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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 September 30, 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 November 1, 2021, there were 19,229,244 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)
 September 30,June 30,
 20212021
ASSETS  
CURRENT ASSETS  
Cash$41,162 $27,767 
Accounts receivable, net 9,847 9,738 
Inventory7,272 6,114 
Contract asset27 20 
Prepaid and other current assets1,756 1,459 
TOTAL CURRENT ASSETS60,064 45,098 
PROPERTY, PLANT AND EQUIPMENT, net10,508 10,843 
OPERATING LEASE RIGHT OF USE ASSET7,919 8,353 
FINANCING LEASE RIGHT OF USE ASSET, net934 907 
INVENTORY, net of current portion982 989 
OTHER ASSETS118 110 
GOODWILL6,735 6,735 
INTANGIBLE ASSETS, net2,109 2,239 
DEFERRED TAX ASSET, net413 157 
TOTAL ASSETS$89,782 $75,431 
LIABILITIES AND STOCKHOLDERS' EQUITY  
CURRENT LIABILITIES  
Accounts payable$2,972 $2,922 
Accrued liabilities3,750 3,940 
Operating lease liability2,240 2,368 
Financing lease liability174 160 
Current maturities of long-term debt622 735 
Contract liability5,965 7,028 
TOTAL CURRENT LIABILITIES15,723 17,153 
CONTRACT LIABILITY, net of current portion1,352 1,461 
OPERATING LEASE LIABILITY, net of current portion5,810 6,118 
FINANCING LEASE LIABILITY, net of current portion772 741 
OTHER LIABILITIES44 45 
LONG-TERM DEBT, net of current portion3,236 3,329 
TOTAL LIABILITIES26,937 28,847 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY  
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 19,524,859 and 17,454,859 shares issued, respectively and 19,229,244 and 17,159,244 shares outstanding, respectively
197 176 
Treasury stock, at cost, 295,615 shares repurchased
(1,554)(1,554)
Additional paid-in capital51,363 34,333 
Retained earnings12,839 13,629 
TOTAL STOCKHOLDERS' EQUITY62,845 46,584 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$89,782 $75,431 
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
September 30,
 20212020
REVENUES$13,915 $13,151 
Cost of revenues10,494 9,528 
GROSS PROFIT3,421 3,623 
Selling, general and administrative4,200 3,788 
Depreciation and amortization218 204 
OPERATING LOSS(997)(369)
OTHER INCOME (EXPENSE)  
Interest expense(56)(32)
Income associated with derivative instrument7 5 
TOTAL OTHER EXPENSE(49)(27)
LOSS BEFORE INCOME TAXES(1,046)(396)
INCOME TAX BENEFIT - Deferred(256)(103)
NET LOSS$(790)$(293)
NET LOSS PER COMMON SHARE - Basic and Diluted$(0.04)$(0.02)
WEIGHTED AVERAGE SHARES USED IN COMPUTING
   NET LOSS PER COMMON SHARE:
Basic and Diluted17,879 16,391 

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

5


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, June 30, 202117,454,859 $176 (295,615)$(1,554)$34,333 $13,629 $46,584 
Issuance of common stock pursuant to secondary offering, net2,070,000 21 — — 16,750 — 16,771 
Stock-based compensation— — — — 280 — 280 
Net loss— — — — — (790)(790)
Balances, September 30, 202119,524,859 $197 (295,615)$(1,554)$51,363 $12,839 $62,845 
 Common StockTreasury StockAdditional
Paid-in
Capital
 Retained Earnings Total
Stockholders'
Equity
SharesAmountSharesAmount
Balances, June 30, 202016,667,572 $168 (295,615)$(1,554)$30,203 $761 $29,578 
Exercise of stock options50,531 1 — — 224 — 225 
Stock-based compensation— — — — 162 — 162 
Net loss— — — — — (293)(293)
Balances, September 30, 202016,718,103 $169 (295,615)$(1,554)$30,589 $468 $29,672 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6


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

 Three-Months Ended
September 30,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES  
Net loss$(790)$(293)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization582 423 
Bad debt expense25 65 
Inventory write-off 10 
Loss on disposal of property, plant and equipment 1 
Stock-based compensation expense280 162 
Income associated with derivative instrument(7)(5)
Deferred tax benefit(256)(103)
Changes in operating assets and liabilities:
Accounts receivable(134)1,095 
Inventory(1,151)182 
Prepaid and other assets(305)296 
Accounts payable and accrued liabilities(116)(311)
Contract asset and contract liability(1,179)239 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(3,051)1,761 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment(47)(925)
Additions to intangible assets(18)(48)
NET CASH USED IN INVESTING ACTIVITIES(65)(973)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 225 
Proceeds from issuance of common stock, net 16,771 
Proceeds from long-term debt 508 
Repayments of long-term debt(206)(152)
Payments on financing lease liabilities(54) 
NET CASH PROVIDED BY FINANCING ACTIVITIES16,511 581 
NET INCREASE IN CASH13,395 1,369 
CASH, beginning of period27,767 5,416 
CASH, end of period$41,162 $6,785 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds$170 $(283)
Interest paid on long-term debt$58 $23 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment financed through accounts payable$20 $85 

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

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 September 30, 2021, the results of its operations for the three months ended September 30, 2021 and 2020, cash flows for the three months ended September 30, 2021 and 2020, and stockholders’ equity for the three months ended September 30, 2021 and 2020. The results of operations for the three months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2022. 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, 2021.

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.
8

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 September 30,
 2021% Total2020% Total
REVENUES BY SOLUTION:    
Mailbacks$6,748 48.5 %$6,162 46.8 %
Route-based pickup services3,199 23.0 %3,156 24.0 %
Unused medications2,629 18.9 %2,361 18.0 %
Third party treatment services31 0.2 %135 1.0 %
Other (1)
1,308 9.4 %1,337 10.2 %
Total revenues$13,915 100.0 %$13,151 100.0 %
(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 months ended September 30, 2021 and 2020, the Company recorded billings from inventory builds that are held in VMI under these service agreements of $0.1 million and $1.0 million, respectively. As of September 30, 2021 and June 30, 2021, $3.1 million and $3.7 million, respectively, of solutions sold through that date were held in VMI 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 months ended September 30, 2021 and 2020 related to contract liabilities recorded as of June 30, 2021 and 2020 were $2.4 million and $0.8 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. No such allowance was deemed necessary based on the Company's assessment of the recoverability of its deferred tax assets.

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.




9


SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 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 months ended September 30, 2021 and 2020 was 24.5% and 26.0%, respectively. During the three months ended September 30, 2021 and 2020, the effective tax rate is based on the statutory federal tax rate of 21% as well as an approximated state income tax rate net of the federal benefit.

NOTE 6 – LEASES

The Company has operating leases for real estate, field equipment, office equipment and vehicles and financing leases for vehicles and office equipment. 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 months ended September 30, 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 September 30,
 20212020
Lease cost (1) - fixed rent expense:
Operating lease cost included in:
Cost of revenues$653 $571 
Selling, general and administrative110 113 
Financing lease cost included in:
 Cost of revenues (amortization expense)65 18 
 Interest expense8 4 
 Total$836 $706 

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

10

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

During the three months ended September 30, 2021 and 2020, the Company had the following cash and non-cash activities associated with leases (in thousands):
Three-Months Ended September 30,
 20212020
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash outflow for operating leases$774 $646 
Non-cash changes to the Operating ROU Asset and Operating Lease Liability
   Additions and modifications to ROU asset obtained from new operating lease liabilities$340 $1,676 
Additions to ROU asset obtained from new financing lease liabilities$99 $ 

As of September 30, 2021, the weighted average remaining lease term for all operating and financing leases is 3.80 years 5.23 years. The weighted average discount rate associated with operating and financing leases as of September 30, 2021 is 4% and 3%, respectively.
The future payments due under operating leases as of September 30, 2021 is as follows (in thousands):

Future payments due in the twelve months ended September 30,Operating leaseFinancing lease
2022$2,505 $201 
20232,224 198 
20241,999 198 
20251,480 191 
2026328 165 
Thereafter108 71 
Total undiscounted lease payments8,644 1,024 
Less effects of discounting
(594)(78)
Lease liability recognized
$8,050 $946 

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 September 30, 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
11

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

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 2.71% on September 30, 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%.

At September 30, 2021 and June 30, 2020, long-term debt consisted of the following (in thousands):
September 30, 2021June 30, 2021
Acquisition loan, monthly payments of $43; maturing March 2022
$302 $431 
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs of $38
780 830 
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026
2,776 2,803 
Total long-term debt3,858 4,064 
Less: current portion622 735 
Long-term debt, net of current portion$3,236 $3,329 

The Company has availability under the Credit Agreement of $13.3 million ($5.3 million for the working capital and $8.0 million for acquisitions) as of September 30, 2021 with the option to extend the availability up to $17.3 million. The Company has $0.7 million in letters of credit outstanding as of September 30, 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 September 30, 2021.

Payments due on long-term debt subsequent to September 30, 2021 are as follows (in thousands):
Twelve Months Ending September 30, 
2022$622 
2023320 
20242,238 
202544 
2026 and thereafter672 
 $3,896 

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). Contingently issued awards with a requisite service period that precedes the grant date are measured and recognized at the start of the requisite service period and remeasured each reporting period until
12

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

the grant date. Total stock-based compensation expense for the three months ended September 30, 2021 and 2021 is as follows (in thousands):
 Three-Months Ended September 30,
 20212020
Stock-based compensation expense included in:  
Cost of revenues$9 $ 
Selling, general and administrative271 162 
Total$280 $162 

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 included in the calculations for diluted weighted average shares 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.

The following information is necessary to calculate earnings per share for the periods presented (in thousands, except per-share amounts):
 Three-Months Ended September 30,
 20212020
Net loss as reported$(790)$(293)
Weighted average common shares outstanding17,879 16,391 
Effect of dilutive stock options  
Weighted average diluted common shares outstanding17,879 16,391 
Net loss per common share  
Basic and Diluted$(0.04)$(0.02)
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive 25 

NOTE 10 - EQUITY TRANSACTIONS

During the three months ended September 30, 2021 and 2020, respectively, stock options to purchase shares of the Company's common stock were exercised as follows:
 Three-Months Ended September 30,
 20212020
Options exercised 50,531 
Proceeds (in thousands)$ $225 
Average exercise price per share$ $4.44 

13

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

As of September 30, 2021, there was $1.5 million of stock compensation expense related to non-vested awards, which is expected to be recognized over a weighted average period of 2.98 years.

On August 30, 2021, the Company closed its previously announced underwritten secondary offering of a total of 2,070,000 shares of its common stock at a public offering price of $8.65 per share, including the exercise in full by the underwriter of its option to purchase an additional 270,000 shares to cover over-allotments in connection with the offering. After the underwriting discount and offering expenses payable by the Company of $1.1 million, the Company received net proceeds of approximately $16.8 million.

NOTE 11 – INVENTORY

The components of inventory are as follows (in thousands):
 September 30, 2021June 30, 2021
Raw materials$2,449 $2,040 
Finished goods5,805 5,063 
Total inventory8,254 7,103 
Less: current portion7,272 6,114 
Inventory, net of current portion$982 $989 

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

NOTE 12 - SUBSEQUENT EVENTS

Effective on October 22, 2021, the Company acquired Affordable Medical Waste LLC, a route-based provider of medical waste solutions with over 500 locations in the Midwest, primarily in Indiana, for $2.2 million paid in cash from funds on hand.
14


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,", "could", "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 healthcare waste generators 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 depending 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 misuse.

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, a system for 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 have also developed route-based services for medical, pharmaceutical and hazardous waste, the TakeAway Recycle 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 on 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.

Significant Developments During the First Quarter of Fiscal Year 2022
Capital Markets Activity:

On August 30, 2021, the Company closed its previously announced underwritten secondary offering of a total of 2,070,000 shares of its common stock at a public offering price of $8.65 per share, including the exercise in full by the underwriter of its option to purchase an additional 270,000 shares to cover over-allotments in connection with the offering. After the underwriting discount and offering expenses payable by the Company, the Company received net proceeds of approximately $16.8 million.

Impact 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 months ended September 30, 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 including remote working options for certain corporate office 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.
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 through most of fiscal year ended June 30, 2021 was 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”) used 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 2021 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 has been 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 2021 season flu and the 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.
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 and 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 adverse 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 months ended September 30, 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, 2021.

RESULTS OF OPERATIONS

The following analyzes changes in the condensed consolidated operating results and financial condition of the Company during the three months ended September 30, 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 September 30,
 2021%2020%
Revenues$13,915 100.0 %$13,151 100.0 %
Cost of revenues10,494 75.4 %9,528 72.5 %
Gross profit3,421 24.6 %3,623 27.5 %
SG&A expense4,200 30.2 %3,788 28.8 %
Depreciation and amortization218 1.6 %204 1.6 %
Operating Loss(997)(7.2)%(369)(2.8)%
Total other expense(49)(0.4)%(27)(0.2)%
Loss before income taxes(1,046)(7.5)%(396)(3.0)%
Income tax benefit(256)(1.8)%(103)(0.8)%
Net Loss$(790)(5.7)%$(293)(2.2)%
 
15


THREE MONTHS ENDED SEPTEMBER 30, 2021 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020

Total revenues for the three months ended September 30, 2021 of $13.9 million increased compared to the total revenues for the three months ended September 30, 2020 of $13.2 million. The increase in revenue is mainly due to higher product returns on sales in prior periods net of current year deferred revenue plus increased billings in the Professional and Retail markets. The net increase in revenue is partially offset by decreases in billings in the Pharmaceutical Manufacturer, Long-Term Care and Home Health Care markets. The components of billings by market are as follows (in thousands, unaudited):
 Three-Months Ended September 30,
 20212020Variance
BILLINGS BY MARKET:   
Professional$4,517 $4,133 $384 
Retail3,867 3,647 220 
Home Health Care1,939 2,348 (409)
Long-Term Care778 1,309 (531)
Government707 515 192 
Pharmaceutical Manufacturer496 1,179 (683)
Environmental31 135 (104)
Other389 162 227 
Subtotal12,724 13,428 (704)
GAAP Adjustment *1,191 (277)1,468 
Revenue Reported$13,915 $13,151 $764 

*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”.

16


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 September 30,
 2021% Total2020% Total
BILLINGS BY SOLUTION:    
Mailbacks$5,557 43.7 %$6,439 47.9 %
Route-based pickup services3,199 25.1 %3,156 23.5 %
Unused medications2,629 20.7 %2,361 17.6 %
Third party treatment services31 0.2 %135 1.0 %
Other (1)
1,308 10.3 %1,337 10.0 %
Total billings12,724 100.0 %13,428 100.0 %
GAAP adjustment (2)
1,191  (277) 
Revenue reported$13,915  $13,151  

(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 net decrease in billings was mainly attributable to increased billings in the the Professional ($0.4 million) and Retail ($0.2 million) markets offset by decreased billings in the Pharmaceutical Manufacturer ($0.7 million), Long-Term Care ($0.5 million) and Home Health Care ($0.4 million) markets. 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. Professional market billings were negatively impacted in the current quarter by about $0.1 million decrease in billings for route-based services to lab customers related to COVID-19 related volume decreases compared to the prior year and over $0.1 million lower billings for route based services to customers for hazardous waste activity that was delayed until the December 2021 quarter due to nationwide sporadic/temporary moratoriums on accepting hazardous waste streams destined for incineration. The increase in retail billings is primarily due to modest increases in immunization related orders. Pharmaceutical Manufacturer market billings decreased by $0.7 million due to the timing of inventory builds for patient support programs, driving most of the $0.9 million decrease in mailback solution billings. Long-Term Care market billings decreased by $0.5 million to $0.8 million compared to prior year period period of $1.3 million, primarily due to heightened volumes of COVID-19 related waste management and ancillary supplies in the prior year period, about half of which impacted the route-based business and with the remainder impacing other ancillary solutions. Home Health Care market billings decreased $0.4 million to $1.9 million in the first quarter of fiscal 2021 compared to $2.3 million in the same prior year period due to the timing of distributor orders.

Billings for Mailbacks decreased 13.7% to $5.6 million as compared to $6.4 million in the prior year period and represented 43.7% of total billings. Billings for Route-Based Pickup Services was consistent with prior year at $3.2 million and represented 25.1% of total billings. Billings for Unused Medications grew 11.4% to $2.6 million for the three months ended September 30, 2021 as compared to $2.4 million for the prior period. Sequentially, billings for Unused Medications, which includes Medsafe, grew 31% in the first quarter of fiscal 2022 as compared to $2.0 million in the fourth quarter of fiscal 2021.

Cost of revenues for the three months ended September 30, 2021 of $10.5 million was 75.4% of revenues. Cost of revenues for the three months ended September 30, 2020 of $9.5 million was 72.5% of revenues. The gross margin for the three months ended September 30, 2021 of 24.6% decreased compared to the gross margin for the three months ended September 30, 2020 of 27.5%. Gross margins was negatively impacted by the timing of flu and COVID-19 related mailback returns.

17


Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2021 and 2020 were $4.2 million and $3.8 million, respectively. The increase in SG&A expense was due primarily to continued investment in sales and marketing and to a $0.2 million increase in the accrual of management incentive compensation.

The Company reported operating loss and loss before income taxes of $1.0 million for the three months ended September 30, 2021 as compared to operating loss and loss before income taxes of $0.4 million in the prior year period. Operating loss and loss before income taxes decreased primarily due to lower gross profit and increased SG&A expense (discussed above).
 
The Company’s effective tax rate for the three months ended September 30, 2021 and 2020 was 24.5% and 26.0%, respectively.

The Company reported net loss of $0.8 million for the three months ended September 30, 2021 as compared to a net loss of $0.3 million for the prior year period. Net loss increased due to the increase in the operating loss (discussed above).

The Company reported basic and diluted loss per share of $(0.04) for the three months ended September 30, 2021 as compared to basic and diluted loss per share of $(0.02) for the prior year period. Basic and diluted loss per share increased due to the increase in net loss (discussed above).


PROSPECTS FOR THE FUTURE

As a result of the COVID-19 outbreak, 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. For example, the following have recently been implemented to address some of the uncertainties related to COVID-19:

Since January 2020, the Company has increased its headcount for route-based drivers, plant and operations personnel by 10% as a result of COVID-19 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 cost of this increased headcount which is recorded as cost of sales is about $0.1 million per quarter.
The Company temporarily increased pay to route-based drivers, plant and operations personnel through June 30, 2020 due to the additional potential risks associated with those functions in light of the COVID-19 environment.
While some areas of the business have seen increased revenue, COVID-19 caused many of the Company’s customers to temporarily close from mid-March 2020 through June 2020. For example, there have been temporary closures of approximately 1,000 customer offices including dental, dermatology and physician practices which equates to almost $0.1 million per month in lost revenue. Most of these offices have now re-opened.
The Company is considered an essential business and could incur elevated costs to maintain uninterrupted essential support to its customers and the overall healthcare industry.
Since June 30, 2019, inventory levels have been increased (approximately 71%) which has also precipitated the need for additional warehouse space for the Company's products. The Company is working to ensure it has adequate products and solutions to address the potential additional needs that could reasonably be expected to follow a pandemic of this magnitude. Whether it be supporting an expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the COVID-19 vaccine, or supporting the pick-up and processing of increased volumes of healthcare waste from the long-term care industry, we are well positioned to take advantage of these growth opportunities.

To date, external effects from the COVID-19 pandemic did not have a material adverse impact on the Company's financial position and results of operations for the year ended June 30, 2021 or the period ended September 30, 2021. 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.

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.

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, long-term care, retail pharmacies and clinics, and the
18


professional market which is comprised of physicians, dentists, surgery centers, veterinary practices and other healthcare facilities. 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, physician groups, urgent care facilities, ambulatory surgical centers, labs, dialysis 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 has made ongoing investments in sales and marketing initiative to drive growth. Our sales team focuses 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. Through targeted telemarketing initiatives, e-commerce driven website and web-based promotional activities, we believe we can drive significant additional growth as we increase awareness of the Company's innovative solution offerings with a focus on individual or small group professional offices, government agencies, smaller retail pharmacies and clinics and 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 over 80% of the U.S. population.

From July 2015 and July 2016, the Company acquired three route-based pickup service companies, which 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 thirty-seven (37) state region of the South, Southeast, Southwest, Midwest and Northeast portions of the United States. To facilitate operational efficiencies, the Company has opened transfer stations and offices in strategic locations. The Company directly serves more than 16,626 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, 2019 Population Estimates and National Projections, the nation's 65-and-older population has grown rapidly since 2010 (34.2% over the past decade), 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"), 44.9% of adults received a flu shot and 32.2% of flu shots for adults were administered in a retail clinic in 2018. Over the flu seasons from 2011 to 2020, the Company saw growth in the retail flu shot related orders in seven years of 10% to 36%, including a 25% increase in 2020, and declines in three years of 13% to 17%. Despite the volatility, 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 the MedSafe and TakeAway Medication Recovery Systems to long-term care and hospice to address a long standing issue within long-term care.

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Local, state and federal agencies have growing needs for solutions to manage medical and pharmaceutical waste. The Company's Sharps Recovery System is ideal for as-needed disposal of sharps and other small quantities of medical waste generated within government buildings, schools and communities. The Company also provides TakeAway Medication Recovery System envelopes and MedSafe solutions to government agencies in need of proper and regulatory compliant medication disposal. The federal government, state agencies and non-profits are recognizing the need to fund programs that address prevention as it pertains to the opioid crisis. MedSafe and mailback envelopes for proper medication disposal are being funded for prevention programs.

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).

COVID-19 prompted healthcare demands and opportunities including the expected significant increase in seasonal flu immunizations, facilitating the proper collection, transportation and treatment of syringes utilized in the administration of the potential COVID-19 vaccine, or supporting the pick-up and processing of the significantly increased volumes of healthcare waste from the long-term care industry.

The Company’s financial position with a cash balance of $41.2 million (used for working capital needs), debt of $3.9 million and additional availability under the Credit and Loan Agreements as of September 30, 2021 (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance).

LIQUIDITY AND CAPITAL RESOURCES

Management believes that the Company's current cash resources (cash on hand and cash flows from operations) will be sufficient to fund operations for at least the next twelve months. Operating cash flows and the capacity from the Credit and Loan Agreements are the Company's primary sources of liquidity.

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 increased by $13.4 million to $41.2 million at September 30, 2021 from $27.8 million at June 30, 2021 due to the following:

Cash Flows from Operating Activities - Cash flow from operating activities was negatively impacted by the net loss, an increase in inventory levels and a decrease in contract liabilities.

Cash Flows from Investing Activities - Cash flow from investing activities is for normal permitting and capital expenditures for plant and equipment additions of $0.1 million.

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Cash Flows from Financing Activities - Cash flow from financing activities provided an increase in cash from proceeds from issuance of common stock, net of underwriting fees and commissions of $16.8 million partially offset by the repayment of debt of $0.2 million.

Credit Facility

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 September 30, 2021 was approximately 3.0%. The Company pays a fee of 0.25% per annum on the unused amount of the committed credit facility. No amounts were outstanding under the working capital portion of the credit facility at September 30, 2021.

On August 21, 2019, certain subsidiaries of the Company entered into a Construction and Term Loan Agreement and a Master Equipment Finance Agreement with the Company's 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 2.71% on September 30, 2021. The Company has entered into a forward rate lock to fix 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%.

The Company has availability under the Credit Agreement of approximately $13.3 million ($5.3 million for the working capital and $8.0 million for acquisitions) as of September 30, 2021 with the option to extend the availability up to $17.3 million (used to support working capital needs and is constrained due to the impacts additional borrowings might have on our future covenant compliance). The Company also has $0.7 million in letters of credit outstanding as of September 30, 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 Credit and Loan Agreements. The Company was in compliance with all the financial covenants under the Credit and Loan Agreements as of September 30, 2021.

The Company utilizes performance bonds to support operations based on certain state requirements. At September 30, 2021, the Company had performance bonds outstanding covering financial assurance up to $1.3 million.

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Management believes that the Company’s current cash resources (cash on hand and cash flows from operations) will be sufficient to fund operations for at least the next twelve months.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are included in the discussion entitled Critical Accounting Policies in Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures,” ("Disclosure Controls") as such term is defined in Rule 13a-15(e) and 15d-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 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 as of September 30, 2021 pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act. In designing and evaluating the Disclosure Controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures. Based on this Evaluation, the CEO and CFO concluded that our Disclosure Controls were effective as of September 30, 2021.

Changes in Internal Control

During the three months ended September 30, 2021, 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 system 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 is not anticipated to 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, 2021 for the Company’s risk factors. During the period ended September 30, 2021, there have been no changes to the Company's risk factors.

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

None

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ITEM 6. EXHIBITS
(a)Exhibits:
101.INSXBRL Instance Document (filed herewith)
101.SCHXBRL Taxonomy Extension Schema Document (filed herewith)
101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEFXBRL Taxonomy Extension Linkbase Document (filed herewith)
101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PREXBRL 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 3, 2021By: /s/ DAVID P. TUSA
David P. Tusa
Chief Executive Officer and President
(Principal Executive Officer)
Dated: November 3, 2021By: /s/ DIANA P. DIAZ
Diana P. Diaz
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23
Document

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 3, 2021/s/David P. Tusa
Chief Executive Officer and President
(Principal Executive Officer)


Document

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 3, 2021/s/Diana P. Diaz
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


Document

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, 2021, 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, 2021, filed with the Securities and Exchange Commission on November 3, 2021 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, 2021 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: November 3, 2021/s/David P. Tusa
Chief Executive Officer and President

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.  A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


Document

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, 2021, 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, 2021, filed with the Securities and Exchange Commission on November 3, 2021 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, 2021 fairly presents, in all material respects, the financial condition and results of operations of Sharps Compliance Corp.

Date: November 3, 2021/s/Diana P. Diaz
Executive Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.  A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.