Sharps Compliance Corporation
SHARPS COMPLIANCE CORP (Form: 10-Q, Received: 11/01/2017 12:28:13)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2017
OR

¨
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
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
 
Large Accelerated Filer  o
 
Accelerated Filer  o
 
Non-accelerated Filer  o
 (Do not check if a smaller reporting company)
 
Emerging growth company company  o
 
Smaller reporting company  ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of October 30, 2017 , there were 16,008,412 outstanding shares of the Registrant's common stock, par value $0.01 per share.

1







SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value)
 
 
September 30,
 
June 30,
 
 
2017
 
2017
 
 
 
 
 
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
5,160

 
$
4,675

Accounts receivable, net of allowance for doubtful accounts of $80 and $78, respectively
 
7,279

 
7,553

Inventory, net
 
4,239

 
4,098

Prepaid and other current assets
 
566

 
694

TOTAL CURRENT ASSETS
 
17,244

 
17,020

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, net
 
6,491

 
6,543

 
 
 
 
 
OTHER ASSETS
 
122

 
120

 
 
 
 
 
GOODWILL
 
6,735

 
6,735

 
 
 
 
 
INTANGIBLE ASSETS, net
 
3,935

 
4,046

 
 
 
 
 
TOTAL ASSETS
 
$
34,527

 
$
34,464

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Accounts payable
 
$
1,978

 
$
1,710

Accrued liabilities
 
1,518

 
1,800

Current maturities of long-term debt
 
600

 
601

Deferred revenue
 
2,396

 
2,421

TOTAL CURRENT LIABILITIES
 
6,492

 
6,532

 
 
 
 
 
LONG-TERM DEFERRED REVENUE, net of current portion
 
528

 
478

 
 
 
 
 
OTHER LONG-TERM LIABILITIES
 
171

 
165

 
 
 
 
 
LONG-TERM DEBT, net of currrent portion
 
1,853

 
2,002

 
 
 
 
 
TOTAL LIABILITIES
 
9,044

 
9,177

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
 


 


 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 

 
 

Common stock, $0.01 par value per share; 20,000,000 shares authorized; 16,304,027 shares issued and 16,008,412 shares outstanding
 
163

 
163

Treasury stock, at cost, 295,615 shares repurchased
 
(1,554
)
 
(1,554
)
Additional paid-in capital
 
28,184

 
28,063

Accumulated deficit
 
(1,310
)
 
(1,385
)
TOTAL STOCKHOLDERS' EQUITY
 
25,483

 
25,287

 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
34,527

 
$
34,464

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

3




SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
 
 
Three-Months Ended
September 30,
 
 
2017
 
2016
REVENUES
 
$
9,683

 
$
9,531

Cost of revenues
 
6,655

 
6,572

GROSS PROFIT
 
3,028

 
2,959

 
 
 
 
 
Selling, general and administrative
 
2,725

 
3,699

Depreciation and amortization
 
202

 
200

 
 
 
 
 
OPERATING INCOME (LOSS)
 
101

 
(940
)
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 

 
 

Interest income
 
5

 
4

Interest expense
 
(24
)
 
(31
)
TOTAL OTHER EXPENSE
 
(19
)
 
(27
)
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
 
82

 
(967
)
INCOME TAX EXPENSE
 
7

 

 
 
 
 
 
NET INCOME (LOSS)
 
$
75

 
$
(967
)
 
 
 
 
 
NET INCOME (LOSS) PER COMMON SHARE - Basic and Diluted
 
$
0.00

 
$
(0.06
)
 
 
 
 
 
WEIGHTED AVERAGE SHARES USED IN COMPUTING
    INCOME (LOSS) PER COMMON SHARE:
 
 
 
 
Basic
 
16,008

 
15,868

Diluted
 
16,093

 
15,868


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


4




SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
 Accumulated
Deficit
 
Total
Stockholders'
Equity
Shares
 
Amount
 
Shares
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, June 30, 2016
 
15,740,458

 
$
158

 
(295,615
)
 
$
(1,554
)
 
$
25,331

 
$
(92
)
 
$
23,843

Exercise of stock options
 
95,050

 
1

 

 

 
341

 

 
342

Stock-based compensation
 

 

 

 

 
496

 

 
496

Issuance of common shares for acquisition
 
415,527

 
4

 
 
 
 
 
1,895

 
 
 
1,899

Issuance of restricted stock
 
52,992

 

 

 

 

 

 

Net loss
 

 

 

 

 

 
(1,293
)
 
(1,293
)
Balances, June 30, 2017
 
16,304,027

 
163

 
(295,615
)
 
(1,554
)
 
28,063

 
(1,385
)
 
25,287

Stock-based compensation
 

 

 

 

 
121

 

 
121

Net income
 

 

 

 

 

 
75

 
75

Balances, September 30, 2017
 
16,304,027

 
$
163

 
(295,615
)
 
$
(1,554
)
 
$
28,184

 
$
(1,310
)
 
$
25,483


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
(Unaudited)
(In thousands)

 
 
Three-Months Ended
September 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income (loss)
 
$
75

 
$
(967
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
390

 
338

(Gain) loss on disposal of property, plant and equipment
 
(2
)
 
6

Stock-based compensation expense
 
121

 
139

Changes in operating assets and liabilities, net of effects of business acquisitions:
 
 

 
 

Accounts receivable
 
274

 
(772
)
Inventory
 
(72
)
 
(252
)
Prepaid and other assets
 
126

 
(213
)
Accounts payable and accrued liabilities
 
(29
)
 
644

Deferred revenue
 
25

 
285

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
908

 
(792
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Purchase of property, plant and equipment
 
(235
)
 
(806
)
Cash proceeds from sale of property, plant and equipment
 
3

 
13

Additions to intangible assets
 
(41
)
 

Payments for business acquisitions, net of cash acquired
 

 
(7,062
)
NET CASH USED IN INVESTING ACTIVITIES
 
(273
)
 
(7,855
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from exercise of stock options
 

 
141

Proceeds from long-term debt
 

 
3,000

Repayments of long-term debt
 
(150
)
 
(21
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
(150
)
 
3,120

 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
485

 
(5,527
)
 
 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
 
4,675

 
12,435

 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
 
$
5,160

 
$
6,908

 
 
 
 
 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
 
 

 
 

Income taxes paid
 
$
3

 
$

 
 
 
 
 
Interest paid on long-term debt
 
$
17

 
$
22

 
 
 
 
 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 

 
 

 
 
 
 
 
Issuance of common stock for acquisition
 
$

 
$
1,889

Unpaid consideration related to acquisitions
 
$

 
$
140

Transfer of equipment to inventory
 
$
69

 
$
34

Property, plant and equipment financed through accounts payable
 
$
21

 
$
310


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

Organization : 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.), Sharps Safety, Inc., Alpha Bio/Med Services LLC, Bio-Team Mobile LLC and Citiwaste, LLC (collectively, “Sharps” or the “Company”). All significant intercompany accounts and transactions have been eliminated upon consolidation.

Business : Sharps is a leading full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous for small and medium quantity generators. The Company’s solutions include Sharps Recovery System™ (formerly Sharps Disposal by Mail System ® ), TakeAway Medication Recovery System™, MedSafe ® , TakeAway Recycle System™, ComplianceTRAC SM , SharpsTracer ® , Sharps Secure ® Needle Disposal System, Complete Needle™ Collection & Disposal System, TakeAway Environmental Return System™, Pitch-It IV™ Poles, Asset Return System and Spill Kit and Recovery System . The Company also offers its route-based pick-up service in a twenty-three ( 23 ) state region of the South, Southeast and Northeast portions of the United States.

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 generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. Additionally, the preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts. 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 September 30, 2017 , the results of its operations for the three months ended September 30, 2017 and 2016 , cash flows for the three months ended September 30, 2017 and 2016 and stockholders’ equity for the three months ended September 30, 2017 . The results of operations for the three months ended September 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2018 . 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, 2017 .

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition: The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered, and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonably assured except for those sales via multiple-deliverable revenue arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse. During both the three months ended September 30, 2017 and 2016 , the Company recorded revenue from inventory builds that are held in vendor managed inventory under these service agreements of $1.0 million . As of September 30, 2017 and June 30, 2017 , $2.9 million and $2.7 million , respectively, of solutions sold through that date were held in vendor managed inventory pending fulfillment or shipment to patients of pharmaceutical manufacturers who offer these solutions to patients in an ongoing patient support program.

Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System and various other solutions like the TakeAway Medication Recovery Systems referred to as “Mailbacks” and Sharps Pump and Asset Return Systems, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation and (3) treatment service. In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based on the

7


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

product and services, provided, including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.

Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.

Income Taxes : Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under GAAP, the valuation allowance has been recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the prior year ended June 30, 2017 .

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

Stock-Based Compensation : Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grant date, based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

Fair Value of Financial Instruments : The Company considers the fair value of all financial instruments, including cash and cash equivalents, accounts receivable and accounts payable to approximate their carrying values at September 30, 2017 and June 30, 2017 due to their short-term nature. The carrying value of the Company’s debt approximates fair value due to the market rates of interest.


8


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


NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In March 2016, guidance for revenue from contracts with customers regarding principal versus agent considerations was issued which modified examples to assist in the application of the guidance. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company is in the initial stages of evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

NOTE 5 – INCOME TAXES

The Company’s net deferred tax assets have been fully reserved by a tax valuation allowance. The Company’s effective tax rate for the three months ended September 30, 2017 was 8.0% reflecting estimated state income taxes. The Company’s tax expense associated with taxable income during the three months ended September 30, 2017 was offset by the utilization of net operating loss carryforwards. No income tax expense was recorded for the three months ended September 30, 2016 as it was not material due to the valuation allowance and net operating losses.

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT

On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million ) and general corporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus the lessor of 50% of eligible inventory and $3.0 million . Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five -year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5% . The LIBOR Margin may increase to as high as 3.0% depending on the Company’s cash flow leverage ratio.  The interest rate as of September 30, 2017 was approximately 3.75% . The Company pays a fee of 0.25% per annum on the unused amount of the line of credit.

At September 30, 2017 , long-term debt consisted of the following (in thousands):
Non-interest bearing, unsecured note payable assumed in acquisition, monthly payments of $7; maturing September 2018.
$
83

 
 

Term loan, bearing interest at 3.75%, monthly payments of $43; maturing March 2022.
2,370

 
 

Total long-term debt
2,453

Less: current portion
600

Long-term debt, net of current portion
$
1,853


The Company has availability under the Credit Agreement of $11.6 million ( $6.0 million for the working capital and $5.6 million for the acquisitions) as of September 30, 2017 which may be limited by its leverage covenant. The Company also has $10,000 in letters of credit outstanding as of September 30, 2017 .

9


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



The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain, beginning with the twelve-month period ending September 30, 2017, a maximum cash flow leverage ratio of no more than 3.5 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The maximum cash flow leverage ratio decreases to 3.25 to 1.0 on December 31, 2017 and to 3.0 to 1.0 on March 31, 2018. The Credit Agreement, which expires on March 29, 2019 , also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders.

Payments due on long-term debt during each of the five years subsequent to September 30, 2017 are as follows (in thousands):
Twelve Months Ending September 30,
 
2018
$
600

2019
517

2020
517

2021
517

2022
302

 
$
2,453


The Company utilizes performance bonds to support operations based on certain state requirements. At September 30, 2017 , the Company had performance bonds outstanding covering financial assurance up to $0.6 million .

NOTE 7 – STOCK-BASED COMPENSATION

Stock-based compensation cost for options and restricted stock awarded to employees and directors is measured at the grant date, based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).  During the three months ended September 30, 2017 and 2016 , stock-based compensation amounts are as follows (in thousands):

 
 
Three-Months Ended
September 30,
 
 
2017
 
2016
Stock-based compensation expense included in:
 
 
 
 
Cost of revenues
 
$
14

 
$
12

Selling, general and administrative
 
107

 
127

Total
 
$
121

 
$
139



10


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


NOTE 8 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings 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.

The Company’s restricted stock awards are treated as outstanding for earnings per share calculations since these shares have full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material.

The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share data):
 
 
Three-Months Ended
September 30,
 
 
2017
 
2016
Net income (loss), as reported
 
$
75

 
$
(967
)
 
 
 
 
 
Weighted average common shares outstanding
 
16,008

 
15,868

Effect of dilutive stock options
 
85

 

Weighted average diluted common shares outstanding
 
16,093

 
15,868

 
 
 
 
 
Net income (loss) per common share
 
 

 
 

Basic and diluted
 
$
0.00

 
$
(0.06
)
 
 
 
 
 
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive
 
231

 
145


NOTE 9 - EQUITY TRANSACTIONS

During the three months ended September 30, 2017 and 2016 , stock options to purchase shares of the Company’s common stock were exercised as follows:

 
 
Three-Months Ended
September 30,
 
 
2017
 
2016
Options Exercised
 

 
46,223

Proceeds (in thousands)
 
$

 
$
141

Average exercise price per share
 
$

 
$
3.05


As of September 30, 2017 , there was $0.3 million of stock option and restricted stock compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 2.62 years .


11


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


NOTE 10 – GOODWILL AND INTANGIBLE ASSETS

At September 30, 2017 and June 30, 2017 , intangible assets consisted of the following (in thousands):
 
 
 
 
September 30, 2017
 
June 30, 2017
 
 
Estimated
Useful Lives
 
Original
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Original
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationships
 
7 years
 
$
3,007

 
$
(597
)
 
$
2,410

 
$
3,007

 
$
(490
)
 
$
2,517

Permits
 
6 - 15 years
 
1,414

 
(314
)
 
1,100

 
1,373

 
(288
)
 
1,085

Patents
 
5 - 17 years
 
383

 
(268
)
 
115

 
383

 
(264
)
 
119

Tradename
 
7 years
 
270

 
(48
)
 
222

 
270

 
(39
)
 
231

Non-compete
 
5 years
 
117

 
(29
)
 
88

 
117

 
(23
)
 
94

Total intangible assets, net
 
 
 
$
5,191

 
$
(1,256
)
 
$
3,935

 
$
5,150

 
$
(1,104
)
 
$
4,046

 
During both the three months ended September 30, 2017 and 2016 , amortization expense was $0.2 million . There have been no changes in the carrying amount of goodwill since June 30, 2017 .
 
As of September 30, 2017 , future amortization of intangible assets is as follows (in thousands):

Twelve Months Ending September 30,
 
2018
606

2019
606

2020
606

2021
599

2022
571

Thereafter
947

 
$
3,935



NOTE 11 – INVENTORY

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

 
 
September 30, 2017
 
June 30, 2017
Raw materials
 
$
1,255

 
1,272

Finished goods
 
2,984

 
2,826

Total
 
$
4,239

 
4,098



12


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


NOTE 12 – REVENUES BY SOLUTION

The components of revenues by solution are as follows (in thousands):

 
 
Three-Months Ended September 30,
 
 
2017
 
% Total
 
2016
 
% Total
REVENUES BY SOLUTION:
 
 
 
 
 
 
 
 
Mailbacks
 
$
5,339

 
55.1
%
 
$
6,249

 
65.6
%
Route-based pickup services
 
1,761

 
18.2
%
 
1,465

 
15.4
%
Unused medications
 
1,172

 
12.1
%
 
791

 
8.3
%
Third party treatment services
 
434

 
4.5
%
 
68

 
0.7
%
Other (1)
 
977

 
10.1
%
 
958

 
10.0
%
Total revenues
 
$
9,683

 
100.0
%
 
$
9,531

 
100.0
%
 
 
 
 
 
 
 
 
 
 
(1)
The Company’s other products include non-mailback products such as IV poles, accessories, containers, asset return boxes and other miscellaneous items.

13




ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words "will," "may," "position," "plan," "potential," "continue," "anticipate," "believe," "expect," "estimate," "project" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the known and unknown risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q or refer to our Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that is not possible to predict or identify all such factors and as such should not consider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update these forward-looking statements.

GENERAL

Sharps Compliance Corp. is a leading full-service national provider of comprehensive waste management services including medical, pharmaceutical and hazardous. Our solutions facilitate the proper collection, containment, transportation and treatment of numerous types of healthcare-related materials, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, or sharps, hazardous waste and unused consumer dispensed medications and over-the-counter drugs. We serve customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), assisted living and long-term care facilities (assisted living, continuing care, long-term acute care, memory care and skilled nursing), government (federal, state and local), consumers, commercial and agriculture, as well as distributors to many of the aforementioned markets. We assist our customers in determining which of our solution offerings best fit their needs for the collection, containment, return transportation and treatment of medical waste, used healthcare materials, pharmaceutical waste, hazardous waste and unused dispensed medications. Our differentiated approach provides our customers the flexibility to return and properly treat medical waste, used healthcare materials or unused dispensed medications through a variety of solutions and products transported primarily through the United States Postal Service (“USPS”). For customers with facilities or locations that may generate larger quantities of medical waste, we integrate the route-based pick-up service into our complete offering. The benefits of this comprehensive offering include single point of contact, consolidated billing, integrated manifest and proof of destruction repository in addition to our cost savings. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth. We continue to take advantage of the many opportunities in all markets served as we educate the market place and as prospective customers become more aware of alternatives to traditional methods of disposal (i.e., route-based pick-up services).

Our key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, surgery centers, retail pharmacies and clinics and the professional market, which is comprised of physicians, dentists and veterinary practices. The Company’s flagship product, the Sharps ® Recovery System, is a comprehensive solution for the containment, transportation, treatment and tracking of medical waste and used healthcare materials. In October 2014, the Company launched MedSafe ® , a patent pending solution for the safe collection, transportation and proper disposal of unwanted and expired prescription medications including controlled substances from ultimate users. MedSafe has been designed to meet or exceed the regulations issued by the Drug Enforcement Administration (“DEA”) implementing the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), which became effective October 9, 2014. In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. Additionally, the Company now services parts of Texas and Louisiana with route-based pickup services. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. The Company now offers its route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. Our other solutions include TakeAway Medication Recovery System™, TakeAway Recycle System™, ComplianceTRAC SM , Universal Waste Shipback Systems, TakeAway Environmental Return System™, SharpsTracer ® , Sharps Secure ® Needle Disposal System, Complete Needle™ Collection & Disposal System, Pitch-It IV™ Poles, Asset Return System, Sharps ® MWMS™ (a Medical Waste Management System (“MWMS”)) and Spill Kit and Recovery System.

RESULTS OF OPERATIONS

The following analyzes changes in the consolidated operating results and financial condition of the Company during the three months ended September 30, 2017 and 2016 . The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Operations (dollars in thousands and percentages expressed as a percentage of revenue):
 
 
Three-Months Ended September 30,
 
 
2017
 
%
 
2016
 
%
 
 
(Unaudited)
Revenues
 
$
9,683

 
100.0
 %
 
$
9,531

 
100.0
 %
Cost of revenues
 
6,655

 
68.7
 %
 
6,572

 
69.0
 %
Gross profit
 
3,028

 
31.3
 %
 
2,959

 
31.0
 %
SG&A expense
 
2,725

 
28.1
 %
 
3,699

 
38.8
 %
Depreciation and amortization
 
202

 
2.1
 %
 
200

 
2.1
 %
Operating income (loss)
 
101

 
1.0
 %
 
(940
)
 
(9.9
)%
Interest income
 
5

 
 

 
4

 


Interest expense
 
(24
)
 
 

 
(31
)
 


Total other expense
 
(19
)
 
(0.2
)%
 
(27
)
 
(0.3
)%
Income (loss) before income taxes
 
82

 
0.8
 %
 
(967
)
 
(10.1
)%
Income tax expense
 
7

 
0.1
 %
 

 
 %
Net Income (loss)
 
$
75

 
0.8
 %
 
$
(967
)
 
(10.1
)%
 
THREE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016

Total revenues for the three months ended September 30, 2017 of $9.7 million increased by $0.2 million, or 1.6%, over the total revenues for the three months ended September 30, 2016 of $9.5 million . The increase in revenue is due to product returns on sales in prior periods in excess of current year deferred revenue. The components of billings by market are as follows (in thousands):
 
 
Three-Months Ended September 30,
 
 
(Unaudited)
 
 
2017
 
2016
 
Variance
BILLINGS BY MARKET:
 
 
 
 
 
 
Professional
 
$
3,101

 
$
2,818

 
$
283

Home Health Care
 
2,001

 
1,866

 
135

Pharmaceutical Manufacturer
 
1,532

 
1,787

 
(255
)
Retail
 
1,400

 
2,059

 
(659
)
Assisted Living
 
604

 
593

 
11

Government
 
554

 
450

 
104

Environmental
 
434

 
68

 
366

Other
 
218

 
207

 
11

Subtotal
 
9,844


9,848


(4
)
GAAP Adjustment *
 
(161
)
 
(317
)
 
156

Revenue Reported
 
$
9,683


$
9,531


$
152


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


14




The components of billings by solution are as follows (in thousands):

 
 
Three-Months Ended September 30,
 
 
2017
 
% Total
 
2016
 
% Total
BILLINGS BY SOLUTION:
 
 
 
 
 
 
 
 
Mailbacks
 
$
5,500

 
55.9
%
 
$
6,566

 
66.7
%
Route-based pickup services
 
1,761

 
17.9
%
 
1,465

 
14.9
%
Unused medications
 
1,172

 
11.9
%
 
791

 
8.0
%
Third party treatment services
 
434

 
4.4
%
 
68

 
0.7
%
Other (1)
 
977

 
9.9
%
 
958

 
9.7
%
Total billings
 
$
9,844

 
100.0
%
 
$
9,848

 
100.0
%
GAAP adjustment (2)
 
(161
)
 
 

 
(317
)
 
 

Revenue reported
 
$
9,683

 
 

 
$
9,531

 
 


(1)
The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
(2)
Represents the net impact of the revenue recognition adjustment required to arrive at reported generally accepted accounting principles (“GAAP”) revenue.  Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported.  GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction.  The difference between customer billings and GAAP revenue is reflected in the Company’s balance sheet as deferred revenue.

Billings were relatively flat compared to the prior year. Billings increased in the Environmental ($0.4 million), Professional ($0.3 million), Home Health Care ($0.1 million) and Government ($0.1 million) markets. Billings decreased in the Retail ($0.7 million) and Pharmaceutical Manufacturer ($0.3 million) markets. The increase in Environmental billings was due to higher third party treatment billings from our treatment facilities in Texas and Pennsylvania. Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sector, which consists largely of physicians, clinics, dentists, surgery centers, veterinarians and other healthcare professionals, who benefit from the cost-effective and convenient Sharps Recovery System™ and the Company’s route-based pick-up services. Home Health Care billings increased due to the timing of distributor purchases. The increase in Government billings was due to Medsafe related orders. The decrease in Retail billings was due primarily to lower flu immunization related orders and the loss of one retail pharmacy customer. The decrease in Pharmaceutical Manufacturer billings was mainly due to timing of inventory builds. Billings for Mailbacks in the three months ended September 30, 2017 decreased 16.2% to $5.5 million as compared to $6.6 million in the prior year period and represented 55.9% of total billings.  Billings for Route-Based Pickup Services increased 20.2% to $1.8 million as compared to $1.5 million in the prior year period and represented 17.9% of total billings.

Cost of revenues for the three months ended September 30, 2017 of $6.7 million was 68.7% of revenues.  Cost of revenues for the three months ended September 30, 2016 of $6.6 million was 69.0% of revenues.  The gross margin for the three months ended September 30, 2017 of 31.3% was in line with the gross margin for the three months ended September 30, 2016 of 31.0% .

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2017 and 2016 were $2.7 million and $3.7 million , respectively.  The three months ended September 30, 2016 included $0.7 million of one-time expenses related to the Company's acquisition of Citiwaste. Without these costs, SG&A for the first quarter of fiscal 2017 was $3.0 million. The decrease in SG&A (after excluding one-time expenses) for the three months ended September 30, 2017 of $0.3 million reflects the impact of cost savings initiatives launched in the second quarter of fiscal year 2017.

The Company reported operating income of $0.1 million for the three months ended September 30, 2017 compared to operating loss of $0.9 million for the three months ended September 30, 2016 . Operating income increased mainly due to lower SG&A costs (discussed above).
 
The Company reported income before income taxes of $0.1 million for the three months ended September 30, 2017 versus loss before income taxes of $1.0 million for the three months ended September 30, 2016 . Income before income taxes increased due to the change in operating income (discussed above).

The Company’s effective tax rate for the three months ended September 30, 2017 was 8.0% reflecting estimated state income tax payments. No income tax expense was recorded for the three months ended September 30, 2016 as it was not material due to the valuation allowance and net operating losses.

15





The Company reported a net income of $0.1 million for the three months ended September 30, 2017 compared to net loss of $1.0 million for the three months ended September 30, 2016 .  Net income increased due to the change in the operating income (discussed above).

The Company reported basic and diluted income per share of $0.00 for the three months ended September 30, 2017 versus basic and diluted loss per share of $(0.06) for the three months ended September 30, 2016 .  Basic and diluted income per share increased due to the change in net income (discussed above).

PROSPECTS FOR THE FUTURE

The Company continues to focus on core markets and solution offerings that fuel growth. Its key markets include healthcare facilities, pharmaceutical manufacturers, home healthcare providers, assisted living/long-term care, retail pharmacies and clinics, and the professional market which is comprised of physicians, dentists, surgery centers and veterinary practices. These markets require cost-effective services for managing medical, pharmaceutical and hazardous waste.

The Company believes its growth opportunities are supported by the following:

A large professional market that consists of dentists, veterinarians, clinics, private practice physicians, urgent care facilities, ambulatory surgical centers and other healthcare facilities. This regulated market consists of small to medium quantity generators of medical, pharmaceutical and hazardous waste where we can offer a lower cost to service with solutions to match individual facility needs. The Company addresses this market from two directions: (i) field sales which focus on larger-dollar and nationwide opportunities where we can integrate the route-based pickup service along with our mailback solutions to create a comprehensive medical waste management offering and (ii) inside and online sales which focus on the individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and assisted living/long-term care facilities. The Company is able to compete more aggressively in the medium quantity generator market with the addition of route-based services where the mailback may not be as cost effective. The Company’s route-based business provides direct service to areas encompassing about 155 million people or 48% of the U.S. population.
 
In July 2015 and December 2015, the Company augmented its network of medical and hazardous waste service providers with acquisitions of route-based pickup services in the Northeast serving Pennsylvania, Maryland, Ohio and other neighboring states. In July 2016, the Company acquired another route-based pickup service which expanded service to New York and New Jersey and strengthened the Company’s position in the Northeast. Through a combination of acquisition and organic growth, the Company now offers route-based pickup services in a twenty-three (23) state region of the South, Southeast and Northeast portions of the United States. The Company directly serves more than 9,500 customer locations with route-based pickup services. With the addition of these route-based pickup regions and the network of medical and hazardous waste service providers servicing the entire U.S., the Company offers customers a blended product portfolio to effectively manage multi-site and multi-sized locations, including those that generate larger quantities of waste. The network has had a significant positive impact on our pipeline of sales opportunities - over 60% of this pipeline is attributable to opportunities providing comprehensive waste management service offerings where both the mailback and pickup service are integrated into the offering.

The changing demographics of the U.S. population – according to the U.S. Census Bureau, 2012 Population Estimates and National Projections, one out of five Americans will be 65 years or older by 2030, which will increase the need for cost-effective medical waste management solutions, especially in the long-term care and home healthcare markets. With multiple solutions for managing regulated healthcare-related waste, the Company delivers value as a single-source provider with blended mailback and route-based pickup services matched to the waste volumes of each facility.

The shift of healthcare from traditional settings to the retail pharmacy and clinic markets, where the Company focuses on driving increased promotion of the Sharps Recovery System. According to the Centers for Disease Control ("CDC"), 24% of flu shots for adults were administered in a retail clinic. Over the flu seasons from 2011 to 2014, the growth in the Retail flu business for Sharps was between 24% and 36%. Despite the decrease in Retail flu business for fiscal year 2017 (the 2016 flu season) of 15% due to a mild flu season and the loss of one retail pharmacy customer, Sharps believes the Retail market should continue to contribute to long-term growth for the Company as consumers increasingly use alternative sites, such as retail pharmacies, to obtain flu and other immunizations.

The passage of regulations for ultimate user medication disposal allows the Company to offer new solutions (MedSafe and TakeAway Medication Recovery System envelopes) that meet the regulations for ultimate user controlled substances disposal (Schedules II-V) to retail pharmacies. Additionally, with the new regulations, the Company is able to provide

16




the MedSafe and TakeAway Medication Recovery Systems to assisted living and hospice to address a long standing issue within long-term care.

Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste — the Company's Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal.

With an increased number of self-injectable medication treatments and local regulations, the Company believes its flagship product, the Sharps Recovery System, continues to offer the best option for proper sharps disposal at an affordable price. The Company delivers comprehensive services to pharmaceutical manufacturers that sell high-dollar, self-injectable medications, which include data management, compliance reporting, fulfillment, proper containment with disposal, branding and conformity with applicable regulations. In addition, the Company provides self-injectors with online and retail purchase options of sharps mailback systems, such as the Sharp Recovery System and Complete Needle Collection & Disposal System, respectively.

A heightened interest by many commercial companies who are looking to improve workplace safety with proper sharps disposal and unused medication disposal solutions — the Company offers a variety of services to meet these needs, including the Sharps Secure Needle Disposal System, Sharps Recovery System, Spill Kits and TakeAway Medication Recovery System envelopes.

The Company continually develops new solution offerings such as ultimate user medication disposal (MedSafe and TakeAway Medication Recovery System), mailback services for DEA registrant expired inventory of controlled substances (TakeAway Medication Recovery System DEA Reverse Distribution for Registrants) and shipback services for collection and recycling of single-use medical devices from surgical centers and other healthcare facilities (TakeAway Recycle System).

The Company’s strong financial position with a cash balance of $5.2 million and debt of $2.5 million and additional availability under the Credit Agreement as of September 30, 2017 .

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

Cash flow has historically been primarily influenced by demand for products and services, operating margins and related working capital needs as well as more strategic activities including acquisitions, stock repurchases and fixed asset additions.  Cash and cash equivalents increased by $0.5 million to $5.2 million at September 30, 2017 from $4.7 million at June 30, 2017 due to the following:

Cash Flows from Operating Activities - Working capital increased by $0.3 million to $10.8 million at September 30, 2017 from $10.5 million at June 30, 2017 . The increase in working capital is primarily attributed to an increase in cash and cash equivalents and:

a decrease in accounts receivable of $0.3 million to $7.3 million at September 30, 2017 from $7.6 million at June 30, 2017 due to timing of billings and collections.

an increase in inventory of $0.1 million to $4.2 million at September 30, 2017 from $4.1 million at June 30, 2017 . The increase in inventory is due to timing of sales and adjustment of inventory levels to facilitate customer orders.

a decrease in prepaid and other current assets of $0.1 million to $0.6 million at September 30, 2017 from $0.7 million at June 30, 2017 .

Cash Flows used in Investing Activities - Investing activities include capital expenditures of $0.2 million .

Cash Flows used in Financing Activities – Financing activities include repayments of debt of $0.2 million .


17




Off-Balance Sheet Arrangements

The Company was not a party to any off-balance sheet transactions as defined in Item 303 of Regulation S-K for the three months ended September 30, 2017 and the year ended June 30, 2017 .

Credit Facility

On March 29, 2017, the Company entered into to a credit agreement with a commercial bank (“Credit Agreement”). The Credit Agreement, which replaced the Company’s prior credit agreement, provides for a $14.0 million credit facility, the proceeds of which may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million ) and general corporate purposes and (ii) $8.0 million for acquisitions. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus the lessor of 50% of eligible inventory and $3 million. Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five -year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) zero percent or (b) the One Month ICE LIBOR plus a LIBOR Margin of 2.5% . The LIBOR Margin may increase to as high as 3.0% depending on the Company’s cash flow leverage ratio.  The interest rate as of September 30, 2017 was approximately 3.75% . The Company pays a fee of 0.25% per annum on the unused amount of credit facility. At September 30, 2017 , $2.4 million was outstanding related to the acquisition portion of the credit facility and $0.1 million related to the unsecured note payable assumed in acquisition. No amounts were outstanding under the working capital portion of the credit facility at September 30, 2017.

The Company has availability under the Credit Agreement of approximately $11.6 million ( $6.0 million for the working capital and $5.6 million for the acquisitions) as of September 30, 2017 which may be limited by its leverage covenant. The Company also had $10 thousand in letters of credit outstanding as of September 30, 2017.

The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain, beginning with the twelve-month period ending September 30, 2017, a maximum cash flow leverage ratio of no more than 3.5 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The maximum cash flow leverage ratio decreases to 3.25 to 1.0 on December 31, 2017 and to 3.0 to 1.0 on March 31, 2018. The Credit Agreement, which expires on March 29, 2019 , also contains customary events of default which, if uncured, may terminate the Credit Agreement and require immediate repayment of all indebtedness to the lenders.

The Company utilizes performance bonds to support operations based on certain state requirements. At September 30, 2017 , the Company had performance bonds outstanding covering financial assurance up to $0.6 million .

Management believes that the Company’s current cash resources (cash on hand) will be sufficient to fund operations for the twelve months ending November 1, 2018.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition : The Company recognizes revenue when services are provided and from product sales when (i) goods are shipped or delivered and title and risk of loss pass to the customer, (ii) the price is substantially fixed or determinable and (iii) collectability is reasonably assured except for those sales via multiple-deliverable arrangements. Provisions for certain rebates, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. Service agreements which include a vendor managed inventory program include terms that meet the “bill and hold” criteria and as such are recognized when the order is completed, at which point title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse.

Certain products offered by the Company have revenue producing components that are recognized over multiple delivery points (Sharps Recovery System™ and various other solutions like the Takeaway Medication Recovery Systems, referred to as “Mailbacks” and Sharps ® Pump and Asset Return Boxes, referred to as “Pump Returns”) and can consist of up to three separate elements, or units of measure, as follows: (1) the sale of the compliance and container system, (2) return transportation and (3) treatment service. In accordance with the relative selling price methodology, an estimated selling price is determined for all deliverables that qualify for separate units of accounting. The actual consideration received in a multiple-deliverable arrangement is then allocated to the units based on their relative sales price. The selling price for the transportation revenue and the treatment revenue utilizes third party evidence. The Company estimates the selling price of the compliance and container system based

18




on the product and services provided including compliance with local, state and federal laws, adherence to stringent manufacturing and testing requirements, safety to the patient and the community as well as storage and containment capabilities.

Revenue for the sale of the compliance and container is recognized upon delivery to the customer, at which time the customer takes title and assumes risk of ownership. Transportation revenue is recognized when the customer returns the compliance and container system and the container has been received at the Company’s owned or contracted facilities. The compliance and container system is mailed or delivered by an alternative logistics provider to the Company’s owned or contracted facilities. Treatment revenue is recognized upon the destruction or conversion and proof of receipt and treatment having been performed on the container. Since the transportation element and the treatment elements are undelivered services at the point of initial sale of the compliance and container, transportation and treatment revenue is deferred until the services are performed. The current and long-term portions of deferred revenues are determined through regression analysis and historical trends. Furthermore, through regression analysis of historical data, the Company has determined that a certain percentage of all compliance and container systems sold may not be returned. Accordingly, a portion of the transportation and treatment elements are recognized at the point of sale.

Income Taxes : Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under GAAP, the valuation allowance has been recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

Goodwill and Other Identifiable Intangible Assets: Finite-lived intangible assets are amortized over their respective estimated useful lives and evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Goodwill is assessed for impairment at least annually. The Company generally performs its annual goodwill impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of our single reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill present in our single reporting unit. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment during the prior year ended June 30, 2017 .

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, guidance for revenue recognition was issued which supersedes the revenue recognition requirements currently followed by the Company. The new guidance provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In March 2016, guidance for revenue from contracts with customers regarding principal versus agent considerations was issued which modified examples to assist in the application of the guidance. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance is effective for annual reporting periods beginning after December 15, 2017 (effective July 1, 2018 for the Company). The Company is in the initial stages of evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

In February 2016, guidance for leases was issued, which requires balance sheet recognition for rights and obligations of all leases with terms in excess of twelve months. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. The provisions of the new guidance are effective for annual periods beginning after December 15, 2018 (effective July 1, 2019 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.


19




ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. The Company conducted an evaluation (the “Evaluation”), under the supervision and with the participation of the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of September 30, 2017 , pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of September 30, 2017 .

Changes in Internal Control

During the three months ended September 30, 2017 , there were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Refer to Item 1A. Risk Factors in the Company’s annual report on Form 10-K for the year ended June 30, 2017 for the Company’s risk factors. During the period ended September 30, 2017 , there have been no changes to the Company’s risk factors.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None


20




ITEM 6. EXHIBITS

(a)
Exhibits:
 
 
 
 
 
 
 
 
 
 
101.INS
XBRL Instance Document (filed herewith)
 
 
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 
 
101.DEF
XBRL Taxonomy Extension Linkbase Document (filed herewith)
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

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


SIGNATURES

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

 
REGISTRANT:
 
SHARPS COMPLIANCE CORP.
 
 
Dated: November 1, 2017
By: /s/ DAVID P. TUSA
 
David P. Tusa
 
Chief Executive Officer and President
 
(Principal Executive Officer)

Dated: November 1, 2017
By: /s/ DIANA P. DIAZ
 
Diana P. Diaz
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)

21



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

I, David P. Tusa, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 1, 2017
/s/David P. Tusa
 
Chief Executive Officer and President
 
(Principal Executive Officer)





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

I, Diana P. Diaz, certify that:

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

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

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

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
            
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

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

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

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

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

Date: November 1, 2017
/s/Diana P. Diaz
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)





Exhibit 32.1

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

In connection with the quarterly report of Sharps Compliance Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2017 , as filed with the Securities and Exchange Commission on the date hereof, I, David P. Tusa, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

(1)
The Form 10-Q report for the period ended September 30, 2017 , filed with the Securities and Exchange Commission on November 1, 2017 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 period ended September 30, 2017 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: November 1, 2017
/s/David P. Tusa
 
Chief Executive Officer and President
 
 





Exhibit 32.2

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

In connection with the quarterly report of Sharps Compliance Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2017 , as filed with the Securities and Exchange Commission on the date hereof, I, Diana P. Diaz, Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

(1)
The Form 10-Q report for the period ended September 30, 2017 , filed with the Securities and Exchange Commission on November 1, 2017 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 period ended September 30, 2017 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: November 1, 2017
/s/Diana P. Diaz
 
Vice President and Chief Financial Officer