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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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)
Delaware74-2657168
(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Shares, $0.01 Par ValueSMEDThe NASDAQ Capital Market

    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   No 

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 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 ☐
Accelerated filer ☐
Non-accelerated filer
Smaller reporting company 
Emerging growth company




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.

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

As of May 3, 2021, there were 16,890,526 outstanding shares of the Registrant's common stock, par value $0.01 per share.






SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
PAGE

3


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 amounts)
 March 31,June 30,
 20212020
ASSETS  
CURRENT ASSETS  
Cash$11,216 $5,416 
Accounts receivable, net 23,415 11,789 
Inventory4,378 5,638 
Contract asset37 156 
Prepaid and other current assets446 1,287 
TOTAL CURRENT ASSETS39,492 24,286 
PROPERTY, PLANT AND EQUIPMENT, net10,952 8,740 
OPERATING LEASE RIGHT OF USE ASSET8,407 8,747 
FINANCING LEASE RIGHT OF USE ASSET, net647 387 
INVENTORY, net of current portion988 1,064 
OTHER ASSETS110 154 
GOODWILL6,735 6,735 
INTANGIBLE ASSETS, net2,390 2,771 
DEFERRED TAX ASSET 1,252 
TOTAL ASSETS$69,721 $54,136 
LIABILITIES AND STOCKHOLDERS' EQUITY  
CURRENT LIABILITIES  
Accounts payable$3,550 $3,291 
Accrued liabilities3,044 2,768 
Operating lease liability2,398 2,192 
Financing lease liability11565
Current maturities of long-term debt2,836 1,658 
Contract liability6,877 3,262 
TOTAL CURRENT LIABILITIES18,820 13,236 
CONTRACT LIABILITY, net of current portion1,692 705 
OPERATING LEASE LIABILITY, net of current portion6,150 6,671 
FINANCING LEASE LIABILITY, net of current portion537 337 
OTHER LIABILITIES54 104 
DEFERRED TAX LIABILITY32  
LONG-TERM DEBT, net of current portion3,616 3,505 
TOTAL LIABILITIES30,901 24,558 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY  
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 16,882,033 and 16,667,572 shares issued, respectively and 16,586,418 and 16,371,957 shares outstanding, respectively
171 168 
Treasury stock, at cost, 295,615 shares repurchased
(1,554)(1,554)
Additional paid-in capital31,657 30,203 
Retained earnings8,546 761 
TOTAL STOCKHOLDERS' EQUITY38,820 29,578 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$69,721 $54,136 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
 Three-Months Ended
March 31,
 20212020
REVENUES$27,528 $10,414 
Cost of revenues14,129 8,191 
GROSS PROFIT13,399 2,223 
Selling, general and administrative4,181 3,600 
Depreciation and amortization216 201 
OPERATING INCOME (LOSS)9,002 (1,578)
OTHER INCOME (EXPENSE)  
Interest income 4 
Interest expense(55)(36)
Income associated with derivative instrument26  
TOTAL OTHER EXPENSE(29)(32)
INCOME (LOSS) BEFORE INCOME TAXES8,973 (1,610)
INCOME TAX EXPENSE (BENEFIT)
Current1,083 (176)
Deferred1,040 122 
TOTAL INCOME TAX EXPENSE (BENEFIT)2,123 (54)
NET INCOME (LOSS)$6,850 $(1,556)
NET INCOME (LOSS) PER COMMON SHARE
Basic$0.41 $(0.10)
Diluted$0.40 $(0.10)
WEIGHTED AVERAGE SHARES USED IN COMPUTING
   NET INCOME (LOSS) PER COMMON SHARE:
Basic16,556 16,264 
Diluted17,187 16,264 

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

5


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
 Nine-Months Ended
March 31,
 20212020
REVENUES$57,690 $38,578 
Cost of revenues35,031 26,999 
GROSS PROFIT22,659 11,579 
Selling, general and administrative11,725 10,718 
Depreciation and amortization625 602 
OPERATING INCOME10,309 259 
OTHER INCOME (EXPENSE)  
Interest income 13 
Interest expense(134)(81)
Income associated with derivative instrument41  
TOTAL OTHER EXPENSE(93)(68)
INCOME BEFORE INCOME TAXES10,216 191 
INCOME TAX EXPENSE (BENEFIT)
Current1,147 (120)
Deferred1,284 211 
TOTAL INCOME TAX EXPENSE2,431 91 
NET INCOME$7,785 $100 
NET INCOME PER COMMON SHARE
Basic$0.47 $0.01 
Diluted$0.46 $0.01 
WEIGHTED AVERAGE SHARES USED IN COMPUTING
    NET INCOME PER COMMON SHARE:
Basic 16,481 16,211 
Diluted16,978 16,312 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 Common StockTreasury StockAdditional
Paid-in
Capital
 Retained EarningsTotal
Stockholders'
Equity
Shares AmountSharesAmount
Balances, December 31, 202016,799,702 $170 (295,615)$(1,554)$30,814 $1,696 $31,126 
Exercise of stock options72,750 1 — — 313 — 314 
Stock-based compensation— — — — 530 — 530 
Issuance of restricted stock9,581  — —  —  
Net income— — — — — 6,850 6,850 
Balances, March 31, 202116,882,033 $171 (295,615)$(1,554)$31,657 $8,546 $38,820 
 Common StockTreasury StockAdditional
Paid-in
Capital
 Retained Earnings (Accumulated
Deficit)
Total
Stockholders'
Equity
SharesAmountSharesAmount
Balances, December 31, 201916,524,478 $166 (295,615)$(1,554)$29,302 $151 $28,065 
Exercise of stock options114,844 1 — — 517 — 518 
Stock-based compensation— — — — 147 — 147 
Net loss— — — — — (1,556)(1,556)
Balances, March 31, 202016,639,322 $167 (295,615)$(1,554)$29,966 $(1,405)$27,174 
 Common StockTreasury StockAdditional
Paid-in
Capital
Retained EarningsTotal
Stockholders'
Equity
SharesAmountSharesAmount
Balances, June 30, 202016,667,572 $168 (295,615)$(1,554)$30,203 $761 $29,578 
Exercise of stock options141,281 2 — — 623 — 625 
Stock-based compensation— — — — 832 — 832 
Issuance of restricted stock73,180 1 — — (1)—  
Net income— — — — — 7,785 7,785 
Balances, March 31, 202116,882,033 $171 (295,615)$(1,554)$31,657 $8,546 $38,820 
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders'
Equity
Shares AmountSharesAmount
Balances, June 30, 201916,433,128 $165 (295,615)$(1,554)$29,020 $(1,505)$26,126 
Exercise of stock options134,194 1 — — 575 — 576 
Stock-based compensation— — — — 372 — 372 
Issuance of restricted stock72,000 1 — — (1)—  
Net income— — — — — 100 100 
Balances, March 31, 202016,639,322 $167 (295,615)$(1,554)$29,966 $(1,405)$27,174 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7


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

 Nine-Months Ended
March 31,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income $7,785 $100 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization1,445 1,191 
Bad debt expense141 91 
Inventory write-off76 13 
Loss on disposal of property, plant and equipment1 6 
Stock-based compensation expense832 372 
Income on derivative instrument(41) 
Deferred tax expense 1,284 211 
Changes in operating assets and liabilities:
Accounts receivable(11,767)(367)
Inventory1,260 (1,034)
Prepaid and other assets885 (700)
Accounts payable and accrued liabilities846 692 
Contract asset and contract liability4,721 947 
NET CASH PROVIDED BY OPERATING ACTIVITIES7,468 1,522 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment(2,566)(2,500)
Proceeds from sale of property, plant and equipment 3 
Additions to intangible assets(79)(121)
NET CASH USED IN INVESTING ACTIVITIES(2,645)(2,618)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options625 576 
Proceeds from long-term debt961 1,343 
Repayments of long-term debt(545)(387)
Payments on financing lease liabilities(64) 
Payments of debt issuance costs (50)
NET CASH PROVIDED BY FINANCING ACTIVITIES977 1,482 
NET INCREASE IN CASH5,800 386 
CASH, beginning of period5,416 4,512 
CASH, end of period$11,216 $4,898 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds$(210)$90 
Interest paid on long-term debt$120 $32 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment financed through accounts payable$(295)$46 
Purchase of previously leased property, plant and equipment financed with note payable$873 $ 

The accompanying notes are an integral part of these condensed consolidated financial statements.
8

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, Citiwaste, LLC and Sharps Properties, LLC (collectively, “Sharps” or the “Company”). All significant intercompany accounts and transactions have been eliminated upon consolidation.

Business: Sharps is a 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 Recovery System, TakeAway Medication Recovery System™, MedSafe®, TakeAway Recycle System™, ComplianceTRACSM, 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 Recovery System. The Company also offers its route-based pick-up services in a thirty-seven (37) state region of the South, Southeast, Southwest, Midwest 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 March 31, 2021, the results of its operations for the three and nine months ended March 31, 2021 and 2020, cash flows for the nine months ended March 31, 2021 and 2020, and stockholders’ equity for the three and nine months ended March 31, 2021 and 2020. The results of operations for the three and nine months ended March 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2021. 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, 2020. Certain amounts on the balance sheet as of June 30, 2020 have been reclassified to conform to current presentation.

A novel strain of coronavirus ("COVID-19") was first identified in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in servicing customers. The Company has implemented some and may take additional precautionary measures intended to help ensure the well-being of its employees, facilitate continued uninterrupted servicing of customers and minimize business disruptions. The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company. To date, the Company has not identified any material adverse impact of COVID-19 on its financial position and results of operations.
9

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

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition: The components of revenues by solution which reflect a disaggregation of revenue by contract type are as follows (dollar amounts in thousands):
 Three-Months Ended March 31,
 2021% Total2020% Total
REVENUES BY SOLUTION:    
Mailbacks$20,893 75.9 %$4,702 45.1 %
Route-based pickup services3,597 13.1 %2,625 25.2 %
Unused medications2,078 7.5 %2,111 20.3 %
Third party treatment services76 0.3 %38 0.4 %
Other (1)
884 3.2 %938 9.0 %
Total revenues$27,528 100.0 %$10,414 100.0 %
 Nine-Months Ended March 31,
 2021% Total2020% Total
REVENUES BY SOLUTION:    
Mailbacks$37,507 64.9 %$20,383 52.8 %
Route-based pickup services10,244 17.8 %7,762 20.1 %
Unused medications6,152 10.7 %6,815 17.7 %
Third party treatment services390 0.7 %123 0.3 %
Other (1)
3,397 5.9 %3,495 9.1 %
Total revenues$57,690 100.0 %$38,578 100.0 %

(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items with single performance obligations.

Vendor Managed Inventory ("VMI") - The VMI program includes terms that meet the “bill and hold” criteria and as such are recognized when the order is placed, title has transferred, there are no acceptance provisions and amounts are segregated in the Company’s warehouse for the customer. During the three and nine months ended March 31, 2021, the Company recorded billings from inventory builds that are held in VMI under these service agreements of $0.3 million and $3.8 million, respectively. During the three and nine months ended March 31, 2020, the Company recorded billings from inventory builds that are held in VMI under these service agreements of $0.5 million and $2.9 million, respectively. As of March 31, 2021 and June 30, 2020, $3.9 million and $2.8 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.

The contract asset is related to VMI service agreements within the maibacks contract type category when the revenue recognition exceeds the amount of consideration the Company was entitled to at the point in time of satisfying the performance obligation associated with the sale of the compliance and container system. The contract liability is related to the mailbacks and unused medications contract type categories in which cash consideration exceeds the transaction price allocated to completed performance obligations. The amount recognized during the three and nine months ended March 31, 2021 and 2020 related to contract liabilities recorded as of June 30, 2020 and 2019 were $0.3 million and $2.4 million, respectively.

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 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. The Company has historically recorded a valuation allowance to reduce its deferred tax assets to an amount that is more likely than not to be realized. However, during the year ended June 30, 2020, the Company released the full amount of the valuation
10


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
allowance against its deferred tax assets on the basis of the Company's reassessment of the recoverability of its deferred tax assets. During the nine months ended March 31, 2021, the Company's net operating losses were completely utilized.

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.

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 its 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 the 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, 2020 and there have been no triggering events since that date that would warrant further impairment testing.


NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2020, guidance for applying optional expedients and exceptions to ease the potential burden in accounting for reference rate reform on financial reporting was issued. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform on financial reporting. The provisions of the new guidance are effective for interim periods beginning as of March 12, 2020 through December 31, 2022. There has been no material impact on the Company's consolidated financial statements and related disclosures from the modification of its arrangements as of March 31, 2021. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

In June 2016, guidance for credit losses of financial instruments was issued, which requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. The provisions of the new guidance are effective for annual periods beginning after December 15, 2022 (effective July 1, 2023 for the Company), including interim periods within the reporting period, and early application is permitted. The Company is in the initial stages of evaluating the impact of the new guidance on its consolidated financial statements and related disclosures as well as evaluating the available transition methods. The Company will continue to evaluate the standard as well as additional changes, modifications or interpretations which may impact the Company.

NOTE 5 – INCOME TAXES

The Company’s effective tax rate for the three and nine months ended March 31, 2021 was 23.7% and 23.8%, respectively and for the three and nine months ended March 31, 2020 was 3.4% and 47.6%, respectively. During the three and nine months ended March 31, 2021, the effective tax rate is based on the statutory federal tax rate of 21%, now that the valuation has been removed since June 30, 2020, as well as an approximated 5% state income tax rate net of the federal benefit. During the three and nine months ended March 31, 2020, the effective tax rate represented the deferred tax expense related to the effects of indefinite lived intangible assets, such as goodwill, which could not be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets as well as the effects of the state income tax expense for the period.


11

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

NOTE 6 – LEASES

The Company has operating leases for real estate, field equipment, office equipment and vehicles and financing leases for vehicles. Operating leases are included in Operating Lease Right of Use ("ROU") Asset and Operating Lease Liability on our Condensed Consolidated Balance Sheets. Financing leases are included in Financing Lease ROU Asset and Financing Lease Liability on the Condensed Consolidated Balance Sheets.

During the three and nine months ended March 31, 2021 and 2020, lease cost amounts, which reflect the fixed rent expense associated with operating and financing leases, are as follows (in thousands):
Three-Months Ended March 31,Nine-Months Ended March 31,
 2021202020212020
Lease cost (1) - fixed rent expense:
Operating lease cost included in:
Cost of revenues$613 $457 $1,805 $1,342 
Selling, general and administrative107 123 333 305 
Finance lease cost included in:
 Cost of revenues (amortization expense)19 3 54 9 
 Interest expense4  12 1 
 Total$743 $583 $2,204 $1,657 

(1) Short-term lease cost and variable lease cost were not significant during the period.

During the nine months ended March 31, 2021 and 2020, the Company had the following cash and non-cash activities associated with leases (in thousands):
Nine-Months Ended March 31,
 20212020
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash outflow for operating leases$2,080 $1,647 
Non-cash changes to the ROU Asset and Lease Liability
   Additions and modifications to ROU asset obtained from new operating lease liabilities$2,382 $5,436 
   Additions to ROU asset obtained from operating lease liabilities upon adoption of new guidance$ $4,591 
Additions to ROU asset obtained from new financing lease liabilities$314 $138 

As of March 31, 2021, the weighted average remaining lease term for all operating leases is 3.97 years. The weighted average discount rate associated with operating leases as of March 31, 2021 is 4.1%.
12

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

The future payments due under operating leases as of March 31, 2021 is as follows (in thousands):

Future payments due in the twelve months ended March 31,
2022$2,696 
20232,138 
20241,951 
20251,686 
2026778 
Thereafter 
Total undiscounted lease payments9,249 
Less effects of discounting
(701)
Lease liability recognized
$8,548 
On January 22, 2021, the Company exercised its option to purchase real estate in Pennsylvania that it had previously leased. As a result, the Operating Lease ROU Asset and Operating Lease Liability decreased by $0.9 million, the Company's future payments due under operating leases decreased by $1.2 million; Property, Plant and Equipment increased by $0.9 million and Notes Payable increased by $0.9 million.

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT

On March 29, 2017, the Company entered into a credit agreement with a commercial bank which was subsequently amended on June 29, 2018 and on December 28, 2020 (“Credit Agreement”). The amended Credit Agreement, which expires on December 28, 2023, provides for a $14.0 million committed credit facility that can be increased to $18 million upon the Company's request. The proceeds of the Credit Agreement may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $2.0 million) and general corporate purposes, (ii) $8.0 million for acquisitions and (iii) an additional $4 million for working capital, upon the Company's request. Indebtedness under the Credit Agreement is secured by substantially all of the Company’s assets with advances outstanding under the working capital portion of the credit facility at any time limited to a Borrowing Base (as defined in the Credit Agreement) equal to 80% of eligible accounts receivable plus the lesser of (i) 50% of eligible inventory and (ii) $3.0 million. Advances under the acquisition portion of the credit facility are limited to 75% of the purchase price of an acquired company and convert to a five-year term note at the time of the borrowing. Borrowings bear interest at the greater of (a) one-half 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 March 31, 2021 was approximately 3.0%. The Company pays a fee of 0.25% per annum on the unused amount of the committed credit facility.

On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreement with its existing commercial bank (collectively, the “Loan Agreement”). The Loan Agreement provides for a five-year, $3.2 million facility, the proceeds of which are to be utilized for expenditures to facilitate future growth at the Company’s treatment facility in Carthage, Texas (the “Texas Treatment Facility”) as follows: (i) $2.0 million for planned improvements and (ii) $1.2 million for equipment. Indebtedness under the Loan Agreement is secured by the Company’s real estate investment and equipment at the Texas Treatment Facility. Advances under the Loan Agreement mature five years from the Closing Date ("August 21, 2019") with monthly payments beginning in the month after the advancing period ends. The advancing period extended through January 15, 2021 and August 2020 for the real estate portion and the equipment portion of the Loan Agreement, respectively. Borrowings during the advancing period for the real estate portion and for the entire term of the equipment portion of the Loan Agreement bear interest computed at the One Month ICE LIBOR, plus two-hundred and fifty (250) basis points which was a rate of 2.74% on March 31, 2021. The Company has entered into a forward rate lock which fixed the rate on the real estate portion of the Loan Agreement at the expiration of the advancing period at 4.15%.

On January 22, 2021, certain wholly owned subsidiaries of the Company entered into a real estate term loan agreement (the "Real Estate Loan Agreement") with its existing commercial bank. The Real Estate Loan Agreement provides for a five-year, $0.9 million facility, the proceeds of which have been utilized to purchase the property in Pennsylvania which had previously been leased by the Company for its operations. The Real Estate Loan Agreement matures five years from January 22, 2021 with monthly payments based on a 20-year amortization and bears interest at 4.0%.
13

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


On April 20, 2020, the Company received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable providing that the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s workforce, and its ability to meet staffing needs in its route-based, treatment and distribution operations and other critical functions are uncertain and is vital to its operations.

The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. While the Company does have availability under its Credit Agreement, $8.0 million of such availability can only be used for acquisitions and the $6.0 million that is available is in place to support working capital needs, along with current cash on hand. Further, the Company has a limited market capitalization and lack of history of being able to access the capital markets and as a result, the Company believes it meets the certification requirements.

The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The term of the Company’s PPP Loan is two years. The Company has applied for forgiveness of the PPP Loan via its existing commercial bank under the guidelines provided by the Small Business Administration ("SBA") and the Department of Treasury. The annual interest rate on the PPP Loan is 1.0% and no payments of principal or interest are due while the application for forgiveness is under review. If the application for forgiveness is denied, equal monthly payments of principal and interest will be made through the maturity date of April 2022. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.

At March 31, 2021 and June 30, 2020, long-term debt consisted of the following (in thousands):
March 31, 2021June 30, 2020
Acquisition loan, monthly payments of $43; maturing March 2022
$560 $948 
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs of $44
879 929 
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026
2,830 1,103 
Paycheck Protection Program loan2,183 2,183 
Total long-term debt6,452 5,163 
Less: current portion2,836 1,658 
Long-term debt, net of current portion$3,616 $3,505 

The Company has availability under the Credit Agreement of $13.9 million ($5.9 million for the working capital and $8.0 million for acquisitions) as of March 31, 2021 with the option to extend the availability up to $17.9 million. The Company has $0.1 million in letters of credit outstanding as of March 31, 2021.

The Credit and Loan Agreements contain affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than 3.0 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit and Loan Agreements also contain customary events of default which, if uncured, may terminate the agreements and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the agreements. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of March 31, 2021.

14

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

Payments due on long-term debt subsequent to March 31, 2021 are as follows (in thousands):
Twelve Months Ending March 31, 
2022$2,836 
2023527 
2024316 
2025316 
2026 and thereafter2,501 
 $6,496 



NOTE 8 – 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). Total stock-based compensation expense for the three and nine months ended March 31, 2021 and 2020 is as follows (in thousands):
 Three-Months Ended March 31,Nine-Months Ended March 31,
 2021202020212020
Stock-based compensation expense included in:    
Cost of revenues$ $1 $ $4 
Selling, general and administrative530 146 832 368 
Total$530 $147 $832 $372 

NOTE 9 - 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 and diluted EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material.

15

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

The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share amounts):
 Three-Months Ended March 31,Nine-Months Ended March 31,
 2021202020212020
Net income (loss) as reported$6,850 $(1,556)$7,785 $100 
Weighted average common shares outstanding16,556 16,264 16,481 16,211 
Effect of dilutive stock options631  497 101 
Weighted average diluted common shares outstanding17,187 16,264 16,978 16,312 
Net income (loss) per common share    
Basic$0.41 $(0.10)$0.47 $0.01 
Diluted$0.40 $(0.10)$0.46 $0.01 
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive 131  296 

NOTE 10 - EQUITY TRANSACTIONS

During the three and nine months ended March 31, 2021 and 2020, respectively, stock options to purchase shares of the Company's common stock were exercised as follows:
 Three-Months Ended March 31,Nine-Months Ended March 31,
 2021202020212020
Options exercised72,750 114,844 141,281 134,194 
Proceeds (in thousands)$314 $518 $625 $576 
Average exercise price per share$4.32 $4.51 $4.42 $4.29 

As of March 31, 2021, there was $0.3 million of stock compensation expense related to non-vested awards, which is expected to be recognized over a weighted average period of 1.93 years.

NOTE 11 – INVENTORY

The components of inventory are as follows (in thousands):
 March 31, 2021June 30, 2020
Raw materials$1,821 $1,402 
Finished goods3,545 5,300 
Total inventory5,366 6,702 
Less: current portion4,378 5,638 
Inventory, net of current portion$988 $1,064 

The current portion of inventory includes amounts which the Company expects to sell in the next twelve month period based on historical sales.


16


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 "may," "position," "plan," "potential," "continue," "anticipate," "believe," "expect," "estimate," "project" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the known and unknown risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein including the impact of the coronavirus COVID-19 (“COVID-19”) pandemic on our operations and financial results. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q or refer to our Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and as such should not consider the preceding list or the risk factors to be a complete list of all potential risks and uncertainties. The Company does not intend to update these forward-looking statements.

GENERAL

Sharps Compliance Corp. is a leading national healthcare waste management provider specializing in regulated waste streams including medical, pharmaceutical and hazardous. Our services facilitate the safe and proper collection, transportation and environmentally-responsible treatment of regulated waste from customers in multiple healthcare-related markets. The markets we manage are small to medium-size generators of healthcare waste including professional offices (ambulatory surgical centers, physician groups, dentists and veterinarians), long-term care facilities, government agencies, home health care, retail clinics and immunizing pharmacies. Additionally, our mailback solutions are positioned to manage waste generated in the home setting such as sharps, lancets and ultimate-user medications which generates business relationships with pharmaceutical manufacturers and other markets to provide safe and proper disposal. Lastly, we maintain a strong distribution network for the sale of our solutions within the aforementioned markets.

We assist our customers in determining solutions that best fit their needs for the collection, transportation and treatment of regulated medical, pharmaceutical and hazardous waste. Our differentiated approach provides our customers the flexibility to transport waste via direct route-based services, the United States Postal Service (“USPS”) or common carrier dependent upon quantity of waste generated, cost savings and facility needs. Our comprehensive services approach includes a single point of contact, consolidated billing, integrated manifest and proof of destruction repository. Furthermore, we provide comprehensive tracking and reporting tools that enable our customers to meet complex medical, pharmaceutical and hazardous waste disposal and compliance requirements. We believe the fully-integrated nature of our operations is a key factor leading to our success and continued recurring revenue growth.

Our flagship products are the Sharps Recovery System™ and MedSafe® Medication Disposal System. These two product offerings account for over 50% of company revenues. The Sharps Recovery System is a comprehensive medical waste management mailback solution used in all markets due to its cost-effective nature and nationwide availability. The MedSafe solution meets the immediate needs of an increasing community risk associated with unused, ultimate-user, medications. Developed in accordance with the Drug Enforcement Administration (“DEA”) implementation of the Secure and Responsible Drug Disposal Act of 2010 (the “Act”), MedSafe is a superior solution used in both private and public sectors to properly remove medications from communities and aid in the prevention of drug abuse.

Over the past few years, the Company has made a series of investments to build a robust direct service, route-based, pickup offering for medical, pharmaceutical and hazardous waste. We have built an infrastructure capable of covering more than 80% of the U.S. population with permitted trucks, transfer stations and treatment facilities. We continue to add routes and the infrastructure required for operational efficiency to reach more customers and prospects directly. Our route-based services, matched with comprehensive mailback solutions, offer us a key differentiator in the market and the ability to capitalize on larger or regional contracts within the healthcare market. With the growth in infrastructure to support the route-based service, we have strategically added new distribution for faster and more cost-effective delivery of products to customers.

We continue to develop new solutions to meet market demands. Over the past five years we have added a robust portfolio of ultimate-user medication disposal solutions for controlled substances, DEA-inventory controlled medication disposal for professionals, the Black Pail Program for disposal of most unused pharmaceuticals, including Resource Conservation and Recovery Act ("RCRA") hazardous medications, and the Inhaler Disposal system. We also developed route-based services for medical, pharmaceutical and hazardous waste, the TakeAway Recycling System™ for single-use devices (SUDs) and the Hazardous Drug Spill Control Kit™, a USP <800> (as defined below) compliant spill kit for cleanup of chemotherapy and other hazardous drug spills.

As hospitals and surgery centers increase their sustainability efforts, they are looking for ways to recycle more materials, such as SUDs. SUDs are constructed of materials capable of being recycled, primarily plastics and metals. With a greater emphasis for more sustainable solutions, the TakeAway Recycle System is a much-needed complement to the single-use device market.

Our dually permitted trucks allow our hazardous waste direct pickup service to align with our medical waste so that we can fully service all our customers. Most healthcare professionals have hazardous waste in addition to medical waste. By also transporting hazardous waste, we have a competitive advantage over local haulers while still offering cost-effective pricing.

Uncertainty Relating to COVID-19 and the Company’s Continuation of Its Infrastructure Build Out
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we did not incur significant disruptions during the three and nine months ended March 31, 2021 from COVID-19, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on our operations or mandates to provide products or services), impacts on our supply chain, the effect on customer demand or changes to our operations. The health of our workforce, and our ability to meet staffing needs in our route-based, treatment and distribution operations and other critical functions cannot be predicted and is vital to our operations.
The Company has taken precautions to ensure the safety of its employees, while at the same time remaining active as a leading national provider of comprehensive medical waste solutions, bringing uninterrupted essential support to its customers and the healthcare industry. For example, the Company increased its route-based drivers, plant and operations personnel by ten percent (10%) in advance of the COVID-19 pandemic to make sure that its operations and servicing of customers would not be adversely affected by the potential absence of employees due to COVID-19. The Company also temporarily increased the pay for its front-line operations personnel and drivers during the pandemic through June 30, 2020.
Related to customer demand, the Company saw temporary closures of about 1,000 dental, dermatology and physician practices equating to about $0.1 million in lost monthly revenue for the Company from mid March 2020 through June 2020. Offsetting this has been increased volumes of medical waste generated by many of the Company’s long-term care customers who are utilizing the Company’s systems and services to contain and dispose of personal protective equipment (“PPE”) utilized in their facilities.
The Company is continuing to focus on expanding its infrastructure, programs which began in calendar 2019, to support what it anticipated would be a strong 2020 flu and immunization season as well as medical waste disposal related to the COVID-19 vaccine which became available for administration in the U.S at the end of calendar year 2020. Additionally, the Company saw some increased medical waste volumes related to COVID-19 such as the long-term care market where PPE in many facilities is being disposed of as medical waste and not as trash which has been the historical practice. Finally, the Company’s route-based footprint now extends to 37 states, or 80% of the population, significantly increasing the pipeline of larger small and medium quantity generator sales opportunities.
To address these opportunities, the Company has:
Significantly increased its production and inventory of medical waste mailback and shipback solutions to ensure it remains well positioned to meet an expected increase in customer demand related to the 2020 season flu and the potential COVID-19 vaccine;
Increased its medical waste processing capacity from 10 million to 27 million pounds per year through the addition of a larger autoclave at its Texas facility as well as an additional autoclave at its Pennsylvania facility;
Secured a larger warehouse and distribution facility in Pennsylvania to store and distribute larger volumes of medical waste mailbacks; and
Expanded its route-based truck fleet and drivers necessary to facilitate the potential increase in volumes from its expanded 37 state route-based footprint and related larger prospect opportunities.

These efforts have contributed to the Company's success in meeting customer needs throughout the pandemic, particularly as the rollout of COVID-19 vaccines has created increased demand for the Company's services.
The Company applied for and received loan proceeds of $2.2 million under the Paycheck Protection Program (“PPP”) under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP was established as part of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
On a broader note, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, suppliers and other business partners; however, any material effect on these parties could adversely impact our results of operations, cash flows and financial conditions. External effects from the COVID-19 pandemic began at the end of the third quarter of 2020 and did not have a material adverse impact on the three and nine months ended March 31, 2021 results. The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with customers, employees and business partners and assessing potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, please see Item 1A, Risk factors in the Company's annual report on form 10-K for the year ended June 30, 2020.

RESULTS OF OPERATIONS

The following analyzes changes in the condensed consolidated operating results and financial condition of the Company during the three and nine months ended March 31, 2021 and 2020. The following table sets forth for the periods indicated certain items from the Company's Condensed Consolidated Statements of Operations (dollars in thousands and percentages expressed as a percentage of revenues, unaudited):
 Three-Months Ended March 31,Nine-Months Ended March 31,
 2021%2020%2021%2020%
Revenues$27,528 100.0 %$10,414 100.0 %$57,690 100.0 %$38,578 100.0 %
Cost of revenues14,129 51.3 %8,191 78.7 %35,031 60.7 %26,999 70.0 %
Gross profit13,399 48.7 %2,223 21.3 %22,659 39.3 %11,579 30.0 %
SG&A expense4,181 15.2 %3,600 34.6 %11,725 20.3 %10,718 27.8 %
Depreciation and amortization216 0.8 %201 1.9 %625 1.1 %602 1.6 %
Operating Income (Loss)9,002 32.7 %(1,578)(15.2)%10,309 17.9 %259 0.7 %
Total other expense(29)(0.1)%(32)(0.3)%(93)(0.2)%(68)(0.2)%
Income (loss) before income taxes8,973 32.6 %(1,610)(15.5)%10,216 17.7 %191 0.5 %
Income tax expense (benefit)2,123 7.7 %(54)(0.5)%2,431 4.2 %91 0.2 %
Net Income (Loss)$6,850 24.9 %$(1,556)(14.9)%$7,785 13.5 %$100 0.3 %
 
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THREE MONTHS ENDED MARCH 31, 2021 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2020

Total revenues for the three months ended March 31, 2021 of $27.5 million increased compared to the total revenues for the three months ended March 31, 2020 of $10.4 million. The increase in revenue is mainly due to increased billings in the Retail, Professional and Home Health Care markets. The net increase in billings is partially offset by current year deferred revenue net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands, unaudited):
 Three-Months Ended March 31,
 20212020Variance
BILLINGS BY MARKET:   
Retail$21,714 $2,314 $19,400 
Professional4,606 3,885 721 
Home Health Care2,299 1,663 636 
Pharmaceutical Manufacturer567 857 (290)
Long-Term Care973 758 215 
Government642 571 71 
Environmental76 38 38 
Other131 240 (109)
Subtotal31,008 10,326 20,682 
GAAP Adjustment *(3,480)88 (3,568)
Revenue Reported$27,528 $10,414 $17,114 

*Represents the net impact of the revenue recognition adjustments to arrive at reported generally accepted accounting principles ("GAAP") revenue. Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associated with product returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period the related sales are recorded. See Note 3 “Significant Accounting Policies - Revenue Recognition” in “Notes to Condensed Consolidated Financial Statements”.

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The components of billings by solution are as follows (in thousands except for percentages expressed as a percentage of total billings, unaudited):

 Three-Months Ended March 31,
 2021% Total2020% Total
BILLINGS BY SOLUTION:    
Mailbacks$24,373 78.5 %$4,614 44.7 %
Route-based pickup services3,597 11.6 %2,625 25.4 %
Unused medications2,078 6.7 %2,111 20.4 %
Third party treatment services76 0.2 %38 0.4 %
Other (1)
884 3.0 %938 9.1 %
Total billings31,008 100.0 %10,326 100.0 %
GAAP adjustment (2)
(3,480) 88  
Revenue reported$27,528  $10,414  

(1)The Company’s other products include IV poles, accessories, containers, asset return boxes and other miscellaneous items.
(2)Represents the net impact of the revenue recognition adjustments required to arrive at reported GAAP revenue.  Customer billings include all invoiced amounts associated with products shipped or services rendered during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect, (i) the deferral of a portion of current period sales, (ii) recognition of certain revenue associated with products returned for treatment and destruction and (iii) provisions for certain product returns and discounts to customers which are accounted for as reductions in sales in the same period to related sales are recorded.

The increase in billings was mainly attributable to increased billings in the the Retail ($19.4 million), Professional ($0.7 million), Home Health Care ($0.6 million) and Long-Term Care markets ($0.2 million) partially offset by decreased billings in the Pharmaceutical Manufacturer ($0.3 million) market . The increase in the Retail market billings is primarily due to increased immunization related orders of $19.5 million. The increase in the Professional market billings reflected organic growth as the Company continued its focus on securing customers from the small to medium quantity generator sectors. This market, which is comprised of physicians, clinics, dentists, surgery centers, labs, veterinarians and other healthcare providers, has shown continued recovery compared to the March 2020 pre-pandemic time period as new customer locations have been added. Home Health Care market billings increased 38% to $2.3 million in the third quarter of fiscal 2021 compared to $1.7 million in the third quarter of fiscal 2020 related primarily to the timing of distributor orders. Long-Term Care market billings increased 28% to $1.0 million in the third quarter of fiscal 2021 compared to $0.8 million in the prior year period, related to an increased volume of COVID-19 related waste management as well as new customers. Pharmaceutical Manufacturer market billings decreased due to the timing of inventory builds for patient support programs.

Billings for Mailbacks increased 428% to $24.4 million as compared to $4.6 million in the prior year period and represented 78.5% of total billings. Billings for Route-Based Pickup Services increased 37% to $3.6 million as compared to $2.6 million in the prior year period and represented 11.6% of total billings.

Cost of revenues for the three months ended March 31, 2021 of $14.1 million was 51.3% of revenues. Cost of revenues for the three months ended March 31, 2020 of $8.2 million was 78.7% of revenues. The gross margin for the three months ended March 31, 2021 of 48.7% increased compared to the gross margin for the three months ended March 31, 2020 of 21.3%. Gross margins were positively impacted by operating leverage associated with higher revenue.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2021 and 2020 were $4.2 million and $3.6 million, respectively. The increase in SG&A expense was due to a $0.4 million increase in management incentive compensation, including both stock and cash, a $0.1 million increase in board compensation and continued investments in sales and marketing.

The Company reported operating income and income before income taxes of $9.0 million for the three months ended March 31, 2021 as compared to operating loss and loss before income taxes of $1.6 million in the prior year period. Operating income and income before income taxes increased primarily due to higher revenues and gross margin.
 
19


The Company’s effective tax rate for the three months ended March 31, 2021 and 2020 was 23.7% and 3.4%, respectively. During the three months ended March 31, 2021, the effective tax rate is based on the statutory federal tax rate of 21%, now that the valuation has been removed since June 30, 2020, as well as an approximated 5% state income tax rate net of the federal benefit. During the three months ended March 31, 2020, the effective tax rate represented the deferred tax expense related to the effects of indefinite lived intangible assets, such as goodwill, which could not be used as a source of future taxable income in evaluating the need for a valuation allowance against deferred tax assets as well as the effects of the state income tax expense for the period.

The Company reported net income of $6.9 million for the three months ended March 31, 2021 as compared to a net loss of $1.6 million for the prior year period. Net income increased due to the increase in the operating income (discussed above).

The Company reported basic and diluted income per share of $0.41 and $0.40, respectively for the three months ended March 31, 2021 as compared to basic and diluted loss per share of $0.10 for the prior year period. Basic and diluted income per share increased due to the increase in net income (discussed above).


NINE MONTHS ENDED MARCH 31, 2021 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2020

Total revenues for the nine months ended March 31, 2021 of $57.7 million increased by $19.1 million, or 49.5%, over the total revenues for the nine months ended March 31, 2020 of $38.6 million. The increase in revenue is mainly due to increased billings in the Retail, Long-Term Care, Professional and Pharmaceutical Manufacturer markets. The increase in billings is partially offset by current year deferred revenue net of product returns on sales in prior periods. The components of billings by market are as follows (in thousands):
 Nine-Months Ended March 31,
 (Unaudited)
 20212020Variance
BILLINGS BY MARKET:   
Retail$