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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, 2022
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 10, 2022, there were 19,430,063 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,
 20222021
ASSETS  
CURRENT ASSETS  
Cash$26,744 $27,767 
Accounts receivable, net 14,790 9,738 
Inventory6,979 6,114 
Contract asset16 20 
Prepaid and other current assets3,446 1,459 
TOTAL CURRENT ASSETS51,975 45,098 
PROPERTY, PLANT AND EQUIPMENT, net11,786 10,843 
OPERATING LEASE RIGHT OF USE ASSET12,424 8,353 
FINANCING LEASE RIGHT OF USE ASSET, net932 907 
INVENTORY, net of current portion987 989 
OTHER ASSETS325 110 
GOODWILL10,216 6,735 
INTANGIBLE ASSETS, net4,541 2,239 
DEFERRED TAX ASSET, net150 157 
TOTAL ASSETS$93,336 $75,431 
LIABILITIES AND STOCKHOLDERS' EQUITY  
CURRENT LIABILITIES  
Accounts payable$3,090 $2,922 
Accrued liabilities4,104 3,940 
Operating lease liability2,872 2,368 
Financing lease liability189 160 
Current maturities of long-term debt307 735 
Contract liability4,285 7,028 
TOTAL CURRENT LIABILITIES14,847 17,153 
CONTRACT LIABILITY, net of current portion523 1,461 
OPERATING LEASE LIABILITY, net of current portion9,701 6,118 
FINANCING LEASE LIABILITY, net of current portion756 741 
OTHER LIABILITIES 45 
LONG-TERM DEBT, net of current portion3,095 3,329 
TOTAL LIABILITIES28,922 28,847 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY  
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 19,725,678 and 17,454,859 shares issued, respectively and 19,430,063 and 17,159,244 shares outstanding, respectively
199 176 
Treasury stock, at cost, 295,615 shares repurchased
(1,554)(1,554)
Additional paid-in capital53,186 34,333 
Retained earnings12,583 13,629 
TOTAL STOCKHOLDERS' EQUITY64,414 46,584 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$93,336 $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
March 31,
 20222021
REVENUES$17,579 $27,528 
Cost of revenues12,601 14,129 
GROSS PROFIT4,978 13,399 
Selling, general and administrative4,713 4,181 
Depreciation and amortization272 216 
OPERATING INCOME (LOSS)(7)9,002 
OTHER INCOME (EXPENSE)  
Interest income16  
Interest expense(53)(55)
Income associated with derivative instrument44 26 
TOTAL OTHER INCOME (EXPENSE)7 (29)
INCOME BEFORE INCOME TAXES 8,973 
INCOME TAX EXPENSE
Current34 1,083 
Deferred253 1,040 
TOTAL INCOME TAX EXPENSE287 2,123 
NET INCOME (LOSS)$(287)$6,850 
NET INCOME (LOSS) PER COMMON SHARE
Basic$(0.01)$0.41 
Diluted$(0.01)$0.40 
WEIGHTED AVERAGE SHARES USED IN COMPUTING
   NET INCOME (LOSS) PER COMMON SHARE:
Basic19,412 16,556 
Diluted19,412 17,187 

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,
 20222021
REVENUES$50,372 $57,690 
Cost of revenues37,266 35,031 
GROSS PROFIT13,106 22,659 
Selling, general and administrative13,301 11,725 
Depreciation and amortization726 625 
OPERATING INCOME (LOSS)(921)10,309 
OTHER INCOME (EXPENSE)  
Interest income30  
Interest expense(167)(134)
Income associated with derivative instrument78 41 
TOTAL OTHER EXPENSE(59)(93)
INCOME (LOSS) BEFORE INCOME TAXES(980)10,216 
INCOME TAX EXPENSE
Current59 1,147 
Deferred7 1,284 
TOTAL INCOME TAX EXPENSE66 2,431 
NET INCOME (LOSS)$(1,046)$7,785 
NET INCOME (LOSS) PER COMMON SHARE
Basic$(0.06)$0.47 
Diluted$(0.06)$0.46 
WEIGHTED AVERAGE SHARES USED IN COMPUTING
    NET INCOME (LOSS) PER COMMON SHARE:
Basic 18,842 16,481 
Diluted18,842 16,978 
 
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, 202119,542,858 $197 (295,615)$(1,554)$51,712 $12,870 $63,225 
Issuance of stock, acquisition164,821 2 — — 1,086 — 1,088 
Stock-based compensation— — — — 388 — 388 
Issuance of restricted stock17,999 — — — — — — 
Net loss— — — — — (287)(287)
Balances, March 31, 202219,725,678 $199 (295,615)$(1,554)$53,186 $12,583 $64,414 
 Common StockTreasury StockAdditional
Paid-in
Capital
 Retained Earnings Total
Stockholders'
Equity
SharesAmountSharesAmount
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 EarningsTotal
Stockholders'
Equity
SharesAmountSharesAmount
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— — — — 1,017 — 1,017 
Issuance of stock, acquisition164,821 2 1,086 1,088 
Issuance of restricted stock35,998 — — — — — — 
Net loss— — — — — (1,046)(1,046)
Balances, March 31, 202219,725,678 $199 (295,615)$(1,554)$53,186 $12,583 $64,414 
 Common StockTreasury StockAdditional
Paid-in
Capital
Retained EarningsTotal
Stockholders'
Equity
Shares AmountSharesAmount
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 

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,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income (loss)$(1,046)$7,785 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization1,820 1,445 
Bad debt expense79 141 
Inventory write-off19 76 
Loss on disposal of property, plant and equipment 1 
Stock-based compensation expense1,017 832 
Income associated with derivative instrument(67)(41)
Deferred tax expense7 1,284 
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable(4,914)(11,767)
Inventory(882)1,260 
Prepaid and other assets(2,127)885 
Accounts payable and accrued liabilities7 846 
Contract asset and contract liability(3,677)4,721 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(9,764)7,468 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment(1,576)(2,566)
Payments for business acquisitions, net of cash acquired(5,533) 
Additions to intangible assets(111)(79)
NET CASH USED IN INVESTING ACTIVITIES(7,220)(2,645)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 625 
Proceeds from issuance of common stock, net 16,771  
Proceeds from long-term debt 961 
Repayments of long-term debt(516)(545)
Payments on financing lease liabilities(148)(64)
Payments of debt issuance costs(146) 
NET CASH PROVIDED BY FINANCING ACTIVITIES15,961 977 
NET INCREASE (DECREASE) IN CASH(1,023)5,800 
CASH, beginning of period27,767 5,416 
CASH, end of period$26,744 $11,216 
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid, net of refunds$187 $(210)
Interest paid on long-term debt$171 $120 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for acquisition$1,088 $ 
Property, plant and equipment financed through accounts payable$215 $(295)
Purchase of previously leased property, plant and equipment financed with note payable$ $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, Sharps Properties, LLC, Affordable Medical Waste LLC and Midwest Medical Waste, Inc. (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, 2022, the results of its operations for the three and nine months ended March 31, 2022 and 2021, cash flows for the nine months ended March 31, 2022 and 2021, and stockholders’ equity for the three and nine months ended March 31, 2022 and 2021. The results of operations for the three and nine months ended March 31, 2022 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.

Effects of COVID-19

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 (in thousands):
 Three-Months Ended March 31,
 2022% Total2021% Total
REVENUES BY SOLUTION:    
Mailbacks$9,476 53.9 %$20,893 75.9 %
Route-based pickup services4,044 23.0 %3,597 13.1 %
Unused medications2,098 12.0 %2,078 7.5 %
Third party treatment services180 1.0 %76 0.3 %
Other (1)
1,781 10.1 %884 3.2 %
Total revenues$17,579 100.0 %$27,528 100.0 %
 Nine-Months Ended March 31,
 2022% Total2021% Total
REVENUES BY SOLUTION:    
Mailbacks28,294 56.2 %$37,507 64.9 %
Route-based pickup services10,794 21.4 %10,244 17.8 %
Unused medications6,592 13.1 %6,152 10.7 %
Third party treatment services265 0.5 %390 0.7 %
Other (1)
4,427 8.8 %3,397 5.9 %
Total revenues$50,372 100.0 %$57,690 100.0 %
(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, 2022, the Company recorded billings from inventory builds that are held in VMI under these service agreements of $1.1 million and $2.9 million, respectively. 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. As of March 31, 2022 and June 30, 2021, $4.4 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 nine months ended March 31, 2022 and 2021 related to contract liabilities recorded as of June 30, 2021 and 2020 were $6.4 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. No such allowance was deemed necessary based on the Company's assessment of the recoverability of its deferred tax assets.

10


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

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

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 and certain other instruments 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 nine months ended March 31, 2022 and 2021 was (6.7)% and 23.8%, respectively. During the nine months ended March 31, 2022, the estimated annual effective tax rate was 4.4%, and the primary components of the rate were federal tax at the statutory rate of 21%, the tax effect of non-deductible expenses and the impact of state income taxes. Tax expense for the current year to date period also includes $0.1 million of discrete items such as return to provision adjustments and the tax effects of stock-based compensation and as such have been excluded from the Company’s estimated annual effective tax rate. During the nine months ended March 31, 2021, the effective tax rate was based on the statutory federal tax rate of 21% as well as an approximated state income tax rate net of the federal benefit.

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 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 and nine months ended March 31, 2022 and 2021, 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,
 2022202120222021
Lease cost (1) - fixed rent expense:
Operating lease cost included in:
Cost of revenues$739 $613 $2,063 $1,805 
Selling, general and administrative106 107 328 333 
Financing lease cost included in:
 Cost of revenues (amortization expense)48 19 137 54 
 Interest expense8 4 23 12 
 Total$901 $743 $2,551 $2,204 

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

During the nine months ended March 31, 2022 and 2021, the Company had the following cash and non-cash activities associated with leases (in thousands):
Nine-Months Ended March 31,
 20222021
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash outflow for operating leases$2,372 $2,080 
Non-cash changes to the Operating ROU Asset and Operating Lease Liability
   Additions and modifications to ROU asset obtained from new operating lease liabilities$6,263 $2,382 
Additions to ROU asset obtained from new financing lease liabilities$179 $314 

As of March 31, 2022, the weighted average remaining lease term for all operating and financing leases is 5.40 years and 4.83 years, respectively. The weighted average discount rate associated with operating and financing leases as of March 31, 2022 is 3% for each.
12

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

The future payments due under operating leases as of March 31, 2022 is as follows (in thousands):

Future payments due in the twelve months ended March 31,Operating leaseFinancing lease
2023$3,239 $216 
20242,970 215 
20252,653 215 
20261,733 202 
2027849 159 
Thereafter2,233 28 
Total undiscounted lease payments13,677 1,035 
Less effects of discounting
(1,104)(90)
Lease liability recognized
$12,573 $945 

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT

On March 18, 2022, certain wholly owned subsidiaries of the Company amended and restated its existing Credit and Loan Agreements with its existing commercial bank ("Credit Agreement"). The Credit Agreement expands the facility available to the Company, extends the maturity date of the Credit Agreement from December 28, 2023 to March 18, 2027 and increases the maximum Cash Flow Leverage Ratio from 3.00 to 3.50. The Credit Agreement provides for a $36.0 million committed credit facility. The proceeds of the credit facility may be utilized as follows: (i) $6.0 million for working capital, letters of credit (up to $1.0 million) and general corporate purposes that can be increased to $10.0 million upon the Company’s request, and (ii) $30.0 million for acquisitions. The Company paid a facility fee of $0.1 million upon execution of the Credit Agreement. 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 end of a three-year advancing period. Borrowings bear interest at the greater of (a) zero percent or (b) the SOFR AVG 30 Day in Advance ("SOFR30A") plus a credit spread adjustment of 0.10% and a margin of 2.5%. The interest rate as of March 31, 2022 was approximately 2.85%. The Company pays a fee of 0.25% per annum on the unused amount of the committed credit facility.

The Credit Agreement also aggregated certain debt agreements previously executed by the Company with its existing commercial agreement, changing the interest rate but retaining the original maturity and monthly payment requirements as shown below including:

Equipment loan which is secured by equipment at the Texas Treatment Facility.
Real estate loan which is secured by the Company’s real estate investment at the Texas Treatment Facility.
Real estate loan which is secured by property in Pennsylvania which had previously been leased by the Company for its operations.

Each of these agreements bears interest at rates consistent with the Credit Agreement. At March 31, 2022 and June 30, 2021, long-term debt consisted of the following (in thousands):
March 31, 2022June 30, 2021
Acquisition loan, monthly payments of $43; matured March 2022
$ $431 
Equipment loan, monthly payments of $17; maturing August 2024, net of debt issuance costs of $31
682 830 
Real estate loans, monthly payments of $9; maturing August 2024 and January 2026
2,720 2,803 
Total long-term debt3,402 4,064 
Less: current portion307 735 
Long-term debt, net of current portion$3,095 $3,329 

13

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

The Company has availability under the Credit Agreement of $35.3 million ($5.3 million for the working capital and $30.0 million for acquisitions) as of March 31, 2022 with the option to extend the availability up to $40.0 million. The Company has $0.7 million in letters of credit outstanding as of March 31, 2022.

The Credit Agreement contains affirmative and negative covenants that, among other things, require the Company to maintain a maximum cash flow leverage ratio of no more than 3.5 to 1.0 and a minimum debt service coverage ratio of not less than 1.15 to 1.00. The Credit Agreement also contains customary events of default which, if incurred, may terminate the agreement and require immediate repayment of all indebtedness to the lenders. The leverage ratio covenant may limit the amount available under the agreement. The Company was in compliance with all the financial covenants under the Credit Agreement as of March 31, 2022.

Payments due on long-term debt subsequent to March 31, 2022 are as follows (in thousands):
Twelve Months Ending March 31, 
2023$307 
2024$320 
2025$2,111 
2026$695 
 $3,433 

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 the grant date. Total stock-based compensation expense for the three and nine months ended March 31, 2022 and 2021 is as follows (in thousands):
 Three-Months Ended March 31,Nine-Months Ended March 31,
 2022202120222021
Stock-based compensation expense included in:    
Cost of revenues$19 $ $33 $ 
Selling, general and administrative369 530 984 832 
Total$388 $530 $1,017 $832 

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 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 considered participating securities as the shares have full voting rights and are entitled to participate in dividends declared on common shares, if any, and undistributed earnings. The two-class method presentation of the basic and diluted EPS is not presented as the amount of earnings allocated to the participating securities was not material for the periods presented. Instead, the unvested awards are included in the diluted EPS.

14

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,
 2022202120222021
Net income (loss) as reported$(287)$6,850 $(1,046)$7,785 
Weighted average common shares outstanding19,412 16,556 18,842 16,481 
Effect of dilutive stock options 631  497 
Weighted average diluted common shares outstanding19,412 17,187 18,842 16,978 
Net income (loss) per common share    
Basic$(0.01)$0.41 $(0.06)$0.47 
 Diluted$(0.01)$0.40 $(0.06)$0.46 
Employee stock options excluded from computation of dilutive income per share amounts because their effect would be anti-dilutive924  924  

NOTE 10 - EQUITY TRANSACTIONS

During the three and nine months ended March 31, 2022 and 2021, 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,
 2022202120222021
Options exercised 72,750  141,281 
Proceeds (in thousands)$ $314 $ $625 
Average exercise price per share$ $4.32 $ $4.42 

As of March 31, 2022, there was $1.1 million and $0.8 million of stock compensation expense related to non-vested options and non-vested restricted stock awards, respectively, which is expected to be recognized over weighted average periods of 2.49 years for each.

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.

15

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

NOTE 11 – INVENTORY

The components of inventory are as follows (in thousands):
 March 31, 2022June 30, 2021
Raw materials$2,530 $2,040 
Finished goods5,436 5,063 
Total inventory7,966 7,103 
Less: current portion6,979 6,114 
Inventory, net of current portion$987 $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 - ACQUISITIONS

Affordable Medical Waste LLC

On October 22, 2021, the Company acquired Affordable Medical Waste LLC, a route-based provider of medical waste solutions with about 500 route-based customer locations in the Midwest, primarily in Indiana, for $2.2 million, net of cash acquired of $0.1 million, paid in cash from funds on hand. This tuck-in acquisition enhances the Company's presence in the Midwest and improves route density in the service area.

The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):

Accounts receivable$65 
Fixed assets145 
Intangibles771 
Goodwill1,261 
Accounts payable and accrued liabilities(61)
Total purchase price, net of cash acquired$2,181 

Intangibles is primarily comprised of amounts allocated to customer relationships in the amount of $0.8 million. The fair value of the fixed assets were determined using the market approach (level 2 inputs) whereas the fair value of the customer relationships was determined using the income approach (level 3 inputs).

Midwest Medical Waste, Inc.

On February 4, 2022, the Company acquired Midwest Medical Waste, Inc., a route-based provider of medical waste management solutions with about 600 locations in Kansas for a total purchase price of $4.4 million, net of cash acquired of $0.3 million. The purchase price consisted of 25% in Company stock (164,821 shares of the Company's stock valued at $1.1 million (the "Common Stock Consideration")) and 75% in cash, paid from funds on hand. The issuance of the Common Stock Consideration was not registered under the Securities Act of 1933, as amended, and was issued pursuant to an exemption from the registration requirements thereunder.

16

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

The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):

Accounts receivable$152 
Other current assets75 
Fixed assets140 
Intangibles1,940 
Goodwill2,220 
Accounts payable and accrued liabilities(87)
Total purchase price, net of cash acquired$4,440 

Intangibles is primarily comprised of amounts allocated to customer relationships in the amount of $1.9 million. The fair value of the fixed assets were determined using the market approach (level 2 inputs) whereas the fair value of the customer relationships was determined using the income approach (level 3 inputs).

Acquisitions in General

During the three and nine months ended March 31, 2022, the Company incurred $0.2 million and $0.4 million, respectively, of acquisition related expenses for investment banking, legal and accounting fees which are included within selling, general and administrative expenses on our condensed consolidated statements of operations. The results of operations of the acquired business have been included in the condensed consolidated statements of operations from the date of acquisition.

Pro forma results of operations for Affordable Medical Waste LLC and Midwest Medical Waste, Inc., are not presented because the pro forma effects were not material to the Company's consolidated results of operations, either individually or in the aggregate. The goodwill recorded for the acquisition will be deductible for income taxes.

The goodwill recognized for the acquisitions is attributable to expected revenue synergies generated by the integration of our products and services with those acquisitions and cost synergies resulting from the consolidation or elimination of certain functions.

NOTE 13 - SUBSEQUENT EVENTS

On April 4, 2022, the Company announced that it appointed W. Patrick Mulloy as President and Chief Executive Officer. Mr. Mulloy, a director of the Company since February 2021, succeeded David P. Tusa, who resigned from the role effective April 1, 2022 to pursue other endeavors. In connection with his appointment, Mr. Mulloy was granted: a Sign-On Bonus of $100,000, a Restricted Stock Award of 20,000 shares of the Company’s common stock and an option to purchase 20,000 shares of the Company’s common stock. The Restricted Stock Award and option vest over a period of four years. Under a Separation and Release Agreement executed on April 1, 2022, Mr. Tusa received: (i) a cash payment of $600,000 in exchange for cancellation of his employment agreement dated July 14, 2003, (ii) acceleration of the vesting of all unvested stock options (202,400 shares with value of approximately $0.4 million) held by Mr. Tusa and (iii) continuation certain benefits for up to 18 months including medical and dental insurance, automobile lease and automobile insurance with value of less than $0.1 million.
17


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 and nine months ended March 31, 2022 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. As continued staffing shortages were experienced by both the Company and in the US, during the three months ended March 31, 2022, the Company increased operational staffing as well as wages to ensure our continued ability to provide uninterrupted service to our customers.
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 ongoing customer demand related to immunizations overall and the continued rollout of COVID-19 vaccines and boosters as well as increased COVID-19 testing;
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 and nine months ended March 31, 2022 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 and nine months ended March 31, 2022 and 2021. 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,
 2022%2021%2022%2021%
Revenues$17,579 100.0 %$27,528 100.0 %$50,372 100.0 %$57,690 100.0 %
Cost of revenues12,601 71.7 %14,129 51.3 %37,266 74.0 %35,031 60.7 %
Gross profit4,978 28.3 %13,399 48.7 %13,106 26.0 %22,659 39.3 %
SG&A expense4,713 26.8 %4,181 15.2 %13,301 26.4 %11,725 20.3 %
Depreciation and amortization272 1.5 %216 0.8 %726 1.4 %625 1.1 %
Operating Income (Loss)(7)— %9,002 32.7 %(921)(1.8)%10,309 17.9 %
Total other income (expense)— %(29)(0.1)%(59)(0.1)%(93)(0.2)%
Income (loss) before income taxes— — %8,973 32.6 %(980)(1.9)%10,216 17.7 %
Income tax expense287 1.6 %2,123 7.7 %66 0.1 %2,431 4.2 %
Net Income (Loss)$(287)(1.6)%$6,850 24.9 %$(1,046)(2.1)%$7,785 13.5 %