 30, 2010 and paid Dr. Kunik approximately $409 thousand in April 2011 related to the expenses noted above.

The Company generated an operating loss of $3.5 million for the nine months ended March 31, 2011 compared to operating income of $16.0 million for the nine months ended March 31, 2010.  The operating margin was (24.6%) for the nine months ended March 31, 2011 compared to 45.7% for the nine months ended March 31, 2010. The decrease in operating income and operating margin is a result of the above mentioned decrease in revenue and operating leverage inherent in the Company’s business model.

The Company generated a loss before tax of $3.5 million for the nine months ended March 31, 2011 versus income before tax of $16.0 million for the nine months ended March 31, 2010.  The decrease in income before tax is a result of lower operating income (discussed above).

The Company’s effective tax rate for the nine months ended March 31, 2011 was 35.3% compared to 34.6% for the nine months ended March 31, 2010. The Company uses estimates in providing for income taxes on a year to date basis and those estimates may change in subsequent interim periods.

The Company generated a net loss of $2.3 million for the nine months ended March 31, 2011 compared to net income of $10.5 million for the nine months ended March 31, 2010.  The decrease in net income is a result of lower operating income (discussed above).

The Company reported diluted loss per share of ($0.15) for the nine months ended March 31, 2011 versus diluted earnings per share of $0.70 for the nine months ended March 31, 2010.  The decrease in diluted earnings per share is a result of a lower net income (discussed above).

PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets served as communities, consumers, government and health care and commercial organizations become more aware of the need for the proper treatment of medical sharps waste and unused dispensed medications.  The Centers for Disease Control (the “CDC”) and the EPA estimate that there are over three billion used syringes disposed of annually outside of the hospital setting in the United States. The Company estimates that it would require 30 to 50 million Sharps ® Recovery System™ (formerly Sharps Disposal by Mail System ® ) products to properly dispose of all such syringes, which would equate to a market opportunity of $1 billion.  There are an estimated 800,000 doctors, dentists, veterinarians, clinics, tattoo parlors and other businesses in the country that generate smaller quantities of medical waste, including used syringes.  These offices and facilities, which must demonstrate proper management of their medical waste, comprise a market opportunity of approximately $600 million, based on estimates of using our solution offerings rather than the traditional pick-up service in what we characterize as a regulated market. Additionally, an estimated 40% of the four billion dispensed medication prescriptions go unused every year in the United States generating an estimated 200 million pounds of unused medication waste. The Company estimated the market opportunity for the proper recovery and management of the unused medications to be at least $1 billion per year.
 
The Company continues to develop new products and services including the Sharps ® MWMS™, the TakeAway™ line of products for unused medications (including the TakeAway™ Environmental Return System™), the 18 and 28 gallon Medical Professional Recovery System, the Sharps® Recovery System™ (formerly Sharps ® Disposal by Mail System ® ) and the new TakeAway™ Recovery and Reporting System which offers the collection, storage, audit, witnessed treatment and documentation of unused medications such as flu vaccine, Tamiflu, and Relenza. The Company continues to develop products and services designed to facilitate the proper and cost effective solutions for management of medical waste and unused dispensed medication generated outside of the hospital and large health care facility setting. The Company believes its future growth will be driven by, among other items, (i) the convergence of issues regarding the environment, the cost of healthcare and changes in our healthcare delivery system and cost-savings initiatives which influence the decision making process of our customers, (ii) the effects of the Company’s extensive multi-level marketing and awareness efforts and (iii) the Company’s leadership position in the development and sales of products and services designed for the proper and cost effective solutions for management of medical waste and unused dispensed medications  generated outside the hospital and large health care facility setting.

 
The Sharps ® MWMS™, a Medical Waste Management System, is a comprehensive medical waste  and dispensed medication solution which includes an array of products and services necessary to effectively collect, store and treat medical waste and unused dispensed medication outside of the hospital or large health care facility setting. Sharps ® MWMS™, which is designed for rapid deployment, features the Sharps ® Recovery System™ (formerly known as the Sharps ® Disposal By Mail System ® )  and TakeAway™ Environmental Return System™ products (the “Products”) combined with warehousing, inventory management, training, data and other services (the “Services”) necessary to provide a comprehensive solution. The Sharps ® MWMS™ is designed to be an integral part of governmental and commercial emergency preparedness programs. The Company recognizes revenue for the Product portion of the contract in accordance with the revenue recognition policy for the Sharps ® Recovery System™ (formerly Sharps ® Disposal By Mail System ® ) products. The Services portion of the contract, described above, is recognized as revenue as services are performed.

The Company announced a $40 million contract (the “U.S. Government Contract”) award (in February 2009) to provide its Sharps®MWMS™ to a major U.S. government agency. The total contract is expected to be executed over a five year period (one year plus four option years). On February 1, 2009, the Company received a purchase order for $28.5 million ($6.0 million of which was recognized in fiscal year 2009, $22.5 million was recognized in the first half of fiscal year 2010). In January 2010, Sharps was awarded the first option year (ending January 31, 2011) valued at approximately $1.6 million and was recognized from February 1, 2010 through January 31, 2011. There was approximately $1.6 million in revenue in calendar year 2010 for the maintenance component of the contract including the $0.8 million in the second half of fiscal year 2010, $0.8 million recognized in the first seven months of fiscal year 2011. In January 2011, Sharps was awarded the second option year (ending January 31, 2012) valued at approximately $3.0 million and is to be recognized from February 1, 2011 through January 31, 2012. There is expected to be approximately $3.0 million in revenue in calendar year 2011 for the maintenance component of the contract including $0.6 million in the third quarter of fiscal year 2011. The remaining two option years are expected to be approximately $3.0 million per contract year. Although, the Company believes the amounts above to be reasonable based upon the underlying contract and its current project plan, it makes no assurances regarding the actual recognition of revenue by fiscal year, which could vary significantly from that noted above.

In January 2010, the Company announced a pilot program with the United States Department of Veterans Affairs (“VA”). The program was launched within the VA Capitol Health Care Network (“Veterans Integrated Service Network 5” or “VISN 5”), which currently provides quality health care for eligible veterans in Maryland and portions of Virginia, West Virginia, and Pennsylvania, as well as the District of Columbia.  The pilot allows each of the medical centers within the VISN 5 region, both inpatient and outpatient, to provide the Sharps ® Recovery System™ (formerly known as the Sharps ® Disposal By Mail System ® ) and the TakeAway™ Environmental Return System™ solutions to their patients.  Since its original launch, the pilot program has now expanded to include eight VISN’s (encompassing twenty-two states plus the District of Columbia). There are a total of twenty-three VISN’s in the VA System. The VISN network is part of the Veterans Health Administration which encompasses the largest integrated health care system in the United States, consisting of 153 medical centers, in addition to numerous community based outpatient clinics, community living centers and Vet Centers. Together these health care facilities provide comprehensive care to over 5.5 million Veterans each year.

The Company believes the pace of regulation of sharps and unused dispensed medications disposal is gaining momentum at both the state and federal level. In December 2004, the U. S. Environmental Protection Agency (“EPA”) issued its new guidelines for the proper disposal of medical sharps, revising the previous guidance that advised patients to dispose of used syringes in the trash (see http://www.epa.gov/wastes/nonhaz/industrial/medical/med-govt.pdf ).  Additionally, in July 2006 both the states of California and Massachusetts passed legislation designed to mandate appropriate disposal of sharps waste necessary to protect the general public and workers from potential exposure to contagious diseases and health and safety risks. In August 2008, the U.S. House of Representatives and U.S. Senate introduced bills 3251 and 1909, respectively, if enacted, which would provide for Medicare reimbursement, under part D, for the safe and effective disposal of used needles and syringes.  Currently, 9 states (covering 30% of the U.S. population) restrict or have introduced legislation to restrict the disposal of used sharps in household trash and 22 states (covering 65% of the U.S. population) have also enacted or introduced legislation to regulate the disposal of pharmaceuticals to reduce pollution of the environment.  As state and federal enforcement of these statutes increases, more companies will turn to solutions such as ours to help manage their medical waste and regulatory compliance. The Company believes it is well positioned to benefit given our strict adherence to established standards and extensive documentation and records.


LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Cash and cash equivalents decreased by $1.2 million to $16.8 million at March 31, 2011 from $18.1 million at June 30, 2010. The decrease in cash and cash equivalents is primarily due to capital expenditures and additions to intangible assets of $0.7 million. The Company received a federal income tax refund of $2.7 million in April 2011.

Inventory increased by $0.3 million to $2.0 million at March 31, 2011 from $1.7 million at June 30, 2010.  The increase in inventory is attributable to new product lines and timing of shipments of the Pitch-It IV™ Pole Inventory.

Prepaid and other assets increased by $0.4 million to $3.8 million at March 31, 2011 from $3.4 million at June 30, 2010. The increase is partially attributable to the changes in the amount of the estimate related to the 2010 income tax return as well as the 2011 taxable loss of $2.1 million offset by a federal income tax refund of $2.0 million received in July 2010. The Company received a federal income tax refund of $2.7 million in April 2011.

Property, plant and equipment, net decreased by $172 thousand to $5.4 million at March 31, 2011 from $5.6 million at June 30, 2010.  The decrease in property and equipment is related to depreciation expense of $728 thousand partially offset by capital expenditures of $556 thousand. The capital expenditures are attributable primarily to the purchase of, (i) computer equipment, new website project and custom software programming of $210 thousand, (ii) manufacturing and assembly equipment including molds, dies and printing plates of $129 thousand primarily for new product development, (iii) treatment facility improvement of $80 thousand including a new boiler for the incinerator, (iv) general office improvements for the completion of the recently expanded corporate office of $62 thousand, (v) improvements on generator and circuits of $52 thousand and (vi) phone system expansion of $23 thousand.

Stockholders’ equity decreased by $0.6 million to $26.3 million at March 31, 2011 from $26.9 million at June 30, 2010.  This decrease is primarily attributable to (i) a net loss for the nine months ended March 31, 2011 of $2.3 million. The impact was partially offset by (i) the effect on equity (credit) of non-cash stock based award expense of $0.7 million  and (ii) the effect of excess tax benefits of stock-based activity of $1.0 million.

Off -Balance Sheet Arrangements
 
The Company entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. The Company’s most significant off-balance sheet transactions include commitments associated with non-cancelable operating leases. The Company has other off-balance sheet obligations involving letters of credit.
 
The Company entered into non-cancelable operating leases for certain of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. At the end of the lease, the Company has no further obligation to the lessor. If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease.
 
Credit Facility

On July 15, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association. The Credit Agreement replaces the Prior Credit Agreement executed on March 9, 2010 with JPMorgan Chase Bank, N.A. The Credit Agreement provides for a two-year, $5.0 million line of credit facility, the proceeds of which may be utilized for: (i) working capital, (ii) capital expenditures, (iii) letters of credit (up to $500,000), (iv) acquisitions (up to $1,000,000) and (v) general corporate purposes. As of March 31, 2011, the Company had no outstanding borrowings, $106 thousand in letters of credit outstanding, and $4.9 million of credit available.

Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at either (i) a fluctuating rate per annum equal to LIBOR plus a margin of 250 basis points or (ii) at the Company’s option, a fixed rate for a 30, 60, or 90 day period set at the option date’s LIBOR plus a margin of 250 basis points. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on July 15, 2012, the maturity date of the Credit Agreement. The Company paid a one-time non-refundable commitment fee of $10,000 applicable to the entire two year term of the Credit Agreement. The Company will pay a fee of 0.2% per annum on the unused amount of the line of credit. The Company estimates that the interest rate applicable to the borrowings under the Credit Agreement would be approximately 2.8% as of March 31, 2011.

The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a minimum level of tangible net worth of $21 million and not exceed a ratio of liabilities to tangible net worth of 1.0 to 1.0. As of March 31, 2011, the Company is in compliance with all financial covenants. The Credit Agreement also contains customary events of default. Upon the occurrence of an event of default that remains uncured after any applicable cure period, the lenders’ commitment to make further loans may terminate and the Company may be required to make immediate repayment of all indebtedness to the lenders.


Management believes that the Company’s current cash resources (cash on hand and cash generated from operations) along with its $5.0 million line of credit with Wells Fargo Bank will be sufficient to fund operations for the twelve months  ending  March 31, 2012.  The Company received a federal income tax refund of $2.7 million in April 2011.

CRITICAL ACCOUNTING ESTIMATES

The Company recognizes revenue in accordance with guidance on revenue recognition of multiple-deliverable revenue arrangements. On July 1, 2010, the Company adopted ASU No. 2009-13 which further clarified guidance on revenue recognition for multiple-deliverable revenue arrangements, changing the way the Company allocates arrangement consideration to the separate units of accounting.  Under this guidance, certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps® Recovery System™ (formerly the Sharps ® Disposal by Mail Systems ® ) and various TakeAway™ Environmental Return Systems referred to as “Mailbacks” and Sharps Pump 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.  

Prior to July 1, 2010, the individual fair value of the transportation and treatment services were determined by the sales price of the service offered by third parties, with the fair value of the compliance and container being the residual value.  Beginning July 1, 2010, under 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.  Because an estimated selling price must be set for each unit, the residual method used previously by the Company to allocate consideration to the compliance and container system is no longer allowed.  The selling price for the transportation revenue and the treatment revenue, which utilizes third party evidence, did not change from the prior method.  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 facility.  The compliance and container system is mailed or delivered by alternative logistics provider to the Company’s facility.  Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been prepared 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 container systems sold may not be returned.  Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.

The Company has calculated the change in revenue assigned to each of the units of accounting under the relative selling price methodology as compared to using the residual allocation method and determined that the change is not material.  The Company has determined that the implementation of ASU No. 2009-13 did not have a material effect on the consolidated financial statements when compared to its previous revenue recognition methodology.  

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the FASB issued guidance expanding disclosure requirements related to receivables. The guidance was issued to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The guidance is for receivables, off-balance sheet credit exposures and foreclosed and repossessed assets. The Company’s summary of significant accounting policies shall now include: (i) basis for accounting for loans, trade receivables, and lease financing (including those classified as held for sale), (ii) method used in determining the lower of cost or fair value of nonmortgage loans held for sale, (iii) classification and method of accounting for interest-only strips, loans and other receivables and (iv) method for recognizing interest income on loan and trade receivables.

In addition, the allowance for credit losses, the allowance for doubtful accounts, and as applicable any unearned income, any unamortized premiums and discounts, and any net unamortized deferred fees and costs, shall be disclosed in the financial statements. The Company adopted this guidance, as required for both interim and annual reporting periods, effective December 15, 2010. The adoption of this guidance does not impact the Company’s consolidated results of operations or financial position. The Company has included its Accounts Receivable policy in Note 3 – Significant Accounting Policies.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have exposure to significant financial market risk including commodity price risk, foreign currency exchange risk or interest rate risk. Management does not use derivative instruments. The Company has limited exposure to changes in interest rates due to its lack of indebtedness.  The Company maintains a credit agreement under which we may borrow funds in the future. Currently, the Company does not foresee any borrowing needs.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures”, as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including, the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2011, the Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”), pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based upon this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of March 31, 2011.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2011, there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

CEO and CFO Certifications

Appearing immediately following the Signatures section of this report are certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this Quarterly Report on Form 10-Q, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certification and this information should be read in conjunction  with the Section 302 Certifications for a more complete understanding of the topics presented.


PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is involved in legal proceedings and litigation in the ordinary course of business.  In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position or consolidated results of operations.

ITEM 1A. RISK FACTORS

Refer to Item 1A. Risk Factors in the Company’s annual report on Form 10-K for the year ended June 30, 2010 for the Company’s risk factors.  During the quarter ended March 31, 2011, there have been no changes to the Company’s risk factors.

ITEM 4. [REMOVED and RESERVED]

ITEM 6. EXHIBITS

(a)
Exhibits:
   
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith)
   
31.2   
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act (filed herewith)
   
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)
   
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)
 
ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 
SIGN ATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
REGISTRANT:
   
 
SHARPS COMPLIANCE CORP.
   
Dated: May 5, 2011
By: /s/ DAVID P. TUSA
 
David P. Tusa
 
Chief Executive Officer and President
 
(Principal Executive Officer)

Dated: May 5, 2011
By: /s/ DIANA P. DIAZ
 
Diana P. Diaz
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
22


Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT

I, David P. Tusa, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Sharps Compliance Corp.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 5, 2011
/s/David P. Tusa
 
Chief Executive Officer and President
 
(Principal Executive Officer)
 
 


Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT

I, Diana P. Diaz, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Sharps Compliance Corp.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 5, 2011
/s/Diana P. Diaz
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 


Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the quarterly report of Sharps Compliance Corp. (the “Company”) on Form 10-Q for the three and nine months ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof, I, David P. Tusa, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

 
(1)
The Form 10-Q report for the three and nine months ended March 31, 2011, filed with the Securities and Exchange Commission on May 5, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Form 10-Q report for the three and nine months ended March 31, 2011 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: May 5, 2011
/s/David P. Tusa
 
Chief Executive Officer and President
 
 


Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
IN ACCORDANCE WITH SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the quarterly report of Sharps Compliance Corp. (the “Company”) on Form 10-Q for the three and nine months ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof, I, Diana P. Diaz, Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

 
(1)
The Form 10-Q report for the three and nine months ended March 31, 2011, filed with the Securities and Exchange Commission on May 5, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Form 10-Q report for the three and nine months ended March 31, 2011 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: May 5, 2011
/s/Diana P. Diaz
 
Vice President and Chief Financial Officer