Sharps Compliance Corporation
SHARPS COMPLIANCE CORP (Form: 10-Q, Received: 05/10/2010 13:00:47)
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, 2010

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 (I.R.S. Employer Identification No.)
incorporation or organization)  
   
9220 Kirby Drive, Suite 500, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
 
(713) 432-0300
(Issuer’s telephone number)
 
        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 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes  No 
 
  Indicate by check mark whether the registrant is a large accelerated filer, an 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 Exchange Act.
 
Large Accelerated
Filer  o
 
Accelerated Filer  o
 
Non-accelerated Filer  o
 (Do not check if a
smaller reporting
company)
 
Smaller reporting
company  ý

        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  ý

        As of May 6, 2010, there were 14,612,654 outstanding shares of the Registrant's common stock, par value $0.01 per share.

 
 

 

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
 
INDEX
        
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2

 
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

   
March 31,
   
June 30,
 
   
2010
   
2009
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS
           
  Cash and cash equivalents
  $ 19,822     $ 4,792  
  Accounts receivable, net of allowance for doubtful accounts of $19 and
         
       $17, respectively
    1,580       1,606  
  Inventory
    1,834       2,283  
  Prepaid and other current assets
    2,563       776  
  Deferred income tax assets
    55       17  
    TOTAL CURRENT ASSETS
    25,854       9,474  
                 
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,437 and
         
       $997, respectively
    4,615       3,445  
                 
DEFERRED INCOME TAX ASSETS, non-current
    822       2,121  
                 
INTANGIBLE ASSETS, net of accumulated amortization of $189 and
               
      $168, respectively
    175       148  
                 
TOTAL ASSETS
  $ 31,466     $ 15,188  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
  Accounts payable
  $ 1,100     $ 2,499  
  Accrued liabilities
    898       1,188  
  Deferred revenue
    1,169       1,221  
    TOTAL CURRENT LIABILITIES
    3,167       4,908  
                 
LONG-TERM DEFERRED REVENUE
    539       625  
                 
RENT ABATEMENT
    375       85  
                 
    TOTAL LIABILITIES
    4,081       5,618  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY
               
  Common stock, $0.01 par value per share; 20,000 shares authorized;
               
      14,613 and 13,258 shares issued and outstanding, respectively
    146       133  
  Additional paid-in capital
    19,047       11,706  
  Retained earnings (accumulated deficit)
    8,192       (2,269 )
    TOTAL STOCKHOLDERS' EQUITY
    27,385       9,570  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 31,466     $ 15,188  


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

 

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
 
   
Three Months
 
   
Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
             
REVENUES
  $ 3,639     $ 5,971  
                 
COSTS AND EXPENSES
               
  Cost of revenues
    2,756       2,436  
  Selling, general and administrative
    2,195       1,442  
  Depreciation and amortization
    127       108  
    TOTAL COSTS AND EXPENSES
    5,078       3,986  
                 
OPERATING INCOME (LOSS)
    (1,439 )     1,985  
                 
OTHER INCOME
               
  Interest income
    12       2  
  Other income
    -       (3 )
    TOTAL OTHER INCOME
    12       (1 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (1,427 )     1,984  
                 
INCOME TAX EXPENSE  (BENEFIT)
               
  Current
    (445 )     38  
  Deferred
    (7 )     616  
    TOTAL INCOME TAX EXPENSE (BENEFIT)
    (452 )     654  
                 
                 
NET INCOME (LOSS)
  $ (975 )   $ 1,330  
                 
NET INCOME (LOSS) PER COMMON SHARE
               
    Basic
  $ (0.07 )   $ 0.10  
                 
    Diluted
  $ (0.07 )   $ 0.09  
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
               
    INCOME (LOSS) PER COMMON SHARE:
               
                 
    Basic
    14,585       12,906  
    Diluted
    14,585       14,084  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per-share data)
 
   
Nine Months
 
   
Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
             
REVENUES
  $ 35,004     $ 13,610  
                 
COSTS AND EXPENSES
               
  Cost of revenues
    12,572       6,938  
  Selling, general and administrative
    6,115       4,043  
  Depreciation and amortization
    335       267  
    TOTAL COSTS AND EXPENSES
    19,022       11,248  
                 
OPERATING INCOME
    15,982       2,362  
                 
OTHER INCOME
               
  Interest income
    25       26  
  Other income
    -       6  
    TOTAL OTHER INCOME
    25       32  
                 
INCOME BEFORE INCOME TAXES
    16,007       2,394  
                 
INCOME TAX EXPENSE (BENEFIT)
               
  Current
    4,286       63  
  Deferred
    1,260       (1,190 )
    TOTAL INCOME TAX EXPENSE (BENEFIT)
    5,546       (1,127 )
                 
                 
NET INCOME
  $ 10,461     $ 3,521  
                 
NET INCOME PER COMMON SHARE
               
    Basic
  $ 0.75     $ 0.27  
                 
    Diluted
  $ 0.70     $ 0.25  
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
               
    INCOME PER COMMON SHARE:
               
                 
    Basic
    13,988       12,802  
    Diluted
    14,872       13,874  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

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

   
Nine Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 10,461     $ 3,521  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
    558       268  
Stock based compensation expense
    732       275  
Excess tax benefits from stock-based award activity
    (917 )     (21 )
Deferred tax expense (benefit)
    1,260       (1,190 )
Changes in operating assets and liabilities:
               
Decrease in restricted cash
    -       10  
Decrease (increase) in accounts receivable
    26       (2,942 )
Decrease (increase) in inventory
    449       (557 )
Increase in prepaid and other current assets
    (1,996 )     (288 )
(Decrease) increase in accounts payable and accrued liabilities
    (272 )     582  
(Decrease) increase in deferred revenue
    (138 )     106  
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    10,163       (236 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (1,707 )     (1,478 )
Additions to intangible assets
    (48 )     (42 )
NET CASH USED IN INVESTING ACTIVITIES
    (1,755 )     (1,520 )
.                
CASH FLOWS FROM FINANCING ACTIVITIES
               
Excess tax benefits from stock-based award activity
    917       21  
Proceeds from stock offering, net of offering costs
    4,832       -  
Proceeds from exercise of stock options
    873       289  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    6,622       310  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    15,030       (1,446 )
                 
CASH AND CASH EQUIVALENTS, beginning of period
    4,792       2,035  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 19,822     $ 589  
                 
                 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
               
Income taxes paid
  $ 5,560     $ -  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

 
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” 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, 2010 and the results of its operations and cash flows for the three and nine months ended March 31, 2010 and 2009.  The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2010.  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, 2009.

NOTE 3 – SUBSEQUENT EVENTS

The Company evaluates events and transactions occurring after the balance sheet date and before the issuance of its financial statements. The Company evaluated such events and transactions through the date of issuance of the consolidated financial statements.

On April 23, 2010, the Company received notice that the Arbitration Panel hearing the Ronald E. Pierce employment-related matter (“Panel”) ruled in favor of the Company. See ITEM 1 LEGAL PROCEEDINGS for a further description of the employment related matter. The Panel agreed with the Company’s position that notice of its intent to non-renew Mr. Pierce’s employment agreement was timely, and that in accordance with Mr. Pierce’s employment agreement, the Company was entitled to provide notice thirty (30) days prior of its intent to terminate the agreement, and that no severance was due to Mr. Pierce.  The decision by the Panel is considered final. The Company will immediately take all steps available under the law, including litigation against Mr. Pierce, to pursue the recovery of its legal fees related to this matter, which for the period beginning July 2008, to date, are approximately $170,000.

NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company complies with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC.  Under SAB No. 104, 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®), referred to as “Mailbacks” and  Sharps Pump Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate elements as follows: (1) the sale of the container system, (2) the transportation of the container system and (3) the treatment of the container system.  The individual fair value of the transportation and treatment services are determined by the sales price of the service offered by third parties, with the fair value of the container being the residual value.  Revenue for the sale of the container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership.  Transportation revenue on Mailbacks is recognized when the customer returns the mailback container system and the container has been received at the Company’s treatment facility.  The Mailback container system is mailed to the treatment facility using the United States Postal Service “USPS” and United Parcel Service “UPS”.  Treatment revenue is recognized upon the destruction and certification of destruction 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 container, the Mailback 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.

 
7

 
NOTE 5 – RECENTLY ISSUED ACCOUNTING STANDARDS

On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards Codification™ “Codification” as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Financial Statements.

In October 2009, the FASB Emerging Issue Task Force issued new accounting guidance related to multiple-deliverable revenue arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services “deliverables” separately rather than as a combined unit. The amendment affects accounting and reporting for all vendors that enter into multiple-deliverable arrangements. The standard provides amendments to the criteria for separating consideration in multiple-deliverable arrangements and will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The amendments in this standard will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing GAAP.  The amendments in this standard significantly expand the disclosures related to multiple-deliverable revenue arrangements.  The amendments in this standard will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The Company will be required to adopt this standard in the first quarter of fiscal year 2011.  Management is currently evaluating the requirements of the standard and whether it will have a material impact on its consolidated financial position and results of operations.

In February 2010, the FASB issued an amendment to guidance related to subsequent events, which reiterates that an SEC filer is required to evaluate subsequent through the date the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The amended guidance was effective upon issuance. The Company adopted this guidance for the third quarter of fiscal year 2010 and has reflected such  subsequent event disclosure in NOTE 3 above.

NOTE 6 - INCOME TAXES

The Company’s effective tax rate for the nine months ended March 31, 2010 was 34.7%.  During the quarter ended December 31, 2008, the Company evaluated the valuation allowance on the deferred tax asset balances and reduced it to zero resulting in a credit of $1.8 million. In addition to the above, the Company recorded a current income tax provision relating to AMT and state income taxes of $6 thousand for the quarter ended December 31, 2008.

Prepaid and other current assets at March 31, 2010 included a current income tax prepayment (federal) of $2.2 million.  The Company plans to file for an income tax refund during the first quarter of fiscal year 2011. Accrued liabilities at March 31, 2010 include a current income taxes payable (state) of $127 thousand which is expected to be paid in the fourth quarter of fiscal year 2010.

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT

On March 10, 2010, the Company entered into an Amended Credit Agreement with JPMorgan Chase Bank, N.A. (“Credit Agreement”) which provides for a $2.5 million line of credit facility (the “Facility”), the proceeds of which may be utilized for, (i) working capital, (ii) letters of credit (up to $200,000), (iii) acquisitions (up to $500,000) and (iv) general corporate purposes. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets. Borrowings bear interest at a fluctuating rate per annum equal to either, (i) the prime rate (interest per annum announced from time to time by JP Morgan Chase Bank, N.A.) or (ii) LIBOR plus a margin of 2.75%. Any outstanding revolving loans, and accrued and unpaid interest, will be due and payable on March 31, 2012, the maturity date of the Facility. The aggregate principal amount of advances outstanding at any time under the Facility shall not exceed the Borrowing Base which is equal to, (i) 80% of Eligible Accounts Receivable (as defined in the Credit Agreement) plus (ii) 50% of Eligible Inventory (as defined in the Credit Agreement). The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a specified tangible net worth and capital expenditure limits if the Company does not maintain a cash balance of at least $5,000,000. 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 lender’s commitment to make further loans may terminate and the Borrower may be required to make immediate repayment of all indebtedness to the lender. The lender would also be entitled to pursue other remedies against the Company and the collateral. As of March 31, 2010, the borrowing base has been reduced by approximately $105 thousand in letters of credit outstanding drawn against the line of credit.   As of

 
8

 
March 31, 2010 and June 30, 2009, no amounts related to the Credit Agreement were outstanding (other than the letters of credit noted above).  Under the Credit Agreement, and based upon the Company’s March 31, 2010 level of accounts receivable and inventory, the amount available to borrow at March 31, 2010 was $1.4 million.
 
NOTE 8 – STOCK-BASED COMPENSATION
 
Share-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).  Share-based compensation expense, included in selling, general and administrative expense in the Company’s consolidated statements of operations for the three months ended March 31, 2010 and 2009, was $231 thousand and $149 thousand, respectively.  The expense for the nine months ended March 31, 2010 and 2009 was $732 thousand and $275 thousand, respectively. 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 activities in the statement of cash flows.  The Company included excess tax benefits in its cash flows from financing activities for the three months and nine months ended March 31, 2010 of $181 thousand and $917 thousand, respectively.  The excess tax benefits in the Company’s cash flows from financing activities for the three and nine months ended March 31, 2009 was $8 thousand and $21 thousand, respectively.

NOTE 9 - 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 (loss) by the weighted average number of common shares outstanding during the period. Diluted per share is computed by dividing net income (loss) 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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net income (loss), as reported
  $ (975 )   $ 1,330     $ 10,461     $ 3,521  
                                 
Weighted average common shares outstanding
    14,585       12,906       13,988       12,802  
Effect of dilutive stock options
    -       1,178       884       1,072  
Weighted average diluted common shares outstanding
    14,585       14,084       14,872       13,874  
                                 
Net income (loss) per common share
                               
    Basic
  $ (0.07 )   $ 0.10     $ 0.75     $ 0.27  
    Diluted
  $ (0.07 )   $ 0.09     $ 0.70     $ 0.25  
                                 
Employee stock options excluded from computation of diluted
                         
income per share amounts because their effect would
                               
be anti-dilutive
    233       10       233       10  

NOTE 10 - EQUITY TRANSACTIONS

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 share (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 offerings, facilities and infrastructure to meet the continued expected growth of the Company.

During the three months ended March 31, 2010, stock options to purchase 28,333 of common shares were exercised.  Total proceeds to the Company were approximately $46 thousand (average price of $1.61 per share).  During the three months ended March 31, 2009, stock options to purchase 80,500 common shares were exercised.  Total proceeds to the Company were approximately $74 thousand (average price of $0.91 per share).

During the nine months ended March 31, 2010, stock options to purchase 722,874 of common shares were exercised.  Total proceeds to the Company were approximately $873 thousand (average price of $1.21 per share).  During the nine months ended March 31, 2009, stock options to purchase 325,100 common shares were exercised.  Total proceeds to the Company

 
9

 
were approximately $290 thousand (average price of $0.89 per share).
 
As of March 31, 2010, there was $841 thousand of compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 1.0 years.

NOTE 11 – INVENTORIES

The components of inventories are as follows (in thousands):
 
   
March 31,
   
June 30,
 
   
2010
   
2009
 
   
(Unaudited)
       
Finished goods
  $ 1,084     $ 1,212  
Raw materials
    750       1,071  
Total
  $ 1,834     $ 2,283  

NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payables, and accrued liabilities approximate fair value due to the short term nature of these instruments.


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 comprehensive provider of cost-effective management solutions for medical waste and unused dispensed medication generated outside the hospital and large healthcare facility setting.  These solutions include Sharps Recovery System™ (formerly known as the Sharps Disposal by Mail System®), TakeAway Recovery System™, RxTakeAway Environmental Return System™, Sharps®MWMS™, Pitch-It™ IV Poles, Trip LesSystem®, Sharps Pump Return Box, Sharps Enteral Pump Return Box, Sharps Secure®, Sharps SureTemp Tote®, IsoWash® Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal System, Sharps e-Tools, Sharps Environmental Services and Sharps Consulting.  In April 2010, the Company introduced its patent-pending GREEN Waste Conversion Process™, eliminating medical waste, which it processes, going into landfills. The process transforms treated medical waste into a new product called PELLA-DRX™ a clean, raw material used in the manufacture of industrial resources such as cement. Some products and services facilitate compliance with state and federal regulations by tracking, treating and documenting the treatment of medical waste and unused dispensed medication.  Additionally, some products and services facilitate compliance with educational and training requirements that meet federal, state, and local regulatory and compliance requirements.

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, 2010 and 2009.

 
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The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations, expressed as a percentage of revenue (unaudited):
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net revenues
    100 %     100 %     100 %     100 %
Costs and expenses
                               
    Cost of revenues
    (76 %)     (41 %)     (36 %)     (51 %)
    Selling, general and administrative
    (60 %)     (24 %)     (17 %)     (30 %)
    Depreciation and amortization
    (4 %)     (2 %)     (1 %)     (2 %)
Total costs and  expenses
    (140 %)     (67 %)     (54 %)     (83 %)
    Operating income (loss)
    (40 %)     33 %     46 %     17 %
Total other income
    0 %     0 %     0 %     0 %
    Income tax expense (benefit)
    (12 %)     11 %     16 %     (9 %)
Net income (loss)
    (28 %)     22 %     30 %     26 %

THREE MONTHS ENDED MARCH 31, 2010 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2009

Total revenues for the three months ended March 31, 2010 of $3.6 million decreased by $2.3 million, or 39.0%, over the total revenues for the three months ended March 31, 2009 of $6.0 million.  Customer billings by market are as follows (in thousands):
 
   
(unaudited)
 
   
Three-Months Ended March 31,
 
   
2010
   
2009
   
Variance
 
                   
BILLINGS BY MARKET:
                 
Health Care
  $ 1,524     $ 1,824     $ (300 )
Government
    509       2,973       (2,464 )
Professional
    373       215       158  
Pharmaceutical
    332       67       265  
Hospitality
    258       276       (18 )
Retail
    257       60       197  
Other
    130       199       (69 )
Agriculture
    45       92       (47 )
Commercial
    44       92       (48 )
Subtotal
    3,472       5,798       (2,326 )
GAAP Adjustment *
    167       173       (6 )
Revenue Reported
  $ 3,639     $ 5,971     $ (2,332 )
 
 
*Represents the net impact of the revenue recognition adjustment required to arrive at reported GAAP revenue.  Customer billings include all invoiced amounts associated with products shipped 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 4 “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 decrease in revenues is primarily attributable to decreased billings in the Government ($2.5 million), Healthcare ($300 thousand), Commercial ($48 thousand), and Agriculture ($47 thousand) markets.  The decreases were partially offset by increased billings in the Pharmaceutical ($265 thousand), Retail ($197 thousand), and Professional ($158 thousand) markets. The decrease in the Government market is attributable to the transition from the product build out to the maintenance phase of

 
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the $40.0 million, five year contract awarded to Sharps in February 2009 by an agency of the U.S. Government. The decrease in the health care market reflects special distributor programs and ordering patterns by the larger home health care customers. The increase in Pharmaceutical market billings is due to the continued sale of the Company’s Sharps Recovery System™ (formerly known as the Sharps Disposal by Mail System®) solutions to pharmaceutical manufacturers for use in their patient support and compliance programs. The Retail market increase is attributable to increased purchases of the Sharps Recovery System™ (formerly known as the Sharps Disposal by Mail System®), by the growing retail clinic market. The Professional market increase is attributable to the impact of the Company’s recently launched outbound sales initiative as well as physician, dental and veterinary offices becoming aware (through the efforts of the Company) of cost-effective alternatives to the traditional medical waste pick-up service.
 
Cost of revenues for the three months ended March 31, 2010 of $2.8 million was 75.7% of revenues.  Cost of revenues for the three months ended March 31, 2009 of $2.4 million was 40.8% of revenue.  The lower gross margin percentage for the quarter ended March 31, 2010 of 24.3% (versus 59.2% for the quarter ended March 31, 2009) was a result of (i) the lower revenue (i.e. lower coverage of fixed cost components in cost of goods sold), (ii) mix of product sold, (iii)  increase in the  fixed components of cost of sales, namely the operational and treatment facility and infrastructure and related cost,  and (iv) higher operations and treatment facility personnel cost.
 
Selling, general and administrative (“S, G & A”) expenses for the three months ended March 31, 2010 of $2.2 million, increased by $753 thousand, from S, G & A expenses for the three months ended March 31, 2009.  The increase in S, G & A is primarily due to higher, (i) professional fees of $232 thousand (primarily due to contract sales personnel, patent preparation and filing expenses, legal fees related to the Ronald E. Pierce matter (See NOTE 3 of the Notes to the Condensed Consolidated Financial Statements), regulatory consulting and NASDAQ listing fees), (ii) costs related to increased sales, marketing, advertising and public relations activities of $157 thousand (including the launch of the Company’s new Waste Conversion Process), (iii) compensation and related benefit expense related to personnel additions of $200 thousand (primarily sales and marketing related positions), (iv) recruiting fees of $78 thousand, (v) non-cash stock based compensation expense of $68 thousand (primarily due to the accrued quarterly expense associated with the award of 51,500 shares of restricted stock of Company common stock to non-employee directors as the equity portion of the fiscal year 2010 Board of Director compensation (vesting over fiscal year 2010) and the award of 210,000 additional stock options, in July 2009, to employees, including officers), and (vi) computer and systems-related expenses of $49 thousand (primarily due to an increase in locations and software support).

The Company generated an operating loss of $1.4 million for the three months ended March 31, 2010 compared to operating income of $2.0 million for the three months ended March 31, 2009.  The operating margin (loss) percentage was (39.5%) for the three months ended March 31, 2010 compared to 33.2% for the three months ended March 31, 2009. The operating loss is a result of the above mentioned decrease in revenue, increase in the fixed component of cost of sales and increase in S, G & A.

The Company generated a loss before tax of $1.4 million for the three months ended March 31, 2010 compared to income before tax of $2.0 million for the three months ended March 31, 2009.  The decrease in income before tax is a result of the operating loss for the current quarter (discussed above).

The Company generated a net loss of $975 thousand for the three months ended March 31, 2010 compared to net income of $1.3 million for the three months ended March 31, 2009.  The decrease in net income is a result of the current quarter operating loss (discussed above).

The Company reported diluted loss per share of ($0.07) for the three months ended March 31, 2010 versus diluted earnings per share of $0.09 for the three months ended March 31, 2009.  The decrease in diluted earnings per share is a result of the net loss generated during the current quarter (discussed above).
 
NINE MONTHS ENDED MARCH 31, 2010 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2009

Total revenues for the nine months ended March 31, 2010 of $35.0 million increased by $21.4 million, or 157.2%, over the total revenues for the nine months ended March 31, 2009 of $13.6 million.  Customer billings by market are as follows (in thousands):
 
 
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Nine Months Ended March 31,
 
   
2010
   
2009
   
Variance
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
BILLINGS BY MARKET:
                 
Government
  $ 23,226     $ 3,093     $ 20,133  
Health Care
    4,789       5,440       (651 )
Retail
    3,225       1,356       1,869  
Professional
    1,169       776       393  
Hospitality
    759       707       52  
Pharmaceutical
    642       1,086       (444 )
Other
    561       497       64  
Agriculture
    216       359       (143 )
Commercial
    207       387       (180 )
Subtotal
    34,794       13,701       21,093  
GAAP Adjustment *
    210       (91 )     301  
Revenue Reported
  $ 35,004     $ 13,610     $ 21,394  

*Represents the net impact of the revenue recognition adjustment required to arrive at reported GAAP revenue.  Customer billings include all invoiced amounts associated with products shipped 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 4 “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 increase in revenues is primarily attributable to increased billings in the Government ($20.1 million), Retail ($1.9 million), Professional ($393 thousand), and Hospitality ($52 thousand) markets.  The increases were partially offset by decreased billings in the Healthcare ($651 thousand), and Pharmaceutical ($444 thousand) markets. The increase in the Government market is a result of $20.0 million in billings related to the sale of the Company’s Sharps®MWMS™ to an agency of the U.S. Government under the contract announced in February 2009. The customer billings in the Government market also included $142 thousand related to the support of the City of Chicago immunization program, $81 thousand related to the sales of the RxTakeAway as part of the State of Iowa funded program and $25 thousand related to the Company’s U.S. Department of Veterans Affairs Pilot Program.  The increase in the billings in the Retail market is a result of, (i) increased market and customer penetration, (ii) a strong 2009 flu shot season (i.e., purchases of the Sharps Recovery System™ (formerly known as the Sharps Disposal by Mail System®) by retail clinics and pharmacies who use the products to collect, store and properly treat syringes used to administer flu-related shots including H1N1) and (iii) increased purchases of the Sharps Recovery System™ solutions used to support community programs. The increase in the Professional market billings is due to the impact of the Company’s recently launched outbound sales initiative as well as physician, dental, and veterinary offices becoming aware (through the efforts of the Company) of cost-effective alternatives to the traditional medical waste pick-up. The decrease in the Health Care market billings is related to the ordering patterns of the larger home healthcare customers as well as additional distributor incentives designed to drive future growth in this market. The decrease in Pharmaceutical market billings is due to the variability in timing associated with the Patient Support Programs the Company provides to the drug manufacturers.

Cost of revenues for the nine months ended March 31, 2010 of $12.6 million was 35.9% of revenues.  Cost of revenues for the nine months ended March 31, 2009 of $7.0 million was 51.0% of revenue.  The higher gross margin percentage for the nine months ended March 31, 2010 of 64.1% (versus 49.0% for the nine months ended March 31, 2009) was a result of (i) the higher revenue (i.e. higher coverage of fixed cost components in cost of goods sold) and (ii) the mix of products and services sold. This was partially offset with the lower third quarter gross margin percentage in the three months ended March 31, 2010 of 24.3% which is a result of (i) mix of products and services sold, (ii) higher operations and treatment facility personnel cost, and (iii) increase in the fixed components of cost of sales, namely the operational and treatment facility and infrastructure related cost.  Prior year gross margins were also adversely impacted by an increase in operations infrastructure costs as the Company prepared for higher sales volumes including those billings related to the sale of the Company’s Sharps®MWMS™ to an agency of the U.S. Government under the contract announced in February 2009.

Selling, general and administrative (“S, G & A”) expenses for the nine months ended March 31, 2010 of $6.1 million, increased by $2.1 million, from S, G & A expenses for the nine months ended March 31, 2009.  The increase in S, G & A is

 
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primarily due to higher (i) compensation and benefit expense including payroll tax of $628 thousand (primarily due to increased number of employees (increase in year-over-year headcount of 15 of which 14 are focused on sales and marketing-related activities), (ii) non-cash, stock based compensation expense of $418 thousand (primarily due to the accrued quarterly expense associated with the award of 51,500 shares of restricted stock of Company common stock to non-employee directors as the equity portion of the fiscal year 2010 Board of Director compensation (vesting over fiscal year 2010) and the award of 410,000 additional stock options, in November 2008 and July 2009, to employees, including officers), (iii) professional fees of $384 thousand (primarily due to contract sales personnel, patent preparation and filing expenses, legal fees related to the Ronald Pierce arbitration (See NOTE 3 of Notes to the Condensed Consolidated Financial Statements), regulatory consulting, and NASDAQ listing fees), (iv) costs related to increased sales and marketing-related activities of $355 thousand primarily due to increased sales, advertising, and public relations costs (including the launch of the Company’s new Waste Conversion Process), and (v) computer and systems-related expenses of $147 thousand (primarily due to an increase in locations and software support).
 
The Company generated operating income of $16.0 million for the nine months ended March 31, 2010 compared to operating income of $2.4 million for the nine months ended March 31, 2009.  The operating margin percentage was 45.7% for the nine months ended March 31, 2010 compared to 17.4% for the nine months ended March 31, 2009. The increase 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 income before tax of $16.0 million for the nine months ended March 31, 2010 versus income before tax of $2.4 million for the nine months ended March 31, 2009.  The increase in income before tax is a result of higher operating income (discussed above).

The Company generated net income of $10.5 million for the nine months ended March 31, 2010 compared to net income of $3.5 million for the nine months ended March 31, 2009.  The increase in net income is a result of higher operating income (discussed above). The nine months ended March 31, 2009 were positively impacted by the reduction in the deferred tax valuation allowance of $1.8 million and corresponding credit to tax expense booked in December 2008 (see Note 6 of the Notes to the Condensed Consolidated Financial Statements).

The Company reported diluted earnings per share of $0.70 for the nine months ended March 31, 2010 versus diluted earnings per share of $0.25 for the nine months ended March 31, 2009.  The increase in diluted earnings per share is a result of a higher net income (discussed above). The earnings per share for the nine months ended March 31, 2010 were adversely impacted by the increase in number of shares used in the computation of 998,307 which was a result of (i) the pro-rated impact of the 577,146 shares of Company common stock issued in conjunction with the public offering (see Note 10), (ii) the pro-rated impact of stock options to purchase 832,874 of common shares (April 1, 2009 through March 31, 2010) and (iii) impact on diluted shares of the higher stock price.

PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets served as communities, consumers, government and healthcare and commercial organizations become more aware of the need for the proper disposal of medical sharps waste and unused dispensed medications. This education process was enhanced in December 2004 when 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 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. Currently, seven states ban the disposal of used syringes in the trash and five states are considering or have introduced similar legislation, while the remaining states operate under the EPA guidance noted above.   In August 2008, the U.S. House of Representatives and U.S. Senate introduced bills 3251 and 1909, respectively, which, if enacted, would provide for Medicare reimbursement, under part D, for the safe and effective disposal of used needles and syringes. In October 2009, California passed Senate Bill 486 requiring drug companies that market and sell prescribed medications that are routinely injected at home to submit plans to the California Integrated Waste Management Board on or before July 1, 2010 (and annually thereafter) describing how they support safe needle collection and disposal programs for patients using their drugs. Among the methods of disposal recommended as part of the above noted regulatory actions are mail-back programs such as those marketed by the Company.  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™ solutions (formerly known as the Sharps Disposal by Mail Systems®) to properly dispose of all such syringes, which would equate to a market opportunity of over $1 billion. Based upon the current level of sales, the Company estimates that it has penetrated approximately 1% of this $1 billion market opportunity.  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 estimates the market opportunity for the proper recovery and management of the unused medications to be at least $1 billion per year.

 
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The Company continues to develop new products and services including the Sharps® MWMS™, the RxTakeAway™ line of products (including the RxTakeAway Recovery System), the 18 and 28 gallon Medical Professional Sharps Recovery System™( formerly known as the Sharps Disposal by Mail System®) and the new TakeAway™ Recovery and Reporting System which offers the collection, storage, audit, witnessed destruction and documentation of unused medications such as HIN1 vaccine, Tamiflu and Relenza. The Company continues to develop products and services designed to facilitate the proper and cost effective treatment of medical waste and unused dispensed medication generated outside the hospital and large healthcare facility setting. The Company believes its future growth will be driven by, among other items, (i) the positive impact and awareness created by the existing and above noted regulatory actions as well as additional potential future legislation, (ii) the effects of the Company’s extensive direct marketing and public relations efforts, and (iii) the Company’s leadership position in the development and sales of products and services designed for the proper and cost-effective treatment of medical waste and unused dispensed medications generated outside the hospital and large health care facility setting.

Demand for the Company’s primary product, the Sharps Recovery System™ (formerly the Sharps Disposal by Mail System®), which facilitates the proper and cost-effective management of medical waste including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin (referred to as “sharps”), has been growing rapidly because of its cost-effective and convenient mail-back component and unique data tracking feature.  In addition, targeted opportunities continue to expand as a result of, (i) legislation mandating the proper disposal of sharps, (ii) the growing awareness of the need to properly handle sharps medical waste for safety and environmental concerns, (iii) the significant increase in self-injectable medications, and (iv) the changing paradigm in the healthcare industry.

The Company is actively marketing its Sharps®MWMS™ to federal, state and local agencies as well as to large corporations.  On February 2, 2009, the Company announced a $40 million contract award (the “U.S. Government Contract”) to provide its Sharps®MWMS™ to an agency of the United States Government. 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 which represents products and services to be provided during the first contract year of which $6.0 million was billed, in aggregate, in the quarters ended March 31, and June 30, 2009, $11.0 million in the quarter ended September 30, 2009, $11.5 million in the quarter ended December 31, 2009 and $0.4 million related to the U.S. Government Contract in the quarter ended March 31, 2010.   In January 2010, Sharps was awarded the first option year (ending January 31, 2011) valued at $1.6 million and will be realized from February 1, 2010 through January 31, 2011. The remaining three option years are expected to be approximately $3 million per year as the program moves from the production phase to the maintenance phase.  The above amounts are estimates only and are subject to change.  Although the Company believes the amounts above to be reasonable based upon 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 December 2009, Sharps Compliance was awarded a five-year Federal Supply schedule contract by the General Services Administration of the U.S. Government (GSA).  The GSA Schedule provides a streamlined vehicle for federal government agencies to purchase the Company’s products and services.  Sharps was also awarded a Distribution and Pricing Agreement (DAPA) with the Defense Supply Center of Philadelphia’s Directorate of Medical Material which provides the automated tools to promote efficient procurement of medical-related products for the Department of Defense.  The Company believes these two contracts should facilitate the sale of virtually all of the Company’s products and solutions (in addition to the Sharps®MWMS™) to the many U.S. Government agencies whom, to-date, have not purchased significant quantities of products or solutions designed to address the proper treatment of used syringes and other sharps as well as unused medications generated outside of the hospital setting utilizing the USPS or UPS.

In January 2010, the Company announced a pilot program with the United States Department of Veterans Affairs (“VA”). The program will take place 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 RxTakeAway™ solutions to their patients.  The VISN 5 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 Sharps®MWMS™, a Medical Waste Management System, is a comprehensive medical waste and unused 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 healthcare 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 RxTakeAway™ 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

 
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for the Sharps Recovery System™ (formerly known as the Sharps Disposal By Mail System®) products. The Services portion of the contract, described above, is recognized as services are performed.
 
The Company serves customers in multiple markets including, but not limited to, Health care, Government, Professional, Pharmaceutical, Industrial, Agriculture and Hospitality. As shown in the results for the fiscal year ended June 30, 2009 and the nine months ended March 31, 2010, the Company has experienced a significant increase in its overall business, primarily related to government ($40.0 million U.S. Government contract), retail (strong flu shot season) and professional (launched outbound sales initiative) markets. The $28.5 million build-out phase of the major government contract occurred throughout calendar year 2009. There will be approximately $1.6 million in revenue in calendar year 2010 for the maintenance component including the $0.4 million in the third quarter fiscal year 2010. In addition, the maintenance component of the contract includes approximately $3.0 million in years 2011, 2012, and 2013. These increases were partially offset by decreases in the health care (ordering patterns of health care customers and distributor incentives) and pharmaceutical (timing in association with Patient Support Programs) markets. In the pharmaceutical market, the sales cycle is slower than initially anticipated; however the Company is encouraged by the opportunities in this market.  The Company currently has a significant cash balance, no debt, and an undrawn $2.5 million line of credit. Under the Credit Agreement, and based upon the Company’s March 31, 2010 level of accounts receivable and inventory, the amount available to borrow at March 31, 2010 was $1.4 million.

California Senate Bill 486, which was signed into law on October 12, 2009, requires pharmaceutical manufacturers who sell or distribute medications that are routinely injected at home to submit plans to the California Integrated Waste Management Board (the “Board”) on or before July 1, 2010 describing how they support and provide safe syringe and needle collection and disposal programs for their patients.  The manufacturers are also required to post those plans on their website and the Board will post the information on its website as well in order to help educate consumers regarding safe and effective means to dispose of their used needles and syringes or injection devices.
 
Sharps believes its proven Patient Support Program (in place with pharmaceutical manufacturers since 2006) is a solution for the patients of pharmaceutical manufacturers as it facilitates the proper, convenient and cost-effective storage, collection and treatment of used syringes. The Company’s Patient Support Program offering also allows the patients of the pharmaceutical manufactures to be fully compliant with California Senate Bill 486.
 
Sharps’ Patient Support Program includes the direct fulfillment of the Sharps Recovery System™ (formerly known as the Sharps Disposal By Mail System®) to the pharmaceutical manufacturers’ self-injecting patient support program participants, who use the product as a convenient means of disposing of used syringes, educational information on the treatment process and distinctive branding for the manufacturer’s product.  The Company’s SharpsTracer™ system tracks the return of the Sharps Recovery Systems™ by the patient to the treatment facility, where the package is processed prior to destruction utilizing the Company’s proprietary and customizable system.  This data is electronically transmitted and available to the pharmaceutical manufacturer via the Company’s proprietary data warehouse which aids in monitoring drug usage and establishes a touch point for individual patient follow-up.
 
In April 2010, the Company announced its patent-pending GREEN Waste Conversion Process™, eliminating medical waste processed for its customers going into landfills. The process transforms treated medical waste into a new product called PELLA-DRX™ a clean, raw material used in the manufacture of industrial resource. The Company believes that treatment of medical waste has presented major, concerns for American society as the vast majority of medical waste is ultimately disposed in landfills, creating massive liabilities for future generations. The Sharps Waste Conversion Process™ creates a sustainable product and a much needed GREEN method to treat medical waste while creating a useable, safe, and clean raw material. PELLA-DRX™ is ideally suited for energy intensive industries like cement, lime, steel, and power plants.
 
LIQUIDITY AND CAPITAL RESOURCES

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 share (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 offerings, facilities and infrastructure to meet the continued expected growth of the Company.

Cash and cash equivalents increased by $15.0 million to $19.8 million at March 31, 2010 from $4.8 million at June 30, 2009. The increase in cash and cash equivalents is primarily a result of cash generated from operations of $10.2 million plus the net proceeds from the public offering of $4.8 million (discussed above) and exercise of stock options of $873 thousand, partially offset by capital expenditures of $1.7 million.

Inventory decreased by $449 thousand to $1.8 million at March 31, 2010 from $2.3 million at June 30, 2009.  The decrease in inventory is primarily attributable to the completion of the initial product phase of the U.S . Government contract.

Prepaid and other current assets increased by $2.0 million to $2.6 million at March 31, 2010 from $776 thousand at June 30,

 
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2009. The increase is primarily due to the prepaid income taxes (federal) of $2.2 million which represents (i) the payment, in December 2009, of federal income taxes and (ii) the impact of the third quarter loss and corresponding tax benefit generated.
 
Property and equipment, net increased by $1.2 million to $4.6 million at March 31, 2010 from $3.4 million at June 30, 2009.  The increase in property and equipment is due to capital expenditures of $1.7 million which was partially offset by depreciation expense of $537 thousand and disposal of assets of $97 thousand. The capital expenditures are attributable primarily to the purchase of, (i) warehouse/operations-related equipment of $597 thousand, (ii) leasehold improvements of $351 thousand, (iii) molds, dies and printing plates of $151 thousand, (iv), treatment facility improvements and related operations equipment of $142 thousand (v) computer equipment and custom software programming totaling $99 thousand, (vi) furniture for expanded office space of $25 thousand,  and (vii) phone system expansion of $19 thousand. In addition to the above and in conjunction with the newly introduced Waste Conversion Process, the Company incurred in the third quarter of 2010 approximately $324 thousand in capital related to equipment to support the production of PELLA-DRX™. The warehouse/operations equipment included racking and related equipment necessary to accommodate the expansion of the Company’s Texas and Atlanta operations and distribution facilities.  The leasehold expenditures were incurred to support the Company’s expansion in both its Texas and Georgia facilities. The molds, dies and printing plates were procured for development of new products and duplicate molds needed to facilitate additional production capacity in light of the Company’s growth. The treatment facility expenditures included a generator and general facility upgrades to the autoclave system.

Accounts payable decreased by $1.4 million to $1.1 million at March 31, 2010 from $2.5 million at June 30, 2009.  The decrease is a result of the timing of payments for raw materials purchased (reflecting the completion of the product portion of the U.S. Government contract) and capital expenditures related to the expansion efforts discussed in the paragraph above.

Stockholder’s equity increased by $17.8 million from $9.6 million to $27.4 million.  This increase is attributable to, (i) net income for the nine months ended March 31, 2010 of $10.5 million, (ii) the $4.8 million effect of the 577,146 shares sold in the December 2009 public offering at a price of $9.165 per share (net of underwriting commission), (iii) the effect of stock options to purchase 722,874 common stock exercised with proceeds of $873 thousand (average exercise price of $1.21), (iv) the effect on equity (credit) of non-cash stock based award expense of $732 thousand, and (v) the excess tax benefits from stock-based award activity of $917 thousand.

Management believes that the Company’s current cash resources (cash on hand and cash generated from operations) along with its $2.5 million line of credit with JPMorgan Chase Bank, N.A. will be sufficient to fund operations for the twelve months  ending March 31, 2011.  Terms of the line of credit were renewed in March 2010 and extended through March 2012 under similar or more favorable terms currently in place. Under the Credit Agreement, and based upon the Company’s March 31, 2010 level of accounts receivable and inventory, the amount available to borrow at March 31, 2010 was $1.4 million.

CRITICAL ACCOUNTING ESTIMATES

Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points and can consist of up to three separate elements as follows: (1) the sale of the container system, (2) the transportation of the container system and (3) the treatment of the container system. Since the transportation element and the treatment element are undelivered services at the point of initial sale of the container, the 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 is recognized at the point of sale.

RECENTLY ISSUED ACCOUNTING STANDARDS

On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards Codification™ “Codification” as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Financial Statements.

In October 2009, the FASB Emerging Issue Task Force issued new accounting guidance related to multiple-deliverable revenue arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services “deliverables” separately rather than as a combined unit.   The amendment affects accounting and

 
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reporting for all vendors that enter into multiple-deliverable arrangements. The standard provides amendments to the criteria for separating consideration in multiple-deliverable arrangements and will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The amendments in this standard will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing GAAP.  The amendments in this standard significantly expand the disclosures related to multiple-deliverable revenue arrangements.  The amendments in this standard will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The Company will be required to adopt this standard in the first quarter of fiscal year 2011.  Management is currently evaluating the requirements of the standard and whether it will have a material impact on its consolidated financial position and results of operations.
 
In February 2010, the FASB issued an amendment to guidance related to subsequent events, which reiterates that an SEC filer is required to evaluate subsequent through the date the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The amended guidance was effective upon issuance. The Company adopted this guidance for the third quarter of fiscal year 2010 and has reflected such a subsequent event disclosure in NOTE 3 of the condensed consolidated financial statements.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by the item.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Company’s periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including, its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2010, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.  Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report (March 31, 2010).

Changes in Internal Control over Financial Reporting

During the third quarter of the fiscal year 2010, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended, are filed as exhibits 31.1 and 31.2, respectively, to this Quarterly Report on Form 10-Q.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Ronald E. Pierce Matter
On June 14, 2004, the Company provided Mr. Ronald E. Pierce (“Mr. Pierce”), its then Chief Operating Officer, with notice of non-renewal of his employment agreement.  As such, July 14, 2004 was Mr. Pierce’s last day of employment. The Company advised Mr. Pierce that under the terms of the employment contract no further compensation (including services) was due.  On July 15, 2008, the Company received a demand for arbitration from Mr. Pierce.  The claim amount under the demand for arbitration is $300,001. The Company has also received various letters from Mr. Pierce’s attorney advising that Mr. Pierce is taking the position that the non-renewal of his employment agreement was not timely and, therefore, Mr. Pierce was terminated without cause. Additionally, Mr. Pierce claims that the Company had no right to terminate him on the

 
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anniversary date of his agreement without the obligation of paying Mr. Pierce as if he were terminated without cause.  The Company believes that notice of such non-renewal was timely, and that in accordance with Mr. Pierce’s employment agreement, the Company was entitled to provide notice thirty days prior to the anniversary of its intent to terminate the agreement, and no severance would therefore be due to Mr. Pierce.
 
On April 23, 2010, the Company received notice that the Arbitration Panel hearing the Ronald E. Pierce employment-related matter (“Panel”) ruled in favor of the Company. The Panel agreed with the Company’s position that notice of its intent to non-renew Mr. Pierce’s employment agreement was timely, and that in accordance with Mr. Pierce’s employment agreement, the Company was entitled to provide notice thirty (30) days prior of its intent to terminate the agreement, and that no severance was due to Mr. Pierce.  The decision by the Panel is considered final. The Company will immediately take all steps available under the law, including litigation against Mr. Pierce, to pursue the recovery of its legal fees related to this matter, which for the period beginning July 2008, to date, are approximately $170,000.


 
 
 
 
 

 
 
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ITEM 6. EXHIBITS

(a) 
Exhibits:
 
3.1 
Bylaws of Sharps Compliance Inc (herein referred to as the Corporation) dated May 23, 1994 (filed herewith)
 
3.2 
Bylaws of Sharps Compliance Corp (herein referred to as the Corporation) (filed herewith)
 
10.1
Second Amendment to Lease Agreement dated March 8, 2010 between Sharps Compliance, Inc. and Warehouse Associates Corporate Centre Kirby II, Ltd. (filed herewith)
 
10.2
Amendment to Credit Agreement dated March 10, 2010, by and between Sharps Compliance Inc. and JPMorgan   Chase Bank, N.A. (filed herewith)
 
10.3
Note Modification Agreement dated March 10, 2010, by and between Sharps Compliance Inc. and JPMorgan Chase Bank, N.A. (filed herewith)
 
31.1
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)
 
32.1
Certification of Chief Executive Officer in Accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)
 
32.2
Certification of Chief Financial Officer in Accordance with Section 906 of the Sarbanes-Oxley Act (filed herewith)

ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
 
 
 
 
 

 
 
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SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
  REGISTRANT:
   
  SHARPS COMPLIANCE CORP.
   
Dated: May 10, 2010
By:   /s/ Dr.  Burton J. Kunik
 
Chairman of the Board of Directors,
 
and Chief Executive Officer
   
Dated: May 10, 2010
By: /s/ David P. Tusa
 
Executive Vice President,
 
Chief Financial Officer,
 
Business Development and
 
Corporate Secretary
 
 
 
 
 
 
 21

Exhibit 3.1
 
BYLAWS

OF

SHARPS COMPLIANCE, INC.
(herein referred to as the “Corporation”)

ARTICLE I.

CAPITAL STOCK

Section 1 .   Certificates Representing Shares .  The Corporation shall deliver certificates representing shares to which shareholders are entitled in such form as shall be approved by the Board of Directors, or the Corporation may issue uncertificated shares in accordance with the requirements of the Texas Business Corporation Act.  Each certificate shall bear on its face the statement that the Corporation is organized in Texas, the name of the shareholder to whom the certificate is being issued, the name of the Corporation, the number, class and series of shares issued and the par value or a statement that the shares are without par value.  Each certificate shall also contain, on its face or back, all recitations or references required by law.  Certificates for shares of the Corporation shall be issued only when consideration for the shares has been fully paid.  Such certificates shall be signed by the President or a Vice President and the Secretary or any Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof.  Where any such certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation itself or an employee, the signature of the President and Secretary or Assistant Secretary may be facsimiles.  In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issuance.  The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued.

Section 2 .   Shareholders of Record .  The Board of Directors of the Corporation may appoint one (1) or more transfer agents or registrars of any class of stock of the
 
 
 

 
Corporation.  Unless and until such appointment is made, the Secretary of the Corporation shall maintain, among other records, a stock transfer book, the stubs in which shall set forth the names and addresses of the holders of all issued shares of the Corporation, the number of shares held by each, the certificate numbers representing such shares, the date of issue of the certificates representing such shares, and whether or not such shares originate from original issues or from transfer.  The names and addresses of shareholders as they appear on the stock transfer book shall be the official list of shareholders of record of the Corporation for all purposes.  The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares, on the part of any other person, including (but without limitation) a purchaser, assignee or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person.

Section 3 .   Transfer of Shares .  The shares of the Corporation shall be transferable on the stock transfer book of the Corporation by the holder of record thereof, or his duly authorized attorney or legal representative, upon endorsement and surrender for cancellation of the certificates representing such shares.  All certificates surrendered for transfer shall be cancelled and no new certificate shall be issued until a former certificate or certificates for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such conditions for the protection of the Corporation and any transfer agent or registrar as the Board of Directors or the secretary may prescribe.  When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its sole discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed.

 
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Section 4 .   No Preemptive Rights .  No holder of shares of the Corporation shall have a preemptive right to acquire additional, unissued, or treasury shares of the Corporation, or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares.

ARTICLE II.

MEETINGS OF SHAREHOLDERS

Section 1.    Place of Meetings .  All meetings of shareholders shall be held at the principal office of the Corporation in the City of Houston, Texas or at such other place within or without the State of Texas as may be designated by the Board of Directors or officer calling the meeting.

Section 2 .   Annual Meeting .  Commencing with the year 1995, annual meetings of the shareholders shall be held on the first Tuesday of May each year at such hour as may be designated in the notice of the meeting, if such day is not a legal holiday, and if a holiday, then on the first following day that is not a legal holiday. If the annual meeting is not held on the date above specified, the Board of Directors shall cause a meeting in lieu thereof to be held as soon thereafter as convenient, and any business transacted or election held at that meeting shall be as valid as if held at the annual meeting. Failure to hold the annual meeting at the designated time shall not work a dissolution of the Corporation.

Section 3 .   Special Meetings .  Special meetings of the shareholders may be called at any time by the President, the executive committee or the Board of Directors. Special meetings of shareholders may also be called by the Secretary upon the written request of the holders of at least ten percent (10%) of the outstanding stock entitled to be voted at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat.

Section 4 .   Notice of Meeting .  Written notice of all meetings, stating the place, day, and hour of the meeting and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60)
 
 
3

 
days before the meeting, either personally or by mail, by or at the direction of the President, the Secretary or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer book of the Corporation, with postage thereon prepaid. Notice for an adjourned meeting is not necessary unless the meeting is adjourned for thirty (30) days or more, in which case, notice of the adjourned meeting shall be given as in the case of any special meeting. Any notice required to be given to any shareholder under any provision of the Texas Business Corporation Act, the Articles of Incorporation or these Bylaws need not be given to the shareholder if either of the following types of mailings have been returned to the Corporation as undeliverable (provided such mailings were addressed at the addressee’s address as shown on the record of the Corporation): (1) notice of two consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (2) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a twelve (12) – month period have been mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given and, if the action taken by the Corporation is reflected in any articles or document filed with the Texas Secretary of State, those articles or that document may state that notice was duly given to all persons to whom notice was required to be given. If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated.

Section 5 .   Conduct of Meetings .  All meetings of shareholders shall be presided over by the President of the Corporation or, in his absence, by a Vice President, or, if no such officer is present, by a chairman chosen at the meeting by the holders of a majority of the voting shares present in person or by proxy. The Secretary of the Corporation or, in the Secretary’s absence, an Assistant Secretary, or, if no such officer is present, a person designated by the presiding officer, shall act as Secretary
 
 
4

 
of the meeting. The precedence of, and procedure on, motions and other procedural matters at the meetings shall be governed by Robert’s Rules of Order insofar as those rules are not inconsistent with law, with the Corporation’s Articles of Incorporation, or with these Bylaws.

Section 6 .   Closing of Transfer Books and Fixing Record Date .  The Board of Directors may fix, in advance, a date as the record date for the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive any distribution, dividend or the allotment of any rights, or in order to make a determination of shareholders for any other proper purpose. Such date, in any case, shall be not more than sixty (60) days, and in case of a meeting of shareholders not less than ten (10) days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer book shall be closed for a stated period, but not to exceed, in any case, sixty (60) days. If the stock transfer book is closed for the purpose of determining shareholders entitled to notice of, or to vote at, a meeting of shareholders, such book shall be closed for at least ten (10) days immediately preceding such meeting.

Section 7 .   Voting List .  The officer or agent having charge of the stock transfer book of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of, and the number of shares held by, each shareholder, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer shall be prima facie evidence as to the identity of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with any requirements of this Section 7 shall not affect the validity of any action taken at such meeting.

 
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Section 8 .   Voting at Meetings .  Any holder of shares of the Corporation entitled to vote shall be entitled to one vote for each such share, either in person or by proxy executed in writing by him or by his duly authorized attorney in fact. Voting on any resolution at the meeting shall be by voice, unless any shareholder demands a ballot vote before the voting begins. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest, including the appointment as proxy of (a) a pledgee, (b) a person who purchased or agreed to purchase, or owns or holds an option to purchase, the shares, (c) a creditor of the Corporation who extended its credit under terms requiring the appointment, (d) an employee of the Corporation whose employment contract requires the appointment, or (e) a party to a voting agreement created under the Texas Business Corporation Act. A revocable proxy shall be deemed to have been revoked if the Secretary of the Corporation shall have received at or before the meeting instructions or revocation or a proxy bearing a later date, which instructions or proxy shall have been duly executed and dated in writing by the shareholder.

Section 9 .   Non-Cumulative Voting .  Any holder of shares of the Corporation entitled to vote at any election for Directors may not cumulate votes and must give a candidate for each directorship a number of votes equal to the number of votes to which his or her shares are entitled. The candidate for each directorship receiving the highest number of votes shall be elected. This provision shall be construed in accordance with the Articles of Incorporation to the extent the same deny shareholders the right to cumulate votes.

Section 10 .   Quorum of Shareholders .  The holders of a majority of shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, but, if a quorum is not represented, a majority in interest of those represented may adjourn the meeting from time to time, without notice of adjournment other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted
 
 
6

 
at the meeting as originally notified. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders’ meeting, unless the vote of a greater number is required by law, the Articles of Incorporation or these Bylaws.

Section 11 .   Officers .  The president shall reside at, and the Secretary shall keep the records of, each meeting of shareholders. In the absence of either such officer, his or her duties shall be performed by another director or officer of the Corporation appointed at the meeting.

ARTICLE III.

DIRECTORS

Section 1 .   Number and Tenure .  The business and affairs of the Corporation shall be managed by a Board of Directors, which shall initially consist of one (1) member. The number of members of the Board of Directors may be increased or decreased from time to time by amendment to these Bylaws, provided that no decrease shall have the effect of shortening the term of any incumbent director. Unless sooner removed in accordance with these Bylaws, members of the Board of Directors shall hold office until the next annual meeting of shareholders and until their successors shall have been elected and qualified. Directors need not be shareholders of the Corporation.

Section 2 .   Vacancies .  Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors, through less than a quorum of the entire Board. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the Board of Directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Any vacancy occurring in the Board of Directors or any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall be elected for unexpired term of his predecessor in office.

 
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Section 3 .   Place of Meeting .  Meetings of the Board of Directors may be held either within or without the State of Texas, at whatever place is specified by the officer calling the meeting. In the absence of specific designation, the meetings shall be held at the office of the Corporation in the City of Houston.

Section 4 .   Regular Meetings .  The Board of Directors shall meet each year immediately following the annual meeting of the shareholders, at the place of such meeting, for the transaction of such business as may properly be brought before it. The Board of Directors may designate other times for the conduct of regular meetings of the Board of Directors. No notice of annual meetings or regular meetings for which the Board of Directors has designated a time need be given to members of the Board of Directors.

Section 5 .   Special Meetings .  Special meetings of the Board of Directors may be held at any time upon the call of the President, or any two (2) directors of the Corporation, or, if there is only one (1) director, by him. Notice shall be sent by mail or telegram to the last known address of each director at least three (3) days before the meeting. Oral notice may be substituted for such written notice if given not later than one day before the meeting. Notice of the time, place and purpose of such meeting may be waived in writing before or after such meeting, and shall be equivalent to the giving of notice. Attendance of a director at such meeting shall also constitute a waiver of notice thereof, except where such director attends for the announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Except as otherwise herein provided, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

Section 6 .   Quorum .  A majority of the number of directors fixed by or in the manner provided in these Bylaws, as from time to time amended, shall constitute a quorum for the transaction of business, but a smaller number may adjourn the meeting from time to time until they can secure the attendance of a quorum. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of
 
 
8

 
Directors. Any regular or special directors’ meeting may be adjourned from time to time by those present, whether a quorum is present or not.

Section 7 .   Compensation .  Directors as such shall not receive any stated salary for their services, but, by unanimous vote of all directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 8 .   Removal .  Any and all directors may be removed, either for or without cause, at any special meeting of shareholders by the affirmative vote of a majority of the outstanding shares entitled to vote at elections of directors. The notice calling such meeting shall give notice of the intention to act upon such matter, and if the notice so provides, the vacancy caused by such removal may be filled at such meeting by vote of a majority of the shares represented at such meeting and entitled to vote for the election of directors.

Section 9 .   Committees .  The Board of Directors may, by resolution, designate an executive committee and one (1) or more other committees to conduct the business and affairs of the Corporation, to the extent authorized by the resolution and subject to the restrictions of the Texas Business Corporation Act. The Board of Directors, by majority vote, shall have the power at any time to change the powers and members of any committee, to fill vacancies and to terminate the existence of any committee. Members of any committee shall receive such compensation as the Board of Directors may from time to time provide. The designation of any committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. Every committee so designated shall keep regular minutes of the proceedings and regularly report the minutes to the Board of Directors.

Section 10 .   Conduct of Meetings .  (1) All meetings of Directors shall be presided over by the Chairman of the Board, if there shall be such an officer, or in his absence, by the President or Vice President of the Corporation, or, if no such officer is present, by any
 
 
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Director chosen by a majority of the Directors present. The Secretary, or an Assistant Secretary, of the Corporation shall attend and take minutes of those meetings. In the absence of that officer, the presiding officer shall designate some person present to take minutes of the meeting. The precedence of, and procedure on, motions and other procedural matters at those meetings shall be governed so far as practicable by Robert’s Rules of Order insofar as those rules are not inconsistent with law, with the Corporation’s Articles of Incorporation, or with these Bylaws. (2) Every meeting of a Board committee shall be presided over by the committee chairman or, in the absence of a chairman, by any member chosen by a majority of the members present. Minutes of committee meetings shall be taken by the secretary of the committee or, if there is no secretary or in that officer’s absence, by the person designated by the chairman or acting chairman of the committee.

ARTICLE IV.

OFFICERS

Section 1 .   Officers .  The officers of the Corporation shall be elected by the Board of Directors and shall, at a minimum, consist of a President and a Secretary. The Board of Directors may elect such other officers, including a Chairman of the Board, a Vice President or Vice Presidents, a Treasurer, and Assistant Secretaries and Assistant Treasurers, and appoint such agents, as it may deem necessary or desirable. All officers shall, unless otherwise removed by the Board of Directors, hold office until their successors are elected and qualified. Any two or more offices may be held by the same person. The salaries and other compensation of the officers shall be determined by the Board of Directors, and may be altered by the Board of Directors from time to time, except as otherwise provided by contract. All officers shall be entitled to be paid or reimbursed for all costs and expenditures incurred in the Corporation’s business.

Section 2 .   Vacancies .  Whenever any vacancies shall occur in any office by death, resignation, increase in the number of officers of the Corporation, or otherwise, the same shall be filled by the Board of Directors, and the officer so elected shall, unless otherwise removed by the
 
 
10

 
Board of Directors, hold office until his successor is chosen and qualified.

Section 3 .   Removal .  Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.

Section 4 .   Chairman of the Board .  The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to the Chairman by the Board of Directors.

Section 5 .   President .  Subject to the supervisory powers, if any, that may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the principal executive officer of the Corporation, and subject to the control of the Board of Directors, shall, in general, supervise and control all of the business and affairs of the Corporation. The President shall preside at all meetings of the shareholders and, if a member of the Board of Directors, at all meetings of the Board of Directors. The President may sign, with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed and executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.

Section 6 .   Vice President .  Each Vice President, if there shall be such an officer, shall perform such duties and have such powers as may from time to time be prescribed by the Board of Directors or be delegated to him or her by the President or Chairman of the Board (if any). Vice
 
 
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Presidents may be given special designations such as “Senior Vice President,” “Vice President—Finance,” or any other designation deemed appropriate by the Board of Directors.

Section 7 .   Secretary .  It shall be the duty of the Secretary to send any and all required notices of and to attend all meetings of the shareholders and Board of Directors and record correctly the proceedings of such meetings in a book suitable for that purpose. It shall also be the duty of the Secretary to attest with his or her signature and the seal of the Corporation all stock certificates issued by the Corporation and to keep a stock transfer in which shall be correctly recorded all transactions pertaining to the capital stock of the Corporation. The Secretary shall attest and keep at the registered office of the Corporation the original or a copy of these Bylaws, as they may be amended, and the original of the Articles of Incorporation, as they may be amended. The Secretary shall also attest with his or her signature and the seal of the Corporation all deeds, conveyances or other instruments requiring the seal of Corporation. The person holding the office of Secretary shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to him or her. The duties of the Secretary may also be performed by any Assistant Secretary.

Section 8 .   Treasurer .  The Treasurer, if there shall be such an officer, shall keep such moneys of the Corporation as may be entrusted to his or her keeping and account for the same. The treasurer shall be prepared at all times to give information as to the condition of the Corporation and shall make a detailed annual report of the entire business and financial condition of the Corporation. The person holding the office of Treasurer shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to him or her. The duties of the Treasurer may also be performed by any Assistant Treasurer.

Section 9 .   Additional Titles .  In addition to their titles as designated in Sections 4 through 8 of this Article IV, particular officers of the Corporation may be given titles indicative of their managerial responsibilities within the Corporation. The officer of the Corporation chiefly responsible for corporate policy-making
 
 
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and the general supervision and direction of the Corporation’s business may, in addition to his or her other title or titles, be designated the “Chief Executive Officer.” The officer of the Corporation charged with supervision and management of the daily operations of the Corporation may, in addition to his or her other title or titles, be designated the “Chief Operating Officer.” The officer of the Corporation chiefly responsible for the finances, securities and accounting systems of the Corporation may, in addition to his or her other title or titles, be designated the “Chief Financial Officer.” The Board of Directors may give officers of the Corporation such other additional titles and designations as it shall deem appropriate.

Section 10 .   Delegation of Authority .  In the case of any absence of ay officer of the Corporation or for an other reason that the Board may deem sufficient, the Board of Directors may delegate some or all of the powers or duties of such officer to any other officer or to any director, employee, shareholder or agent for whatever period of time seems desirable, providing that a majority of the entire Board occurs therein.

ARTICLE V.

INDEMNIFICATION AND INSURANCE

Section 1 .   Persons; Scope; Advancement of Expenses .  The Corporation shall indemnify a person to the full extent a corporation is required or permitted under Article 2.02-1 of the Texas Business Corporation Act and any other applicable laws, and may, at the discretion of the Board of Directors, advance reasonable expenses to such persons to the full extent and according to the procedures and standards of Article 2.02-1 of the Texas Business Corporation Act and any other applicable law.

Section 2 .   Insurance .  The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venture, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation,
 
 
13

 
partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify him against that liability under this bylaw.

Section 3 .   Vesting of Rights .  Notwithstanding any other provision of these Bylaws to the contrary, no action taken by the Corporation, whether by amendment of these Bylaws or otherwise, shall diminish or adversely affect any rights to indemnification or advancement of expenses with respect to any event or transaction that occurs prior to such action being taken by the Corporation.

Section 4 .   Nonexclusive .  The indemnification provided by these Bylaws shall not be exclusive of any other rights to which a person may be entitled by law, articles of incorporation, bylaw, agreement, vote of shareholders or disinterested directors, or otherwise. Indemnification shall continue and inure to the benefit of the heirs, executors and administrators of any person entitled to indemnification under the provisions of this Article V.

ARTICLE VI.

MISCELLANEOUS PROVISIONS

Section 1 .   Amendments .  The Board of Directors shall have the power to amend or repeal the Bylaws or adopt new Bylaws, unless any provision of these Bylaws expressly provides, or unless the shareholders in amending, repealing or adopting a new Bylaw expressly provide, that only the shareholders may amend or repeal that Bylaw. The Board of Directors may exercise any power so granted at any regular or special meeting at which a quorum is present by the affirmative vote of a majority of the directors present at the meeting provided that notice of the action to be taken with respect to the Bylaws is contained in the notice or waiver of notice of such meeting. The shareholders may amend, repeal or adopt new Bylaws at any annual meeting of the shareholders or at any special meeting of the shareholders at which a quorum is present or represented, provided that notice of the proposed alteration or repeal is contained in the notice of such special meeting, by the affirmative vote of a two-thirds majority of the shares
 
 
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entitled to vote at such meeting and present or represented thereat. These Bylaws shall not be amended so as to effect a change in the time or place of the meeting for the election of directors within sixty (60) days next before the day on which such meeting is to be held; furthermore, in case of any change of said time or place, notice thereof shall be given to each shareholder in person or by letter mailed to his last known post office address at least twenty (20) days before the meeting is held.

Section 2 .   Waiver .  Whenever, under the provisions of any law, the Articles of Incorporation or amendments thereto, or these Bylaws, any notice is required to be given to any shareholders, director or committee member, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Moreover, attendance at any meeting by a shareholder or director shall constitute a waiver of notice of said meeting by such shareholder or director unless such individual attends the meeting for the specific purpose of objecting to the transaction of any business thereat on the ground that the meeting is not lawfully called or convened.

Section 3 .   Conference Telephone Meetings .  Meetings of shareholders, directors or any committee thereof, may be held by means of conference telephone or similar communications equipment so long as all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business thereat on the ground that the meeting is not lawfully called or convened.

Section 4 .   Action by Written Consent .  Any action that may be taken at a regular or special meeting of the shareholders, directors or committees may be taken without a meeting if a consent in writing, setting forth the actions to be taken, shall be signed by all of those persons entitled to vote at that meeting, and such consent shall have the same force and effect as a unanimous vote of said shareholders, directors or committee members. No notice shall be required in connection with the use of a written consent pursuant to this Section.

 
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Section 5 .   Offices .  The principal office of the Corporation shall be located in Houston, Texas unless and until changed by resolution of the Board of Directors. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or as the business of the Corporation may require.

Section 6 .   Resignations . Any director or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.

Section 7 .   Seal .  The seal of the Corporation shall be such as from time to time may be approved by the Board of Directors, but the use of a seal shall not be essential to the validity of any agreement entered into by the Corporation, unless otherwise provided by law.

Section 8 .   Fiscal Year .  The fiscal year of the Corporation shall end at the close of business on the last day of that month selected by the Board of Directors of the Corporation.

Section 9 .   Books and Records .  The Corporation shall maintain a minute book, stock record book and such other books and records as may be required by law or as may be deemed necessary or desirable by the Board of Directors or officers of the Corporation. All books and records provided for by law shall be open to inspection of the shareholders from time to time and to the extent expressly provided by law, and not otherwise. The members of the Board of Directors may examine all books and records of the Corporation at all reasonable times.

CERTIFICATE OF SECRETARY

I, the undersigned, do hereby certify:

1. That I am the duly elected and acting Secretary of SHARPS COMPLIANCE, INC., a Texas corporation; and

2. That the foregoing Bylaws, comprising 14 pages, constitute the bylaws of said Corporation as duly adopted by action of the Board of Directors of the Corporation effective May ____, 1994.

 
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IN WITNESS WHEREOF, I have hereunder subscribed my name and affixed the seal of said Corporation this May 23, 1994.


_____________________________
BURTIN J. KUNIK, Secretary




Exhibit 3.2
 
 
 
*********
 
BY-LAWS
 
*********
 

 
SHARPS COMPLIANCE CORP.
 

 

 
ARTICLE I
 
OFFICES
 

 
1.01                      The registered office shall be in the city of Wilmington, County of New Castle, State of Delaware.
 
1.02                      The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require.
 
ARTICLE II
 
MEETING OF STOCKHOLDERS
 
2.01                      All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the board of directors, either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of the stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of meeting or in a duly executed waiver of notice thereof.
 
2.02                      Annual meetings of stockholders, commencing with the year 1993, shall be held on the third Thursday of November, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of directors and transact such other business as may properly be brought before the meeting.
 
 
 

 
2.03                      Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.
 
2.04                      The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
 
2.05                      Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.
 
2.06                      Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting.
 
2.07                      Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
 
2.08                      The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, until a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
 
 
 

 
2.09                      When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question.
 
2.10                      Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted after three (3) years from its date, unless the proxy provides for a longer period.
 
2.11                      Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.
 
ARTICLE III
 
DIRECTORS
 
3.01                      The number of directors which shall constitute the whole board of directors shall be not less than three nor more than fifteen. The first board shall consist of seven directors. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the board of directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.
 
3.02                      Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are not directors in office, then an election of directors may be held in the manner provided by the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery of the State of Delaware may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the
 
 
 

 
right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.
 
3.03                      The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or these by-laws directed or required to be exercised or done by the stockholders.
 
Meetings of the Board of Directors
 
3.04                      The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.
 
3.05                      The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors.
 
3.06                      Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board.
 
3.07                      Special meetings of the board may be called by the president on two days’ notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director.
 
3.08                      At all meetings of the board a majority of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
 
3.09                      Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any
 
 
 

 
 
committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee.
 
3.10                       Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee designated by the board of directors, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
 
Committees of Directors
 
3.11                      The board of directors may, by resolution passed by a majority of the whole board of directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.
 
In absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member.
 
Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and unless the resolution or the certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors.
 
 
 

 
3.12                      Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.
 
Compensation of Directors
 
3.13                      Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.
 
Removal of Directors
 
3.14                      Unless otherwise restricted by the certificate of incorporation or these by-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors.
 
ARTICLE IV
 
NOTICES
 
4.01                      Whenever, under the provisions of the statutes or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.
 
4.02                      Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
 
ARTICLE V
 
OFFICERS
 
5.01                      The officers of the corporation shall be chosen by the board of directors and shall be a chairman, a president, a vice president, a secretary and a treasurer. The board of directors may also choose additional vice presidents and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide.
 
 
 

 
5.02                      The board of directors at its first meeting after such annual meeting of stockholders shall choose a chairman, a president, one or more vice presidents, a secretary and a treasurer.
 
5.03                      The board of directors may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board.
 
5.04                      The salaries of all officers and agents of the corporation shall be fixed by the board of directors.
 
5.05                      The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors.
 
The Chairman
 
5.06                      The Chairman shall be the chief executive officer of the corporation, shall preside at all meetings of the stockholders and the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect.
 
5.07                      He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation.
 
The President
 
5.08                      The President shall be the chief operating officer of the corporation. In the absence of the chairman or in the event of his inability or refusal to act, the president shall perform the duties of the chairman, and when so acting, shall have all the powers of and be subject to all the restrictions upon the chairman. The president shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
 
The Vice President
 
5.09                      In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in order designated by the directors, or in the absence of any designation, then in order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
 
 
 

 
The Secretary and the Assistant Secretary
 
5.10                      The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for the purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation, and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested to by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any officer to affix the seal of the corporation and to attest to the affixing by his signature.
 
5.11                      The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
 
The Treasurer and the Assistant Treasurer
 
5.12                      The treasurer shall be the chief financial officer of the corporation and shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors.
 
5.13                      He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meeting, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation.
 
5.14                      If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.
 
5.15                      The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or
 
 
 

 
 
refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
 
ARTICLE VI
 
CERTIFICATES FOR SHARES
 
6.01                      The shares of the corporation shall be represented by a certificate or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the chairman or vice chairman of the board of directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation.
 
6.02                      Upon the face or back of each stock certificate issued to represent any partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, shall be set forth the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated.
 
6.03                      If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
 
6.04                      Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) or a statement that the corporation will furnish without charge to each stockholder who so requests, the powers, designations, preferences and relative participating, optional or other special rights of each class of stock series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
 
6.05                      Any of or all the signatures on a certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate
 
 
 
 

 
is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
 
Lost Certificates
 
6.06                      The board of directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertified shares, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
 
Transfer of Stock
 
6.07                      Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.  Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be cancelled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation.
 
Fixing Record Date
 
6.08                      In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the board of directors; and (3) in the case of any other action, shall not be more than sixty (60) days prior to such other action.  If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for
 
 
 

 
 
determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the board of directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or if prior action by the board of directors is required by law, shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.  A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
 
Registered Stockholders
 
6.09                      The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notices thereof, except as otherwise provided by the laws of Delaware.
 
ARTICLE VII
 
GENERAL PROVISIONS
 
Dividends
 
7.01                      Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the certificate of incorporation.
 
7.02                      Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
 
 
 

 
Annual Statement
 
7.03                      The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.
 
Checks
 
7.04                      All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate.
 
Fiscal Year
 
7.05                      The fiscal year of the corporation shall be fixed by resolution of the board of directors.
 
Seal
 
7.06                      The corporate seal, if any, shall have inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
 
Indemnification
 
7.07                      The corporation shall indemnify and advance expenses to any and all persons who may serve or who have served at any time as directors or officers, or who at the request of the Board of Directors of the corporation may serve or at any time have served as directors or officers of another corporation in which the corporation at such time owned or may own shares of stock or of which it was or may be a creditor, and their respective heirs, administrators, successors and assigns, against any and all expenses, including amounts paid upon judgments, counsel fees and amounts paid in settlement (before or after suit is commenced), actually and necessarily incurred by such persons in connection with the defense or settlement of any claim, action, suit or proceeding in which they, or any of them, are made parties, or a party, or which may be asserted against them or any of them, by reason of being or having been directors or officers or a director or officer of the corporation, or of such other corporation, except in relation to matters as to which any such director or officer or former director or officer or person shall be adjudged in any action, suit or proceeding to be liable for his own negligence or misconduct in the performance of his duty. Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any law, by-law, amendment, vote of stockholders or otherwise.
 
 
 

 
ARTICLE VII
 
AMENDMENTS
 
8.01                      These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the board of directors, when such power is conferred upon the board of directors by the certificate of incorporation, at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration, amendment, repeal of or adoption of new by-laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal by-laws is conferred upon the board of directors by the certificate of incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws.
 

 

 

 
 

 

Exhibit 10.1
WAREHOUSE ASSOCIATES
LEASE AMENDMENT #2

This LEASE AMENDMENT #2 (the “Agreement”) is made and entered as of the 8th day of March, 2010  by and between Sharps Compliance, Inc. (“Tenant”) and Warehouse Associates Corporate Centre Kirby II, Ltd. (“Landlord”).

WITNESSETH:

A.  Landlord , or its predecessor in Interest, and Tenant , or its predecessor in Interest, have heretofore entered into that certain lease dated July 13, 2006 (the “Lease”), and for Lease Amendment  #1 dated December 12, 2007 for 9220 Kirby Drive, Suite 500 containing 18,231 rentable   square feet in the Project known as Corporate Centre Kirby II , located at 9220-9230 Kirby Drive, Houston, Texas, 77054 (the “Premises”),

B.  The parties mutually desire to amend the Lease, subject to the terms and conditions hereof.

NOW THEREFORE, in consideration of the mutual terms and conditions herein contained, the parties hereby agree as follows:

1.   The parties agree that:

A.  
The Lease Expiration Date shall be February 28, 2015;
B.  
Landlord, at its sole cost, remove the grassy area on the dock side of the building and will also pave and stripe all areas on the dock side of the building in order to facilitate maximum additional parking spaces; and
C.  
There is no change in the base rent payable under the Lease during the term noted in A above.

2.   Effective Date. This Agreement   shall be effective as of the 8th day of March, 2010 (herein referred to as the “Effective Date”).

3.  Whole Agreement. This Agreement sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. As amended herein, the Lease between the parties shall remain in full force and effect. In case of any inconsistency between the provisions of the Lease and this Agreement, the latter provisions shall govern and control.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

LANDLORD:   Warehouse Associates Corporate Centre Kirby II, Ltd

By: __________________________
Name:  David R. David
Its:  Authorized Agent

 
TENANT:  Sharps Compliance, Inc.

By: __________________________
Name: David P. Tusa
Its:       Executive Vice President and Chief Financial Officer
EXHIBIT 10.2
 
 
Amendment to Credit Agreement

This agreement is dated as of March 10, 2010, by and between Sharps Compliance, Inc. of Texas (the "Borrower") and JPMorgan Chase Bank, N.A. (together with its successors and assigns the " Bank "). The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the " Effective Date ").

WHEREAS , the Borrower and the Bank entered into a credit agreement dated March 16, 2009, as amended (if applicable) (the " Credit Agreement "); and

WHEREAS , the Borrower has requested and the Bank has agreed to amend the Credit Agreement as set forth in this agreement;

NOW, THEREFORE , in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1.  
DEFINED TERMS . Capitalized terms used in this agreement shall have the same meanings as in the Credit Agreement, unless otherwise defined in this agreement.

2.  
MODIFICATION OF CREDIT AGREEMENT . The Credit Agreement is hereby amended as follows:

2.1  
From and after the Effective Date, the provision in the Credit Agreement under Section 5.2 captioned " N. Capital Expenditures " is hereby amended and restated to read as follows:

N.  
Capital Expenditures.   During any Test Period in which the total of Sharps Compliance Corp’s cash, cash   equivalents and marketable securities is less than $5,000,000.00, permit Sharps Compliance Corp. to make Capital   Expenditures (whether by purchase or capital lease of any fixed assets, or otherwise) in an amount in excess of 20% of the Borrower’s earnings before interest, tax and depreciation and amortization expense for the Test Period.  “ Test Period ” means each period of four consecutive fiscal quarters, on a rolling basis.

3.  
RATIFICATION . The Borrower ratifies and reaffirms the Credit Agreement and the Credit Agreement shall remain in full force and effect as modified by this agreement.

4.  
BORROWER REPRESENTATIONS AND WARRANTIES . The Borrower represents and warrants that (a) the representations and warranties contained in the Credit Agreement are true and correct in all material respects as of the date of this agreement, (b) no condition, event, act or omission which could constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document exists, and (c) no condition, event, act or omission has occurred and is continuing that with the giving of notice, or the passage of time or both, would constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document.

5.  
FEES AND EXPENSES . The Borrower agrees to pay all fees and out-of-pocket disbursements incurred by the Bank in connection with this agreement, including legal fees incurred by the Bank in the preparation, consummation, administration and enforcement of this agreement.

6.  
EXECUTION AND DELIVERY . This agreement shall become effective only after it is fully executed by the Borrower and the Bank, and the Bank shall have received from the Borrower the following documents: Note Modification Agreement.

7.  
ACKNOWLEDGEMENTS OF BORROWER / RELEASE. The Borrower acknowledges that as of the date of this agreement it has no offsets with respect to all amounts owed by the Borrower to the Bank arising under or related to the Credit Agreement, as modified by this agreement, or any other Related Document on or prior to the date of this agreement. The Borrower fully, finally and forever releases and discharges the Bank, its successors and assigns and their respective directors, officers, employees, agents and representatives (each a " Bank Party ") from any and all claims, causes of action, debts, demands and liabilities, of whatever kind or nature, in law or in equity, of the Borrower, whether now known or unknown to the Borrower, which may have arisen in connection with the Credit Agreement or the actions or omissions of any Bank Party related to the Credit Agreement on or prior to the date hereof. (" Claims "); provided, however, that the foregoing RELEASE SHALL INCLUDE ALL CLAIMS ARISING OUT OF THE NEGLIGENCE OF ANY BANK PARTY , but not the gross negligence or willful misconduct of any Bank Party. The Borrower acknowledges and agrees that this agreement is limited to the terms outlined above, and shall not be construed as an agreement to change any other terms or provisions of the Credit Agreement. This agreement shall not establish a course of dealing or be construed as evidence of any willingness on the Bank's part to grant other or future agreements, should any be requested.

 
 

 
8.  
INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Credit Agreement, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of the Credit Facilities and supersede all prior understandings and negotiations. If any one or more of the obligations of the Borrower under this agreement or the Credit Agreement, as amended by this agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement, the Credit Agreement, as modified by this agreement, or any other Related Document in any other jurisdiction. No provision of the Credit Agreement, as modified by this agreement, or the other Related Documents, may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

9.  
Governing Law and Venue. This agreement shall be governed by and construed in accordance with the laws of the State of Texas (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this agreement may be brought by the Bank in any state or federal court located in the State of Texas, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Texas is not a convenient forum or the proper venue for any such suit, action or proceeding.

10.  
NOT A NOVATION . This agreement is a modification only and not a novation. Except as expressly modified by this agreement, the Credit Agreement, any other Related Documents, and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Credit Agreement and made a part thereof. This agreement shall not release or affect the liability of any guarantor of any promissory note or credit facility executed in reference to the Credit Agreement or release any owner of collateral granted as security for the Credit Agreement. The validity, priority and enforceability of the Credit Agreement shall not be impaired hereby. To the extent that any provision of this agreement conflicts with any term or condition set forth in the Credit Agreement, or any other Related Documents, the provisions of this agreement shall supersede and control. The Bank expressly reserves all rights against all parties to the Credit Agreement and the other Related Documents.

11.  
TIME IS OF THE ESSENCE. Time is of the essence under this agreement and in the performance of every term, covenant and obligation contained herein.

THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
 
     
Borrower:
 
 
 
Sharps Compliance, Inc. of Texas
     
By:
 
           
       
Printed Name
Title
 
Date Signed:
 
 
     
Bank:
 
 
 
JPMorgan Chase Bank, N.A.
     
By:
 
           
       
Printed Name
Title
 
Date Signed:
 
 
 
 
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EXHIBIT 10.3
 
 
Note Modification Agreement

This agreement is dated as of March 10, 2010 (the " Agreement Date "), by and between Sharps Compliance, Inc. of Texas (the " Borrower ") and JPMorgan Chase Bank, N.A. (together with its successors and assigns, the " Bank "). The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the " Effective Date ").

WHEREAS , the Borrower executed a Line of Credit Note dated as of March 16, 2009 in the original principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00), (as same may have been amended or modified from time to time, the " Note ") as evidence of an extension of credit from the Bank to the Borrower, which Note has at all times been, and is now, continuously and without interruption outstanding in favor of the Bank; and,

WHEREAS , the Borrower has requested and the Bank has agreed that the Note be modified to the limited extent as hereinafter set forth in this agreement;

NOW THEREFORE , in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1.   ACCURACY OF RECITALS. The Borrower acknowledges the accuracy of the Recitals stated above.

2.   DEFINITIONS. Capitalized terms used in this agreement shall have the same meanings as in the Note, unless otherwise defined in this agreement.

3.   MODIFICATION OF NOTE.

3.1   From and after the Effective Date, the provision in the Note captioned " Promise to Pay " is hereby amended as follows: The date on which the entire balance of unpaid principal plus accrued interest shall be due and payable immediately is hereby changed from March 31, 2010 to March 31, 2012.

3.2   Each of the Related Documents is modified to provide that it shall be a default or an event of default thereunder if the Borrower shall fail to comply with any of the covenants of the Borrower herein or if any representation or warranty by the Borrower herein or by any guarantor in any Related Documents is materially incomplete, incorrect, or misleading as of the date hereof. As used in this agreement, the " Related Documents " shall include the Note and all applications for letters of credit, loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, or any other instrument or document executed in connection with the Note or in connection with any other obligations of the Borrower to the Bank.

3.3   Each reference in the Related Documents to any of the Related Documents shall be a reference to such document as modified by this agreement.

4.   RATIFICATION OF RELATED DOCUMENTS AND COLLATERAL. The Related Documents are ratified and reaffirmed by the Borrower and shall remain in full force and effect as they may be modified by this agreement. All property described as security in the Related Documents shall remain as security for the Note, as modified by this agreement, and the Liabilities under the other Related Documents.

5.   BORROWER REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank that each of the representations and warranties made in the Note and the other Related Documents and each of the following representations and warranties are and will remain, true and correct until the later of maturity or the date on which all Liabilities evidenced by the Note are paid in full:

5.1   No default, event of default or event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, has occurred and is continuing under any provision of the Note, as modified by this agreement, or any other Related Document.

5.2   No event has occurred which may in any one case or in the aggregate materially and adversely affect the financial condition, properties, business, affairs, prospects or operations of the Borrower or any guarantor or any subsidiary of the Borrower.

 
 

 
5.3   The Borrower has no defenses or counterclaims, offsets or adverse claims, demands or actions of any kind, personal or otherwise, that it could assert with respect to the Note or any other Liabilities.

5.4   The Note, as modified by this agreement, and the other Related Documents are the legal, valid, and binding obligations of the Borrower and the other parties, enforceable against the Borrower and other parties in accordance with their terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by general principles of equity.

5.5   The Borrower, other than any Borrower who is a natural person, is validly existing under the laws of the State of its formation or organization. The Borrower has the requisite power and authority to execute and deliver this agreement and to perform the obligations described in the Related Documents as modified herein. The execution and delivery of this agreement and the performance of the obligations described in the Related Documents as modified herein have been duly authorized by all requisite action by or on behalf of the Borrower. This agreement has been duly executed and delivered by or on behalf of the Borrower.

6.   BORROWER COVENANTS. The Borrower covenants with the Bank:

6.1   The Borrower shall execute, deliver, and provide to the Bank such additional agreements, documents, and instruments as reasonably required by the Bank to effectuate the intent of this agreement.

6.2   The Borrower fully, finally, and forever releases and discharges the Bank, its successors, and assigns and their respective directors, officers, employees, agents, and representatives (each a " Bank Party ") from any and all causes of action, claims, debts, demands, and liabilities, of whatever kind or nature, in law or equity, of the Borrower, whether now known or unknown to the Borrower, (i) in respect of the loan evidenced by the Note and the Related Documents, or of the actions or omissions of any Bank Party in any manner related to the loan evidenced by the Note or the Related Documents and (ii) arising from events occurring prior to the date of this agreement (" Claims "); provided, however, that the foregoing RELEASE SHALL INCLUDE ALL CLAIMS ARISING OUT OF THE NEGLIGENCE OF ANY BANK PARTY , but not the gross negligence or willful misconduct of any Bank Party.

6.3   To the extent not prohibited by applicable law, the Borrower shall pay to the Bank:

6.3.1   All the internal and external costs and expenses incurred (or charged by internal allocation) by the Bank in connection with this agreement (including, without limitation, inside and outside attorneys, appraisal, appraisal review, processing, title, filing, and recording costs, expenses, and fees).

7.   EXECUTION AND DELIVERY OF AGREEMENT BY THE BANK. The Bank shall not be bound by this agreement until (i) the Bank has executed this agreement and (ii) the Borrower performed all of the obligations of the Borrower under this agreement to be performed contemporaneously with the execution and delivery of this agreement.

8.   INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Note, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of any Liabilities evidenced by the Note and supersede all prior understandings, and negotiations. If any one or more of the obligations of the Borrower under this agreement or the Note, as modified by this Agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement, the Note as modified by this agreement and the other Related Documents in any other jurisdiction. No provision of the Note, as modified by this agreement, or any other Related Documents may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

9.   GOVERNING LAW AND VENUE. This agreement shall be governed by and construed in accordance with the laws of the State of Texas (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under the Note or this agreement may be brought by the Bank in any state or federal court located in the State of Texas, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Texas is not a convenient forum or the proper venue for any such suit, action or proceeding. This agreement binds the Borrower and its successors, and benefits the Bank, its successors and assigns. The Borrower shall not, however, have the right to assign the Borrower's rights under this agreement or any interest therein, without the prior written consent of the Bank.

10.   COUNTERPART EXECUTION. This agreement may be executed in multiple counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts, taken together, shall constitute one and the same agreement.

 
2

 
11.   NOT A NOVATION. This agreement is a modification only and not a novation. In addition to all amounts hereafter due under the Note, as modified by this agreement, and the other Related Documents, all accrued interest evidenced by the Note being modified by this agreement and all accrued amounts due and payable under the Related Documents shall continue to be due and payable until paid. Except for the modification(s) set forth in this agreement, the Note, the other Related Documents and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Note and made a part thereof. This agreement shall not release or affect the liability of any guarantor, surety or endorser of the Note or release any owner of collateral securing the Note. The validity, priority and enforceability of the Note shall not be impaired hereby. References to the Related Documents and to other agreements shall not affect or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on the Note when due. The Bank reserves all rights against all parties to the Note and the other Related Documents.

12.   TIME IS OF THE ESSENCE. Time is of the essence under this agreement and in the performance of every term, covenant and obligation contained herein.

THIS AGREEMENT AND THE OTHER RELATED DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.


     
Borrower:
Address:
9220 Kirby Drive, Suite 500
Houston, TX 77054-2534
 
Sharps Compliance, Inc. of Texas
     
By:
 
           
       
Printed Name
Title
 
Date Signed:
 




BANK’S ACCEPTANCE

The foregoing agreement is hereby agreed to and acknowledged.

     
Bank:
     
JPMorgan Chase Bank, N.A.
     
By:
 
           
       
Printed Name
Title
     
Date Signed:
 


3

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

I, Dr. Burton J. Kunik, 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 10, 2010
/s/ DR. BURTON J. KUNIK
 
Dr. Burton J. Kunik
 
Chairman of the Board , and
 
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL 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 10, 2010
/s/ DAVID P. TUSA
 
David P. Tusa
 
Executive Vice President,
 
Chief Financial Officer, Business
 
Development and Corporate Secretary
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, 2010, as filed with the Securities and Exchange Commission on the date hereof, I, Dr. Burton J. Kunik, Chairman of the Board, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §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, 2010 filed with the Securities and Exchange Commission on May 10, 2010 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, 2010 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.
 
 
By: /s/ DR. BURTON J. KUNIK Date: May 10, 2010
Dr. Burton J. Kunik  
Chairman of the Board of Directors,  
and Chief Executive Officer  
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, 2010, as filed with the Securities and Exchange Commission on the date hereof, I, David P. Tusa, Executive Vice President, Chief Financial Officer, Business Development and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §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, 2010, filed with the Securities and Exchange Commission on May 10, 2010 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, 2010 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

 
By: /s/ DAVID P. TUSA Date: May 10, 2010
David P. Tusa  
Executive Vice President  
Chief Financial Officer,  
Business Development and  
Corporate Secretary